Friday, 28 July 2017

Is the Lease Buyback Scheme a worthwhile option to monetize your home?

Came across a blogger's post about the Lease Buyback Scheme (LBS) available at HDB. This pique my interest and I decided to check out its info graphics at HDB's website.

HDB Info graphics


Quoting directly from HDB's website its example of LBS. This is what I get below.


Source: HDB Lease Buyback Scheme (as of 28 July 2017) 

From the Info Graphic, we can infer two assumptions: i) a 65 year old flat is valued at $450,000 and ii) at the tail end of its 35 year lease, the HDB flat is valued at approximately $190,000. Let's delve into the two assumptions further.

Leasehold Valuation of Singapore Property


The Singapore Land Authority (SLA) has a leasehold table which shows how much value of your property is retained as the number of years on its lease runs down. The detailed breakdown of the leasehold table can be found here on page 3.

From the table, a property of 65 year lease remaining will retain 83% of its value; while a property with a remaining lease of 35 years will retain 64% of its value if we are to follow SLA's table. That means if you had bought a brand new 99 year HDB flat at $545,000; with 65 years left on its lease, the property should be valued at approximately $450,000 and when it has 35 years of its lease left, the valuation should be approximately $348,000.


Comparing HDB's illustrated example and following from SLA's valuation table, the difference in value of selling the tail end of your flat lease to HDB vs at the open market is about $148,000 (including the $10,000 LBS bonus which HDB gives on top of the $190,000). To summarize, you may be making a loss of $148,000 (in today's value) by signing to LBS compared to selling it in the open market in the future.


A few thoughts 


The simple exercise has opened a few thoughts in my mind:


Does it mean that HDB valuers hold the view that should an influx of HDB owners decide to sell their 35 year lease remianing HDB flat, they would not be able to sell at the market predetermined value? If so, does it mean SLA's Leasehold Table does not apply to HDB's flat? And does it mean we should be depreciating our HDB flat's value at a faster rate?


In fact the appreciation of our HDB's flat value may not be as great as we think because depreciation at the front end of the lease is in fact higher than what we think; resulting in a much lower valuation at the tail end of the lease.


Conclusion


Based on HDB's illustrative example, it does not make much financial sense to take the LBS scheme unless you hold a very pessimistic outlook that prices of Singapore property market is set to fall by about 42.5% in real value during your lifetime. Contrary to what majority of the 
population is expecting.


Let's Gather Data

No doubt that the example HDB provides may be only illustrative by nature and they are in fact paying $340,000 to flat owners who are surrendering the tail end of their flat's 35 year lease under LBS. 


However, all of these will require true data. For those who have signed for the LBS, You may comment below or email me at Cychan0913@gmail.com


Do Provide the following:
  • No of years of lease sold under LBS;
  • The total value all homeowners obtained from LBS;
  • No of years left in your HDB's lease (include the years of lease sold to HDB under the LBS);
  • Location of flat by stating which MRT Station it is closest to;
  • Rough distance of how far the flat is from that particular MRT station [Please state in Km or if it is only 500 meter and below from the MRT station, just state 500 meters] (From there, I will be able to get a rough sensing of where the flat is and seek out its resale value by using HDB's resale flat price inquiry.)
Please only state the above 5 pointers and not other confidential or personal details. I look forward to hearing from you all. 

Saturday, 15 July 2017

How a trip to Courts offered me Personal Finance Lesson and its Company model

Recently, my laptop that had accompanied me since my last year of university has been acting up; a sign that a tech refresh to a new laptop may be needed. So I was off for a window shopping trip to identify a laptop good for writing and reading annual reports.

Flexi Plan (which will put you to ruins)

One of those that caught my eye (because it was literally big) was a Lenovo 15.6" inch laptop. It screen size was big and ideal for staring at annual reports and investing forum. Not sure if it was reasonably priced, but it was going selling for $1,499; but what caught my attention even more was Court's Flexi Plan, an installment plan

Apparently at Courts, you can buy many items on installment; and for this laptop, it was being offered on a 60 month installment plan for $61 monthly. 

While the monthly installment sum seemed small, the maths didn't add up. For the laptop on installment, I will be paying a cool $3,660 after 5 years for it. 

Courts Business Model  

Courts has a pretty unique business model- 1) It sells furniture and IT accessories at its retail price for a small margin and 2) It sells furniture and IT accessories in installments at a high margin. Essentially courts is a financier offering consumers "money" to buy items at a loan shark high rate. In fact, in its recent full year results, Courts proudly presents its revenue mix.


