What a week it has been. Markets have rallied (told you so) back to levels close to their year highs. Japan is back to its post quake highs (told you so too) with Japanese mutual funds leadings all gainers in the mutual fund space. Fortune always favors the brave. Expect much more to come, this is just the beginning. If you looked at the markets 3 months ago and compare it to today's levels, you would never have guessed that the world has been dealing with a global slowdown, US debt ceiling and Euro sovereign crisis issues. Magic? Thats what excess liquidity does to markets. When has the world seen such money supply growth in developed countries? Never. Liquidity is here to stay for some time.
What that means is inflation is going to be a lot stickier. How much has rice risen this year? 70%? Pork? 49%? Diamonds outperforming gold? Now that is what I call inflation. Yogurt for more than $3 bucks per small pint...at cold storage...so much for cheap healthy living. What should we buy in such a time? Gold, silver and platinum? Nope... The fallacy of gold being a great inflation hedge is something which investors have to learn. Gold has underperformed inflation for the longest time in the 90s and it is still trying hard to play catch up. Go check, you will know I am telling the truth.
I do not have all the answers on this, but personally, I am going to buy into some of my golden stock picks because of their underlying value which will eventually outperform inflation when their time comes.
QAF has just started moving, Heng Long has resumed its uptick, QSR Brands have broken out of its consolidation phase, STX OSV hitting new highs on a daily basis, Sarin delivering solid gains as raw diamond prices rise, Keppel T&T delivering solid growth in their profits etc. These are companies which I feel are still undervalued and should continue to perform well over time.
Was asked by a friend of mine to review my call on Tat Hong some time ago. So here it is. Tat hong as been the subject of downgrades over the past year and its stock price has fallen close to 35% over the past 12 months. Earnings have been dropping due to lower margins caused by more intense competition, weather issues in Australia and delays in shipments no thanks to the Japan earthquake. Why is Tat Hong facing so many headwinds? Bad luck or bad timing? A little bit of both, I would say. Tat Hong is in the middle of restructuring its business, acquiring new businesses and adding to their stakes in JVs. In normal situations, this would mean a lengthy gestation period and teething problems. However, I have personally met Tat Hong's management in the past and I was impressed by their professionalism and enthusiasm in managing their business. However, what should you do if you are down by 35%? Buy more or sell out? For me, I would buy more, but not everyone is the same. If there is a better opportunity this is staring you in the face, take it. If not, hold on. I think the turnaround should be soon. Remember KS Energy? They had a long gestation period and what happened now? 2 large contracts in a span of a month.
Sarin too has a blip before moving up. How long did it take for Sarin to move since my call? 1 year? To me, that is already fast. Bear in mind, when I make a call, I always have the long term in mind. We should always look at returns from a percentage point of view. My target is 10% per year, so if my stock stagnates for 5 years and suddenly within a year it doubles, it would still mean that it has hit my objective. Picking stocks is what I try to do all the time, one thing I never like to do is to time the market. Do not own a crystal ball and never will. Good things come to those who wait.
This coming week will see the market get jittery over the US debt ceiling situation as the deadline draws close. Do not worry, buy on weakness. There is no chance they will allow a default. If they do, we are all dead anyway. So no downside. Hahaha. Gotta go cos its getting a little late.
Have a great week ahead!
Best,
SVI
Sunday, July 24, 2011
Sunday, July 17, 2011
Commemorating my 100th Post - Keppel T&T - Buy $1.365
The world is definitely evolving. It is moving so fast, it is so hard to catch up. Considering the fact that there have been so many events happening this week, it is fast becoming extremely difficult times for investors. This week, we had the scare on Italy, Moody's ridiculous report on Chinese companies, US debt ceiling disagreement, Moody's placing US debt on ratings review and European stress tests.
Madness. Social media, internet, tv, newspapers etc are making information so easily accessible that markets are starting to react to everything as they come online. Isn't the internet an amazing tool? Who would have thought that the internet would be such a great tool? Or has it gotten to stage where it has become detrimental? I really wonder if too much information is detrimental to investors and their decision making process.
Not to worry, all the problems that are cited are not that big a deal. Trust me. The media is having a field day with this but I still think that they are blowing things up. All I can say is, there are that many people who are not that bright in this world. They trust everything they read, which is the dumbest thing to do. Trust your own judgement and also think through how much bullshit there is in the news.
This is my 100th post and I would like to commemorate it with a stock pick. A long time has passed since I picked a stock for this blog. It is not because there have not been any ideas, but the truth is, I have become more choosy on the stocks I pick. STX OSV has been a good pick, hitting a new high and now that Och Ziff capital has bought 20% of the company, it makes me even more positive on the stock. Patience in this stock has really paid off for the guys who listened to me earlier. KS energy on the other hand has been really a sad story. After the mandatory takeover offer, the company has announced two huge contracts. I will once again beseech shareholders to not sell their holdings. The integration is over and the company is finally going to deliver. Sell it and you will really be giving up a very good company.
