Sunday, July 31, 2016

Which Of The 3 Local Banks Should You Buy?

Banks are increasingly difficult to analyse because of the various business nature and regulatory compliance requirements which needs to be monitored.

I am not adept at analyzing banks because I do not have an in-depth understanding of the industry. If I made any mistake here, please forgive and do point out to me. I am still learning to understand the industry and will hopefully get better over time.

Folks who invest in the 3 local banks do so because they are the main core of STI components. If you track their returns respectively, you'd see a lot of similar correlation between the two. Hence, I believe many folks who bought into banks do so because they believe MAS is regulating them efficiently and sufficiently.

I've drawn up the basic lists of a few of the important factors when I do look into banks as an investment. These are not extensive in nature because there are so much more one has to look beyond and understand on the industry before they can be on top of their game.

Net Interest Margin (NIM)

For those who are not familiar with NIM, they are simply measuring how successful the banks are at investing the funds after taking into account the expenses on the same investment.

Customer deposits which the bank gets from folks like you and me are being reinvested at a higher return, and the margin measures the spread difference.

Among the 3 banks, NIM % is highest for DBS, which inched slightly over the other 2 banks. Having said that, DBS has yet to report their Q2 and I am expecting them to drop by a similar 10 basis point at least.

For UOB, we need to watch out on the latest Q2 performance as NIM has declined by 11 basis point yoy and 10 basis point qoq on the back of declining interest rate environment.

For OCBC, the NIM has performed better by declining less at 7 basis point qoq and have actually inched slightly up by 1 basis point yoy.

Non-Performing Loan (NPL)

NPL is an important component of banks due to the nature of the industry they are operating in. In short, NPL measures the bad debt unrecoverable amount which the banks are measuring against the Loans and Advances less provision for general and specific allowances they've made.

Among the 3 banks, NPL % is lowest for OCBC.

The provision for allowances is one which I think is severely overlooked by many because a bank can continue not to make any provision but they have to take the hit when the storm comes. At the opposite end, a prudent management can provision for general or specific allowances, on the back of a potential storm before they come. Notice the difference.

For instance, DBS has made lesser provision for allowances against their oil and gas exposure as compared to OCBC and UOB, who have made further general provision in Q1 and Q2 2016.

NPL% inched up during 2008 GFC

For the purpose of this exercise, I've further broken down the exposure mainly on two most commonly discussed: 1.) China; and 2.) Oil & Gas.

Do note that the exposure was not done based on NPL but rather as a total loans less allowances they've made on the back of these exposures.

OCBC and DBS are banks that have a greater exposure to Hongkong and Greater China due to the growth strategy that they are pursuing. For example, OCBC has a wealth strategy management to tap onto the Chinese market through Wing Hang. For UOB, they have a greater exposure on the rest of the South East Asia.

On exposure to O&G, UOB has again emerged as the winner as they have the least exposure to these industries. We are of course assuming that the O&G exposure is bad here. It could be the other way round when the cycle turns.

Capital Adequacy Ratio

For those who are not familiar with the Basel III arrangements, there are the respective regulatory minimal adequacy for banks to keep. Common Equity Tier 1, Tier 1 and Total CAR has a minimum adequacy regulatory of 6.5%, 8% and 10%. There is also a need to keep a capital conservation buffer of 2.5% which will slowly be phased transitionally from 2016 to 2019. This increases the requirement for banks to beef up their capital balance sheet in order to get stronger and pass the "stressed test" the banks are required to take from time to time.

Out of the 3 local banks, OCBC has currently the strongest CAR at 17.5%, which is well above the minimum regulatory requirement. The other 2 banks are not far off either.

This also explains why OCBC is currently discontinuing to offer the scrip dividend while UOB is enticing a 10% scrip dividend in order to increase their capital adequacy. I see scrip dividends issued by these banks more as a disadvantage to shareholders over time.


Moving on to valuations, it appears quite evidently that DBS emerged as the winner when we are valuing them in terms of price to earnings and price to book. Nevertheless, the key is still in ensuring if DBS has taken the conservative path to impairing their bad loans appropriately. If they don't and the crap hits the fans, it'll come back to haunt them like what happened to Deutsche Bank right now.

In terms of dividend yield, OCBC still emerged as one of the highest dividend paying bank with 4.19% yield.

