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Archive for November, 2009|Monthly archive page

Dividends — Chk Oz out

In Investments on 29/11/2009 at 7:02 am

Dear Mr Cynical Investor

I thought I would add my two bits worth after reading your piece on “New thinking on Asian Stocks”. If you think that dividend yields of 2.8% for Asian markets is exciting may I tickle you with dividend yields of 6% plus for Australian banks (the major 4 being among the world’s top ten triple A rated banks) and as much as 9% for the nation’s Telecom company, Telstra. With 100% franking (tax credits), FY10 gross yield jumps up to 8-9% for the banks and 13% for Telstra. Using the simple Rule of 72, an investment in Telstra (ceteris paribus of cos) at the gross yield of 13% would double your money in 5 1/2 years.

No wonder the A$ is so strong ;-)

From someone who thinks Albert Einstein, Jesus Christ, Ussan Bolt are not a patch on her son — but at least the boy got letter from Kevin Rudd contragulating him that among he the top 1%  A-level students.

Temasek’s exposure to Dubai (Part 1)

In Temasek on 28/11/2009 at 7:43 am

Standard Chartered and HSBC are the most exposed, NCB Stockbrokers estimates, with 7 per cent and 2 per cent respectively of their loan books there.  Both reported sharply increased credit impairments against their loans to the Middle East in the first half.”

From the FT

And from the Guardian

“The City is speculating that Standard Chartered and HSBC could be the banks facing the biggest losses after developing close ties to the Middle East.Goldman Sachs said an initial estimate put HSBC’s potential losses at $600m, but only if a deal with Dubai’s partners in Abu Dhabi failed to materialise and Dubai was left to fend for itself in negotiations with its creditors.”

Full article

According to the Emirates Bank Association, HSBC has $17bn invested in UAE, while  Standard Chartered has $7.8bn

Will be looking at CapitaLand’s and KepLand’s portfolios though these companies prefer Abu Dhabi. And to that of DBS. Remember there is a DBS Islamic Bank. Gee DBS is accident prone: what with HN5 Notes one yr before Lehman collapsed, Middle East exapansion isonce 2006, 2007.

Let’s hope its move into encouraging  investments in ETFs via POSB MyHOME Fund isn’t a’cursed.

New thinking on Asian stocks

In China, Economy, Investments on 25/11/2009 at 6:26 pm

This appeared in today’s BT.

Writer, Lee King Fui, a fund mgr from Schroder, advocates buying Asian stocks that pay good dividends regularly. Investors in Asian stocks used to consider this kiddie stuff. You bought Asian shares because they gave spectatcular capital gains. You wanted dividends,  you bought into wimps in the  US, UK, European.  Asia was for he-men, not girlie-men

Can’t say much abt other markets, but such a strategy would have worked here esp as there were tax credits to be used up. Now gone alas.

“To participate in … long-term economic growth of Asia, investors may wish to look at an investment strategy that focuses on the dividends of companies. While not intuitive, capital return has rarely been a dominant component of total return nor has it a strong relation to economic performance. Other studies on the US and the rest of the world have reached a similar conclusion. In fact, our empirical investigation into the historical make-up of total return for Asia from 1994 to 2008 shows that dividend return is by far the largest component of total return, and bears a much stronger correlation to economic growth.

‘The reason why dividends closely track economic growth is not hard to comprehend; dividend payouts are driven by company fundamentals such as earnings and cashflow which are directly impacted by prevailing economic conditions. Stockmarket appreciation, however, can sometimes be driven by less fundamental factors such as sentiment, momentum and liquidity. Therefore, investors looking to invest in Asian markets because they want to participate in the region’s strong economic growth are more likely to achieve their objectives in the long-term by focusing on capturing the dividend return of Asian companies, than by targeting the capital return of stocks. In essence, they should be owning assets that pay shareholders to own them over time.

‘Focusing on dividends also helps one identify fundamentally strong firms. Because managers have better inside knowledge of their companies, dividends are often used by them to signal superior information about their firms’ future earnings and growth prospects. In our study of dividend payouts in Asia, we have found a positive relation between the dividend payout of companies and their future real earnings growth, thus supporting the existence of dividend signaling in the region.

‘However, investing in companies paying high dividends goes beyond investing in companies that are signaling high expected earnings growth. Often, companies that have high payout ratios have tended to be companies with good corporate governance standards as well. Because the disbursement of free cashflow as dividends helps to limit the potential for inefficient managerial investment or insider expropriation, agency costs are alleviated and the interests of managers and shareholders are aligned.

‘Indeed, in a region like Asia where corporate governance is improving but not necessarily always strong, picking companies which share their earnings growth with minority shareholders via dividends actually helps investors pick companies that have credible management.