I need to say, this is probably the last stock pick I will have for the next two month because I will be very busy and the postings will become more irregular. SO lets make it a good one.
Keppel Telecommunications & Transportation Ltd (Keppel T&T) is a subsidiary of Keppel Corporation Ltd. Headquartered in Singapore, Keppel T&T offers integrated services and solutions in two core businesses: logistics and data centers. It traces its origin to Straits Steamship Company Ltd, which was established in 1890 as a partnership between British and Chinese interests at Malacca to provide regional and coastal shipping services. Today, Keppel T&T has operations spanning 12 countries in Asia Pacific and Europe.
Through its subsidiaries Keppel Logistics Pte Ltd, Keppel Logistics (Foshan) Limited, Keppel Logistics (Hong Kong) Limited, Keppel International Freight Forwarding (Shenzhen) Limited and Keppel Logistics Sdn Bhd, Keppel T&T offers one-stop, integrated logistics solutions to help clients manage their entire supply chain--from the inbound movement of raw materials to the delivery of finished goods.
Operating world-class facilities with state-of-the-art IT infrastructure in Singapore, China, Hong Kong, Malaysia and Vietnam, they deliver logistics solutions that are tailored to meet clients’ specific needs.
As a strong testament to their operational and service excellence, Keppel Logistics clinched for the third consecutive year in 2009 the FMCG & Retail Logistics Service Provider of the Year (Singapore) Award , as well as the Domestic Logistics Service Provider of the Year (Singapore) given out by Frost and Sullivan.
Through its subsidiaries Keppel Data Centre Holdings Pte Ltd and Citadel 100 Datacenters Limited, Keppel T&T owns, acquires, develops and manages high-availability data centre facilities for an international clientele. They help companies ensure smooth business and IT operations by providing highly resilient and energy efficient data centres that are reliable and cost-efficient for their customers.
Keppel T&T hold stakes in a portfolio of companies that helps contribute to the profitability of the Group.
M1 limited is a leading integrated communications service provider and it provides a full range of voice and data communications services over its 2G/3G/3.5G network, as well as fixed and mobile broadband. M1 also provides international call services to both mobile and fixed line customers. It has partnered operators globally to provide its customers coverage and roaming services in over 230 countries and territories.
Business Online Public Co. Ltd (BOL) provides full-service business verification support: company's information search, creditability check, business analysis and debts collection. Established in 1995, BOL has been cooperating with Department of Business Development, Ministry of Commerce to provide basic information on more than 720,000 companies registered in Thailand.
Computer Generated Solutions, Inc. is a leading global provider of end-to-end, technology-enabled business solutions, including ERP, SCM, PLM, WMS, CRM, portal, e-commerce, application development, project services, e-learning, training, staffing, call center, and global sourcing solutions.
Founded in New York City in 1984, CGS currently serves North America, Europe, and Asia with 20 global locations and 2,500 employees worldwide. CGS enables mid-market enterprises, Fortune 1000 companies, and government agencies to drive business transformation and improve operating performance by adapting and implementing advanced technologies.
Advanced Research Group Co., Ltd. is a leading information and knowledge provider in Thailand offering fully integrated information resources associated with state-of-the-art information technology to enhance the potential of individuals, businesses and organisations in making informed decisions.
Anew Corporation Ltd is an associated company of Advanced Research Group. It is a holding company of:
* A-Net Co., Ltd
o Thailand's third largest ISP. Anew holds a 53.32% stake.
o Customers include the general public and corporate clients. General businesses and educational institutions are the major corporate clients.
* Business Online Co., Ltd
o A business information services related firm, in which ANEW holds an 80% stake. Dun & Bradstreet holds the remaining 20%. This company focuses on the provision of company information, most notably in the credit rating field.
SVOA Public Company Ltd and its associated companies are the distributors of leading brands of office automation, computers and peripherals. The company also provides consulting services and full-service computer installation to customers.
Keppel's earnings have been very consistent driven by strong warehouse occupancy, growing strength in Data Center business and earnings contribution from M1. The key growth engine will come from its Data Center business as they add on more capacity. M1's earnings is not expected to grow much in Singapore's saturated mobile market. No doubt, the increased use of smart phones has led to increased revenues from data streaming services but that also cannibalized some of the mobile usage. Therefore it does not deserve any re-rating in my view.
In terms of margins, the teleco and data center business looks very attractive. High margin businesses are something which I like. The expansion in their data business will be very beneficial for the top and bottom lines. It is more a matter of capacity than utilization rates. Over the last two years, I have become a big believer of cloud computing and data center services that is why I have spent some time looking into Keppel T&T.
Having a strong shareholder in Keppel Corp (owns close to 80% of shares) gives extra credibility to Keppel T&T. I do like the company for its business. Current valuations on the company is around 15 times p/e which is not considered excessive considering the potential of its data center businesses. The company's operating cash flow is very consistent and I expect it to grow at a good healthy rate going forward.
