Tuesday, 21 January 2020

Will The Spread of The Wuhan Coronavirus Led to East Asia Recession Similar to SARS in 2003?

In 2003, the Severe Acute Respiratory Syndrome (SARS) coronavirus caused a substantial economic demand shock in East Asia particularly in Hong Kong, Singapore and China. The economic disruption caused much turmoil to the local economies of the affected countries where the outbreak occurred. Tourism industry then was hard hit by the nose-dive in tourists arrival and the hospitality industry was badly impacted. Other industries such as retail also suffered when people stayed indoors in order to avoid catching the virus. According to official estimates from the Economic Survey of Singapore, Third Quarter 2003, the local service industries such as hotels, restaurants and air transport shrank by 10% to 30% in the 2nd quarter of 2003. 

The SGX was in the red today with heavy selling by worried investors. Will the current Wuhan coronavirus also lead to the same severe economic disruption that we have seen in 2003? Will stock prices begin to plummet further to factor in the new threat of an impending economic recession due to disruption in economic activities from the rapid spread of the virus?

1. China has confirmed human to human transmission of the new Wuhan coronavirus
As of 21st January 2020, China has confirmed that 15 medical workers (with 1 in critical condition) are stricken down by the Wuhan pneumonia and that the virus can spread from human to human. Hong Kong, South Korea and Thailand also confirmed cases of the Wuhan pneumonia. The outbreak timing could not have been much worst as it occurred at the eve of the Lunar New Year period where hundreds of millions of Chinese move around the entire country during this festive season. I expect the pneumonia cases to continue to spike daily as the virus spread to different parts of China and also to other countries. The Philippines is currently investigating a suspected case of Wuhan coronavirus. 
2. New Wuhan coronavirus is not as deadly as SARS or MERS (Middle East Respiratory Syndrome)
The new Wuhan coronavirus appeared to be less virulent than SARS or MERS. While there have been 4 reported deaths, most of the 200 people who caught it are being treated and in stable conditions. Death rate are thus only 2% relative to the 15% fatality rate for SARS and 35% for MERS.

3. New Wuhan coronavirus seems to have limited transmission capability
Apparently, the new virus does not transmit as easily as SARS albeit China confirming that human to human spread has happened. However, researchers are currently still in the midst of studying the new coronavirus to determine how does it spread exactly and whether the transmission is sustained.

4. New vaccine are being developed- A record timing compared to SARS time in completion of sequencing of genome of the virus
Different teams of scientists in China and USA are already at work on developing a vaccine for this new strain of coronavirus. This is made possible as Chinese scientists completed the mapping and sequencing of the genomes of the new virus within a month. With SARS, it took almost 1 whole year before scientists completed the genome mapping. 

Parting Thoughts: Will Wuhan coronavirus lead to economic recession and stock market crash?
Based on the above developments as well as the better transparency offered by China this time round, I think that the current spread of this new threat can be contained effectively globally. There may be some short term market panic but overall, I believe that there should not be any adverse long term effect. However, the marco-economic situation may worsen immediately if the Wuhan coronavirus begin to mutate and evolve into something deadlier than SARS or MERS. I have been through the SARS crisis and have difficulties securing a job in the aftermath of the economic slowdown hence I know how virulent the sense of panic and doom can spread if the virus caused many fatalities or start to transmit rapidly between humans to humans.

For now, keeping my fingers crossed and will monitor the development of this new threat but will not be making any significant adjustment to my investment portfolio.

Elite Commercial REIT Singapore IPO- Did It Suay Suay Choose A Wrong Time? Or Is Elite Commercial REIT Immune To The Wuhan Pneumonia?

Elite Commercial Trust seems to have filed for IPO during a time of poor market sentiment over the increasing number of Wuhan pneumonia cases that seems to be spreading across China as well as other Asian countries. But I think it will perform well for the IPO as the public offer tranche is only a mere £3.3 Million or 3% of the total IPO offering as reported by the The Business Times. The bulk of the offering will go on to international investor outside the US of £63.2 Million to £74.3 Million. A third tranche of £52.9Mil (44.3%) of the offering is already committed to cornerstone investors- Bank of Singapore, CIMB Bank Berhad Singapore Branch and UBS AG Singapore Branch on behalf of their private banking clients.

