Grinding to farm money

If you are familiar with computer games, you will know the terms "farmer" and "grind". Basically, you grind -- brainlessly and boringly kill mobs to earn gold coins -- coin by coin. After a few weeks or months, you accumulate enough gold to buy or upgrade equipment, so that you can fight high level mobs to earn more gold and so on and so forth. A person who continuously does that is sometimes called a farmer because he farms gold coins, and supposedly loses out on the story of the game play.

If you were associated as gold farmers in any game, I am going to guess that you can live with some grinding -- really really boring stuff of saving money every day, tracking expenses every month, ensuring you run a surplus every year, and forcing yourself to save if you forgot to save -- with your sheer will power silencing any procrastination that you have.

I was one such farmer, but I was more of a trader, where I buy goods low during weekdays and resell them higher during weekends when demand is higher, but I can grind.

What I grind:

1. Record income and expense daily, monthly and yearly (14th year)
2. Desk-bound job, email warrior, telephone mistress (11th year)
3. CPF Special Account top-up -- transfer $7000 every year (2nd year)
4. CPF OA to SA transfer -- transfer max to SA every year (3rd year)
5. Medisave Account top-up for daughter -- $1000 every year (1st year)
6. SRS contribution -- transfer max every year for 10 years (3rd year) $12750 previously, now $15300
7. Monthly investment budget -- $3000 every month for 5 years (3rd year)
8. Read a financial report -- at least 1 every month (3rd year)
9. Learn french -- read french every week (2nd year)

Achievements:

1. Next year Jan, after I make my last CPF Special Account top-up to claim $7k tax relief, I will reach the Minimum Sum or Full Retirement Sum (FRS). => I have 2 things less to grind... Phew. 

... but it will be replaced with 1 new grinding task: repay mortgage loan with OA balances until loan is cleared.

This is a very boring post about the boring tasks of a farmer.

How much have I earned and lost in 2016?

How much have I earned and lost in 2015?

My objective for 2016 was to aim for a $10,000 of investment and interest income, with $12,000 being stretch target. Unfortunately, I did not hit my target. Income for the year was $9,700 but I also netted a loss of $2,100, which means my nett is $7,600. I realised losses because I decided to cut loss for 1 stock.

One of the biggest mistakes in 2015 was probably betting big on Keppel Corp, 75% of my portfolio then. I really liked the property assets they hold, so I bought a lot. I will remember this lesson for the next few years of my life -- never bet big big because I don't have the luck. I had to start looking at stocks that paid 6-10% yield to cover the shortfall from Keppel Corp, and had to keep diversifying my purchases (which could be a blessing in disguise). Keppel Corp now forms 30% of my portfolio and I had promised myself not to buy anymore of it no matter how tempting, and work towards doubling my portfolio size by end 2020 to reduce Keppel Corp to 15% of portfolio.

Excluding Keppel, my capital gain is +11.5%, excluding dividends, and I would have beat the market.

Including Keppel, my capital gain is -9%. Portfolio capital gain + dividends is -2%, so I didn't beat the market because of my big big bet on Keppel.

I sold my shares in Sembcorp Industries (profit), Keppel TT (profit) and Tiong Seng (loss).

The overall dividend yield with respect to capital is 5.2%, and 6.2% if I exclude Keppel, which means I met my 5% target. I probably will never hit 7% with Keppel forming 30% of my portfolio yielding just 3.5%.

Objective for 2017: Maintain existing portfolio and receive $10,000.
Stock to cash (exclude emergency funds) allocation ratio: 50:50.

Learn -> Earn -> Save -> Invest

High Interest Savings Account

I have been switching bank accounts for the higher interest rates. I am still using UOB One, and Bank of China (BOC) SmartSaver, CIMB Fast Saver to earn interests. I had also created a Hong Leong Finance Fixed Savings account because it pays 1.7% for a 6-month fixed saving, but it's only for 6 months, so I see it more as a Fixed Deposit. My OCBC 360 account is still lying around because I still have some GIRO payments tied to it and I pay 3 bills to get 0.5% on the min balance of $3000.

Assuming you have a salary credit of >= $2000, spend $500 on credit card, and pay 3 bills and

A. have <= $60k, the best account is Bank of China 2.35% on the first $60k balance.

B. have ~ $110k, the best account is Bank of China 2.35% on the first $60k balance, and then balance in CIMB Fast Saver 1%.

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Assuming you have a salary credit of >$2000, spend $1000 on credit card, and pay 3 bills and

C. have ~ $110k, the best account is  Bank of China 2.35% on the first $60k balance, and then balance in
UOB One 2.43% for exactly $50k. You need to make GIRO arrangements for the 3 bills to qualify for the UOB One conditions. BOC doesn't require you to set up GIRO, so you just pay the same 3 bills, $30/bill just to clock the bill payments. The extra money just adds credit to those bills.

D. have ~ $160k, option C + CIMB Fast Saver 1%

E. have >=$260k, option D + Singapore Savings Bond (SSB) 0.91% for 1st year that increases over 10 years for SSB-JAN17 (effective rate 2.18%) up to $100k.

F. if you still have money, house your balance in CIMB Star Saver 0.8%.

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For options A to F, if salary credit of >= $6000, Bank of China 2.75%.

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If you can't meet all the requirements, here are the best accounts for each category:

• salary credit of >$2000 only, the best account is OCBC 360 1.2% on first $60k
• spend $500 on credit card, the best account is UOB One 1.6% on exactly $50k
• pay 3 bills, the best account is CIMB Fast Saver 1% on first $50k

You can tell that it pays to read and do some homework.

Stock Review: Sheng Siong Group

I wrote an earlier review in Aug on Sheng Siong. The price has since returned to where it was in Aug and I am reviewing my moral position again -- they might not be exploiting low wage workers.

Government Grant
In their quarter ending 30 Sep 2016, they reported that expenses had increased because more bonuses were paid out. I actually changed my mind and was willing to reconsider Sheng Siong because they said they paid their employees more. However, the grants received from the Wages and Special Employment Credit Scheme and Temporary Employment Scheme is still substantial. Using straight-line projection, $4.8M worth of grants will be recorded under 2016. In 2017, the grants will be reduced by half, so expenses will increase by $2.4M, assuming all things equal. In 2018, when the scheme ends, expenses will increase by another $2.4M, again, assuming all things equal. Impact on profit is expected to be about 4% in 2017 and 8% in 2018.

Negative Cash Flow
They had been operating with negative cash flow. The good thing is that they are very honest about it and stated it in the executive summary of the financial report. As I was just reviewing Asian Pay TV yesterday, and lamenting about how sneaky they are to hide the negative parts of their finances, I like that Sheng Siong wrote their Capital Expenditure (Capex) in the cash flow statement too. Unfortunately, I get the feeling that they are paying out too much dividend. For illustration, if they don't pay dividend, then cash flow will probably be around $0, so they are channeling all their operating cash into dividends and Capex is funded by debt/cash. I will think that halving the current dividend is more sustainable.

Debt
Liabilities/Equity is 0.48x. The financial report states that the company has no borrowings, hence I can't exactly say that I can calculate a Debt/Equity ratio. "Trade and other payables" was reported as $102M. This is probably something I want to find out what makes up this amount. It could be an innovative way of managing cashflow. An example is Warren Buffet's Berkshire Hathaway that uses insurance premiums to fund investments and operating cash requirements, and they report zero debt in their books year after year. I wonder what kind of arrangement Sheng Siong has for this, but I am going to give them credit for it, assuming it's legal.