The risk to this company is that they have a current and quick ratio of below 1. Short term debt has grown quite substantially over year due to acquisition of a subsidiary. Since the borrowings are listed as short term, I expect Keppel T&T look for refinancing soon. Either that or a cash call of some sort will happen. However, this is really one to keep an eye out for. So for investors who are looking for some exposure to the fast growing data business, this is one to invest in.
Ok have a good week ahead!
Best,
SVI
Madness. Social media, internet, tv, newspapers etc are making information so easily accessible that markets are starting to react to everything as they come online. Isn't the internet an amazing tool? Who would have thought that the internet would be such a great tool? Or has it gotten to stage where it has become detrimental? I really wonder if too much information is detrimental to investors and their decision making process.
Not to worry, all the problems that are cited are not that big a deal. Trust me. The media is having a field day with this but I still think that they are blowing things up. All I can say is, there are that many people who are not that bright in this world. They trust everything they read, which is the dumbest thing to do. Trust your own judgement and also think through how much bullshit there is in the news.
This is my 100th post and I would like to commemorate it with a stock pick. A long time has passed since I picked a stock for this blog. It is not because there have not been any ideas, but the truth is, I have become more choosy on the stocks I pick. STX OSV has been a good pick, hitting a new high and now that Och Ziff capital has bought 20% of the company, it makes me even more positive on the stock. Patience in this stock has really paid off for the guys who listened to me earlier. KS energy on the other hand has been really a sad story. After the mandatory takeover offer, the company has announced two huge contracts. I will once again beseech shareholders to not sell their holdings. The integration is over and the company is finally going to deliver. Sell it and you will really be giving up a very good company.
I need to say, this is probably the last stock pick I will have for the next two month because I will be very busy and the postings will become more irregular. SO lets make it a good one.
Keppel Telecommunications & Transportation Ltd (Keppel T&T) is a subsidiary of Keppel Corporation Ltd. Headquartered in Singapore, Keppel T&T offers integrated services and solutions in two core businesses: logistics and data centers. It traces its origin to Straits Steamship Company Ltd, which was established in 1890 as a partnership between British and Chinese interests at Malacca to provide regional and coastal shipping services. Today, Keppel T&T has operations spanning 12 countries in Asia Pacific and Europe.
Through its subsidiaries Keppel Logistics Pte Ltd, Keppel Logistics (Foshan) Limited, Keppel Logistics (Hong Kong) Limited, Keppel International Freight Forwarding (Shenzhen) Limited and Keppel Logistics Sdn Bhd, Keppel T&T offers one-stop, integrated logistics solutions to help clients manage their entire supply chain--from the inbound movement of raw materials to the delivery of finished goods.
Operating world-class facilities with state-of-the-art IT infrastructure in Singapore, China, Hong Kong, Malaysia and Vietnam, they deliver logistics solutions that are tailored to meet clients’ specific needs.
As a strong testament to their operational and service excellence, Keppel Logistics clinched for the third consecutive year in 2009 the FMCG & Retail Logistics Service Provider of the Year (Singapore) Award , as well as the Domestic Logistics Service Provider of the Year (Singapore) given out by Frost and Sullivan.
Through its subsidiaries Keppel Data Centre Holdings Pte Ltd and Citadel 100 Datacenters Limited, Keppel T&T owns, acquires, develops and manages high-availability data centre facilities for an international clientele. They help companies ensure smooth business and IT operations by providing highly resilient and energy efficient data centres that are reliable and cost-efficient for their customers.
Keppel T&T hold stakes in a portfolio of companies that helps contribute to the profitability of the Group.
M1 limited is a leading integrated communications service provider and it provides a full range of voice and data communications services over its 2G/3G/3.5G network, as well as fixed and mobile broadband. M1 also provides international call services to both mobile and fixed line customers. It has partnered operators globally to provide its customers coverage and roaming services in over 230 countries and territories.
Business Online Public Co. Ltd (BOL) provides full-service business verification support: company's information search, creditability check, business analysis and debts collection. Established in 1995, BOL has been cooperating with Department of Business Development, Ministry of Commerce to provide basic information on more than 720,000 companies registered in Thailand.
Computer Generated Solutions, Inc. is a leading global provider of end-to-end, technology-enabled business solutions, including ERP, SCM, PLM, WMS, CRM, portal, e-commerce, application development, project services, e-learning, training, staffing, call center, and global sourcing solutions.
Founded in New York City in 1984, CGS currently serves North America, Europe, and Asia with 20 global locations and 2,500 employees worldwide. CGS enables mid-market enterprises, Fortune 1000 companies, and government agencies to drive business transformation and improve operating performance by adapting and implementing advanced technologies.
Advanced Research Group Co., Ltd. is a leading information and knowledge provider in Thailand offering fully integrated information resources associated with state-of-the-art information technology to enhance the potential of individuals, businesses and organisations in making informed decisions.
