Sunday, 11 March 2018

Why Singapore actually has a housing oversupply

At the start of 2015, I posted an observation on a forum that Singapore has a ratio of 4.14 people to housing units based on 2014's population numbers. These numbers included foreign workers, students, maids etc.

So how then did it fare now based on 2017's stats? Here are the figures now
^HDB 2017 figure were based as of end March 2017, hence there is a slight underestimate
*Data from HDB, URA and Singstats 2017 data  

As of 2017, this ratio has fallen to below 4. It shows housing supply in Singapore has increased (7.0%) at a much faster rate than our population (2.5%). I find this number ridiculous because it means for every housing unit, there are 3.96 people staying in it; the 296,700 foreign construction workers in Singapore will be heartened to know that four of them can comfortably stay in a 4 room HDB flat instead of having to squeeze in a dormitory room. 

If you look at it objectively, it means a lot of housing units only has 2-3 people staying in them. So to a certain Minister, do not worry, Singaporeans in fact have a lot of "space to do XXX things".

Is there a cause for concern?

HDB's resale and private property prices have remained flat from 2014 to 2017 with a slight decline in experienced. 

However, should Singapore persist with its slow growth of population, there is a high likelihood that we will see a drastic fall in property prices. HDB is likely to maintain its trajectory of building 17,000 flats each year to help young couples, while URA is projecting a 42,000 private housing growth in the next 5 years. This means until 2022, we can expect about 127,000 more housing supply. Based on a 4 to 1 ratio, we need to grow our population by 508,000 to maintain the wretched housing market we have now. This means a 6.1 million population in 2022.

Can we hit 6.1 million in 2022? 

To hit 6.1 million, we will need to grow our population by 10%, or 200,000 more people annually. Singapore's population only grew by 130,000 for the entire past 3 years. This means we may have to return to the less stringent immigration policy we had in the early part of this decade.

In addition, it is important to realize that Singapore's has an ageing population with a significant proportion being the baby boomer generation (age range 50-70). There are about 1.2 million people in this group. Hence 20-30 years down, this generation will age and die; eventually leaving their houses to their descendants. As HDB does not allow owners to have more than 1 HDB unit, it means more resale units will be released into the market. Furthermore, the passing of a person also means a fall in demand for housing. 

To replace this 1.2 million people, we will need 1.2 million people. However, based on our current population demographics, there are only about 800,000 people in the age range of 0-20 years old. It points to a shortfall of 400,000 people.

To summarize, based on our current slow population growth; in the short run (until 2022),expect property prices to decline because housing supply will outstrip housing demand. Conversely, if we are to look into the long term (say 2050), the ageing and eventual death of our baby boomers is likely to cause a drastic fall in housing demand and create a housing oversupply.

The only way forward is perhaps for the government to buy back housing units when the aged passes on. However, this will be a huge budget expenditure which will be a severe strain on government's finances.

Sunday, 18 February 2018

Review of Starhub - Be Prepared for Another Reduction in Dividends

Starhub has revealed another terrible set of performance. This is because of the declining revenue in Mobile and PayTV segments, as a result, Starhub's cashflow generated for the second half of the year has fallen to only $280 million. This can be seen using a comparsion of the cashflow statements of Q2 and Q4 of FY 2017.

First Half of Starhub Cashflow
Full Year of Starhub cash flow

Declining Deterioration

With zero1 coming on with its unlimited Data Plan at $30 per month, the arrival of virutal telecos are going to affect the profitability (in turn cashflow) of traditional telecos (E.g. Starhub and M1).

In addition, in its PayTV segment, Starhub is facing intense competition from OTT companies such as VIU (which is a subsidiary of Pacific Century, a SGX-listed company). In fact, Pacific Century has reported a growth of user base by 4 times last FY. The cost of VIU membership to watch TV content costs $6/month vis a vis that of Starhub which costs $20+ each month

All these point to a high probability that Starhub's cash flow and in turn dividends are likely to be cut.

How much dividends can Starhub give?

To support a 12 cents dividends, starhub needs to have free cash flow of $208 million.

Based on the outlook of its segments, Starhub is likely only able to generate $570 million on a full year basis. Netting off cash outflows such as:

i) Maintenance Capex - s$290 mil (based on past data)
ii) Income Tax of about s$50 mil
iii) Finance Expense of s$32 mil 

iv) Annual distribution to perpetual holders of s$7.9 mil 
v) Government Grant of $10 million (cash inflow)

Starhub has only about $200.1 million to distribute a sustainable cashflow. That actually means a 10 cents dividend is sustainable. However given that Starhub recently had built its cash reserves from issuing perpetuals, 12 cents dividend is sustainable for a short period. Beyond that, it is up to Starhub's management capability to improve its cash flow generation ability

Terrible Acquisition

In my opinion, the current Starhub management has not been making good use of its cash proceeds for acquisitions. One such purchase was in MM2 Asia, which is producing very little positive cashflow for its shareholders. Only time will tell if I am right about it.