Final Thoughts

I'd summarized the above with the following table which might be easier to compare across the 3 banks.

Summary - Done by B

A lot of people are buying into banks right now.

Personally, I feel that with the current valuations, banks are not as attractive as their valuation suggest because there are pretty evident scale that all their core business are taking a trend downwards. For instance, the loans growth, net interest income and others. In terms of how they are going to fare onward, there are also signs where the growth might be stalling in several geographical markets.

In order for banks to be attractive at this point, investors should at least not pay above P/BV above 1x which I feel is very much fair to richly valued. Unless you have a lot of warchest on the sideline or desperately wanted a bank exposure so much in your portfolio, my personal take is to wait further until a lot more crap hits the fans. You can be sure banks will be the first to react regardless of whatever bad news out there in the market.

If you had analyzed the banks' past 10 year valuations which will see them fare against the likes of GFC and the Euro crisis, you would notice that there are a lot of rooms for them to still fall. On the opposite end, we'd see these banks trade as high as 1.2x to 1.3x book value, so there are risks that one might miss out on the run should market goes crazy. Core business down but valuations up? Never say never.

I am tempted to cash in given my current warchest on banks but I'd rather swing high and hard when the right time comes than buy these banks at fair value right now. Somewhere along $8 will probably entice me to start my first round on OCBC, but I'd go slow because all it takes is just one right moment to hit all the jackpot home.

Tuesday, July 26, 2016

Uncertainty Is An Investor's Best Friend

The best time to invest in the market is when there are full of uncertainties surrounding the sentiments of the market and the company itself.

Given how interconnected we are in today's global world, the only certainty is that nothing is certain.

Think a few months back when there were signs of talk from media regarding the Chinese economy going for a hard landing, stock market across the world crashes down massively, prompting circuit breaker in a few markets.

Think a few months back when everyone was touting a massive office oversupply which sends companies like Capitaland Commercial Trust (CCT) down to as low as $1.28 and Fraser Commercial Trust (FCOT) to as low as $1.16, no one seems interested to buy because the atmosphere was so gloomy. Kyith wrote a good article here on FCOT articulating his thoughts on the uncertainties when the share price hits $1.16 and he was not as prepared as he is today.

Those were the best moments to invest because the media continues to tout multiple spiral negative news which would work in investor's favor, pushing prices down spirally to a value investor's delight.

When things are more certain like today when investors are pretty certain that there will be no interest hike in the upcoming Fed meeting this week, we get prices looming at $1.52 for CCT, $1.35 for FCOT, $2.54 for Ascendas and $2.20 for CMT. Even Keppel DC reit went up 3% after going ex-dividend recently. 

That was a pretty uncommon sight.

Those are probably moments I would like to avoid because these are signs of exuberance where everyone are flocking to the same investment ideas. 

I think there are a few ways an investor could sensibly do at this point:

1.) Rebalance Your Portfolio

Portfolio management beats any other strategies when it comes to investment.

Ideally speaking, you do not need to split among the many asset classes the market offers out there. 

To me, there are only two asset class that matters at this point for such investment: Cash and Equities.

By allocating across a 80/20, 70/30 or 60/40 accordingly is up to an investor's appetite, but it does provide a sensible moment to protect our hard earned capital if the share price of equities goes even higher.

2.) Building A Cash / Bond Ladder

Cash is a very precious callable option one can utilize during periods when they need them most.

Alternatively, an investor can also build upon a bond ladder (e.g SSB) by subscribing to short to medium term bonds with different immediate maturity date. This not only provides a decent return on investment while waiting but also psychologically play a very important role in ensuring decent portfolio management and utilization of those cash across a stretch period.

3.) Research Deep Into The Companies You are Aiming For

This is probably the best time to do research on companies you wish to pounce on opportunities.

By having a deep understanding of the business and risks the company entails, an investor would be in a good position to take on opportunities during a market correction or when there are fear in the market.

When the atmosphere is so ugly that everyone is touting a sell-off, this should be one of the few moments to shine, provided you are ready to action and become the exception.

4.) Ignore CNN / CNBC / Bloomberg News

I'd say take advantage of the noise provided from these newscasters because they provide an amplified glory or gloomy news depending on where the market is.

There are many people on the street that depends on these news to make decision and psychologically it will infuse emotional reaction which will bring about volatility in the market.

