Heartland Boy - Investment | Seriously Singaporean Financial Literacy
Heartlandboy.com is a personal finance blog in Singapore where you can follow the arduous journey of a true-blue heartlander who is on the elusive chase for financial independence. He has the ambition of attaining financial freedom before turning forty so that he has the option to retire before society retires him prematurely.
When Heartland Boy’s supervisor at work asked him how his renovation experience was, he replied matter-of-factly, “No major issues so far and they handed over within the timeline as well”. Heartland Boy’s supervisor was surprised and commented that Heartland Boy was incredibly lucky. Indeed, luck could have played a part but Heartland Boy thought that due diligence efforts should not be overlooked either. This is his HDB BTO renovation experience with an interior design company and find out why he would recommend the services of his interior designer in this blog review.
Interior designer or renovation contractor from hell
Amongst his peers, there would always be a few horror renovation stories in them. Even in the BTO Facebook group where he is a member of, some neighbours were already warning others about their own bad experiences.
Diagram 1: Bad renovation experiences are more common than you think
As renovation is a big-ticket item, Heartland Boy felt that it was worth the effort to spend more time to ensure he minimized the possibility of having a bad renovation experience. In addition, as time was a precious commodity, Heartland Boy was clear that he needed an interior designer and not a general contractor as he did not want to play the role of a Project Manager coordinating the jobs and schedules of the various sub-contractors.
With these parameters firmed up, he first asked his peers (A big thank-you to each of them who responded!) for Interior Designers that they would personally recommend before running each referral through a personal checklist.
Heartland Boy’s Checklist To Shortlist Interior Designers1. Reputable company with long track record
As the barrier to entry to the renovation industry is very low, there is a high likelihood that some fly-by-night operators linger amongst them. These operators may not be familiar with HDB renovation rules and guidelines or worse, could run into cashflow problems and default. To avoid these service providers, Heartland Boy looked out for companies with industry accreditations such as Singapore’s CaseTrust. Here is an example of the credentials of the ID company that he worked with:
Diagram 2: Weiken.com accredited by CaseTrust
Do also ensure that you hire only HDB licensed contractors as well. Note that having such accreditations does not mean that these companies will not perform badly or default, but at least this is one level of precaution that home-owner can take.
2. Excellent Workmanship
To verify the quality of the ID’s work, Heartland Boy requested (politely of course) if he could visit his friends’ homes. Simply seeing photos on online platforms such as Qanvast is insufficient for him. Factors that Heartland Boy looked out for was thoughtful space planning, quality of workmanship such as carpentry, tiling, wet works etc.
3. Online Reviews
Finally, besides positive reviews from his peers, he would also read the reviews of past customers online. Such third party feedback are valuable in forming first impressions.
Interior designers who satisfy these 3 criteria would then make it into his shortlist. From this shortlist, he contacted 3 of them to start initial discussions. Once again, Heartland Boy has his own set of factors to help him decide on the one.
A) ID’s Ability To Provide Design Concepts And Solutions
Part of the reason why an ID would be preferred to a renovation contractor is his/her idea generation. Such renovation ideas might or might not be dependent on the years of experience that the ID possesses. Firstly, interior designers should be quick to “catch” the design brief of the home-owners so that they can provide design concepts and solutions that resonate well. Secondly, it is way more important for ID to anchor their solutions on practicality and functionality over visual appeal (which is often driven by the desire to create Instagram-worthy homes). It would of course be a welcome bonus if an ID’s idea successfully marries all these traits. Here is how Heartland Boy’s ID resolved his issue of space constraints of a small house.
As Heartland Boy and Heartland Girl often work from home, it was important to them to have a very comfortable home office. Due to the space constraints of a 3-bedroom BTO, he has to accommodate this home office in the living room. (Master bedroom is for Heartland couple while the remaining bedroom is for Olympiaand the transfer maid). One interior designer came up with the proposal of combining the work desk with the dining table and the TV console in the living room. This one-piece furniture turned out to be an elegant solution. That was one of the eureka moments whereby Heartland Boy felt that the particular ID (Jessie) has truly earned her keep.
Diagram 3: Work station, dining table and tv console in a single furniture piece
B. Communication Process
The second important factor is the communication process. IDs who follow up with emails after the initial meetings can quickly earn brownie points and gain the trust of the client. Jessie was quick to provide her proposed space planning on the floorplan and the initial quotation. Subsequent sessions to clarify line items in the fee quote helped to build up some form of chemistry and trust between them.
This continued into the actual renovation process as well. Jessie would send videos/photos of the works done via whatsapp to keep Heartland Boy informed of the progress on site. As a result, Heartland Boy seldom found it necessary to go down during renovation except to take delivery of his home appliances. Even as his house is still under the defects liability period (1-year warranty), Jessie remains easily contactable.
On the outset, Heartland Boy wasn’t looking for a cheap and good renovation contractor/interior designer. He just wanted a feasible fee quote that could conceptualise his house design. Strangely, only 1 out of the 3 interior designers brainstormed hard enough to come up with a proposal that fit within Heartland Boy’s renovation budget. It turned out to be Jessie as well. Note that examining an absolute lump-sum is meaningless because it depends on the extent of the works done proposed by the ID. It is more important to compare per unit cost such as per square feet (psf) of carpentry works across the quotations that you have received.
After 2 rounds of discussions, Heartland Boy felt confident enough to sign on the dotted line for a $31K renovation package contract with Jessie from Weiken. It might not be the cheapest available in the market, but Heartland Boy still feel it is value for money considering that he did not purchase any materials under HDB’s optional component scheme.
The proposed space planning, 3D drawings and selection of materials were done before Olympia was born in Oct 2018! Therefore, when he finally received his HDB BTO keys in January 2019, he simply handed it over to his Interior Designer for her company to commence works. The ID applied the HDB renovation permit on his behalf and approval was swiftly obtained. For Heartland Boy, he quickly purchased home contents insurance (very critical, can’t emphasize this enough) to protect the value of the renovation works and his electrical appliances. 8 weeks later, this was the result:
Diagram 4: Master Bedroom with a Pseudo Walk-In Wardrobe
Jessie suggested a U-shaped wardrobe that adjoins the wall outside the master bedroom toilet while the other side of the wardrobe faces their queen-sized bed. This created an illusion of a walk-in wardrobe without the need to hack any wall. She also added a full-length mirror which not only helped to elongate the corridor and made Heartland Boy’s apartment look bigger than its 68sm (common mirror trick deployed in showflats), it also contributed to good fengshui. Her solution for the master bedroom satisfied all the parameters that Heartland Boy instructed her to work with.
Diagram 5: A kitchen that manages to fit Heartland Boy’s toys
The kitchen was the area where Heartland Boy was most intimately involved in. Instead of a man shed or a gaming room, the kitchen is actually the part of the house where he lets his creative juices run wild. He was very clear in his vision the equipment (oven, wine chiller, dishwasher) that the built-in carpentry needed to accommodate. Once again, he was very pleased with the end result as all the equipment managed to slot themselves in nicely in such a small kitchen. Careful space planning also went in to ensure that there was sufficient countertop left for mi-en-place.
