Saturday 25 August 2018

Investment Portfolio Updates- Aug'18 (Much Volatility in the Market)

Passive income projection of S$25.3K per annum @ 6.13% yield (Dividends only and exclude CPF and rental income)

Total stock portfolio and deployable cash for investment is S$425K (excluding investment property and CPF)
For the past few months, the stock market has been on a see-saw ride after the market correction. I am glad that my significant weightage on REIT component has withstood much of the market downside with vastly lesser volatility relative to other SGX counters.

Key highlights of the following main changes to the portfolio:

1. Sold off all my Netlink Trust holdings at a loss. The stability that I craved for seems to be facing an upcoming technological disruption from the 5G mobile network. The risk of downside has increased significantly relative to the upsides. Decided to re-deploy the proceeds into other oversold listed business on SGX.

2. Purchased 3,500 units of Singtel at S$3.060 per unit. Market has oversold the blue chip. Upsides potential from Singtel. Also since then, TPG has announced possible M&A with Vodafone in Australia.  

3. Purchased ThaiBev. Oversold counter. Take out and normalise the prior period fair value gain and the underperformance percentage is lower than the plunge in price. This is one counter that I have been keeping an eye on for its excellent diversity in its principal activities and operations in different consumer markets. Took advantage of the sharp decline to S$0.650 previously and bought 30,000 shares. Looking forward to deploying more cash into ThaiBev if the price dropped further. 

4. Increased shareholdings of Global Investment Limited. Fair value a lot higher than market pricing. Even if market downturn, there will be adequate margin of safety to avoid a total investment wipe-out. Looking to re-invest the upcoming dividend proceeds back into the business.

5. Increased shareholdings in Perennial Real Estate Holdings. Capitol hotel operations to commence operations in Q4 2018 and Chengdu integrated development have started operations in Q3 2018.

6. Added Parkway Life REIT as part of a more defensive move and also due to its better pricing after recent market correction for this medical REIT.

7. Sold off part of Asian Pay TV Trust. The recent quarter results have not stabilised and still in decline. CAPEX deployed are not generating growth but seems to become defensive in nature of existing revenue. Dividends will definitely be cut by next year in view of the poor business performance.

8. Sold off part of Fraser Commercial Trust to diversify the concentration risk. Also the promised growth engine from UK may not have the previously anticipated high upside in view of current Brexit discussion which does not seemed to be going well.

Monday 20 August 2018

Government Solution to HDB 99 year leasehold expiry issue- Voluntary Early Redevelopment Scheme (VERS)

This is awesome! Our Prime Minister had announced during the National Day Rally that HDB will be launching (albeit in another 20 years time) the Voluntary Early Redevelopment Scheme ("VERS"). Under VERS, HDB owners of flats aged 70 years old will be able to vote (akin to enbloc for private properties) for the government to buy back their homes before the end of the lease. Considering that more than 80% of our fellow Singaporeans live in HDB flats, this is certainly a right step in resolving the depreciation and eventual zero value of HDB flats upon the end of the 99 years old lease period. VERS thus offer another solution for Singaporeans to preserve at least part of the value of their beloved homes and hard earned money.

The 99 years leasehold expiry nightmare suddenly surfaced last year (2017) when our Minister for National Development, Lawrence Wong, mentioned that HDB owners should not assume that their aged flats will definitely undergo Selective Enbloc Redevelopment Scheme ("SERS"). As a matter of fact, it was reported in the Straits Times that the flat identified for SERS was only a miserable 4% since 1995. There is actually an inextricably intertwined relationship between HDB and private property prices. If HDB prices crash eventually for aged HDB, then there will be less resources for HDB potential upgraders to get private properties. This leads to a vicious circle in terms of the future of Singapore Property market whereby the bulk of one's wealth is tied to the home where they are living in. 

While I am happy with the announcement of VERS which in a way will prevent a total erosion of the wealth of most Singaporeans, there are still some mind boggling aspects which I want to point out.

Firstly, new generation of Singaporeans are getting married later these days when compared to 10 to 15 years back. According to the Singapore statistics 2017, the median age is now around 30 years old for first time groom and 28 years old for first time bride- please see below screenshot.
From Statistics Singapore

Now, let's assume that a young couple will always follow the traditional route of waiting for a BTO flat to be ready first before getting married. This means that a married Singaporean couple will be around 30 years old for the husband and 28 years old for the wife. VERS is only available when the flat is aged 70 years. So by that time, the first time buyers of the flat-if still alive- would have already reached 100 years old. I believed that both would have kicked the bucket and will not be able to enjoy VERS. More of would be for the future descendants to benefit from this legacy.

It seems to be catering more for the 2nd time, 3rd time and so on and so forth resales buyers to reassure them that the government will be giving them an exit option when they reached retirement age and to continue to pay high high prices for resales. So keep the record S$1Mil HDB resales purchases going and property crazy mindset going. We will probably need to wait for the government to tweak the details for this scheme such that it does not veer towards this route. 

Secondly, we all saw what happened to the recently collapsed bridge in Italy. Reinforced concrete cannot last forever. Most buildings in Singapore have steel  embedded in the concrete and in our hot and moist tropical weather, they will corrode eventually and weaken the building structure via spalling of the concrete. Will most HDB be able to survive till 70 years old in terms of structural integrity as well as the monthly maintenance cost?

Last but not least, what if residents who oppose the VERS at the 70th year later regret it (smacks of the Brexit which appeared to have no trade deal concluded in place yet)? So does it mean people who have disagreed on the one and only redvelopment vote at 70 years, later on regret it for the rest of their lives? This is different from private property where they can start new enbloc proceedings 2 years after the previous failed attempt. Perhaps the government can offer 2 VERS during the life time of the HDB home similar to the 2 upgradings during the life time of a flat that was announced during the National Day Rally. Maybe first VERS at 60 years old and another at 70 years old.

There will of course also be potential acrimony issues for the VERS which are already common for private enbloc. But in the context of the greater good, the exploration and fine tuning of VERS shall cushion the harsh landing expected for the diminution in value of leasehold HDB and thus of paramount importance. 

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.