Is Singapore Property Cheap Now?

Had a very insightful discussion pertaining to this topic recently on valuebuddies forum and here are my contribution:

Came across this annual housing affordability research with a focus on Singapore(link: here) which rank Singapore 53. 92 being the most unaffordable base on median house price/median household income and 1 being the most affordable. Singapore is ranked out of the critical red zone and is deemed affordable by demographia. It makes for an interesting read.

First of all, Singapore do not have peripheral mainland or the luxury of a competitive suburban market for housing like other countries have. We have 3/4 less gross land than Hong Kong and 3/4 as many residents as Hong Kong. Our GDP per capita is still around top 3 in the world.

If we do a comparison with Hong Kong as per above, it seems to the Hong Kong people, Singapore properties are cheap, in terms of price to income ratio and mortgage to income ratio. Singapore government is very successful in controlling the property market by using cooling measures, 10 so far. that has pretty much controlled the price of private property from escalating since 2013.

Additionally, the TDSR, ABSD, LTV measures implemented by the government has eradicated speculation and flipping here in Singapore. This means all those who own properties here can afford them and are likely long term own stayers or landlords. Evidence from the 2018 enbloc frenzy has shown that Singaporeans have deep pockets and are waiting at the side lines for the right time to contribute to the demand. Despite 20% ABSD to foreigners, we can still see foreign demand seeping in especially from China and Hong Kong because even after the 20% tax, its still cheaper here than their domestic market.

Not forgetting Hong Kong residential land is at most 70 years lease, while Singapore land has freehold option ie no depreciation in land value over time. We cant compare with our neighbour Malaysia as Sg is AAA credit rated with a much higher GDP per capita coupled with a very small land which I feel matches Hong Kong the most in terms of land size, Chinese predominant, corporate governance and international attractiveness. Foreigners now I feel prefer Singapore to Hong Kong because many westerners don't like to put their money under indirect watch of China.

Singapore has one trillion usd in foreign reserve there about, don't think its fair to compare it with any ASEAN countries around it. Singapore is well located, that's why our ports are still one of the busiest in the world. If we look at this collectively, it seems to me that Singapore properties are actually relative cheap, artificially controlled by government policies amidst a pent up demand by deep pocket Singaporeans here waiting at the side lines.

In terms of net passive return on rental, the yield after deducting property tax, income tax and mcst may not satisfy common folks here who is used to reits and other alternative property asset classes. A rough back of envelope calculation shows an avg mid 2 to mid 3% of net yield not including mortgage loan. Rental is dependent on labour forces and supply/demand. The dwindling rental quantum over the years could be due to a more controlled foreign worker influx to Singapore and more supply due to the enbloc period.

The silver lining to the dwindling rentals here is the divergence of our vacancy rate, which is dropping yearly over a four years period since second quarter of 2016 till. This could hint towards a positive rental trend reversal, likely attributed to an influx of foreign PMET to Singapore.

ps: The global covid 19 epidemic will likely cast a dark cloud to this whole theory in the short term to medium term.

To continue the ongoing discussion on valuebuddies, can click on the link here

My thoughts on Cosco International HK(517)

One of the written thoughts that I have submitted to Value Investors Club on HK listed 517:

COSCO International Holdings Limited (SEHK: 517) is the subsidiary of COSCO (Hong Kong) Group (COSCO Hong Kong's parent company is COSCO Group). It is headquartered in Hong Kong and it was listed in the Hong Kong Stock Exchange in 1992. It is 66% owned by the COSCO SHIPPING Group.

The value thesis for this company is in its balance sheet. 6.09bil hkd of net cash which equates to HK$3.97 of net cash per share vis a vis a market cap of 3.34bil hkd(2.18 per share). This will likely allow the company to make a series of small acquisitions to complement its existing businesses and/or enable it to make a transformational acquisition to substantially expand its earnings.

This company is trading at 45% discount to its net cash and has been profitable every year since the GFC. It has also been paying out more than 50% of its earnings consistently.