Diagram 6: Toilet retains all HDB fittings to minimize wastage and save money
The theme of trying to minimize wastage and save money continued at the master toilet as Heartland Boy asked Jessie to work with the floor and wall tiles and toilet bowl that were provided by HDB. This were the same wall and floor tiles that were already installed in the kitchen too. Without any overlay of the toilet, Jessie managed to create a simple and functional master toilet.
Considering that HDB did not provide additional materials, Heartland Boy was quite satisfied that the entire renovation cost came up to $31,000. The renovation journey was no doubt one of the more time-consuming milestones in adulting but equally rewarding as well.
Diagram 7: Before and After Renovation of his HDB BTO
His heart is full when he has a cozy home that he looks forward to coming back to after work. For those who would like to set up a meeting with Heartland Boy’s interior designer, Jessie of Weiken.com, you can write in to email@example.com and he can help link you up. His ID has also promised that she will be able to extend a goodwill discount on the contract sum to Heartland Boy’s readers. In addition, if you have further questions on your renovation process, Heartland Boy will be happy to address them to his best ability as well. He can also share tips on what he personally did to facilitate the meetings with the panel of IDs that he shortlisted.
Diagram 8: Interior designer (Jessie) from Weiken and the Heartland Family
Boustead Projects Limited (‘BP’) is a leading industrial real estate solution provider listed on the SGX. It provides high-specifications industrial projects that are built to suit its clients’ needs on a turnkey basis. It is also the real estate business arm of mainboard-listed, engineering services group Boustead Singapore. By way of issuance of dividends in specie of BP shares from Boustead Singapore, BP IPO-ed on 30 April 2015 at 88 cents with ticker code SGX:AVM. As at 21 June 2019, it has a market capitalisation of SGD$285 million. The business model of BP is plain and simple; it offers 2 types of services to its clients.
Business Model of Boustead Projects Limited
Diagram 1: Business model of Boustead Projects Limited
As seen its Diagram 1, BP offers (i) Design and Build services and (ii) a Leasehold Portfolio for its clients to lease office space from.
1) Design And Build
Boustead Projects E & C Pte Ltd, BP’s wholly-owned subsidiary, offers a full suite of industrial real estate solutions to meet every client’s unique requirements and specifications. It engages the clients at a very early stage of development so that it can consider, interpret and understand their needs, processes and strategies and then help to carry out the financial and feasibility studies. BP can design and build industrial facilities, business parks and commercial buildings. Its track record include over 3 million square meters of industrial real estate spanning over 170 projects in Singapore, Malaysia, Vietnam and China. In addition, BP is one of the few approved developers by Singapore Building & Construction Authority (‘BCA’) to execute construction contracts of unlimited value.
The Design and Build industry is actually a niche segment with fewer participants in the market compared to construction industry. Most importantly, BP serves as the overall Project Manager and outsources the labour-intensive construction works to general construction companies. It is therefore less reliant on cheap foreign labour and less plugged in to the razor-thin margins commonly associated with the construction sector.
2) Leasehold Portfolio (Design And Build And Lease)
Besides helping its clients to design and build their facilities, BP also offer to own these buildings on their behalf. This is known as “Design, Build and Lease (‘DBL’). BP’s clients span from a wide spectrum of industries such as Aerospace, Precision Engineering, Logistics, Healthcare, Pharmaceutical etc.
The DBL solution helps BP’s clients to free up capital so that they can focus on their core businesses and maintain an asset-light strategy. This is a highly popular solution as BP is there throughout the entire customer journey; from designing, building, and maintaining the asset. Typically, before proceeding with a custom DBL project, BP would have already secured its end-customer and fixed the commercial leases terms. This allows BP to have a good gauge of the profitability of the project before it even commences.
In taking over this burden on behalf of the client, BP needs significant balance sheet ammunition. That is why it has utilised fund management platforms where strategic investors to provide the necessary equity for BP to scale quickly. Some of these strategic partnerships worth highlighting are:
A) Boustead Development Partnership (BDP)
This is a partnership with Abu Dhabi Investment Council (ADIC) since 2014 with an initial development target of over $600 million when fully leveraged. Since its inception, its has secured 6 development projects, the most notable of which is ALICE@Mediapolis.
B) THAB Development Sdn Bhd
This is a partnership platform with AME Construction Sdn Bhd, Tat Hong Holdings and CSC Holdings Ltd established in 2013. It recently completed a logistics hub at the Port of Tanjung Pelepas which caters to corporations looking for quality logistics space at the port.
C) Echo Base JV
Established in 2018, this is a real estate fund management and services platform focused on the development, investment and management of smart buildings and integrated developments across Asia Pacific in global gateway cities. One of the investors is the CEO of Razer. Not surprisingly, its maiden project is the Razer SEA HQ announced in late 2018. This strategic partnership could potentially pave the way for BP to enter into non-industrial asset classes and enhances its geographical reach.
With all these additional firepower, BP has built up a sizeable leasehold portfolio consisting of 24 properties, of which 19 are completed and 5 are under development.
Investment Merits of Boustead Projects1.Record Order Book
Since end 2018, news of BP’s multiple contract wins have come fast and furious. As at FY2019, BP’s order book backlog stands at $660 million. Diagram 2 will tell the story best.
Diagram 2: Boustead Projects’ order book backlog from FY2015 to FY2019
With its Design and Build division ending FY2019 with thrice the usual order book, it is the main reason why Heartland Boy bought into this stock. It is not just the size of the order book, but the number of firsts that it achieved in the recent contract wins:
10 Dec 2018- First public sector contract to build JTC multi-storey recycling facility awarded via the GE BIZ tender process
21 Dec 2018- Awarded contract to build the iconic Razer SEA HQ
18 Jan 2019- Largest private sector construction project in BP history as it was awarded the contract to develop Surbana Jurong Campus
Heartland Boy believes that BP is finally reaping the fruits of years of investing substantially in advanced capabilities with industry 4.0 transformation and market-leading standards. Assuming that it had not been overly aggressive in its bid submissions, these contract wins will have significant positive impact to its bottom line. Assuming a net profit margin of 9%, the current orderbook will translate into profits of ~$60 million to be recognized progressively in FY2020 and FY2021. That means the contribution from D&B division alone will match the Group’s annual profits of previous years.
