Golden Village Cinemas as a Value Play?- Revisiting Investment Thesis

Contributed by: The Big Fat Whale

In an earlier article, we have covered Orange Sky Golden Harvest which is listed in Hong Kong. They are the owners of the popular Golden Village cinemas. They also have a presence in Hong Kong and Taiwan. Their latest foray is into China with a 360 theatre in Suzhou that is meant for live performance- it is able to house up to 2700 spectators.

Source: AAStocks

The stock has seen exciting movements after our article, on a quick upsurge to 18 cents in March 2023 from the 6.5 cents level. It has actually reached our target (18 cents) which was highlighted in our report. It was mainly speculative flow as it has since retreated back. The catalyst was mainly due to the newsflow that TVB is getting their stars to do live-stream sales on the Taobao online platform.

This is our recently published book where we touched on how we go about valuing stocks and our insights into the investment world. Authored by a Chartered Financial Analyst, it encompasses 2 decades of experience in the market that is condensed into this book. Hope you can lend support to our website and gain insights into the world of investment by purchasing the Kindle Ebook (Sample Copy) or the Paperback.

Loss More than Doubled

Source: Orange Sky Golden Harvest Announcement

Recently, the company has seen a further drop in prices to a low of 4.6 cents, which could be due to their latest financial results announcement. The headline number is the loss has more than doubled on a half-yearly basis.

However, the loss has more than doubled because there was a non-recurring gain in the first half of 2022 of HK$56.5 million. If we exclude the one-off gain from the disposal of office property, there was actually a 64% reduction in loss. So things are turning better from the numbers itself.

Click Here for the Full Article:

https://thebigfatwhale.com/golden-village-investment/

Negative Equity Stocks- Is it An Outright Sell?

Contributed by: The Big Fat Whale

Recently, I have been looking up Oracle's financials to see if it is something that I would add to my watchlist. In a usual filtering process, using value investing metrics such as Price to Book, Debt to Equity and Return on Equity, Oracle would never appear in the list.

The reason being it is having negative equity. In simple terms, when you take their total assets and net off their total liabilities, they are coming in with a shortfall.

So it brings us to the question:

Are Negative Equity Stocks an Outright Sell?

Negative equity stocks, also known as “underwater stocks,” are shares of companies that are trading below their book value or the total value of their assets. In other words, if a company has more liabilities than assets, it can result in negative equity. While negative equity might seem like a cause for concern for investors, there are situations where it may not necessarily be a bad thing.

 

Why Negative Equity Might Be a Cause for Concern?

Negative equity can often be a red flag that something is not right with a company. It could indicate that the company has taken on too much debt or made poor investments, leading to financial troubles. In such situations, the company may struggle to pay off its debts and interest, which can lead to bankruptcy.

Negative equity may also be a sign of declining or stagnant revenues. If a company is losing money and not generating enough cash to cover its operating costs, it could result in a negative equity situation. This may be due to increased competition, changing market conditions, or poor management decisions.

 

Why Negative Equity Might Not Be a Bad Thing?

While negative equity might be a cause for concern in many cases, there are situations where it may not necessarily be a bad thing. For instance, a company with negative equity may have a large number of intangible assets, such as patents or brand value, that are not reflected in its book value. Such companies may be worth more than their current market value, even if their book value is negative.

Say, for example, McDonald's is one of the world's most recognisable and valuable brands, the brand value is estimated at 42 billion dollars. On their books, it is only valued at less than 2 billion dollars.

The value will only emerge when the business is sold with the total brand worth (the additional 40 billion dollars) highlighted as goodwill in the acquiring company accounts.

Market Values vs Book Values (In Millions) - Credit: OShaugnessy Asset Management

Also, when companies are acquiring other companies, the intangible assets/goodwill would be subjected to writing off on a gradual basis. So using back the McDonald's example, the 42 billion dollar brand value would see a write-off every year, despite the Mcdonald's brand value might be getting more valuable through advertising strategy and etc. The effect on the financial statements would be lower profitability and hence lower book value.