5.) Execution

This may seem the most common sense but it's actually the hardest to execute on an action plan and strategies when the real thing hits the fan.

Regardless of whether your strategies is to invest or do nothing, these are execution which will make or break on your success towards investing in the stock market.

Even if you have the simplest strategies of waiting for a low hanging fruits during a deep market correction, that is still an execution worth mentioning because not many can appreciate or do that confidently.

Friday, July 15, 2016

Building A Bigger Base For My Investment Portfolio

This post is written in reference to a fellow blog and buddy LP in an article which he wrote here.

Like him, I have a lot of similar thoughts on this subject matter regarding the different priorities at different points in life. There is a bigger learning to takeaway from this for those who understand it better.

There is no doubt that I am still in the building phase of my investment portfolio, which technically means I cannot rest on my shoulders, drop my worries and let nature runs its course. There is a goal which I wanted to achieve in my investment portfolio every year and that is to achieve a minimal of 10% return. This can be achieved by both dividend and capital gain. An ideal scenario would be 5% dividend and 5% capital gain. When stocks are high and they push the yield to a low 5% without any room to run for further capital gain due to stretch valuation, my immediate reaction is to sell.

There is no right or wrong with buying or selling at a certain period. So far, it works a perfect miracle for me. This may or may not be sustainable, until I prove another 5 to 10 years otherwise.

To grow the portfolio by injecting a fresh capital, I will have about $25k / year on average from 2017 onwards. There is a good announcement which I am expecting to make which will push the savings rate visually lower than before. Based on the latest Jul portfolio of $433k, the yearly capital injection represent a 5.7% growth on the portfolio. That is hardly significant if I were to reference based on my 10% goal. Working out and growing both organic and inorganically will create the most optimal scenario, but my energy will run low over the years. 

From understanding the above scenario, I can roughly know how long more I need to sustain my working lifestyle. I can either stretch the years of working or grow the portfolio inorganically at a higher and faster rate.

This does not mean that working is not an important factor when you are at the "growing the portfolio" stage. A 100% return on a $1k base is not as powerful as a 5% return on a $100k base. The earlier we work out those numbers, the better we understand what and where our situation are and we can channel our energies towards it better.

Sunday, July 10, 2016

"Jul 16" - SG Transactions & Portfolio Update"‏

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
IReit Global
ST Engineering
CapitaCommercial Trust
HK Land*
Ascott Reit
First Reit
Advancer Global Limited
Total SGD

I will be providing an early update this month as I will be away on a week trip the week after next to Krabi and Bkk for several days. Next week is also quarterly reporting period so there will be some which I would like to cover hopefully.

There are a flurry of activities which I have made since the last monthly update.

The first is on the full divestment of FCT which I have blogged here in more detail. The main reason for the divestment is more towards the reason siding on the valuation than fundamental. At current price, I think there's a lot of hope for growth on their rental reversion which can be tricky with tenant sales getting lesser sluggish growth and the economy getting uncertain. I also brought up the point where I think the Reits will feel performance pressure these few quarters ahead when Northpoint will be undergoing AEI. I just feel that when it happens, there will be knee jerk reaction in the market which will point to a lower valuation. I can be terribly wrong on this of course and they continue their upward surge.

I have also made full divestment to Ho bee Land which I have also blogged here. For this, the divestment is siding towards more onto fundamental reason that the company will have to re-strategize following the Brexit event which will have some unintended consequence on how the company will be directing its strategy onward. The foreign exchange loss and pressure on its UK properties will be a tough one to swallow on their financial reporting which I think will be a pressure to their share price. I do think however with the stewardship of Mr. Chua they will ensure that the company turn this into an opportunity, but things could get tricky. Again, I could be very wrong on this and end up a lot poorer.

I have also made a divestment to Keppel DC Reit recently as I will be unwinding a few of my Reits which I think has reached fair valuation. 

On the GO offer for CMPH, I have also finally received the full funds so it is time to move on.

On the long front, I have recently bid for the Advancer Global IPO and was successfully allocated a small minor shares which I have added to the portfolio.

The portfolio has increased from the previous month of $426,343 to $433,256 this month (+1.6% month on month; +39.6% year on year). The Brexit event has been a rather surprising event in a way that most investors have benefited from it somehow.