2009: 0.56 EPS 0.2454 FCF 0.094 DIV(4.33%)
2010: 0.83 EPS -0.0891 FCF 0.400 DIV(18.4%)
2011: 0.25 EPS 0.0028 FCF 0.090 DIV(4.15%)
2012: 0.24 EPS 0.2532 FCF 0.080 DIV(3.69%)
2013: 0.16 EPS 0.2698 FCF 0.055 DIV(2.53%)
2014: 0.23 EPS -0.1008 FCF 0.130 DIV(6.00%)
2015: 0.22 EPS 0.2759 FCF 0.160 DIV(7.40%)
2016: 0.16 EPS 0.4363 FCF 0.145 DIV(6.68%)
2017: 0.23 EPS 0.0739 FCF 0.180 DIV(8.29%)
2018: 0.19 EPS 0.1285 FCF 0.140 DIV(6.45%)
2019: 0.17 EPS 0.1451 FCF 0.160 DIV(7.37%)

512 is able to churn out cash consistently almost every year due to its low capex services orientated operations. A simple calculation of its total FCF per share since 2009 till now equates to HK$1.64 against its total div paid per share since 2009 till now of HK$1.634. This shows that in this 10 years period, its div payout is sustainable from its FCF generation.

Assuming they dont touch their cash horde and just churns out the same fcf for the next 10 years with the same, close to 100% payout of fcf, it would theoretically give back 75% of its current market cap to opmi in the next 10 years. Here is the breakdown of their net cash over the years:

2009: 1.26bil
2010: 6.26bil
2011: 5.69bil
2012: 5.80bil
2013: 6.27bil
2014: 6.11bil
2015: 6.21bil
2016: 6.68bil
2017: 6.53bil
2018: 6.33bil
2019: 6.09bil

Their net cash has min fluctuations over the years. In Aug 2018 they acquire a 33% stake in Nasurfar for 99.7mil hkd which contributed a monthly avg profit of 460k(18x pe) in 1H 2019 compared to 400k in 2018. Cash is being used slowly on acquisitions that have growing bottom line.

Another thing to note is that its 6.09bil hkd worth of cash, consist of 91% usd which is actually strengthening amongst the other major currencies like yuan, hkd and sgd etc. The cash is also getting a return of 3.42% representing a 110 basis points above 3 month US dollar London Interbank Offered Rate as at the end of June 2019. So there is a fix D mechanism inbuild to the company if it continues to sit there. To add to the stability, its finance income from its interest is 50% more than its operating income.

A simple break down of its "free" core businesses:

1) Ship Trading Agency Services. Earnings are from commission for being the middle man in a transaction of a ship. Very cyclical business and dependent on over/under supply of ships. Average OPMs are in the 60% range.

2) Marine Insurance. A stable but low-growth business as companies need to renew their insurance on their vessels frequently. The OPMs have averaged about 70% in the last 5 years. Very parent based business as majority of this business is to insure its parent's vessels. Which brings consistency and stability.

3) Marine Equipment and Spare Parts. They have been growing this business as they try to target customers outside of the COSCO shipping group. The economics here are not great with OPMs at 5% and demand is tied to vessel demand.

4) Coatings. Here they manufacture and sell marine coating paint with anti-corrosive characteristics. Here the profitability fluctuates with raw material prices but demand itself is stable as most of it is for maintenance and repairs. They also sell similar products for industrial use and for containers. OPMs are in the low single digit range. Recent cost restructuring and acquisition increased its PBT by 3000%.

5) Trading business. This is trading mostly for marine fuel and the profits varies with oil price but it accounts for only 4-5% of the profits.

Their businesses have a moat due to the fact that there are servicing its parent predominantly(which is a captive stable customer) followed by outside customers. So even though its not exciting, the bottom line should be consistent.

