Portfolio Summary for March 2022

As of 31 March 2022

CDP

Security	# shares	Price S$	%
DBS	300	35.83	4.44
OCBC Bank	700	12.38	3.58
SGX	1,200	9.97	4.95
SATS	3,900	4.34	7.00
ST Engineering	4,100	4.12	6.98
Micro-Mechanics	1,300	3.20	1.72
Powermatic Data	5,000	2.99	6.18
Singtel	6,100	2.64	6.66
TheHourGlass	5,000	2.33	4.82
Sheng Siong	13,000	1.52	8.17
ComfortDelGro	11,200	1.49	6.90
Genting Singapore	11,700	0.815	3.94
HRnetGroup	21,900	0.77	6.97
HC Surgical	35,500	0.49	7.19
China Sunsine	41,800	0.465	8.04
Kimly	27,000	0.395	4.41
Silverlake Axis	60,800	0.32	8.04

Portfolio Market Value = $241,861

Trade Actions
- Sold 10,400 shares of The Hour Glass.
- Sold 2,700 shares of ST Engineering.
- Sold 2,700 shares of CapitaLand Investment Management.
- Sold 3,400 shares of CapitaLand Integrated Comm. Trust.

SRS

Security	# shares	Price S$	%
OCBC Bank	900	12.38	11.41
SGX	1,300	9.97	13.27
SATS	2,200	4.34	9.78
ST Engineering	3,000	4.12	12.65
Singtel	2,000	2.64	5.41
Sheng Siong	8,700	1.52	13.54
ComfortDelGro	6,900	1.49	10.53
HC Surgical	19,500	0.49	9.78
China Sunsine	10,800	0.465	5.14
TalkMed Group	3,700	0.40	1.52
Silverlake Axis	21,300	0.32	6.98

Portfolio Market Value = $97,669

Trade Actions
- Bought 3,700 shares of TalkMed Group.

Commentary:

Even while the Russia-Ukraine war is ongoing and economists are worried about "stagflation", there is a positive vibe in the air. That is because the government has relaxed its COVID-19 safe management measures.

Overseas visitors will no longer need to be quarantined or tested on arrival. F&B outlets can serve up to 10 fully vaccinated patrons in a group. Live music events and alcohol consumption after 10.30pm can resume.

In short, life is almost back to normal.

This bodes well for aviation and tourism-related stocks like Singapore Airlines, SATS and Genting Singapore. Like a rising tide lifting all boats, the prices of other mega cap stocks such as ST Engineering, Comfortdelgro and Singtel also received a boost.

I grabbed the chance to sell into the rally as a few of my holdings crossed their 52-week high. I squared off my entire position in CapitaLand Investment Management (CLI) as well as CapitaLand Integrated Commercial Trust (CICT). CLI saw its stock price rocketed recently. I have no idea why investors are so bullish on the company, but I decided to take my profit and move on. CICT was my last Reit holding, and with this sale, my CDP portfolio is completely cleared of Reits. No regret though, as my investment focus has changed.

At the same time, I nibbled on TalkMed Group for my SRS portfolio. TalkMed provides medical oncology and palliative care services to patients in Singapore. The company has been well covered by other bloggers (see [here] and [here]), so I won't elaborate further on why I like the stock. The company received SGX approval to transfer its listing from the Catalist board to the Mainboard [news]. One risk though, is the lack of liquidity, which makes it challenging to get out of this counter at a good price. Nonetheless, my SRS portfolio has a long-term horizon, so this isn't an immediate concern. I would love to add this counter to my CDP portfolio when an attractive opportunity appears.

I recently read a book written by the founder of Pheim Asset Management (PAM), Dr. Tan Chong Koay. PAM has been successful in generating consistent alpha from trading small and medium-cap stocks in Southeast Asia. Their investment philosophy is unique - while PAM looks for undervalued stocks, they operate on the basis to "never be fully vested at all times". This means during exuberant times when valuations are overstretched, PAM is always ready to sell the stocks in its portfolio and go all cash.

In regional bourses, volatility is rampant. Prices rise and fall depending on which stocks are the flavour of the day. The small market capitalization and lack of analyst coverage mean many companies go unnoticed on the secondary board. While certain counters remain unloved by the market for years, a majority of them get traded up once their strong fundamentals are recognized. By buying low ahead of others and selling on the way up, PAM was able to profit handsomely.

Now, this sounds a lot like market timing, but PAM never claimed to be able to time the market. This also deviates from the buy-and-hold-forever mindset of Buffett devotees. That said, PAM's principled approach has its merits - human nature means long-only investors are susceptible to endowment effect and confirmation bias. By being disciplined to sell when valuation dictates so, there is less emotional attachment and the excess cash can be re-deployed to capture other opportunities.

Speaking of cash, my dry powder has grown considerably and is over 40 percent of my total portfolio value. I would love to deploy it generously, albeit not at current market prices. My view is that the recent optimistic outlook is only fleeting. However, inflation is real and climbing throughout the world. From ultra-loose monetary policies to supply chain bottlenecks to post-pandemic ramped up consumer demand, all these contributed to the inflationary environment today. Already, we are feeling the heat from the spike in food and fuel prices. Companies will see increased costs eat into their bottom line. If they are not able to pass on the increment to their customers, those companies will face margin squeeze over the next few quarters^#. Lower investor expectations should moderate the stock prices accordingly.