The company could also be buying back their shares in an aggressive mode or paying back huge dividends that would have an impact of turning the company into a negative equity situation. Even Apple, thou it is not in negative equity, Apple has negative retained profits as the company have been aggressively buying back its shares for the past few years.

Another reason why negative equity might not be a bad thing is when a company is undergoing a turnaround or restructuring. If a company is making strategic changes to its operations, such as selling off unprofitable divisions or reducing debt, it may be able to improve its financial position over time. In such cases, investors may see an opportunity to buy the stock at a lower price before it turns around.

 

Are Negative Equity Stocks an Outright Sell?

From a Singapore market perspective, I believe it is usually the case as negative equity stocks are not very common. It is negative equity for the right and logical reason, which translates to the company being in distress.

However, the US markets have lots of good quality companies that have been in negative equity situations at some point in time. Some examples will be Home Depot, McDonald, Yum Brands and Oracle.

Instead of writing a negative equity stock off, if the company have strong branding or is an established name, we should look beyond the trees. There could be other metrics such as revenue growth, profit growth, interest coverage and positive operating cash flow that we could look into. If there is a contradiction to the base thesis for the negative equity scenario which is a red flag by itself, we should revisit the investment decision.

As for Oracle, I am still in the midst of my research. The huge negative equity figure could be due to their huge acquisitions through the years and goodwill have to be written off that could have led to a negative equity situation. After saying that, their acquired companies could be worth more than what they are acquired at which the negative equity is more an accounting exercise than what Oracle is actually worth.

Given that their software solution and Java program create a sustainable moat for the company, I will not be too bothered by the negative equity situation. Nonetheless, at a PE of 30, there could be a better entry level.

To sum up, being in negative equity does not mean it will be an outright sell but more due diligence would be needed if the company is an attractive investment based on its growth and earnings prospect.

 

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Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.

Food Crisis and Protectionism- Boom for the Cold Storage Industry

Contributed by: The Big Fat Whale

The recent ban on exporting live chickens- 3.6 million a month- from Malaysia to Singapore has been unprecedented. It shows the vulnerabilities of the supply chain issues for a country like Singapore which is highly dependent on others for their food and energy sources.

The current situation is due to the cap by the Malaysian government on chicken prices at RM8.90 per kg since Feb 5, 2022, which has led to losses or minuscule margins for the chicken breeders. This has affected the supply of chickens as some would rather not breed given a loss-making situation where costs of breeding have shot up due to the world's inflationary environment.

The government did try to cushion and provided support to the breeders through a subsidy of RM730 million. However, to date, only RM50 million have been paid out.

The ban on Malaysia's export to Singapore could help stabilise the prices of chickens in Malaysia as there is a good possibility that prices the breeders managed to secure from Singapore would be higher than the ceiling price set by the Malaysian government.

However, if prices are not set by market forces, sustainability would be questionable, especially with subsidies not efficiently handed out.

Source: The Straits Time

From the chart above, Malaysia should form the bulk of our live chicken supply due to the geographical and logistical aspects of the supply chain. 

Going forward, with a huge dent in the supply of live chicken stocks, we might have to make do with frozen chicken till the ban eases.

Click Here for the Full Article:

https://thebigfatwhale.com/food-crisis-and-protectionism-boom-for-the-cold-storage-industry/ 

When to Sell Your Stocks?- Return Trip is Terrible

Contributed by: The Big Fat Whale

The bloodshed in the markets especially in the growth and technology sector has made some investors' saneness go overblown, it would further exacerbate the situation if they are on financing or borrowed funds.

As the saying goes:

"The Market moves up like climbing the stairs but comes down in an escalator"

Some of the stocks have done a return trip which is giving back all the great gains and even worse, you are underwater and in deficit. A good example will be one of Ark Investment's favourite stocks, Teladoc.

The feeling of letting go of a 3-4 bagger gain and making a loss is a terribly tough situation to handle emotionally.