Entry Price
My only issue is the Price Earning Ratio is 24.7. I would have preferred it to be nearer the range of 15. Enterprise Value/EBITDA is 20, and I would have preferred it to be nearer to 10. Overall, the price needs to be half of the current to be attractive, but it's probably over valued because of its growth potential, just like how Raffles Medical Group sustained 1% yields for consecutive years -- it was consistently over-valued for 10 years and anyone who was waiting for the price to drop would never had bought anything. In the short term, there may be some price weakness because of store closures and new stores waiting to be opened. They also didn't report their online store profits, which I am interested to know, but I guess it isn't doing well that's why it's not mentioned anywhere. I will probably review Sheng Siong again after the next quarterly report.

Stock Review: Asian Pay TV

 Asian Pay Television Trust (APTT) launched its IPO in Singapore in May 2013 at a price of 97 cents/unit. APTT holds assets for Taiwan Broadband Communications (TBC) Group for cable TV and broadband services. If Starhub in Singapore were to follow what TBC did, it will be equivilent to Starhub selling away its cable TV infrastructure to another company that is still not owned by Starhub but retail investors, to make the debt on Starhub's balance sheet disappear magically. The only thing different is the Taiwanese chose to pass the debt to Singaporeans, similar to what Li Ka Shing did with Hutchison Port Holdings. He probably is very grateful to the Singaporeans who had taken over his company's debt.

The company operates in a way purely to pay lower taxes. Offshore portion is in low tax jurisdiction. Two ways to read this: These guys are smart. These guys know their stuff. I shouts to me: Steer clear! What are these Taiwanese doing in Singapore if not to take advantage of the tax exemptions for foreign-sourced income?

extracted from IPO document

Who owns the Taiwanese cable network now? Singaporeans. Seems like Eastspring Investments and Cornerstone Investors had also divested.

Top 5 major shareholders based on SGX data at 4 Dec 2016

Shareholders based on IPO document

Cornerstone investors stated in the IPO document were:

• Asian Century Quest Capital LLC
• Capital Research and Management Company
• Eastspring Investments (Singapore) Limited
• Indus Capital Partners, LLC
• Lion Global Investors Limited
• Neuberger Berman LLC
• OZ Master Fund, Ltd., Goldman Sachs Profit Sharing Master Trust, Gordel Capital Limited,
• Ozea, L.P., OZ Equity Long-Short Master Fund, Ltd., OZ Asia Master Fund, Ltd., OZ Eureka
• Fund, L.P., OZ Global Special Investments Master Fund, L.P. and OZ ELS Master Fund
• Quantum Partners LP
• Signature Global Advisors

Pay TV Business
Chunghwa Telecom is the largest telecommunication service provider in Taiwan and one of the largest in Asia in terms of revenue. In terms of both revenue and customers, Chunghwa is Taiwan’s largest provider of fixed line services, mobile services, broadband access service, and Internet service. (source wikipedia) Chunghwa also operates the fibre broadband for businesses and homes. Think of it as Singtel, where they have the money to buy spectrum rights and dominate the mobile phone networks.

If you already have fibre broadband, it's probably a little hard to predict what technology might make fibre broadband obselete. If you have broadband and cable TV, you have no reason not to expect the next wave to be fibre broadband and digital TV, eventually. It will reach everyone eventually, then the cost goes down, so that was the main reason why I did not buy into the APTT IPO in 2013. However, with its price down 50% since IPO, I am willing to take a second look, hence this review.

APTT, understandably, will face decreasing customers for its broadband segment, which forms 41% of its revenue and 18% of its subscriber base. This means that if broadband customers switch to fibre, we have to factor in a future earning baseline that is just 60% of the current.

The saving grace is that the cable TV network is rather safe because the taiwanese TV producer -- TBC --broadcasts on the cable TV network it owns and monopolises. The government also restricted IP TV, probably because of political censorship. However, if there is a new producer that is more popular than TBC and starts streaming these content on youtube (like what the Koreans do), or netflix (like what the Americans do), then probably the business model will be disrupted.

Japan's cable TV resembles the Taiwan cable TV business model, closed, exclusive and sustainable solely by domestic consumption, but there are multiple competitors in Japan, so there is a continuous need to innovate to stay relevant. All the Japanese cable TV networks have satellite broadcasting networks to bridge the rural areas when there are earthquakes (and cables break), something which isn't seen in Taiwan yet, although Taiwan is also earthquake prone. In Japan, fibre broadband in homes for internet is also mainstream, unlike in Taiwan. Thus, it is plausible to believe that APTT could eventually branch into satellite broadcasting networks if TBC decides to. However, if TBC were to be capitalistic, they will probably spin off another trust in Taiwan instead of APTT for its satellite assets (if any, in future), so as not to be bogged down by the low yield cable assets of APTT, and let APTT die a natural death in Singapore (with its Singaporean investors).

Business wise, we can say that APTT isn't entirely at a dead end of the industry, but whatever happens to it largely depends on TBC, which Singaporeans have totally no control over.

Financial Report
I was turned off by the way the financials are being reported (quarter ended 30 Sep 2016). The entire presentation slides didn't mention anything about profit or debt, just EBITDA, which is Earnings Before Interest, Taxes, Depreciation and Amortization. Thankfully, there is a financial report that they need to produce to comply with MAS regulations for being a public-listed company. Even then, the heading says "Selected Financial Information". Why on earth do they do that? Do they have something to hide?

I had to flipped to the profit and loss statement on Page 18 to see the profit ($43.532M). The capital expenditure isn't in the profit and loss statement. -.-" I spent quite some time comparing the profit and loss statement with the "Selected Financial Information" and the numbers also didn't tally for the income tax and interest cost. They only reconciled the EBITDA to the Profit on Page 24!

Capex is funded by air?

As their dividend policy is to pay out 100% of their operating cash, who funds the capex? Why is it that they are not saving their operating cash to fund the capex, especially when their cost of debt is at 4% p.a., which is higher than a Singapore-based REIT's (2.7% p.a.)?

Now, there is another sneaky bit. They have a table of capital expenditure (capex) forecast for next year. If you miss this out, you might just wonder why the debt keeps increasing. There is an additional capex of $20-$25M next year. The money will drop from the sky for that.

Capex forecast

Their debt stands at $1.246B (Page 36). Equity is $1.337B (Page 15). Debt/Equity is 0.93x. If they borrow another $25M, it will just add to the debt (maybe some Singaporeans are funding it), and who cares even if the Debt/Equity exceeds 1? Just for benchmark sake, REITs need to keep their Debt/Equity < 0.45x.

Dividend
Even without looking at the dividend, this company doesn't attract me at all. At 6.5 cents/year, at 48 cents, it translates to 13.5% yield. If the broadband business were to disappear, I will apply a 40% discount based on revenue share (since they are too sneaky not to report the profit by segment which most companies do), it's 8.1% yield based on the current price.

If I were to buy this company, I will want a margin of safety of at least 10% yield at a 40% discount, which translates to 39 cents, so I probably have to wait for the price to drop by another 9 cents before I reconsider this stock again.

What did I buy in Nov 2016?

The US presidential elections did rock the stock market a little. As usual, when it rocks, some people scamper in a hurry and dump their shares. I went in to pick up some. I bought SIA Engineering ($3.40) and AIMS AMP ($1.33 and $1.25).

