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 *.