Wednesday, 8 August 2018

Upcoming 5G Network Technology and Imminent Threat to Netlink Trust Business

The faster than expected development of the 5G network caught me by surprise. Just last month (July’18), Singtel and Ericsson announced that they will be launching a 5G pilot network test by the fourth quarter of 2018 to support drone and self-driving car tests in the one-north district. Also, Optus (Singtel’s Australian subsidiary) and Globe (Singtel’s Philippine Associate Company) have announced plans for the rolling out of commercial 5G services next year. I have done up some technical readings and post it here on the 5G technology characteristics so as to analyze the potential implication on Netlink Trust, which is supposed to be the backbone of our Smart Nation initiative.

Technical Characteristics of 5G   
5G builds upon today’s 4G mobile network technology. It refers to fifth-generation mobile technology which is expected to open up industry and consumer applications with promise of super-fast wireless connection speeds and lesser latency (lag time). 5G higher connection speeds will be possible due to advances in current radio technologies, increased allocations of radio spectrum, and by using many more antenna sites or base stations than today’s networks. Each mobile antenna will thus serve a smaller area or cell.

The one major difference between a fixed fiber network and 5G mobile network is that the latter’s connection speed decreases as the number of users increases. This is due to the contention effect. If 5G network has successfully been deployed at Marina Bay Float, Singaporeans attending the National Day Parade who are surfing the internet to upload photos or watch video will find the less than satisfactory connection speed. All 5G mobile devices in a vicinity connect to the local base station and will always share its data capacity. This will not affect users using a fixed broadband network.

5G base stations will always need a backhaul to connect to the internet. This will likely be in the form of optical fiber network. Hence this could be further monetize by our current Broadband Network Operator, Netlink Trust. The problem is that while Netlink Trust can theoretically earn some money from this, the bigger issue will be the loss of monthly fixed line connection fees from customers of Singtel, Starhub, M1 and TPG, that will switch to the 5G network. I will elaborate more on this aspect in later paragraph on this scary scenario.

Will 5G Replace Cable Broadband?
Similar to Netlink Trust Singapore, Australia also have their own Company operating National Broadband Network (NBN). It is interesting to note that the Australian NBN CEO thinks that there will be damaging and intense competition from the up and coming 5G network technology. This is a stark contrast to a study done by the Media Asia Partners (commissioned by Netlink Trust Singapore) which gives the following reasons on why our NBN will not face any threat from 5G: 
(i)                   Slower speed of the wireless mobile network;
(ii)                 Latency issue- average time for pockets of data to travel between 2 points tend to be slower relative to fixed broadband network;
(iii)                Mobile networks suffer from network congestion and
(iv)                Data limit suppression by current telco- there is no unlimited data plans on offer in Singapore yet.

Lightning Speed Development of Latest 5G Technology
5G provides for speeds up to 20Gbps in theory. Current trials are still ongoing worldwide. But getting 1Gbps will not pose a challenge within the next 5 years or probably even faster. This will definitely rival fixed broadband network.

Latency issue for 5G has vastly improve to 1 millisecond relative to up to 20millisecond for 4G. This is amazing as it paves the way live TV programme streaming using a mobile wireless network.

Also once the 5G base stations deployment begin, this will eventually cover the entire country. In a small country like Singapore, this can definitely be achieved within 5 years. If we take into consideration the permission clearance to access private or commercial buildings, I reckon another 2-3 years on top of the 5 years for the network infrastructure to be widespread and ready. Singapore has always embraced new technologies.

Another point to add is that in Taiwan, there are already telcos offering unlimited data plans. Fixed Broadband operators such as Asian Pay TV have reported losing their broadband customers to mobile broadband. Such a development will definitely happen in Singapore with the widespread build up of the 5G infrastructure.  

5G Impact on Netlink Trust
I was very much surprised at the availability of a technology in the near term that pose a significant threat to Netlink Trust. Initially, I thought that such technology is at least a decade away from full deployment and mass market adoption. From my personal perspective, this is a major threat to Netlink Trust.

The issue of whether Netlink Trust will be commissioned to build up the 5G network or being left to individual telcos has not been addressed. Even if appointed, Netlink Trust will need to incur significant capital expenditure before it can monetize the new wireless network. This will lead to inevitable reduction in cashflow available for dividend pay out to shareholders.