Fortunately for the Singapore segment, a small but still significant portion of consumers are tapping on Courts's Installment Plan to finance their furniture and IT accessories purchases. In my opinion, that is still a crazy amount of people taking themselves on a journey of financial ruin.

Of course, to shareholders of Courts Asia, this is music because Courts is able to earn a fat profit margin as it is lending money to consumer at a high interest rate.

Flexi Ruin Plan

Back to my laptop plan. A simple maths will show that over the installment plan, I will be shelling out $3,660 for the laptop if I do not pay $1,499 for the laptop upfront. That is nearly 244% of the upfront retail price Courts is selling.  For $3,660, I would have been able to afford 2 of the same laptop and still be able to buy a brand new Xiaomi hand phone from the spare change!

Seriously, who are those 18.2% on Courts credit scheme?

Let's reverse the scenario. Assuming you put $1,499 in a bank product and wish to withdraw $61 monthly to fund your retirement for the next 5 years. How much must your $1,499 grow annually to fund this?

The answer is a 45.14% annul return.

If you are to ask me: achieving a 45.14% annual return over the next 5 years is no easy task. In fact even the world's best investors including Warren Buffett wont be able to match that. So why should consumers punish themselves by being on these monthly installment plan which are charging a hefty rate (even more than credit card interest)?

No doubt, it is likely there are many people who will default on Court's Installment Plan but that is because the hefty interest rate is killing them. The above is a simple example of a bad debt and how you can lead yourself on a path of financial ruin.

Sunday, 18 June 2017

Low Oil Price for a Long Time

Let's face the facts: Low oil prices are here to stay for a while.

Despite OPEC's commitment to continue supply cuts until mid 2018, the world is still producing more oil than it needs (similar to our local property oversupply and global container ship glut). In addition, Singapore is now set to be one of the largest "parking lots" for large crude oil tankers as covered in this article. In my opinion, low oil prices are expected, to 2019; because i) oil supply outstrips global demand due to production increase by USA and Nigeria and ii) the need to draw down on excess inventories built over the past 4 years.

It is this current scenario that investors will have to consider and position our investments. 

Consequences

What are the consequences? There are many but all are hypothetical reasoning - oil & gas offshore support industry (e.g. Ezra, Mermaid) will continue to suffer from overcapacity, more foreign worker layoffs in O&G sector will mean less demand for rental housing, etc.

This comes to show how beyond the element of quantitative investing (e.g. P/E ratio, Free cash flow calculation), investing too carries the element of qualitative analysis - What is the future trend, how is each company affected by it and is their current balance sheet/management structure able to withstand it?

As for me, I am positioning for an upturn in the tanker charter markets (which too is experiencing an increase in new build tanker deliveries, a potential oversupply)

It is important that each individual forms his/her own opinion (investment thesis) based on the trend and how one expects it will progress. Hence, feel free to share your thoughts in the comments below on the current market trends.
*[Spams are not welcomed! I am referring to you spam bots, for the recent littering of comments which I have to clean]

^(Accumulated more FSL Trust and monitoring semi-conductor related stocks) 





Tuesday, 30 May 2017

Candy, Decision Fatigue & Habits

Ever wondered why most candy products are placed near the cashier? Well there is a psychological explanation behind it and that is "Decision Fatigue". The idea is simple: During a consumer's journey through the supermarket, he/she would have made numerous decisions such as the items to buy, product to choose etc, this in turn reduces their mental willpower making the subject susceptible (tempted) to temptations. Aided partly by the colorful visuals of candy packages (stimuli), the consumer succumbs to the temptations and we engage in impulsive buying which harms our financial health.

This blog is not going Psycho!


So how does decision fatigue affect one's personal finance? Well, as one gets mentally drained from the daily decision making process, causing us to make faulty decisions or fall for temptations; which results in the frequent indulgences on treats/gifts that hurts both the wallet and perhaps waist line. Simply put, being mentally fatigued on a daily basis hurts our personal finances. Imagine the amount of money you can save and use for investment if you just had that extra mental capacity to stop yourself from having a daily bubble tea drink in the afternoon from LiHo (formerly known as Gong Cha), hint think $3.

So how can we steel our willpower? Well, it revolves around forming good habits which improves decision making and essentially, personal finance. The key is to form habits which helps eliminate the need to make simple decisions. This is because these small decision makings made everyday also saps your brainpower. After all, your brain is like a battery and every decision you make that day, saps the brain's energy. Your brain gets "weaker" lacking the willpower as the day continues; this probably explains why we tend to feel lethargic towards the afternoon.

