Economic Outlook-2012 and 2013

It seems that many financial gurus and analysts are predicting gloom and doom for 2012 and 2013. There are also talks of the next upcoming global financial crisis leading to the outbreak of World War 3. Renowned Financial Guru, Dennis Ng, even predicted the demise of the Eurozone in 2012. The self made multi millionaire also quoted another analyst on the running of the "biggest Ponzi scam" through the printing of US dollars to finance the largest economy in the world. So, if Mr Dennis Ng is raising his cash position, should everyone of us also start selling our assets to raise cash and prepare to re-enter the market once crisis struck and then snap up cheap and good assets?

My view is that no one can accurately analyse and predict the market. Economic outlook is all about market sentiment. It would be foolish to have everything in cash and missed out on market rally as evident from the past few months. Based on my past experience, I found that it is virtually impossible to time the market and determine exactly when to buy and sell albeit lots of experts claiming they can do it.

An investor must always be prepared to suffer a 50% to 60% plunge in the market value of his investments. Mr Market is forever irrational. What matters most is to have the holding power and the guts to snap up good value assets like stocks or properties in times of financial crisis in order to exploit Mr Market when he is in one of his irrational mood swing.

The dividend yield investment strategy thus offers investors the chance to gradually realise the gains made annually through the payment of dividends instead of seeing all the capital gains made disappear during times of stock market downturn.

Returns as of 23 March 2012-Year to Date

Cache Logistics, Sabana REITs and K Green continue to pay good dividends. In addition, looking forward to the dividends from Macquire Infrastructure, Starhub and CapitaRChina.

Global economy continues to be gloomy with investors worries over the health of the China economy.

Returns as per below:

Portfolio-23 March 2012

Allocation of S$187K of assets as of 23 March 2012. The market rally this month resulted in a significant improvement in market valuation and returns on investments. Starhub went past the $3 mark.

CapitaRetail China Trust-Additional Investments

Have decided to give Mapletree REITs a miss and invest into CapitaRetail China Trust. Just been back from China recently and I have been awed by the rapid development there. There is no doubt that China is getting more powerful and many of its people are moving up in terms of earning power.

CapitaRetail China Trust (CRCT) is the first and only People's Republic of China shopping mall real estate investment trust (REIT) in Singapore with a portfolio of nine income-producing shopping malls. It is established with the objective of investing on a long term basis in a diversified portfolio of income-producing real estate used primarily for retail purposes and located primarily in China, Hong Kong and Macau.

In particularly, I like the fact that CRCT focuses on retail business which offers resilience in earnings from the tenancy agreements signed. This will enable the business to do well even during times of economic crisis. A significant portion of the properties' tenancies consists of major international and domestic retailers such as Wal-Mart, Carrefour and the Beijing Hualian Group (BHG) under master leases or long-term leases.

Growing with the Chinese Consumer is indeed a good theme for CRCT annual report.

H2O Residences Review (North East District)

Review of H2O Residences

H2O Residences is an upcoming new condo launch by City Developments Ltd (CDL) located at Sengkang West Avenue / Fernvale Link and directly next to Layar LRT Station connecting to Sengkang MRT station and bus interchange.

Awarded the Active, Beautiful & Clean Waters (ABC Waters) certification by PUB.

Details of this CDL project:

Project Name : H2O Residences

 Developer : Impac Holdings Pte Ltd (Subsidary of City Development Limited (CDL))
Address : Sengkang West Avenue / Fernvale Link
Tenure : 99 years leasehold w.e.f 10 May 2010
Site Area : Approx 16,998.8 sq m / 182,795 sq ft
District : 28 (Seletar, Yio Chu Kang)
Type of Development : Proposed erection of condominium comprising of 5 blocks residential flats (total 521) with 2 basement carparks, swimming pool and communal facilities on lots 4340A MK 20 at Sengkang West Avene
No of Units : 521 + 1 retail unit
Car Park Lots : 540
Facilities : Full Condo Facilities
Expected TOP : Dec 2015
Legal TOP : Dec 2018

Good Points:
(1) Just next to Layar LRT Station. As compared to Riversound Residences, one has to walk5-10mins to reach the LRT. Also, a sheltered linkway will connect from Layar LRT to H20 Residences. This means residents will not get wet even when it rains cats and dogs.

(2) Not sure why but people keep complaining about the location being remote. This is not true especially for those very familiar with the North East District. Access to the SLE, CTE, TPE and KPE are good. HDB has actually planned for new roads in the precinct.

(3) Amenities such as NTUC Fairprice and Foodcourt are within walking distance-the temporary commercial hub known as Fernvale Point. I estimated less than 500m. (No point to actually travel another LRT station down). Also near to Jalan Kayu! Besides Roti Prata, there are various nice eateries and even a shop famed for selling durian and choclate cakes there. Selegie beacurd too.....

(4) Singapore Press Holdings just won the land tender to the plot besides Fernvale Point for development of a shopping mall. It is just a 5mins walk from H20 Residences. Once the new mall is completed, it will increase the value of all properties in the vicinity.

(5) There is definitely rental potential-AMK Industrial Parks and the Seletar Aerospace Park.