‘The financial scandal at a leading Indian IT outsourcing company earlier this year is a case in point. The admission by the chairman then that he had been falsifying company accounts and inflating assets for several years had rocked the corporate community. A dividend-focused strategy would have helped one avoid this investment pitfall as the company had been paying no dividends for many years. Certainly, a company that was reporting double-digit earnings growth and sitting on a reported huge cash pile but paying no dividends would have pointed any dividend-focused investor to either poor capital management, weak corporate governance or, in this instance, fraudulent accounting.

‘[B]esides some of the more conventional dividend hunting grounds such as Australia, Hong Kong and Singapore, we are increasingly seeing opportunities in some of the developing markets. In particular, we like markets like China and India, as we believe these countries have much scope to grow their dividend payout ratios going forward, from current low levels of 38 per cent and 22 per cent to the Asian average of 47 per cent. The growth in their dividend payments will also be underpinned by the huge economic growth potential of these emerging giants.

‘We also see vast dividend potential in the smaller developing markets, like Thailand and Indonesia. For Indonesia in particular, the dividend paying culture has been continually improving over the last few years, with payout ratios rising from 31 per cent last year to 42 per cent this year. This trend of higher dividends will be further supported by the stronger and more stable political environment, which should lessen the need of Indonesian companies to retain excessive cash on their balance sheets to offset macroeconomic uncertainty.

‘Overall, we continue to believe that the long-term case for investing in the region remains compelling. Not only do regional markets offer good opportunities for investors focused on dividend yield, they offer the scope for greater participation in the region’s strong economic growth as well. Asia is now one of the highest dividend payout regions in the world, and this trend of improvement is set to continue. Indeed, the dividend yield available from Asian markets stands at 2.8 per cent which compares favourably to the yield in global markets of 2.6 per cent. [BTW STI index yields about 3.3% as at Sept]

‘[T]he dividend growth that we have seen in Asian equity markets has not been at the expense of dividend cover, which is at a relatively good level. Sources of dividend yield across the region have also become more diverse with many of the regions’ markets trading on attractive yields. Indeed, the improvement that we have seen in Asian dividends is a structural – rather than just a cyclical – development, helping to lay the foundation for more sustainable dividend payments, and justification for a longer-term re-rating of Asian markets in general.”

Where value investing can go wrong

In GIC, Investment banking, Investments, Temasek on 24/11/2009 at 8:25 am

“A study by Standard & Poor’s, one of the world’s leading credit rating agencies, has raised questions over the financial strength of some of the biggest banks ahead of new rules that could require them to raise more funds.

‘The analysis by S&P showed that HSBC is the best capitalised bank in the world, while Switzerland’s UBS, Citigroup of the US and several of Japan’s biggest banks are among the weakest.”: an excerpt from the FT.

No the purpose is not to show that highly paid managers at GIC goffed, or how smart I am. I have been a shareholder of HSBC since the 1980s. Even during Green’s (Christian + McKinsey, a lethal combination that always leads to problems) tenure as CEO, I kept the faith.

Now that the CEO is a man who joined the bank as an International Officer from a minor public school with I think A-levels, and he is basing himself in HK, one can only expect the return to the values that made HSBC great during the tenures of Sandberg, Purvis and Bond. Oh Purvis won the Military Cross in Korea, when he disobeyed orders to withdraw. He claimed he couldn’t hear the radio messge.

Sorry I am digressing. When Temasek bought into Merrill Lynch and Barclays and  GIC into UBS and Citi, I realised that they were buying into highly efficient banking machines. There was just enough capital for regulatory reasons and to provide a buffer for some things going wrong.  They needed a bit more cushion and GIC, Temasek were providing it.  Risky but history was on their side.

When the world recovered from the credit crunch of 2006, 2007, GIC and Temasek would reap the rewards of these finely tuned cash machines. They were the equivalent of the best of the best F1 cars.  I thought we had smart boys and gals. And that the risk would pay off.

But then came Bear Sterns, Lehman Brothers and AIG, and the rules changed. The winners were the better capitalised banks. If HSBC had as little capital as Citi, I’d be a poor man. The amounts it had to write-off on US sub prime would have shmed Citi. But it had capital.

So value investing doesn’t always pay off.

What a bunch of clowns

In Investments, Property on 23/11/2009 at 2:01 pm

I wonder if Cambridge University or its local alumni association will sue Cambridge Reit for bring the name  “Cambridge” into ridicule.

Early last week, righteously angry (and who can blame them), the manager of Cambridge Reit, complained that they were being diluted. It said  that “it was in the process of finalising refinancing arrangements” to offer an alternative. By friday this had become  “it does not have any financing arrangements in place yet for MI-Reit and discussions on alternative options are “only preliminary and exploratory in nature””. The quotes are from MediaCorp’s free sheet.