By the way, if you have ten minutes to spare, I recommend you to watch this interview video with billionaire investor Ray Dalio of Bridgewater Associates [here]. Bridgewater is a very successful hedge fund and is currently the largest in the world (with US$150 billion AUM). Ray shared how the signs of recent times reminded him of the Depression era situation of the 1930s, and warned investors to be cautious. My favourite takeaway from the video is this quote:

When everyone starts to extrapolate the past (uptrend), the past will not perform up to expectations, and that is the time to sell.
Ray Dalio

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# This also makes the point why it is important to choose companies with healthy profit margin (preferably double-digit) in the first place.

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Reits - More hands on the pie means less for everyone

Today, the Business Times published an article titled, "Reit distributions to fund your retirement may be less than what you anticipate" [news]. The article cautions investors who use S-Reits to fund their retirement.

Reits, by their structure, are required to pay out 90 per cent of their distributable income to unitholders. Such income comes through the rent Reits collect from their tenants. As we know, properties are capital intensive. Most - if not all - Reits borrow money to fund their real estate acquisitions. However, there is a limit to how much leverage Reits can utilize. Hence, there are times when Reits have to raise equity from existing and new investors via right offerings and new unit issuance.

Moreover, all forms of borrowing have a maturity date, unless it is issued as a perpetual security. This means when the deadline approaches, Reit managers will have to raise new debt to repay the old. The debt amount does not decline - think about it, if a Reit has to pay out 90 per cent of its distributable income, how much debt principal can it repay? The only way the debt level can be pared down is when a Reit manager sells a property at a price more than what it had paid for. The old adage applies: Buy Low + Sell High = Profit.

Smart Reit managers will be quite vocal about making only 'accretive' acquisitions. This means these managers will only purchase properties that increase their net distribution per unit (DPU). But what is conveniently left out of the picture is that rental income is CYCLICAL. In good times, Reit managers can afford to increase their rental rates (the so-called positive rental reversion), which helps to boost the income and hence a higher DPU. But when the economy hits a recession, businesses earn less and correspondingly, rental rates have to decrease. (Otherwise, you will be left with an empty property, which is worse.)

When Reits raise equity in good times, this means there are more unitholders sharing in the income. But the number of unitholders does not decrease in bad times! In short, there are more hands dipping on a shrunken pie, which means less pie (money) for everyone.

Additionally, some Reit Trust Deeds mandate that the Reit managers collect annual management fees in the form of new units rather than upfront cash. This means REGARDLESS of how the economy performs, the number of units issued rises every year. So unless you keep buying new units on the market, or take part in every equity offering, your percentage share of the distributable income declines.

This is the main reason I decided to pivot away from S-Reits in my portfolios. I now look for listed companies with high profit margins, high return on equity (ROE), little or no debt, strong branding or diversified streams of revenue (geographical / sectoral). Market leadership, a high barrier of entry and shareholder-aligned management are a bonus.

Now, there is no doubt that companies can suffer losses in bad times too, and they can choose not to pay out dividends so as to conserve cash. But if the companies you choose have the above advantages, they should be well poised to go through the economic valleys and emerge stronger when the situation improves. In fact, downturns may present opportunities for those cash-laden companies to acquire targets on the cheap.

So my friends, if you are still keen to fund your retirement with S-Reits, do note my above caveat and opt for only those S-Reits managed by well-established and reputable managers.

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Grab - It never rains but it pours

As the saying goes, "It never rains but it pours."

This morning, I read a Business Times article that ride-hailing and delivery platform Grab is at risk of U.S. class action lawsuits after its share price plunged recently [news].

Several U.S. law firms are taking advantage of the situation to entice Grab shareholders to come forward and take up their offer for litigation against the company management.

While the investigation may reveal no just cause for a lawsuit, I believe the reputational damage is done to Grab. Existing and potential investors may be spooked by the possibility of legal costs further draining the company coffers and distracting the management from focusing on the business.

Getting a U.S. public listing may be glamourous. But it does have its inherent dangers too.

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Grab ($$$ while you can)

This morning, I read a news article on Bloomberg about ride-hailing and delivery platform Grab. The stock price plunged 37% after the company reported wider losses in its fourth quarter [news].

I can never understand why folks will invest in unicorns that burn cash by the millions (this applies to Sea too). Companies are meant to be profitable entities. A free capitalist market ought to channel money to those that can generate positive returns.

Perhaps that is why I can never be a technologist. Haha. I don't foresee how Grab or Sea can turn the situation around, when the barrier of entry is low and competitors are aplenty. Every startup seems to believe they can become the dominant player in the market.

The massive share price plunge indicates speculators are controlling the company shares, not investors. And when you don't have a steady investor base, the stock is bound to be wrapped up in volatility.

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