After a week of extremely boring market movement, I decided to make things even worse by going home early on a Friday night. Talk about being masochistic, I am every bit a masochist as I am an egoist. Haha. Believe me when I say it was only quiet on the markets front but on the current affairs side, we had such an uproar in Singapore on the list of sex offenders and this has provided plenty of talking points in a week that could put anyone to sleep.
This week lets have a casual post on some of my thoughts on the market. Every time earnings season starts, it reminds me how another quarter has passed by and suddenly we are closing quickly onto the month of May and almost half the year has gone by. Earnings have been strong coming from the banks which have all outperformed from the pick up in trading activities. Bellwethers have looked good so far. Microsoft, Mcdonalds, etc have all done well and the markets should be cheering right? Of course they should, but market's is also constrained by one particular stock which is ironic. What stock is that? Give it an educated guess. The answer is of course APPLE. Ironically, this has been the stock that pushed the S&P500 up strongly over the past 3-4 months. It also saved last quarter's earnings season by reporting out of this world results. However as this quarter's earnings announcement draws nearer, APPLE has fallen from its lofty perch of $630 to $578 as I am drafting this post.
Why would a stock like Apple stifle the upside of major indices? Well Apple accounts for close to 20% of the Nasdaq 100 and 4.5% of the S&P500. A weighting not seen by any company since 1999, when Microsoft Corp had a 4.9 percent weighting. Apple is the largest holding for many money managers, to say nothing of the billions of dollars in index funds of which Apple is a core holding. The question here is whether the strength in the other large cap stocks can mitigate any of the weakness in Apple. Now that the great Apple is showing some weakness with this current 10% drop, it is starting to look a little weak technically. The reason for this weakness? The company has probably run up to much too fast. Also an indicator of the possible end of Apple's solid end is the ludicrous expectations of analysts. We have seen crazy proclamations of $1000 stock price when the stock is currently trading at close to $600 per pop. This in my view is what we call complacency. When an analyst puts a target price on a stock at more than 60% upside from current levels is ludicrous but to put it at 60% upside after the stock has hit an all time high, that is just insanity. Bear in mind that Apple is already valued as the most valuable company in the world. Above Exxon and when a consumer electronics company is more valuable than the largest oil company in the world....what does that mean....? Remember when did gold make its turnaround? When analysts started predicting $2200-$3000 target price while the spot price was $1800.
French elections are over this weekend and the run off if any will be May 6. This is going to be an important event over this weekend because we are looking at the possibility of radical reforms should the front runner Francois Hollande come up tops. In my view, in the current situation we are in, it would be best if the incumbents win in their respective elections. Why? Because they will all be in their 2nd and final terms and that would mean that they do not need to think so much about their political careers going forward. There is not going to be a 3rd term, thus they will be able or even willing to make the necessary decisions to help the economies to get back on their feet. As I have mentioned many times, the problems the US and Eurozone are structural and they will need political leaders to make very tough decisions. If we have new leaders, they will be too caught up with the longevity of their political careers thus they will find it hard to make unpopular decisions. Who can blame them? Also they may make radical moves that may hurt the overall economy in the long run and cause market volatility in the short run.
The other day I was looking at a company which I always found interesting but did not understand enough. But now that I have looked at the company I am going to put my neck out that this is a company that has one hell of a future. At its helm, is a CEO whom I have nothing but utmost respect for. It all started when I graduated and came back more than 10 years ago. My friend asked me whether I had tried the latest sensation in Singapore, I was bemused as to what was the latest craze after the bubble tea debacle and she said.....pork floss bun. Have to be honest, when I heard that answer, I just thought that Singaporeans fascination with food had fallen to new depths after falling in love with bubble tea and now a pork floss bun? By now most of you should be able to guess which company I am talking about.
Breadtalk the bakery sensation that took Singapore by storm more than 10 years ago is a company which I have been looking at it since IPO in 2003. From 2003 till present, Breadtalk has delivered more than 150% returns to shareholders so far and I believe it will continue to do well as long as the current management is in place. In the years, they have grown across 16 countries, with more than 400 boutique bakeries, 40 food atriums and restaurants, supported by global staff strength of 6000 employees. For those of you that think that Breadtalk is just a bakery company, think again. I believe in the company because of the vision of its founder of being a versatile food and beverage player. Under its stable of restaurant brands, they have Ding Tai Feng, Toast Box, Food Republic and Ramen Play and I would challenge anyone to try to get a seat in Ding Tai Feng during lunch or dinner. Good luck on that front.
The company has not rested on its laurels and expanded to other restaurant concepts to try to diversify away concentration risks from its core bakery business. Most of the time when a company diversifies away from its core business, there are execution risks but if they do not veer too far away from their core capabilities, the risks are significantly lower. That is where Breadtalk has been so successful in their expansion into other businesses. Now they have started to dabble a little into retail space investing through their investment in Perennial Retail Trust's revamp of Katong 112. They have also bought into 10% of Chijmes with Perennial. Both are good acquisitions in my view. Currently, the company is generating a very nice S$45 million operating cash flow consistently on a yearly basis and they are putting the money to good use. That is what I love about companies that have consistent cash flows from operations, they can put the money to good use and grow the value of the company outside of their businesses. That is the same for all of us, investing our free cash into investments that deliver returns so that we can grow our wealth. For those that are depending on their work to add value to their wealth will have to work harder and longer.
As for valuations, the company is not trading at a cheap valuation of 14 times p/e but I believe this is a good entry point as there has been a lot of selling by funds on this stock and the price is still holding up well. I believe that investors in this stock should try to be patient as this is one for the long term but it will be a steady path as long as the management remains intact. Key man risk is an issue but George Quek still looks pretty healthy to me.
Thats all I have for this week. Have a great week ahead!
Best,
SVI
Saturday, April 21, 2012
Saturday, April 7, 2012
This week was about DBS doing national service. What are your thoughts?
These days I have not had much time to post due to work and personal commitments. The lack of momentum is affecting my train of thought so why don't I just write whatever I feel like writing today. Be it about the markets, asset classes or even about life. Like I always tell my protege, I love thinking about life and how it really sucks. Haha. Just kidding. Lets get back to reality and maybe some of my passing thoughts or even sarcasm.
The past two weeks have been good for two of my favourite stocks. Auric pacific and QAF. Both of which are still strong buys on my list but I know many of you are too impatient to wait and like higher beta stocks. Over my investment career, I have always liked the under the radar kind of stocks to achieve my alpha and it has worked. So I beseech all of you to consider taking the patient approach to investing and you will see the returns. Be it over 2 - 3 years.
One stock that has moved weaker over the past two weeks has been Dukang which I can only attribute it to the fall in Baijiu prices in China over the past month. The mainland distillers have also suffered in terms of stock price performance so it should not be looked upon as a company specific move.
Was screening the for stocks in Japan recently and for those who know me will understand why I have been so bullish on Japan over the past two years. No thanks to the earthquake and ensuing nuclear fallout, the Japanese market recovery stalled. I believe barring any acts of god that we are on the way to a multi-year recovery in Japan and am looking to put some money there. Problem that I am facing is the weakness in the Yen. I do believe that it is a catch-22 situation because one of the key reasons that I am bullish on the Japanese market is the anticipation of a weaker Yen. Found a couple of stocks which made me interested but I am still trying hard to translate their info from Japanese. When i finally graduate from my Japanese classes I will tell you guys more.
IPOs are all coming back, with the explosive debut of Cordlife and now we are going to see Bumitama Agri make its highly anticipated debut. For me, when there is a flux of ipos coming to the market, it is a signal that a correction is coming. Ipos tend to come in when the market has a sustained rally and when it becomes overbought in the short term. Market volumes have also come down in March and early April. If you are looking to trade be wary, if looking to buy and hold, take this opportunity to buy.
In recent times, it has gotten tougher for me to find anything worth writing about because most of the good penny stocks in Singapore has been sieved out and it is getting harder to find undervalued gems. I am currently looking to accumulate more of the ones I picked so far and probably venture out to foreign markets. Suddenly, I am starting to sound more like Temasek, moving out of Singapore into foreign markets to establish a foothold. The main difference is that I will not have other vehicles for which I can hive off my assets at an attractive price to. For those following the news, will know what I am talking about.
Many of my clients who hold DBS in their stable of stocks have been asking me about what I think. Even the guy whom I play badminton with asked me whether it was a good move or not. For those who have been working with me will know that I have never been a fan of DBS for a very simple reason. Poor management....There is without a doubt that by valuation, DBS is very attractive compared to the other two banks but I would have to put a discount on its valuation for the fact that DBS is country owned and thus may not be thinking so much for its minority shareholders. Their track record for acquisitions has been as good as Whitney Houston's choices in life. Suicidal. That is why over the years whenever DBS is linked with any acquisitions, the stock always takes a hit. For me, this is a clear illustration on why top fund managers steer clear of state owned companies because they have to tend more to the state's interest than minority shareholders. Just ask Sinopec and Petrochina.
Right at this moment, DBS shareholders understand how K-Reit unit holders felt when Ocean Financial Center was bought by K-Reit from Keppel land. Talk about getting F*$ked up your butt. All I can say is, try not to touch companies with poor management record. Leopards will never shed their spots.
Now there are talks on the European crisis rearing its ugly head once again and this time they are talking about Spain once again. The yields are no doubt moving higher at this moment but the speed of the rise and the levels are no where close to what we saw in August last year. The market is not silly and it understands that the Euro crisis is not even close to being solved. The problems underlying are structural and it will take time to solve. This is exactly what the ECB bought with their Long Term Refinancing Operations...TIME. Now the market is watching the moves which the governments will take to address these structural issues and time is of the essence. If the moves are right and the markets are convinced, more time will be given. The biggest danger the world faces now is complacent thinking which will lead to passive behavior in terms of structural reforms proposed. The election cycles are just starting now with the May elections for France, followed by the US and soon Germany. Will the fear over losing their political careers lead to passive behavior by the incumbent governments? That is something which I would advice to monitor closely.
Still too busy with work to look at the company which I wanted to look into. Will write more the next time. Have a good week ahead!
Best,
SVI
The past two weeks have been good for two of my favourite stocks. Auric pacific and QAF. Both of which are still strong buys on my list but I know many of you are too impatient to wait and like higher beta stocks. Over my investment career, I have always liked the under the radar kind of stocks to achieve my alpha and it has worked. So I beseech all of you to consider taking the patient approach to investing and you will see the returns. Be it over 2 - 3 years.