Work and Home

There are two domains where we do make small decisions frequently and that is Work and Home. Hence these are areas where good habits can be formed:

At Home

One good habit is automating the decision of having similar outfits to work (or supermarket). This practice has been done by others such as Former President Barrack Obama etc. In an interview, he mentioned why: 

"You’ll see I wear only gray or blue suits. I’m trying to pare down decisions. I don’t want to make decisions about what I’m eating or wearing. Because I have too many other decisions to make.” - Barack Obama

On a personal level too, I have felt the difference in my thinking at the start of my day. At my previous workplace, work attire was something we could choose on a daily basis and for me, I definitely had to think a bit on the attire I had to wear. On the contrary, at my present workplace; there is a certain work uniform. Decision making now is easier because all I need to do is wear the same bottom design (which I have numerous pairs), shoes and shirt to work. It avoids the daily agonize of what to wear, sparing me mental anguish and allowed my "brain battery" to be put for more important mental tasks.

At Work

The work place is another area. Often we are swarmed by mundane daily tasks which we have to do. Why not prepare a short mental checklist the night before on what you need to do. It eliminates the need for us to decide what to do in the morning, leaving us refreshed for the daunting tasks that may appear in the later part of the day.

Another alternative way is to apply MS outlook rules to automate the removal of those unimportant emails to your line of work. Why agonize when MS outlook can automatically archive for you in some far flung area of your hard disk. The automation of decision rules has saved me time and mental capacity.

To note, the road to financial freedom sometimes lies beyond that of frugality or becoming an investment guru. It also revolves around building strong habits such that you are conserving your mental capacity to make sound decisions be it, in investments or avoiding impulsive expenditure.

Monday, 1 May 2017

Review of First Ship Lease Trust (FSL)

First Ship Lease Trust (FSL) is currently the only listed shipping trust on SGX, in recent times, the market value of FSL has fallen 35% from a market value of s$102 in million to s$65.5million. This was due to the negativity of the shipping industry and market's apprehension on the trust's inability to refinance its debts. 

Business 

FSL owns a fleet of mainly tankers and 5 container ships and lease them out to shipping companies for revenue. While we tend to associate shipping to the container or dry bulk segment, FSL is more exposed to the tanker segment; with only 33% revenue derived from the container segment. 

However, its most lucrative contract are its 3 container ships with Yang Ming at a bare boat charter revenue (BBCE) of $20.8mil a year for the 3 contracted 4,250 TEU container ships. This represents 32% of its revenue with only 15% of its fleet with Yang Ming. This is because the Yang Ming contract was signed during the heydays of the container ship cycle, as a result Yang Ming has to continue honoring the contract until 2020-2021. At current rates, one is likely only able to obtain annual BBCE of US$2 mil for such 3 ships., When asked on the possibility of Yang Ming defaulting during the AGM, the board expressed high confidence because Yang Ming had recently dry docked the 3 ships (costed Yang Ming 1 mil per ship for dry docking). Dry docking is similar to car servicing and after "servicing" is completed, the ships will operate for another 5 years. The dry docking process costs money to Yang Ming as well.

As for the tanker market, most of the tankers segment rates are falling due to the continue oversupply, so its a question of how much can FSL continue to milk from the rest of its fleet

Survival and Refinancing

This is a key concern for the Board and it was repeatedly stressed that without refinancing, a fire sale of its fleet may result. As of Q1FY2017, FSL's debt is at $192 million, with the mgmt guiding that it will be reduced to $171 million by end Dec 17. In my opinion, with a potential cash inflow via BBCE of $60 mil this year, the trust will be able to pay down to about $150 million. Hence a refinancing in the region of $150 million is probably the magic number to ensure the Trust continues as a going concern.

Valuation Difference

Currently FSL utilities a "value in use" (VIU) methodology to value its fleet. This methodology is similar to the "discounted cash flow basis" used for property valuation  where the future cash flows of its ships until its useful life and scrap value is "present valued" to today's value. This is how FSL obtained its vessel value of $427 million. On the contrary, it is likely banks are valuing on a low basis which is even lower than the adoption of "market comparison basis". This difference in valuation basis is one of reasons why refinancing is not yet completed.

Weak Sponsor

The sponsor of the Trust is HSH Nordbank who coincidentally is also one of the lender. The bank itself is in a weak financial state and will be wound up next year. This has resulted in the uncertainty and apprehension of other lenders to continue lending to FSL. This is where Navios is coming in by trying to take over HSH Nordbank's role by becoming the sponsor/ trustee manager. FSL mgmt mentioned during the AGM that with Navios help, the chance of obtaining a refinancing is higher.