 

Click here for the Full Article:

https://thebigfatwhale.com/when-to-sell-your-stocks-return-trip-is-terrible/

Interview with the Dean of Valuation- Aswath Damodaran

Those who are into value investing would likely have heard of Aswath Damodaran. He is the Professor of Finance at New York University and has generously shared his lectures and valuation spreadsheets online for all to benefit from it.

In this podcast interview by We Study Billionaires- The Investor's Podcast Network on Spotify, he shared many of his thoughts on valuation and going to even philosophy of life.

Some interesting nuggets of knowledge I gathered from this interview will be:

1) To value a company, you just have to split the information gathered into 3 baskets. These are namely growth profile, operating margins and reinvestment needs.

2) In order to come up with a good valuation, you have to curate a story which you can do it better by talking to the stakeholders- tesla owners or Airbnb hosts.

3) His thoughts on Tesla which I would disagree with as his valuation is more towards Tesla just as a merely auto manufacturer.

4) The hype of ESG is overblown and focusing on it would not lead to drastic changes in cash flow and valuation.

5) His thoughts on crypto as an alternative investment and also on Alibaba.

6) Portfolio allocation and When to Sell your Winners?

7) How to keep your serenity under extreme market conditions?

There are many more snippets of sound advice that you could benefit from in this interview.

Here is the link to the full interview:

https://open.spotify.com/episode/2BAxBluC9l0VfytwzyEohQ?si=qahZpMx5S7unR0Nb0gZpfg

These are some old videos with him at the Google Talks that are also very insightful:

https://www.youtube.com/watch?v=Z5chrxMuBoo

https://www.youtube.com/watch?v=uH-ffKIgb38

How to Invest in a Bear Market? - Advice from a Veteran Fund Manager with 54 years of Experience

 

If you are heavily invested in China Tech, it is not an easy time in the past few weeks. Baba has fallen by 30% within a week and the end seems not in sight. Even the almighty Tencent was not spared from this perfect storm.

The reasons for their drop could be from the possible implications of delisting from the US, China's regulatory claw and the more likely cause which is similar sanctions imposed on Russia slapped on the Chinese companies.

Would the US and its allies impose drastic sanctions on China? Based on a realistic assessment, it is unlikely to happen as China is playing the neutral role well so far. However, it was also unlikely too for Russia to wage a war on Ukraine without negotiations so it is anyone's guess in this crazy world.

It has been a long while since I saw HSI testing 18000 levels, the way it is going, it looks like they are going into bankruptcy administration. Many of the companies are currently trading close to value stocks status despite their growth characteristics. Tencent at PE of 12 and Baba at PE of 11 (excluding one-off writing down of goodwill).

The Chinese Government have to step in soon unless they want to have a crumpled capital market which will not be in line with their goal of China being strong, independent and vibrant. Statements to provide support for the Chinese market would be most welcome in such dire conditions.

They have shown their prowess and proven their point that no one is on top of the powerful government. Jack Ma is nothing but just a cloud in the sky. Is it perhaps time to spare the rod and shower some care and concern?

The merits of being able to do valuation of a company based on financials rather than concepts would come in useful at this juncture. If we are convinced China would not let their titans fall, this is the time to be brave and accumulate the "best of the class stocks" in China.  

The Graham crowd would be excited to hunt for gems in this current massacre of China's market where Mr Market is getting moody and throwing bargains at us. Even strong names like Ping An is not spared this time around.

Here is some advice from a veteran portfolio manager with 54 years of experience from Royce Investment Partners as he gives his input on how to invest in a bear market. I hope you will find it useful to navigate the current challenging conditions.

What’s your take on the sharp market decline?

I think it was overdue and I believe we have more to go. The reason that I think more drawdowns and declines are likely is the Fed has yet to implement the measures they need to take to restrain and hopefully bring down inflation.

I feel that they’re dramatically behind the curve, meaning that they have to catch up to do. They should have been removing stimulus and should have been raising rates earlier. They haven’t done so. And that’s ahead of us.