One stock that has moved weaker over the past two weeks has been Dukang which I can only attribute it to the fall in Baijiu prices in China over the past month. The mainland distillers have also suffered in terms of stock price performance so it should not be looked upon as a company specific move.
Was screening the for stocks in Japan recently and for those who know me will understand why I have been so bullish on Japan over the past two years. No thanks to the earthquake and ensuing nuclear fallout, the Japanese market recovery stalled. I believe barring any acts of god that we are on the way to a multi-year recovery in Japan and am looking to put some money there. Problem that I am facing is the weakness in the Yen. I do believe that it is a catch-22 situation because one of the key reasons that I am bullish on the Japanese market is the anticipation of a weaker Yen. Found a couple of stocks which made me interested but I am still trying hard to translate their info from Japanese. When i finally graduate from my Japanese classes I will tell you guys more.
IPOs are all coming back, with the explosive debut of Cordlife and now we are going to see Bumitama Agri make its highly anticipated debut. For me, when there is a flux of ipos coming to the market, it is a signal that a correction is coming. Ipos tend to come in when the market has a sustained rally and when it becomes overbought in the short term. Market volumes have also come down in March and early April. If you are looking to trade be wary, if looking to buy and hold, take this opportunity to buy.
In recent times, it has gotten tougher for me to find anything worth writing about because most of the good penny stocks in Singapore has been sieved out and it is getting harder to find undervalued gems. I am currently looking to accumulate more of the ones I picked so far and probably venture out to foreign markets. Suddenly, I am starting to sound more like Temasek, moving out of Singapore into foreign markets to establish a foothold. The main difference is that I will not have other vehicles for which I can hive off my assets at an attractive price to. For those following the news, will know what I am talking about.
Many of my clients who hold DBS in their stable of stocks have been asking me about what I think. Even the guy whom I play badminton with asked me whether it was a good move or not. For those who have been working with me will know that I have never been a fan of DBS for a very simple reason. Poor management....There is without a doubt that by valuation, DBS is very attractive compared to the other two banks but I would have to put a discount on its valuation for the fact that DBS is country owned and thus may not be thinking so much for its minority shareholders. Their track record for acquisitions has been as good as Whitney Houston's choices in life. Suicidal. That is why over the years whenever DBS is linked with any acquisitions, the stock always takes a hit. For me, this is a clear illustration on why top fund managers steer clear of state owned companies because they have to tend more to the state's interest than minority shareholders. Just ask Sinopec and Petrochina.
Right at this moment, DBS shareholders understand how K-Reit unit holders felt when Ocean Financial Center was bought by K-Reit from Keppel land. Talk about getting F*$ked up your butt. All I can say is, try not to touch companies with poor management record. Leopards will never shed their spots.
Now there are talks on the European crisis rearing its ugly head once again and this time they are talking about Spain once again. The yields are no doubt moving higher at this moment but the speed of the rise and the levels are no where close to what we saw in August last year. The market is not silly and it understands that the Euro crisis is not even close to being solved. The problems underlying are structural and it will take time to solve. This is exactly what the ECB bought with their Long Term Refinancing Operations...TIME. Now the market is watching the moves which the governments will take to address these structural issues and time is of the essence. If the moves are right and the markets are convinced, more time will be given. The biggest danger the world faces now is complacent thinking which will lead to passive behavior in terms of structural reforms proposed. The election cycles are just starting now with the May elections for France, followed by the US and soon Germany. Will the fear over losing their political careers lead to passive behavior by the incumbent governments? That is something which I would advice to monitor closely.
Still too busy with work to look at the company which I wanted to look into. Will write more the next time. Have a good week ahead!
Best,
SVI
Saturday, March 24, 2012
Some thoughts before I leave. Reiterating some of my earlier calls.
Gonna be away next week and I figured that if I do not put anything in writing this week, nothing will come out for at least a month. Blogging consistently this year is really going the direction of my dieting plans. Inconsistent is the word.
Correction or not? That is the question. The market momentum has slowed down significant compared to the past two months. March has been a range bound month so far and there are times which you just wonder why the market was even open for trading. We have reached some psychological resistance levels and there have not been any catalysts to push the market higher. The comfort which take from all this is the fact that the market remains resilient and the volatility has been low. Plenty of predictions on a weak April as market participants start to price in a possible "Sell in May and go away" scenario. All I know is, corrections at this point in time is healthy and I do hope it comes. Liquidity driven rallies can get out of hand and as long as there are pullbacks, it still signals some legs to run. Really have no idea when the liquidity will be drained so I am still going to continue to maintain my stance from the start of the year...keep an open mind.
Two large houses came out to call for a "sell" on bonds this week. Now that is some gutsy call because this is afterall an asset class that has thrashed the performance of equities over the past 20 years. This is what I call a generational call and it is something I believe very strongly in. In my investment life, I have never bought a single bond or even bond funds. Even though the returns have been good but I believe that bonds are a negatively skewed asset class where you do not have upside and just be happy with a fixed yield. So if nothing happens you get a coupon payment, if something happens you lose everything. Does not sound like a fair trade to me. Especially when the supply of bonds have increased exponentially this year to date, I am getting really concerned. How much did Genting Singapore raised through its perpetuals two weeks ago? S$1.8 billion. Why would a company that is net cash by more than S$1 billion be raising money with a 5.1% yield? That is because they believe that money is cheap at this moment and going forward, their 5.1% will look like a bargain. Anyway, we shall see whether this generational call will pan out or not. I am in the same camp as those guys, so lets just see.
Since my last post two weeks ago, more has been said about oil prices hurting the economy. We have even seen China raise prices at the pump for the second time in 6 weeks. President Obama has been criticized for not handling the the rise in oil prices, now he is pressurized into speeding up the Keystone pipeline approval. The funniest part of the news flow was the rumor that the US and UK had released supplies from their special oil reserves. Now the question on everyone's head is whether higher oil prices are going to hurt the fragile economic recovery we are currently in. It is really funny when you hear about how one single commodity price can hurt the global economy. Any truth to that? I am sure there are two sides to that story.
From my experience, I would like to say that rising oil prices have not hurt the global economic growth in the past 10 years. Bear in mind we saw 150 dollar oil price in 2007-08 but it was not oil that hurt us, it was the man made subprime problem that hurt us. The last time oik prices hurt the general economy was the oil embargo in the 1970s. Since then, there have not been any oil price related significant slowdown to growth. Important thing to note is the speed of the rise rather than the price it reaches. If there is a nice gradual rise over time, expectations can adjust accordingly but if there is a sharp spike, it will be detrimental consumption.
Did any of you read about the rumor of a coup in China? That was pretty funny I have to say. It did however bring some jitters in the market as netizens on Weibo (China's micro-blogging website) claim to see large numbers of military police in Beijing and the whisper was that the military had moved in to "protect" the much loved Bo Xilai. In the end, there was no truth in the rumors of such a coup. But I would advise not to take this Bo Xilai debacle lightly. What this situation has brought to light is the possibility of China's political party being split into factions. The world has attributed China's rise over the past decade and a half to political stability and the party to stay in power long enough to make long term plans and execute them. The Chinese now have to prove to the world that the stability remains and this issue with Bo Xilai is a one off and there is no deep wedge driven in between the different factions. For me, this is a very important issue to continue to watch because we should not underestimate the possible repercussions that may stem from it.
So the last few picks have started to do well. Centurion is showing some movement, Genting Hong Kong has delivered more than 25% returns (translating into 25 years of interest). Of course, my favourite Sarin and Wheelock have been doing well too. Sarin is really one that I am very proud of, considering it is the only stock I have ever written twice on. I would write a third post on it but I am worried that you guys will just stop reading the blog due to its repetitiveness. Repetitiveness is not a bad thing, especially if it has worked. You will realise that my selection of stocks has always been about valuation and the sustainability of the business. There are still more picks to come but I would advise on adding to more positions in LMA, Genting HK, Genting Singapore and Centurion. For those who love Sarin as much as I do, they can consider adding more of it. I have absolute faith in that company, so I would continue to add to it as long as they continue to lead in the cutting edge of diamond grading technology.
Genting HK's results were sterling and what impressed me most is how they are trying to reduce the share premium to prepare itself for possible distributions going forward. The cashflow generation of the company is now at a different level and I believe this is sustainable due to the turnaround in the Star Cruise ops and their revenue generator in the form of Resorts World Manila. I am looking forward to another 2 quarters of solid earnings over the next 6 months and the stock will clearly be re-rated.
Genting Singapore had a great Friday after the first two licences for junket operations were approved. I do not really care for the junkets because I felt that the stock was undervalued and underappreciated in the first place. What this is proving to be is how analysts love to go where the wind blows. Downgrading a company that generates such cashflows from operations so consistently is just being myopic. I am hoping the stock performance will prove all of them wrong. Continue to like the stock, in fact I am considering selling one of my properties to go "all in" with it. Hahaha. Now that would be radical wouldn't it. I continue to like this company and believe in its long term story.
Currently, I am thinking of a certain company that will be listing in Singapore in the near future and no it is not Cordlife. Will share more as I do more research on that company.
Till then have a great fortnight ahead.
Best,
SVI
Correction or not? That is the question. The market momentum has slowed down significant compared to the past two months. March has been a range bound month so far and there are times which you just wonder why the market was even open for trading. We have reached some psychological resistance levels and there have not been any catalysts to push the market higher. The comfort which take from all this is the fact that the market remains resilient and the volatility has been low. Plenty of predictions on a weak April as market participants start to price in a possible "Sell in May and go away" scenario. All I know is, corrections at this point in time is healthy and I do hope it comes. Liquidity driven rallies can get out of hand and as long as there are pullbacks, it still signals some legs to run. Really have no idea when the liquidity will be drained so I am still going to continue to maintain my stance from the start of the year...keep an open mind.