2022 bonds

It is worth noting that Starhub has a $220 million 3.08% bond tranche due in Sep 2022 (4.5 years time). Given that these bonds were issued in 2012, way before Central Banks stopped their QE and shrunk their balance sheet, it is difficult for Starhub to reissue new bonds at such low rates. Since 2012, we have seen 5 rate hikes of 0.25% each, Starhub is likely to need a coupon rate of 5% to roll it over in 2022 - barring another economic recession from now to then. This is going to be another cash burn aspect


All in all, given the deteriorating conditions, Starhub definitely has to cut its dividends to a sustainable level. As a dividend stock, asking for a 5% yield is acceptable given that its perpetuals is already yielding 3.95% per year. Furthermore, given how much cash burn Starhub has, I feel it is unlikely Starhub will redeem its perps; but instead let it shoot up to 4.95% after 10 years. Hence, a 5% yield demanded by common shareholders is reasonable.

This puts Starhub at a fair value of only about $2.00 to $2.40.

Saturday, 20 January 2018

Update on First Ship Lease Trust (FSL)

A few major developments has happened at FSL Trust. Hence, it is time that a review of FSL's performance and financial strength be done to determine if the trust is still a viable investment.

Recent Developments

The recent sale of 3 ships (FSL Tokyo, FSL Santos & FSL Santos) was a major development. FSL is estimated to receive a cash proceed of 26 mil which will be used to lower their debts to 132 mil. Based on the past three quarters of financial results, the 3 ships have produced for the trust about US$2.2 mil in BBCE. Annualising it, it means FSL was selling an asset that was yielding about 10% in cash yield. The three ships contribute about 6.7% of FSL's revenue.

Given how hard FSL is trying to refinance its current debt facility, I feel it is a compromise FSL has to take. After all, the 3 ships are likely to have only about 9 years in service left before they have to be scrapped.


A major concern for shareholders now is that FSL is in the process of obtaining the renewal for its debt facility. Not all bankers being in favor of a renewal. This has resulted in the refinancing moving on to a scheme of arrangement of stage which involves a court meeting. It remains to be seen if the banks will agree to an eventual renewal of debt facility. In my view, the recent 3 disposals of ships is likely to make renewal of the debt facility easier to achieve.

Evaluation of FSL

It is important to see how much is FSL worth now in the current Tanker climate. In this part, I will be evaluating on an asset based level and on a cash flow.

Asset basis

KGI securitites did an estimation of the second hand market value of FSL's assets by a ship by ship breakdown, Based on the past three transactions, KGI's valuation of the ship has been below the price which FSL has sold. This means KGI's estimation are conservative and perhaps is a good benchmark to evaluate. 

Based on KGI's, the remaining ships are deemed to be worth US$199 million. Netting off FSL's debt of US$132 million, interest accumulation of US$5 million and estimated disposal fee of US$6 million, shareholders are likely to get back US$56 million for the ships. And with US$16 million in cash holdings, the current value of FSL is US $72 million or 14.9 cents per share.

Cashflow basis

From the past 3 quarters of financial results, FSL has generated US$32.6mil in BBCE revenue. BBCE is the revenue that goes to FSL after netting off all relevant cost. Taking into consideration the loss of US $2.2 mil BBCE from the disposal of 3 ships and a 10% discount on future BBCE revenue due to ageing ships etc, FSL's BBCE generation ability is US$37 million per year until 2021.

After 2021, the lucrative US$20mil in BBCE from the Yangming contracts will expire and this means, the 3 containerships' BBCE revenue is likely to be about US $4mil per year. Hence from 2021 and possibly to 2026, BBCE for FSL is US$21 million per year.

At a debt level of US$132 mil and constant repayment of US$44 mil per year based on existing cash holdings and BBCE generation until 2021, it will take FSL until 2022 to repay all debts. From 2022 to 2026, the cashflow generated as well as the scrap value of the ships will be for shareholders. Based on current scrap metal prices, the ships are worth about US$65 million. This means shareholders will receive a total cashflow of about US$170 million, or about 26 cents per share.

Discounting it to present value at a 10% discount rate, the current value of FSL is coincidentally about US $72million or 14.9 cents per share.

Monday, 1 January 2018

World Precision Machinery - Undervalued Gem or another "S-cheat"?