Do you think there are other parallels in your career?

I’ve been doing this professionally for 54 years, which means I was actually a young portfolio manager managing a pension fund in 1972-75, also known as the Nifty Fifty era. And this was at a time when, much like the FANG stocks of today, there was an anointed group that sold at very high valuations. We’ve obviously seen this in the dot.com bubble. It repeats itself. So history is a good instructor in these matters.

And the market, from top to bottom, went down 50%. That insight that I learned then was instilled in me by a veteran trader. And he says to me, Charlie, hold your horses. This is the beginning of a bear market. What you’ve got to do is you’ve got to pace your purchases, dollar cost average. You don’t know how long this is going to take.

So what I learned then was a pyramid. What you do is you buy, think of the top of the pyramid, you buy a little. And as the price declines, you buy more. And on days that market goes up, you stop buying, on the presumption, it’s going to go down tomorrow or the day after.

Here is the link for the Full Article:

https://www.royceinvest.com/insights/2022/1Q22/how-a-veteran-pm-invests-in-bear-markets

Your Gateway to Digital Payments- PayPal

Contributed By: The Big Fat Whale

The digital payment industry has been on a steady climb for many years given the e-commerce revolution. The Covid 19 situation, has further led to new users who usually would not have shopped online to come onboard. All these bode well for a good runway for further consistent growth ahead.

With the coming of the new era of Metaverse by Meta, where the future could be split between your virtual and physical world, the need for a digital wallet would be essential. The digital wallet could be used for keeping your digital currency, digital assets (NFTs) and other digital-related items.

Source: Mordor Intelligence

The transaction value of the digital payments market was USD 5.44 trillion in 2020, and it is projected to be worth USD 11.29 trillion by 2026, registering a CAGR of 11.21% from 2021 to 2026

Source: Mordor Intelligence

The global payments market is expected to grow from $466.29 billion in 2020 to $517.68 billion in 2021 at a compound annual growth rate (CAGR) of 11%. The market is expected to reach $735.39 billion in 2025 at a CAGR of 9.2%.

Source: Businesswire.com

The growth as predicted by both Modor Intelligence and Businesswire for the digital payment industry would be in the region of around 11% for the next 5 years. This is consistent growth rather than exceptional growth but one thing is for sure, it is still a sunrise sector. Hence, it is going to be a good place to look for potential investments.

Here is the full article on the Merits of Investing in PayPal:

https://thebigfatwhale.com/your-gateway-to-metaverse-paypal/

 

Riding The Commodities Boom- Wilmar

Contributed By: The Big Fat Whale

There has been recent talk about an inflationary spike and pressure on the overall economy. Commodities prices have been creeping up. This phenomenon is not surprising given the huge money press at work and it is still running on full steam- Biden's recent 2 trillion infrastructure bill was passed.

The current US debt is at 28 trillion dollars. We touched on the Fiat Money symptom in our article supporting Silver as a hedge against hyperinflation.

Source: Dow Jones Commodities Index- spglobal.com

Looking at the charts, the commodities prices have been on a steady ascent since mid-2020.

Looking around us, there have been new policies to increase wages of security guards to 3500 dollars by 2028. This is equivalent to or more than a fresh graduate pay in today's term. We can still remember our starting pay when we graduated ages ago was just 1800-2000 dollars.

Click Here to Read More:

https://thebigfatwhale.com/riding-the-commodities-boom-wilmar/

 

Fed's Latest Move- Demise of ARKK and Innovation Stocks?

Contributed by: TheBigFatWhale

With the latest move by the Fed, where they are looking to have 3 interest rate hikes in 2022 and into reducing their balance sheet, growth stocks have not been faring well. The move by Fed is a move towards a monetary tightening policy that will drain the exodus of liquidity that has been pumped into the economy since early 2020. 

Source: Tradingeconomics.com- Fed Balance Sheet

The Fed Balance sheet has more than doubled since 2020 which is a worrying sign that things are going out of control. Therefore, the indication by Fed to reduce their balance sheet is a sound and prudent move provided they are really serious about doing it. We touch on our previous article about the 6 indicators to gauge if the S&P 500 is peaking with the Fed Balance sheet as one of our concerns.