Two large houses came out to call for a "sell" on bonds this week. Now that is some gutsy call because this is afterall an asset class that has thrashed the performance of equities over the past 20 years. This is what I call a generational call and it is something I believe very strongly in. In my investment life, I have never bought a single bond or even bond funds. Even though the returns have been good but I believe that bonds are a negatively skewed asset class where you do not have upside and just be happy with a fixed yield. So if nothing happens you get a coupon payment, if something happens you lose everything. Does not sound like a fair trade to me. Especially when the supply of bonds have increased exponentially this year to date, I am getting really concerned. How much did Genting Singapore raised through its perpetuals two weeks ago? S$1.8 billion. Why would a company that is net cash by more than S$1 billion be raising money with a 5.1% yield? That is because they believe that money is cheap at this moment and going forward, their 5.1% will look like a bargain. Anyway, we shall see whether this generational call will pan out or not. I am in the same camp as those guys, so lets just see.
Since my last post two weeks ago, more has been said about oil prices hurting the economy. We have even seen China raise prices at the pump for the second time in 6 weeks. President Obama has been criticized for not handling the the rise in oil prices, now he is pressurized into speeding up the Keystone pipeline approval. The funniest part of the news flow was the rumor that the US and UK had released supplies from their special oil reserves. Now the question on everyone's head is whether higher oil prices are going to hurt the fragile economic recovery we are currently in. It is really funny when you hear about how one single commodity price can hurt the global economy. Any truth to that? I am sure there are two sides to that story.
From my experience, I would like to say that rising oil prices have not hurt the global economic growth in the past 10 years. Bear in mind we saw 150 dollar oil price in 2007-08 but it was not oil that hurt us, it was the man made subprime problem that hurt us. The last time oik prices hurt the general economy was the oil embargo in the 1970s. Since then, there have not been any oil price related significant slowdown to growth. Important thing to note is the speed of the rise rather than the price it reaches. If there is a nice gradual rise over time, expectations can adjust accordingly but if there is a sharp spike, it will be detrimental consumption.
Did any of you read about the rumor of a coup in China? That was pretty funny I have to say. It did however bring some jitters in the market as netizens on Weibo (China's micro-blogging website) claim to see large numbers of military police in Beijing and the whisper was that the military had moved in to "protect" the much loved Bo Xilai. In the end, there was no truth in the rumors of such a coup. But I would advise not to take this Bo Xilai debacle lightly. What this situation has brought to light is the possibility of China's political party being split into factions. The world has attributed China's rise over the past decade and a half to political stability and the party to stay in power long enough to make long term plans and execute them. The Chinese now have to prove to the world that the stability remains and this issue with Bo Xilai is a one off and there is no deep wedge driven in between the different factions. For me, this is a very important issue to continue to watch because we should not underestimate the possible repercussions that may stem from it.
So the last few picks have started to do well. Centurion is showing some movement, Genting Hong Kong has delivered more than 25% returns (translating into 25 years of interest). Of course, my favourite Sarin and Wheelock have been doing well too. Sarin is really one that I am very proud of, considering it is the only stock I have ever written twice on. I would write a third post on it but I am worried that you guys will just stop reading the blog due to its repetitiveness. Repetitiveness is not a bad thing, especially if it has worked. You will realise that my selection of stocks has always been about valuation and the sustainability of the business. There are still more picks to come but I would advise on adding to more positions in LMA, Genting HK, Genting Singapore and Centurion. For those who love Sarin as much as I do, they can consider adding more of it. I have absolute faith in that company, so I would continue to add to it as long as they continue to lead in the cutting edge of diamond grading technology.
Genting HK's results were sterling and what impressed me most is how they are trying to reduce the share premium to prepare itself for possible distributions going forward. The cashflow generation of the company is now at a different level and I believe this is sustainable due to the turnaround in the Star Cruise ops and their revenue generator in the form of Resorts World Manila. I am looking forward to another 2 quarters of solid earnings over the next 6 months and the stock will clearly be re-rated.
Genting Singapore had a great Friday after the first two licences for junket operations were approved. I do not really care for the junkets because I felt that the stock was undervalued and underappreciated in the first place. What this is proving to be is how analysts love to go where the wind blows. Downgrading a company that generates such cashflows from operations so consistently is just being myopic. I am hoping the stock performance will prove all of them wrong. Continue to like the stock, in fact I am considering selling one of my properties to go "all in" with it. Hahaha. Now that would be radical wouldn't it. I continue to like this company and believe in its long term story.
Currently, I am thinking of a certain company that will be listing in Singapore in the near future and no it is not Cordlife. Will share more as I do more research on that company.
Till then have a great fortnight ahead.
Best,
SVI
Sunday, March 11, 2012
The year of the Dragon. Could it be the year for Dragon Oil? Buy 6.39 Sterling Pounds.
Have posted for more than two years and this is the first time I am going to be posting while carrying a dog in my arms. A real challenge especially for a person who does not type fast in the first place. So if there are plenty of typos, do not blame me.
First of all, I would like to congratulate my favourite feng shui master whom I know is a great follower of this blog. Your Fragrance holdings is making you richer than ever. Next meal is on you. Please do not tell me that you are a poor man. After two stock splits and now a spin off....you are really rolling in the dough, considering the large quantity you bought from the beginning. You have my respect. Doing all your own field research and on the ground work and finding a gem like this. Impressive. The stock has probably delivered 300% over the past few years for you. That is almost equivalent to Apple's stock. Do let us know your next pick when you get one.
Over the past few weeks, I have been really busy researching on oil companies for my own portfolio. Learnt a lot about the industry and it has been a rather enriching experience so far. As you should all know by now, I have been a big fan of oil and I have never been more bullish about the black liquid than right now. Why? Because technically from the charts, oil looks like it has plenty of momentum to move up. Some may argue that China's slow down will affect the demand for oil. I would like to say that I disagree with that notion because the Chinese will take every chance to stockpile on oil inventories as and when they have the opportunity too. A lot has been said about the tensions in the Middle East affecting the price of oil. Throw in the sanctions the Europeans are looking to impose on Iranian oil exports, looks like oil is going to be the center of attention over the next few months.
I have gone around to all my analyst friends for some ideas on which oil companies to look out for. They came back with Keppel and Sembmarine. Talk about original ideas. I do not understand how simplistic some people can be when it comes to investing. Resting on their laurels on finding a stock that will meet the actual criteria set out. So as usual went to the good ole Bloomberg to screen for oil stocks that look interesting to me. Finally, I found one that is really a dream come true for people looking for upstream oil exposure. Whats more, the name of the company is really a clear sign of things to come for this year. The name of the company? Dragon Oil.
Dragon Oil plc is an independent international oil and gas exploration, development and production company. Their principal producing asset is the Cheleken Contract Area, in the eastern section of the Caspian Sea, offshore Turkmenistan. Turkmenistan formerly also known as Turkmenia, is one of the Turkic states in Central Asia. Until 1991, it was a constituent republic of the Soviet Union, the Turkmen Soviet Socialist Republic (Turkmen SSR). Turkmenistan is one of the six independent Turkic states. It is bordered by Afghanistan to the southeast, Iran to the south and southwest, Uzbekistan to the east and northeast, Kazakhstan to the north and northwest and the Caspian Sea to the west.
Turkmenistan's GDP growth rate of 11% in 2010 ranks 4th in the world. It possesses the world's fourth largest reserves of natural gas resources. Although it is wealthy in natural resources in certain areas, most of the country is covered by the Karakum (Black Sand) Desert.
The Group’s headquarters are located in Dubai, United Arab Emirates. Emirates National Oil Company Limited (ENOC) L.L.C., a company ultimately owned by the Government of Dubai, owns approximately 51% of the Company’s ordinary share capital.
The Group develops the oil reserves in the Cheleken Contract Area in accordance with the terms of the Production Sharing Agreement (PSA). Under the PSA, Dragon Oil Turkmenistan, as operator, was granted a production licence for the exploration and development of oil and gas resources in the Cheleken Contract Area for a term of 25 years from 1 May 2000 and an exclusive right to negotiate an extension of not less than 10 years.
Dragon Oil has had the privilege of working with Turkmenistan for 12 years now, having invested more than US$2 billion in expanding the oil production in the Cheleken Contract Area, and as such, is one of the largest foreign investors in Turkmenistan. The Group is producing from a significant number of new and old wells and has an aggressive development programme comprising drilling of new wells and an ongoing workover programme. The average daily gross field production has increased from approximately 7,000 bopd in 2000 to over 61,500 bopd of average daily gross production in 2011 with the exit rate of 71,751 bopd at the end of 2011.
The Group has over 1,100 employees of which approx. 1,000 are working in Turkmenistan and a majority of whom are Turkmen nationals with over 100 employees based in Dubai.
Dragon Oil had as at 31 December 2011 proved and probable oil and condensate reserves of 658 million barrels and 88 million of oil and condensate contingent resources, 1.5 trillion cubic feet of gas reserves (corresponding to 250 million barrels of oil equivalent) and 1.4 trillion cubic feet of gas resources.
The group trades at a forward p/e of less than 7 times and has more than US1.8 billion cash on their balance sheet. This is an oil company that still has plenty of growth, but trades at a valuation that is only appropriate for an oil major like Shell, Exxon or Total. I like the fact that this is a company that is run by the UAE government (trust me, they know their oil business) and operating in an area that is still rich in oil. The reserve replacement for the company has also been very impressive over the years. Replacing their reserves at a fast rate while still generating so much cash through their increase in production over the years.
Dragon made its first steps down the M&A route last month as it made an early stage approach to buy Cameroon focused explorer Bowleven before dropping its interest shortly after, without making a bid. The company has indicated that they want to invest their cash hoard with more acquisitions going forward.
With US$1.8 billion cash on their books, Dragon Oil presents a healthy debt free balance sheet. Management continues to evaluate M&A opportunities with a target price of US$200-500 million and a minimum size of 50 million barrels of 2P reserves (probable and proven reserves added together).
Underpinned by strong drilling results in 2011, the company produced 61.500 barrels per day, up 30 per cent year-on-year. At this rate, the company will probably achieve its production target of 100,000k barrels per day within the next 3 years. Bear in mind, this is one of the up and coming oil companies out there and I prefer it to Tullow Oil which is now a favourite of many analysts for its exposure to African assets and their high success drilling rates. The valuation however leaves much to be desired. Oh did I mention that Dragon oil pays a nice dividend too? Close to 3% yield at the moment.
For their growth and the quality of their asset, I believe Dragon oil deserves a higher valuation. If you are a big believer of oil like I am, then this is a company for you. If you are bullish on oil, why won't you want exposure to the direct oil producer? For those who are looking at the oil service providers, I do not consider them as direct beneficiaries of higher oil prices. For me, its time to move to upstream players rather than downstream or even integrated oil companies.