2. Leasehold portfolio recorded at cost less depreciation
BP’s wholly-owned properties are recorded on its balance sheet at cost less depreciation. It therefore does not have the accounting practice of marking its investment properties to fair market value. Therefore, what is recorded on its balance sheet is not a true reflection of the value of its properties. For instance, in its FY18 annual report, BP’s Chairman and Managing Director revealed that the market valuation of its leasehold portfolio has already approached $800 million. (Note that this could potentially include properties which BP do not hold 100% shareholding)
When compared to its balance sheet, the total value of its investment projects (10 projects) and properties held for sale (5 projects) was only $159.5 million. In its 4Q19 results announcement, the total value of its investment projects and property held for sale have since grown to $208 million as it was boosted by some property completions in year passed. As the FY2019 Annual Report is not yet published at the time of this blogpost, Heartland Boy is unable to derive the professional valuers’ valuation of its investment properties and properties held for sale.
Nonetheless, going by FY2018, it is acknowledged that a significant gap exists between what is recorded on the books and the true economic conditions. This suggests that BP’s shares are significantly undervalued. However, there is little value talking about such a discount gap unless the portfolio can be unlocked to return value to the shareholders- i.e. the properties must be sold in order for shareholders to enjoy the capital appreciation.
3. Possible REIT Listing In The Short Term
When BP was spun off from Boustead Singapore, a possible medium goal was to seek an industrial REIT listing by spinning off its leasehold portfolio. It was a medium-term goal because it takes time to build up a portfolio (close to $1 billion) that is sizeable enough to be spun off into a REIT. As Viva Industrial Trust and ESR-REIT have shown, it is necessary to have scale to command a decent market valuation.
As the various fund platforms have allowed BP to scale up quickly, the REIT dream is no longer a medium-term goal anymore. In fact, Heartland Boy feels that this could potentially take place in the next couple of years. If that happens, the severely undervalued leasehold portfolio will then be able to reward shareholders (perhaps by way of a special dividend) with the capital gains that it has made over the years. In addition, the establishment of a REIT platform would accelerate BP’s future capital recycling efforts and it will allow them to consider taking on even more development projects under its leasehold portfolio.
Investment Risks of Boustead Projects1. Government Policies And Regulations
BP operates in the industrial segment and like any other real estate sector, it is exposed to government’s policies and regulations. As Heartland Boy found out via APAC Realty and Roxy-Pacific, the Singapore government will not hesitate to take a strong interventionist approach if it sees the need to. So far, the government continues to promote high-value industrial sectors that BP is focused on.
2. Bitten Off More Than It Can Chew?
While the recent contract wins and record order backlog is definitely something to rejoice about, Heartland Boy is mindful that this could also invite questions such as compressed margins and execution capability. It is important to consider whether:
BP had been too aggressive in its bids? If that is the case, its operating margins could be compromised.
Would BP be able to execute these contracts in time since current backlog is almost 3 times of what it has traditionally handled? If it fails, it might face liquidated damages or reputation losses.
If Heartland Boy were to hazard a guess, it is likely that BP was not in any desperate situation to secure these contracts. He doesn’t see it worthwhile to ask its Investor Relations department as such a question would generally elicit a standard response. Instead, if Heartland Boy is able to make time for its upcoming Annual General Meeting (‘AGM’), he would like to ask the Board of Directors these questions directly. Meanwhile, he will continue to monitor the margins going forward as shown in Diagram 3.
Diagram 3: Boustead Projects’ historical margins and ROE
3. Receipt of Writ Of Summons
In Nov 2018, YCH Holdings filed a claim that it suffered damages in the sum of S$2.33 million between 2012 to 2014 as a result of a breach of contract from BP. BP has stated that it will defend the claims vigorously but the result of which is only likely to be made known in FY2020. Viewed in totality, this represents less than 10% of its annual profits and Heartland Boy assesses this risk event to be small.
Review of Boustead Projects
BP is led by an experienced management team (MD is Thomas Chu) and has reported solid financials since it debuted as a listed entity. According to Bloomberg, at a share price of 0.915 cents, Boustead Projects has a dividend yield of 2.2% and a Price/Book Ratio of 0.91. Shares buyback was last done at March 2018 at a stock price of $0.80. It is unlikely that this will continue in the near term as BP would require plenty of cash to carry out the development works (eg: Braddell Road GLS tender that it won end of last year)
Employing a discounted cashflow methodology to value Boustead Projects, Heartland Boy derived at a target price of $1.20. This does not factor into the scenario that BP is able to unlock the value of its undervalued leasehold portfolio. There is currently no analyst research report that covers Boustead Projects although CGS-CIMB recently released a “non-rated” report on it.
Vested at an average price of 0.93 cents since early June 2019. He will continue to share his thoughts of Boustead Projects on forums such as InvestingNote.
HDB recently launched a new HDB Sales scheme whereby would-be home owners can choose to apply for unselected flats from the Re-Offer of Balance Flats (‘ROF’) pool at any time of the year! This was the “new scheme” that the National Development Minister was talking about on his blogback in February 2019. Being curious, Heartland Boy decided to delve deeper into this new scheme and see see which group of aspiring home owner can potentially benefit from it!
Open Booking of Unselected Flats from ROF Pool
Funny thing is that the Ministry did not come up with a new name for this scheme. It simply refers to this as the “open booking of unselected flats from the ROF pool”. Even without a new name, you can already imagine the difficulty that first-time owners face when having to learn about the differences between Build-to-Order (‘BTO’), Sales of Balance (‘SBF’) and Re-offer of Balance (‘ROF’)! Not to worry, Heartland Boy has come up with a table to detail the key differences between the various sales schemes as shown in Diagram 1.
Diagram 1: Different types of HDB sales schemes* (information accurate as at 12 June 2019)
Basically, this open booking of unselected flats from the ROF pool is considered an enhanced version of the ROF exercise (No.3 in Diagram 1) as aspiring home-owners can choose to apply for a HDB unit listed on the website at any time of the year! Previously, flats in the ROF pool were only made available during semi-annual sales exercises. The government has allocated a total of 123 unsold/repurchased flats to “open this new scheme”. There will be 2 periods where fresh supply of unsold HDB apartments will be injected into the ROF pool and this will take place during February and August annually. During such periods when the supply will be replenished, members of the public will not be able to apply for the “open booking of unselected flats from the ROF pool”. Do note that the other types of sales mode (No 1 to 3 in Diagram 1) will continue to take place as scheduled unless the government announces otherwise.
Popular Units Largely Unavailable
Having explained how the open booking of unselected flats from the ROF pool works (yes, its quite a mouthful), do note the trade-offs for an almost unrestricted sales window are:
Lesser proportion of larger units
Lesser proportion of higher-floor units
The trade-offs listed above are expected as popular units would have been taken up in the earlier sales exercises listed in Diagram 1. Another point to note is that the number of flats available would be dependent on your ethnicity.
Diagram 2: Total number of units available to the various races (Source: HDB)
As shown in Diagram 2, only 26 out of the 123 flats listed in the ROF pool are available to the Chinese race. 7 out of the 26 available are located in mature estates, which shows the vastly reduced choice a Chinese applicant would face.
Do bear in mind that the “open booking of unselected flats from the ROF pool” is meant for those who have more urgent housing needs and are less particular about location and flat attributes. If those factors are important to you, you may have to try your luck in the earlier sales exercises.