Anew Corporation Ltd is an associated company of Advanced Research Group. It is a holding company of:
* A-Net Co., Ltd
o Thailand's third largest ISP. Anew holds a 53.32% stake.
o Customers include the general public and corporate clients. General businesses and educational institutions are the major corporate clients.
* Business Online Co., Ltd
o A business information services related firm, in which ANEW holds an 80% stake. Dun & Bradstreet holds the remaining 20%. This company focuses on the provision of company information, most notably in the credit rating field.
SVOA Public Company Ltd and its associated companies are the distributors of leading brands of office automation, computers and peripherals. The company also provides consulting services and full-service computer installation to customers.
Keppel's earnings have been very consistent driven by strong warehouse occupancy, growing strength in Data Center business and earnings contribution from M1. The key growth engine will come from its Data Center business as they add on more capacity. M1's earnings is not expected to grow much in Singapore's saturated mobile market. No doubt, the increased use of smart phones has led to increased revenues from data streaming services but that also cannibalized some of the mobile usage. Therefore it does not deserve any re-rating in my view.
In terms of margins, the teleco and data center business looks very attractive. High margin businesses are something which I like. The expansion in their data business will be very beneficial for the top and bottom lines. It is more a matter of capacity than utilization rates. Over the last two years, I have become a big believer of cloud computing and data center services that is why I have spent some time looking into Keppel T&T.
Having a strong shareholder in Keppel Corp (owns close to 80% of shares) gives extra credibility to Keppel T&T. I do like the company for its business. Current valuations on the company is around 15 times p/e which is not considered excessive considering the potential of its data center businesses. The company's operating cash flow is very consistent and I expect it to grow at a good healthy rate going forward.
The risk to this company is that they have a current and quick ratio of below 1. Short term debt has grown quite substantially over year due to acquisition of a subsidiary. Since the borrowings are listed as short term, I expect Keppel T&T look for refinancing soon. Either that or a cash call of some sort will happen. However, this is really one to keep an eye out for. So for investors who are looking for some exposure to the fast growing data business, this is one to invest in.
Ok have a good week ahead!
Best,
SVI
Monday, July 11, 2011
Sharing some thoughts on China's rise.
Did not have time to write anything this week because of a previous engagement to speak at a China related forum over the weekend. So decided to share with you some excerpts from my speech.
China's rise, promise or peril
China without a doubt is the economic miracle of the last 30 years. Is it rising in every aspect? I cannot say every aspect but all I can say is that it is progressing. Economically, it has grown into a giant and is currently the second largest economy in the world. Achieving this in a matter of 30 years is pretty impressive in my view and the central government has to be given credit when credit is due.
The rise of China has come under the scrutiny of the world over the past few years. This should not come as a surprise because of the self defense mechanism within human nature to question whether the rise of a new power will be a threat or not. Worries over China creating a new world order can be expected especially considering how China's rise has been structured in a manner that is not in line with the model of open market, capitalism and democracy. This of course is an issue which the US and its largest advocates will worry about because it differs from the prescriptive model of capitalism they subscribe to.
Will the next generation of leaders look upon China and think to themselves, is this the correct model? Can this model be replicated? Remember, replication is the ultimate compliment. Success will always attract replication. This is exactly what the champions of democracy fear most. All I can say is, there is no way to say who has the right model and who has the wrong one. Different strokes for different folks. I believe eventually some sort of hybrid model will be arrived as the optimal one because both models have shown throughout history that the growth achieved are not sustainable.
Will China overtake the US as the sole superpower of the world? I would not jump to that conclusion so quickly because the world is evolving very quickly and it will be fool's gold to think that you will be able to forecast growth numbers past a 2-3 year period. No one in this room can even be sure about what will happen to them tomorrow, what makes you so sure that the things will happen as per you forecasted. You can only use history, knowledge and past experiences to try to chart a path of progress and hope for the best that you come close to it when its time to judge.
I do however believe that China is on the right track to become a major influence in this world but sole super power will be pushing it. Right now, the US still commands the largest influence on the world because of their strong military, reserve currency and superb marketing skills. The US itself is an economic miracle to say the least and probably one of the greatest empires ever built. But one thing I know for sure is, no one remains at the top forever. There is no player in any sport that can remain on top forever. This is no different for the US. Without a doubt, the US will try their best to remain where they are for as long as they can but it will fall down the ranks eventually.
Romans have come and gone. China had their time in the past too. Everything moves in cycles and I believe the changing of the guard will come.
Competition or cooperation with Asean?
As I mentioned before earlier, it is very normal, in fact it is very natural for us to question whether our neighbor rising in power is beneficial or threatening to us. Self defense mechanisms are always in place. Don't mention China. If our class mates start showing better results, you will always wonder whether he or she will exceed you. Human nature at play.