How did “finalising refinancing arrangements” turn into “discussions on alternative options are “only preliminary and exploratory in nature””?

As an ex-commercial lawyer, the former comments are misrepresentations, if the latter are correct.

That no financing deal was concluded it not surprising. These take time. But for “finalising refinancing arrangements” to morph into” discussions on alternative options are “only preliminary and exploratory in nature”” is not acceptable.

I hope the SGX, MAS, ACRA etc investigate this matter as the first announcement may have led to an ill-informed market.

I wonder how many votes Cambridge will garner today?

Judging SPH’s mall bid — CEO gives a hostage to Fortune

In Investments, Property on 23/11/2009 at 5:00 am

Last Wednesday, BT carried an article in which the CEO of SPH (its parent) explained the thinking behind an SPH-led consortium winning bid to build a mall in Clementi. Its partners with 20% each were NTUC Fair Price and NTUC Income.

BT giving the background said, “Its winning bid of $541.898 million was the highest of six offers that HDB received for the mall. The winning bid is nearly 42 per cent more than the next highest offer of $382 million.” Analysts were amazed at the price paid.

“Winning bidders looking ahead at rentals upon lease renewal” was the screaming headline. BT went on quoting SPH’s CEO, “‘[W]hen we do our calculations, we are not using the rentals when we start operations. We are actually using after rental renewal cycle, whether it is after three years or six years,’ said SPH chief executive officer Alan Chan.”

“Had SPH used the typical strategy of real estate investment trusts (Reits), which assume say a 5-6 per cent return based on rents when the mall starts operating, it would have led to bids in the $300 million range – where four of the six bids came in for the mall at the close of HDB’s tender last Tuesday,” BT continued.

What I liked about the CEO’s comments is that he gave analysts a time frame on which he can be judged. I’m surprised that the PR/ IR spin doctors allowed him to make these hostage to fortune statements. I hope he will continue making such statements, that help anlaysts.

The usual practice when the winning bid is way above the next bid (known as “winner’s curse”)  is for mangement to mumble something about corporate long term values without going into details.

Long-termism is often used as an excuse for avoiding tough but necessary short-term decisions, or for covering up mistakes.  Remember Temasek’s Merrill Lynch investment was “long term”

So it is refreshing to see a CEO give a time frame of 3-6 years on which analysts like me can judge the bid.

If you are wondering why this piece took so long to appear — I wanted to ensure that the article reflected correctly the CEO’s views: there would be no retraction, correction or clarification.

Remember the AWARE bun fight (where “Anal sex is normal” feminists fought “Crucify the weirdos” X’ians. OK I exaggerate wildly the positions)? There were a lot of ponticating nabobs in the MSM and online who rushed into “print” talking of the implications on civil society of the government’s non-intervention, allowing the analists to retake control of  AWARE  from the “family values” X’ians.

Well a few days later, the government stepped in and said that AWARE’s sex manual did not conform to society’s standards on anal sex and homosexualism, giving the X’ians a famous victory and making the pontificating nabobs who rushed to judgement looking decidely stupid.

SGX-listed Oz Property Fund

In Property on 22/11/2009 at 1:43 pm
MacarthurCook Property Securities Fund is listed on the ASX and SGX.
81% of its assets are in Australia (with 45% in Victoria and NSW), with 29% of these assets in retail assets and 38% office assets. As at June 30, its published NTA was 39 Australian cents, or 50 Singpore cents. The share price was 13.5 Singapore cents on friday.
A steal at 13.5cents? Well on ASX it was trading at 9.5 Australian cents or 12 Singapore cents. The Singapore price is a 12.5% premium to the Oz price.
Do the Oz investors know something abt the state of the Oz assets, that Singaporean investors don’t? Or is it sheer illiquidity in both markets?

Free Option on Revival of a Swiss Bank

In GIC, Investment banking, Investments on 21/11/2009 at 9:39 am

“Analysts at Credit Suisse reckon that even though UBS will not be able to pay any dividends for the next few years, its shares are so cheap relative to the aggressive profit-targets that it has announced that they are a “free option” on a revival of the investment bank.” : Economist.

The issue is will the Swiss regulators allow the bank to expand as aggressively as it wants t,o especially as Switzerland had to rescue the bank.  Albeit the Swiss government made a good profit.

Readers may remember that GIC first bought into UBS in December 2007 and has been sitting on a loss ever since then.

Democracy isn’t always fair

In Corporate governance on 19/11/2009 at 5:43 am

What with substantial shareholders upset with management decisions at Global Investments and M-REIT, the link below is an antidote to all the mindless pontifications by corporate governance experts on the need for more shareholder democracy.