(6) Quite like the floor storage patented by CDL in one of the room. This was the only part that impressed my wife who went along to view the showflat. Not sure why some people think this is a silly idea. Extra storage space is practical and efficient.

(7) 540 underground parking lots relative to 521 units. Adequate parking which reduces potential conflicts.Out of the 540 lots, 2 will be catered for electric cars.

(8) Superb landscaping and facilities on offer by CDL! The whistling pavilions and nature terrace concepts are awesome. Another interesting point is that all the facilities and stacks actually started on the "2nd level". Also, from the end of the secondary club house and lap pool, one is able to overlook the park connector and Punggol reservoir.....very well though out by the development team.

Not so good points
(i)It is not next to the main MRT. Residents have to take the LRT to Sengkang MRT. A bit troublesome as you have to dismount and then move on to another platform for the LRT. But the price already factored it in relative to say the Luxurie near Compass Point which is going above S$1000psf.

(ii) The bedrooms (including Master bedroom) are small....seems typical these days but still bigger relative to say Luxurie or Barley Residences. In the showflat, there are lots of mirrors, missing walls and even enlarged doorframe to make the unit seems bigger. The 3 bedroom at 1130sqft is decent size relative to 1055-76sqft type which newer projects are marketing. 

(iii) The interior finishing given smacks of squeezing as much margins out of home buyers as possible by CDL. Tiles pretending to be marble/stone lookalike given by CDL. Built in Wardrobe for the 2 common rooms are not sliding nature albeit the tiny room size (however, the Masterbedroom Wardrobe given are sliding and cleverly design).

Overall, I think it is quite good value these days (with other developments going above 1000psf). Rare to have a development so close to Sengkang Riverside Park but at the same time, close to amenities like shopping mall and just next to a LRT station.  

K-Green- Valuation

There are different methodologies out there for valuation. A simple one is probably using the standard dividend model. For K Green, there is another even easier way to do the estimation: Using a simple net asset on hand divided by total units. Allow me to explain further.

The business in K Green is actually very straight forward...it is a business trust that at the moment, focuses on "green infrastructure assets" in Singapore, namely, the (i) Senoko waste to energy plant, (ii) Ulu Pandan NEWater Plant and (iii) Tuas waste to energy plant. K Green also has the right of first refusal from Keppel and the management is also actively looking for opportunities aboard albeit no announcement of M&A of any sort yet. It is also no secret that Keppel probably spin it off into a Trust those projects that are of lower yield....but we should not discuss it further in this post....focus will be on the 3 main projects it is running for government.

Oh ya, talking about government makes things very interesting indeed, it's major and only customer is actually the Singapore government. The default risk is minimal unless somehow, Singapore collapses or K Green team unable to deliver proper maintenance or operation support which leads to a fundamental breach of contract. Unless that happens, it is safe to assume that the money made from government will keep recurring. Do note that based on the current business, the trust is actually self liquidating. The higher paid out in the form of dividends which is significantly more than the earnings thus cause the net asset to decline gradually over time.

 Next, with regards to the balance sheet of K Green, the net assets is really a good proxy to it's fair value. For example, cash, trade receivables, trade payables, provisions will approximate their fair value for obvious reasons. Only tricky part will be the service concession receivables and plant and equipment (we can ignore the Plant and equipment as it is immaterial). Based on IFRIC 12 accounting for service concessionary agreement, the total receivables from the 3 projects would have been factored and discounted to the present value during 2010. Hence I put it across boldly that what you see is what you will get from the published K Green financial.

Attached below an illustration how I worked out (that was last year hence I only have the half year June 2011). Yields based on it's earnings effectively around 2.71%. But if base on the net assets acquired at that point, it is a 17% discount to my perceived intrinsic value of K Green hence I went ahead to buy at 0.935 and was confident that I have found a very good deal. 

 










Did I also forget to mention that K Green currently does not has any loans outstanding and if it were to take on new projects and leverage up on the low interest rate environment, the yield to shareholders will actually increase.


Have found that the market price can be extremely volatile. It's first day listing price in June 2010 was S$1.05. From there, it had been a downward spiral until the recent market rally in Jan 2012.  I would say just ignore the background noise and let the market go on it's daily up and down see saw. If you have put $10K with K Green instead of leaving it in the bank in savings or fixed deposits (@1.87% interest), you would be rewarded and definitely better off with the total returns accumulated throughout the remaining income generating lifespan of the 3 projects.. Along the way, we can also wait for potential growth in acquisition of new infrastructure assets from leveraging on bank loans. Hence, holding on to K Green definitely has lots of good upside at the moment. May not be as exciting as holding on to blue chip stocks but the returns are decent.

P.S: The largest shareholder in K Green is still Temasek Holding at 49% of the issued units.

K-Green

The recent Sunday Times investment section list down K Green as a dividend stock producing yield of over 9% which is extremely impressive. However, the journalist failed to point out that there is a big difference between a trust and a REIT. Under the Singapore Companies Act, all companies can only pay out dividends from earnings (accounting profits). This is not true for business registered as a Trust. For such business, they are able to pay out dividends based on free cashflow. The fair value of K Green will thus decline overtime based on it's current business model.

Many investors seems confused by the accounting for concessionary service agreements and how to compute a fair value to K Green. Will try to analyse how we should work out the fair value in future posts.