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Friday, September 7, 2018

A Technical View of The Singapore Straits Times Index (STI) - 07 September 2018

  Technical Analysis of The Straits Times Index (STI) 
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STI had formed a major top with neckline of the Head & Shoulder (H&S) at around 3200 broken on this weekly close. If the breakdown can be sustained, the measured target is around 2750 area, with next major support at around 2950.

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STI peaked at end April – early May 2018 which coincided with the net out-flow of Institutional Funds for a cumulative amount of S$2.1 billion from May to August 2018. Such selling of Institutional Investors had already been observed in the previous posting Who Had Been Buying and Selling the Shares of Singapore Banks? As the financial sector has a heavy weightage on STI, it is not surprising that STI had been dragged down with the exiting of the Big Boys.

To negate the bearish H&S formation, STI first must rally above 3200, possibly consolidate, and then make another new high.

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This is not a buy or sell recommendation. Please do your own due diligence before making any investment decision. Read Disclaimer

Friday, August 24, 2018

Which China bank to invest, ABC, BOC, CCB or ICBC?

According to Business Insider Singapore in May 2018, there are 28 banks in the world with $1 trillion of asset each. Of that, China is home to the four largest in the world by asset ranked in the following order:
1.       Industrial & Commercial Bank of China (ICBC)- $4.0 trillion (SHA: 601398, HKG: 1398, US: IDCBY)

2.       China Construction Bank (CCB) - $3.4 trillion (SHA: 601939, HKG: 0939, US: CICHY)

3.       Agricultural bank of China (ABC) - $3.24 trillion (SHA: 601288, HKG: 1288, US: ACGBY)

4.       Bank of China (BOC) - $2.99 trillion (SHA: 601988, HKG: 3988, US: BACHY)

Collectively known as Big Four banks in China, their A-shares and H-shares dual-listed in China and Hong Kong stock markets and ADR shares are available for trading in US market too. These bank stocks had a good run since bottoming in early 2016, clocking gains of between 80% to 120% from their lows. After peaking in Jan 2018, their share prices have correct almost 20%. With low Price-earnings ratios and high dividend yields currently, are they good bargains to buy now?

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Based on the price as of 22 Aug 2018, the valuation matrices based on Price-earnings ratios (P/E), Price-book ratios (P/B) and dividend yields are as follow:
(Based on H-share prices)

Comparing Valuations based on P/E against dividend yield:

At a glance, it appears that BOC is the cheapest (lowest PE, highest dividend yield) among the four followed by ABC while ICBC and CCB are trading at very close valuations.

Before deciding on which bank is the best bargain right away, the analysis might be useful to compare the banks in terms of profitability, asset quality and capital adequacy based on their 2017 annual results.

Comparison of Profitability

Based on the above profit indicators, ICBC and CCB scored the best. Although ABC was the best in terms of NIM (i.e. difference between Interest Income and Interest Expense over Total value of Loans and Securities), it also had the highest cost-to-income ratio (expenses incurred to earn that income) and lowest return on total assets. However, ABC managed to earn relatively higher Return on Equity (ROE), probably due to the lower common equity employed which could be seen from the section on Capital Adequacy. Of the four, BOC had the lowest ROE.

Comparison of Asset Quality

A non-performing loan (NPL) is defined as a loan that is in default or close to being in default. High NPL ratio may indicate that greater portion of loans were made to poor credit quality borrowers. Allowance to NPL is the amount provision made divided by the amount of NPL. A higher Allowance to NPL indicates a bigger buffer and hence ability to absorb any sudden increase in the NPL without immediate impact on the future profits.

From the table above, it can be seen that ABC had the highest NPL ratio and was the most aggressive in terms of making provision for the potential impairment losses on loans and CCB seems to be in the middle of the extremes.

 Comparison of Capital Adequacy

According to Investopedia, the Capital Adequacy Ratio (CAR) is a measure of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. Tier one capital is the capital that is permanently and easily available to cushion losses suffered by a bank without it being required to stop operating.

As tabulated, CCB and ICBC had the highest capital adequacy ratios. While ABC had the lowest ratios, it may be useful to note that BASEL III international regulatory framework only requires 8.5, 9.5 and 11.5 for the above ratios (source DBS Research) and all the four banks were well in excess of the minimum requirements.

 What does the market think of the valuations?