Move In The Right Direction
Having personally waited almost 5 years for his own BTO flat to be completed, Heartland Boy knows painfully well the anguish of such a long arduous wait. Many unpredictable events can happen during this time. In his own circle of friends and colleagues, he has witnessed some who chose to postpone marriage and even childbirth plans because of this long wait. Although they have gone in with their eyes open (i.e. exercised the option to purchase knowing a 4-year wait was in store, the actual wait could turn out to be more intolerable than first imagined.
Even till today, Heartland Boy remembers having to field the dreaded same question on the status of his home when asked repeatedly by friends and relatives during gatherings (CNY). While he has thankfully “graduated unscathed from the scheme”, he had long wished that something be done about it.
This is why that despite the trade-offs listed above, Heartland Boy still thinks that this move is a step in the right direction by the Singapore government. This has made HDB flats more accessible to a group of aspiring home-owners whose immediate housing needs outweigh other factors.
How To Apply For Unselected Flats In ROF Pool
If you are eyeing any of these flats, make sure you have done the necessary due diligence so that you willselect the best unit available (regardless of how limited the options are). All the HDB apartments listed for sale are available online so you have ample time to visit the location itself to do your homework.
If you would like to apply, take note that application period opens from 18 June 2019 Tuesday 12.00am. Yes, the precise timing matters because it is on a first come first served basis. (yes, it might sound deja-vu for university students who have experienced bidding for modules)
Here’s a pro tip: Make sure you have a strong internet connection and camp in front of your computer before the stroke of midnight! If you have previously applied for a flat, HDB should have your information stored in its system and this should expedite the process.
The long-anticipated annual REITs Symposium 2019 is scheduled to be held on 18 May 2019 (Saturday) at Sands Expo and Convention Centre, Marina Bay Sands. Online tickets are going for only $15 and first 30 readers of Heartland Boy will also receive a mystery gift worth $25 (more details on that later). REITs Symposium 2019 will be a congregation of over 75% of the REITs listed on the SGX and therefore represents the only setting whereby the public can interact with a large number of REIT-managers at one go. The REITs scene in Singapore has developed into one of the most mature globally. The anticipated public listings of ARA US Hospitality Trust and Eagle Hospitality Trust will further boost the plethora of available options for retail investors.
Why We Love REITS
Retail investors are attracted to REITs largely due to its regular, stable and high dividend yields. Besides, REITs are a more liquid and convenient asset class compared to owning physical properties. Because of these characteristics, Heartland Boy has often recommended first-time investors to pick some of the best-performing S-REITs as their first investments. He gave a REIT 101 presentation at SGX My First Stock Carnival 2018 and shared why REITS are ideal candidates for novice investors:
Dividend yields ranging from 5-10% provides some form of buffer against capital depreciation
Regular distributions can serve as encouragement and assurance
Low barriers to entry (as little as $100)
High liquidity (i.e. easy to exit your investments)
Diagram 1: Heartland Boy sharing about REITS in SGX’s My First Stock Carnival 2018
These were the same traits that drawn Heartland Boy to study REITs in detail when he first started investing in 2014. He took a long time to understand the jargon used in the S-REITs industry. Heartland Boy has been a regular investor of S-REITs and they have often been the top-performing selections in his portfolio. Here is his experience investing in S-REITS so far.
Diagram 2: Heartland Boy’s track record with S-REITS
What To Look Out For In REITS Symposium
Besides the standard corporate presentations typically given by the REIT Manager, Heartland Boy would like to highlight some noteworthy segments:
REITs Investing via Margin Financing by Maybank Kim Eng
#Panel Discussion: Insights To Best Performing Singapore REITs
REITS 101 would be highly suitable for beginner investors who want to understand the business model of a REIT. REITs investing with leverage would be a topic more suitable for experienced investors. Some of his peers have also been dipping their toes into REITs investing via margin financing. Therefore, this is a segment that Heartland Boy would want to explore especially since he wants to grow his stream of passive income to achieve his goal of financial freedom.
Diagram 3: Heartland Boy often sneaks out of the conference proper to get valuable interaction with the REIT Manager
Outside of these presentations by the various speakers, Heartland Boy will definitely be visiting the various exhibition booths set up by the REITs Managers. Heartland Boy has always found that it is very valuable to meet management face to face where his queries can be directly addressed. Here was his experience attending the REITs Sympsoium 2017.
For REITS symposium 2019, he will be heading a beeline for ESR-REIT’s booth. Although he is no longer a unitholder, he is actively monitoring this REIT after its merger with Viva Industrial Trust. He wants to be sure that the reasons why he divested ESR-REIT only last month remain valid.
Giveaway for Heartland Boy’s readers
If you would also like to attend the 2019 REITs Symposium, you can punch in the promo code “heartlandboy” when you sign up. First 30 readers who sign up with this promo code receives a mystery gift worth $25 from ShareInvestor, which is more than the ticket price of $15! See you there!
Disclaimer: Note that Heartland Boy earns a small fee for every successful referral.
Heartland Boy is depending on his investments returns to generate passive income during his retirement. As 2018 was not a very kind year in terms of his investment portfolio returns, he decided to brush up his investment skills. Therefore, he attended the Investment Quadrant Course 2.0 organized by the Fifth Person back in June 2018. On hindsight, he was glad he did because he could hardly devote such precious weekends now that he has become a dad. Investment Quadrant is based on 4 core principals of Business, Management, Financial and Valuation. As such, Heartland Boy is going to review Investment Quadrant course according to those principles.
What Heartland Boy Likes About Investment Quadrant1. Provided Value Beyond US$347 (S$470)
Under the ‘Business Quadrant’ of Investment Quadrant, one of the key questions that The Fifth Person often asks is “Does the business provide value to the customer?”
Applying the same metric, Heartland Boy thinks that participants are clearly getting value beyond the US$347 that they have paid. Beyond the face value of the lecture notes, it is the nuggets of wisdom that the speakers were able to provide. The speakers generously shared some useful tips that they have garnered from their years of professional experience. For instance, to get up to speed with any listed company’s business, here are a few nifty tips:
Zoom right into the revenue component of the Annual Report by searching for these keywords “Revenue Recognition” and “Segment Information”
Read the Chairman’s statement in the Annual Report
Read analyst reports but you may want to ignore the price targets
The value provided transcends beyond the classroom experience. Participants can take their learning experience online by logging into the Investment Quadrant. The online materials are clearly designed to facilitate e-learning with its user-friendly interface. More importantly, the course materials allow participants to learn the concepts at their own pace and from the comforts of their home.