The XIRR YTD return has edged ahead from last month to 13.6% this month due to the surprise performance following the Brexit event. The benchmark for STI has returned -1.9% this year to date. 

In terms of dividends, it will be a rather dry run this month as the companies are only starting to report their interim reporting which means dividends would come in again mostly in Aug/Sep.

The cash portion is something which has now increased significantly from 7% last month to 45% this month. I'll continue to find opportunities in the midst of these market uncertainties. But overall, I think it's a very good allocation percentage to take advantage of the market should something happens.

I hope the July month has done well for everyone.

How has Jul been for you so far?

Friday, July 8, 2016

Advancer Global Limited - IPO Balloting Results

Advancer Global Limited has announced their balloting results this evening which shows that the total invitation was 5.5x oversubscribed.

For the small retail public tranche of 2 million shares, the balloting ratio was pretty decent and spread across the range of offer shares applied.

For instance, the majority of the offer shares was in the range of 100,000 to 499,000 shares applied and the probability of successful allocation was at 17% which I thought was pretty decent. The successful applicant will be allocated 8,000 shares for this instance.

Not surprisingly, the odds for the higher range applied was visibly lower than the lower range as the company probably wanted a range of investors at the lower range which indicate to me that the management might be minority shareholder's friendly. They could be rough and decide to allocate most of the shares to the highest bid applicants instead.

I applied for 100,000 shares previously and was one of the lucky (unlucky?) shareholders who were allocated 8,000 shares. They were insignificant in value but provide a good understudy base for me to study on the business model in the future.

The company will start trading next Monday onwards so interested investors can still get in the market assuming they are still interested in the company.

Monday, July 4, 2016

Advancer Global Limited - IPO Review

I am a bit late to this as I had just finished reading the prospectus over the weekend.

Advancer Global Limited is a company established in providing integrated services in the following segments:

  • Employment Services - Sourcing and Employment for FDWs to individuals and corporate.
  • Cleaning and Stewarding - Integrated cleaning and stewarding solution service to corporate offices and residential. This is also the biggest segments among the three.
  • Security Services - Providing security guard services to residential and corporate.

They are offering a total of 43 million shares, of which 41 m shares will be under placement and the rest of the 2 m shares will be under the public retail tranche. There is a very small amount of limited offer to the public, so you can expect demand to get very crowded.

Anyway, I will just go through the pros and cons of what I like and dislike about the company.


1.) Solid Financial Standings and Strong Cash Flow

As with most company doing their IPOs, the financial statement always look strong and impressive so it is not very surprising to see the same for this company. I am more interested in looking at the gross and net margins than the increasing profitability itself.

If you dissect these details, you would find that the "Cleaning and Stewarding" business has expanded rapidly from 2013 to 2015, though their margins are not the highest among the 3 segments. Nevertheless, the margins still improved over the years due to the company undertaking service contracts using the in-house manpower resources to achieve a greater cost efficiency and through the acquisition of Unipest. 

The "Employment (FDWs) services" segment has not really grown as much as we'd like to see from 2013 to 2015, though margins remain steady high at around 40+% on average. 

The revenue from the "security services" business is about the same range but with a much lower margin. Labor costs is a concern though the company has undertaken steps to use the progressive wage model to project the amount of wages they need to cater.

In terms of cashflow, they look pretty solid out there because they do not have a huge capital expenditures to commit. This is understandable given that they are a service and asset light company and the key could probably lies in the valuation (P/FCF which is currently at about 8x).

2.) Synergies among the 3 segments

There are synergies with the 3 divisions and bigger players can take advantage of this by streamlining their process efficiency to reduce costs.

For example, the contract they secured for a particular residential project can consist of the security and cleaning services at one go.

Also, when a family resists an employment services for full time FDW, they can choose the alternative services of part-time cleaning which appeals to them.

3.) None of Major Customers or Suppliers take up > 5% revenue

This is purposefully chosen such that the business do not have to depend upon each individual major customer or supplier which will impact their business should anything happens.

4.) Regulatory laws favoring these industries

The company business is subject easily to regulatory laws abiding the demand and supply of the nature of industry.

This can be good or bad, depending on how you view at them.

For instance, the government has placed certain criteria for accreditation for those opening up a security business by requiring them to obtain a licence from the PLRD to supply the services of a security officers under Section 15 of the PSIA.

