Thursday, September 11, 2014

The Crash Preparation 3 Step Check List

In 2000 we had the dot com bubble and in 2007 we had the global financial crisis, since then the market has been breaking new highs. The bull may continue and I do not have the ability to predict when a major crash may come again, but what we as serious investors can do is to be fully prepared for it. The following are the 3 key questions that you need to ask yourself.

1) How much % of Cash are you holding?

If you had been holding 50-100% cash over the last few years, then I'm gonna boo at you for being a scared loser. And there's still nothing much you can do now but wait. The worst thing you can ever do is to go all in right at the top and watch it sink.

If you are fully vested in equities and/or bonds then here's where I think you might wanna take some profits and put 10-20% into cash. Currently 1 year fixed deposits are paying over 1% interest so its really not that bad. If a major correction comes, this opportunity fund would be very handy.

If you're anywhere in between the middle, just sit back and collect your dividends/interest. You really don't wanna be putting money into stocks that are selling at 20 times earnings nor bonds that are selling at 5-10% above par value.

2) Are you holding on to any heavily Geared companies?

SGX listed companies currently have an average gearing of about 30%, which as a whole is still fine.
I think that holding any business with a debt to asset of over 50% would be a red flag. Let me show you an example of a company with 50% debt to asset

Net asset value of $1 per share
Debt of $0.50 per share
Shareholder equity would be Asset minus Debt = $0.50

If the market crashes and the assets lose half the value, what's your shareholder equity balance?
A big big ZERO! ($0.50-$0.50=$0)

Certain highly geared industries that I really prefer not to be in would be like Properties, Commodities, Shipping etc

3) If all stocks fall by 50% which companies would you be buying?

A very common mistake investors have is that they have a watch list of stocks that they say to themselves "if the market crashes I will buy them, they are currently just too expensive"

But when the market really corrects itself, wouldn't all your current holdings be selling cheap too? Wouldn't it make more sense to purchase the same great company that you had faithfully believed in and paid full price but is now selling for half price?

I think its bests to have in mind of which are the top few stocks that you currently hold and could confidently double down if a fire sale really comes.

He Who Fails To Plan, Plans To Fail

Felix Leong

Wednesday, September 10, 2014

3 New Changes to Challenger Techonologies

In 2012 Challenger Technologies named Tan Huat Ben as COO (Chief Operating Officer, he was previously from Microsoft and was responsible for over 500 million of revenues from its Asia Pacific region, managing 4 business units over 9 countries.

From my view Mr Loo is getting old and this new guy seem likely to be his handpicked successor.
(If not why would he leave a senior management position in a blue chip US company for?)

Since then over the last 2 years I observed that Challenger has gone through 3 major changes

1) Expansion

In the past Challenger was very conservative when it came to opening of new stores, it was like only 1-2 new stores per year with a slow and steady northward expansion into Malaysia.

Over the last 2 years, we have seen very aggressive expansions of 3-5 new stores per year and the decisive closing of the 3 Msia outlets to focus purely in the SG market instead.

I like the pure SG play, as I think its a big enough market for the company to profit from.
(Take a look at Starhub and M1, they are pure SG plays too and have grown so big)

2) Cash

There's no doubt that Challenger is a cash cow and Mr Loo had a long habit of hoarding cash, resulting to close to 1/3 of its market cap being cold hard cash! However this is not productive.

Things has since changed as the company started making the cash work harder by purchasing corporate bonds and also establishing of a new dividend policy to pay out at least 50% of earnings as dividends.

As a shareholder I would really like to collect more dividends as long as the company remains in net cash position.

3) House Brand

Basically what they are trying to do is push up profit margins by introducing they own house brands. This is very similar to what the local super markets like NTUC and Sheng Shiong has done.

Normally it will take a few years before we can have a good picture of whether its house brand is successful or not. Achieving economies of scale is important and I think this new area could impact 10-20% of total revenues (the impact could be negative or positive depending if it succeeds or fails)

Looking at their new line of products I do not think that it caters well to young professionals, as they usually shop online and are able to get the same product at a much lower price. However students and uncles/aunties would be the core customers.


As a retailer, you can't always stay the same. The saying goes "Change or Die!"

Looking at Harvey Norman(Under Pertama) and CourtsAsia, their results too for 2014 had been very poor as competition in this industry continues to intensify. In the end only the fittest will survive!

Felix Leong

Wednesday, August 27, 2014

S&P 500 Hits 2000 - Be Fearful When Others Are Greedy!

An amazing 5 year bull run it has been! The S&P 500 gained 94% over this period to reach a new record high of 2000 points! It currently trades at around 19 times earnings, which way above its historical average of 15 times earnings.

Investors that had parked mostly in cash over these few years could only watch in envy as the market climbed higher and higher. Even some of these investors have started to lose their patients and instead follow the crowd by jumping on board too, but do keep in mind that by paying 19 times earnings, not only does one not have any margin of safety, one is greatly at risk of capital loss!

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1." - Warren Buffett

Back home the STI has only gained a disappointing 25% over the last 5 years. The STI seems "stuck" around the 3300 level and it might be years before it ever touches its previously high of 3800 again.