Diagram 1: One of the key lecturers: Victor from The Fifth Person
2. Behind The Scenes Sharing
The Fifth Person are advocates of meeting the Management of the companies. Basically, they need to feel comfortable with Management before parting with their monies. This explains the ‘Management Quadrant’ of their Investment Quadrant. The Fifth Person have the habit of buying only 1 lot in order to attend an AGM to observe the Management. It could even be a notorious company that they will never be interested in but would even attend the AGM just to observe how the Management behaves. Indeed, the sharing was so generous and forthcoming that some of those anecdotes should strictly not leave the confines of the classroom. Some examples of Management who are not aligned with shareholders:
Management who talk up the prospects of their stocks but blatantly offload their own shares in the company
Management who pays themselves beyond market standards because they can
Because of their years of meeting with Management, they are now better judges of Management’s character. This was however not the case when they first started out. What Heartland Boy felt comforting was that The Fifth Person were equally enthusiastic sharing their failures as well as their success stories. In the investing world where egos can be the size of footballs, it says something about a company when the owners are willing to admit their mistakes. Measuring them by the same yardstick, Heartland Boy thinks that these are chaps who are genuinely motivated to provide value for the participants’ monies.
3. Real Case Studies
For every concept explained, they are always supplemented with real-life case studies. When explaining the ‘Financial Quadrant’ of the Investment Quadrant, they illustrated it using BreadTalk Group as an example. At face value, the profits of BreadTalk Group can look plain boring.
Diagram 2: Compare the profits vs net operating cashflow of BreadTalk Group
However, The Fifth Person shared that a deeper analysis of the financials would reveal that BreadTalk Group has been conservative in their approach towards the depreciation of their Property, Plant & Equipment (PP&E). As a result, the reported profits are not a true reflection of the strength of their underlying business.
Another example of their dedication- The Fifth Person went down to various BreadTalk stores all over Singapore to monitor the queues after the fresh soy milk sagain 2015.
4. Hands On Practice In the Classroom
To hammer home the point of ‘Valuation Quadrant’, nothing beats hands-on practice in the classroom. Students in the classroom were able to download an excel file and complete a valuation exercise by using Kingsmen Creatives’ Annual Report. As the proprietary Excel File already contain formulas, it is able to populate key financial ratios such as Price to Earnings (‘P/E’), Price to Book (‘P/B’) and Price to Cashflow (‘P/CF’)
Diagram 3: Simply extract the relevant financial information from the Company’s Annual Report to get the key financial ratios
Armed with the various financial ratios, the next step would be to deploy the right financial ratio to value a company. According to The Fifth Person, the general rule of thumb to value companies would be:
P/E ratio for company with predictable earnings
P/B ratio for companies that are asset-heavy (eg: real estate)
P/CF ratio for companies with earnings distorted by depreciation/amortization
Yes, because you have paid for the course, you obviously get to keep the Excel file and use it to value the companies you are interested in. This would arm you with the necessary tools to find undervalued companies in the stock market.
How To Maximise Your Learning From Investment Quadrant
Go through the online videos before attending the class. This enables you to absorb the information better in class. Heartland Boy’s opinion is that The Fifth Person tries to cover a lot of content within the 1-day session. Once again, this is testament to the value that they are providing.
Get equipped with basic financial knowledge before attending this workshop. You should be familiar with the financial ratios used in Fundamental Analysis such as P/B, P/E etc. A very basic understanding of financial accounting will be necessary since the in-class assignments involve extracting information from the financial statements
Do not be shy to clarify your doubts. You can post your queries online and the founders will endeavor to respond to them within 48 hours!
Diagram 4: Email blast to summarise the content of Investment Quadrant 3.0
Sign Up For Investment Quadrant 2019
Good news that Investment Quadrant 3.0, the 2019 edition, is finally open for registration from 22 April to 12 May (closes at midnight sharp).
Register using this link as an early bird to get US$50 discount off the course fee before the 12 May 2019.
The first run of Investment Quadrant takes place on 4 May (Saturday), from 9am to 7pm. Registration is on a first come first serve basis, and classes would generally take place on the weekends of May. If you can’t make it for the first run, there will be other runs still available on the weekends of May. But if you are unable to make it for ALL the runs in May, the next one would unfortunately be in 2020!
*Do note that Heartland Boy earns a referral fee for each sign-up.
Diagram 5: Investment Quadrant Class 2.0 By The Fifth Person
Conclusion Of Investment Quadrant
Investing money is hard work and there is indeed no free lunch in this world. The trainers took care to ensure that this was communicated repeatedly throughout the workshop. Having been an active investor for over 5 years himself, Heartland Boy would be the first to agree to this stance. That is why he is well placed to gauge the effectiveness of this investment course. He wished that he had chanced upon such a stock investing class earlier in his investment journey. Such investment education would definitely have solidified his foundations when he was just a beginner. He would be very certain that he would have saved some tuition fees along the way that would have improved his investment performance.
The most exciting day in your HDB journey has finally arrived! Getting keys to your HDB BTO is a momentous milestone in your adulting journey. As you countdown to that fateful day with bated breath, there will be a hundred and one things going through your mind – What documents do I have to bring? What should I expect? How do I perform the door opening ceremony? Heartland Boy knew exactly how you feel because he too waited almost 4.5 years before he finally collected his keys on 28 Jan 2019. As such, he shall share the HDB key collection process in this blog article and pen a “Complete Guide To Your HDB Key Collection Date”. In this review, he will also give some handy tips so that you can be the most prepared you can be, especially after waiting for so long for your dream house!
Things To Do Before Your HDB Appointment DateA) Check Your HDB Appointment Date Online
To check your HDB key collection date, simply make use of HDB e-Services under its My HDBPage. Go to My Flat > Application Status > New Flat > Reg.No.
Diagram 1: You will be able to see the various details of your New Flat under Ref/Reg No
Once you have clicked Ref/ Reg. No, you can view the various important HDB documents
Agreement for lease (to check your loan eligibility)
Appointment letter- Remember to print and sign
Details of payment for flat purchase
As part of HDB e-Services, you can also opt to delay or defer your key collection date if the initial appointment date is not suitable for either of you. It is also via this communication channel that Heartland Boy wrote in to request HDB to expedite the handover of keys. That is because his existing in-law’s place is getting a little too cozy after the addition of Olympia. HDB kindly acceded to his request and he was one of the first few within his block to secure an appointment!
Big congrats to all couples on reaching this milestone!
B. Apply For HDB Fire Insurance By eTiQa
Go to eTiQa’s website to sign up for your HDB Fire Insurance. HDB will want to see your Certificate of HDB Fire Insurance before issuing you the keys. Heartland Boy is paying $4.50 for a 5-year premium. The reason why this is so affordable is because it is (1) compulsory for those taking up HDB Loan and (2) does not provide coverage for home contents such as furniture, renovations and personal belongings. Homeowners will have to apply for additional home insurance to get these covered. This is highly advisable especially if you intend to spend a fortune to doll up your love nest.