If I said that China's rise poses no threat to Asean, I would be lying. There is no doubt that China's rise has forced many of its neighbors to move up the value chain in manufacturing. We used to be a manufacturing hub for many daily necessities but now it is just no longer viable because labour costs are just too high and uncompetitive compared to China. What did we do? We moved up the value chain by doing more research and development work, higher value added products which require better technological know how etc. Of course, one day we will move so high up in the value chain that we will have no other place to go. China will also move up the value chain as their population gets more literate and technological transfers take place.
I am not insinuating that competition is negative in every way, in fact with competition; we will better ourselves even faster. In terms of exports, since the FTA was signed between China and Asean, trade volume has surged to close to 300 billion in 2010 and this year we are headed for another record breaking year. Bear in mind we started off with 39 billion in 2000. Amongst ASEAN’s top exports to China include electrical equipment, computer/machinery, lubricants/fuels/oil, organic chemicals, plastics, fats & oils and rubber. Notably these products are mostly intermediate goods to China’s exports to Third Countries. Thus, it can be expected that in the process of China’s economic expansion and with the ACFTA in place, it will import more from ASEAN countries for its required inputs in its production processes and for its needs as its income and standard of living improves.
As I said before, what we are looking here is a static picture of the world. Currently, China is in its early phases of growth. Using the export model to build up its base before moving to more advance stages of growth which means newer growth engines like domestic consumption.
It is no secret that the developed economies like the US, Europe and Japan are experiencing sustained periods of slow down in growth. These are the largest export markets for emerging economies like China, India, emerging Asia etc. With sluggish growth, consumption is expected to fall. Thus the export models do not look like the best model for sustainable growth for China and Asean. The China-Asean FTA has given both parties an extra channel for export trade but the need to move to a self sustaining model is getting imperative. Debt problems in the US and Europe makes it an even more urgent priority. The years of vendor financing by China to its trade partners are going to end soon as the credit worthiness of their partners diminish. As China transitions into a consumption driven economy, this will be an opportunity to Asean as they will become even more important customers of ours. Currently, private consumption makes up about 34% of China’s GDP which is still far off from the US.
The formation of an ASEAN-China Investment Area should also aid in generating more investments for ASEAN. Not only will more ASEAN and Chinese companies be willing to investment within the integrated market, since market risk and uncertainty are lowered, but US, European and Japanese companies, which are interested in making inroads into the Asian market, will also be attracted to invest in the integrated market.
On its own, China has been successful in luring investors into its growing economy for it has the essential investment determinants in place. China’s market potential is already well established and its performance in relation to some indicators of institutional quality and macroeconomic and political stability is better than other members of ASEAN. And despite the perceived inadequate legal framework, high inflation and the pervasiveness of bureaucratic red tape and corruption, foreign investors are looking at the long-term benefits of investing in China more than its short problems.
As such, the integration of ASEAN with China can entice more foreign corporations, which each market alone cannot otherwise attract. With a larger market, more intense competition, increased investment and economies of scale, investors will be more inclined to locate in the integrated region.
Impact on Singapore
Singapore’s trade with China is pretty robust. As of 2010, we were exporting 24 billion worth of goods to China while importing 45 billion from them. Singapore's principal exports are petroleum products, food/beverages, chemicals, textile/garments, electronic components, telecommunication apparatus, and transport equipment. Singapore's main imports are aircraft, crude oil and petroleum products, electronic components, radio and television receivers/parts, motor vehicles, chemicals, food/beverages, iron/steel, and textile yarns/fabrics. Over time, we can expect this relationship to continue to grow but one is tempted to ask whether things will get more lopsided over time. I believe our government also understands that Singapore will move towards to deindustrialization to move into a consumption model. Consumption stands at 115 billion, making up 38% of GDP. This figure will probably move up to around 50% or more. This should not come as a surprise and it is the natural move for our little red dot.
Loose immigration policy has been the talk of the town during the general elections. Concerns over Chinese workers coming over to here to compete with every day Singaporeans for jobs were pointed out as possible election issues. There is no way to deny that this is a strong possibility, however China themselves will undergo a huge demographic shift over the next few years. The share of population above 60 will rise from 12.5% in 2010 to 20% in 2020. Put it in another way, the availability of lots of young workers which helped fuel its growth will soon begin to disappear. That may mean that the labor situation may not go on like this forever. So let us not get carried away with the xenophobic comments because over time things may change.
Overall, China is an intriguing topic for everyone and when it comes to investments, it is definitely an area which no one can overlook. Currently, this juggernaut of a country is one of the few bright spots in the global economy. Imagine all of us on a plane with 4 engines. Three of which are on fire (US, Europe and Japan), we are left with only one engine running. Let us pray that the remaining engine (China) continues to run well till we land safely on the runway. Otherwise, we could be in for a crash landing that will lead to a widespread panic and casualties. I am not here to monger fear, but this is a fact and we should all bear in mind the importance of China in the global economy, more so now than ever.
Have a good week ahead!
Best,
SVI
China's rise, promise or peril
China without a doubt is the economic miracle of the last 30 years. Is it rising in every aspect? I cannot say every aspect but all I can say is that it is progressing. Economically, it has grown into a giant and is currently the second largest economy in the world. Achieving this in a matter of 30 years is pretty impressive in my view and the central government has to be given credit when credit is due.