Why SIA Engineering?

I like the nature of its business, specialised and will be in demand as long as there are aeroplanes to be maintained. Its debt is also very well managed over the years, which shows that the management looks at their top and bottom everyday. No reckless moves seen so far, just joint ventures. To me, reckless will mean acquisitions that result in a debt and its yield lower than the interest cost.

Why AIMS AMP?

Although I am bearish towards the Business Parks sector, the main reason why I bought AIMS was because of its 0.8 Price/Book and 8.5% dividend yield. Although there were some risks that the rental revisions for new leases will be -10%, overall, if you factor that into the yield for expiring leases this year, the yield will reduce from 8.5% to 8%, which is still decent. This purchase is intended to partially make up for the reduction in yields from my Keppel Corp purchases (average purchase price was $8 which translates to a 3.74%).

I can't predict when the market will rock again, but I feel that the market is still considered more "cheap" than "expensive". The Straits Times Index fund's Price Earning Ratio (PER) is 12, which is lower than average (about 16). However, we should also look at the fundamental individual company. If the PER is lower the average, than there is a higher chance for the price to be higher than lower in the short term.

Do I think the economy is bad? Yes, a little, but growth is still positive. Will the market crash? Usually market crashes when there is exuberance and growth, which we don't see now, so it's unlikely to crash. However, anything can happen, and we are very near to the 7-10 year market cycle, so it pays to hold cash. I am still hugging on to a 50% cash 50% investment ratio because my income doesn't grow fast. If you worry about having too little interest on your cash, try any of the following:

1. UOB One 2.43% p.a. for $50k (2 conditions)
2. Bank of China/OCBC 2.25% p.a. for $60k (3 conditions)
3. CIMB 1.0% p.a. for $50k (No conditions)
4. CIMB 0.8% p.a. up to $1M (No conditions)
5. Singapore Savings Bonds (SSB) 0.9% p.a. (1st year, average 1.8%) up to $100k

I use UOB One, Bank of China, CIMB, SSB. Bank of China's service is quite bad so I won't recommend, especially after they reduced the interest from 3.55% p.a. to 2.25% p.a. last month.

What will I buy with $3000 (Nov 2016)?

I didn't buy any stock in Oct. Will I buy any stock in Nov? I don't know.

There are a few events that make some investors jittery -- US Presidential Elections on 8 Nov, OPEC and Iraq being unable to agree on a supply cut despite saying that they will cut, Swiber defaulting on its bond payments. There are many worried shareholders, to the extent of local banks having to report their exposure to oil-related companies. I am glad that our banks are able to give the break down of their loan books.

Cooling measures are still in place, which means the government believes that prices has room to fall. If property prices do fall, cooling measures could be removed.

There are also reports on retrenchment and new jobs. Should we give Singaporeans priority in jobs? I think we already do. The paperwork and levies should deter the hiring of foreigners, but the salary expectation is probably the problem. Foreigners are willing to be paid lesser. Does the government have to specifically create jobs for jobless Singaporeans? Probably not. Eventually, the market will balance out the supply and demand which is reflected in the quality and the price of goods and services. At an individual level, I just need to make sure that I continue to learn new skills and remain as a desirable asset to my employer, while at the same time thinking about what I will do if I suddenly become jobless tomorrow. My current back up plan is to be a part time uber driver and maybe write my own application.

However if there are good buys, I may spend a bit. Thinking about the Singtel, SIA Engineering, ST Engineering, UOB, but prices aren't attractive enough yet. Otherwise, just build up warchest and collect dividends.

The writer owns shares in Singtel, SIA Engineering, ST Engineering, UOB.

SGXCafe - a tool to track your portfolio

I don't receive anything out of this recommendation. I want to commend the creator of SGXCafe for the website he developed. If you are serious about investing, you will most probably be like me who religiously track every buy/sell transaction. The reason is to know what the breakeven price is if we need to cut loss or to calculate the total return on our portfolio. This is a very tedious process. SGXCafe simplifies all that and saves at least 1 man hour a month of my time checking the dividend dates, updating the dividend amounts to revise my portfolio returns, etc. I spend 1 man hour partly also because I have many shares to read and update.

Here's how it will look like: https://www.sgxcafe.com/user/profile?username=jarwey

I chose not to show the actual amount, but anybody who is smart enough can guess by looking at the total dividend and work backwards.

SGXCafe Profile Sharing Settings

Benefit 1: Calculates total return per share (past dividends collected + capital gain)

Benefit 2: Calculates total return for your portfolio. You can create different portfolios to calculate this return differently if you are managing different accounts for your family members.

Benefit 3: Easy to share the portfolio to friends who ask you what you have bought. Particularly useful when you have so many shares that you can't remember every single one within 5 seconds.

Frill: A game that you can play to practise your skill at evaluating stocks. To be honest, this is probably not suitable for newbies because it doesn't teach you how to evaluate. It shows a bunch of financial ratios and you decide whether to buy or not. As the game removed the company name, the business is unknown to you, but you can see how well/badly the company performed compared with similar businesses (in the same industry). Here's how the scoring is done:

Although the creator asked for feedback to share how we (the players who had played the game) evaluate the numbers, I find it hard to explain what goes through my mind. One thing I know for sure is I always avoid companies making losses. Out of all the loss-making companies I chose to ignore, I only recall 1 or 2 companies that outperformed, which is probably the most a 5%. I am ok to forego that 5% companies for now, but I haven't given up trying to identify what indicators will point to the outperform possibility.

What will I buy with $3000 (Sep 2016)?

I didn't post what I will buy with $3000 in Jul and Aug 2016 because I wouldn't have bought anything. My last purchase was $3000 worth of SPH REIT in Jun. I felt that it was worthwhile to adopt a wait-and-see attitude because traditionally, the second half of the year usually performs worse than the first half of the year.

Without spending $3000 x 2 for the 2 months, it means I have $6000 more in my opportunity fund (aka warchest). I had also been trying to digest the statistics, in particular, unemployment statistics. The reason is there had been many reports of company retrenchments worldwide in sectors that are facing lower demand and higher automation. Unemployment rates inched up a little. For the quarter ending Jun, it's 3.1% for Singaporeans. Overall, including foreigners, the rate is 2.1%.

The next number I was looking at was job vacancy rate, which means jobs that have not been filled. For example, you want to hire a waitress, you will contribute to this job vacancy number that is measured every quarter. This is no data for the quarter ending Jun, but the job vacancy to unemployed person ratio is 1.03 for Mar, which means there are more job vacancies than unemployed persons. This rate is quite similar to the rate in 2012, but circumstances are different. In 2012, the property fever had not been tamed. In fact, the cooling measures had the reverse effect of buyers rushing to buy properties for fear that there will be more cooling measures that will prohibit them from buying in future. STI in 2012 was around 3000 points, versus 2800 now, for the same timeframe of Aug-Sep.

What will I buy in Sep? More bank shares if it heads back into the low range. If not, I will just add the $3000 into my warchest and continue to hug my warchest tight. Read my earlier bank stock review which shows the low range prices.

The writer owns units in SPH REIT, DBS, OCBC and UOB.

SGX Stockfacts Screener

There are 728 companies listed on the SGX. For the first-timer, or relatively new investor who have had fewer than five transactions, you are probably still conforming with social proofs -- a bias that believes that if everybody is doing something, it can't be too wrong.