512 in my view represent a very interesting case where not only is the share price trading at 45% disc to its net cash, Its share price is also at near 10 years low. A neg 2.457bil hkd coy that has been always profitable and also paying out more than 50% of its earnings. Owned by cosco group which is the world largest shipping company in terms of comprehensive strength. Its fleet of more than 1,100 ships, with a combined capacity of over 85 million DWT, ranks the first in the world.

I feel with the above consideration, 512 is being excessively mispriced by the market. I would be conservative and give a tgt of $3.97 which is its net cash per share valued.

Lack of execution on acquisition front. The share price could continue to trade at a depressed valuation if the group fails to execute on its plans for acquisition(s).

Overpaying for an acquisition or buying a non-complementary business. The risk exists that the group may overpay for an acquisition or buy a business that does not complement its current businesses, thus leading to shareholder value destruction.


Any of these catalysts might play out for 512.

1)A big earning accretive acquisition using its cash hoard(cosco logistic would be a good idea)
2)Coy pays out all its cash of $3.97 per share and immediately multibags
3)Parent privatize 512 at an acceptable price and slowly strip the cash and IPs for themselves

Do note, at this price, you are buying their core businesses and investment properties(115mil hkd worth) for free. You are also using 2.17 hkd to buy 3.97 of net cash(predominantly in usd) while getting a 6.42% thereabout return via div yield which is net sustainable by its own fcf.

New Revision To BOC SmartSaver

With effect from 1st Dec 2016, the feature for BOC Smartsaver will be revised to be much worse in my view.

Right off the bat, the usual $500 credit card spending will be nerfed to 0.8%(of the 60k). You can however spend $1,500 on it to get 1.6%. Those who do a lot of groceries shopping can consider buying $1,000 - $1,500 of ntuc shopping vouchers every month, spend and keep the rest to still be able to qualify for the 1.6%. Those who usually only spend $500 per month will be very upset due to the drastic reduction to 0.8% interest. One work around I can think of now is to buy $1.5k ntuc voucher using Family card and sell all via carousell at 4% disc to meet the spending requirement(that way you earn a 1% spread as you get 5% direct disc from buying).

One important thing to note, the AXS payment transactions are no more eligible for Card Spend Bonus, means they have more or less closed this loophole. Previously, one can just use AXS app to pay other credit cards using BOC Great Wall debit card and it will be counted as credit card spend.

Secondly your salary credit needs to be $6k and above to get a better interest of 1.2% instead of the usual 1%. $2k - $5,999 you will only be entitled to 0.8%. There is no work around for this, as manually giro or split salary crediting will not work. If you can hit $6k a month, your interest will be better than the current one.

Thirdly, the pay bill criteria interest is reduced from 0.6% to 0.35%. I usually just pay $5 to three credit cards now the minimum payment per bill is $30. This criteria's interest is reduced by 0.25%, not good. Still you can consider paying $30 to BOC Family, SCB Stand Chart and DBS live.

There is a new criteria now called Extra Savings Bonus. This is basically a criteria to make sure you have more than 60k in the account. As any additional amount after $60k to $1mil will get you 0.6% interest if one of the three above criteria is met(Card Spend, Salary Crediting or Payment). Means effective interest is 1%(0.6% + 0.4% prevailing). I think this is not useful at all, one can just dump their excess cash into CIMB fast saver to get 1% without doing anything.

I have been using this since the first day it was released, I have even gotten a $100 cash card from them. Really milked alot of risk free cash from this(considering this is just my cash portion). This new changes maintains the total effective interest to 3.55%(3.15% + 0.4%) if you manage to meet all three max requirements. I will most likely still continue to use this until I can think of a better alternative(Have till end of Nov to think). The only problem I have is the credit card spending hike to 1.5k. If I only spend $500 to buy ntuc vouchers I will only get 2.75%(2.35% + 0.4%). The 0.4% is the prevailing interest rate.

I guess all good things will inevitably come to an end. Will give another update by end of the year on my work around. You can read the full details of the change here.