With a potential stoppage of easy money, the prospects for growth stocks could be bleak. Most of the growth or innovation stocks run on the theory that they would be wildly profitable once they are able to scale. Moreover, it is the vision for the future and it will disrupt the whole way things are done. 

Click Here to Read More:

https://thebigfatwhale.com/feds-latest-move-demise-of-arkk-and-innovation-stocks-quick-thoughts/

Rowsley (Remisier King Midas Touch)

The Remisier King is waving his Midas touch yet again. His earlier moves have so far been disappointing. The solar story was full of promise with supposedly guaranteed profits seems to be now just a castle in the sky situation. Next was the Iskander grand plan which seems to have wind down given the huge oversupply situation.

Currently, Rowsley operations are mainly in the hospitality business in UK, their architect business through RSP and their real estate development in Vantage Bay Healthcare City.

With the recent deal of injecting Thomson Medical and TMC Life Sciences, could it be the winning touch for a sustainable uptrend in the stock?

Let's look at the numbers. Rowsley is going to purchase Mr Lim's stake of Thomson Medical and TMC Life Sciences at 1.9 billion sgd dollars. The takeover of Thomson Medical in 2010 was at a price of 513 million dollars and at a valuation of around 3.4X book value and 30x PE. TMC Life Sciences are currently trading at a PE of 66X.

In a Business Times article dated September 13th 2016, it was revealed that the revenue growth of Thomson Medical went up by almost a fold and assuming profits went up by the same rate. The current state of Thomson Medical should be worth close to 1 billion with the same valuation that Mr Lim took over considering the growth of their earnings. It seems to be a fair value as Raffles Medical is trading at 30x PE and 3.2x book value currently. Also, in the article, the CEO was saying if they were to list, they are able to get a valuation of 2 to 3 billion dollars but they are aiming for a 5 billion dollars valuation. I am not sure how did he get such a valuation unless they are intending to list at an inflated valuation and there are takers for it. 

Here is the article:

http://www.businesstimes.com.sg/companies-markets/thomson-medical-eyes-spore-listing-in-near-term-0

For TMC Life Sciences, it is trading at a PE of 66X which is even higher than IHH of 56X, so i presume Rowsley is paying a high price for this asset and Mr Lim's stake will be worth around 320 million Sgd dollars based on their current market capitalization.

Doing up the sums, a fair value for the assets could be around 1.3 billion dollars but he is injecting it in at a valuation of 1.9 billion dollars. The deal is structured by issuing 25.3 billion of Rowsley shares to Mr Lim at a price of $0.075. Given the recent decline in healthcare stocks, perhaps it was an optimal move to try to do the deal at a good valuation.

Valuation

To make things simplistic, we will assume that 1.9 billion dollars is a fair value (After my analysis, I think Rowsley overpaid thou) for the assets and assuming their current business will be trading at their book value (Around 400 million) given that it is loss making. We will have total shares of 30.5 billion excluding the warrants that will be issued with the deal. The valuation of Rowsley should be around $0.0755 (1.9 billion plus 400 million divided by 30.5 billion). Their warrants are going to be issue at exercise price of 9 cents and 12 cents for piggyback version. Currently, the price of Rowsley seems to be defying my valuation. 

As with all the Midas touches so far, the price of Rowsley have shot up tremendously and eventually came back to reality. Unless, there are further positive developments in their existing business or the profits or growth prospects of Thomson Medical are way above my estimates. My view is at best Rowsley is worth 10 to 12 cents and this valuation is consider rich.

Do take note, lots of assumptions goes into this valuation and so kindly do your own due diligence. I would term this as a trading stock at the moment and usually trading stocks do not follow fundamentals when the animal spirits are high. Do have a proper risk management in place.

