Saturday 22 September 2018

The 99 Years Leasehold HDB Issue And The Legend of Freehold Property is King

Recently, I have been hearing a lot of people talking about the declining value of HDB Flat due to the 99 year leasehold problem. The opposition political parties members also went on to rattle away about how the current government is not doing enough to address this problem and it is wrong to be telling Singaporeans that HDB is an appreciating asset. In addition, many folks began to assert that owning a freehold property is the best solution to preserve the capital value of the investment into housing which is a major component of all assets for most families.

The "Legend of Freehold is King" in Singapore is not entirely correct for a number of reasons:

(1)  In one of my previous post, I have mentioned that in land-scare Singapore,  no one can guarantee that the Singapore Government will not invoke the use of a major weapon in their arsenal, that is, the Land Acquisition Act to take away even Freehold land. Hence freehold in Singapore context does not contain the essence of perpetuity relative to other neighboring countries such as Thailand. 

(2) Once a property reaches 30 years old or older, chances are that there will be many property maintenance issues regardless of being HDB, private leasehold or private freehold properties. Common problems include spalling concrete, worn out electrical fittings, water pipes bursting or leaking, pneumatic disposal system, major refurbishment of old and frequently broken down lifts etc. I have not known of any property that just because of its status being "Freehold" are exempted from these old age maintenance issues. The collapse of the bridge in Italy has shown the world that reinforced concretes do not last forever.

(3) In land scare cities such as Hong Kong and Singapore, buying any type of property is an extremely expensive affair. But in Malaysia and Thailand, there are abundance of freehold land and properties all around but at so much cheaper prices and also the associated maintenance cost. The cost of maintenance alone for any type of property is high in the context of Singapore. Tearing down and rebuilding are known to be very expensive for individual owners to undertake. Only the very rich minority upper class benefit from  holding a freehold property and not the middle class folks which forms the majority.    

(4) If freehold is so wonderful, then why do many private freehold owners in Singapore wanted to go the En Bloc route for redevelopment via selling off to private developers citing aging properties and maintenance issues. Most of these properties are less than 40 years old. Not even reaching half of 99 years old.  

(5) Freehold properties are generally at least 10%-20% more expensive than leasehold properties. One would be better off investing the differences into other income generating investments for additional passive income.  Personally, I will not pay a single cents more for a freehold status property over a similarly located property if the purpose is just for own stay.

(6) Most freehold properties locations are inferior to 99 years old leasehold properties in the context of the middle class which forms the majority base of Singapore. 

As alluded to the above factors, my personal thoughts are that having the so called "coveted" freehold title is not an effective solution to the 99 years declining value problem in our local Singapore context. For own residential living in Singapore, holding a HDB flat may in fact turn out to be a better choice than other forms of property and which makes the most financial sense. 

Please also refer to my other posting with regard to the (i) preservation of value for HDB and (ii) also the latest "VERS" announced by government:

Thursday 13 September 2018

Asian Pay TV Trust Review for Q2 2018-Plummeting Unit Price And Goodbye To 2019 Dividends

Frankly speaking, I am extremely disappointed with the financial performance of Asian Pay TV Trust (“APTT”) for Q2. Disappointing as in the ARPU has not stabilized at all as per asserted by APTT management for many prior quarters. Q2 2018 saw further decline instead of “stability” in the key performance indicator of all its business segments. I have previously posted that in the absence of visibility of earnings upgrade from the ARPU, I will not put in more investment into APTT due to the intense competition disrupting its business.

Basic Cable and Premium Digital Cable TV Q2 2018 Performance
APTT is clearly facing tremendous competition from pirated Android TV boxes, Netflix and other online video streaming medium-IPTV. The piracy issue is not just a Taiwanese issue. This is a global problem. In Singapore, Starhub is a very good example of another pay TV business that is seeing declining subscription from the rampant piracy issues. I am sure many of you all know of some colleagues/friends or relatives who have purchased those “TV boxes” from Sim Lim Square and then decided to cancel the monthly subscription to Singtel and Starhub pay TV services due to the super cheap cost. So far, the content pirates are still outwitting authorities & pay TV companies and proved almost impossible to shut them down. 

Broadband Q2 2018 Performance
In addition, APTT is also besieged by unlimited wireless data packages from mobile operators on the Broadband front. The availability of low cost unlimited data offerings from top Taiwanese mobile operators means that APTT is forced to offer higher speeds at competitive prices to acquire new RGUs and re-contracting existing RGUs. The CAPEX invested over the past few years for growth purpose turns out to be more of a defensive CAPEX nature in order to address the decline in broadband subscription over the past few years.
Management assertion on share buyback due to undervaluation of share prices
APTT senior management gave reassurance to all investors during the Q2 results presentation by pointing to the assertion that “With a stable and resilient cashflow, APTT is a defensive business that is positioned to grow in a measured way”.

The 4 main growth drivers are as follow:
(1)         Up sell and cross sell across TBC’s subscriber base for future growth;
(2)         Scalable and efficient cost structure. There is headroom in network capacity to allow provision of additional services at limited incremental cost to support future inorganic growth;
(3)         Broadband Growth intact from opportunity to gain more market share. Moreover, there is rising demand for higher speed broadband due to rapidly growing demand for data AND
(4)         Premium Digitial TV. Room for growth as digital cable TV penetration in Taiwan is still lower than that of Korea, Singapore and Hong Kong.