The most likely scenario will be that telcos will be investing heavily in the 5G infrastructure. While not all subscribers will switch to wireless broadband, I envisage a strong take up rate once the infrastructure gets build up and 5G permeate through every part of the country. This will lead to loss of revenue and profitability despite perhaps some upsides from the backhaul support of 5G base stations.

As alluded to the above points, I am adopting a rather pessimistic and conservative outlook on the future of Netlink Trust in view of the upcoming pressure on its cashflow due to the competition from 5G. I will thus be paring down my shares in Netlink Trust and re-deploying the capital into other businesses.

Various articles are taking different standpoints with regard to 5G technology impact on fixed broadband network. Fellow investors, please feel free to help share your thoughts on the outlook of 5G on Netlink Trust. 

Saturday, 28 July 2018

Now Is The Best Time To Buy Private Property?

Just a few days ago, I had a rather exasperated conversation with a colleague who is moonlighting as a property agent. My colleague is a 40 over years old lady who is notoriously well known to be very blunt in dealing with people. The ironic part is that she is a business development manager. I am not sure whether I should be upset or to just laugh off the entire episode. The conversation I had went something like this in my office pantry during lunch hours:


BK: "Hi Xiaoling, long time never see you back in office liao. How have you been?"

Xiaoling: "Hi BK, I am fine. Just that super busy these days with work. How about you? You ok?"

BK: "Yup, I am good. Eeeer, saw the latest pictures you posted on your Facebook and Wat's App. You got this "CEA" license on your profile picture and wearing the business suit. So, you into Property now ar?"

Xiaoling: "Hehe, yup...I got my Estate Agent License. I am marketing Park Colonial. Are you interested? By the way BK, please do not tell our Managing Director or anyone in our office that I am a qualified property agent now." 

(I was feeling incredulous at this point as my colleague had actually blatantly posted her CEA license and new profile photo everywhere on her own Facebook and also Wat's App. I am sure she will get into trouble with my Human Resource team soon as the cat is out of the bag with the damning evidence splashed all over by her ownself).

BK: "Not really lah. I am actually contemplating selling off my current home and buying a re-sales HDB near MRT Station. It has always been my dream to be semi-retired and just do part time job."

Xiaoling:  "What? Buying HDB is one of the stupidest thing to do. Investing in new and bigger private property is the way to make lots of money now. "


BK: "Eeeer, no thank you. I read that the market is filled with euphoria right now. The recent additional cooling measures by the government is also quite harsh. Probably not a good time to go in. Perhaps another 1 year to 2 years if I got extra spare cash and the cooling measures on ABSD on 2nd property gets reduced."


Xiaoling: "OMG! Let me tell you how wrong you are. Now is the best time to go into buying new private property. Singapore is experiencing the start of a property upswing. If you buy now, you will be buying at a low price. BK, you need to move fast else you will miss the boat. The peak of this current upswing will be another 2 to 3 years. If you buy only next year or after, you will be buying at the peak. You will regret it if you don't listen to me. I am many years older than you and have lived through many such property cycles."


BK: "Eeer, I will still prefer to wait. I have been reading on forums and investment blogs such as Propertysoul. Most of them are exercising caution over the current market. In fact, most of them thinks that the current new launches prices are super high. Let me Wat's App you my favorite property blog."


Xiaoling: "Aiyo, what Propertysoul? Seriously, I have never heard of it before. BK, you are a very weird guy, read and believe so funny stuff. Property cycle upswing always last for 3-4 years. I am telling you that we are just starting the upswing cycle and this is definitely the best time to buy new property just before the peak. This is common knowledge and common sense. EVERYONE knows this basic fact. Also in Singapore, the property market will never crash. Our government will ensure it appreciate gradually over time definitely."


(Ok, at this juncture, I can sense my colleague getting work up as she starts to raise her voice after reading a while on a post on Propertysoul. She must be thinking of how silly I am and lacking general knowledge. I always believed that investor sentiment is what drives the entire market. Market confidence can just crash quickly like what happened in 2008 which led to rapid exit of funds and prices of assets dropped like flies. There is no fixed rule that says an upturn cycle will always be 3 or 4 years. Who can predict with absolute certainty?)