“[S]hareholders don’t necessarily know what’s good for them, and that companies need someone looking out for their best interests”

“There is also very little evidence that shareholder democracy works better than directors in deal-making. A number of academic studies suggest it is a wash.”

But before you think I am misquoting PAP on voters and democracy, the piece goes on “There will always be exceptions to every rule. Some boards make bad calls. [There you are, MM excepted, the PAP will never say this.]

‘“Look at the lost opportunity with Yahoo and Microsoft,” said Professor Sonnenfeld about the decision by Yahoo’s board to originally block Microsoft’s offer, a decision that probably lost Yahoo shareholders billions.

‘Professor Kaplan argues that both boards and shareholders will always make mistakes, but that when shareholders are in charge, “Net-net, the shareholder wins.”

‘And he may have a point: While Cadbury’s fate may now be in the hands of fast-money arbitrageurs, “some long-term investor had to make the decision to sell.” And selling is in itself a vote on the long-term future of the company.

‘Democracy is indeed messy.”

Temasek taking leaf from Buffett?

In Temasek, Uncategorized on 18/11/2009 at 11:26 am

When Temasek and GIC first bought big stakes in Merrill Lynch and Citi respectively, some analysts (self-included) were wondering where was Warren Buffett? Surely these banks would have tried him first? And if he passed, what did it mean? Was he giving banks a miss because they were offering him bad terms (he has a reputation of demanding and getting great terms: Goldman Sachs is a gd example) or did he have other issues?

Since then the world has witnesses the deaths of Lehman and AIG, and a shakeup in the financial industry. And Buffett buying.

Not only that, but he  is borrowing half of the $16 billion in cash Berkshire plans to use for the Burlington deal, his latest.

So it is interesting to note that Temasek  returned to the bond market for the second time this year to raise US$500 million ($692 million) via a 30-year issue.  This issue  follows a US$1.5 billion 10-year bond in October and a US$1.75 billion 10-year paper in Sept 2005.

After the latest deal, US$1.25 billion remains untapped of Temasek’s US$5 billion medium-term note program.

Wepco — Latest Incarnation

In Energy, Investments on 18/11/2009 at 6:12 am

China-based Brian Chang (he was born in South Africa) was in the 70s and 80s one of Singapore’s most famous entrepreneurs, building a major offshore marine business. He ran into a spot of bother and relocated to China where he rebuilt his fortune again and again in the offshore marine sector.

So in late 2007, when his son, Malcolm, took a 29.5% stake in very thinly traded and capitalised Wepco, there was speculation that the Changs would use Wepco to list some offshore marine assets. Nothing happened until Monday

Wepco announced that it iwas acquiring real estate firm HSR in a reverse takeover.  Patrick Liew and Kellie Lim, who own 100 per cent of HSR, will sell their entire stakeholding to Catalist-listed Wepco Ltd for S$40 million. Wepco will issue some 80 million consideration shares at a price of 50 cents per share.Mr Liew and Ms Lim will own 83%  of Wepco’s enlarged share capital.

Malcolm Chang bought into Wepco at around 60 cents, so he must be hoping that the new Wepco will attract investor interest.

GIL: Worth Analysing?

In Investments on 16/11/2009 at 1:31 am

(GIL) surely must be worth further analysis as a special situation. Published NTA is 35 cents a share as at June while it is now trading at 25 cents (up 2 cents).

But I’ll give detailed analysis a miss as there will be a change of manager. The present manager is part of the defunct Babcock & Brown group (in fact GIL was once Babcock & Brown Global Infrastructure Fund). The directors want to appoint as manager a ST Gp company, while a shareholder with about 20% wants a relatively unknown Australian fund manager.

So better to wait to see who becomes the manager (there is EGM later in November). And in the meantime,  I will try to find out more abt both managers.

Preview of what to expect

In Uncategorized on 14/11/2009 at 9:38 am

For a preview of what I will be writing about below are some pieces I did in mid June for two weeks for a project that did not take off. They are in chronological order.

Winning whatever the price of oil

Last week, it was announced that PetroChina (subject to Chinese regulatory approvals) would buy from Keppel its entire stake of 46% in SPC for S$6.25 a share.

Immediately one thought of 2003, when Keppel sold a 28% in SPC to Hong Kong-based (but Indonesian owned) Kapital Asia for S$1.50 a share, and said it was considering divesting its entire stake.

In 2004 the price of oil took off and Keppel decided to keep the refiner to expand its oil and gas production in SE Asia. Could Keppel be repeating its mistake of selling SPC shares, just before the oil market takes off? It could.

But Keppel shareholders (especially Temsek) should not complain. In the announcement of the deal, it was said “PetroChina and Keppel also plan to explore opportunities in the offshore oil industry and in other areas of mutual benefit as such opportunities become available”.