As a non-conformist, and I say that because I will probably be the out-lyer in most social experiments, I am conscious of all these cognitive biases and human natures, hence I consciously act on raw, hard, facts that will stare at my face while I concurrently tear away any emotions.

Here's my simple criteria to selecting stocks, backed by sound financial fundamentals.

1. Low Debt/Equity (D/E) ratio You can never be any safer than following this ratio. A company with little or no debt means that the company has superb money management. They watch their top and bottom very tightly. This is very suitable for new investors because of the loss/risk aversion bias.
2. Minimally 3.5% yield Bank of China pays 3.55% p.a. on balances up to $60k if you credit your salary, spend $500/month on credit card, and pay 3 bills. It's safe to have dividends higher than the savings interest rate. A metric to look at for over-valued companies are extremely low yields, such as tech companies that cost a bomb before they even start to make enough money to pay you dividends higher than the savings account interest of 0.05%.
3. Price/Earning ratio < 13 which is an STI average This is also an arbitrary anchor to make you see feel safer that you are buying a stock that is below the average, which has a lower chance to be over-valued compared with another company that is above the average.
4. At least $800M market capitalization This is an arbitrary number I took from someone else's study (I can't remember) that companies in the 70-th percentile in terms of market capitalisation have the best performance. The companies are big enough to secure funds/loans for expansion, likely have established corporate governance structures, but are also small enough to grow and transform to seize opportunities, usually have one boss to call the shots. The very very large caps (e.g. >$10B) with very established businesses will not be able to adjust as quickly because of multiple layers of management to manuverve and many stakeholders with vested interests. They tend to be over-valued as well because the market pays a premium for their track record and reputation.

With these simple criteria, I present you a screen shot of only 20 companies that can satisfy my selection criteria from SGX Stockfacts Screener...

Here's how you select the criteria, if you don't know how.

Here's the shortlisted 20 companies.

This is the easy part. Now, start reading up on each company to find a business that resonates with your beliefs. You are one step nearer than 728 companies staring at you.

The writer owns shares in SIA Engineering, Keppel Corporation and Keppel REIT.

[Updated on 27/8/2016: You can also check the market statistics that SGX compiles every month to show which are the performing sectors. In this year, until Jul, Consumer Goods, Telco and REITS were the top 3 performers. How I use this data is to look for those sectors that are negative and study the companies in those sectors to look for under-valued stocks. Those that are positive, I will just verify with my stock selections to see if I had performed better than the average. For example, telco 12.84%: my singtel share bought at $3.60 last year is $4.20 now, so it's +16.67%, so I had performed better than the average.

Annual Sectorial Performance of Singapore Securities

]

Stock Review: Hyflux

I haven't recommended any first-stock this month because I didn't come across any to recommend.

Today I will review Hyflux -- the darling who created Singapore's NEWater. CEO Olivia Lum was a household name when she quitted school to start her company to make this first-of-a-kind Singapore-made water filtration technology because I own 30 units of 6% Cumulative Preference Shares (CPS) which I bought via an IPO in 2011. The structure was such that you get paid $6/year for every $100 unit held for 7 years. Upon maturity, Hyflux either redeems your capital or extends the tenure by a duration to be determined but at a 8% rate. The main reason why I bought it was because it was like a bond, and we have limited bond choices as retail investors.

Last week, this said CPS was trading below par value, or $100. The lowest was $93. Over the past 6 years holding this CPS, the price had been always at least $100. That pompted me to dig little deeper into its financial report.

The company is debt-laden. Debt/Equity (D/E) ratio is 80 as at Jun 2016. The lower the better. There are many other companies who fare much worse, so don't be too alarmed. There are other companies with similar preference shares holding much much much more debt (about 4 times more than Hyflux), for e.g. Oxley holdings (D/E = 348). Aspial's DE = 208. Basically I had divested all my shares in any company whose D/E ratio is above 50 because the economy is undergoing a lot of change and companies with high debt will likely have difficulties changing because they may not have the money to make the moves they want.

Top 10 D/E companies extracted from SGX Stockfacts

Anyway, back to Hyflux. After going through the financial report, the line item that is burning their cash is something I don't really understand, this term called "service concession arrangement". After doing a Google search, I seem to understand it as a maintenance agreement to manage and operate the water/energy plant after Hyflux constructs it. Hyflux owns the rights to manage and operate and these rights can be sold to other operators. However, as the filtration technology is proprietary to Hyflux, I am not sure whether there are patent or rights income because I don't see it anywhere in the financial report.

The other thing I was trying to identify was the profit margin to operate the plants. In 1H2015, profit margin (before tax) was 22%. in 1H2016, profit margin (before tax) was 2%. I seriously hope that I am misinterpreting the report. What happened over 1 year? 2 projects started, so higher revenue had been recorded, however, expenses are also very high as these are construction costs (~S$300M). The 2 projects are: TuasOne waste-to-energy (“WTE”) project (to be completed in 2019, client NEA) and Qurayyat Independent Water Project (“IWP”) in the Sultanate of Oman (to be completed in 2017, client Oman gov). This S$300M is likely the "service concession arrangement" line item on the cash flow sheet. In terms of reporting, I would have preferred the project expenses and loans to be tracked separately to show that their cash flow issues are purely because of the projects.

My conclusion is that Hyflux' negative cash flow issues are due to project construction costs. However, this is not conclusive as the company chooses not to separate the development and maintenance business. I still have faith to hold on to my CPS. If I were the Hyflux CEO, I will probably want to report my revenue, expense, debt, profit by the business nature. In terms of construction projects, I will also require my clients to pay me more upfront to manage my cash flow better. I probably prefer to buy the CPS that guarantees the 6% payout than to buy Hyflux equity ($0.51, 1.2 cents dividend or 2.3% yield) whose dividend is currently heavily penalised because of negative cash flow.

The writer owns Hyflux CPS 6% at the time of writing.

Stock Review: Sheng Siong Group

Sheng Siong is a household supermarket name. I had been avoiding it because I felt that their ethics could be improved and by that, I just felt that they were exploiting cheap labour, exploiting foreigners, selling low quality food, taking advantage of hawkers because they bidded for a hawker centre and turned it into a more expensive food court, etc.

Then I realised that all this while, Sheng Siong's share price had been rising non-stop. Do I hop on in support to earn some pocket money or do I hang on to my belief that because of their way they operate their business, they will get some "retribution" in time to come.

They have hit all the right notes. No debt. Dividend payout is almost 90%. Positive and growing cash flow. Marketing efforts are superb, analyst coverage is perfect (100% issue buy calls), every financial report, they report a bit about what they want to do and how they are achieving it. They expand their stores every year. They are even starting one in China, Kunming.

At $1.02 and 3.6 cents dividend, it translates to a yield of 3.5% which is decent.

It's tempting, but then I ask myself again whether they are exploilting cheap labour ($2.88M worth of Government Grant under Wage and Special Employment Credit Schemes, as reported in the Q2 2016 financial report). I asked myself whether it's their fault that they turned the hawker centre into a food court or is it the government's? While it could be the government's fault for publishing the tender, Sheng Siong had the choice to run it as a hawker centre or a food court and it chose to charge it as a food court.

Profit margins are growing. 10% is high. They could have paid these employees higher salaries. They could have sold better quality food to improve the well being and health of the lower income families who patronise their supermarkets. As a shareholder, I will like it, but I then ask myself whether it's morally right to take advantage of the lower income group that Sheng Siong targets and I can't bear to want to have a part in it.