Disclaimer:

The information contained in this publication is provided to you for general information only and is not intended to nor will it create/induce the creation of any binding legal relations. The information or opinions provided do not constitute investment advice, a recommendation, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person or group of persons acting on this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise.

You may wish to obtain advice from a financial adviser before making a commitment to purchase any of the investment products mentioned herein. In the event that you choose not to obtain advice from a financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest.

Any views, opinions, references or other statements or facts provided in this publication are personal views and shall disclaim any liability for damages resulting from errors and omissions contained.

Sabana Reit (On A Skyfall)

Source: NextView 

Looking at the price action of Sabana Reit, I was quite astonished by the steep fall whereby their peak was around $1.20 in 2013 and is currently trading at $0.35. It have been on a steady decline since 2013.

Part of the recent fall is due to a rights issue of 42 for 100 at $0.258 which will be used to finance the purchase of 3 new industrial properties.

Background:
Sabana Reit was listed in 2010 at an IPO price of 1.05. It plunged on opening and was trading as low as $0.75 before recovering where income generation assets became a favorite asset class in the late 2012 to 2013 period. Their sponsor and manager is the Vibrant Group which is previously Freight Links [Freight Links Express Holdings Limited (now known as “Vibrant Group Limited”) is an investment holding company established in 1986 and listed on the SGX-ST in 1995. Headquartered in Singapore, the Group has over time grown its business from that of being an integrated logistics solution provider offering a comprehensive range of integrated logistics services including international freight forwarding, chemical storage and logistics, warehousing & distribution and record management ("Freight and Logistics Business") to include the business of fund management, financial leasing services and asset and trust management services ("Financial Services Business"), and the business of property management services as well as real estate development and investment ("Real Estate Business")]

Sabana holds 23 industrial properties if all their recent acquisition and disposal across Singapore goes through and will manage them in line with Islamic principles. To be Shari’ah Compliant, the premises cannot be used for gambling or the production of pork or alcohol for human consumption.

Ratios:
Price to book: 0.53
Price Earnings Ratio: Negative (Making a loss in terms of Earnings per unit)
Dividend Yield: 10.7% (Based on last year payout)
Net Debt to Equity: 0.7
Current Ratio: 0.23
Price to free cash flow: 11
Source: Shareinvestor.com

Analysis:
Sabana Reit was having good occupancy rate of 100% since listing till around Q3 of 2013. Occupancy rate started to fall to high 80s and 90 percent level since then which affected their distribution per unit. The distribution in 2012 was 9.3 cents and the payout for 2016 was 4.7 cents. One of the reasons for the fall in distribution could be that more master leases were converted to multi tenanted leases as according to JTC ruling, master lessor have to take up 70 percent of the lettable space. Therefore, it is tough to get master leases into the portfolio. Currently the ratio is around 44% master leases and 56% multi tenanted leases. Moreover, with oversupply of industrial spaces and competition from Iskander region coupled with bleak economic conditions, it will be challenging to get tenants and rental rates are likely to revise downwards. Currently, multi tenanted leases occupancy rate is at around 82%.

Their average weighted lease for master leases is around 2.5 years and for multi tenancies is at around 2.6 years. Their average weighted tenor of their loans is at 2.1 years with average financing cost at around 4.1%. We could foresee there could be lots of refinancing needs ahead and in a rising interest rate environment and with a deteriorating industry landscape, the financing cost could see a steeper increase in the near future. The leases renewal could also be an issue given the competition and the sponsor is taking up just around 15% of the lettable space.

Their earnings per unit were negative since 2015 but they managed to generate free cash flow through sale of properties and factoring in revaluation losses which allowed them to distribute dividends. Going forward, they have to ramp up their occupancy rate to be able to maintain their distribution per unit which I feel would be a challenge and thus there could be further downside to their distribution per unit.