BK: "Haha, yup, you are probably right. If I really miss the boat, then too bad for me. Just not comfortable to upgrade or buy new property now. By the way, when are you going to submit to me your sales pipeline report for compilation and reporting to our Managing Director?"


Xiaoling: "Oh, pai sei, I still owe you that right? I will pass to you as soon as possible. I recall I got an appointment with a prospective retail client. Need to go off first. Bye!"

With that, my colleague beat a hurried retreat. It was only later that I discovered that my colleague may have been upset at a post by Vina from Propertysoul on "Buyers beware: Misleading message on overseas properties" posted on 24 July 2018.  Let me quote what was written: "Good or bad days, property agents still need to make a living...Very soon you will see companies selling alternative investment and agents marketing overseas properties again. The latter will claim to have no ABSD and seller stamp duty, easy to obtain mortgages and attractive returns." 

Saturday, 21 July 2018

Government Should Bail Out Hyflux And Don't Put All Your Eggs Into One Basket


It was poignant to read from the news that there was a retail investor who risk losing a certain portion of his S$250K of capital investment into Hyflux bond. The retail investor in this case was a retiree who originally intent to use it to finance part of his retirement income and also to fund his children upcoming university expenses. For all retail investors caught in the current Hyflux Tuaspring crisis, I am keeping my fingers crossed that the eventual divestment and re-organisation is successful so that they can get back most of their capital.

Types of Bond
There are some who believed that bonds are relatively safer than equities. This is not true. Rather, it is more of lower volatility relative to stocks. The same stringent risk assessment of the fundamental of the underlying business entity by retail investor must still apply. Types of bonds can be generally classified into 2 main types, namely, government bonds and retail/corporate bonds.

(i) Government Bonds

For our Singapore local context, this will refer to Government Securities Bonds (SGS), Singapore Saving Bonds (SSB) and short term Treasury bills. As such bonds are guaranteed by the government, they are usually of a lesser risk for investors relative to Retail/Corporate Bonds. Less risk does not mean ZERO risk. There are countries such as Greek which defaulted on bond repayment before during the Greek financial crisis. Even for SGS or SSB, there are still risk. For example, in a scenario of extreme hostility exercised by the Malaysian government to stop the supply of water immediately to Singapore & eventual escalated armed conflicts, it may trigger exodus of MNCs and people pulling out of Singapore. Singapore ultimately does not have its own natural resources and in such extreme situation, the Singapore Government may have insufficient funds to repay back borrowers. 

Not likely, but from the fanatical antics of Mahathir towards Singapore, this is a concern. It may not just be a simple strategy of softening the negotiation for the cancellation or postponement of the High Speed Rail Project.  


 (ii) Retail/Corporate Bonds

This represents the debt financial instrument issued by companies to raise funds. For corporate bonds, most of the issuance used to be in larger denomination of at least S$250K before an individual investor can invest in it. The trending now seems to be going into smaller bite size minimum S$1K tranche for retail investor. Again the financial strength of the underlying investee company will determine the risk level. Those government linked companies or statutory board (HDB, LTA etc) bonds will be less risky while pure commercial organisation issuance (Eg: Hyflux, Aspial, Perennial) will have a higher degree of risk of default. 

Bonds are also subject to interest rate fluctuation risk. If the market interest rates goes up, price of the bond which is inversely related will decline as prospective investors demand a higher yield as compensation. 

The Need for Diversification in Investments
The Hyflux episode clearly illustrated a need for portfolio diversification. Too much concentration in one particular bond issuance or equity may lead to an unexpected loss of capital albeit how well known a Company is or how long a company had been in the industry.  

The recent Astrea class bond issuance by Temasek Holdings is a good example of a bond instrument that is supported by sub-funds with bond issuances from hundreds of companies re-packaged into this unique product. Hence any failure in one company will be balanced out by the numerous companies in the stable. 

Why the Government should step in to rescue Hyflux?
While I always believe in the free market for business to compete and run in the most efficient manner, the shareholders and other stakeholders of Hyflux have all been punished already with the plunge in share price and also expectation of a haircut of debts owing to them. 

It may come to a ludicrous situation if any prospective bidders decided to make an offer at a severely discounted fair value. The need for liquidity quickly and the short 6 mth reprieve given by the High Court means that Hyflux has the shorter end of the stick and leverage is on the bidders' side.

