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Principles For Navigating Big Debt Crises is a series of 3 books by Ray Dalio, the founder of Bridgewater Associates, a global asset manager and the largest hedge fund in the world. My blog post would be reviewing the first book of the 3-part series. I was interested in this book because I felt that it would be good to learn from the lessons of the 2008 financial crisis (this is covered in detail in Part 2, which includes detailed case studies of the debt crises). I did not experience the 2008 crisis from the perspective of an investor, and the only market correction I’ve experience was during late 2015 and early 2016, due to fears of a hard landing for the Chinese economy, as well as crashing oil prices; and perhaps also early this year as well as the recent volatility in the markets. I believe that as even these relatively mild corrections can be rattling for many investors, I can’t help but to wonder how we would react in the event of a crash of similar magnitude to that of 2007 – 2009, when equity prices declined by more than 60%. It has only been about 10 years since the Great Recession, but it seems as though complacency has begun to set in again.

Today, people are still irrational as ever, as evident from the cryptocurrency hype last year, driving Bitcoin to $20,000 before the bubble burst. Greed and fear of missing out drives investors to pile money into ‘investments’, (or rather, speculation) in hope of making a quick buck. Undeniably, there are those who made huge returns through cryptocurrencies, and the underlying blockchain technology is set to bring about many practical benefits. However, as described in the book, bubbles form when the boom encourages new buyers who don’t want to miss out to enter the market (although the book is focused on debt fuelled bubbles, which wasn’t the case for crypto).

Given that we are still in the longest bull market since World War Two, many of us have questioned whether the next crisis would be approaching. This book describes how debt cycles are formed, and that by studying many cases, we would be able to see patterns that repeat itself over time.

The key points that the book covered were 1) the deflationary debt cycle, 2) the inflationary debt cycle (currency crises), and 3) the spiral to hyperinflation. The deflationary debt cycle is probably best characterised by the 2008 subprime mortgage crisis, while hyperinflation is what Venezuela is experiencing now.

The book begins by discussing how “debit” and “credit” underpins our entire economy, and that having too little growth in debt can be as bad as having too much debt, because of the forgone opportunities. Dalio includes a good analogy using the Monopoly game as a simplified example of how debt cycles are formed. Bubbles occur when unrealistic expectations and reckless lending results in high levels of bad loans, and when increasing amounts of money is borrowed to service debt payments.

Dalio listed seven measurable characteristics of bubbles as follows:

1) Prices are high relative to traditional measures

2) Prices are discounting future rapid price appreciation from these high levels

3) There is broad bullish sentiment

4) Purchases are being financed by high leverage

5) Buyers have made exceptionally extend forward purchases to speculate or protect themselves against future price gains

6) New buyers have entered the market

7) Stimulative monetary policy threatens to inflate the bubble even more, and tight policy to cause its popping

However, Dalio notes that debt ratios of the entire economy may not be adequate as compared to specific debt service abilities of the individual entities, which are often lost in the averages.

For policymakers to manage debt crises, Dalio notes that the following methods have been employed – the four levers:

1) Austerity – cutting government spending and raising taxes. Dalio believes that this is a mistake during depressions

2) ‘Printing’ money – guarantee liabilities, providing liquidity, supporting the solvency of systemically important institutions and recapitalising/nationalising systematically important financial institutions.

3) Debt defaults/restructuring – balance the benefits of allowing broke institutions to fail with the risks that failures can have detrimental effects on other creditworthy lenders and borrowers. Ensure that the pain is distributed across the population, and spread out over time.

4) Redistributing wealth – through taxes, politically attractive but rarely impactful.

Dalio notes that the four levers have to be moved in a balanced way to reduce intolerable shocks; balancing the inflationary forces against the deflationary ones. Additionally, it is much harder for policymakers to manage debt crises when the majority of the debt are denominated in foreign currency.

Overall, I picked this book because I believe we all want to be able to spot the peak of the bubble – and adjusting the position of our portfolios. Imagine shorting CDOs in 2008, as depicted in “The Big Short” movie. While Dalio described the typical indicators of spotting bubbles, the book didn’t exactly cover how investors should react during a debt crisis; instead, it was more about what policymakers could do to mitigate the effects of debt crises. 