Conclusion:
The lack of a strong sponsor is a crucial factor for the confidence level and investment merits in Sabana Reit. Given the general outlook and oversupply situation, we might have to monitor the occupancy rate for multi tenanted leases and the refinancing rate for their debt (An indicative based on my checks, the bonds expiring in 2018 is having a yield to maturity of around 5.5%) before we might want to consider an investment in this Reit. For better alternatives in the industrial space, we could look at Ascendas Reit with assets such as Science Park which is their niche and is therefore relatively more resilient. Also, we can look at Frasers Logistics Trust with assets based in Australia that could see a potential good upside if the commodities recovery is intact.

Disclaimer:
The information contained in this publication is provided to you for general information only and is not intended to nor will it create/induce the creation of any binding legal relations. The information or opinions provided do not constitute investment advice, a recommendation, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person or group of persons acting on this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise.

You may wish to obtain advice from a financial adviser before making a commitment to purchase any of the investment products mentioned herein. In the event that you choose not to obtain advice from a financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest.

Any views, opinions, references or other statements or facts provided in this publication are personal views and shall disclaim any liability for damages resulting from errors and omissions contained.

Is Deutsche Bank Heading The Path Of Lehman?

With the recent Deutsche Bank upheaval which could be a reminiscent of the Lehman crisis. Have decided to read up more and here are some of my findings.

Let’s take a look at some statistics first:

Price- 13.5 USD

DB market Cap- 18.5 billion USD

Potential Fine from DOJ- 14 billion (Fine for their part in selling toxic mortgage backed securities during Lehman’s time)

Derivatives Exposure: 42 trillion

Price to Book: 0.25

Latest Year End Loss: 6.8 billion Euros

Debt to Equity: 2.8

The current worries of the market are mainly due to the fine and also huge derivatives exposure as it beats the exposure Lehman (85 billion) had heads down. There have been talk that the fine could be negotiated down and a rumored amount of 5.4 billion was spreading through the grapevine and this caused a positive surge for DB shares.

Let's first look at the DOJ fine, which I believe could be negotiated to the extent; whereby progressive payment is doable. It would also not be DOJ's best interests to force DB to insolvency,

As for the derivatives exposures, though it looks huge and simply mind blowing. However, these may be hedged positions (a buy position will have a sell leg and this is to allow trading of the spread differentials of a nearer month to a further month). Their interest rate derivatives took up 70 percent of their exposure. My guess will be they could be executing trading strategies that are similar to Long Term Capital Management Fund ("LTCM"). LTCM was really successful at the start but things began to go hey-wire when they try to go into areas that are not their forte to drive positive returns.

Looking at the net exposure which they will take the long positions and minus the short positions and after further netting the positive and negative figures; we actually have a positive net market value of around 18 billion. In other words, if I interpret correctly, their derivatives exposure are actually netting a gain as of Dec 31 2015 annual report. However as most are OTC contracts, therefore we have to take the valuation with caution too. 

https://annualreport.deutsche-bank.com/2015/ar/risk-report/risk-and-capital-performance/credit-risk-exposure/credit-exposure-from-derivatives.html

My personal opinion - The real issue with Deutsche Bank is actually profitability whereby they lost a whopping 6.8 billion Euros in 2015 due to impairments, increase in administration charges and litigation charges.

Given the current situation whereby hedge funds are withdrawing funds and even their asset management business is likely to see an outflow of funds; along with the current stagnant economic conditions, their investment banking business should not be the black knight to the rescue. The odds of a quick rebound could be unlikely.

For the path of recovery, confidence is paramount to the banking business. They may need some form of assurance from the German government to the investment community of their commitment to aid the bank if need be in order to stabilize the ship (Something like MAS's stance during the Global Financial Crisis). If not a bank run could be on the cards as they have close to 500 billion worth of deposits. There may also likely to be another round of fund raising to beef up their capital requirements.

In summary, a collapse of Deutsche Bank in the footsteps of Lehman is a low probability event. Given that Lehman's books are toxic derivatives backed by junk mortgages, the derivatives exposure of Deustche Bank should be much safer (If the valuation of their OTC contracts can be trusted) especially after we look at their net positions. However, the road to recovery is still some way ahead and it could still be the lingering negative catalyst in the near future for the global markets given the scale and reach of the largest European Bank in the world.