The Tuaspring integrated desalination and power plant is clearly a vital strategic asset of the entire nation. Temasek linked companies such as Keppel or Sembcorp should step out to make an offer based on the current selling rates of desalinated water & electricity, expected cost of running and required profit margin and not taking advantage of the current financial crisis that Hyflux is embroiled in by asking for huge discount. 

In addition, if the current crisis worsen and Hyflux really goes into liquidation, it would mean the loss of numerous jobs as well as the loss of local expertise in water treatment. This scenario will also mean heavy losses for the shareholders and bond holders. If Temasek can save Olam, surely it can come out and give a bit of help to Hyflux and all its stakeholders. 

I do hope that things turn out well and see how the next few months unfold for Hyflux which was once the market darling vaunted for its amazing accomplishments in water treatment projects locally and overseas.  

Saturday, 14 July 2018

SPH- The New Transformer And Interesting Points To Note

SPH recently announced its 3rd quarter ending 30 June 2018 financial results and more insights into Management strategy in its Property Business. While investors must be happy to know that SPH is embarking on a transformation journey by riding on its new growth engine, the traditional Media business is still in doldrums. 


Key Highlights:
1. New strategy by SPH is to focus on the acquisition of cash yielding, real estate assets overseas. 

2. SPH is particularly interested in Aged Care business which it believes to be a recession proof business. There are also opportunities for investments into overseas student care accommodation. Recently, Temasek via Mapletree had invested over 1 billion into UK student Housing.

3. The Property segment of SPH currently contributes approximately 60% of its profit. The diversification strategy into Property business has been very successful and it has continued to provide a steady income stream and stability to SPH Group.

4. The Woodleigh Residences, Woodleigh Mall and the bid for Seng Kang Central will be additional local future catalyst of growth for the Property Business in Singapore. Please refer to my previous blog (Singapore Press Holdings and SPH REIT- Growth Engine in Property Development and Retail Shopping Malls).

5. While there is a lot of focus on the new Property Business as its future growth engine, the key point to note is that the decline in its traditional media business is still ongoing albeit the good sign that the rate of degeneration has slowed down.

6. The presence of the impairment charge means that the Media business is definitely not out of the woods yet. It remains to be seen how Management contains the damage from the persistent decline. SPH may have to look for more cost cutting measures in its Media segment even though it just completed a staff restructuring exercise.  

While I am glad that SPH management is now playing Transformer, I am sadden in a way that the Media business is gradually slipping away just like the Transformer 2014 movie: "The Age of Extinction". The strangest thing out of all these latest development is that the SPH acronym actually stands for "Singapore PRESS Holdings" but it is now becoming more of a Property Group. 

But guess it does not really matter right? “不管黑猫白猫,能捉老鼠的就是好猫!”

Saturday, 7 July 2018

Singtel- Hidden Danger And Downside Risk That May Have Been Neglected By Potential Investors


Singtel dropped to a 5 year all time record low of S$3.02 per share on 3 July 2018 (Tuesday) before rebounding to S$3.23 per share on 6 July 2018  (Friday). The plunge to the lowest point is a 16% dropped from S$3.60 at the start of this calendar year. The mind blogging part is many well known analysts over the past 2 months have predicted a targeted price of over S$3.57 to S$4.22 per share for Singtel. Hence it is certainly bewildering to see the price of Singtel flopping and wiping billions of dollars off its market capitalisation and deviation from the crystal ball prediction by so many Oracles.  
Reasons for analysts "optimistic" outlook on Singtel
Well, of course, proponents will believe that the Oracles cannot be all wrong. This must be a special case of short term and one off market overselling of the Singtel counter. No doubts Singtel will recover back to S$4 soon.  

One of the key belief in Singtel was its diversified businesses across geographical region such as Digital Life, Smart City & Security Business on top of its traditional historical business in mobile and internet subscription services. 

In addition, the 3 national outages by Telstra , Singtel-Optus's competitor, are believed to be beneficial to Optus in terms of attracting market share. 

It is also a popular belief that out of the 3 main telecom, Singtel will be the least affected by the entry of  TPG at year end due to this geographical diversification- up to 70% of revenue is from overseas.