C. Sign Up For Your SP Service Account
Log on to SP Utilities Portal and apply for a utilities account (New Account Sign Up > Individual). If you are a busy working adult who has limited annual leave, it will be a good idea to complete your apartment defects check on the same day that you collect your keys. For this to happen, it will be advisable to ensure your SP Services Account is activated 1 day before your HDB key collection date. With running electricity and water, you will be able to complete the following checks:
Flush to ensure that your toilet bowl is functional
Store a pail of water and splash it on your toilet and service yard. This is to check the direction of the water flow.
Plug in your handphone charger to ensure that that the electrical point is functional
Of course, B & C are activities that can be done within HDB Hub but doing them online means you beat the queue and get to reach your flat faster!
D. Discuss Your HDB Financing Strategy
The good news is that HDB will no longer wipe out your CPF Ordinary Account if you decide to opt for a HDB Loan, so that is one less problem to worry about. Therefore, the first factor to discuss with your partner now is whether both of you intend to leave any emergency cash in your respective CPF OA.
For those taking a HDB Loan, you need to discuss with your partner on how you intend to service the mortgage of your HDB BTO flat. You can discuss on (i) the quantum to borrow, (ii) the length of your HDB Loan and (iii) the allocation of CPF deductions. For those who intend to use cash to make monthly payments, please get ready your bank details to arrange for GIRO facility.
Things To Do On Key Collection DateE. Document Checklist For Appointment With HDB
Here is a list of documents to bring:
A working Singpass with 2FA (either your mobile phone or OneKey token)
Copy of your Certificate of HDB Fire Insurance (Refer to B)
Original Marriage Certificate if you have applied under the Fiancé/Fiancée Scheme
Completed HDB Appointment Letter
Arrangement for Power of Attorney (if either flat applicant will be absent)
F. Items For Defects Rectification Check
You will need several equipment to complete your defects check before you call on the Building Service Centre. Here is the checklist of the handy tools:
Masking tape or coloured post-it flags
Markers and pens
Measuring tape – Especially important if you would like to do some preliminary measurements
Torchlight- Remember that there is no light in your BTO flat yet!
Your apartment floor plan
Door stopper- Leave this in the house so that your contractor will be gentle with your door when working
A bicycle lock– You can simply inform your interior designer or contractor the code to the lock. Never leave your complete set of keys with strangers!
Handphone charger- To test for electricity as well as provide juice for your handphone
A pail – To store water and splash it on your toilet and service yard
A stool or a ladder to reach for taller places
Wet wipes, tissue, disposable gloves, towel, water – for basic hygiene and to keep yourself hydrated
G) Items For Door Opening Ceremony & Ritual
Save some money if you DIY the door-opening-ceremony!
If you believe in fengshui, you may like to conduct a new house door opening ceremony. For this traditional Chinese ritual, you will need the following items to complete the entire procedure:
Various fruits (In odd numbers)
1X Chinese Prosperity Cake
1 X Red Plate
If you intend to DIY the new house door opening ceremony like Heartland Boy, here are 8 helpful Chinese Greetings for you as you move around the house:
HUAT AH HUAT AH
There it is, Heartland Boy’s complete guide to your HDB key collection date process. Hope you have as much fun inspecting your new house as Heartland Boy did. He did all this in super quick time so that his interior designer can commence renovation works as soon as Chinese New Year celebration is over.
2018 is behind us and it is time for an annual review of Heartland Boy’s stock portfolio. The metric used to measure the stock performance would be Internal Rate of Return (“IRR”) and the relevant benchmark is the Singapore Straits Times Index (STI Exchange Traded Fund). Having a benchmark is important as it allows Heartland Boy to track and compare his active investment strategy. Heartland Boy will also be including his cash component when calculating his stock performance. Returns will include both realised and unrealised transactions. Without further ado, let’s get straight down to business.
Historical Stock Performance Of Heartland Boy
Diagram 1: Heartland Boy’s Investment Track Record Vs STI
From the table shown above, 2018 was a disastrous year for Heartland Boy. It was his WORST annual performance in his 5 years of investing. This severely negated all the good work done previously. As a result, his overall XIRR since beginning 2014 stands at a negative -0.01%. He would be better off holding cash and gorging on Netflix instead. Here is the detailed breakdown of the individual equity counters that contributed to his set of disastrous results in 2018.
2018 Stock Performance Review Analysis
Diagram 2: All equity transactions for Heartland Boy in 2018
Now that the report card has already been handed out for some time, which Heartland Boy evaluated himself with an ‘E’ grade, he finally has time to cast his emotions aside. Here is his cold, hard analysis of the investing lessons learnt in an eventful 2018.
In short, he never recovered from this morale-damaging mistake.
2. Too Trigger Happy
In the first half of 2018, Heartland Boy was still riding high on confidence owing to the relatively solid 2017 investment returns. This optimism gave rise to a false sense of infallibility and led to impulse purchases such as Ascendas Hospitality Trust and Hock Lian Seng. These stocks were subsequently sold a few months later without triggering their respective stop-loss orders. This was poor portfolio management on his part. Worse, such frequent transactions all added up to unnecessary brokerage commissions and distractions.
3. Did Not Cut Loss When Stop-Loss Orders Were Reached
On 5 July 2018, Heartland Boy’s portfolio experienced a black swan event of sorts. The government announced fresh cooling measures to the Singapore residential property just when a firm recovery was occurring. On the next trading day, equities exposed to the Singapore property market took a nosedive, sinking anywhere from -5% to -17%. Obviously, stop loss orders for APAC Realty and Roxy Pacific were triggered. However, Heartland Boy did not have the courage to react. In other words, he did not have the discipline to follow through on his investment strategy. He comforted himself by thinking that it was a knee-jerk reaction by the investment community. However, he was very wrong as the decline continued not just for the next few days, but the next few months as well.
Yet, he remains steadfast in his analysis of Roxy Pacific and APAC Realty today. For instance, he has been tracking the sales of Roxy Pacific and it has done really well so far. It is sitting on huge profit margins for the projects sold in 2018 as these land plots were purchased back in 2016 and 2017 before the en-bloc furore. Likewise, some developers have responded in this tepid market by increasing the commissions for property agents to drive more sales to their projects. Coupled with the tons of liquidity generated from the en-bloc craze, Heartland Boy believes that these continue to bode well for APAC Realty. He is hoping that his investment thesis will eventually bear fruit, although it could take considerable time for stock market sentiments to turn for the better.
Conclusion of 2018 Stock Performance Review
That’s it for the review of his stock performance in 2018! It is really quite disheartening because such a poor performance inevitably sets Heartland Boy’s dream of achieving financial independence by the age of 40 back considerably. However, this is also not the time to cry over spilled milk. The lessons learnt in 2018 will be ingrained in his memory forever and be put to good use in the future.
Btw, 2019 is supposed to be a good year for dragon babies! Huat ah!