Things like this are usually to be ignored as fluff. Maybe not in this case.

PetroChina is one of China Inc’s two flagship oil companies, tasked with developing oil and gas resources globally to meet China’s energy needs. The Chinese have been active recently making oil-for-loan deals with national oil companies of Brazil, Russia and Kazakhstan, all very good for the likes of PetroChina.

Keppel’s off-shore rig business, is only one of two world-class companies in Singapore Inc’s local portfolio. Should the value of SPC explode upwards, then Keppel has, at the very least, the goodwill of PetroChina when it bids to build rigs for projects where PetroChina has an interest.

And should the price of oil collapse, Keppel and its shareholders will have S$1.47 billion in the bank to fund the rig business.

And if anyone thinks that it is a no-brainer to buy SPC because PetroChina said it could serve as a platform for future transactions, suggesting it might try to use SPC to make takeovers that it would be blocked from making directly — think again.

There would still be concerns of takeovers by Chinese state-run firms, done directly or indirectly, through a Singaporean subsidiary.

Managers turn swashbucklers? Can pigs fly?

Short of plans to buy assets, NOL does not need the S$1.4b. NOL, which has S$400m in cash reserves, would have almost less than 2% net debt. (45% of equity at the end of 1Q) against container sector average between 60 and 65.

NOL intends to use about S$700m to repay debt, the remainder for investments and working capital.

But the prognosis for the entire shipping industry for 2009 and early 2010 remain gloomy, so likewise does NOL operational gearing.

Buying into NOL (its shares have risen from 0.85 in early March to 1.68 yesterday) is to believe that NOL’s management can use its great financial gearing into something tangible. EG buying ship at bargain prices from highly leveraged shippers in distress, and shipyards.

And increasingly its gearing again in the process.

Imagine going into the next cycle with cheaply acquired ships and a gearing of 45%. Wow Bam. This is an unproven thesis. NOL is one of the most conservative container lines and has taken a higher proportion of its ships out of service than other lines to tackle over-capacity.

Can cautious managers turn into swashbuckling asset buyers? There are the Greeks and Chinese buccaneers out there too on the prowl for ships.

Writer has some NOL shares in his CPF portfolio.

Looking a gift horse in the mouth or  Why new SAT shareholders should be grumpy

On May 14, SIA announced that it was going to distribute to its shareholders its 81% stake in SATS by way of a dividend in specie. Since then share price is up 5%. This comes after SATS has become cash poor.

In January 2009, SATS launched a takeover bid for its Temask stable-mate SFI. According to the takeover documents, the pro-forma balance sheet as at September 2008 would have shown that the net cash position of the SATS (including SFI) group deteriorated to minus S$21 from S$528. In particular, cash in fixed deposits would have fallen from S$573 million to S$64 million.

But SATS needs cash because “SATS is committed to growing its 2 core businesses of airport and food services”.

It could borrow big-time, pro forma net gearing is 0.04% from (0.35)%. But in Singapore, where debt is a dirty word in GLCs (NOL comes to mind), a rights issue is reasonably probable.

Temasek as the new controlling shareholder of SATS has $356 million from its sale of SFI shares to fund any rights issue. But do other new SATS shareholders have the cash?

Finally, looks like MM Lee gets his way. In 2004, he said SIA should divest itself of SATS and SIAEC. SIA’s management demurred.

Will SAEC be divested despite SIA mgt saying last night that the SAEC holding is strategic? Stay tuned.

Backward into the Future

November 8, 2009 [OK I did get this wrong, but it could still happen]

SIA announces that it is proposing a dividend in specie to its shareholders of the Company’s entire shareholding in SIA Engg.

“Distributing shares through an in specie dividend will unlock shareholder value by giving SIA shareholders direct ownership of SIA Engg at no cost to them.”

“The proposed distribution will allow SIA to concentrate on its airline business,”something advised by MM Lee in 2004.

“SIA Engg will be able to independently pursue opportunities to aircraft maintenance, repair and overhaul businesses. The Proposal will improve trading liquidity of SIA Engg  shares, potentially enhancing value.”

May 14, 2010

SIA Engg announces Acquisition of 100% of ST Aerospace from ST Engg

“Acquisition consistent with SIA Engg previously announced long-term strategic plan”

ST Aerospace is the “Largest aircraft MRO company by commercial airframe man-hours” and has “Strategic partnership with RSAF”

Rights issue with Temasek taking up its entitlement and prepared to subscribe for shares that other shareholders don’t want.