From the P/B and ROE chart above, it can be deduced that the market is currently pricing the four PRC banks based on profitability, quality of assets and adequacy of capital with CCB having the highest valuation awarded, followed by ICBC, ABC and BOC in that order.
Would you pick the cheapest bank to invest or pay a higher price for better quality?

Due to lingering fears of hidden bad loans, China banks have persistently traded at low PEs and below its book values over the past few years despite providing relatively high dividend yield.
Other articles on Banks:
Who Had Been Buying and Selling the Shares of Singapore Banks?

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This is not a buy or sell recommendation. Please do your own due diligence before making any investment decision. Read Disclaimer

Saturday, August 11, 2018

Who Had Been Buying and Selling the Shares of Singapore Banks?

Since bottoming around January – February 2016, the share prices of DBS, UOB and OCBC listed in Singapore Stock Exchange had gained 100% - 150% from trough-to-peak in April 2018.

Chart 1
An analysis of the monthly institutional fund flow into the Singapore Financial sector, which comprises of major banks and financial companies, may shed some lights into their share price movements. Institutional fund inflow would mean net buying by such as endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies and institutional fund outflow would mean aggregate selling by them.
Chart 2

As seen from the chart 2, there was a huge net inflow of S$1 bil from the institutional investors in the month of Nov 16 and since then to Apr 18, there had not been any period of significant outflow of > S$300 mil nor continuous outflow for more than consecutive two months. The three-months moving average of net fund flow had also stayed above the zero line during this period.

Chart 3
These fund inflows from the Institutional Investors aka the Big Boys, had been accompanied by an almost continuous rally in ST Financial Index since Nov 16.

If the Big Boys (“BBs”) had been the buyers during those period, then who had been selling to them?

Chart 4
However, the net institutional inflow was interrupted in May 18 and had recorded a consecutive three months of S$710 mil outflow as well as a correction of more than 10% of the FTSE ST Financial Index. 

So has the rally in the Financial sector ended or it is just a temporary profit taking by the BBs? Is this the opportunity for the retail investors to buy it cheap from the Big Boys or they should clear out of the way of the BBs?

According to a report by Channel NewsAsia,

“Over the past week, OCBC and UOB announced second-quarter net profit results that beat market estimates, while DBS posted a weaker-than-expected net profit gain for the same period as the impact of business volume growth was moderated by lower trading income.

Even as all three banks flagged concerns about a slower home loan market following the recent property cooling measures, analysts remained positive. “

If the analysts are correct, would BBs stop the selling and flow back into the banks? It would be interesting to watch the tracks of the BBs in the coming months.

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Saturday, March 24, 2018

TA Investment Portfolio For February 2018

Read about TA Investment Portfolio HERE

February had been a month marked with market volatility. While volatility provides ample trade opportunities for short-term traders, a buy-and-hold investor would need a big stomach for those wild price swings.

With the basic principle of protecting the capital and keeping the losses small, stops were set in this TA portfolio and many positions were exited during the month. The fortunate thing was most positions had been triggered to close at profits. 

Closed Positions

Open Positions

While waiting for the dust to settle and the market direction to be clearer, no new position has been initiated in February.

As of 2nd Mar 18 (weekly close), this portfolio recorded a realized profits of $5.6K since its initiation and only 3 positions brought forward from January "survived" the volatility "attacks". The portfolio recorded a cumulative gain of 6.5% compared to 2% gain for the MSCI World Index.          

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S&P 500 had initially broken upwards of the symmetrical triangle but then, the move failed and it had closed on 23 Mar 18 near the 200MA. At this level, it would be interesting to watch the resolve of the market participants for the next few weeks.

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Saturday, February 24, 2018

Stock Sniper's Portfolio For January 2018


Read about Stock Sniper's Portfolio HERE

The opening month of 2018 saw quite a bit of activities in this portfolio, with two new stocks added, increased exposure in one current holding and partial profit taking in another. 
Higher cash amount had been deployed and the cash position fell to below 40% of total portfolio.
Transactions done in Jan 18:

1. CapitaLand Limited
Initiated new position.
CapitaLand Limited is one of the Asia's largest real estate companies based in Singapore. Quick analysis of the company can be found HERE.
With the expected pick up in the economies around Asia, property sector may be one of the beneficiaries. Singapore private property market which has been subject to Government's cooling measures has also shown signs of improving sentiments. While China residential property market has also been under Government's control measures, share prices of property stocks have rallied strongly recently on sales optimism and expectation on relaxation of cooling measures.