Ok thats all I have for this week. Till the next.
Have a great week ahead.
Best,
SVI
First of all, I would like to congratulate my favourite feng shui master whom I know is a great follower of this blog. Your Fragrance holdings is making you richer than ever. Next meal is on you. Please do not tell me that you are a poor man. After two stock splits and now a spin off....you are really rolling in the dough, considering the large quantity you bought from the beginning. You have my respect. Doing all your own field research and on the ground work and finding a gem like this. Impressive. The stock has probably delivered 300% over the past few years for you. That is almost equivalent to Apple's stock. Do let us know your next pick when you get one.
Over the past few weeks, I have been really busy researching on oil companies for my own portfolio. Learnt a lot about the industry and it has been a rather enriching experience so far. As you should all know by now, I have been a big fan of oil and I have never been more bullish about the black liquid than right now. Why? Because technically from the charts, oil looks like it has plenty of momentum to move up. Some may argue that China's slow down will affect the demand for oil. I would like to say that I disagree with that notion because the Chinese will take every chance to stockpile on oil inventories as and when they have the opportunity too. A lot has been said about the tensions in the Middle East affecting the price of oil. Throw in the sanctions the Europeans are looking to impose on Iranian oil exports, looks like oil is going to be the center of attention over the next few months.
I have gone around to all my analyst friends for some ideas on which oil companies to look out for. They came back with Keppel and Sembmarine. Talk about original ideas. I do not understand how simplistic some people can be when it comes to investing. Resting on their laurels on finding a stock that will meet the actual criteria set out. So as usual went to the good ole Bloomberg to screen for oil stocks that look interesting to me. Finally, I found one that is really a dream come true for people looking for upstream oil exposure. Whats more, the name of the company is really a clear sign of things to come for this year. The name of the company? Dragon Oil.
Dragon Oil plc is an independent international oil and gas exploration, development and production company. Their principal producing asset is the Cheleken Contract Area, in the eastern section of the Caspian Sea, offshore Turkmenistan. Turkmenistan formerly also known as Turkmenia, is one of the Turkic states in Central Asia. Until 1991, it was a constituent republic of the Soviet Union, the Turkmen Soviet Socialist Republic (Turkmen SSR). Turkmenistan is one of the six independent Turkic states. It is bordered by Afghanistan to the southeast, Iran to the south and southwest, Uzbekistan to the east and northeast, Kazakhstan to the north and northwest and the Caspian Sea to the west.
Turkmenistan's GDP growth rate of 11% in 2010 ranks 4th in the world. It possesses the world's fourth largest reserves of natural gas resources. Although it is wealthy in natural resources in certain areas, most of the country is covered by the Karakum (Black Sand) Desert.
The Group’s headquarters are located in Dubai, United Arab Emirates. Emirates National Oil Company Limited (ENOC) L.L.C., a company ultimately owned by the Government of Dubai, owns approximately 51% of the Company’s ordinary share capital.
The Group develops the oil reserves in the Cheleken Contract Area in accordance with the terms of the Production Sharing Agreement (PSA). Under the PSA, Dragon Oil Turkmenistan, as operator, was granted a production licence for the exploration and development of oil and gas resources in the Cheleken Contract Area for a term of 25 years from 1 May 2000 and an exclusive right to negotiate an extension of not less than 10 years.
Dragon Oil has had the privilege of working with Turkmenistan for 12 years now, having invested more than US$2 billion in expanding the oil production in the Cheleken Contract Area, and as such, is one of the largest foreign investors in Turkmenistan. The Group is producing from a significant number of new and old wells and has an aggressive development programme comprising drilling of new wells and an ongoing workover programme. The average daily gross field production has increased from approximately 7,000 bopd in 2000 to over 61,500 bopd of average daily gross production in 2011 with the exit rate of 71,751 bopd at the end of 2011.
The Group has over 1,100 employees of which approx. 1,000 are working in Turkmenistan and a majority of whom are Turkmen nationals with over 100 employees based in Dubai.
Dragon Oil had as at 31 December 2011 proved and probable oil and condensate reserves of 658 million barrels and 88 million of oil and condensate contingent resources, 1.5 trillion cubic feet of gas reserves (corresponding to 250 million barrels of oil equivalent) and 1.4 trillion cubic feet of gas resources.
The group trades at a forward p/e of less than 7 times and has more than US1.8 billion cash on their balance sheet. This is an oil company that still has plenty of growth, but trades at a valuation that is only appropriate for an oil major like Shell, Exxon or Total. I like the fact that this is a company that is run by the UAE government (trust me, they know their oil business) and operating in an area that is still rich in oil. The reserve replacement for the company has also been very impressive over the years. Replacing their reserves at a fast rate while still generating so much cash through their increase in production over the years.
Dragon made its first steps down the M&A route last month as it made an early stage approach to buy Cameroon focused explorer Bowleven before dropping its interest shortly after, without making a bid. The company has indicated that they want to invest their cash hoard with more acquisitions going forward.
With US$1.8 billion cash on their books, Dragon Oil presents a healthy debt free balance sheet. Management continues to evaluate M&A opportunities with a target price of US$200-500 million and a minimum size of 50 million barrels of 2P reserves (probable and proven reserves added together).
Underpinned by strong drilling results in 2011, the company produced 61.500 barrels per day, up 30 per cent year-on-year. At this rate, the company will probably achieve its production target of 100,000k barrels per day within the next 3 years. Bear in mind, this is one of the up and coming oil companies out there and I prefer it to Tullow Oil which is now a favourite of many analysts for its exposure to African assets and their high success drilling rates. The valuation however leaves much to be desired. Oh did I mention that Dragon oil pays a nice dividend too? Close to 3% yield at the moment.
For their growth and the quality of their asset, I believe Dragon oil deserves a higher valuation. If you are a big believer of oil like I am, then this is a company for you. If you are bullish on oil, why won't you want exposure to the direct oil producer? For those who are looking at the oil service providers, I do not consider them as direct beneficiaries of higher oil prices. For me, its time to move to upstream players rather than downstream or even integrated oil companies.
Ok thats all I have for this week. Till the next.
Have a great week ahead.
Best,
SVI
Sunday, February 26, 2012
Dormitory business..boring but lucrative. Buy Centurion Holdings, one for the future $0.195.
Another two weeks have flown by and I have once again not been consistent in my posting. Time really has to slow down a little for me to find enough of it to do more research. Markets are still resilient even though the pace of its rise has been slowing down. Earnings have been pretty bad for the large caps but the market continues to be strong. The picks I have given have done pretty well in terms of earnings so far. Silverlake, LMA, Sarin, Dukang etc have all produced results that have been stronger than expected in spite of the poor economic conditions. I continue to like these stocks and recommend you guys to accumulate them.
This week, I want to write about a company which has been pretty much on my mind. I believe that it will deliver good earnings over time. This is a company that just came out of a Reverse Takeover and it is still in its teething stage. Profits have not come in at this point as it is still in the midst of shedding their loss making business.
Centurion Corporation Limited, formerly known as SM Summit Holdings Limited, owns and operates dormitory assets, as well as a storage disc manufacturing business. The Group’s dormitory assets currently include Centurion Dormitory (Westlite) Pte. Ltd. the owner-operator of Westlite Dormitory located at 18 Toh Guan Road East and 45% of the issued share capital of Lian Beng-Centurion (Mandai) Pte. Ltd. which owns a piece of freehold industrial land in Mandai, of approximately 18,700 square metres which will be developed into dormitories on part of the land. In addition, it is also involved in the business of manufacturing compact discs, digital versatile discs and data storage.
With various expansion plans in place, Centurion looks to gain a strong foothold in the growing workers accommodation industry in the region. In line with its growth strategies, the company is actively seeking to enhance its current assets in the midst of its development and acquisition of new projects, aiming to be one of Asia’s leading providers of quality workers accommodation and professional dormitory management services.
Lian Beng-Centurion (Mandai) Pte Ltd, 45% held by Centurion and 55% by Lian Beng Group, intends to launch the sale of 141 units of its ramp-up industrial building to be developed on the freehold Mandai Land1 in the fourth quarter of 2011. The Mandai Land has been divided into three plots for separate developments as below:
- The first plot will be developed as a workers dormitory with a capacity of approximately 4,700 beds.
- The second plot will be developed into a ten-storey ramp-up multiple-user general industrial building with a total of 141 units and a canteen.
- The third plot may be developed as workers dormitory or industrial spaces.
Construction of the ramp-up industrial building on the second plot of Mandai Land is expected to commence in Q4 2011 and likely to be completed within 15 to 18 months. The average selling price per square foot for the units is expected to range between S$650 and S$700.
Centurion is embarking on the acquisition for a Tuas dormitory as part of the Group’s acquisition growth strategy to be a dominant player in providing dormitory accommodation and services to foreign workers. The acquisition will add 8,600 beds to the Group’s portfolio, which will immediately raise the profile of the Group as a dominant independent dormitory operator, enable the Group to enjoy economies of scale in its operations and provide the Group with the necessary infrastructure and platform with which to widen its customer base. As the Tuas Asset is an operating dormitory, the Proposed Acquisition will bolster the company’s revenue from this financial year.
This acquisition can be used to leverage on the customer base it will gain as a result of the acquisition. The Tuas Asset is presently utilized by an existing set of customers, which the Group will absorb upon completion. It will be able to tap its enlarged customer base to promote and fill up its other dormitories when development and upgrading works at such dormitories are completed and become operational in the Company’s financial year ended 31 December 2013 or 31 December 2014. Increasing the number of its existing customers will facilitate the Group’s future marketing efforts and possibly improve the rate at which the Group is able to fill up upcoming vacancies at its dormitories.
Centurion has also been active in Malaysia with two acquisitions over the past two months and it has also identified 6 dormitory projects in Malaysia as potential acquisition targets. All six projects are located within or in proximity to key industrial and manufacturing hubs in Johor, Southern Malaysia and comprise completed dormitories, projects under construction, vacant land and factories for conversion to dormitories. The two successful acquisitions will add approximately 9,000 beds to the Group’s Malaysia dormitory portfolio. These projects which consist of completed dormitories, projects under construction, vacant land and factories for conversion to dormitories, are expected to add approximately 33,400 beds to the dormitory assets portfolio of the Group. In addition, Centurion is also actively pursuing opportunities in China to acquire or build dormitory projects either independently or in partnership with third parties.