The rise of China has come under the scrutiny of the world over the past few years. This should not come as a surprise because of the self defense mechanism within human nature to question whether the rise of a new power will be a threat or not. Worries over China creating a new world order can be expected especially considering how China's rise has been structured in a manner that is not in line with the model of open market, capitalism and democracy. This of course is an issue which the US and its largest advocates will worry about because it differs from the prescriptive model of capitalism they subscribe to.
Will the next generation of leaders look upon China and think to themselves, is this the correct model? Can this model be replicated? Remember, replication is the ultimate compliment. Success will always attract replication. This is exactly what the champions of democracy fear most. All I can say is, there is no way to say who has the right model and who has the wrong one. Different strokes for different folks. I believe eventually some sort of hybrid model will be arrived as the optimal one because both models have shown throughout history that the growth achieved are not sustainable.
Will China overtake the US as the sole superpower of the world? I would not jump to that conclusion so quickly because the world is evolving very quickly and it will be fool's gold to think that you will be able to forecast growth numbers past a 2-3 year period. No one in this room can even be sure about what will happen to them tomorrow, what makes you so sure that the things will happen as per you forecasted. You can only use history, knowledge and past experiences to try to chart a path of progress and hope for the best that you come close to it when its time to judge.
I do however believe that China is on the right track to become a major influence in this world but sole super power will be pushing it. Right now, the US still commands the largest influence on the world because of their strong military, reserve currency and superb marketing skills. The US itself is an economic miracle to say the least and probably one of the greatest empires ever built. But one thing I know for sure is, no one remains at the top forever. There is no player in any sport that can remain on top forever. This is no different for the US. Without a doubt, the US will try their best to remain where they are for as long as they can but it will fall down the ranks eventually.
Romans have come and gone. China had their time in the past too. Everything moves in cycles and I believe the changing of the guard will come.
Competition or cooperation with Asean?
As I mentioned before earlier, it is very normal, in fact it is very natural for us to question whether our neighbor rising in power is beneficial or threatening to us. Self defense mechanisms are always in place. Don't mention China. If our class mates start showing better results, you will always wonder whether he or she will exceed you. Human nature at play.
If I said that China's rise poses no threat to Asean, I would be lying. There is no doubt that China's rise has forced many of its neighbors to move up the value chain in manufacturing. We used to be a manufacturing hub for many daily necessities but now it is just no longer viable because labour costs are just too high and uncompetitive compared to China. What did we do? We moved up the value chain by doing more research and development work, higher value added products which require better technological know how etc. Of course, one day we will move so high up in the value chain that we will have no other place to go. China will also move up the value chain as their population gets more literate and technological transfers take place.
I am not insinuating that competition is negative in every way, in fact with competition; we will better ourselves even faster. In terms of exports, since the FTA was signed between China and Asean, trade volume has surged to close to 300 billion in 2010 and this year we are headed for another record breaking year. Bear in mind we started off with 39 billion in 2000. Amongst ASEAN’s top exports to China include electrical equipment, computer/machinery, lubricants/fuels/oil, organic chemicals, plastics, fats & oils and rubber. Notably these products are mostly intermediate goods to China’s exports to Third Countries. Thus, it can be expected that in the process of China’s economic expansion and with the ACFTA in place, it will import more from ASEAN countries for its required inputs in its production processes and for its needs as its income and standard of living improves.
As I said before, what we are looking here is a static picture of the world. Currently, China is in its early phases of growth. Using the export model to build up its base before moving to more advance stages of growth which means newer growth engines like domestic consumption.
It is no secret that the developed economies like the US, Europe and Japan are experiencing sustained periods of slow down in growth. These are the largest export markets for emerging economies like China, India, emerging Asia etc. With sluggish growth, consumption is expected to fall. Thus the export models do not look like the best model for sustainable growth for China and Asean. The China-Asean FTA has given both parties an extra channel for export trade but the need to move to a self sustaining model is getting imperative. Debt problems in the US and Europe makes it an even more urgent priority. The years of vendor financing by China to its trade partners are going to end soon as the credit worthiness of their partners diminish. As China transitions into a consumption driven economy, this will be an opportunity to Asean as they will become even more important customers of ours. Currently, private consumption makes up about 34% of China’s GDP which is still far off from the US.
The formation of an ASEAN-China Investment Area should also aid in generating more investments for ASEAN. Not only will more ASEAN and Chinese companies be willing to investment within the integrated market, since market risk and uncertainty are lowered, but US, European and Japanese companies, which are interested in making inroads into the Asian market, will also be attracted to invest in the integrated market.
On its own, China has been successful in luring investors into its growing economy for it has the essential investment determinants in place. China’s market potential is already well established and its performance in relation to some indicators of institutional quality and macroeconomic and political stability is better than other members of ASEAN. And despite the perceived inadequate legal framework, high inflation and the pervasiveness of bureaucratic red tape and corruption, foreign investors are looking at the long-term benefits of investing in China more than its short problems.
