Thursday, May 20, 2010

May updates 2010

With German Chancellor Angela Merkel ban on short selling and Wilmar's VAT tax dispute, Asian markets took a tumble. This goes to show the weakness of holders.

Anyway,  shorts are in fact a form of feedback mechanism to ensure the health of the financial markets. The way they are going after hedge funds, shortists and financial institutions is somewhat like a witch hunt to which no purpose entails.

Now Wilmar has been accused of tax fraud

  • Amount outstanding is US$ 341 to 550 mil from various sources
  • According to UBS and Indonesian tax laws, total amount payable is 400% of outstanding
  • So total amount they have to cough out tentatively is US$1.3-2.2 bn 
  • Mkt value of Wilmar dropped 
    • Day 1 - dropped S$0.43 or S$2.75 bn 
    • Day 2 - dropped S$0.23 or S$1.47 bn 
    • Ill update later dates accordingly 
So, if you look at it,
Wilmar lost S$4.22 bn of market value for fines of approx possible fines of S$ 1.89-3 bn.
Then some questions come to mind: 
  1. Why did it drop so much? 
  2. Why Indonesia govt stepped in on tax of a sudden?
After much reading, it appears that everyone is concerned that 
  1. There may be more than just that amount of fines (Possible, since it is early to tell and its Indonesia)
  2. Wilmar is trading at pretty lofty valuations
    • Currently its at 13x PER for a firm that is not massively cashflow generative 
    • Although it is in a dominant trading/processing position in terms of agri produce
    • It previously went to $7 per share on news of a HK spin off of its China arm (which is now cancelled)
    • The china arm was reported to have earnings of over 50% of Wilmar's share and the long run price only retreated to S$6.19 as of news of tax fraud was announced
  3.  Govt is stepping up taxes as 
    • It appears theres a political reason to do so against current candidate SBY, Read Jakarta Global
    • Apparently another firm, coal miner Bumi resources is under the radar as well 

Now it seems theres a high probability that the amount will rise and Wilmar may be deeper in the hole. 
Higher valuations also hints that this is not a good price level to buy in as yet.

On the portfolio
My accumulation of Roxy will be put on hold unless it goes even lower for better accumulation. 
Entry of other counters will be put on hold as well, in the meantime, I will do more research and put up the ideas just before I get into the positions. 

With Europe reaching for the money printing press to save Euro zone, seems like a decade of fiat currencies will be unavoidable. You can protect yourself by 

  1. Buying gold or related securities
  2. Buy companies with strong, moat like earnings, sustainable for the long run or lastly
  3. Stop investing and get involved with hard, brick and mortar enterprises with strong pricing power
  4. Get out of fiat currencies as mentioned in my previous posts on sovereign risks
Do note your writer here do not full agree with gold as an investment class. I agree with Warren Buffett in that gold itself has little intrinsic value. 

Friday, May 14, 2010

Roxy Pacific, E8Z.SI, ROXY.SP (UPDATES)

1Q results are out and figures came in much better than expectations as the firm recognizes more revenues from completed projects.

Please note I do not typically track firms by the quarters but this note is to double check on the investment and to ensure that the original thesis that the previous operating results were just average holds.

  • Revenue up 60% while profit rose to 42% 
  • $121.7m of $149.6m or over 81% in properties for sale under development are sold 
    • The increase from $131.5m in dec 09 was due to purchase of site at Lorong 102 Changi
  • Short term debt of $160.42m and long term debt of $96.06m. Total $256.48m
    • $72.6m of short term debt will be repaid by March 2011 upon TOP and collection
    • And if you worried why net debt to equity was high...bulk of cash is locked up in project accounts 
    • Assuming firm earns $30m in 2010 (likely to be much higher), they would need approx over 2.7 years to pay back the debt which is perfectly reasonable and in fact on the low side for developers  
    • Firm remains adopting FRS 16, hotel is still at cost less depreciation/ impairment 
    • Property devt is 82% of total revenue
      • "The Ambra" TOP is in March 2010
      • Revenue recognized from 9 projects, Azzuro, Verte, Adara, Ambriosa Ambra, Florentine, Nova 48, Nova 88 and Lucent
    • Hotel and property investment is 18% of total revenue 
      • Hotel AOR improved from to 82.4% to 93.5% yoy (13% rise)
      • Hotel ARR declined $167.2 to $151.8 yoy (9% decline) 
      • Revpar up $137.8 to $141.9 (3% rise) 
    • Gross margins wise, property devt made up 55%, rest from hotel and investments 
      • Hotel margins flat while devt declined due to recognition of lower margin projects  
    • Intention to launch 4 out of 7 current plots of development sites in 2010
      • Revenue will approximate $325m for the rest of 2010 
    • Firm's intrinsic value remains intact 
      • Note revaluation surplus was not added to income statement under FRS16
      • Value of hotel declined a little due to depreciation, hence increasing the revaluation surplus 
      • Still a deeply undervalued counter with favorable risk reward ratio 
    • RISKS
      • Downside is very low
        • Assuming 0.5-0.6x NTA (book value + hotel RNAV), downside is 7-22.5% 
        • Upside taking into hotel only is already 55%
        • Management is very transparent and communicates their thoughts through the quarterly reports, recently gave a dividend of S$0.01
      • I suppose the fear lies in inability of firm to replenish landbank and control margins  
          • Dont forget... 
        • you are buying it at less than the hotel value alone (gives only 45% of gross profits)
        • Singapore residential real estate remains robust, in fact improved over last quarter
        • Significant improvements in hotel segments and embedded value in Kovan center 
        • I will look to buy more in the coming weeks 