Remember you first heard it here. But based on the companies’ past performance, SIA Engg should only buy ST Aerospace, if the price paid reflected Aeo’s lower margins. SIA Engg’s margins are consistently better than those of Aero. EG In financial yr ending Dec 2008, Aero’s turnover was S$1.9b with PBIT of S$272m, while SIA Engg turnover was S$1.1b but PBIT of S$301m.

But what price another national champion? And financial engineering by Temasek?

Temasek’s recently revised investment priorities R SGX Listcos

Yes this was Temasek week, and we will end the week by looking to see which non-Temasek SGX-listcos fit into its recently revised investment priorities:

  • non-West (It got its timing wrong with Merrills and Barclays coming-in and exiting. And misanalysing ABC Learning),
  • poised to capitalise on the growth of middle class consumer credit in Asia, and
  • with plausible competitive advantages, following its reinvestment in Olam.

What about the following?

  • Bayan – manager and developer resorts, hotels and spas in the Asia Pacific.
  • Creative – remember its MP3 player predated iPOD and Apple paid it damages for breaching its patents. All it needs is a bit more Zen meditation and it could have a mega hit on its hands.
  • Eu Yan San – has reached the limits of what it can do with its resources in Chinese medicine. Needs outside capital, but family squabbles prevail. But Temasek is different.
  • Raffles Education – big in Chinese education (and indirectly in property). In a bit of bother now but controlling shareholder and manager has a track record.

Bayan, Creative and RE are run by home-grown and-bred entrepreneurs. What better way of encouraging the growth of entrepreneurs with global ambitions, then by supporting these three companies?  We will keep you posted as we trawl through SGX listcos.

This continuing series will help us fill the gaps on those days when we wake up late or have nothing more interesting to say.

Whither the markets?

Fund managers, analysts, traders and media pundits are struggling to contain their confusion at what global equity markets have been doing since March.

The markets’ upsurge defies all rational explanations: just ask Temasek’s scholars and foreign-talent MBAs.

The conventional view is that this is a bear market rally. There will be a double-dip recession – a so called “W” recovery, where there is a steep fall, followed by a steep recovery and then another fall before another recovery finally appears which becomes more sustained.

Pundits pont out that, while not widely reported in the regular news, the bond markets had a mini crash in May. There’s talk of the ending of the multi-decade bull market in bonds, what with all the debt that governments have to raise.

My views on whether we are in bear market rally are just as irrelevant as anybody’s else.

But I heard something interesting on the FT (my second favourite newspaper) website a few weeks ago.

The strategist, from CLSA, belived that we are in the midst of a bear market rally. Nothing new here. But unlike other pundits, he said this rally could run for another two years before collapsing. He cited what happened after the dotcom bubble bust in 2000/ 2001.

He said, with hindsight, it was clear that the recovery from 2003 to 2007 was a bear market rally. Bottom line: A bull run or bear market rally can only be predicted in hindsight. Seating tight and doing nothing is not an option for a fund manager unless he is Warren Buffett.

Another reason to remain invested in Singapore mkt?

Could the plans to celebrate big-time the 50th anniversary of self-rule be a signal that the PM wants to calls a GE in the first half of next yr?

Remember that 50 years of self-independence coincides with 50 years of PAP rule, something that the celebrations are sure to link.

Have a good time tonite. And the next insight will be on tues morning.

Tempting the shorts

“China’s property market has been bouncing back over the last several weeks,” reports a FT publication. “Statistics from the China Real Estate Index System showed that residential property sales in 30 large cities increased by 11.42% April from March and transaction prices for new residential developments were up 3% week on week to the highest level this year between May 11 to 17.”

So it was not surprising that the CEO of CapitaLand over the weekend implicitly reminded investors that CapitaLand is NOT a Singapore property play but a China (property) play, “In 2008, our China operations accounted for about 26% of total group assets and contributed approximately 45% of the group’s earnings”.

The target is for China to make up 40 or 45% of assets in the next few years and for more than 45% of earnings. (Incidentally, if China assets are at 45%, then China earnings should be at 90%)

Is he reminding himself how big a bet CapitaLand is putting in China?

CapitaLand has just secured a S$5b three-year credit line with Bank of China and Industrial and Commercial Bank of China. What this means is that CapitaLand is gearing up just after completing a rights issue a few months back. It had reduced its net debt from S$5.6b to S$4.6b, a 18% improvement. Its net debt to equity had fallen to 0.32 from 0.47.

Now, making an assumption on drawdown by end FY2009, it will have net debt of S$9.6b and net debt to equity of 0.67. All very good if the Chinese property continues its bull run

But if it implodes (note that China super bull, Jim Rogers, is avoiding recommending property to investors: in 2008 he was negative about Chinese property) and CapitaLand has not sold assets before the downturn: another rights issue?

Hedge funds who are negative on China property could do worse than start to build up short positions in CapitaLand.

