Published March 31, 2011
By EMILYN YAP
HUTCHISON Port Holdings (HPH) Trust's initial public offering has clearly been a letdown for punters who are in for a quick ride. The container port business trust sank in its stock market debut almost two weeks ago and has not recovered past its offer price of US$1.01 per unit since.
But for long-term investors seeking yields, the verdict remains open. The lower unit price means a chance of securing higher yields by buying in now, assuming that the projected distributions to unitholders (DPUs) materialise. Is HPH Trust worth a shot for this purpose?
The answer may be 'no', because better options exist in the form of real estate investment trusts (Reits).
To be fair, HPH Trust is dangling attractive yields. Its forecast seasonally annualised DPU for 2011 is 45.88 Hong Kong cents and at yesterday's closing unit price of 98.5 US cents, after currency conversions, the yield comes up to almost 6 per cent. This is high in today's low interest rate environment. For 2012, based on the same closing unit price, the yield could be 6.7 per cent.
What is uncertain is whether HPH Trust will eventually pay out the same DPUs as projected, and also maintain reasonable distributions in future.
In the first place, business trusts are not required to make minimum levels of payout. This is something that a number of investors may not have noticed, because they assume that business trusts and Reits are the same. They are not.
HPH Trust said in its prospectus that its policy is to give out all of its distributable income. But in any case, it has flexibility to change this, especially if hard times come along.
Recall what shipping trust Rickmers Maritime did in 2009 when it had to conserve cash during the financial crisis. Even though income available for distribution in Q2 rose 42 per cent year-on-year, Rickmers still cut DPU and unitholders received 73 per cent less from the previous year.
By contrast, Reits have to pay out at least 90 per cent of their distributable income to unitholders to enjoy tax transparency on the amount they pay out. This alone puts Reits ahead of business trusts for investors keen on steady yields.
Unitholders can be pretty sure that this rule will not change. Even in the face of 2009's credit crunch, the authorities rejected requests from some Reit managers to lower the minimum payout ratio, emphasising that Reits' characteristics as a stable, high-payout, pass-through vehicle must be preserved.
Reits look even safer when we consider the currency exposures HPH Trust investors face. Most of HPH Trust's revenue is recognised in Hong Kong and US dollars; its units are priced in US dollars; and its DPUs are in Hong Kong dollars. The risks are worth repeating given how the Singapore dollar looks poised to continue strengthening.
The Sing dollar was trading at around S$1.26 to the US dollar yesterday and one of the more bullish research houses believes this could reach S$1.19 by year-end. If the forecast materialises, HPH Trust investors will have to pray that unit prices go up by more than 5 per cent just to make up for foreign exchange losses.
The Singapore Exchange (SGX) is looking at ways to facilitate the quotation and trading of HPH Trust in Singapore dollars as well as US dollars. But until details emerge, it is not clear if the arrangement will remove currency exposure on that front.
Also, assuming that the Sing dollar appreciates against the Hong Kong dollar at the same pace (since the latter is pegged to the greenback), HPH Trust's distributions would lose value after currency conversion.
Investors can easily minimise foreign exchange risks by investing in Reits. All but one of them listed on SGX trade in Sing dollars, and most pay out distributions in Sing dollars. It is even possible to find Reits which hold only assets in Singapore, meaning that income streams are insulated from currency movements.
A quick scan on Bloomberg turns out a few Reits that generate yields of over 6 per cent and pay out distributions in Sing dollars. Some examples are Ascendas Reit and Frasers Commercial Trust.
Some may argue that HPH Trust has greater growth potential because its Shenzhen ports still have a lot of room for expansion. Also, unlike Reits, business trusts are not hampered by limits on borrowings or development asset size.
These are good reasons for the growth-seeking investor to consider HPH Trust. But investors hungry for yields and stability may sleep better with their money parked in Reits.
Thursday, March 31, 2011
Wednesday, March 30, 2011
Bursting the recovery bubble
Published March 30, 2011
Don't count on a complete recovery anytime soon, says chief investment strategist at S&P's Equity Research, reports PAUL J LIM
(NEW YORK) DESPITE recent volatility in global markets, domestic stocks have doubled in value in the past two years, the fastest such gain since the Great Depression. And financial shares have fared even better, soaring more than 160 per cent since the long stock rally began in March 2009. But will the broad market in general and financial stocks in particular resume this torrid pace? Perhaps not.
Unsustainable: It's hard to imagine how much longer the broad market can keep up the pace of the last two years, some market strategists say
Consider how stocks have fared over a much longer stretch - since the end of the previous bull market, in March 2000. Last Thursday was the 11th anniversary of the bursting of the technology bubble, a reminder of how long it may take investments at the centre of a major market plunge to return to their past glory.
For example, though most sectors of the Standard & Poor's 500-stock index are now trading above their levels of March 2000, the overall index is still slightly below where it was then. And technology and telecommunications stocks - the market's best performers leading up to the 2000-02 bear market - are still down around 60 per cent, on average, from their peaks 11 years ago; blue-chip growth stocks are off about 35 per cent.