The sponsors are Elite Partners Holdings Pte Ltd (Fund Management Group), Ho Lee Group Pte Ltd  (Developer of industrial and residential properties and one of major sponsors of Viva Industrial Trust during its IPO) and Sunway RE Capital Pte Ltd (a subsidiary of Malaysia's largest conglomerates Sunway Berhad).

The concentration of major tenant in a government agency is actually quite interesting. I think that it actually reduces the rental default risk despite going against the traditional convention of wide spread diversification. It is backed by the British government which can raise funds easily to meet its obligations. On non-renewal risk upon expiry by the government, I believe that other tenants can be found easily as most of the properties are close to public amenities and public transportation. Elite management team will need to work hard before expiry of leases to market and secure new tenants in the worst case scenario.  

Overall, I thought it is weird that Elite Commercial REIT has no confidence at all by allocating only £3.3 Million to Singapore investors as the public offer tranche. I will probably give this IPO a miss in view of conserving my cash on hand during this period of economic uncertainty as well as having some reservations over the strange mixture of sponsors. 

Sunday, 19 January 2020

Is Singapore Medical Group Still An Undervalued Gem? Or Trapped in Downward Spiral Bottomless Pit?

Singapore Medical Group (“SMG”) share price has been stuck in a whirlpool of S$0.300 range for many months ever since August 2019. It all started with an offer by the Korean Medical Group, CHA, to buy out substantial number of shares from Dr Beng and his management team at S$0.605 per share. To add insult to injury, while the share price was at a high of S$0.485 per share, SMG decided to place out to CHA a S$10Mil convertible loan with conversion rights at S$0.435. Many shareholders were outraged at the unfairness of no general offer being made to them as well as the value destruction of the convertible loan pegged to a low exercise price. As a result, the massive sell off of SMG stocks from S$0.485 to S$0.300 per share commenced. What a bloodbath it had been since then for the many investors who came in at the all-time high of S$0.485 and booking in unrealised/realised losses of 38.1%.

Is SMG still an undervalued gem?
The excellent quarterly financial results announcement speaks volume of the potential of SMG. I believe that the current dramatic plunge in share price is only a temporary situation given the good financial results. However, the main problem is how long will the prevailing low market share price situation persist? The next issue is while deploying capital into SMG and playing the waiting game, there has been a drought of dividends being paid out of SMG to loyal shareholders for their sacrifice. 

There is an opportunity cost in waiting for the sun to shine once again.  If share buybacks do not work, then SMG should try paying out dividends to try to revitalise the sluggish share price performance. On 2 July 2018, there has been an announcement by SMG with regard to the implementation of a formal dividend policy but since then, there has been no updates at all.

Emailed to senior management of SMG with regard to share price in doldrums as well as dividend policy.
Since August 2019, I have been dropping emails via the general “Contact Us” email but there was no reply at all from SMG with regard to my recommendations. Earlier this year, I decided to follow up again with a last ditch effort to get past the red tapes by informing the staff behind the “Contact Us” email that I may inform the Corporate Secretary of SMG to table an additional resolution into the upcoming AGM agenda for all shareholders to discuss about dividends declaration which may make the situation awkward for the directors (albeit not my intention) if the customer service staff continue to play the ignoring tactic and not escalate my email to their senior management team. 

I was pleasantly surprised when 2 days later, Ms Wong Sian Jing (CFO of SMG) actually replied to my email. Ms Wong re-affirmed that implementing a formal dividend policy is always part of the management plan. However, SMG is cautious on the right timing to formalise such policy given that the Group is still at net current liabilities position as at 30 September 2019. The main reason for the net current liabilities are primarily due to deferred considerations arising from the business acquisitions and the CHA convertible loan that is due in less than 12months. Her management team will continue to execute its growth strategies and will update shareholders on any material development including decision on dividend payout (if any) via SGX announcement. 