Hidden Dangers/Downside risks that may have been neglected by many investors
It is a fallacy to believe that the entry of TPG affects only the Singapore market. TPG has also been aggressively expanding its operations in Australia. TPG had announced last year that it will be building Australia's 4th mobile network. It has spent billions in M&A deals as well as capital expenditure improving on its broadband network and also building up its Australian mobile ambition to rival Telstra and Optus. 

Singtel Group derives 50% of its revenue from Optus which is operating in Australia.  The effect of the more intense competition and the adverse effect on average pricing and market share in the Australian market will definitely lead to a decline in overall businesses in its traditional core mobile and broadband businesses. 


The entry of TPG in both Singapore and Australia markets thus erodes the revenue and profitability of its core businesses of mobile and internet which makes up more than 56% of the Group's revenue. The speed of building up the new business segments is thus crucial for the future of Singtel.

Also key is the belief that the new Digital Life business and Cyber Security (Trustwave) business will play an increasing significant role in future revenue generation for Singtel Group. I am unsure of how these businesses will unfold or behave in the event of a market downturn with global capital expenditure being delayed. Some may argue that in this information age, these will be key essential items but it remains to be seen in such drastic scenario how it will materialise. 

High level valuation of Singtel
I will do a quick and dirty projection based on some simplistic assumptions. Assuming the beginning of the year pricing already factored in investors expectation based on the previous year, the results released in May'18 for financial year ended 31 March 2018 will be the key base of further price movement due to revised market projection. We know that Singtel after normalising for the net gain of S$1.9 billion from Netlink Trust IPO, the performance so far for the previous audited financial year and Q4 had declined against the prior year and prior Q4 respectively by <8.4%> and  <17.9%>.



For the beginning calendar year of 2nd Jan 2018, Singtel pricing was at S$3.60 and I will use it as a proxy for the initial expectation before the final year and Q4 results was released. 

Taking into account the full year performance and Q4 decline, the estimated revision in price should theoretically be in a range of S$ 2.956 to S$3.298.   

Future Outlook
Prediction of value is really based on investors' outlook and a summation of all the available market information and making a judgement based on a peek into the future. 

If one takes a more pessimistic views of the possible downsides, well, it may drop below S$3 per share by year end until the new business initiatives taken up matures and proven themselves to be successful.    

If one believes the diversification story and that the overseas revenue contribution and new business segments will continue to grow, then now is the perfect time to accumulate more of Singtel at its 5 years low. I would just want to add on that investors or potential investors should also take a look the impressive resume of Singtel's key management. The Group CEO and the various divisional CEOs leading the various businesses are some of the best of the best talents in the ever dynamic Singtel Group.

Sunday, 1 July 2018

Global Investment Limited- Excess cash from FY2017 deployed into China Domestic Bonds

From my last review, Global Investment Limited ("GIL") had S$88Mil of cash on hand as at 31 December 2017. Total assets is S$337Mil. This represented a 26% of unproductive assets held as cash and cash equivalent at the end of the previous financial year.   

For Q1 2018, GIL had deployed S$59.11Mil into purchase of a basket of 21 China domestic bonds. These fixed income securities have a weighted average coupon of 4.28% and have a weighted short term maturity of 2.22 years. The invested fixed income securities are classified by management as held at fair value. This is a sound strategic decision to deploy the excess cash on hand to earn returns. At the same time, the 2.22 years holding duration minimizes the risk of further likely global interest rate hikes while leaving room for GIL investment team to maneuver if global recession indeed sets in. 

New investment into China Domestic Bonds-S$59.11Mil allocation by Sector

The China retail bonds may not be as low risk as one believes. There is no ratings by international rating agencies, instead, only the ratings from domestic rating agencies are available. There is also currency risk exposure as the bonds are all denominated in CNY whereas the functional currency of GIL is SGD.  However, I think that overall, the risk is manageable as the current market price of S$0.135 is at an almost 44% discount off the Net Assets per unit held by GIL (S$0.1945 as at 31 March 2018). Recently, the price of GIL declined further by 6.9% (from S$0.145 to S$0.135) hence further enhancing the margin of safety for investors who are accumulating GIL units during the recent market downturn.  

The other significant development announced in May 2018 is that GIL managed to get an amicable settlement from Babcock and Brown in respect of false and misleading representations made to GIL in respect of its previous investments in railcar portfolios. GIL will be receiving approximately S$6.8Mil from Babcock and Brown as the settlement sum. This is a positive development as that there is no long drawn litigation case from this saga which will drain financial resources as well as the focus of the management from running the Company and that GIL will be getting compensation of S$0.004 per unit. 