Dilution upon Navios entry

However the entry of Navios doesn't come cheap. The Navios and FSL deal is described in the SGX announcement link here:

http://infopub.sgx.com/FileOpen/20170428_FSL%20announces%20execution%20of%20Termsheet%20with%20Navios%20Maritime%20Holdings%20Inc..ashx?App=Announcement&FileID=450979

Basically if refinancing is done and Navios comes onboard as the new trustee manager/sponsor, Navios gets at least a 50.1% share. So lets run through a quick maths exercise on the deal:

Current no of shares in FSL = 637,456,577
No of shares held by Nordbank which will be sold to Navios = 154,430,600

Under the agreement, should Navios exercise its US $20mil (s$28mil) convertible loan into shares, Navios has to have at least 50.1% of the enlarged share capital. Assuming the exercise of this convertible loan, Navios will receive "X" amount of shares to obtain its "at least 50.1% desired share"

Hence (154,430,600+X) divided by (637,456,577+X) must equal to 0.501. Using algebra, the number of shares Navios will get through the convertible loan is 330,531,353 shares. Divide this by s$28 mil, Navios is paying 8.47 cents per share (in Singapore Dollar value).

Thoughts on the deal

In my opinion, Navios seems to have quite a good deal because it is purchasing 330,531,353 shares at about 0.17 of FSL's stated book value. However, it seems without Navios assistance, refinancing progress will be harder. So let's re-evaluate the net worth of FSL should Navios dilution come in and assume the trust will continue to operate as a going concern as a result.

Current Vessel Value based on "VIU" methodology =  $427 million
My own discount (30%) on the VIU = $299 million
New book value of FSL = $119.8 million
Estimated value per share before Navios Dilution = 18.8 US cents per share

Add Navios US $20 million loan, revised book value = $139.8 million
Estimated value per share after Navios Dilution = 14.4 US cents per share ( 20 Sing cents per share)

Are there other ways?

A way suggested by unit holders at the AGM was to sell some of its vessels to repay the debts. Of course, the downside would be that if the market knows you are in desperate need of cash, you will not be fetching the true market value of your vessels in a fire sale.


In my opinion, if it is possible, one good arrangement will be for a "3 rights for every 1 share" exercise at say s$0.09. The raised proceeds will be close to US$120 million and this means only US$30 million of refinancing is needed. Of course, this will be difficult for many shareholders to stomach. As for me personally, I have the sufficient capital resources to subscribe for 3 times my current exposure in FSL (or even 4 times to cover for HSH Nordbank's non-involvement in the rights) 

If the above are not viable, it seems getting Navios help is a good way to persuade banks to refinance and ensure the Trust's survival.

<Vested interest in FSL at multiple entry prices>




Sunday, 23 April 2017

Short Portfolio Update

Just a quick update to my portfolio because there has been a flurry of activities.

Sale of Hyflux Preference Shares

Sold all Hyflux Preference Shares in my CDP to realize an approximate 10% gain. I managed to "pick some pennies" on this company debt instrument and have decided to allocate my capital to the below 2:

Memtech International

The thesis for Memtech was pretty simple. It is in the same industry as Fischer Tech and Sunningdale. With its strong cash position and cash flow generation ability, the price which i purchased at 0.705 seemed a good steal. Furthermore Memtech was trading at a 0.7x P/B ratio while Sunningdale and Fischer were being sold close to book value. In addition, Memtech Intl is a turn around stock with its profitability improving year on year. So given the industry it is in and how much its peers were being valued by Mr. Market, I have set a target of about 0.90 on the premise of revaluing it close to its peer values.

First Ship Lease Trust 

The reverse can be said about FSL. Its prices has been declining and I used the opportunity to accumulate more at 0.124, 0.116 and very recently 0.103. In my view, the worries of the company''s inability to refinance and becoming a "rickmers" has caused Mr. Market to downgrade it "exuberantly". I will write a review on FSL at later date, (probably after its AGM and release of Q1 FY 17 results).

Sunday, 9 April 2017

Your HDB Flat is a Depreciating Asset (eventually)

Recently, the stark reality about the value of our HDB flats was reiterated by our current MND minister, Mr. Lawrence Wong - where upon expiry of its lease, your flat will be returned at zero value to the State via HDB. The Straits Times too has been unforgiving with its relentless churning of articles on the topic of "Lease Expiry" with its latest article on private estates nearing the end of its lease and residents distraught. 