    Disclaimer: The writer is vested in this counter 

    Wednesday, May 12, 2010

    A simply amazing day

    Asian markets were up over 1-3%
    European especially Spanish and French financials up 18-20+% 
    The reason was a shift of risk from companies to governments due to new legislation and program of bond purchase from European financial institutions providing up to US 1 trillion.

    Is it me or Mr. market is having yet again having his crazy bouts.
    The US1 trillion will come from taxpayers which eventually affects corporations.
    Is it also my bad memory that US just had a bailout worth US$700 billion? This versus US$1 tr?

    Even now, Freddie mac is asking for another US$ 10.6 bn (Think MASSIVE charities). 
    Canda Finance minister Jim Flaherty mentioned concerns on Eu crisis affecing others? 
    Now why a country with strong fiscal position and miraculously avoided the sub prime crisis be worried?

    CMHC (Canada mortgage and housing corp) is learning from the US and China the bad tricks.
    Guaranteeing the bad loans through government and hiding bad loans in asset management firms.
    So lets say Mr. Wannabe wants to buy a house worth US$ 500,000 in Canada.  
    Check indicative prices HERE

    Source: HERE Montreal Chamber of commerce

    Low dispensable income of US$ 25,000 per annum but want to own a dream home, no problem...CMHC will solve your worries. Just put 0 - 5% or US$0-25,000 and pay the rest US$ 475,000 - 500,000 over 35 years or approx US$ 13,000 a year with no effect from time value. 

    Firstly 0 - 5% is really low, almost sub prime. Do you buy a car if you are jobless with no deposits?
    Secondly 35 years, thats long. Who claims in event the debtor dies? Health issues? Job losses?
    Thirdly even at US$13,000, thats over half of you average disposable income. 
    Do not forget the dynamics of employment in Canada.

    Surprisingly, approval rates were estimated to be around 40-50% for sub prime borrowers. 
    Now does that sound familiar to you? 
    Only difference - MBS are 100% guaranteed by the government, approx USD$ 813 bn as a min.
    From 2007/8 figures, government will have insured estimated well over $500 billion in securitized mortgages and lines of credit by the end of 2010 and issued over $600 billion in outstanding mortgage insurance.

    Thursday, May 6, 2010

    Chinese economy, banks and Malaysia KL Trip

    Back from a weekend trip to Malaysia in KL. 
    Much improvement has to be made to attract investors to the country in terms of infrastructure, range of services, level of technology and stability of investing in the country. Even the staff at A&W fast food chain attempted to fleece me by adding extra cheese and ice cream that I did not ask for. If you were wondering, that increases my set meal cost from RM 8.50 to RM 12.30, over 44% rise in price. 

    As I was telling many of my friends to be patient, China has yet again raised reserve ratios by 50bps (3rd time this year) due May 2010. Major banks and Asia indices fell over 1% on trade today. This was on top of Australia raising a super mining tax of 40% (Ouch!), that will not only increase cost or miners (Think Rio Tinto or BHP) but also makes buying more expensive (Think China).