It is also this very same moral principle that I also don't buy SMRT's shares. I don't own any Sheng Siong shares. I don't foresee myself buying it although it looks attractive. However, if you don't have this same moral dilemma that I have, just go forth and buy.

A study on my portfolio allocation

Whenever large price swings happen, I always recall what the feng shui masters say about the Year of the Fire Monkey -- that there will be a bull run for the financial markets until Apr 2017 with many wild swings in between. Anybody who observes the trend will know that April is always the best month for any market, so that was a no brainer prediction. The reason given was that Fire favours financial markets and fans a bull run. When we look further into the Fire element, 2017 will be the Fire Rooster, and if the fire symbolises a bull run in the financial markets, then 15 Feb 2018 could be the end date. However, history has also shown that nobody can predict a market crash, so we just need to be rational about investing, while keeping in mind that crashes do happen.

When I buy stocks, I usually go by what I perceive as intuitive decision-making. Over the past few months, I had been thinking about putting structure and logic into my intuition so I started with a portfolio allocation study of my own portfolio formed by, supposedly, my intuition. Perhaps it is something I subconsciously know about but have not written it out before.

Before I buy, I usually have to answer Yes to a few basic questions:

1. Is the business income model sustainable?
2. Is the growth driven by legitimate economic demand?
3. Is the yield >= 5%?

Assuming Yes to #1 and #2, if the yield is <5%, I will check what the historical yield (10-20 years) is. If the current yield is higher than the historical yield, then it's ok to buy.

The first exercise was to calculate the yield distribution. I currently have a 5% p.a. return. Market value vs. capital is -15% in the current down market. "3-4%" means more than 3 and less than or equal to 4.

My portfolio allocation by yield (based on ~S$200k capital)

The second exercise was to study the industry/sector the companies are in. The categories follow the SGX sector classification. I favour conglomerates with multiple businesses and property landlords. Having multiple businesses allows the company to more efficiently operate, especially when the businesses are related from a supply-chain perspective. These companies also tend to have passive income (expenses are very low relative to the income earned), which I like a lot.

The third exercise was to study my risk appetite. I usually don't like debt-ridden companies. Ratios I always look at are :

• Debt/Equity ratio (lower the better)
• Enterprise Value/EBITDA (lower the better)
• Receivables (quarter to quarter comparison) this will usually signal whether their customers have problems paying and it's useless (bad debt) if the customers cannot pay up.

Portfolio allocation only makes sense when your capital is at least $50,000. However, it is important to also know what you are building so that you will slowly see your portfolio become the portfolio you have imagined it to be. While I said that I bought based on intuition, I probably took the easy way out to explain how I selected the shares I bought.

Stock Review: Yoma Strategic Holdings

Yoma's founder is an enterprising man, Mr Serge Pun (63). He is a Myanmar national who started a company in Hong Kong in real estate development, progressed into real estate investment. His business spanned Bangkok, Shenzhen, Kuala Lumpur, Chengdu, and then finally Myanmar.

Yoma's business is primarily about real estate development business in Myanmar, managed by Serge Pun's two sons, CEO Melvyn Pun (38) and Cyrus Pun (36). The business also diverged into automotive (tractors), F&B (KFC) and tourism (balloons), with real estate still forming majority of the business.

There are a few figures in the financial report that I will dig into.

Profit Margin
What I could not find in the financial report was the expense per sector to find which sector was the most profitable. Instead, revenue was the only number that was categorised. As a result, I am forced to calculate the profit margin for the business as a whole -- 39% in 2016 and 35% in 2015 which are extremely high margins for a property developer.

Revenue categories extracted from financial report

Balance Sheet
Net cash is positive, however assets are largely contributed by development properties and land development rights. Asset value increased $100M to ~$950M as at 31 Mar 2016, contributed by increase in trade receivables, higher values of development property and land development rights. I didn't like it that the report didn't explain whether the higher values were due to higher valuations or increase in stock. There was a brief description about valuation gains for their investment properties.

Revenue Driver
Revenue driver appears to be driven by debt, which does not look sustainable to me -- debt steadily and proportionally increasing with revenue.

Star City
ALL the properties are in this little carved out "world" called Star City or Thanlyin. On the map, it appears to be a plot of land separated from the Yangon city centre by a river. It is marketed as a new township for the upper class.

extracted from Google Maps

What puzzles me is Star City is surrounded by farm land (at least to me it seems like it on the map). Yet the residential buildings are 8 to 12 storeys high, which will require lifts. I consider it too expensive a commodity to maintain. I would have believed a little bit more in the township and planning story had it been a combination of landed houses and 4 storey walk-up apartments spanning a wider area to help people move into homes they can afford.

Myanmar is also a relatively poor country with GDP per capita of US$1,183 in 2013. For comparison sake, Singapore's GDP per capita was US$54,648 in 2013. Indonesia, US$3,475. Vietnam, US$1,867.

Conclusion
While Myanmar is just beginning their path to democracy, it will take a lot of hard work and cleaning up (of corruption, crime, etc.) to be able to improve its citizens' standard of living. Building high-rise buildings with international schools in a ring-fenced, secured, Star City will not help the average citizen afford a better education or house. Unfortunately, it reminds me a lot about Malaysia's Iskandar township story. I wouldn't place my money on Yoma Strategic at its current price of 56 cents. Dividend was 0.25 cents or 0.4% yield. However, it could become an overnight darling like Genting Singapore if there are many speculators in Thanlyin, but the bubble will definitely burst for this one because high prices are not supported by fundamental wage growth and affordability in Myanmar.

References:

1. Full Year 2016 Financial Report
2. FY2016 Presentation Slides

What will I buy with $3000 (Jun 2016)?

The media reports about consecutive slowdown in the economy and government downgrading outlook forecasts. Do you read into the positive growth figure of 1-2%? or do you read into the consecutive quarters of economic slowdown? Although I am not an economics expert, there are some logical ways to understand what growth figures mean.

Singapore settles for slower growth for rest of decade - May 27, 2016, Business Times

For example, there is a report that the median salary has increased from $3,705 (2013) to $3,770 (2014). At a national level, it means that salaries for each worker had gone up, which may seem like a good thing. However, that does not mean that you will get a salary increment. It also does not mean that your job will always be there for you. In fact, if you are drawing a salary lower than the median and you get retrenched, you are helping to move the average higher.

Similarly, if manufacturing exports are decreasing, it can mean that the value of exported goods had decreased, or the goods are no longer in demand, or there had been a reduction in manufacturing companies because cost-conscious companies had shifted their manufacturing operations offshore. Does it mean that the economy is headed for a really bad time? Tuition centres are definitely sprouting up everywhere. The positive growth and negative growth still add up to a positive growth, which means that businesses are still adjusting to new business models, or the government is simply faking numbers.

The key to knowing what to invest in is to understand what is relevant to you and the world today. Learn relevant skills. Invest in relevant companies. There are certain industries that you know will disappear in 10 years time, some that you don't know or will not. Sometimes I also ask myself whether the mobile phone will be replaced. Does it matter? Will your land disappear? Will the need for food and energy disappear? Does Singapore still need the skills you have?