Shareholders of World Precision Machinery (WPM) have suffered a torrid time owning this company. Since 2013, shares of WPM have tumbled from a price of $0.40 to $0.196. That’s a decline of 51% (before accounting for dividends).
What it does
In one sentence: WPM makes metal stamping machines for hundreds of customers in China ranging from automotive plants to household appliances brands. Stamping machines are machines which bends/folds/presses metal sheets into the desired form required by the user. There are two types of machines manufactured by WPM – i) Conventional stamping machines and ii) High end stamping machines.
Decline of business
So what contributed to WPM’s decline in share price? Well the answer is because of a deterioration in orders for its stamping machines. While China is “growing”, it seems the manufacturing side of China is in contraction mode. Many stamping plants including WPM have experienced a decline in orders for their stamping machines.

From its Annual Report 2016, we can see that demand for WPM conventional machines are declining, fortunately, its high end machines demand has been fairly constant. Table 1 and 2 are extracts of WPM's revenue and the demand for its conventional and high end stamping machines.
Table 1: World Precision Revenue/Profits and Conventional Machine Demand

Table 2: World Precision High End Machines Order and Dividend payout
Based on its AR16, we can see that the fall in WPM's revenue and profits is due to the a decline in demand for its conventional stamping machines.
Has the decline stopped?
This is a question which I posed. Based on WPM’s revenue and profit for the first 9 months of FY17, WPM’s revenue has grown by 16% as compared against the same period while it net profits has grown by 13.8%. It signals that the decline in profitability for WPM has stopped and perhaps one can start valuing WPM based on its current financial results.
I do not think WPM will continue to experience a drop in demand for its conventional stamping machines.
Strengthening Balance Sheet
One thing which attracted me to WPM is how the company has reduced its debts even during tough times. From a FY13 debt level of RMB 300mil, the company has reduced its debts to only RMB 38 million. The company’s cash level has reduced by about RMB 30 mil during this time (35mil to 5mil).
This was largely due to the cash flow generating ability of the company:
Operating Cash flow (RMB)
Investing (RMB)
Free Cash Flow
273.6 mil
(125 mil)
148.6 mil
210 mil
162.8 mil
194 mil
(56 mil)
138 mil
150.8 mil
(38.6 mil)
112.2 mil

The strong cash generating ability of the company has been used to pare down debts and as dividends r shareholders.
Current results
As of now, WPM has RMB 38 mil of debts. In the current 9 months, WPM has already generated RMB 124 Mil in CAPEX with a cash outflow of RMB 44mil.
Extrapolating its current 9 month cash flow results, one can expect WPM to generate about RMB 100mil in free cash flow for this financial year. Translated to Singapore dollars, this means WPM’s business is generating about 5.1 Singapore cents per share. With such a strong cash flow generation ability, I am quite optimistic that WPM will be debt free by the end of FY2018.

As of Q3FY17, the net asset value of WPM is 54 Singapore cents; this means it is selling at a rather low book value of 0.36. What is more tantalizing is the cash flow yield one can get now from acquiring this company. At a share price of 0.196, the cash flow yield for owning a share of WPM’s business is 26%.
Liquidity of WPM shares
WPM is a fairly illiquid shares on the company with 87.43% of the shares are held by the major shareholders. This makes purchase of the shares rather difficult. For me, I had to patiently monitor the buy/sell bids of the shares before purchasing it. Fortunately for me, I was able to obtain some at 0.196.
While it is an S-chip, what surprised me was the amount of dividends WPM has been returning to shareholders. From Table 2, it can be seen that WPM has been constantly giving out dividends on shareholders since 2010. FY16 was the anomaly where dividends were stopped. Since it's listing in 2006, WPM has returned more dividends than the cash amount it raised during its IPO. This is a good sign for a Chinese Listed Company.

Given the cash generating ability of the company and low debt, I believe WPM will resume its dividends soon.
Is it an S-Cheat?
This to me is another issue. Being a Chinese company and the terrible reputation Chinese listed entities have here, one does not know if its financial accounts are real. However, given that the modus operandi of "S-cheats" is to raise money on the SGX and run away with the money, it does not make much sense that WPM has paid more dividends than it had raised nor the large shareholdings of its owners unlike the other frauds whose owners had a less than 50% stake.

In my opinion, it may be worth staking a small percentage of your portfolio; Sometimes you have to take a leap of faith first, the trust part comes later.

<The author is vested in World Precision Machinery>

Wednesday, 27 December 2017

Portfolio- Year end update

It has been a while since I last updated my portfolio; in fact I have made many transactions but was lazy to cover them.

Short Term Punts

Bought Sarine Tech at 0.94. Initially, I thought Sarine would be a good deal at 0.94 because it was a low leveraged company with strong cash flow. However, it seems its business condition is deteriorating and I was lucky to offload it at 0.95.

DISA- A penny stock which I noticed trades in the range of 0.012-0.016. Purely speculative, bought 0.013 sold at 0.015.

IPOs- This year I had been fairly lucky as I was allocated shares for the all 2 IPOs i applied- RE&S and No signboard. Following from Mr IPO ratings, they were a hit & run for me in the first day of trading.