The management team has mentioned that APTT is exploring potential unit buybacks as the current unit price of APTT is undervalued. At the same time, it wanted to strengthen its balance sheet hence as a result, the Board of directors is of the view that the distribution per unit in 2019 is likely to be lowered to support the initiatives.

My thoughts before final parting for Q2 2018 review
I find it incredulous that at this juncture, the management team feels strongly that APTT is undervalued by the market. A declining service pricing and uncertain future market outlook (declining historical track record since IPO) can also mean that the business activities will continue to worsen. I will not be surprised given the upcoming super fast 5G mobile network roll out and also unresolved rampant piracy issues. APTT is already warning investors that the overall performance of FY2018 will be worse off than FY2017. The cutting of future 2019 dividends in a way seems to be an admittance that the historical business model of leveraging heavily from bank borrowings is no longer sustainable in view of the competitive operating environment.

Using the dividend discount model and assuming dividend is cut by 50% due to lower cashflow and to fund CAPEX, the price may drop to S$0.216 per unit once it is announced officially in Q4 with regard to the slashing of dividends. I do not think investors will accept a cost of equity lower than 15% for holding on to APTT unless the business outlook and revenue generation improved drastically.

I am thus unsure why the management choose to want to cut dividends instead of continuing to utilize cheaper bank borrowing at effective interest rate of a mere 3.4%…..unless despite all the positives painted in the presentations, they have no confidence and are in fact very worried over the declining APTT business and worsening cash flow generation. But I reckon that APTT management team is probably really just being prudent in its new approach and I am just thinking too much?     

Sunday 2 September 2018

The Global Financial Crisis Strikes Again Year 2018!

The Global Financial Crisis is back again in 2018! Another Era (再创世纪) is currently being broadcasted. This is an amazing show which draws invaluable lessons from the Global Financial Crisis in 2008 but of course with elements of drama added into it. Also, I find it closely resembling the various office politics in real life and is able to draw parallel to it. 

The great Roger Kwok (郭晋安) plays a resourceful man who was only a low level salaried staff and how he rose up to riches. Roger is some of those folks out there that you will meet  in life who does not see anything right or wrong with how he made his money. Whatever the means, as long as it helps him in his quest to become rich, his principle values do not have the values of good or bad that bounds many other people. In business, he justified the scheming plots and working with other cunning old foxes as exchanging of what each other needs as a fair deal. Also, in the stock market, if there are winners who made it big, there will also be losers who ruined themselves financially. 

Danger of over leveraging and economic outlook is all about consumer confidence.
Roger basically brought down the wealthiest Fang family in Hong Kong by bribing a personal lawyer who keep encouraging the 富二代 CEO to load up on mini bonds while his father,the capable Group Chairman was being hospitalized. When the US government came out to bail out some of the financial and insurance companies as well as Fannie Mae and Freddie Mac, there was a mini stock rally. The corrupted family lawyer managed to get the stupid CEO to take out huge loans using his family shares of the Fang family listed business as collateral to buy more mini bonds and stocks by persuading him that the crisis is over and stock prices will shoot up and it's time to make more money. When the US government decided to let Lehman Brother collapse without rescuing it, the global stock prices continued to free fall. With the value of the collateral of Fang listed shares dropping and the CEO not having enough cash to top up the collateral, the lending bank sold off all the Fang listed shares. The abundance of Fang shares dumped into the market lead to a share price collapse from HK$100 to HK$25 while allowing Roger Kwok to jump in and accumulate the Fang family business at a super cheap price. Damn smart unscrupulous guy!

The moral of the story here is one can never know how bad the financial crisis will become. The 2008 Global Financial Crisis was considered mild relative to the 1930s Great Depression. If one is forced to liquidate during such market downturn and do not have sufficient resources to prevent a force selling of  one's own stock purchases, one will suffer tremendous realized losses. This is the danger of over leveraging on loans or margin financing. The world was lucky that Ben Bernanke, a student of the Great Depression and belief in staunch government intervention managed to prevent the crisis from worsening.  

Complex financial products such as sub-prime mini-bonds is not for all retail investors.
In "Another Era", the series antagonist Roger Kwok approached the "good guy" Frankie Lam (林文龙) to offer him a job at his new Company. Roger greatly admired Frankie for his wits in advising the then 2nd richest man in Hong Kong  on how to rescue the Hong Kong Stock Exchange by engineering a series of financial moves to restore confidences back in companies, institutional investors  and also retail investors. However, Frankie replied that he will never align himself with such an unscrupulous man like Roger.  The next shocking thing that Roger responded was that the Minibonds product were designed by Frankie himself so as a matter of fact, Frankie himself is no saint as retail investors lost more than HKD$20 billion due to this sub-prime creature. 

Frankie lamented that the mini-bond was supposed to be for corporate companies and the greedy banks repackaged them and sold them to the man on the street without highlight on the complex underlying securities risk on this product.  
The lesson here is never to purchase a financial product that you do not understand. Do not follow the herd instinct. Buying something without adequately understanding it and succumbing to thoughts on easy money will make one vulnerable to total loss of investment.

Final thoughts
The "Another Era" is an awesome show starring many prominent Hong Kong Stars and highly recommended. It is cleverly written and depicts the financial market as well as the greed of man accurately. A must watch for all retail investors!