However, I still feel that this was a worthy read, as it allowed me to understand more about the macroeconomic factors affecting our economy, as compared to the individual company level or industry level analysis that I have been familiar with. My blog post has mainly covered the deflationary debt cycle, as I had found it challenging to fully appreciate the chapters about inflationary depressions and currency crises, and I did not want to write any misinterpretations of what these chapters cover. I’ll be reading the detailed case studies in Part 2 of the series in the coming weeks.

I’d recommend anyone interested in understanding debt crises from a macroeconomic perspective to read this book. Lastly, if you have read a good book regarding investing or personal development in general, please leave a comment below and I’d be glad to check them out. Thanks in advance!

If you enjoy reading my articles, please 'like' my Facebook page to receive all the latest updates. It would also mean a lot to me if you could share my articles on Facebook. Thanks! :)



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With property companies in Singapore being hit by both the recent property cooling measures and the prospect of rising interest rates, many property companies listed here have fallen greatly from their January highs. I've began to take interest in property companies recently, as a number of them are trading close to their 52-week lows. Another proxy for our local residential property market would be APAC Realty, which has seen its share price performing poorly of late. As interest rates increases, home buyers face higher financing costs for their property, which may result in them scaling back on their purchases.

In July, when the latest property cooling measures were implemented, property developers here sold off sharply during the next few days. However, it would be important to note that many property companies here aren't merely residential property developers - some have assets diversified geographically across numerous sectors. Hence, I believe that the recent selloff in property companies has been overdone, and bargains have started to surface.

A company that got me interested was Frasers Property (FPL), a company that operates across Singapore, Australia, Europe, Thailand and China. FPL's 2017 annual report provides a breakdown of their assets geographically.

Source: FPL Annual Report 2017


Company Overview

Frasers Property has stakes in various REITs, including Frasers Commercial Trust, Frasers Centerpoint Trust, Frasers Logistics & Industrial Trust and Frasers Hospitality Trust. I feel that owing FPL would be a more diversified option rather than selecting the individual REITs.

Investors should note that only approximately 12% of FPL's shares are held by the public. The remaining shares are held by TCC Assets Limited (59%) and InterBev Investment Limited (28%). This results in FPL shares being less liquid relative to other developers.

Why I like Frasers Property

High Percentage of Recurring Income

This factor is of high importance to me as property developers tend to have lumpy earnings - depending on when the development properties are completed. With a high percentage of recurring income, it gives the company a more predictable revenue stream, thus the company would be less affected by a slowdown in the property market. 67% of FPL's PBIT are derived from recurring income sources (Figure 1), while 80% of FPL's assets are generating recurring income. FPL's recurring income base is derived from its fee income as a REIT manager, dividends received from it's stake in the REITs, as well as from rental income from its investment properties. In the latest annual report, FPL's management has stated that its strategy would be to continue to grow its recurring income base, while ensuring that its sources are diversified geographically. 

FPL's 3Q 2018 presentation shows how FPL has managed to grow its recurring income base:

Source: FPL Results Presentation, Q3 2018


High Dividend Yield relative to other developers

FPL has been paying out a constant dividend of 8.6 cents for the past 4 years. Looking at their dividend payout ratio, I believe that it is reasonable to expect a similar rate of dividends going forward. When looking at whether the dividends are sustainable, I look at the dividends paid as a percentage of FPL's net attributable income before fair value adjustments. The net attributable income to shareholders before fair value adjustments gives us a more accurate perspective of earnings, as it does not include revaluation gains on investment properties, which are non-cash gains and boosts earnings per share.

Here's a table which compares FPL's dividend payout against its net income attributable to shareholders before and after fair value adjustments.

AlpacaInvestments Estimates


From the table above, it is evident that FPL's payout ratio is healthy, and we can reasonably expect FPL to maintain or even increase its dividends going forward.

Investment Risks

High Debt to Equity Ratio

A key concern for me would be FPL's high net debt to equity ratio, which currently stands at 89.3%.  I also noticed that FPL's net interest cover ratio declined from 10x for 9M 2017 to 4x for 9M 2018. This was due to the double whammy of falling earnings per share and higher interest expense following its increased borrowings to fund acquisitions, as well as the completions of investment properties. During construction of investment properties, interest on the borrowings funding these properties can be capitalised, which reduces overall interest expense. Once they are completed, the subsequent interest expense cannot be capitalised, increasing interest expense.  However, FPL noted that there is a timing difference between the completion of these properties and the revenue contributions from them. Hence, we should expect FPL's interest cover ratio to show some improvements in the next quarter.