One thing I am not so sure about is the opening of flagship stores along Orchard. What impact does an Apple flagship store at Knightsbridge Mall beside Paragon have on Paragon? What impact does Uniqlo flagship store have on Orchard Central (a mall whose layout I seriously dislike) and its neighbour Centrepoint? Will crowds be drawn away from hot favourites Ngee Ann City and Paragon?

I am still placing my money in SPH REIT.


1. SPH REIT* $0.93, 5.9% yield. 5.5 cents/share. If you buy 3,000 units, you can expect to get $160/year. Pros: Easy to visit Paragon and Clementi Mall to see how the shopper crowd is like. Occupancy is consistency maintained at 99.9% to 100% for both malls.

Read the financial statements before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Is there a pattern in the stock market?

I had been following the stock market for quite some time and I believe in a few patterns:

1. Holiday season low trade volume because investors are having holidays with their families given their passive income from investments.

2. Sell in May (also partly attributable to the holiday season reason)

3. Holiday seasons generate very high sales numbers and make people very optimistic about the new year. Major market movers (i.e. popular gadgets, games, shopping, etc.) launch their new products/once-a-year-huge-discounts just-in-time for Christmas. The reports normally get reported in Jan-Feb the following year.

The sudden jolts can't be predicted:

1. SARS, influenza, Eloba, Zika, etc.

2. Flash crash due to technical glitches in trading algorithm, or China's circuit breaker that halts markets based on % swings.

3. Lehman brothers defaulting on their bonds (although people saw it coming, they believed that the bank was too big to fail)

Despite my constant answer to my friends that we can never predict the market, I decided to make an attempt to "predict" what the market will be like in the next 6 months (just for the fun of it).

Please don't take this too seriously as I will not be responsible for your missed opportunities. If the predictions turn out to be true, it could be mere coincidence or empirical evidence to support the hypothesis that there indeed are annual patterns in the market.

I extracted the historical monthly index from Yahoo and then did a month to month % comparison and average it over the 5, 10, 15 year spans. For e.g. 1 Jan vs. 1 Feb = 5% means STI was 5% higher on 1 Feb compared with 1 Jan. When plotted on a graph, it shows that 1 May sees the sharpest increase and 1 Sep sees the sharpest drop as compared with all other monthly comparisons. However, the index at 1 Sep could still be higher than the index on 1 Jan.

STI monthly difference

So sell in May probably became a self-fulfilling prophecy.

What will I buy with $3000 (May 2016)?

Hug money and hold tight for a mini roller coaster ride. I will still be recommending the same stock this month.

1. SPH REIT* $0.93, 5.9% yield. 5.5 cents/share. If you buy 3,000 units, you can expect to get $160/year. Pros: Easy to visit Paragon and Clementi Mall to see how the shopper crowd is like.

Read the financial statements before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Stock Review: Keppel DC REIT

Keppel Data Center (DC) REIT's financials look decent. Debt ratio of 30%, average lease expiry is 8.7 years, loan rates are fixed at 2.4%, occupancy 92%, etc.

What is holding me back from buying Keppel DC REIT? (I applied for it during the IPO but did not buy any post-IPO as I thought that the price does not offer me sufficient margin of safety. 7% is so-so, 6% is not high enough...)

1. Lease expiry

When you look deeper into the distribution of rental income vs lease expiry, 66.8% of the leases are 2.3 years, which is very short. In terms of distribution of rental income vs tenants, 62.1% belong to internet enterprises and IT services. My rough guess is that the 62.1% of tenants form the majority of the 66.8% short leases.

2. Demand and Supply

Keppel DC REIT appears to suggest that the growth in global data centre traffic (which is something like internet traffic) will provide the demand for data centres. To me, there are certain assumptions for this correlation to hold true:

• Size of servers remain the same
• Servers will still be in existence and will not be overtaken by a newer breed of hardware (much like how servers overtook mainframes 20 years ago)
• No consolidation of server infrastructure across the globe (hence demand keeps growing)
• Wired network infrastructure will still be in existence and will not be overtaken by a newer wired/wireless/satellite technology (much like how copper wires were replaced with eternet cables 20 years ago and then fibre cables 10 years ago)

If you believe in those assumptions, then perhaps the growth in data centre traffic will indeed continue to contribute to the demand for data centres. Personally, I feel that the size of servers is already shrinking at a very fast pace. For example, if we need to use 5 server racks 5 years ago, we can easily get the same computing power with a fraction of a server rack today. (This is purely based on my own observations which will need to be further validated to be believed.) As servers become more energy and space efficient, data centre space (physical space which is what Keppel DC REIT is about) requirements will definitely be reduced. Global data centre traffic can grow, storage requirements can grow, and data centre requirements can still be reduced at the same time if any of the assumptions I stated above suddenly become irrelevant.

3. Valuation model

The valuation of the data centres assumes that the space is worth a 1000 times more than the raw cost of renting the physical space (at industrial REIT rental rates) because of the specialised manpower and equipment required to manage the data centre, and high barrier for entry because of the high capital investment required.

While this is probably the best valuation method now, we need to remind ourselves that this method of valuation is not an assurance of its asset value. In the container shipping industry, we had seen how software and machines automated the entire sorting and movement of containers. Ships that were valued based on the pre-automation days of specialised manpower rates become overvalued. In telecommunications, we had seen how cable TV had become obselete in a matter of 20 years. If the coaxial cables were valued based on the cable TV subscription fees then they would be not worth anything now because fibre cables had fully replaced the network infrastructure.

Telecommunications as an industry will not disappear because people still need to communicate. Data centres businesses will not disappear too because people still need the infrastructure for internet applications. We just need to ask ourselves how much we are willing to pay as an income/value/growth investor. As an income investor, I will expect a minimum of 8% yield to consider an entry. I personally do not see any growth or value in this, so ask someone else about that.

References:

1. Q1 2016 financial results

What will I buy with $3000 (Apr 2016)?

STI has been hovering around 2800 points and it's quite safe to buy income generating stocks at 5% yield or higher when you are not caught in an upturn wave. When income is generated, you don't really need to worry about whether the market is good or bad. It's similar to a hawker centre set up -- just because 99 stalls keep changing owners because business is bad doesn't necessarily mean that the 100th stall that constantly enjoys long queues of customers will be unable to make money.

1. SPH REIT* $0.95, 5.7% yield. If you buy 3,000 units, you can expect to get $160/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable despite reports about retail shops closing down and high vacancy rates in a handful of Orchard district retail malls. The reasons why the units are vacant are probably why Paragon enjoys 100% occupancy -- location, location, and location.

2. Boardroom* $0.59, 5% yield. If you buy 5,000 units, you can expect to get $150/year. This company has 3 business areas: Secretarial services, depository services, business solutions. There are many similar companies (at least 50 companies) offering similar services except for the depository services where they help CDP with the shareholders registry. Whenever you buy shares, it has to be recorded somewhere, and the service is provided by Boardroom. If you look at its financial report, it has been consistently operating at positive cash flow. Profit margin is around 10%. The downside is that there is very little float in the public market (just 15%) and you will be just waiting for one of the 400+ shareholders to sell their shares to you. Limited upside.

Read the financial statements before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Stock Review: Keppel Corp and Semb Corp Industries

I still have my holdings in Keppel Corp (KC, bought since 2 years ago, hence I am still sitting on thousands of paper losses, but will seek to reduce exposure depending on circumstances) but I had sold off my holdings in Semb Corp Industries (SCI, bought 3 months ago) last week for a small profit. I foresee eratic and depressed prices to persist and definitely would not recommend first-time investors to take this roller-coaster ride. This is my 3rd ride on the roller coaster (1st - 2009, 2nd - 2011) and every ride has been different. This ride seems to be longer than the earlier two as the fall in oil prices had fallen to a once-in-30-years low.