For the cleaning service, the NEA has also in 2014 implemented a new licensing system by imposing a higher standards across the industry with the goal of encouraging a more professional and reliable services.

For the employment service, the government has also reduced the concessionary rate of the levy rate from $120 to $60 per month in order to cater to the aging needs of the elderly and children. This will help to increase the demand for such services in the future.


1.) Not familiar with the industry

The industry has no precedence to which we can compare against the valuation of competitors easily.

The company has highlighted the below as competitors but it is very difficult to ascertain what kind of services or moats does Advancer Global has in advantage over the other competitors.

The only familiar name I know is Certis Cisco which is offering security services to corporate, hotels and commercials. Their net margin is in the similar range at about 12%.

2.) Expanding regionally

One of the company intent with the proceeds is to grow their overseas presence by setting up a joint venture with another company due to the difficulty in complying law in that particular countries.

The company has also little to no experience dealing with overseas operations, so the question of whether local market share is sufficient to grow over the long run. Overseas expansion will add on risks to the portfolio.

3.) Supply of Foreign Labors regulated by local laws

This is on the opposite end of the spectrum for cons of regulation laws.

The supply of foreign labor is highly dependent on the regulatory laws abiding the conditions. The introduction of restrictions on foreign labor may place a huge dent on the operations of these companies. 

For instance, the Indonesian government has announced in May that they will stop sending in maids from Indonesia to abroad in order to protect their rights.

4.) High needs for working capital

The average number of days for the cash conversion is about 44 days so you can expect a lot of cash being tied up for working capital purpose needs. Again, I am not familiar with the industry so do not know if that is the norms. Generally, I'd like company which can expect to turnaround their cash conversion a little faster than that.

Final Thoughts

I have presented both the pros and cons that I can think of.

I think if one wants to have a quick punt on this you should minimally bid for at least 100,000 shares to make it worthwhile, assuming a 10% successful allocation, they are only worth 10,000 x $0.22 = $2,200.

Given their current cheap valuation, I do think they have legs to run further so it may also be wise to keep them slightly for longer periods and see where they go from here. For all we know, this could be another multi-bagger like the ones we see recently with acromec.

It's up to the individual to decide. The closing applications is on 7th Jul noon.

Friday, July 1, 2016

Recent Action - Ho Bee Land

This will be a quick update to the portfolio as I made another divestment, this time Ho Bee Land for 22,000 shares at a price of $2.13.

I started accumulating Ho Bee during late last year and even more earlier this year with the thesis of a strong recurring income play, particularly in the UK where they have geared up to buy one after another in quick succession. Based on the recurring income alone, they should be able to pay dividends of up to 7 cents to its shareholders which is what they have been doing in 2015. At current closing price of $2.13, this represents a decent yield of 3.2% for the shareholders.

The Brexit event turned out to be one of the factors that influenced my decision to divest the company at this point as there will be more uncertainty towards both how the UK and EU will operate and function in the future. For a start, the sterling pounds are getting hammered which means that for every 10% sensitivity downside to the currency, Ho Bee earnings will be impacted by 3.2% respectively. In terms of balance sheet, Ho bee has a natural hedge against the assets it owned ($1.3 Billion) by borrowing in pounds as well ($1 Billion), so the NAV would get less affected.

For those who are looking at long term play, property developers like Ho Bee or CDL, who are affected by these events, could turnaround and provide an opportunity for them to grow their exposure in the UK by having a cheaper pounds sterling. The investment horizon has to be far because these are not events that you can forget a month or two. In fact, the whole procedure of the UK negotiating the exit clause with the EU will take years to solve, so a lot of uncertainty will be in play here.

Given that they only yield 3.2% at the moment, and with the ongoing uncertainty clouding the picture for the company, I chose to exit my position at this point as first I needed a greater returns on investment on my capital and second a greater margin of safety should my thesis was incorrect. At this time, I just feel that the risk outweigh the reward at this point.

The divestment at $2.13 means that I netted a 14% gains (including dividends) on this investment on a time span of 6 months. They are not as great as what I was expecting but given the climate I'll take it for now.

I'll continue to save the proceeds into the warchest portion, which has now grown to 44% as of writing. This will only be deployed when I have identified an ideal opportunity to go in.