With interest rates expected to continue rising, this would increase FPL's interest expense. When FPL refinances their debt, it would likely have to borrow at a higher rate. However, property companies tend to have higher debt to equity ratios due to the nature of their operations. 

As of 30 Jun 2018, FPL had a fixed debt percentage of 74.8%, with an average debt maturity of 3 years. Their average cost of debt stands at 3%. 

Geographical Exposure to Australia

FPL has significant exposure to Australia, with 26% of their assets based there. Australia's residential property prices have fallen for 12 months straight, and FPL's management has flagged out challenging market conditions in Sydney, Melbourne and Perth in their quarterly earnings report. In addtion to Australia's recent political challenges, Australia has also been affected by the US-China trade war, as the Australian economy is heavily dependent on exports to China. Weakness in the Australian Dollar may affect FPL's earnings going forward, although FPL has some currency hedges (e.g FLT hedges its Australian currency risk) in place to mitigate this.

Conclusion

With FPL's exposure to the Singapore property market estimated to be approximately 5%, FPL's exposure to the Singapore property market is significantly lower than most other developers. I believe that FPL may have been irrationally sold off together with most of the Singapore property developers, due to fears over further residential property cooling measures. Nonetheless, some risks remain, including rising interest rates and a weak Australian Dollar. Ultimately, I believe that FPL at a range of ~$1.50 is probably a good time for investors to consider.



If you enjoy reading my articles, please 'like' my Facebook page to receive all the latest updates. It would also mean a lot to me if you could share my articles on Facebook. Thanks! :)


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As I did not provide an update on my investment holdings since December 2017, here are the recent transactions for my portfolio.

Purchased shares in Hanwell Holdings Limited at $0.23 after the steep fall in share price. From an assets-based valuation perspective, I believe that its current share price presents us with an opportunity to enter, with a good margin of safety.

Read my detailed discussion here - Hanwell Holdings: Net Cash 70% of Market Cap.

Received $1.10 per share in dividends from DBS, including the special dividend of $0.50. DBS has undoubtedly been my best performer thus far, with returns in excess of 100%. 

I believe that a significant factor for the recent surge in DBS' share price is the decision to increase its dividend payout ratio, with the new dividend policy to pay $1.20 in dividends annually going forward. Currently, even at close to $30, DBS provides a yield of almost 4%. At my average price of $15.01, I am collecting 8% of dividends annually, and I have no plans to divest my holdings.

I remember attending the DBS Annual General Meeting back in 2017 at Marina Bay Sands, and one key takeaway that I got was how DBS has managed to stay far ahead of its competitors in the e-payments sector. CEO Gupta shared that DBS was the first-mover to introduce the DBS PayLah! app as an e-payments platform in Singapore, which spurned many of its rivals to jump on the bandwagon. Mr Gupta also mentioned how Singapore is lagging behind China in terms of embracing e-payments. DBS' digital developments were recognised when they were awarded the 'World's Best Digital Bank" by Euromoney in 2016. Coupled with strong growth in their wealth management segment, DBS remains my top pick among our local banks.

Received $0.05 per share of dividends from SGX. For Q1 2018, SGX reported their strongest quarterly earnings in a decade, with net profit exceeding $100 million.

With my 3-month summer break ahead, I aim to do more in depth analyses of companies on my watchlist, and continue build a diversified portfolio.

Take a look at my latest portfolio here: My Portfolio


If you enjoy reading my articles, please 'like' my Facebook page to receive all the latest updates. It would also mean a lot to me if you could share my articles on Facebook. Thanks! :)



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Updated as at 11/05/2018

After much consideration, I've decided to reveal the current holdings in my portfolio. My portfolio is a low five-figure sum, which I have accumulated from my savings, National Service allowance and working part-time jobs.

I started investing in mid-2015, while I was in National Service. Looking back, mid-2015 was probably the worst time to start, as the markets began to decline due to the sharp fall in oil prices and fears of a hard landing for the Chinese economy. I'd concede that when I first started buying shares, I had close to zero knowledge about doing due diligence. All I did was to base my analysis on P/E or P/B ratios. I definitely wasn't ready, and consequently got badly burnt by the downturn in oil and gas sector.