I understand that this is still a work in progress company but in my view, it has every chance of becoming a major player in a very niche business. There is a need for additional capital raising in order for them to fund their targeted acquisitions but over the longer term this is a company that has the potential to reward its shareholders handsomely. The way the company is out there looking for acquisition targets, I would not be surprised if they hived off the assets into a dormitory Reit. The yields on such a Reit will really be quite attractive from the research I have been doing on dormitories. Apparently, it is a very lucrative business with yields of above 7% from the services provided.
I like the company's exposure to Malaysia because there is going to be a lot of changes in the southern part of the country with the development of Iskandar Economic Region and many other infrastructure projects coming up. All these projects are going to need plenty of foreign workers to work on them. Housing for these workers will be in great demand and I believe that the company shares the same vision.
One possible headwind facing Centurion in Singapore could be the Government's drive to lower our dependence on foreign workers but I really doubt it will hurt the business at all. Show me Singaporeans who are willing to do the work which foreign workers have been doing for us at the same cost and I will be impressed.
Overall, I like the story behind this stock and it is not expensive at current price as the company is still very much under the radar and I guess investors are still pretty oblivious about how profitable the dormitory business can be. Technically, the company's stock price hit a new high two weeks ago after which it pulled back and I believe this is not a bad level for entry.
Ok thats all I have for this week and lets hope next week's LTRO does not disappoint the markets. Have a great week ahead!
Best,
SVI
This week, I want to write about a company which has been pretty much on my mind. I believe that it will deliver good earnings over time. This is a company that just came out of a Reverse Takeover and it is still in its teething stage. Profits have not come in at this point as it is still in the midst of shedding their loss making business.
Centurion Corporation Limited, formerly known as SM Summit Holdings Limited, owns and operates dormitory assets, as well as a storage disc manufacturing business. The Group’s dormitory assets currently include Centurion Dormitory (Westlite) Pte. Ltd. the owner-operator of Westlite Dormitory located at 18 Toh Guan Road East and 45% of the issued share capital of Lian Beng-Centurion (Mandai) Pte. Ltd. which owns a piece of freehold industrial land in Mandai, of approximately 18,700 square metres which will be developed into dormitories on part of the land. In addition, it is also involved in the business of manufacturing compact discs, digital versatile discs and data storage.
With various expansion plans in place, Centurion looks to gain a strong foothold in the growing workers accommodation industry in the region. In line with its growth strategies, the company is actively seeking to enhance its current assets in the midst of its development and acquisition of new projects, aiming to be one of Asia’s leading providers of quality workers accommodation and professional dormitory management services.
Lian Beng-Centurion (Mandai) Pte Ltd, 45% held by Centurion and 55% by Lian Beng Group, intends to launch the sale of 141 units of its ramp-up industrial building to be developed on the freehold Mandai Land1 in the fourth quarter of 2011. The Mandai Land has been divided into three plots for separate developments as below:
- The first plot will be developed as a workers dormitory with a capacity of approximately 4,700 beds.
- The second plot will be developed into a ten-storey ramp-up multiple-user general industrial building with a total of 141 units and a canteen.
- The third plot may be developed as workers dormitory or industrial spaces.
Construction of the ramp-up industrial building on the second plot of Mandai Land is expected to commence in Q4 2011 and likely to be completed within 15 to 18 months. The average selling price per square foot for the units is expected to range between S$650 and S$700.
Centurion is embarking on the acquisition for a Tuas dormitory as part of the Group’s acquisition growth strategy to be a dominant player in providing dormitory accommodation and services to foreign workers. The acquisition will add 8,600 beds to the Group’s portfolio, which will immediately raise the profile of the Group as a dominant independent dormitory operator, enable the Group to enjoy economies of scale in its operations and provide the Group with the necessary infrastructure and platform with which to widen its customer base. As the Tuas Asset is an operating dormitory, the Proposed Acquisition will bolster the company’s revenue from this financial year.
This acquisition can be used to leverage on the customer base it will gain as a result of the acquisition. The Tuas Asset is presently utilized by an existing set of customers, which the Group will absorb upon completion. It will be able to tap its enlarged customer base to promote and fill up its other dormitories when development and upgrading works at such dormitories are completed and become operational in the Company’s financial year ended 31 December 2013 or 31 December 2014. Increasing the number of its existing customers will facilitate the Group’s future marketing efforts and possibly improve the rate at which the Group is able to fill up upcoming vacancies at its dormitories.
Centurion has also been active in Malaysia with two acquisitions over the past two months and it has also identified 6 dormitory projects in Malaysia as potential acquisition targets. All six projects are located within or in proximity to key industrial and manufacturing hubs in Johor, Southern Malaysia and comprise completed dormitories, projects under construction, vacant land and factories for conversion to dormitories. The two successful acquisitions will add approximately 9,000 beds to the Group’s Malaysia dormitory portfolio. These projects which consist of completed dormitories, projects under construction, vacant land and factories for conversion to dormitories, are expected to add approximately 33,400 beds to the dormitory assets portfolio of the Group. In addition, Centurion is also actively pursuing opportunities in China to acquire or build dormitory projects either independently or in partnership with third parties.
I understand that this is still a work in progress company but in my view, it has every chance of becoming a major player in a very niche business. There is a need for additional capital raising in order for them to fund their targeted acquisitions but over the longer term this is a company that has the potential to reward its shareholders handsomely. The way the company is out there looking for acquisition targets, I would not be surprised if they hived off the assets into a dormitory Reit. The yields on such a Reit will really be quite attractive from the research I have been doing on dormitories. Apparently, it is a very lucrative business with yields of above 7% from the services provided.
I like the company's exposure to Malaysia because there is going to be a lot of changes in the southern part of the country with the development of Iskandar Economic Region and many other infrastructure projects coming up. All these projects are going to need plenty of foreign workers to work on them. Housing for these workers will be in great demand and I believe that the company shares the same vision.
One possible headwind facing Centurion in Singapore could be the Government's drive to lower our dependence on foreign workers but I really doubt it will hurt the business at all. Show me Singaporeans who are willing to do the work which foreign workers have been doing for us at the same cost and I will be impressed.
Overall, I like the story behind this stock and it is not expensive at current price as the company is still very much under the radar and I guess investors are still pretty oblivious about how profitable the dormitory business can be. Technically, the company's stock price hit a new high two weeks ago after which it pulled back and I believe this is not a bad level for entry.
Ok thats all I have for this week and lets hope next week's LTRO does not disappoint the markets. Have a great week ahead!
Best,
SVI
Sunday, February 12, 2012
Unprecedented liquidity injection leads to simultaneous asset bubbles forming. I call it FOAMING.
Been too busy these days to post regularly and it makes me feel bad that I have not been disciplined enough to do so. The markets have been wonderfully kind to investors in January and we have seen some ridiculous moves on certain obscure stocks like Yoma, IEV etc. Very impressive moves especially considering Yoma rose uninterrupted from 8 cents to 58 cents in a span of a month and a half. Wish I was in it, but it was not to be. These kinds of moves only happens once in a long time so it was another missed opportunity for me. Well thats life.
February has started off in bullish fashion and markets have been on a tear. Small caps, mid caps, large caps, you name it, they have had a great run up. The US markets have reclaimed their 2011 highs after just 5 months. European markets have been a little more subtle but they have also done well over the past two months. Asian markets being the high beta play among all regions have outperformed. How did we end up here? Considering the talks of a doomsday event occurring in 2012 have been rife at the start of the year and here we have the best market performance for the month of January since 1987. That is why I love financial markets, the excitement and its unpredictable nature makes one look forward to every trading day.
So what is the reason for this strong bullish like rally? Like my good colleague was saying earlier this week. "It feels and looks like a bull market." Any betting man would not have placed bets on such a bullish move happening in the market at the beginning of the year. In my humble view, it boils down to just one word...liquidity. Liquidity, that is the key word for the investment world today. My ex boss used to say, liquidity is the most fickle element in financial markets as it can be here today and gone tomorrow. But before we get too worried about liquidity disappearing into thin air, bear in mind that the guys turning the liquidity taps in the world are not too interested to turn them off any time soon. So I really do not think liquidity is going to dry up any time soon.
Why do I say that? This is going to sound like its a conspiracy but I do think it is logical so lets see what you think. Central bankers are given a mandate of controlling consumer inflation and ensuring the employment numbers look decent. With the key gauges on how well they are doing their jobs being the very questionable Consumer Price Index and Unemployment rate, their course of action is clear. Focus on the CPI and try to stimulate the economy into creating more jobs. So what do they do? They inject liquidity into the banking system with their creation of QE and LTROs.
If you tell me that the ECB did not instruct the banks out there who took money during LTRO part 1, to pump the money back into the sovereign bond markets, I will tell you that you are very naive. It is by no coincidence why the sovereign yields of Italy and Spain have fallen so significantly since LTRO was introduced. This will make it look like there are more buyers of Italian sovereign bonds and making the market place look more real with more than one buyer and that being the ECB. However the truth is, the financier for all the buyers of such bonds remain the ECB. This action has brought a false sense of security to investors and injected the much needed optimism into the markets.
With all these QE and LTROs going on in the developed markets, the amount of liquidity sloshing in the markets is unimaginable. I would put the figure to be more than 4 trillion dollars and if you factor in the multiplier effect plus the increased velocity of money in the system, we could be seeing much more than that. What is possibly going to happen here is asset bubbles forming. Yes you are reading it right. Not a bubble but bubbles. Usually when there is an excessive move in a certain asset class, we will witness a bubble forming and eventually bursting. We have seen a few in recent decades, Japanese property bubble, Tech bubble, Subprime bubble etc. What do we know about them? They all happened at different periods. My conjecture here is that we are going to enter into a period of concurrent forming of bubbles if liquidity continues to be pumped in so freely. I will term this as "FOAMING". Whereby the asset classes will all move in tandem and inflate into bubbles thus causing a foaming effect and we all now how foam dissipates in the end. The little bubbles will all burst together just like how they were formed.