As such, the integration of ASEAN with China can entice more foreign corporations, which each market alone cannot otherwise attract. With a larger market, more intense competition, increased investment and economies of scale, investors will be more inclined to locate in the integrated region.
Impact on Singapore
Singapore’s trade with China is pretty robust. As of 2010, we were exporting 24 billion worth of goods to China while importing 45 billion from them. Singapore's principal exports are petroleum products, food/beverages, chemicals, textile/garments, electronic components, telecommunication apparatus, and transport equipment. Singapore's main imports are aircraft, crude oil and petroleum products, electronic components, radio and television receivers/parts, motor vehicles, chemicals, food/beverages, iron/steel, and textile yarns/fabrics. Over time, we can expect this relationship to continue to grow but one is tempted to ask whether things will get more lopsided over time. I believe our government also understands that Singapore will move towards to deindustrialization to move into a consumption model. Consumption stands at 115 billion, making up 38% of GDP. This figure will probably move up to around 50% or more. This should not come as a surprise and it is the natural move for our little red dot.
Loose immigration policy has been the talk of the town during the general elections. Concerns over Chinese workers coming over to here to compete with every day Singaporeans for jobs were pointed out as possible election issues. There is no way to deny that this is a strong possibility, however China themselves will undergo a huge demographic shift over the next few years. The share of population above 60 will rise from 12.5% in 2010 to 20% in 2020. Put it in another way, the availability of lots of young workers which helped fuel its growth will soon begin to disappear. That may mean that the labor situation may not go on like this forever. So let us not get carried away with the xenophobic comments because over time things may change.
Overall, China is an intriguing topic for everyone and when it comes to investments, it is definitely an area which no one can overlook. Currently, this juggernaut of a country is one of the few bright spots in the global economy. Imagine all of us on a plane with 4 engines. Three of which are on fire (US, Europe and Japan), we are left with only one engine running. Let us pray that the remaining engine (China) continues to run well till we land safely on the runway. Otherwise, we could be in for a crash landing that will lead to a widespread panic and casualties. I am not here to monger fear, but this is a fact and we should all bear in mind the importance of China in the global economy, more so now than ever.
Have a good week ahead!
Best,
SVI
Friday, July 1, 2011
My friend loves Soup Restaurant's food and stock, I just love the food. Neutral on Soup Restaurant.
What a week! As predicted the market has turned around in last week of June. Of course people are going to credit it to the resolution of the Greek debt crisis. Which I think is utter trash but who am I to say? Please raise your hand and let me know which of you actually thought that Greece was going to default. The German and French banks have come out to offer extension of the maturities of their Greek debt holdings. So we have averted the bullet for now. Christine Lagarde's appointment also brought lots of confidence into Europe. We will see more stability for now.
What we had here was a very smooth week, bringing back the bullishness with a bang. You know what this week illustrated? It showed that it is very difficult to time the market and if you missed this week, you would have missed a great run. The key question is whether the bull is back. Let me say this, I think there will be a little of a dip and after which the market will rebound. We have just witnessed the best weekly performance in US markets in 2 years. The S&P500 rose 5.6% over the week which meant the market recovered all its losses for June! What a way to start July.
Enough of the market, don't want to start sounding like a cheer leader for it. This week I had dinner with a friend whom I have tremendous respect for. He is able to make the junk stocks in the world look like blue chips. How? Just by buying them. He is the luckiest man I have ever met and trust me, many of my friends have witnessed his magic. Right after he buys, the stocks tend to do very well registering very good gains within a short period of time. Also this is the guy who owns a huge chunk of Fragrance Holdings, so you now know how well to do he is. Why did I mention him? Its because he asked me to look at Soup Restaurant. I could not bring myself to say no, especially with his track record. When I asked him why he was interested in it, he gave me an answer which I could not argue with. " I like the food.", he said.....How do you argue with that?
So here it is. Soup Restaurant was incorporated on 20 July 1991 and they operate a chain of restaurant outlets under the name of "Soup Restaurant" and "Dian Xiao Er" in Singapore.
Soup restaurant's stock price is definitely not going to perform like Chipotle Mexican Grill (stock has just shot through the roof since its listing) in the US. It is however one of the more consistent performing stocks in terms of financial performance. Generating positive cashflows from operations every year and have a very healthy balance sheet. Earnings have grown consistently with RETURN on Equity of more than 20% per year on average since 2006. That is pretty impressive. The company is currently trading at 11 times historical p/e which is not excessive. However if we take out the cash holdings of the company, the p/e falls to 8.6 times. In terms of valuation, I do think it is cheap.