Target Price of S$0.605 and parting thoughts:
Over the past few months, I have decided to sell off part of my SMG shares and realised losses as I re-deployed my capital into income generating stocks in order to increase my recurring cash-flow. However, I am still holding on to 40,000 units of SMG shares as I am still bullish on the eventual realisation of its intrinsic value into its market pricing. The fair value target should be S$0.605 based on CHA Medical Group recently paid consideration for SMG shares as well as the low PE ratio relative to SMG industry peers. This represented a 100% potential upside based on the undervalued price of S$0.300 per share. As aforesaid mentioned, main challenge is no one is exactly sure how many months (or years) one have to wait for the share price to breakout of its current whirlpool. 

Please also see my previous articles relating to Singapore Medical Group:

Friday, 17 January 2020

Fu Yu Corporation- Super Hero Cash Cow New Growth Path- To Expand Operations Capability in Singapore

Share price of Fu Yu Corp has surged by 52% relative to one year ago. The main reason for the sudden spike in January 2020 was due to the announcement of the redevelopment of its 7 Tuas Drive premises. Fu Yu Corp is embarking on a drive to expand and improve its operations in Singapore through the construction of a larger building to house a factory, warehouse and office space. 

1. Fu Yu Corp retained too much cash on its balance sheet which are none productive- Good and Bad
As at 30 September 2019, total cash on the balance sheet was a staggering sum of S$84.6Mil which is S$0.112 per share. The good point is that based on market price of S$0.285 as at 17 January 2020, this means that 38.8% of Fu Yu Corp fair value are being backed up by physical hard cash. The bad point however is that most of these cash are underutilized and none productive. 

The redevelopment and expansion plan actually come across as a pleasant surprise for me. The excess cash are now being reinvested to boost production capability and also to improve productivity. 

These are definitely worthwhile and value adding to the business and shareholders. Fu Yu Corp intended to fund S$15Mil of the entire projected capital expenditure from internal funds.

2. Debt Free Balance sheet
Fu Yu Corp does not have any bank borrowings at all on its balance sheet except for some lease obligation being capitalized upfront as part of the change in new accounting standard on application of the “Right of Use” model for operating leases. The current cash pool will provide a relatively high margin of safety for Fu Yu Corp and its seasoned senior management team to weather any sudden economic downturn. 

3. Is there any further potential upside in Fu Yu Corp’s share price?
Yes. Ever since the announcement of the redevelopment of the Tuas premises, analysts have been busy re-rating the target price. The most optimistic target price was set by DBS Research of S$0.350 per share which is another potential 20% capital appreciation. I believe this is likely in the long run given that Fu Yu Corp has been booking in its owned properties at cost. This represented a further estimated S$50Mil revaluation gain in fair value for its properties that remains hidden. 

Summary and other thoughts
Even though my average entry price for Fu Yu Corp is approximately S$0.192 per share (48% capital gain), I think that now is still not the time to sell Fu Yu Corp. Hidden intrinsic value such as those from its properties can be further unlocked if there is a buyout by potential suitors. 

In addition, I strongly believe that Fu Yu Corp is an attractive target for M&A given its new medical industry and automotive customers’ exposure. At the current market price of S$0.285 per share, Fu Yu Corp is still giving out an annual dividend yield of 5.5% with upsides from the business expansion as well as productivity cost savings from high tech machinery being purchased. Therefore, one can continue to wait for future M&A offer and at the same time, get part of the earnings realized from dividend declaration by Fu Yu Corp. 

Friday, 10 January 2020

SGX Drops Quarterly Reporting And The Irony Behind It.

With effect from 7 Feb 2020 (Friday), SGX will drop the quarterly reporting (“QR”) requirement for listed companies. QR was implemented in 2003 and applicable to companies with market capitalization over S$75Mil. The current need to do QR for listed company will be dependent on risk assessment basis. In place will be a risk focused governance regime based on continuous disclosure.

Main reasons cited for change
I was very disappointed by the announcement as quarterly release of financial results give retail investors like myself more timely visibility to the overall health of the business. Apparently, what triggered the downgrade in reporting requirement was to (i) allow management team of listed companies to implement longer term strategies rather than devoting time with meeting quarterly reporting deadlines and (ii) the issue of high compliance cost for companies.