Hard Truth

A few investment bloggers and investing forum had been harping on the fact that many properties in Singapore are leasehold by nature; which means the property value eventually depreciates to zero upon expiry of its lease (be it 20, 30, 99 years etc) and returned to the State,

A feature of Singapore's leasehold is that the value of the property does not depreciate in a straight line but that similar to a concave nature. The Singapore Land Authority (SLA) has a leasehold table which shows how much value of your property is retained as the number of years on its lease runs down. Fellow blogger, Investmentmoats, has depicted this on a table and a graph showing the speed of depreciation which I have reproduced below with his permission.  
Table 1: Leasehold Values to Remaining Lease Years

Graph 2: Speed of Land Depreciation


Applying SLA's leasehold rates to the value of a HDB flat with the number of years on the lease left; from the table and graph, one will notice the speed of depreciation is most pronounced when a flat's remaining lease tenure falls below 30 years. At that stage, your flat retains about 60% of its value as compared to freehold value; moving to 20 years remaining, it only retains 48.0%, and with 10 years remaining - 30.0%. That sets out to a 1-3% annual loss! 

On the contrary, during the first 69 years of a HDB flat's lifespan; you only lose approximately 36-40% of its value. Therefore between these 69 years, about 0.2% to 0.6% of property value is lost annually (before inflation and other demand factors). The slower depreciation at the beginning probably why HDB flat prices are still intact despite using 10 - 30 years of its lease.

Reality

Hence fortunately (or unfortunately), because very few HDB flats has reached the stage where there is only 30 years of its lease remaining (only 7% of HDB flats are above 40 years old); valuations of HDB flats have remained sky high. This is because the annual 0.2% to 0.6% depreciation had been offset by factors such as i) Inflation and ii) Property demand due to a growing population. It will take about 40-50 years to see the effects of depreciation on HDB flats.

Critics may argue that the value of HDB flat at the tail end of its 30 years lease can be maintained by ensuring that inflation and property demand remains stubbornly high to offset the approximate 2-3% annual decrease. However, in my opinion, such a scenario will mean either ensuring no houses are built to meet the demands of a rapid population growth (most likely achieved by importing a lot of foreigners) or that Singapore experiences a period of high inflation - not ideal to the citizens' cost of living.

Nevertheless, even if such scenarios do materialize; at the end of the 99th year, a HDB flat is still returned at zero value back to HDB and then to the State.

Wait, there is a Solution!

Others may point out that topping up your lease back to 99 years will do the trick. Some example has been like how Singholdings did an enbloc at Robin Road and paid cash to top up the remaining lease for a fresh 99 year status. 

While this indeed can be done, it is highly unlikely HDB will do so for all of its land.This is because land use intensification or urban renewal has to be done to allow for the justification of a lease top up. In addition, it requires approval from the lessee. Property developers are able to do such lease topping up quickly and efficiently because they are the sole lessee of the land after completion of the enbloc.

Therefore, for the 937,341 flat owners (as of 31st March 2016, HDB Statistics Report), this article serves as a reminder that your HDB flat is in fact a depreciating asset. For those among the group of 937,341 flat owners seeking to flip your HDB flat for a profit, just don't be the last fool holding on and suffer from the effects of leasehold depreciation. 

And the Icing on the Cake

While I have been going on about how a HDB flat's value is affected by depreciation of its lease, another factor deserves a worthy mention - the low fertility rate (1.2 as of 2016). Without enough babies to replace Singapore Citizens and PRs in the future, it will mean a fall in demand for HDB flats; indicating less opportunity for HDB dwellers to upgrade or even monetize their flat's value when they purchase a second home.


Saturday, 1 April 2017

March 17 Portfolio Update

It has been almost 2 months since my last portfolio transaction updates. So here goes:

1. World Precision Machinery

The "No dividend" announcement was bit of a shocker to me. My main thesis to invest in World Precision was due to its consistent declaration of dividends. Therefore, i took a chance to divest it when someone was offering to buy it at 0.235 after the full year results. This allowed me to clock in a 7% return.

2. First Ship Lease Trust

This was another company hit by negative news via comments made by its auditors. However, when I re-invested into FSL trust; I was already aware of the fact that its bank loan will be classified to "Current Liabilities" because it is due in Dec 17, resulting in current liabilities exceeding current assets. So when Moore Stephens LLP, its auditor, highlighted of its going concerns due to the high current liabilities; I wasn't surprised. To me, given the company's prompt repayment, and that its 22 ships will serve as collateral and has sufficient market value in the tanker markets, I am quite confident a new bank loan will be granted (rolled over)

Capitalizing on the fall in prices due to its auditor's comments, I took the opportunity to add to my initial stake at 0.131. 

3. Silverlake Axis

I also bought 11,000 shares of Silverlake at 0.575 because I still find it undervalued due to its actions of monetizing its china associate's stake and stable core banking system segment.


4. Broadway Industrial

Sold all of my Broadway Industrial holdings as the run up in its price meant an opportunity to deploy cash for other purposes.

