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.