It was a humbling experience to be taught a lesson be Mr Market, and one thing I learnt was that we should never underestimate the power of the markets to work against us. Nonetheless, I believe that learning a hard lesson early was exactly the wake-up call that I needed. Over the past three years, I have spent a lot more time reading investment books to continually improve my fundamental analysis.

I am still in the process of rebalancing my portfolio, as it is still heavily skewed towards the financial sector, given that our 3 local banks make up a huge proportion of the STI ETF. Therefore, the percentage of cash that I'm holding is somewhat on the high side. Sectors I'm looking at include property, utilities, industrials, healthcare and consumer staples.

Briefly, here are the reasons why I've invested in these companies:

DBS Group Holdings

DBS comes in top among our local banks, and I like their drive to embrace technology to improve their banking services. DBS was award the World's Best Digital Bank last year, and was also the first mover to introduce e-payments in Singapore. I attended DBS' AGM earlier this year, and I must say that I was really impressed by CEO Piyush Gupta's vision to keep DBS competitive by integrating technology with banking services. 

My initial purchase price was higher, but after opting for the scrip dividend scheme for a few rounds of dividends, my average price has decreased to $15, which gives me a yield of close to 8% annually.

In early 2017, I sold off half of my shares at $19, which on hindsight was too soon.

STI ETF

I purchased this after reading the book 'A Random Walk Down Wall Street', which was about the merits of passive investing through index funds. This a more of a long-term position, rather than leaving these funds in fixed deposits with near zero interest rates. I was fortunate to have made my decision in mid-2016, which gave me a good entry price. I'm currently receiving a dividend yield of more than 3% annually.

My reason for allocating a portion of my portfolio to ETFs is because I view them as an 'insurance', if my stock picks underperform, I still can fall back on getting an average index return, which is still rather decent. I am considering diversifying my ETF allocation too, keeping an eye on emerging markets ETFs or a REIT ETF.

Post on REIT ETFs: Should we invest in REIT ETFs?

SGX 

I purchased SGXin November 2016, after Trump's presidential victory, as I had expected the rise in volatility to boost trading volumes in our local market, which has been sluggish after the Global Financial Crisis. However, trading volumes have not increased significantly, and SGX faces several challenges, including the threat of investors leaning towards passive strategies instead of active investing and low IPO activity. This is probably a vicious cycle, as the lack of action in our local market further deters companies from listing here, such as Razer and Sea (formerly Garena).

Nonetheless, I am getting a yield of 4% based on my cost price of $6.99.

Jumbo Group

When Jumbo's share price fell to $0.54, I felt that was a reasonable valuation for a company with good growth potential, as they seek to expand in Asia. More details can be found in my earlier post.

Post on Jumbo: Jumbo at 52-week low

Far East Orchard 

I believe the improving sentiments for our local property market, as evident from the increasing number of collective sales, would benefit FEO, which has been trading far below its net asset value. More details can be found here.

                         2) Update on Far East Orchard

Hanwell Holdings Limited

From an assets-based valuation perspective, I believe that it an opportunity invest in a company with a huge cash pile, providing us with a good margin of safety.



If you enjoyed reading my post, please 'like' my Facebook page to receive all the latest updates. It would also mean a lot to me if you could share my posts on Facebook. Thank you! :)





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I finally had some time to resume writing my blog posts. Apologies for not updating my blog for the past 4 months, as I had been really busy with school activities.

Recently, I have added a new company to my portfolio - Hanwell Holdings Limited.





For the past month, Hanwell Holdings has undergone a sharp selloff, breaking the 30 cents support level for the first time since May 2017. At yesterday's closing price of $0.23, Hanwell's market cap currently stands at $124.5 million, compared to its cash and cash equivalents of $147.9 million, and $61.4 million in borrowings. This gives us a net cash figure of $86.5 million, which makes up 70% of its market cap.

However, because Hanwell has a relatively high proportion of non-controlling interest recorded on its balance sheet, it would be inaccurate for us to simply quote this net cash amount of $86.5 million. A significant portion of this cash is attributed to the non-controlling interest. For the year ending December 31, 2017, Hanwell had $336.6 million in total equity, of which $58.5 million is attributed to non-controlling interests. This non-controlling interest has to be considered when we value Hanwell's business. I would go a little more in depth into details about non-controlling interests point later in my post.

Business Overview

For FY2017, Hanwell recorded $464 million of revenue, a 16% increase over FY2016, and a net profit of $11.1 million.