5. Hyflux Preference Shares

Sold some of my Hyflux Preference Shares and used the proceeds to purchase FSL. This is due to my belief that FSL trust should achieve a return of at least 10% vis-a-vis Hyflux's estimated returns of 8.5% in the next 1 year and 2 months basis.

Financial Journey

Thanks to my bonus and own saving habit, my portfolio has crossed the $300,000 mark! In my journey thus far, the growth of my portfolio has been largely down to my frugal saving habit. Hopefully as my portfolio grows, the returns it generates will eventually exceed that of my monthly saving contributions. 

Sunday, 19 March 2017

Lesson from Ezra Bankruptcy: Asset "Rich", Cash Flow Poor

By now, some of you would have read Ezra's filing for bankruptcy protection in the United States. Previously a billion dollar company, Ezra's fall from grace was due to the fall in oil prices. Nevertheless here are a few things we can learn from it.

1) Cash/Cashflow is key

One reason for Ezra''s decision to file for bankruptcy was due to its inability to pay creditors. The reason was simple - Ezra's assets was neither generating sufficient cash flow to meet its daily expenses nor did it have enough cash reserves. If one were to examine Era's balance sheet over the years; despite a growing asset base, Ezra's assets were generating paltry cash flow.


In the personal finance sphere, it highlights to us the importance of our assets (income from work or property rental income) to generate the necessary cash to service our cash expenses. This is because regardless of your asset's worth, if your cash expenses exceeds the amount of cash your assets are able to generate; chances are you will run yourself to the ground.

2) Stated Asset Value vs Value of Asset when Force Sold

In Ezra's FY16 balance sheet, Ezra's stated assets were worth US$622 million with a net asset of US$378 million. Logically, all Ezra had to do was sell off some assets on its balance sheet to raise the necessary cash to tide over. However, I have reasoned that this could not be achieved because the true recoverable value of Ezra's assets were perhaps only about 30% of its stated value. This is largely due to the oversupply of offshore oil equipment in Ezra's deep waters industry.


It highlights how in times of distress, the value one's assets is perceived to fetch might not be real. In fact, it reminds how during a financial crisis, property values can be so depressed because no one is interested to buy a home and home owners are desperately trying to sell properties to cover their cash expenses. The valuation as appraised by valuers is one thing, but the true market value of your property is another. This is something we have to take note of in light of Singapore's property market which is oversupplied; What happens if your rental income from property are decreasing. Do you have enough cash generating assets to tide over your cash expenses during these hard times?



Saturday, 25 February 2017

Portfolio Update Feb 16

Since my previous portfolio update, I have made a few more purchases.

The first was the purchase of Broadway Industrial at 0.195. The thesis is pretty simple because I am hoping for a bumper dividend from completion of its "Foam Plastics and Flow Control" Segment. I am hoping its one off high dividend will attract investors attention and push its stock price up. Thta is where I will evaluate my position. 


The Second purchase was World Precision Machinery at 0.22. Its business is in the metal stamping industry and is based in China. It is a subsidiary of Bright World Group, a chinese SOE. What attracted me was the strong constant Free cash flow generated from its operations. At an estimated free cash flow generation of RMB 80 mil annually, the company is being sold at a ratio of 6x P/FCF, to me its rather cheap and i have initiated a position.


To allay the fear of fake cash, the company has been declaring dividends to shareholders annually. 


The last purchase is a familiar name to me- First Ship Lease Trust. It was only purchased last Thursday at a price of 0.133. To me, despite the company's announcement that it will be doing an impairment exercise which resulted in a full year loss; it's strong cash flow generation ability is a draw.


The trust produced about US$70mil cash from operation before working capital changes in the most recent financial year. Moving forward, given the declining tanker rates and that many of the leases of its tankers are up for renewal this year, it will prudent to assume the company is only able to generate about 70% of that (US$42mil). Assume dry docking expenses of US $2mil and interest expense of US$8mil, FSL should be able to generate free cash flow of US$32 mil. This translates to about 1.6x P/FCF.


However the above ratio should not be a key consideration. This is because FSL operates assets which has a limited lifespan. Its ship fleet currently has a weighted average of 10 years. This means probably another 16 more years before they are scrapped.


Unlike Rickemers who is having trouble repaying its debts, FSL cash flow shows it has the ability to repay its entire debt in 5 years. My opinion is that FSL is unlikely to pay dividends for the next 5 years to pay down its loans, after which it is anybody's guess. Hopefully then, its cash flow remains strong and should it decide to pay just half of its free cash flow generated, I will be getting an approximate 30% dividend yield at current price.