Why are the central bankers doing all these actions when they know that this will cause asset bubbles? Because they are not judged by Asset Inflation but Consumer Inflation. There is no API (Asset Price Index) so they are pretty safe. Asset price inflation will create a money illusion which in turn will create a wealth effect for market participants. Why won't consumer inflation rise as asset inflation occurs, you may ask. The reason being that asset inflation will only help the rich and the extra liquidity in the banking system is only going to go into the coffers of the wealthy who are credit worthy and are willing to take the risk of leveraging up to invest. The "marginal propensity to consume" for the wealthy is significantly lower than that of their "marginal propensity to invest". I believe that the central bankers are trying to inflate assets to such an extent that people will get the impression that everything is hunky dory and forget that Spain has a unemployment rate of more than 40% amongst their younger labor force.
Consumer prices will remain tepid as the poor do not have the money to consume more so the central bankers are going to report low CPI numbers and probably give themselves more room for further liquidity pumping activity. I personally regard these liquidity moves as short term fixes and basically trying to sweep all the problems under a rug and hope that the rug sticks. What worries me is that they have opened the equivalent of the "Pandora's box" for the financial markets. If I am right, they are going to have a big problem down the road when they finally decide to withdraw the liquidity they have made available to the markets.
Excerpt from Wikipedia: Pandora's box is an artifact in Greek mythology, taken from the myth of Pandora's creation in Hesiod's Works and Days.[1] The "box" was actually a large jar (πίθος pithos)[2] given to Pandora (Πανδώρα) ("all-gifted", "all-giving"),[3] which contained all the evils of the world. When Pandora opened the jar, all its contents except for one item were released into the world. The one remaining item was Hope.[4] Today, to open Pandora's box means to create evil that cannot be undone.
So you may ask, which assets will inflate first? Of course, it is natural for the inflation to happen in the safest assets first, which is of course high grade bonds where investors can leverage on the low interest rates till 2014 (thank you, Ben Bernanke) and earn the yield spread. After that we will have to move to the assets that has no real science to valuing them. Things like commodities. Why? Because commodities are valued more on perceived value than actual value metrics like price earnings ratios or price to book ratios. There is no way to determine accurately what the price of a bushel of wheat is worth in terms of price. When there is no valuation metric for the asset, it is easy for people to use nice convincing stories to justify ever rising prices for that particular asset class.
Whatever I have written today is not something that will happen over the next few months, I believe this whole process of FOAMING will take years and it is important to bear this in mind while investing now. We have no choice but to try to ride this wave because I believe that asset prices will go through what I call above trend inflation and if we do not try to ride this wave we will be left behind as the value of money continues to depreciate implicitly. This is the situation that can be most aptly described as "damn if you do and damn if you don't".
Ok it is getting a little late. Will try to post more regularly, I promise.
Have a great week ahead!
Best,
SVI
February has started off in bullish fashion and markets have been on a tear. Small caps, mid caps, large caps, you name it, they have had a great run up. The US markets have reclaimed their 2011 highs after just 5 months. European markets have been a little more subtle but they have also done well over the past two months. Asian markets being the high beta play among all regions have outperformed. How did we end up here? Considering the talks of a doomsday event occurring in 2012 have been rife at the start of the year and here we have the best market performance for the month of January since 1987. That is why I love financial markets, the excitement and its unpredictable nature makes one look forward to every trading day.
So what is the reason for this strong bullish like rally? Like my good colleague was saying earlier this week. "It feels and looks like a bull market." Any betting man would not have placed bets on such a bullish move happening in the market at the beginning of the year. In my humble view, it boils down to just one word...liquidity. Liquidity, that is the key word for the investment world today. My ex boss used to say, liquidity is the most fickle element in financial markets as it can be here today and gone tomorrow. But before we get too worried about liquidity disappearing into thin air, bear in mind that the guys turning the liquidity taps in the world are not too interested to turn them off any time soon. So I really do not think liquidity is going to dry up any time soon.
Why do I say that? This is going to sound like its a conspiracy but I do think it is logical so lets see what you think. Central bankers are given a mandate of controlling consumer inflation and ensuring the employment numbers look decent. With the key gauges on how well they are doing their jobs being the very questionable Consumer Price Index and Unemployment rate, their course of action is clear. Focus on the CPI and try to stimulate the economy into creating more jobs. So what do they do? They inject liquidity into the banking system with their creation of QE and LTROs.
If you tell me that the ECB did not instruct the banks out there who took money during LTRO part 1, to pump the money back into the sovereign bond markets, I will tell you that you are very naive. It is by no coincidence why the sovereign yields of Italy and Spain have fallen so significantly since LTRO was introduced. This will make it look like there are more buyers of Italian sovereign bonds and making the market place look more real with more than one buyer and that being the ECB. However the truth is, the financier for all the buyers of such bonds remain the ECB. This action has brought a false sense of security to investors and injected the much needed optimism into the markets.
With all these QE and LTROs going on in the developed markets, the amount of liquidity sloshing in the markets is unimaginable. I would put the figure to be more than 4 trillion dollars and if you factor in the multiplier effect plus the increased velocity of money in the system, we could be seeing much more than that. What is possibly going to happen here is asset bubbles forming. Yes you are reading it right. Not a bubble but bubbles. Usually when there is an excessive move in a certain asset class, we will witness a bubble forming and eventually bursting. We have seen a few in recent decades, Japanese property bubble, Tech bubble, Subprime bubble etc. What do we know about them? They all happened at different periods. My conjecture here is that we are going to enter into a period of concurrent forming of bubbles if liquidity continues to be pumped in so freely. I will term this as "FOAMING". Whereby the asset classes will all move in tandem and inflate into bubbles thus causing a foaming effect and we all now how foam dissipates in the end. The little bubbles will all burst together just like how they were formed.
Why are the central bankers doing all these actions when they know that this will cause asset bubbles? Because they are not judged by Asset Inflation but Consumer Inflation. There is no API (Asset Price Index) so they are pretty safe. Asset price inflation will create a money illusion which in turn will create a wealth effect for market participants. Why won't consumer inflation rise as asset inflation occurs, you may ask. The reason being that asset inflation will only help the rich and the extra liquidity in the banking system is only going to go into the coffers of the wealthy who are credit worthy and are willing to take the risk of leveraging up to invest. The "marginal propensity to consume" for the wealthy is significantly lower than that of their "marginal propensity to invest". I believe that the central bankers are trying to inflate assets to such an extent that people will get the impression that everything is hunky dory and forget that Spain has a unemployment rate of more than 40% amongst their younger labor force.
Consumer prices will remain tepid as the poor do not have the money to consume more so the central bankers are going to report low CPI numbers and probably give themselves more room for further liquidity pumping activity. I personally regard these liquidity moves as short term fixes and basically trying to sweep all the problems under a rug and hope that the rug sticks. What worries me is that they have opened the equivalent of the "Pandora's box" for the financial markets. If I am right, they are going to have a big problem down the road when they finally decide to withdraw the liquidity they have made available to the markets.
Excerpt from Wikipedia: Pandora's box is an artifact in Greek mythology, taken from the myth of Pandora's creation in Hesiod's Works and Days.[1] The "box" was actually a large jar (πίθος pithos)[2] given to Pandora (Πανδώρα) ("all-gifted", "all-giving"),[3] which contained all the evils of the world. When Pandora opened the jar, all its contents except for one item were released into the world. The one remaining item was Hope.[4] Today, to open Pandora's box means to create evil that cannot be undone.
So you may ask, which assets will inflate first? Of course, it is natural for the inflation to happen in the safest assets first, which is of course high grade bonds where investors can leverage on the low interest rates till 2014 (thank you, Ben Bernanke) and earn the yield spread. After that we will have to move to the assets that has no real science to valuing them. Things like commodities. Why? Because commodities are valued more on perceived value than actual value metrics like price earnings ratios or price to book ratios. There is no way to determine accurately what the price of a bushel of wheat is worth in terms of price. When there is no valuation metric for the asset, it is easy for people to use nice convincing stories to justify ever rising prices for that particular asset class.
Whatever I have written today is not something that will happen over the next few months, I believe this whole process of FOAMING will take years and it is important to bear this in mind while investing now. We have no choice but to try to ride this wave because I believe that asset prices will go through what I call above trend inflation and if we do not try to ride this wave we will be left behind as the value of money continues to depreciate implicitly. This is the situation that can be most aptly described as "damn if you do and damn if you don't".
Ok it is getting a little late. Will try to post more regularly, I promise.
Have a great week ahead!
Best,
SVI
Saturday, January 28, 2012
LTRO, QE3 and low interest rates till 2014. The perfect recipe for asset inflation.
Starting a post these days is getting tougher and tougher. Juggling between work, studying and stock picking is just a little overwhelming. Did you guys like Genting Hong Kong? It has done well since the last post, but so did the rest of the market. The most common question posed to me these days is "why is the market so bullish when nothing has changed?". Bad news is still in the market but investors are just choosing to ignore everything. On the positive side of things, we have seen Bernanke doing his best to boost markets by increasing transparency on his policies. There was also the Long Term Refinancing Operations done by the ECB, that has really been the real reason to why the market has come back so strongly.
Remember my first post of the year? I did say, we have to keep an open mind this year as this will be the year of unusual uncertainty. I bet most people did not expect the year to start off with such a bang. Corporate earnings season has not been great at all. Plenty of profit warnings have been issued and revenue growth for many large corporations have disappointed. This should not come as a surprise as the global economy has indeed slowed down and demand for many products have slowed down. How long is this rally going to last? I would say that the market is technically overbought at this moment and a short term correction may come soon. However with all the talk about QE3 and interest rates being held at this ultra low level till late 2014, the ECB out to do another LTRO by the end of Feb, the market should hold up pretty nicely.
Fact of the matter is, the rally is purely liquidity driven and it has nothing to do with fundamentals. Valuations are cheap no doubt, but earnings can be expected to moderate over the next couple of quarters. What we are witnessing here is once again distortion in the markets due to unprecedented amount of liquidity being pumped into the markets. I commented to one of my colleagues the other day, that we should just throw all our finance textbooks out of the window as the normal relationships between asset classes are no longer applicable. Distortions from these actions from policy makers and central bankers are going to cause new books to be written on economics and finance as new lessons will be learnt from these actions. Honestly, I personally am worried about what the world will become once the dust settles.