Far East Hospitality Trust is a Singapore-focused hotel and service residence hospitality trust listed on the SGX. It IPO-ed on 27 August 2012 at 0.93 cents with ticker code of (Q5T.SI). As at 30 October 2018, it has a market capitalisation of SGD$1,132 million. Far East Hospitality Trust is a stapled Trust that consists of both a REIT and a Business Trust. Heartland Boy knows that REIT has a unique set of framework. As REITs are mandated to hold stable assets, Hospitality REITs have to devise creative ways to overcome this regulatory hurdle. Therefore, Heartland Boy has provided some layman notes to Far East Hospitality Trust’s holding structure found in its Annual Report to aid your understanding.
Diagram 1: Chart of Far East Hospitality Trust: Adapted from 2017 Annual Report
REIT Manager rents out the Hotel and Service Residence portfolio to a Master Lessee
The Master Lessee enters into a Hotel Management Agreement with a hospitality operator (in this case, it happens to be Far East Orchard, an entity related to Far East Organisation)
Master Lessee is a passive tenant who simply collects profits (if any) from the assets after paying management fees to the hospitality operator. In turn, Master Lessee pays rent to the Landlord (FEHT) for use of the assets.
The Business Trust is established with a view to be appointed as master lessee of last resort and has remained dormant so far.
Far East Hospitality Trust’s portfolio of assets is shown in Diagram 2.
Diagram 2: FEHT Portfolio across 3 sectors
It is critical to understand the rental formula under which the REIT is getting its cash flow as it allows unitholders to understand the variability of a hotel REIT’s cashflow. For instance, structuring a high fixed rent with a low variable rent component means lower risk for a hotel REIT. Hotels & Serviced Residences of Far East Hospitality Trust are leased to Master Lessees in accordance to the Master Lease Agreements for a duration of 20 years, with an option for Master Lessees to extend for a further 20 years. Master Lessees will pay rent in the form of Fixed Rent and Variable Rent to Far East Hospitality Trust. The specific breakdown is shown below:
Fixed Rent ranging from S$2.5 to S$10 million and
Variable Rent consisting both 33% of Gross Operating Revenue (‘GOR’) + (23%-37%) of GOP less Fixed Rent in (i)
In 2Q2018, Hotels contributed 70% of Gross Revenue.
b) Serviced Residence
Fixed Rent ranging from S$1.5 to S$3.5 million and
Variable Rent consisting both 33% of Gross Operating Revenue (‘GOR’) + (38%-41%) of GOP less Fixed Rent in (i)
In 2Q2018, Serviced Residences contributed 10% of Gross Revenue. For those who are interested to know the specific rental arrangement between the Trust and the respective Master Lessee, please refer to its Prospectus.
c) Commercial Space
Commercial space consists of retail, office and serviced office units. Specifically, Far East Hospitality Trust has approximately 286 units across 9 properties. There is no concept of master lease as the leases are negotiated between the Asset Manager and the various individual end-user tenants at market rates.
In 2Q2018, Serviced Residences contributed 20% of Gross Revenue.
Investment Merits of Far East Hospitality Trust1. Discount To Book
At a stock price of 60.5 cents and a NAV of 0.87, Far East Hospitality Trust currently trades at a Price to Book ratio of 0.7. However, its peers on the SGX are trading at P/B ratio of:
OUE Hospitality Trust – 0.92
CDL Hospitality Trust – 1.03
Frasers Hospitality Trust – 0.85
It is this disparity with its peers that prompted Heartland Boy to conduct further investigation.
2. Growth Driversi) Tourists Numbers Are Climbing Up
Demand for Far East Hospitality Trust’s hotels depend greatly on Singapore’s inbound tourist arrivals. In simple economics, if more tourists arrive, there will be greater need for more room nights. Ceteris paribus, the entire hotel industry will sell more room nights. Heartland Boy refers to Singapore Tourism Board to track international visitor arrivals. As shown in Diagram 3, Singapore has done very will in 2018 thus far, recording a YTD 7.5% increase in tourist arrivals.
Diagram 3: Tourists arrival year-on-year comparison by month from Jan-Aug 2018
One-off events such as Trump-Kim Summit and the Crazy Rich Asians movie will increase awareness about Singapore and inevitably spur more tourist arrivals. All these can only bode well for the tourism industry.
ii) Tight Hotel Supply Until 2021
On the supply side, upcoming inventory will be significantly lower than what the industry had experienced for the past decade. From 2008 to 2017, an average of 3,000 rooms per annum had been added to the market. However, only a cumulative total of 2,600 rooms will be added from the period of 2018 to 2020. An absence of Government Land Sale site for the past 5 years has led to a situation of low inventory for the next few years.
Diagram 4: Record-low upcoming inventory from 2018-2020 (Source: Maybank Kim Eng)
A combination of growing demand and tight supply will lead to higher Average Daily Rates (‘ADR’) and Occupancy. As the only Singapore-focused hospitality REIT, the outlook for Far East Hospitality Trust is certainly bright. According to its performance in FY2017, its Hotels & Serviced Residences portfolio earned $81.2 million in gross rent. $60.5 million was from fixed rent while the remaining 25% was variable rent. This suggests that there is significant room for Far East Hospitality Trust to enjoy upside from the favourable micro-economic situation.
iii) Oasia Hotel Downtown To Fully Contribute
Oasia Hotel Downtown is a very new property completed recently in 2016. As a result, its REVPAR underperformed the industry average in 2017 due to a lack of brand awareness. Therefore, there is an opportunity for REVPAR to improve once the property reaches a more mature stage. Given that it was purchased by Far East Hospitality Trust in April 2018, unitholders can look forward to a full year of contribution in 2019.
iv) Sentosa Properties To Complete In 2019
In September 2014, Far East Hospitality Trust entered into a Joint Venture and undertook a 30% equity stake to develop a total of 3 hotels (839 rooms) in Sentosa. They are:
Village Hotel (606 rooms) which serves the mid-tier market,
The Outpost Hotel (193-room) which serves the upscale market, and
The Barracks Hotel (40-room) which serves the luxury market
In its latest announcement update, the properties will progressively open from 1Q2019, furthering driving organic DPU growth.
Investment Risks of Far East Hospitality Trust1. Unpredictable One-Off Events
In the traditional real estate space, Hospitality is considered the most vulnerable asset class. All it takes is one natural disaster or one pandemic to cause the Hotel’s performance to suffer overnight. Moreover, Hospitality is a perishable product. A room night not sold cannot be returned to the inventory. As these events are often unpredictable in nature, a larger discount is afforded by the market compared to other asset types. Therefore, unitholders of Hospitality assets must be able to stomach this type of risk.
2. Poor Track Record of Manager
The track record of the REIT Manger has been remarkably consistently poor. This assessment is made by observing its dividend history as shown in Diagram 5.
Diagram 5: DPU Track Record of Far East Hospitality Trust
Since its IPO, DPU has declined by a CAGR of -6.9% per year. As a result, unitholders who have held the Trust since IPO would have made an overall loss as the dividends distributed in the past are still insufficient to account for the capital loss. However, Far East Hospitality Trust had demonstrated 3 quarters of outperformance in 2018 thus far. This is a sign to Heartland Boy that a turnaround is in sight for this unloved Hospitality Trust.