Wednesday, 1 February 2017

Owning a Car in Singapore can make sense

Fellow Blogger, Bullythebear, covered an interesting concept he read from 'Tools of Titans" by Timothy Ferris. It talks about weighing the utility of the extra time gained from spending an extra dollar to get it.

This concept reminds me of constant conversations about how a car is a tool of convenience through saving time. So, I will be using a mathematical approach to show when owning a car in Singapore may make sense.

Cost of Owning and Maintaining a car

Firstly, lets find out the approximate expense of owning a car for 10 years. I used the price of a Toyota 1.6L as a gauge. Its current price is about $102,000. Next I estimated a down payment of 50% with the rest being financed by a car loan at 3% interest for a 5 years tenure. I also provided an estimate of the annual road tax, fuel expense and car insurance in the table below. As this is an annual expense which happens every year for the next 10 years, I applied a discount rate of 4% to get the present value (P.V.). Lastly, I estimated receiving a scrap value of $6,000 at the end of the 10 years and discounted it to present vale (P.V.) The below Excel shows the estimated present value of owning and maintaining the car over 10 years. This will be the amount we are spending to gain the extra time.
Figure 1: Finding P.V of annual expenses over 10 years


Figure 2: Total Expense of Car

Utility of Extra Time

Ask anyone on the street how much would they pay for an extra hour and a variety of answers will be obtained. Hence to avoid doing a sample survey, I will base it on "hourly wage" concept by dividing the monthly salary by 168 man hours worked in a single month. Hence, if someone earns $4,200 monthly (excluding Employer CPF Contributions), his perceived utility of earning an extra hour is $25 per hour ($4,200 divided by 168).

Next, I ask how much time is saved by commuting on a car than public transport. From my guess estimate of commuting to the city for work, I realize it is fair to say one saves about 30 minutes on a one way trip; so two ways will be 1 hour saved. And on Saturdays and Sundays, people will definitely use the car for easier commute. So in a year of 365 days, one person will have gained an "extra" 365 hours.  

So in the current year, a person saving 365 hours and basing on a monetary value of $25 per hour, the person gains S$9,125 for the first year. As one will realize, the utility gained is over a 10 year time frame, therefore I will have to calculate the present value of this utility earned over 10 years.


Figure 3: P.V of Utility
Figure 4: Scenario of $8,400 monthly pay

Conclusion

I did some permutations and made two observations.

i) Income Level

If one is earning at least an estimated $50 per hour wage or $8,400 monthly, owning a car in Singapore alone is justified because the utility from the time gained is about the same as your overall expenditure on the car (owning & maintaining), see Figure 4.

ii) Ownership of a car if one is married or with a sibling

Of course, many of us do not earn $50 per hour (including yours truly!) However, if you are married or have a sibling who is working, mathematics will prove that earning $25 per hour justifies the reason to own a car in Singapore.


Figure 5: 2 person at $25 per hour wages

Takeaway

This simple Excel model has informed how the efficiency of the public transport system affects the ownership of a car to a large extent. In fact, with many Singaporean graduates already entering the workforce with an at least $3,000 monthly paycheck; it is likely a married couple's combined income level would have exceeded the $8,400 threshold having worked for a while- a tad worrying.  

From this angle, it seems our transport and urban planners will have to accomplish much to reduce the travelling time by either increasing the connectivity of the public transport system or decentralizing commercial spaces. 

The diabolical alternative is to reduce the wages of the people; to make them feel time is not that valuable 😈


Sunday, 22 January 2017

How to be a millionaire through Stock Investing in 2017

Dear Readers & Fellow Bloggers,

I am neither hallucinating nor suffering from permanent brain damage as I write this post. I have stumbled across a company on the SGX where you can indeed earn a million ( if you believe the management & auditors). Introducing China Sports International

About China Sports International

A China Company which sells Sports & Apparel products in China under the brand name "Yeli". The company's current market capitalization on the SGX is s$9.228 million. Its current auditor is RT LLP.

How To Make a Million

Before you guys get too excited , lets analyse its latest Balance Sheet:


China Sport's Balance Sheet as of 3QFY16

If you notice the company has RMB 133 mil cash & equivalent and a total liabilities of only RMB 66 Million. 

The Plan

Step 1: Go to any (dumb) bank, tell them you wish to takeover China Sports International and need a s$12 million loan to launch the takeover. Take the money and announce the s$12 million takeover (at a 30% premium).

Step 2; Takeover the company and use its cash to pay off all the liabilities; you will be left with cash of  RMB 67.41 Million (approx s$13.9 million). 