    Is this a right time to go in? I do not think so. Besides Euro nation problems, the Dubai is still being resolved slowly and if you noticed, many of Chinese firms listed in HK have started to raise money as their coffers run dry. This is also including the China sovereign wealth, Central Huijing Investment Co raising money to clear bad debts hidden over the years. Read it HERE

    Some firms raising funds
    1. Property mostly debt after China restricts shares issuance for real estate firms, large supply leading to indigestion. Total loans listed here equals USD 3.15 bn in 2010 ytd.
      • 1638 HK - China Kaisa 3 year 13.25% USD 300 mil
      • 1387 HK - Renhe Commercial USD 500 mil 
      • YLL SGX - Yanlord Land 7 year 9.5% USD 300 mil 
      • 0845 HK - Glorius property postponed bond deal 
      • 2008 HK - Country Garden 7 year 11.73% USD 550 mil
      • 3383 HK - Agile property 7year 8.875% USD 650 mil
      • 3333 HK - Evergrande 5 years 13% USD 750 mil
      • 0127 HK - Chinese Estates 5 year 13% USD 750 mil 
      • 1638 HK - Henderson land 5 year 13.5% USD 350 mil bond 
    2. Financials (Basic overview HERE)
      • Refer to the table attached below 
      • Agricultural bank (4th largest, financially unstable) 
        • IPO USD 30 bn this week after a 19 bn cleanup
        • NPLs were said to be over 25% as the bank used to be a rural cooperative to provide loans to poor farmers and rural civilians 
        • SWFs, tycoons and funds rush in to get a piece of the pie. I think the supply of money has gotten out of hand and they should look clearly to the quality of the bank first rather than buying just because it is China's 4th largest bank and offers growth
      • Merchants Bank and Minsheng Bank (600016.SS) (1988.HK), China's 6th and 7th largest are working with 3rd parties to launch property funds
      • Foreigners launching Yuan denominated funds (Prax Capital) to invest in China real estate. HERE 

    On Central Huijing
    Now Huijing gets some RMB 70 billion in dividends each year from China's top 3 lending banks, why does it need to raise RMB 80 billion in bonds baffles me. It is said the funds will be injected into China EXIM and Sinosure to provide cushion for loan losses. The way China hides bad loans in AMCs (Asset Mgmt Cos) reminds me of US during the savings and loans crisis in the 1980-90s.
    • RMB 9.59 tr new loans (2009), about double 2008
    • Total new loans (08+09) approx RMB 14 tr or almost half of 2009 GDP! 
    • Targets RMB 7.5 tr in new loans in 2010..... 2.6 tr already issued in 1Q (34.6%)
    • NPL in 07-08 average 3-4%, that would mean RMB 280-420 bn of bad loans in coming years 

    1. Dynamics are not favoring China much to their fears, including higher commodity prices and inflation
    2. China's GDP driven economy will show weakness in their figures, it is impossible to clamp down fixed assets investment and money supply and yet show a growth in GDP which is hugely made of fixed asset investments and consumption
    3. There is too much fund raising by Chinese banks and too little demand, prices will continue to tumble  
    4. Many are expecting that rates in China will have to go up, however with reserve ratio restrictions, it may not be a needed method to control money supply in China. Currently its 17% (large banks) and 14% for others
    5. China hiked the ratio 9 times in 2007 and currently the latest hike is only the 3rd time
    6. Looking at various indicators for real estate prices and economic data such as an over 2.5% inflation rate , it is unlikely that China will stop the sleuth of restrictions and controls.

    So, be patient and do nothing -that will be the most meaningful activity in the coming weeks.

    On value investing, BP oil spill and Australia 40% mining tax

    I pen this post in reply to a good friend of mine working in one of Wall Street blue blood institutions.

    We were having a discussion on sector/company specific events, and their impact on long term prospects for a long term value investor like me. (In exact words). Having said that, 2 recent examples were thrown out and I decided to share them with the readers.
    1. BP oil spill 
    2. Australian 40% super mining tax 
    I shall attempt to answer the query as best as my small mind can afford to.
    Please note that I will not answer it in some Graham and Doddsville style of low price to book or low price to earnings and end up pissing a whole bunch of Buffett hate fans. The key to value investing is once again I emphasis not in low ratios. 

    Furthermore, value investing is not = long term. It is synonymous with long term because most of the time, value guys invest due to catalysts and that takes some time to materialize so people can hold out andsit on their positions versus traders who lever and cannot afford to sit out. Warren Buffett is long term not because he likes it but simply his size does not allow him to move in and out easily. Can you imagine trading US 10 billion worth in a single day, you will probably be the only buyer or seller with psuedo self fulfilling returns but yet definite losses.