Giving an educated guess is all I can do and what I want to say is that the growing divide between the rich and the poor is going to be even larger by the time this debacle is over. Why? Asset inflation is going to be the key words to remember. Consider this....are you really getting richer because of the asset price increase or are you only keeping up with inflation as the money supply is doubled, tripled, quadrupled etc. When our grand parents bought their flats over 30 years ago, they paid 20-50k for their flats. Now those same flats are going at more than 500k. Is it because they were astute and made the right decisions to invest in property or is the price of the property just a clear reflection of inflationary pressures and destruction of our purchasing power? Just because your net worth doubled over the past 10 years does not mean that you are richer, it just means that the money supply has doubled and your asset has inflated. Now lets just think about what is happening at this time. I honestly think that asset inflation is only going to make the wealthy richer as they have the means and ability to invest their money but for those who only earn enough to save a menial sum, things are going to get worse. They will not be able to invest their money in those assets as prices just get overly exorbitant and their savings will only keep losing their value. That is why I believe the divide will get even more obvious.
So you may ask, why I think the LTRO has worked in calming the markets when Greece is probably still going to default. The fact of the matter is, no one expects Greece to not default. The question is whether it is a disorderly or an orderly one. The default is something that has been pretty much priced into the markets and even if it defaults, the market is still going to be fine. The worry is how the rest of the problematic countries like Portugal, Spain or Italy going to be affected by this. Does a Greek default signal the possibility of other Eurozone countries defaulting? What we are seeing in the European sovereign debt markets is that yields are falling. That is a good sign but there is no guarantee that is it sustainable. Why are the yields falling? That is because the LTRO has allowed the European banking system to attain refinancing which would have not been available and some of the cash injected in the system is going back into the sovereign markets. Throw in the fact that this move has removed the worries over the banking system and significantly lowers the risk of a systemic meltdown in the banking system in the short term. The market is currently relieved that the banking system is safe for now.
I do not deny that a systemic meltdown has been averted but risks still remain as this is just another kick of the can down the road. Nothing has been solved. The question is whether to join in the market cheering or to sit on the sidelines. This is really the million dollar question. Is it too costly to really just sit back and watch everything unfold? As I mentioned earlier, asset inflation is happening now and if you do not get in, will you be left behind? This is really a "catch 22" situation.
Personally, I have been very cautious while at the same time taking opportunistic bets on the market. I am a momentum trader and my broker commented that I seem to like buying at day highs for the counters I trade in. Momentum trading has helped my returns over the 4 weeks. But I am seeing the momentum slow down for the time being. The fact that I am involved in the market every day is very helpful for my own portfolio as I can actively monitor and adjust my positions but for those of you who are not staring at the monitor 24/7 like me, it is a lot harder. My advise is still to go for the companies which you believe are cheap, trading at a good level, sustainable in terms of earnings and you are willing to hold over the next few years. I know plenty of people are bearish on the property counters right now, but I feel the property counters have pretty much priced in the possibility of a property market slowdown, but plenty of them have strong balance sheets and trade at a good discount from the NAV and RNAV. Capitaland is one of these companies. Wheelock is also another. Buy and accumulate these counters slowly and you will be rewarded over the next few years. I am pretty sure.
Just wanted to put some of my thoughts into writing for this week. Nothing much more to say. Will post more regularly after I finish with my exams. Have a great week ahead and Happy CNY to all of you!
Best,
SVI
Remember my first post of the year? I did say, we have to keep an open mind this year as this will be the year of unusual uncertainty. I bet most people did not expect the year to start off with such a bang. Corporate earnings season has not been great at all. Plenty of profit warnings have been issued and revenue growth for many large corporations have disappointed. This should not come as a surprise as the global economy has indeed slowed down and demand for many products have slowed down. How long is this rally going to last? I would say that the market is technically overbought at this moment and a short term correction may come soon. However with all the talk about QE3 and interest rates being held at this ultra low level till late 2014, the ECB out to do another LTRO by the end of Feb, the market should hold up pretty nicely.
Fact of the matter is, the rally is purely liquidity driven and it has nothing to do with fundamentals. Valuations are cheap no doubt, but earnings can be expected to moderate over the next couple of quarters. What we are witnessing here is once again distortion in the markets due to unprecedented amount of liquidity being pumped into the markets. I commented to one of my colleagues the other day, that we should just throw all our finance textbooks out of the window as the normal relationships between asset classes are no longer applicable. Distortions from these actions from policy makers and central bankers are going to cause new books to be written on economics and finance as new lessons will be learnt from these actions. Honestly, I personally am worried about what the world will become once the dust settles.
Giving an educated guess is all I can do and what I want to say is that the growing divide between the rich and the poor is going to be even larger by the time this debacle is over. Why? Asset inflation is going to be the key words to remember. Consider this....are you really getting richer because of the asset price increase or are you only keeping up with inflation as the money supply is doubled, tripled, quadrupled etc. When our grand parents bought their flats over 30 years ago, they paid 20-50k for their flats. Now those same flats are going at more than 500k. Is it because they were astute and made the right decisions to invest in property or is the price of the property just a clear reflection of inflationary pressures and destruction of our purchasing power? Just because your net worth doubled over the past 10 years does not mean that you are richer, it just means that the money supply has doubled and your asset has inflated. Now lets just think about what is happening at this time. I honestly think that asset inflation is only going to make the wealthy richer as they have the means and ability to invest their money but for those who only earn enough to save a menial sum, things are going to get worse. They will not be able to invest their money in those assets as prices just get overly exorbitant and their savings will only keep losing their value. That is why I believe the divide will get even more obvious.
So you may ask, why I think the LTRO has worked in calming the markets when Greece is probably still going to default. The fact of the matter is, no one expects Greece to not default. The question is whether it is a disorderly or an orderly one. The default is something that has been pretty much priced into the markets and even if it defaults, the market is still going to be fine. The worry is how the rest of the problematic countries like Portugal, Spain or Italy going to be affected by this. Does a Greek default signal the possibility of other Eurozone countries defaulting? What we are seeing in the European sovereign debt markets is that yields are falling. That is a good sign but there is no guarantee that is it sustainable. Why are the yields falling? That is because the LTRO has allowed the European banking system to attain refinancing which would have not been available and some of the cash injected in the system is going back into the sovereign markets. Throw in the fact that this move has removed the worries over the banking system and significantly lowers the risk of a systemic meltdown in the banking system in the short term. The market is currently relieved that the banking system is safe for now.
I do not deny that a systemic meltdown has been averted but risks still remain as this is just another kick of the can down the road. Nothing has been solved. The question is whether to join in the market cheering or to sit on the sidelines. This is really the million dollar question. Is it too costly to really just sit back and watch everything unfold? As I mentioned earlier, asset inflation is happening now and if you do not get in, will you be left behind? This is really a "catch 22" situation.
Personally, I have been very cautious while at the same time taking opportunistic bets on the market. I am a momentum trader and my broker commented that I seem to like buying at day highs for the counters I trade in. Momentum trading has helped my returns over the 4 weeks. But I am seeing the momentum slow down for the time being. The fact that I am involved in the market every day is very helpful for my own portfolio as I can actively monitor and adjust my positions but for those of you who are not staring at the monitor 24/7 like me, it is a lot harder. My advise is still to go for the companies which you believe are cheap, trading at a good level, sustainable in terms of earnings and you are willing to hold over the next few years. I know plenty of people are bearish on the property counters right now, but I feel the property counters have pretty much priced in the possibility of a property market slowdown, but plenty of them have strong balance sheets and trade at a good discount from the NAV and RNAV. Capitaland is one of these companies. Wheelock is also another. Buy and accumulate these counters slowly and you will be rewarded over the next few years. I am pretty sure.
Just wanted to put some of my thoughts into writing for this week. Nothing much more to say. Will post more regularly after I finish with my exams. Have a great week ahead and Happy CNY to all of you!
Best,
SVI
Sunday, January 15, 2012
Genting Hong Kong. Buy US$0.315. A Philippines growth story.
How do we start off the new year? With a bang! The market has been cheering since the new year started. Like I said in my previous post, we have to keep an open mind. Why is the market in such a cheery mood? Has anything changed since the end of 2011? The answer is no. I start off every new year with big ambitions on how I am going to make my life so much more meaningful but what happens in the end? Still chasing money with no meaning to anything. Why did I say this out loud? Because that is how the markets are feeling. They want to start off the new year on a positive note and put the horrible 2011 behind them. Not off to a bad start so far, but the question is all about the sustainability. I certainly hope it is because it will be because my job depends on it.
Decided to come out with my first stock pick for the year. The last two have been pretty good considering the market condition so lets try to make it a good start for the year.
The first pick I am going to give this year is one that is very close to my heart. Maybe it is due to my love for vices. The first stock which has caught my eye for this year is....Genting Hong Kong. For those of you who know me, will know that the Genting group is one that is very close to my heart. Over the past 2 years, I have written on both Genting Berhad and Genting Singapore. So why not just make it a nice trio?
Genting Hong Kong, formerly known as Star Cruises Limited, is a leading global leisure, entertainment and hospitality enterprise, with core competences in both land and sea-based businesses:
Star Cruises - Asia-Pacific
Norwegian Cruise Lines (NCL) - A 50% joint ownership alongside Apollo and TPG.
Star Cruises together with NCL is the third largest cruise operator in the world, with a combined fleet of 18 ships cruising to over 200 destinations, offering approximately 35,000 lower berths. This has been a drag on their earnings over the past years however after restructuring and redeployment of their cruise ships, capacity and occupancy has risen and it really is quite impressive.
Resorts World Manila (RWM) - Manila, Philippines; joint partnership with Alliance Global Group under Travellers International. Resorts World Manila is Genting Hong Kong's first foray in a land-based attraction and what an attraction it has been. RWM opened its doors to the public in August 2009, and is one of the premier leisure brands under the Genting Group, representing a flagship integrated leisure and entertainment complex featuring 3 hotels including a six star all-suite Maxims Hotel, an iconic shopping mall, 4 high-end cinemas and a multi-purpose performing arts theatre.
Headquartered in Hong Kong, Genting Hong Kong has a presence in more than 20 locations worldwide with offices and representation in Australia, China, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Sweden, Taiwan, Thailand, the United Arab Emirates, the United Kingdom, the United States and Vietnam.