CapitaLand, having strong presence in both markets (83% of total assets), has been trading near multi-year low valuation in terms of PE and Price over book value. Moreover, CapitaLand has been growing its recurring income from investment properties (85% of total assets are contributing to recurring income as at Sept 17) and have recently increased its dividend payout which appears to be sustainable.

With improving outlook and sentiment, CapitaLand could trade closer its historical mean of 1 to 1.1x its book value which is currently at $4.29 as at Sep 17, i.e. fair value of $4.29 to $4.70. 

At the purchased price, dividend yield of 2.7% is pretty decent.

1. Property business, especially residential property development can be quite cyclical, subject to the health of the economy as well as Government's policies.
2. Rising interest rates might increase the financial burdens of property companies with high gearings, adversely affect capitalization rates used for property valuations and dampen buyers' appetite for properties.
2. Hongkong Land Limited

Initiated new position.

Founded in 1889, Hongkong Land is a listed leading property investment, management and development group.  The Group owns and manages almost 800,000 sq. m. of prime office and luxury retail property in key Asian cities, principally in Hong Kong and Singapore.
Its Hong Kong Central portfolio represents some 450,000 sq. m. of prime property. It has a further 165,000 sq. m. of prime office space in Singapore mainly held through joint ventures, and a 50% interest in a leading office complex in Central Jakarta. The Group also has a number of high quality residential and mixed-use projects under development in cities across Greater China and Southeast Asia, including a luxury retail centre at Wangfujing in Beijing. In Singapore, its subsidiary, MCL Land, is a well-established residential developer. Majority of its assets are investment properties producing recurring income.

The investment thesis for Hongkong Land is almost the same as CapitaLand, at current price, HK Land is trading at huge discount to its book value of more than 50%, dividend yield of about 2.7%. 

Based on its half year announcement, Hongkong Land is expecting a "solid" full year performance.

3. Fufeng Group 

Increased position.

The share price had experienced quite a bit of volatility at the beginning of Jan, which may be due to the raise in corn prices in China since last quarter. There were reports that the China state grains stockpiler had started to sell corns from its stockpiles to meet demands and also China imports from USA and Ukraine, and this could moderate the price increase.

As corn is the major cost component in Fufeng's business, it is worthwhile to keep a close tab on its market outlook.

3. Hopefluent 
Taken partial profits.

In late Jan, Hopefluent announced a Framework agreement with another large SSE listed property co, Poly Real Estate Group (RMB201B mrk cap) with both companies transferring their the primary & secondary real estate agency business to a new JV. Under the Framework, Hopefluent shall hold 55 - 65% of the JV and Hopefluent shall issue 5% new shares to this partner at HK$4.20 to strengthen the cooperation. This agreement is still subject to the completion of due diligence expected by May 18.

My initial thoughts
1. There is potentially more primary business from new property launches from this big property developer
2. Removed direct competition in the primary and secondary real estate agencies with Poly Real Estate Group upon completion of the deal
3. Hopefluent will be flooded with even more cash from this new share issuance!

The market got excited on this news in the next trading day and the share price jumped more than 12% to as high as HK$4.60 before closing at HK$4.16.

While the ex-cash valuation of Hopefluent at current price is still not demanding, the exposure to property sector in this portfolio has increased substantially after adding CapitaLand and Hongkong Land and I deemed an adjustment was necessary. Therefore, I took the opportunity of share price spike to realize some profits on this investment made in Aug-Sep 17, netting an average gain of more 30% (or than more than 60% gain on an annualized basis), not counting the dividend received.
(Refer to previous postings on this company HERE)
News Review for the rest of Portfolio companies during the month:


Readers might recall that I had written about Goldpac being hit by exchange losses due to  currency translation of its huge USD balance as RMB strengthened against USD during the half year period end Jun 2017.

In the previous financial year, it was reported that approximately 49% of Goldpac's huge cash hoards were in USD & HKD.

If its currency exposure remained the same without hedging done, with continue weakening of USD (note that HKD is also pegged to the USD) since Jun 17, it should not be a surprise that Goldpac would suffer greater exchange losses in the 2nd half period as USD continued to weaken against CNY

In Jan 18, Goldpac was honored with "Best Value TMT Company” for Golden HK Stock Award, 2017.
(Refer to previous postings on this company HERE)

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Launch of Stock Sniper's Model Investment Portfolio

Please read the disclaimer before you proceed with the rest of the article. This portfolio is a mock-up model to test the investment thes...

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