The perils of buying NTA

The share price of United Engineers is falling after its high of S$2.37 on 29 May. This illustrates that buying a counter at a deep discount to its NTA can be problematic, if there is no catalyst to unlock value. To recap. As part of an asset rationalising swap, Straits Trading and its controlling privately-owned shareholder swapped assets.

12% of UE was sold to Tecity at around S$1.52 a share, and 7% of WBL Corp was sold to ST as part of the asset swap. ST ended up with 19% of WBL. BTW WBL has another 10% of UE.

There was speculation that Tecity had immediate designs on UE. UE’s shares are at a deep discount to its published NTA of S$3.43. They remembered Tecity’s bid for ST which ended with Tecity paying S$6.70 for assets (revalued) worth S$6.52 a share. What is forgotten is that Tecity busy coping with the consequences of having spent S$1.1bn to own 82% of ST; is not likely to want to reward other UE shareholders at Tecity’s expense.

Assuming it bids at published NTA, it would have to spend S$679m. And if, the other major shareholder, GE Life starts a bidding war, the cost could escalate, like in ST. In early 2008, there were estimates that UE’s NTA could be S$6. And if it did bid at NTA or more, any time soon, ST’s minority shareholders would rightly cry foul.

TeCity’s founder, the deceased Tan Chin Tuan, would spin in his grave hearing his heirs being accused of being unfair to minorities.

Incidentally the cost of selling UE’s assets are likely to be very high.

Maybe future UE annual reports should give an estimate of the costs of selling these assets to unlock the published NTA. And maybe advisers to the independent directors of a target company; and the acquirer should subtract the costs of liquidating the assets when toying with NTA values in their reports.

If this had been done in ST, Tecity could have got away with a lower bid.

What price growth?

Bharti’s proposed acquisition of a 49% stake in South African MTN would give SingTel (at 30% Bhart’s biggest shareholder) exposure to markets in Africa and the Middle East, where there are a lot more mobile phones than people. Australia and Singapore (its biggest markets) are the opposite.

But the complex deal involving cash and a cross-shareholding by MTN into Bharti would mean that SingTel’s share of Bharti would drop to 19%. SingTel has indicated that it wants to rebuild its stake back up to 30%, if the deal goes through. At current prices, this means coming up with about US$5.3bn or S$7.7bn.

It has net debt of S$6.5bn and net gearing of 24%. But raising net debt to S$14.2bn and net gearing to 52% is not an option in a GLC, though it could make sense in any other telco that has stable underlying cashflow. Qwest (albeit it is now trying to reduce debt) has a ratio of 110%. (more debt than equity).

So if the Bharti/ MTN deal goes through, a SingTel rights issue will be necessary.

As to how dilutive this will be — S$7.7bn works out to only Singapore 48 cents a share, or 16% of its market capitalisation based on yesterday’s closing price of S$2.95.

Not too dilutive for exposure to fast-growing markets where there are more people than phones.

Long short pair

DBS Research’s economist issued a report suggesting Asia is on its way to an economic recovery because the region’s production is rebounding in a V-shaped fashion. “Asia is perched on a recovery path at the moment … we do not expect a W-shaped path in the near term.”

DBS Vickers Securities raised its 12-month target price for the stock of Singapore Exchange (SGX) to S$9.10 – the highest now among the target prices of 20 analysts polled by Bloomberg.

But does how does SGX look in the medium term vis-a-vis its rival, HKSE? Remember HK would benefit from a V-shaped recovery too.

Traditionally, an important measure of the success an exchange vis-a-vis its peers is the new IPOs it attracts According to Dealogic, some US$1.6bn has been raised this year through eight listings in Hong Kong. And the outlook is improving By contrast, Singapore raised US$12.5m from 3 IPOs all second board (sorry “Catalyst”) IPOs: with gloom pervasive, “2009 may be the worst year in memory for the IPO market”.

Funnily this just when FT reports that “Asia is expecting a strong pick-up in market listings in the second half of this year thanks to a steady flow of flotations in Hong Kong and amid growing expectations that Beijing could soon allow domestic listings for the first time in almost a year.”. It quoted Dealogic’s Ken Poon, “Given the strong liquidity flows into the region, I would expect 2009 IPO volumes will exceed 2008 … As Asian IPO volumes in 2008 was US$23bn while in the first half of 2009, it’s less than US$2bn … That would mean a really surprising second half. Sentiment is strong and liquidity is there to support new issues.”

And Hong Kong can look forward in 2010 to the AIA listing, the $5bn-plus IPO of AIG’s Asian life insurance unit This IPO is set to be the world’s largest IPO since 2007, when incidentally thanks to the Chinese, more money was raised in HK than in New York. So shouldn’t hedgies be thinking of shorting SGX, and buying HKSE? Even though SGX’s forecasted PE is below 20x, while that of HKSE is closer to 30x.