The key factor that I am watching at this point in time is "Inventories and Work-in-Progress" and "Trade and other Receivables" on the balance sheet. Receivables usually means work has been fully delivered. This is because KC and SCI both did their first write-off in years, which is probably the first sign of many more to come. To write-off "receivables" in their accounting mean they remove the payment amount from the "receivable" column and tell you that they do not think that they will be able to collect that payment. The trick to deciding how much to write-off also depends on how overdue the payment is (could be as old as one year or sometimes more).  There is some benefit to write-off gradually over a few quarters because you pay less taxes and you can better manage your cash flow.

Trend of  Receivables amount on the balance sheet

Trend of Inventories and Receivables amount on the balance sheet

From the trend, receivables appear to be on an uptrend. The downtrend for KC is not to be taken as a good sign either because KC's management explained during the Q&A sessions that their projects with Sete Brasil (the brazilian company in a scandal and it at risk of bankruptcy) are still recorded under order books and not "receivables".

In terms of debt, both companies have been very stretched in the past 1 year. However, the large increase in KC's debt is largely due to the funding of the privatisation of Keppel Land in the start of FY15.

Debt (leverage) ratio

Overall, KC's balance sheet is riskier than SCI's as KC's inventories and receivables are much much more than its net assets (i.e. assets minus liabilities). However, this is also largely due to the large debt for Keppel Land. At this point in time, I had not seen any signs of how the privatisation of Keppel Land had helped the company.

SCI faces a higher concentration risk than KC. Sete Brasil contributes to 30% of SCI's rig-related order books and 20% to KC's rig-related order books. The amount SCI wrote-off was 3 times that of KC's. Taken in proportion to the inventories and receivables (charts shown earlier), the write-off effect is definitely bigger for SCI. Had it not been for the one-time divestment gains SCI made, the write-off could have made SCI's full year result in a net loss, like what happened to Semb Corp Marine.

KC, on the other hand, has investment income support that forms 25% of its recurring income, which is something built up over KC's lifetime. This to me, is a reflection of KC's management long-term investment focus and risk appetite, which is one of the main reasons why I have the faith to endure the long winter with KC.

Oh, and the dividend yields for KC are higher, so I am happy to get paid to ride this roller coaster.

The writer owns units of Keppel Corp shares at the time of writing.

References:

1. KC Financial Reports
2. SCI Financial Reports

What will I buy with $3000 (Mar 2016)?

Read more about First Stock Series.

Over the past one month, stocks have risen ~5%. If anyone made money out of it, it would have been pure luck. Nobody would have expected Saudi Arabia and the 70% of the oil suppliers to agree to freeze oil output. They could have done this 1.5 years ago, but they didn't.

In Singapore, manufacturing output decreased, which was not surprising as Singapore's labour costs had been growing the past 10 years and factories shift out. Office supply is adding pressure on rentals, which is also expected (we all knew this when these projects started construction 4 years ago), so the market has priced that in. If you look at how each industry contributes to Singapore's GDP, you will know why a manufacturing output drop is deemed to be a sign of a technical recession coming our way. Finance and business services (e.g. consulting) are growing.

Extracted from Statistics Singapore 

For me, as long as the population grows, businesses will always be in business, (of course) subjected to prudent financial management. The growth investor may want to invest in businesses that benefit from higher population densities. Trains breaking down more often doesn't count. Examples of such businesses are food, medical services, waste disposal, high-tech construction, logistics, etc.

I probably will recommend the first-time investor to buy on weakness, i.e. wait for the current wave to subside to a support level before making any purchases. Steer clear of bank and oil stocks if you can't survive a market shock.

1. SPH REIT* $0.95, 5.7% yield. If you buy 3,000 units, you can expect to get $150/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable.

2. AIMS AMP Capital REIT $1.33, 8.5% yield. Pros: Diversed industrial properties (business parks, light industrial buildings, warehouses) on rental with continual asset enhancement activities (i.e. rebuilding/renovating old buildings). Buy 2,200 units, and expect to get $249/year.

Read the financial statements before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Stock Review: DBS, OCBC, UOB

I wrote a review one year ago about DBS, OCBC and UOB. The three banks have since published their full year results and I am reviewing them again.

Over the past 10 months, banks, not just in Singapore, had been battered really badly. I had been buying all three bank stocks, but what should a new buyer be looking out for?

Bank	Peak	Low	% change
DBS	$21.50	$13.01	-39.5%
OCBC	$10.92	$7.41	-32.1%
UOB	$25.05	$17.01	-32.1%

1. Debt to Deposit ratio

The loan to deposit ratio is used to calculate a bank's ability to cover withdrawals made by its customers. In Singapore, the Singapore Deposit Insurance Act insures deposits by individuals up to $50,000. This is a safeguard against bank customers, such as you and I, to withdraw our money en masse when the bank shows signs of weakness. For e.g. when you see a headline such as HSBC made a net loss for their full year, as a customer, you may feel worried that your deposits may disappear if the bank goes bankrupt, and hence want to withdraw your money. If many people do that, the deposits outflow will create cash flows problems for the bank, which worsens the bank's financial woes.

A ratio of 1 (100%) means that for every $1 loan given, it is supported with $1 deposit from another customer.

Compared with the US banks, the SG banks' debt to deposit ratio is high (84-89%). Read this recent article about the US banks. As the US banks prepare for the interest rate hike, JP Morgan, the most risk-adversed, maintained a debt to deposit ratio of 60%. There is no magic number, just a risk appetite measurement.

2. Cost to Income ratio

This ratio calculates a bank's expenses as a multiple of its income earning ability -- the lower, the better. Compared with a year ago, all three banks' cost to income ratios had increased.

Extracted from individual financial reports. Distribution of income sources and loan currencies.

Extracted from individual financial reports. Key financial ratios.

Verdict

OCBC appears to be the best positioned out of the three. This confidence is also reflected in its market price where Price/NAV is 1 (i.e. fully valued). Although DBS' Price/NAV is 0.85, it may not be undervalued, as the market had priced in its risks towards non-performing loans in the commodities sector which DBS has the highest exposure to.

Among the three financial reports, the DBS CEO was particularly upbeat about the economy, delivering lots of confidence in the business outlook for even badly battered commodities sector. In fact, they presented the "worst case scenario" where all the commodities debt go bad and they would still be in good shape. In my opinion, based on the sectors with higher absolute amount of non-performing loans, the companies that we need to be wary about are in industries such as manufacturing, transport, logistics, communications. If we have holdings in industrial REITs, where these companies typically operate in, we would need to keep our eyes on the "account receivable" component of the balance sheet to ensure that their tenants are on-time in their rental payments.

Housing loans form a substantial fraction of non-performing loans for UOB. This could be a sign that prices of high-end condominiums will continue to fall because UOB targets this sector of home loans. Consequently, we should also take note of the property developers that are still holding on to vacant units of similar high-end condominium developments. Leasehold units should expect a worse fall based on historical trends.

Buy based on yield, if you can afford to hold for more than five years, the 4.5% yields are very good value for money because in good times, yields hover around 2-3%. If you just have your last $5,000 or less, don't bet on these stocks to make a quick rebound anytime soon.