3. Under Investigation By CCSS
In the latest news announced in August 2018, The Competition and Consumer Commission of Singapore (CCSS) issued a Proposed Infringement Decision against the owners and operators of three hotels: Capri, Village and Crown Plaza. It is alleged that the operators “entered into agreements or practices to discuss and exchange confidential, customer-specific and sensitive information on the provision of hotel room accommodation in Singapore to corporate customers”.
It is not known at this point if any remedies and financial penalties will be imposed by CCCS. Heartland Boy expects minimal reputational damage to the Trust but any one-off financial penalty will definitely eat into the DPU. Regardless, this is a question that Heartland Boy will definitely be asking the Board of Directors at the AGM.
4. High Gearing
Far East Hospitality Trust has a high gearing ratio of 40% in 3Q2018. As a Trust, it may not face any gearing limits. However, this also implies that any future acquisition from its Sponsor’s pipeline would likely have to be funded via equity. If a private placement is not done, Far East Hospitality Trust could will be calling for a rights offering. Therefore, unitholders, especially those who had purchased FEHT via SRS, would have to bear this in mind.
Review of Far East Hospitality Trust
At a share price of 0.605 cents, Far East Hospitality Trust has a dividend yield of 6.6% and a Price/Book Ratio of 0.7. Heartland Boy thinks that once Far East Hospitality Trust is able to fully arrest the slide in its DPU, the market would start to appreciate it more. The discount it is trading at compared to its peers is simply too large and unwarranted. Heartland Boy expects it to trade nearer to P/B of 0.8 and its DPU to improve to a minimum of 4 cents. Analyst research reports by DBS Vickers and OCBC indicated target prices of 0.74 and 0.69 cents respectively.
Vested at an average price of 0.625 cents since October 2018. Heartland Boy will definitely add more if his thesis of a turnaround in SG Hospitality pans out. He will continue to share his thoughts of Far East Hospitality Trust on forums such as InvestingNote.
According to most Chinese Zodiac forecast, 2018 will be a terrible year for those born in the Year of the Dragon. Dragon babies ought to be extra careful when it comes to investment in 2018. Heartland Boy was born in the year of the Dragon but he did not shy away from the stock market despite such ominous warnings. Afterall, Heartland Boy never read about famous investors such as Warren Buffet blaming astrology for poor performances. Prescient or otherwise, 2018 had so far turn out to be extremely disappointing in terms of investment returns for Heartland Boy. He is currently staring at paper losses running in the mid-teens in his portfolio. But that is not the worst part. Earlier this year, he committed the cardinal sin of accidentally selling a stock that he did not own or borrow. It caused him to lose money from this short sell stock mistake. Here is the narrative of what happened and a full account of the solutions that he brainstormed.
Short Sell Stocks He Did Not Own
Heartland Boy has multiple trading accounts. He has been diligently using the Standard Chartered Brokerage account for the longest time because it offered one of the lowest commissions in Singapore. However, in 1Q2018, he started to make use of a limited-time promotion consisting of cash rebates offered by DBS Vickers Cash account. Moreover, he was practising the CDP Dividend Hack to consistently fulfil the investment category of the DBS Multiplier Account. After a few months, he began to own shares held under the custodian account of SCB as well as his own Central Depositary (‘CDP’) via the DBS Vickers Platform. Nonetheless, the ever-organized Heartland Boy had them neatly written down in his very dependable portfolio tracker. Or so he thought.
One fine day, a moment of utter recklessness befell Heartland Boy. Hoping to take advantage of a surge in price of a stock, he placed a SELL order on a stock via the DBS Vickers platform. The order proceeded to clear and Heartland Boy cheered his good fortune. It all came crashing down when he received this email the next working day.
A dreaded email arrived from DBS Vickers that sent chills down Heartland Boy’s spine
TLDR, Heartland Boy sold a stock from his CDP via the DBS Vickers Platform. However, the shares of this stock had instead been residing under the custodian watch of Standard Chartered all this while! Therefore, under the eyes of SGX, Heartland Boy had committed a naked sell by selling shares that he did not own. The definition of naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. (Source: Investopedia)
Solution 1: Transfer Shares From Custodian Account to CDP
Heartland Boy’s first reaction was to contact SCB Equities team and request for his shares to be transferred to his CDP. Afterall, he did own the shares. It just happened so that they were held in custody by a brokerage and hence the system does not recognise him as the beneficial owner. The SCB customer service officer said that this will take 10-14 working days and a transfer fee would apply. When Heartland Boy heard this, he thought he was still living in the stone age. How could it possibly take up to 3 freaking weeks for such a simple transfer to take place? It is essentially just a transfer of electronic documents right. This solution was obviously not viable as Heartland Boy needed to show CDP ownership of the stock in 3 days’ time.
Solution 2: SGX Buy-In
The regulations governing a naked sell is that if Heartland Boy still fails to deliver the shares on settlement date (T+3), SGX will be forced to purchase the shares at 2 bids higher than the closing price of the stock on T+3. Basically, SGX is forced to act to ensure that Heartland Boy’s short sell position is covered. With fees and penalties added in, Heartland Boy incurred a $344 financial loss. This was a painful financial lesson for Heartland Boy in his investment journey. Here is the breakdown of the fees charged:
Total Fees charged for a transaction value of $11,200
Had SGX not been able to buy in successfully, Heartland Boy would have been slapped with a minimum fine of $1,000!
Come to think of it, it would have been entirely possible for Heartland Boy to “profit” from this accidental short selling. If SGX bought in at a price lower than Heartland Boy’s selling price, Heartland Boy would have made a smaller loss than $344 or even a trading gain after all the fees. Unfortunately, Heartland Boy could only watch helplessly as the share price refuse to dip any further during those 3 days. Well, that should hardly come as a surprise because the Year of the Dog is supposed to be an unlucky year for Dragon babies.
Solution 3: Instruct Your Broker To Borrow Shares
Solution 3 only came about after the whole episode had died down and more significantly; after Heartland Boy had taken a dent to his pocket. Determined not to repeat this mistake again, he searched online for better solutions to his problem. One of the most common recommendations was the following:
Contact your broker and request to borrow the shares by T+2 day
Request broker to waive the $75 trading commission (if possible)
If the broker successfully managed to find shares to borrow by T+2, you must be prepared to make payment by cash cheque at the counter. Note that Heartland Boy has not personally experienced this method and therefore cannot vouch for its efficacy. He would be happy to hear from his readers about their own experiences.
Short Selling Stock Mistake
Hope this anecdotal story would be of help to future investors who find themselves in such awkward situations. Of course, if Heartland Boy really wants to short sell again, he would be using an instrument such as Contract For Difference (‘CFD’). And that is an entirely legitimate and proven short selling strategy employed by some of the biggest hedge funds.