Resorts World Manila at Newport City continues to extend its leisure, hospitality and entertainment offerings into its second year of operations. Remington Hotel, the resort’s third hotel offering catered towards the budget conscious traveller, is expected to open its 712 rooms during the second half of 2011. In November 2010, Travellers Group purchased 13,777 square meters of land adjacent to the existing Marriott Hotel for the purposes of constructing a convention centre, which is expected to be completed in approximately 18 months. A fourth hotel of five-star calibre is also expected to be completed within the same time frame.
NCLC Group continues to look forward to the two new Project Breakaway ships, scheduled for delivery in the spring of 2013 and 2014. The two new vessels will join the five existing ships, Norwegian Epic, Norwegian Gem, Norwegian Jade, Norwegian Pearl and Norwegian Jewel, in offering “The Haven”, an exclusive suites complex which offers passengers an additional level of privacy and luxury, complete with a private courtyard and pool area, restaurant, bar and concierge lounge. So if you have the time or the money, do consider going for it. After reading through their offerings, I cannot help but to consider whether I have the resources to go for one of those cruises.
Profit for the Group in 1H 2011 was US$61.8 million, increased 445.6% compared with US$11.3 million in 1H 2010.
Contributions from jointly controlled entities, Travellers International Hotel Group, Inc. and its subsidiaries Travellers Group and NCL Corporation Ltd, during the period were US$25.7 million and US$12.3 million, respectively. Share of profit from Travellers Group increased US$15.5 million from the same period in 2010, while share of profit from NCLC Group was US$12.3 million in 1H 2011 compared with a share of loss of US$18.7 million in 1H 2010
EBITDA for the period improved 21.8% to US$61.5 million, compared with US$50.5 million for the same period in 2010. Capacity days increased by 10.8% from approximately 0.8 million to 0.9 million capacity days due to the full operations of m.v. SuperStar Libra in 1H 2011
Total revenue increased by 22.9% from US$184.7 million in 1H 2010 to US$ 227.0 million in 1H 2011 mainly due to the 32.2% increase in gaming revenue from 1H 2010. If we look at Genting HK, its fortunes turned around when Resorts World Manila opened in 2009. GHK and its Philippine partner Alliance Global Group will reportedly start building their second gambling resort called Resorts World Bayshore next year following the success of Resorts World Manila, currently the largest casino in Philippines. Resorts World Bayshore will measure almost 40ha and feature some 2,500 hotel rooms as well as leisure, retail, gaming, and entertainment facilities. No doubt, the building of 3 other casinos in Manila is going to affect the growth of Resorts World Manila but I still believe the gaming market is still going to grow and it will continue to generate sustainable profits over the long term.
Another thought that crossed my mind is the possibility of spinning off Resorts World Manila as Genting Philippines. It probably will happen but maybe not in the near future. With Genting's vision of internationalizing its brand, it will not come as a surprise to me if that happens. What do I mean by this? 3 years ago, we did not have Genting Singapore or Genting Malaysia or even Genting Hong Kong. There was only Genting Berhad, Resorts World Malaysia and Genting International. Now we are looking at a possible Genting New York and Miami in the near future. We already have Genting Malaysia and Singapore. So will you be surprised if there is a Genting Philippines?
Clearly on a valuation basis, Genting Hong Kong is not cheap because it is trading at 20 times 2011 p/e but if you believe in its growth story and considering net profit for 1H2011 has grown 330% excluding one-off gains. Of course this is not sustainable but a 20% growth rate over the next 2 years is very possible and that would make its current valuation pretty reasonable. Throw in the expansion plans in Manila and further fleet rationalizations and refurbishments, the company should continue to grow. With a gearing ratio of 0.14 times as of end June 2011, the company will be able to further leverage to finance their expansion plans and that will also mean that the company should be able to weather the current economic slowdown easily with no financing issues. Lastly, I have a lot of faith in Genting's management and their track record has been impeccable.
I have always loved the gaming business. There is plenty of growth and demand for casinos in Asian markets because of the gambling nature of Asians and throw in the strong demand for money laundering activities (you know what I mean), gaming is a great growth industry. I know this is not exactly the most socially responsible industry to invest in but my view is social responsibility does not go well with investments. So its better to make money through socially irresponsible investments and use some of the profits to do some charitable donations.
Thats all for this week! Have a great trading week ahead.
Best,
SVI
Decided to come out with my first stock pick for the year. The last two have been pretty good considering the market condition so lets try to make it a good start for the year.
The first pick I am going to give this year is one that is very close to my heart. Maybe it is due to my love for vices. The first stock which has caught my eye for this year is....Genting Hong Kong. For those of you who know me, will know that the Genting group is one that is very close to my heart. Over the past 2 years, I have written on both Genting Berhad and Genting Singapore. So why not just make it a nice trio?
Genting Hong Kong, formerly known as Star Cruises Limited, is a leading global leisure, entertainment and hospitality enterprise, with core competences in both land and sea-based businesses:
Star Cruises - Asia-Pacific
Norwegian Cruise Lines (NCL) - A 50% joint ownership alongside Apollo and TPG.
Star Cruises together with NCL is the third largest cruise operator in the world, with a combined fleet of 18 ships cruising to over 200 destinations, offering approximately 35,000 lower berths. This has been a drag on their earnings over the past years however after restructuring and redeployment of their cruise ships, capacity and occupancy has risen and it really is quite impressive.
Resorts World Manila (RWM) - Manila, Philippines; joint partnership with Alliance Global Group under Travellers International. Resorts World Manila is Genting Hong Kong's first foray in a land-based attraction and what an attraction it has been. RWM opened its doors to the public in August 2009, and is one of the premier leisure brands under the Genting Group, representing a flagship integrated leisure and entertainment complex featuring 3 hotels including a six star all-suite Maxims Hotel, an iconic shopping mall, 4 high-end cinemas and a multi-purpose performing arts theatre.
Headquartered in Hong Kong, Genting Hong Kong has a presence in more than 20 locations worldwide with offices and representation in Australia, China, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Sweden, Taiwan, Thailand, the United Arab Emirates, the United Kingdom, the United States and Vietnam.
Resorts World Manila at Newport City continues to extend its leisure, hospitality and entertainment offerings into its second year of operations. Remington Hotel, the resort’s third hotel offering catered towards the budget conscious traveller, is expected to open its 712 rooms during the second half of 2011. In November 2010, Travellers Group purchased 13,777 square meters of land adjacent to the existing Marriott Hotel for the purposes of constructing a convention centre, which is expected to be completed in approximately 18 months. A fourth hotel of five-star calibre is also expected to be completed within the same time frame.
NCLC Group continues to look forward to the two new Project Breakaway ships, scheduled for delivery in the spring of 2013 and 2014. The two new vessels will join the five existing ships, Norwegian Epic, Norwegian Gem, Norwegian Jade, Norwegian Pearl and Norwegian Jewel, in offering “The Haven”, an exclusive suites complex which offers passengers an additional level of privacy and luxury, complete with a private courtyard and pool area, restaurant, bar and concierge lounge. So if you have the time or the money, do consider going for it. After reading through their offerings, I cannot help but to consider whether I have the resources to go for one of those cruises.
Profit for the Group in 1H 2011 was US$61.8 million, increased 445.6% compared with US$11.3 million in 1H 2010.
Contributions from jointly controlled entities, Travellers International Hotel Group, Inc. and its subsidiaries Travellers Group and NCL Corporation Ltd, during the period were US$25.7 million and US$12.3 million, respectively. Share of profit from Travellers Group increased US$15.5 million from the same period in 2010, while share of profit from NCLC Group was US$12.3 million in 1H 2011 compared with a share of loss of US$18.7 million in 1H 2010
EBITDA for the period improved 21.8% to US$61.5 million, compared with US$50.5 million for the same period in 2010. Capacity days increased by 10.8% from approximately 0.8 million to 0.9 million capacity days due to the full operations of m.v. SuperStar Libra in 1H 2011
Total revenue increased by 22.9% from US$184.7 million in 1H 2010 to US$ 227.0 million in 1H 2011 mainly due to the 32.2% increase in gaming revenue from 1H 2010. If we look at Genting HK, its fortunes turned around when Resorts World Manila opened in 2009. GHK and its Philippine partner Alliance Global Group will reportedly start building their second gambling resort called Resorts World Bayshore next year following the success of Resorts World Manila, currently the largest casino in Philippines. Resorts World Bayshore will measure almost 40ha and feature some 2,500 hotel rooms as well as leisure, retail, gaming, and entertainment facilities. No doubt, the building of 3 other casinos in Manila is going to affect the growth of Resorts World Manila but I still believe the gaming market is still going to grow and it will continue to generate sustainable profits over the long term.
Another thought that crossed my mind is the possibility of spinning off Resorts World Manila as Genting Philippines. It probably will happen but maybe not in the near future. With Genting's vision of internationalizing its brand, it will not come as a surprise to me if that happens. What do I mean by this? 3 years ago, we did not have Genting Singapore or Genting Malaysia or even Genting Hong Kong. There was only Genting Berhad, Resorts World Malaysia and Genting International. Now we are looking at a possible Genting New York and Miami in the near future. We already have Genting Malaysia and Singapore. So will you be surprised if there is a Genting Philippines?
Clearly on a valuation basis, Genting Hong Kong is not cheap because it is trading at 20 times 2011 p/e but if you believe in its growth story and considering net profit for 1H2011 has grown 330% excluding one-off gains. Of course this is not sustainable but a 20% growth rate over the next 2 years is very possible and that would make its current valuation pretty reasonable. Throw in the expansion plans in Manila and further fleet rationalizations and refurbishments, the company should continue to grow. With a gearing ratio of 0.14 times as of end June 2011, the company will be able to further leverage to finance their expansion plans and that will also mean that the company should be able to weather the current economic slowdown easily with no financing issues. Lastly, I have a lot of faith in Genting's management and their track record has been impeccable.
I have always loved the gaming business. There is plenty of growth and demand for casinos in Asian markets because of the gambling nature of Asians and throw in the strong demand for money laundering activities (you know what I mean), gaming is a great growth industry. I know this is not exactly the most socially responsible industry to invest in but my view is social responsibility does not go well with investments. So its better to make money through socially irresponsible investments and use some of the profits to do some charitable donations.
Thats all for this week! Have a great trading week ahead.
Best,
SVI
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