There are however some fears on my part with regards to costs going forward for the company. Raw material costs is the primary worry as food prices continue to soar and question is whether the company will be able to transfer the higher food prices to the final consumer. Labour costs will also be tough to handle because the labour situation the the services sector is extremely tight, throw in the tighter immigration laws preventing more foreign workers to come into Singapore, you can expect labour costs to tighten as competition for such workers pushes wages higher. Rental is also a big issue. I was recently looking at some retail spaces in prime areas and on a per square foot basis sellers were looking for $5000 and above. Rental rates have reached levels which makes many retail businesses no longer viable. Tampines Mall alone is renting at $68 dollars per square foot. So imagine how much would a restaurant have to pay for a space big enough for their operations.
We will have to monitor the situation closely for retail related counters going forward. I have to admit, we do have some really good retail franchises in Singapore which do look promising but they will have to expand outside of Singapore to grow and diversify their exposures because if they rest on their laurels and stay here their growth prospects will diminish. Breadtalk, Eu Yan Sang, Old Changkee are just a few of the franchises that have pretty good prospects but more needs to be done to secure their growth going forward.
So in conclusion, I do like Soup Restaurant for its consistency and valuations but the headwinds are ahead and bear in mind this is a very competitive industry and the barriers of entry are not strong, thus it is not a stock which I will like to buy myself. My view is that the stock will not have much upside from here so it is not something I will buy. But I know I am going up against one of the luckiest guys around and the odds may be against me. All one can do is to use the facts and figures and stick to his investment philosophy to determine whether a stock is worth investing in or not. I will not buy this stock, but I will still continue to eather there. Hahaha.
Have a great week ahead!
Best,
SVI
What we had here was a very smooth week, bringing back the bullishness with a bang. You know what this week illustrated? It showed that it is very difficult to time the market and if you missed this week, you would have missed a great run. The key question is whether the bull is back. Let me say this, I think there will be a little of a dip and after which the market will rebound. We have just witnessed the best weekly performance in US markets in 2 years. The S&P500 rose 5.6% over the week which meant the market recovered all its losses for June! What a way to start July.
Enough of the market, don't want to start sounding like a cheer leader for it. This week I had dinner with a friend whom I have tremendous respect for. He is able to make the junk stocks in the world look like blue chips. How? Just by buying them. He is the luckiest man I have ever met and trust me, many of my friends have witnessed his magic. Right after he buys, the stocks tend to do very well registering very good gains within a short period of time. Also this is the guy who owns a huge chunk of Fragrance Holdings, so you now know how well to do he is. Why did I mention him? Its because he asked me to look at Soup Restaurant. I could not bring myself to say no, especially with his track record. When I asked him why he was interested in it, he gave me an answer which I could not argue with. " I like the food.", he said.....How do you argue with that?
So here it is. Soup Restaurant was incorporated on 20 July 1991 and they operate a chain of restaurant outlets under the name of "Soup Restaurant" and "Dian Xiao Er" in Singapore.
Soup restaurant's stock price is definitely not going to perform like Chipotle Mexican Grill (stock has just shot through the roof since its listing) in the US. It is however one of the more consistent performing stocks in terms of financial performance. Generating positive cashflows from operations every year and have a very healthy balance sheet. Earnings have grown consistently with RETURN on Equity of more than 20% per year on average since 2006. That is pretty impressive. The company is currently trading at 11 times historical p/e which is not excessive. However if we take out the cash holdings of the company, the p/e falls to 8.6 times. In terms of valuation, I do think it is cheap.
There are however some fears on my part with regards to costs going forward for the company. Raw material costs is the primary worry as food prices continue to soar and question is whether the company will be able to transfer the higher food prices to the final consumer. Labour costs will also be tough to handle because the labour situation the the services sector is extremely tight, throw in the tighter immigration laws preventing more foreign workers to come into Singapore, you can expect labour costs to tighten as competition for such workers pushes wages higher. Rental is also a big issue. I was recently looking at some retail spaces in prime areas and on a per square foot basis sellers were looking for $5000 and above. Rental rates have reached levels which makes many retail businesses no longer viable. Tampines Mall alone is renting at $68 dollars per square foot. So imagine how much would a restaurant have to pay for a space big enough for their operations.
We will have to monitor the situation closely for retail related counters going forward. I have to admit, we do have some really good retail franchises in Singapore which do look promising but they will have to expand outside of Singapore to grow and diversify their exposures because if they rest on their laurels and stay here their growth prospects will diminish. Breadtalk, Eu Yan Sang, Old Changkee are just a few of the franchises that have pretty good prospects but more needs to be done to secure their growth going forward.
So in conclusion, I do like Soup Restaurant for its consistency and valuations but the headwinds are ahead and bear in mind this is a very competitive industry and the barriers of entry are not strong, thus it is not a stock which I will like to buy myself. My view is that the stock will not have much upside from here so it is not something I will buy. But I know I am going up against one of the luckiest guys around and the odds may be against me. All one can do is to use the facts and figures and stick to his investment philosophy to determine whether a stock is worth investing in or not. I will not buy this stock, but I will still continue to eather there. Hahaha.
Have a great week ahead!
Best,
SVI
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