SIA’s Investment Prowess

If SIA were not such a great airline operationally and financially, I should be worried about its: “still keeping an eye out for possible acquisitions in China and India, despite the current economic downturn”.

The last time it went on a buying spree between 1999 – 2001, it showed that investing in airlines was not a core competency.

In April 2000, SIA purchased a 25% stake in Air New Zealand for 426 million New Zealand dollars (352 million Singapore dollars), or NZ$3 a share. Yes it was the usual “strategic” investment. SIA also participated in a subsequent rights issue, paying an additional S$51 million, to avoid diluting its 25% stake. The original purchase plus rights amounted to S$403 million.

SIA in 2001 tried to invest more, failing only because the NZ government was dilatory in approving an increase in its stake in Air NZ. Phew!

When 100% owned subsidiary Ansett failed in late 2001, pulling AirNZ down with it, SIA’s unapproved offer of NZ$1.31 a share was still on the table.

And in late 1999, a cash-strapped Richard Branson sold a 49% stake in his airline, Virgin Atlantic, to SIA for £600m (US$960m), a very good price for Mr Branson. SIA still has the stake and the much talked about synergies have been quietly forgotten.

There were also rumours of rows between Mr Branson and SIA on Branson’s plans to muscle-in on SIA’s lucrative UK to Oz route. So has the idea of selling the stake, what with valuations of airlines falling.

But let’s be fair. The then CEO of SIA has moved on to become chairman of OCBC, not bringing with him his deal-making enthusiasm: for that OCBC shareholders should be happy.

And recently SIA kept its nerve and refused to up its offer for a stake in China Eastern Airlines, which is now in financil difficulties. So maybe SIA is a more disciplined investor.

But being disciplined has its perils. Ask PSA which refused to outbid the Arabs for a stake in a choice HK terminal, only to have play catch-up on a second-rate terminal.

Things might not be as they seem

Consoling yrself that higher petrol prices are the price to pay for a V-shape recovery? The Western and Chinese economies are on their way to recovery, and rising oil and commodity prices are foreshadowing this recovery.. Think again because this NYT article http://www.nytimes.com/2009/06/11/business/economy/11commodity.html?ref=business reports that growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.

Core competency of new Temasek CEO

Could the new CEO of Temasek finally sort out the strangeness of Temasek having

  • two world class competing offshore rig builders in two separate listed listcos; two property listcos — one big, one tiny
  • two MRO aerospace cos – one listed and the other part of a listed conglomerate?

Surely the national interest could be served by merging these and creating national champs. Yes, these have discussed inside before, but nothing happened. Gossip says that the bosse at the helms of TLCs are protective of their turfs: bit like Chinese lawlords throughout history. It always took a great leader to unify China over and over again.

But this is unlikely to be his priority. Neither is going into natural resources.

When he was hired to be CFO of Melbourne-based miner BHP in 1999, the “Big Australian” had lost its way.  In the 1990s, it did a series of ill-conceived acquisitions and failed projects, amid historically low commodity prices.

The former investment banker was one half of an American duo. The other was CEO Paul Anderson, who came from Duke Energy.

In their first two years, BHP got rid of 2,000 jobs and A$6.9bn worth of assets. They then merged BHP with Billiton, createding the world’s biggest miner.

Goodyear then became CEO and a key legacies, analysts say, is the financial discipline he brought to BHP. He ensured it grew fast enough to capitalise on the commodities boom while avoiding the ill-conceived spending of the past; and all the while,  returning cash to shareholders.

Shortly after he took charge as CEO,  it was announced that BHP would increase its capital management programme by more than four times to US$13bn, beginning with a US$2.5bn off-market return in Australia.

With the Singapore government tapping the reserves, someone with a track record of returning  cash to shareholders while growing the portfolio is needed.

There is no Singaporean with these skills.

Mission Statement of Thoughts of a Cynical Investor

In Uncategorized on 13/11/2009 at 2:33 am

The purpose of this blog is to entertain by providing, I hope, witty,  critical and acerbic analysis of companies’ strategies, financials,  and management.  In particular to analyse the difference between what managers say they are doing, and the truth.

Just so everyone is clear where I am coming from — I analyse and write from the perspective of  a small investor who tries to invest in “special situations”: unfashionable companies that are experiencing change in their returns due to internal factors, such as restructuring, or external factors, like industry changes. Or whose high, consistent dividend payouts are ignored by the the market. Trading is not my style.

As I do not hold any adviser’s licence, I will have take care to ensure that no-one can complain that I am giving advice. And please do not ask for advice on market conditions or stocks.

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