Hanwell Holdings has two main business segments - the Consumer business and the packaging business. The Consumer Business distributes household necessities including rice, cooking oil and tissue paper, comprising of brands such as Royal Umbrella and Beautex, a brand of tissue paper that many of us would be familiar with. The packaging business mainly consists of Hanwell's 63.9% owned subsidiary, Tat Seng Packaging, which produces corrugated packaging products for customers in the F&B, pharmaceutical and biotechnology industries.

Valuation

When assigning a valuation to Hanwell, I believe that it is appropriate to separate Hanwell's Tat Seng stake and the remainder of the business, because of the significant contribution from Tat Seng's operations to Hanwell's group consolidated balance sheet. As mentioned earlier, Hanwell has a significant amount of non-controlling interest on its balance sheet, mainly attributed to the 36.1% of Tat Seng that it does not own. For some brief explanation of how group consolidated financial statements are prepared, firstly, under the group column, Hanwell would report the line items as if they owned 100% of Tat Seng. Subsequently, the 36.1% that they do not own would be recorded under non-controlling interest, and deducted from total equity, which gives us equity attributable to shareholders.

Therefore, using some figures as an example, if Tat Seng has $100 million in cash, Hanwell would first record this $100 million to their group consolidated balance sheet. Subsequently, the 36.1% that Hanwell does not own, of $36.1 million, would be recorded under non-controlling interest, and deducted from total equity. Hence, simply relying on the $100 million figure without taking into account non-controlling interest would be overstating the total amount of cash that actually belongs to Hanwell.





For Hanwell's stake in Tat Seng, Hanwell currently owns 63.9% of the company. From the chart above, Tat Seng Packaging has been trading within a range of $0.56 - $0.84 for the past year. Based on Tat Seng's 157,200,000 outstanding shares, this gives us a market cap of between $88 million and $132 million. Given Hanwell's 63.9% shareholding, the market valuation of Hanwell's stake would be between $56.2 million and $ $84.3 million. Based on Hanwell's 553 million outstanding shares, its Tat Seng stake would contributes a valuation of between $0.102 and $0.152 per Hanwell share.

As for the remainder of Hanwell's business, we can estimate its value by looking at their statement of financial position under the 'company' column. Do note that this is only an estimate, as this would disregard the value of the rest of Hanwell's subsidiaries. 

When we refer to the 'company' column, we realise that Hanwell itself does not have any borrowings. The Group borrowings of $61.2 million is entirely attributed to the borrowings by Tat Seng. Other key line items under the 'company' column includes $30.5 million in property, plant and equipment; $45.8 million in receivables; $86.8 million in cash and cash equivalents; and $14.2 million in payables.

Based on these key line items, I estimated the value of Hanwell's remaining business, by including a discount factor of 0.7 for the value of the PPE and receivables stated on Hanwell's balance sheet. The estimations are shown below, taking a range of prices for Tat Seng from $0.50 to $0.80.





Using a sum-of-the-parts valuation from the calculations above, I estimated that Hanwell's fair value should be between $0.31 and $0.37. Therefore, I believe that Hanwell's current price of $0.225 presents us with a considerable margin of safety.

Downsides

A potential downside when investing in Hanwell is its low profit margins. Due to the nature of the consumer business, its gross profit margins are rather thin, averaging at below 5%. Another issue is the relatively high remuneration that Chairman Allan Yap receives. There are shareholders who believe that the renumeration of $1.639 million for Mr Yap is relatively high compared to similar sized companies.

Additionally, if Hanwell continues to sit on a huge cash pile, and not return some to shareholders by increasing its dividend payout, investors are forgoing the opportunity cost of deploying that cash to higher yielding opportunities.

Conclusion

If you were to invest in Hanwell, please be prepared to stomach some volatility. At Friday's closing price of $0.225, a movement of half a cent in either direction means a 2% change. Apart from this, I believe that its current price provides a good margin of safety. I have a target price of at least $0.30 for Hanwell, within the next 12 months. Lastly, if this would interest you, Sam Goi, the Popiah King, recently increased his stake by 1.6 million shares at a price of $0.215.

Note: I own shares in Hanwell at an average price of $0.23


If you enjoy reading my articles, please 'like' my Facebook page to receive all the latest updates. It would also mean a lot to me if you could share my articles on Facebook. Thanks! :)





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