CHU China Unicom --> Observe / 23% discount

China telco with low debt/equity relative to typical telco.
Free cash flow generation is good with low dividend payout ratio indicating future potential for higher dividend payout.
Share price is beaten till its multi-year lows.
CAPEX to invest on mobile network and other necessary infrastructure is largely financed from FCF instead of debt indicating prudent management and sustainability.
2018 finance income is larger than interest cost. If dont consider finance income, the interest coverage on net profit basis is 6x, 50x on OP Cash basis and 25x on FCF basis. This indicates business has little liquidity risk as it can largely finance its debt.
Long term bank loan is 3B RMB and short term bank loan is 15B RMB + corporate bond of 16B RMB versus cash balance of 30B RMB.  The bonds will expire in 2019. There are some liquidity strain if company cannot find cash to pay off the bonds.

Annual dividend payout is 4.1B indicates very low payout ratio at current yield of <2%. Room for future increase is high.

Company actively paydown debt leading to lower debt.equity ratio and lower finance cost with better interest coverage ratio.

Free cash flow is 40B per year vs short term loan of 15B. In terms ability to repay debt, the company is in good shape, they can repay debt easily even after paying the dividends.

Currently is undervalued by not deep enough. Wait until beyond 30%. discount.

Dairy Farm Review

20% correction from 52 week of ~$US 9.2 to ~$US 7.5. The all time high is $S9.75.

Weak SEA hypermart and supermart business (Mainly Giant) is suffering and not performing well compared to the other business. Groceries comprises of highest percentage of sales but deliver the lowest profit margin compared to its Beauty & Care, Convenience store, Home furnishing and Restaurant business which average a margin of 7-10% compare to groceries of ~1-3%.
While there are growth in almost all sectors except for the groceries business, Beauty & Care register the faster growth and contribute to 50% of profit despite sales contribution of 10-20%.
Company has installed a new CEO with a new transformation plan with 5 key initiatives that is focus on China expansion, maintain HK business, Strengthen and revitalize SEA business and better adoption of digital technology. Company acknowledge that they have been slow on adopting digital technology and install a CTO and CIO to address this issue. Goodwill impairment has been done on the SEA food business to give it a fresh start.

Going forward, expect more CAPEX on digital technology investment. Profitability and cash flow maybe reduced. Current payout ratio is still low dividend of 21 cents vs underlying EPS of 31cents.
Company has been prudent in dividend payout.
Currently in net debt position due to investment in Chinese business Yonghui which is growing well.
Current borrowing is 1B vs long term borrowing of 14.5MM and cash of 300MM. Company need to ensure liquidity availability to refinance its current debt of 1B. This appears to be always the case to maintain current debt level high vs long term debt. Company should have some liquidity arrrangement with their bankers based on certain caveats of interest coverage and debt/equity ratio which is still appearing to be fairly reasonable where debt/equity < 1 and interest coverage is >10x on net proft basis and 15x on operating cash flow basis (interest expense is ~$40MM)

Operating cash flow is 600M vs  dividend of 284M. Payout ratio is less than 50%. CAPEX investrment is ~ 220M per year. In that sense, the cash flow can sustain cAPEX and dividend payout and paydown of long term debt if any. The current revolving credit of 1B  appears to be working capital financing.

Detail analysis to be performed to look into its historical valuation trend and current valuation metrics in next posting.

Analysis indicated fair value range of $US 6.6-10 versus current price of $7.1 (07th Aug 19). There is no steep discount to make this a compelling investment case. We will wait for more price correction before entry price of $6 which is near its 2014 lows.

2019-08-21: Historical fair value margin is 16% versus current margin of  13%. Price is not discounted enough. Further correction required.

Sarine Technology Updates

This is a painful one. we initiated BUY at roughly ~$1 after evaluating that it is undervalued compared to historical valuation and price. Indeed, our hypothesis was validated initially within 6 months when the share price rise ~30%. Never did we imagine the market change their view point so fast with the on-going china trade war and the competition with man-made diamonds etc, that the share price keep tanking. We keep holding the position, thinking it is temporary but the market keep hitting us back. As of today, the share price is $0.3, a 70% drop from our buy price! Indeed, this is a tasting of our patience and conviction towards of strategy.
As of 1Q 2019, the balance sheet is still very sound with no debt and cash in place. The losses make so far are NON-cash in nature comprising of depreciation and amortization. If dividend is not cut, the yield is very attractive at > 10%. However if current loss making trend continues, we believe at some point, the dividend will be cut when cash flow generation is not sustainable.
We will closely monitor and wait.

We reiterate, this is a painful waiting process...

Investing philosophy: Understand where we are at the market cycle

Recently heard a podcast interviewing Oaktree capital investment chief Howard Marks who wrote a book about market cycle. It is important to know where we stand at current market. The easy money has been made in 2009. Currently we are near end of cycle where making money is tougher with rich valuation at various market. Upside is minimal and downside is plenty. Expected forward returns will be lower than historical average. It is important to manage risk at this point. Opportunity cost is market continue to rise but downside risk is protected and allow us to stay in the game should the market corrected in near or distant future.

Also value investing is suffering a Long run of underperformance compared to growth investing. It maybe demoralizing to see your strategy not performing, but it is important to maintain a consistent strategy and not flip to another strategy that chase the return. A System will not work in all market cycle. Key is to trust ur system that is backed by proven results.

Lippo Group Impact on First Reit and Lippomall trust

Both REITs price correction due to parent company lippo group financial issues. Since then lippo group has began initiatives to shore up the group balance sheets. First reit tenants which are laretely lippo owned hospitals should not have issues paying the rental going forward. The rating agencies also upgrade the ratings with the plan in place. First reit and Lippomall trust price have corrected a lot and are not rising compared to the rest of the S REITs which have their yields compressed. Indicating a potential entry opportunity at current larger yields. Take note of upcoming quarterly performance to check for further developments.

SG Stock Actions 2019-07-17: Selling for Risk Management

With recent US markets going all time high, the risk for overvaluation and future low returns is increasing. Although SG market has not reach all-time high, if the US market corrects leading to a world wide market correction, SG cannot escape. Moreover, the REITs has increased sharply ~15-20% this year while the underlying business does not change much; ie income does not increase proportionally. We believe this is an increase in market multiplier and yield compression rather then improvement in business fundamental. 

Although some of the holdings are still in RED, it has rise from its LOWs along with the general market REIT's rise. Some of the holdings are seeing good profits after holding for a couple of years.

The capital gains realised is equivalent to 3-6 years of dividends. We believe we can buy back these companies at a lower valuation subsequently when the market corrects.

The opportunity cost is lost of dividends and potential price appreciation should this hypothesis of a potential future market correction fails to materialize. However, if the hypothesis is true, we will be spared from the potential 15-30% market correction.

Cash gives you a piece of mind and flexibility to buy the market at discount.