Valuation wise, our index is only trading at 14 times earnings with a decent dividend yield of 2.6%. Which I feel is neither expensive nor cheap, but fairly priced already. I would not be interested in buying the index as whole due to the lack of margin of safety, but some individual blue chips could be still attractive.

When taking a overview of the index components I like to use a sortable table, please feel free to use the link below

You can also look at mid cap stocks at this link

which is pretty useful, as I usually like to sort by PE and dividend yield

Currently O&G and Banks trade at lower valuations, Keppel/Semb Corp (PE ~11) OCBC/DBS/UOB (PE ~12), which I find still attractive for the long term.

Other Blue Chips that I really like but are trading at way too high valuations are
SIA Engineering (PE 19)
Comfort Delgro (PE 20)
ST Engineering (PE 20)
Genting (PE 21)
SGX (PE 24)

The market may continue roaring higher or a crash may come soon, you never know. But when one is tested by the market, do make sure you are holding high quality businesses and not penny stocks nor heavily geared cyclicals (commodities, property, shipping etc)

Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.  - Warren Buffett

Signing Off
Felix Leong aka pipi486

Sunday, August 17, 2014

Arbitrage Play - OCBC Rights Issue 1 for 8 @ $7.65


1 Rights for every 8 existing shares
Exercise price $7.65 to convert each rights into shares
Ex Rights date: 25th Aug

Rights trading period: 1st to 9th sept


Ocbc is up close to 7% over the last 6 months, so its management took this rally as an opportunity to quickly do its much awaited rights issue following its acquisition of wing hang bank. Previously that was much fears of capital rising and dilution that resulted in OCBC trading as low as $9.05 over the past 1 year, however with the dust settled investors seems to be taking it well with the stock price holding well above the $10 level.

Trading Strategy 

The rights could be traded in the open market  from 1st to 9th sept. The theoretical ex-rights price would be $9.92 meaning there could be opportunity for arbitrage if one can complete below this price.

Post rights, I estimate OCBC to make around 90 cents per share for the full year. A theoretical price of $9.92 would mean OCBC will be trading at close to 11 times earnings post rights. I would demand some margin of safety, thus I would be interested at paying say 10 times earnings or less. In that case I would like to pay something like $9.00 for the new shares.

So if we take $9.00 minus the rights exercise price of $7.65, we get $1.35
I would be on a look out when the rights start trading on 1st sept, if it opens below $1.50 or so I would definitely be glad to scoop more up to increase my position in OCBC.

Theoretically the rights should trade around $2.30, but if there is negative market news or that investors are cash tight and unable to deploy their cash for this deal or technical difficulties such as those who bought OCBC using CPF investment funds but currently do not have extra funds to pick up the rights etc, these factors could result to a lower trading price of the rights in open market.

As such case this would present a great opportunity for those who are cash rich.
Lastly if the market instead overvalues the rights at say $2.50-$3.00, I would gladly sell off my rights.


Felix Leong

"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially."

~ Warren Buffett

Friday, August 8, 2014

Lesson on Margin of Safety - Challenger 1H Earnings Down 27%

First half earnings took a big dip as Challenger completely exits its Malaysia operations. It previously had 3 stores in Msia and has failed to execute its growth strategy.

The stock is down 15% this year, from a high of around 60 cents to 49 cents now. On the bright side is that dividends had been maintained.

I expected Challenger to make about 3.8 to 4 cents for the full year while maintaining full year dividends at around 2.5 cents. At 12-13 times earnings with a dividend yield of 5% and net cash position, Challenger is probably fairly priced already.

Given Challenger's failure to expand into Malaysia, I think the days of Challenger growing its earnings by 10-20% is over! I guess its more likely for future earnings to be pretty stagnant around 4 cents and probably they would consider a higher payout ratio, anything 60-80% would be fine. In short its no longer a growth stock but its Singapore business is still a cash cow and the dividend yield would be my focus instead. Anything 6-8% would be attractive for me.

One important lesson I have learned here is margin of safety when buying growth stocks! The big fall in earnings was a big disaster, but I was fortunate that I paid only 5 to 10 times earnings for my purchases. So even with this big fall, I'm still very comfortable sitting back and collecting the dividends.

When I look at the valuations of other growth stocks like Super, Osim & Sheng Shiong. These are really great companies and investors are expecting 20% growth rates, however they trade at very high valuations of about 20 times earnings or more. By paying so much, these investors have no margin safety!

What happens if earnings come flat, or even worse... a decline in earnings? Surely the market will cease to price it at 20 times earnings and it could come down to 15 times or even worse 10-12 times earnings! So no matter how confident you are about a company's growth prospect, its normally not wise to pay 20 time earnings for a 20% grower, unless you are 100% sure.

What I am 100% sure is that among Super, Osim and Sheng Shiong is that not all of them will grow constantly at 20% year after year, sometimes there's bound to be setbacks.

If I had to define my investing philosophy in only 3 words, it would definitely be

Margin of Safety

Felix Leong