Ironic arguments by the regulator
I find the arguments for the change ironic as SGX will still require “problematic” listed companies to continue to do QR. If the apparent reason is to allow longer term strategies implementation, then isn’t it even more crucial for loss making high risk companies doing restructuring to do away with QR so that they can focus on restructuring planning? Why do such higher risk companies then need to keep doing QR rather than focusing on long term back to profitability plan? The cost argument is even more mind perplexing. If a company which wants to list on SGX to get public funding cannot even afford a good accounting & compliance team, then how can we trust it to keep true and fair views of its daily financials? The arguments are thus laden with inconsistencies from my perspective.

Personal thoughts
Personally, I think that SGX is moving in the wrong direction by copying other countries which are doing away with QR. The lack of QR will mean less timely reaction time in particularly for investors monitoring the financial performance of those smaller sized listed companies. I will not be surprised that in another 5-10years time, SGX may announce that it will be reverting to QR again.

Tuesday, 7 January 2020

Netlink Trust Finally Proved Itself- Free Cashflow Now Able to Sustain Dividends.

During my last review of Netlink Trust after its Q1 FY2020 results announcement (Netlink Trust- Stable Cash Cow Or Just Another Time Bomb Waiting To Explode?), I was disappointed that its free cashflow was insufficient to sustain dividends and seems to be using bank borrowings to fill the gap. But with the announcement of its Q2 FY2020 results, Netlink Trust has shown an amazing 17% increase in quarterly net profit relative to FY2019 on the back of the switch by many customers of Starhub from cable to fibre services. This is an awesome delivery of results considering the previous quarters of mediocre financial performance which lead to the prolong lackluster unit price since IPO. 

I have re-run the free cash flow testing using 3 scenarios:
1. The first one is using Q1 FY2020 net operating cashflow and CAPEX and then annualized the results to assess yearly impact on dividend sustainability.   There is a gap of <S$33.4Mil>.

2. The 2nd one is simply just using the latest Q2 FY2020 results for assessment. Due to the excellent performance in Q2 FY2020, there is now a surplus of +S$11.5 Mil in free cash-flow after extrapolation. If the good performance sustain, then the dividend yield can go as high as 5.5% based on the latest closing price of S$0.94 per unit. 

3. The 3rd scenario is  adding up Q1 and Q2 cash-flow projection and then extrapolating it for full year impact- something like a mix and match average. Such scenario does still show an annual deficit of <S$12.4Mil> which is significantly lesser than the <S$33.4Mil> in scenario 1. 

Which is the most likely scenario?
I believe that scenario 2 is the most likely scenario going forward based on actual results released. Q3 FY2020 results will be out soon and it should mirror the same excellent performance. Also, with the government award of 5G licenses, the telecos will be busy setting up new 5G base stations for connecting to Netlink's fibre network. There is thus potential new upsides over the next 2 years which will lead to increase in dividend distribution as well as capital growth. I have started to accumulate more units of Netlink Trust at the range of S$0.93 to S$0.94 in view of the good financial performance. 

Parting thoughts:
95% of what the eyes can see is real and 95% of what the ears can hear is illusion. Given the actual display of excellent financial performance, I decided to change my pessimistic view of Netlink Trust future prospects. If the upcoming Q3 FY2020 results continue to outshine the previous year, I think it is worthwhile then to take up additional stakes in Netlink Trust. 

Chinese Zodiac Fengshui Forecast Accurate A Not?

Lunar New Year is coming! Do you folks feel the CNY celebratory mood already? It is interesting that every year, many shopping malls start displaying giant Chinese Zodiac Fengshui Forecast stand. This year is no exception. I can see many shoppers gathered around them and reading them in full concentration. Sometimes, I wonder how accurate are these fortune telling forecasts which categorise the global population into 12 different types of destiny for the upcoming year. Only 12 scenarios to guide everyone.....whaha. 

May everyone prosper in your investments and HUAT ar!