The writer owns units of DBS, OCBC and UOB shares at the time of writing.

References:

1. DBS FY15
2. UOB FY15
3. OCBC FY15

What will I buy with $3000 (Feb 2016)?

Read more about First Stock Series.

Across the world, stocks continued to fall and we had reached a point where all the "psychological support levels" were broken. After throwing a few months' worth of budgeted investment money into the market, and suffering immediate paper losses, I also sat out for a large part of it to wait for the next level of new lows. Wherever the market would go in Feb would be anyone's guess. However, traditionally, before the Singapore Budget announcements in Feb, there would be a stock rally of some-sort.

1. SPH REIT* $0.91, 6% yield. If you buy 3,000 units, you can expect to get $165/year. Pros: Rental from Paragon and Clementi Mall are expected to be stable.

2. Singapore Technologies (ST) Engineering Ltd* $2.70, 6% yield. If you buy 1,000 units, you can expect to get $160/year. Pros: Cost-conscious management, ever-increasing defense budget that contributes to increasing revenue.

I am conscious that the overall sentiment is rather weary, and for a first-timer to decide to take the first plunge in a time like this is going to be hard, so I am recommending just two companies which I think will weather any shocks in Feb, if any more were to come our way.

There you go! Google search, read the financial statements, before putting your money on any stocks.

The above is by no means a fail-proof recommendation to buy. Stock prices fluctuate and buyers need to be aware of the risks.

The writer owns stocks marked *.

Thinking about the mini crisis caused by falling oil prices

The price of crude oil had fallen from US$110 to US$30 (-70%). Assuming oil prices remain low for a few years, many industries will be impacted:

1. Oil exploration and support services companies are at risk of not receiving payment from their customers who are unable to pay because they are earning a lot less now. In Singapore. oil rig builders, Keppel Corp and Semb Corp Industries (Semb Marine) had already announced staff reduction and projects deferrment.
2. Manufacturing companies supplying steel and other peripheral materials to build oil rigs will also earn less because fewer oil rigs are to be built.
3. Communications companies supplying satellite communications for oil rigs to be connected to land officers will also earn less.
4. Housing rental market in these oil producing countries will have increased vacancy as expatriates return home. However, the workforce shift may not be signficant because oil exploration work is mostly done by machines and construction done by locals anyway.
5. Salesmen will lose jobs. Oil traders, bank loan arrangers, and the 101 middlemen who get commission cuts along the value chain.
6. Banks and insurance companies with exposure to clients mentioned above will be at risk, somehow or another. However, banks and insurance companies are in a risk balancing business in the first place, so it's expected to have bad debt. Client selection becomes the key differentiating factor. In Singapore, DBS, OCBC and UOB all have some level of exposure, but I feel that <10% is still within a manageable range. Which bank is most exposed to the struggling oil and gas sector?

Assuming people lose jobs, will there be transferable skill sets?

1. Salesmen will enter the tech or other new booming industries.
2. Engineers will look for other jobs, maybe in offshore construction, such as solar farms on sea, or maybe underwater tunnels or living environments.
3. Manufacturers will be forced to reduce costs by improving their product manufacturing processes.
4. Explorators will be forced to reduce costs and look for alternative ways to get oil cheaper. 
5. Advocates for alternative energies will be forced to reduce costs because cost savings is no longer the reason to switch.

Overall, I see depressed oil prices as a catalyst for businesses to transform to lower expense and look for new business areas.

In this mini crisis, I will fish for companies that continually manage their expenses well, have positive cash flow and invest in research and productivity improvements.

Staying calm in rough waters

There are many similarities between facing paper losses on our investments and diving in strong currents. Weather conditions can vary widely but fundamentals remain the same -- be prepared before you dive (into the sea or investments), make sure you can swim well, stay calm and regulate your breathing, be aware of your surroundings and follow your navigation tools. I don't dive but I did pass my dive test to get an open water diving "license".

Personally, diving isn't my cup of tea. I was a good swimmer so it was very easy for me, but I didn't feel attracted to the sport. Investment, on the other hand, had a strange appeal. The satisfaction from being able to "forecast" made me feel like a prophet. In reality, there was no prophet, just lots of analysis and number crunching which anybody determined enough could derive.

To share a benchmark measure of my threshold for boring activities, when I was in secondary school, I completed my maths ten-year-series (TYS) twice. I can spend a weekend just reading a 500-page novel. I can drag myself to swim everyday so that I can reduce my sprint time by 1 second.

In investing, patience is a virtue. All things equal, the most patient usually ends up as the biggest winner. When one is patient, one is usually able to be calmer than others. When one sees a shark approaching for the first time, the one who is calm and can recall prep drills probably has a greater chance of survival. In investing, when one sees steep market corrections for the first time, the one who is calm and can recall textbook analysis of market corrections and crashes has a greater chance of not losing money. It's ok to earn less, just as long as you don't lose more. Never lose money unnecessarily. So if you are impatient, it is still possible to be calm and survive as an investor.

Everyone needs to weather a few crisises. The experience enriches one if one chooses to be enriched by it. Although I had only weathered through the SARS, lehman and 2009 crashes, I would say that staying invested and continuously studying companies when everybody said the markets were crashing like never before made me aware of the need to hold cash and be on a constant look out for value investments. If you were caught with your pants down, just make sure you have your pants more securely fastened in the next crisis. Constantly sitting out of the market will breed more fear and lost opportunities to learn how to weather storms.

Being prepared before one even starts investing means having cash, having your shopping list ready, being aware of the economic situations around the world. Being prepared also means being able to resist temptations to spend money that is sitting in the bank and ignoring the salespersons at banks trying to convince you to part with your money. Every $1 adds up, even if it is just a cup of coffee. Money spent on investments should be money one can afford to lose completely because that is the worst case scenario.

Knowing how to invest isn't important. Knowing what you are investing in is the most important. Buying a plot of land in Texas that gives you 20% annual yield? Buying wines that can be resold at a profit after a few years of holding the stock? Buying a shares of a casino company? There is no right answer to how to invest. Our characters reflect how we invest.

Everybody knows how to invest. Every decision we make in our lives is an investment. We decide whether to spend $5 at a hawker centre or $20 at a restaurant. We decide whether to eat fried oyster or chicken soup. We decide whether to sign up for music classes. We decide whether we want to buy insurance plans and how much to be insured for. We decide the school we attend, the jobs we work at, the friends we hang out with, the families we marry, etc. Every decision is an investment of our time and energy and money with a corresponding return. The yield is then how much we get in return for the decision we make, tangible or intangible, our value systems kick in to calibrate a measure of yield to aid us in our decision-making process.

So before you rush off to buy a book on how to invest or how to be rich or retire early, stop and ask yourself how buying a book on how to invest will help you in your objectives. The money is probably funding the writer's early retirement.

Know what you are buying and spending on. Observe and look for businesses that are profitable. Before long, you will realise that every second in your life is an investment decision and that conscious effort to evaluate your actions will translate to a need to want to buy certain (profitable) companies. That's when you take action and part with your money. That's the conviction every investor needs.

That's when you realised that you are still calm when your portfolio is suffering paper losses. You know that dividends will still appear in your bank account every month because the companies you invest in have profitable businesses. Remember that stress is created when you don't know what to do or what will happen. To reduce stress, you need to have the answers to those two questions or just simply not be involved in the investing process.