August 2011

Some important highlights 

• S&P downgraded US ratings from AAA to AA+ 
• BOJ sold Yen to stabilize currency with losses on Thursday 4 Aug 2011 of approx US$ 50 billion

What this means

• While everyone is fleeing from equities, I cannot help but think that US is in fact much more important than I ever thought. With Debt to GDP of over 1x, it is around the same league as the many nations which have experience defaults in some ways or another but US had only a downgrade to AA+.
• Everyone knew long ago that US rating was not AAA and this day will come eventually, however when the day comes, it seems alot of compromise was reached and much "face" given to US.
• Click this link to understand the rating positions of the countries - Guardian UK
• While there is expectation of rising interest rates, there is nowhere else more liquid and more productive to be than in US debt. As such, we did see that US 10 year notes were in fact rising in price, hence a lowering yield.
• US is undoubtedly still highly competitive with advanced technology, a quarter of world's industrial production, so end of the world day scenario will NOT come.
• US and Japan has 40% of the world's largest companies with assets over US$ 40 trillion.
• US, Japan and Germany has over 50% of world's patents with US having 30%.
• There will definitely be an impact on the credit side, likely an across the board rise in required yields and probably lower volumes in higher yield issues as restrictions keep institutions from acquiring them.

Portfolio

• Short side have performed well. Whilst shorts are not my focus and expertise, this current year is filled with opportunities on this front and have done well beyond expectations. See Portfolio
• Decided to keep the shorts in Olam and Gallant 
• Reason being they are highly exposed to economic cycles
• Long side while performance is not satisfactory, is still positive and undervalued.
• Koon, one of the larger positions sees a high price $0.30 never reached in almost a year. Came from positive news that firm bought into a real estate agency and expansion into advisory and valuation. Firm also secured S$30.9mm of projects (Seletar-marine bridge/TPE) to total of S$90.4mm excluding precast projects worth S$53.2mm. On both fronts, significant traction made and if firm maintains a minimum of 10% margin (was 17% in 2010), we will see at least S$9 to 11mm of profits for 2011 (was $12.7m in 2010). With cap at $43mm and net cash of S$19mm, one pays S$24mm for earnings of S$9-11mm, with a free option on a S$225mm Vietnam Port project (S$22.5mm worth of profits at 10% margins) and throw in the Australian power business for free which gives an additional S$1mm in profit est. annually. Sure that some guy warned me that income is not recurring and this looks bad. However at 2010 when I bought in, and at this rate, the company would had paid for itself with its earnings in the 2 years at 2x PE. Who cares whether it recurs or not at that level.
• Nanyang Holdings remains deeply unappreciated and being more on commercial and individual focused, will have minimal impact from the corporate front in terms of the sovereign downgrades and economic situation in the west. Core properties in Kowloon also facing  redevelopment due to lack of space in Central. Low costs mitigates risks of a downturn. 
• Roxy 2H came out well, lower sales but higher profits as expected, still undervalued versus other hotel cum development players out there. Hotel value alone is >= its market cap.
• World precision had a new book order RMB 21.5mm, looks set to break 2H profit estimates. Price wise has also had strong support from good volumes.
• Many opportunities in the west, however I will pick choices based on superior returns profile, preferably event driven and with a limited time period to limit possible losses from USD. I will be working hard to crunch the numbers over the weekend.

Thats it for now, Monday will be rough.

Cheers!