The blood of a value investor still runs in me! Fortunately during the past 3 months, I was able to locate one small gem besides accumulating more First Ship Lease Trust - Miyoshi. It is a precision engineering company, which was producing a free cash flow yield of 7+% when I bought it at 0.072. Not very great but I am running out of options in searching for value Gems on the SGX.

I have added Dutech at 0.335. Dutech is in the business of manufacturing ATM machines and safes globally. Recently, its profits has been hampered by the increase in China steel price. I am hoping the company's margins for its product will improve.

Sunday, 24 December 2017

Lesson on the Gift of Compounding: Save Young and Be Rich Sooner

Interest Compounding has a wonderful effect on our savings. When you start young and let compounding work its magic, achieving your retirement goal is very easy. This is why many financial bloggers including, yours truly, espouse on the importance of starting to save in the early stages of working life.

Using Mathematics

Regular readers of this blog will know of my penchant of relying on boring Mathematics to convince, so here comes the maths :)

Two individuals, Alan and John, enters the workforce at 25. 

Knowing the effects of compounding by saving when young, Alan decides to set aside $10,000 yearly from age 25 to 60. John, on the other hand, being a millennial with a YOLO life, only realizes during his mid-career the need to plan for retirement. John immediately starts to set aside $20,000 yearly from age 40 to 60. Both Alan and John invests in the same investment which yields a 5% return per year. Instead of copying and pasting an entire Excel Worksheet, let me spare readers the agony. 

At age 60, Alan would have a retirement saving of $1,006,281 while John would have a retirement saving of $750,104.

To summarize, while Alan saved half the quantum of John's, the fact that Alan had started 15 years earlier than John, places Alan on a better retirement footing financially.

The Story of the Tortoise and the Hare

During our school days, we have been taught of the idiom "slow and steady wins the race", financial freedom is exactly like this. Be the tortoise who starts the race early and run slowly; Not the hare who slept at the start and had to run doubly hard because he had fallen too far behind. 

Saturday, 21 October 2017

3 Things People Forget to Consider when Investing in a Condominium Property

Recently, Channelnewsasia covered a topic asking whether Singapore's private housing market is in a bubble. In it, a certain property firm’s "expert" was interviewed. One fact which made me interested is how annual rental yields of Condominiums in Singapore are now between 2.8% - 3.2%.

Having been in the real estate and investing on my own, my perception is that these figures do not reflect the reality for investors buying a private property to rent out for investment purposes. In my opinion, it seems 3 significant expenses may have been forgotten/ignored by property investors when computing the rental yield:

1. Property Tax

This is the biggest factor which many seem to have forgotten. In Singapore, the property tax is determined by the annual value of your property and for properties renting out, it is based on the annual rental income of the rented property. The base tax rate is 10% and moves up to a max tier of 20%. E.g., if your monthly rental to a tenant is $3,000, the annual value of your home is $36,000 and will incur a tax expense of $3,720. You can find the link to property tax here.

Cost relative to monthly rental income: 1.20 - 1.40 months (Variable cost)

2. Monthly Fees for Maintenance

Unlike HDB flats where our town council helps maintain the amenities, Condominiums have their own MCST that is in charge of maintaining the condo’s compound and amenities. Each owner pays a monthly fee (proportional to their housing unit’s size). For many, the monthly fee to the MCST is about $250-$300.

Cost relative to monthly rental income: Approx 1.10 -1.25 months (Fixed Cost)

3. Commission to Agent

Commission is about 0.5 months per rental year of lease.

Cost relative to monthly rental income: 0.5 months

With these 3 main factors and small items such as Insurance etc., a landlord (owner) will incur a cost equivalent to 3 months’ rental income for every 1 year of rent secured. And this is under the assumption that the condo is always rented out (in fact, our country is now facing a 10+% vacancy rate).

To summarize, if a Condo is touted to give a 3% yield, its true yield to the owner is about 2.25% (factoring the above mentioned costs).


This got me wondering if people investing in private properties now are fully aware of how low the yields they are getting and the financial perils associated with such a low yield. 

It is true current interest rates for a private housing loan is low, ranging from 1.6% -2.0%. But a simple hike in interest rates of 0.75% (3 rate hikes equivalent in the federal reserve context) will mean the housing loan interest rate exceeds that of the condo’s yield. 10 years ago, Singapore’s housing loan interest was in the region of 4% p.a and if we were to look further into history, the rates were higher than 4%. A reversion to the mean of about 4% p.a is a likely scenario based on history.

It may end up a situation where investing in a private property eats into your cash flow or that instead of becoming an investment for retirement, it becomes a liability to you; serving only the bank's bottom line or as taxes contributing to the nation building of Singapore.