Amicable settlement of litigation with expected S$0.004 per unit of net proceeds for GIL

The only unfortunate event for Q1 2018 is that there is a net loss from fair valuation of assets classified as held for trading. This might have an impact on the upcoming interim dividend paid out. The management had informed shareholders that instead of economic profit, it will benchmark dividends payment against net profit to better relate the dividends payment to earnings. Management seems confident as of 10 May 2018 that they will be able to deliver dividends of S$0.005 per unit. This is a dividend yield of 3.7% for half year interim and if extrapolated, represents an expected 7.4% dividend yield for the whole of FY2018 based on market closing price of S$0.135 per unit for the 1st half of 2018. If we compare this to last year interim dividend of S$0.006 per unit, this is a decline of 16.7% in terms of dividends paid out.  
S$0.005 per unit of dividends expected for interim 2018- 16.7% decline from prior year.

It will be interesting as investors await the announcement of the results of GIL for its 1st half financial year performance in August 2018. 

Saturday, 23 June 2018

Singapore Press Holdings and SPH REIT- Growth Engine in Property Development and Retail Shopping Malls


Singapore Press Holdings ("SPH") has been actively pursuing business development in its property segment as part of its diversification strategy.  Recently,  SPH has again partnered with Japanese developer Kajima to bid for a mixed residential and commercial plot at Seng Kang Central as at 21 June 2018. Just last year, SPH and Kajima had bidded and successfully won the Bidadari mixed residential and commercial plot  just next to Woodleigh MRT Station which will be the heart of the new housing estate. These developments will serve as future catalyst of growth as the revenue of the former Media super star has been declining and in doldrums over the past few years due to market disruption from other online media.
Seven tender submission by major developers for this site. If the SPH-Kajima Consortium wins by beating other major players such as City Development, Far East Organization and Keppel Land, it will be another major win by SPH coming off the recent 2017 newly won Bidadari development project.

From a former giant print media Group, SPH has been slowly transforming itself. As part of SPH's strategic sustainability business plan, it has been building up its property development business and on top of that, it has also been enhancing on recurring income from the commercial shopping mall businesses at Paragon, Clementi Mall, Seletar Mall and the upcoming Woodleigh Mall. Shareholders of SPH will soon have reprieve from the ever falling share prices once the property development projects are executed successfully and the additional recurring income from its latest investment into commercial retail activities starts rolling in. SPH's crown jewel Paragon remains firmly in SPH's possession for future redevelopment as it had crafted out a 99 years leasehold tenure out of its freehold status to SPH REIT.  
Paragon- The jewel of SPH's Property Portfolio

As for SPH REIT, it stands to benefit from the more aggressive venture into the building of shopping malls by its sponsor. Seletar Mall and the upcoming Woodleigh Mall will be the future pipeline for growth as SPH REIT has the right of first refusal over these income producing real estates. SPH REIT had withstood well over the past 2 months of blood letting at the local stock market due to the market interest rates increase and also fear of global trade war. Its debt gearing ratio is one of the lowest among the existing REITS.  

The Clementi Mall serving our local heartland with huge crowds at weekend and weekday

The exciting aspect for SPH REIT in 2018 is the expected completion of the Rail Mall acquisition by end of June 2018 which will begin contributing to its result for 2nd half of the year. I am looking forward to what the management of SPH REIT can do to further improve on the yield of this real estate piece which will be added into the SPH REIT family. By re-positioning via tenant mix as well as other initiatives, there is certainly potential to boost the traffic and enhance the rental for collection. 


As the REIT model is a relatively simpler business with more transparent earnings visibility, I am more confident in terms of its potential for further income growth over the next few years. For SPH, its perceived value depends very much on a wide ranging variables in terms of investor's outlook on the "right" entry price. What is your view of SPH current market valuation? Has the recent market turmoil excessively discount it and thus present the best opportunity to take up a position in SPH now?

(P.S: Please also see my previous post on  "SPH REIT acquiring The Rail Mail at Upper Bukit Timah Road for S$63.24M- First acquisition after IPO for almost 5 years")