    So my reply was:
    1. For the BP oil spill, it was unfortunate the incident happened and that President Obama said that all cost are to be borne by BP.
      • Spills do happen and many of currently "blue chip" names have suffered a loss of reputation and are doing fine now. Examples would be Exxon Valdez and Shell's Sakhalin projects
      • Investors tend to overreact to news
        • Although it is true that they have certainly severely damaged the environment and carry a liability for the clean up, most of the time, the sell off is overdone
        • BP tanked 16% over 4 days, losing est. £19 billion market cap (From £650 to 548 )
        • BP lost over £6 billion on 29 April itself
      • One has to see if the event is mis priced, i.e is the spill cost over stated? 
        • One has to refer to past events, find out from industry people and estimate the approximate cost of cleanup
        • This can never be a clear cut method as there may be contingent liabilities from numerous environmental groups or even US government itself
      • BP leaks 5 kboe / day and 9 days passed (Rig sank 22 apr), 45 kboe are in the seas. 
        • News stated one of 3 holes is capped
        • However leak volume stays the same, only variable is the amount of time saved
      • Given 7 days used to cap 1st leak, >14 days will be needed to cap the other 2 leaks
        • Since the remaining holes are larger, we assume 40 - 50 days required (2 months)
        • Giving rise to 5 kboe per day * 40 - 50 days = 200-250 kboe
        • So approx 245 - 295 kboe will be floating on the Gulk of Mexico
        • Valdez spilled approx 260 kboe of oil (1 boe = 42 US gallons)
        • So on the surface, it seems BP spill even after over compensating for the time to seal the hole the spill is slightly worse to Valdez and not much worse that most claimed
        • The only variable now is if unexpected delays occur such as sealed hole leaks again or explosions in the well
      • Now Exxon spent US$ 2 bn in clean up, US$1 bn in civil and criminal charges
        • Actual damages of about US$ 287 mn
        • Compensatory damages of about US$ 500 mn 
          • Both were awarded after a series of appeals spanning 20 years
          • US$ 5 bn in punitive charges were in the end limited by supreme court ruling
        • Total US$ 4.5 (PV) + 0.787 = US$ 5.2 bn of legal liabilities assuming inflation of 2% p.a
        • Note Exxon claimed most if not all of clean up cost via insurance as it was an accident
          • Hence actual cost is likely to be US$ 2.7+ bn 
          • BP will likely be able to claim as there will be insurance for rigs, Link HERE
        • Compare this with the fall in market value of £19 bn of BP, now it seems a little overdone
          • Even if BP spill is 2X larger, payments will be in the range of US$ 6-7bn or £4-4.6
      • Lastly, check on the health of BP as an investment 
        • From a Wall street journal column by BrettArends 
          • BP is 0.6x sales vs. Exxon and Chevron of 1x 
          • BP is 5x operating cashflow vs.Chevron 8.5x and Exxon 9.6x 
          • high dividend yield of 5-6% vs others 2-3% + strong balance sheet 
      • SO IS BP A BUY?
        • It is clear that on basic assumptions, the sell off is overdone
        • However do note that there may be possibilities of BP understating the leaks /day or other force majure events happening that may put the calculations out of whack
        • However with US$ 28bn stock loss versus a likely less than US$ 10 bn payout
          • Its worth a very close look but more work needs to be done 
        • This is a preliminary framework to think about 
    2. Australia 40% mining super tax affects all miners from BHP Billiton, Randgold, Xstrata
      • This case is more tacky since it is hard to prove the impact on the bottom line quantitatively 
        • Affects not only miners but ultimately, cost will be passed to the end users (Think China!)
        • It depends on a case to case basis for each company on how they are geared to bottom line in terms of operating leverage, some firms will get hit worse than others 
      • Company individual financial strength and cheapness of the stock is of utmost importance 
      • Investing is not speculation, in this case the tax laws are being proposed and not finalized 
        1. The rule seems rather draconian and some miners are starting to write in to oppose the ruling 
        2. The proposals still have to pass Australia's parliament, where several recent major laws have failed to get through the Senate, where the government lacks a majority
        3. Also noted as mentioned in Wall street journal :
          • Tax system review - headline corporate tax rate reduced 30% to 28%
          • Royalty that mining companies pay to state governments will be rebated, reducing the net effect of the tax changes below the headline rate of 40%
          • Combined with company taxes and after allowing for extraction costs and recouping capital investment, companies will pay a statutory rate of around 58%, according to a Treasury estimate
      • As a whole, not a clear case, however working along this lines, if you once again find any firms sold off beyond logical analysis of the figures, it is probably worth a look
        • This case is slightly more political in nature and a good understanding of it is crucial 
        • It may be too early to act on unfounded news and / or data 
    3. The last point is that when you look at things from a bottom up perspective, do note that having an awareness of the surroundings is important too.
      • Markets are selling at the slightest news because most  if not all are fairly priced in 
      • Do your homework to ensure not getting stuck in a massive sell off or at least you can stay certain of the position when it occurs 
      • Short term events should not affect your decision and views, especially changes in the stock prices unless there is/are new developments that will significantly impact the value of the investments and/or materialization of the catalysts
      • If it is outside your circle of competence, just avoid it, opportunities will be around