Step 3: Repay your s$12 million loan and you will  be left with s$1.9 million cash; what's more you get a  factory in China and an inventory loads of "Yeli" Shoes and Apparel.

Be a Millionaire!

Let me reiterate my disclaimer that I accept no liability whatsoever for any loss or damage of any kind arising out from the use of any or part of this post.

If you are gungho/naive to adjudge the numbers reported by the management as true, this is truly your chance to become a millionaire in 2017.

Sunday, 15 January 2017

Portfolio Update and New update of Ellipsiz

Since the last update of my portfolio, I have made a few more purchases: 23,000 shares of silverlake shares at the price range of 52-52.5 cents and 10,000 shares of ARA at s$1.685.

The rationale for ARA is straightforward. The company is undergoing a takeover offer at 1.78. With the takeover targeting for completion by 1H2017, I am expecting a return of about 5% over the holding period of half a year. The downside is of course the failure of the takeover. However, ARA is a relatively strong company; given that it is dishing out annual divided of 4 cents and is in the business of a portfolio manager, I am inclined to continue holding the stock for its dividend.

Ellipsiz

I am more interested in my latest addition and that is Ellipsiz. To summarize, the company main's business is the production of probe card for the semiconductor and electronics manufacturing industry and distribution of service solutions for the electronics manufacturing chain.

Good Free Cash flow

This is one of the main thesis for investing into Ellipsiz.

Ellipsiz Operating Cashflow

From its cash flow statement for the past few years, Ellipsiz's has been generating an increasing operating cash flow before WC changes. Given that the semiconductor industry it is serving is still going strong due to the demand of electronic goods, my opinion its current cashflow generation will be constant. 

At current cash flow generation of about 13 mil, then deducting taxes, interest and its maintenance CAPEX of approx 2.7 mil, Ellipsiz free cash flow is about s$8.5 million.

At current share price of 0.375, Ellipsiz market capitalization is s$62.6mil. This means it is selling at a 13.5% FCF yield.

Strong Balance Sheet

At a debt ratio position of 19%, the company is relatively lowly geared. The company too has been paying down its bank borrowings which it had utilized due to the acquisition of a Japanese company in the past. Soon, the company will have negligible borrowings and that is definitely a positive sign.

With the recent disposal of an associate company, Kita, the company is in a net cash position of 78%.

<Vested 20,000 shares at 0.375>

Saturday, 7 January 2017

When Reality does not Meet Expectations

Read a US news article which argued how dining expenses will increase if President Trump's policy were set in place. You can read it here.

What got pique my interest was this particular paragraph:


"A stark example of the need for immigrant labor was apparent in 2011, when the North Carolina Growers Association had 6,500 farm jobs available, all of them in or next to counties with unemployment rates greater than 10 %. Only 268 of the approximately 500,000 unemployed North Carolinians applied for a position. Ninety percent of them were hired, but only 163 showed up to work on the first day, and only seven workers — of the 6,500 required — completed the growing season"

This reminded me of Certis CISCO recruitment failure in Singapore where they were not able to obtain enough locals to fill its manpower vacancies and had to seek foreign manpower to fill this gap. Article can be read here.

What surprised me was that despite offering about $2,575 monthly salary to "O" level graduates after their training period (and a higher starting salary to those who join with a higher educational level), many of the local workforce are still not inclined to join. To get a sense of how much is a $2,575 starting salary; this starting pay is much higher than the average starting pay of any polytechnic graduate in MOE's survey

To add icing to the cake, Singapore's labour situation is not rosy at all - Our economy is experiencing a problem where there are more job seekers than job vacancies. As the situation narrated in the US article, it bears resemblance to what we are experiencing here. 

When Reality does not Meet Expectations

So why does such a disparity exist. Another paragraph from the US article will shed some light:

"Some may argue that these laborer positions could, and should, be filled by American workers. But the reality is that these positions are not considered desirable due to the physical demands and the need to work outside in inclement weather."

So as one may guess, the answer is because those job vacancies do not match what job seekers are expecting; in psychology, we learn that when one's expectations are not met, it leads to a drop in dopamine in the brain, resulting in the feeling of disappointment. Perhaps our local workforce are disappointed with these available jobs and are bidding their time to seek employment.

Singapore is going through an interesting period and therefore I am curious - Given the current scenario where reality is not matching the expectations of the workforce: will businesses here pack up due to the stringent labor compliance cost (eg. local to foreigner ratio/high cost of labor) or will the hunger of the people eventually succumb to the acceptance of jobs below their expectations.

This reminds me of another viewpoint article written by a local journalist. Is the lack of hunger something which will hinder our economy navigating through these tough times?