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Sinopipe AGM and Experience with S Chips

I have recently went to the AGM of Sinopipe at Lion Industrial Building which is around Paya Lebar area. This counter is one of my "tuition fees" in the equity markets as like many other S-Chips, it is still suspended but at least they do come up with an AGM which I hope it would be a positive signal that it would not be a total write off. The other heavy "tuition fees" in my investment journey is the previous China Enersave which is now called YHM. With the huge dilution from the issue of new shares, it as good as a total write off. You could by now realise that my heavy "tuition fees" are both S Chips (China Enersave is not really a S-Chip but their business are in China) and not surprisingly, I have totally given up hope on this sector. 

Just some background of what led to this investment,  it is in the pipe making business and with China's urbanisation and infrastructure needs, it seems to be a viable good growth industry to be operating. Moreover, their Price Earnings Ratio was just around 5 and with Net Asset Value of 50 cents. So getting it at around 20 plus cents seems like a good proposition with a margin of safety. Furthermore, one of my clients did mention to me that he is using Sinopipe products in Singapore and find the quality is not too bad.

For those who can recall, the S Chips sector was a value investor's paradise, with counters such as China Hongxin trading at below their cash holdings and many meeting Benjamin Graham stringent requirement of having their current asset more than their total liabilities. Also, many have fallen from their lofty highs of 2 dollars plus to their current price level of below 20 cents. During that period, I was also vested in counters such as China Farm and China Paper which I managed to get out in time with profits on hand. 

However, I failed to take into account or did not placed huge emphasis on corporate governance and think this is a situation of at least a "one bagger" opportunity. For Sinopipe, it has given out generous dividend which give me more confidence of the management and their corporate governance structure. It was around 10 percent or 2 cents per share. I was thinking this could be the "Special One" and even the CEO was saying that we should not "Taint all Ships with a Brush". Thinking back, what a Classic!

So my lesson from this is that unless there are really solid institutional investors backing such as GIC or Temasek (China Minzhong), we should avoid S chips as those Top Notch China Companies would try to list in Hong Kong first.

Back to the AGM, the room it was held was sort of a training room. There were around 10 shareholders who attended. As my shares are brought using CPF and am not entitled to attend, so I got a proxy from another investor, Sadly, they did not received the proxy form and so I ended up as an observer and was unable to ask any questions.

I can feel the tension in the air as the shareholders started questioning the directors about the accounting irregularities and the status of their previous CEO who was the cause of the current predicament. Surprisingly, he was still under the director list but as expected, he was not present for the AGM,

I am really stunned that this previous CEO, Chen Lihui, is still conducting business and making deals with his newly formed company. Don't they have laws in china to bring such errant executives to task?

Currently, their new CEO, Dr Pu Weidong, is also one of the biggest shareholder through his investment holding company (Triumpus Capital). So I guess he is trying his very best not to let this investment be a total write off for himself. Their current chairman, Wang Sen, is just 38 years of age which the other directors highlighted that he has the right connections to get things done in China. When i try to google about the companies he is involved in, I don't seem to find anything hmmmm.

With the restated accounts after taking into consideration of the account irregularities, they are making losses for 2010 and heavier losses in  2011. The audited 2012 results will be out by October 2013. Current NAV stands at around 0.12 Sgd from the previous 0.5 Sgd. Ouch!

For those who are interested in the numbers, you can check out their annual reports and learn a lesson or two from "creative accounting": http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/annual_financial

The current directors plan is to stabilise the ship which should take at least a year and once things are back to normal, they will re-list the company. I certainly hope they are able to do so but chances are slim till I could see they are starting to turn in profits.

I would also like to highlight that that they have actually proposed an  increase in director fees by almost one fold from 100k plus to 200k plus giving the reasons that there are more directors and the transition phase is tedious and time consuming for the directors. Really BS! 

Nonetheless, I wish Dr Pu and his team all the best in turning over this company.

Lee