What's the moral of this story? Don't count on a complete recovery anytime soon, said Sam Stovall, chief investment strategist at S&P's Equity Research. 'It could take 15 years for stocks to work off the effects of a major bubble,' he said.
Mr Stovall has studied market recovery periods in the years after World War II. He has found that while it usually takes stocks about 14 months to return to previous highs after a mild bear market, and five years, on average, to bounce back from a severe downturn of 40 per cent or more, it typically takes even longer to recover from a bubble.
He noted, for example, that after oil prices peaked during the energy bubble in 1980, it took 16 years for some categories of oil-related stocks to recover to their pre-bubble highs. And after gold peaked in 1980 at around US$850 an ounce, it took 28 years for the price to return to its pre-bust perch. (Of course, even at US$1,426 an ounce, gold still hasn't recovered to its 1980 levels when adjusted for inflation.)
The reason recoveries take so long 'is that a true bubble occurs only when valuations are taken to extremes, and it usually requires at least two bear markets to bring those valuations back to historic norms,' said James B Stack, editor of the InvesTech Market Analyst newsletter.
To be sure, one could argue that the valuations of financial shares have never skyrocketed the way those of tech shares did in the late 1990s. In fact, at the end of 2007, when the global credit bubble had popped, the price-to- earnings ratio for financial stocks stood at around 17, according to Bloomberg. That's about on par with valuations for the broad market at the time.
Yet that happened because the reported profits of financial companies had soared leading up to the plunge, Mr Stack said, so that earnings - the 'E' in the P/E ratio - generally kept pace with rising prices. 'But in reality,' he said, 'many of those earnings were built on artificial sources of income that were not only going to dry up but reversed course when the asset bubble popped.'
Another reason to believe that financials may soon hit a ceiling, Mr Stack said, is that 'there are still too many people waiting to get out' of those shares. In other words, many investors are still holding onto financial stocks not out of faith, but because those shares are still so far below their October 2007 peaks - about 50 per cent, on average - that they've have been waiting for a bigger rally before selling.
Haven't financials surged over the last two years? Yes. But Jack A Ablin, chief investment officer at Harris Private Bank, notes that since the first three months of this rally - when financial stocks bounced back the most - these shares have actually lagged behind the broad market. Since the start of June 2009, the S&P 500 has gained 42 per cent, versus just 34 per cent for the financial stocks in the index.
Mr Ablin said 'conditions during this stretch couldn't have been any better for the banks', alluding to the government's efforts to keep short-term interest rates near zero, assuring substantial profits when banks relend that money to customers. 'Yet this is all we got to show for it,' he said. 'That would suggest that it could take many years for the fundamentals of this sector to recover.' As for the broad market, it's hard to imagine how much longer it can keep up the pace of the last two years, some market strategists say.
Beyond the threat of rising inflation, as well as various geopolitical risks, valuations are becoming stretched. David R Kotok, chief investment officer at Cumberland Advisors, says a simple way to judge the frothiness of the market is to consider the ratio of total domestic stock market capitalisation to gross domestic product (GDP).
'History says that when stock market capitalisation is about 55 per cent or 60 per cent of GDP, stocks are a great bargain, which was the case during the March 2009 lows,' Mr Kotok said. 'But when stocks are 110 per cent of GDP, it's time to sell.' Today, the stock market is worth about 95 per cent of GDP. 'So,' he said, 'I don't believe the market has a large strategic move upward from here in the short term.' - NYT
Don't count on a complete recovery anytime soon, says chief investment strategist at S&P's Equity Research, reports PAUL J LIM
(NEW YORK) DESPITE recent volatility in global markets, domestic stocks have doubled in value in the past two years, the fastest such gain since the Great Depression. And financial shares have fared even better, soaring more than 160 per cent since the long stock rally began in March 2009. But will the broad market in general and financial stocks in particular resume this torrid pace? Perhaps not.
Unsustainable: It's hard to imagine how much longer the broad market can keep up the pace of the last two years, some market strategists say
Consider how stocks have fared over a much longer stretch - since the end of the previous bull market, in March 2000. Last Thursday was the 11th anniversary of the bursting of the technology bubble, a reminder of how long it may take investments at the centre of a major market plunge to return to their past glory.
For example, though most sectors of the Standard & Poor's 500-stock index are now trading above their levels of March 2000, the overall index is still slightly below where it was then. And technology and telecommunications stocks - the market's best performers leading up to the 2000-02 bear market - are still down around 60 per cent, on average, from their peaks 11 years ago; blue-chip growth stocks are off about 35 per cent.
What's the moral of this story? Don't count on a complete recovery anytime soon, said Sam Stovall, chief investment strategist at S&P's Equity Research. 'It could take 15 years for stocks to work off the effects of a major bubble,' he said.
Mr Stovall has studied market recovery periods in the years after World War II. He has found that while it usually takes stocks about 14 months to return to previous highs after a mild bear market, and five years, on average, to bounce back from a severe downturn of 40 per cent or more, it typically takes even longer to recover from a bubble.
He noted, for example, that after oil prices peaked during the energy bubble in 1980, it took 16 years for some categories of oil-related stocks to recover to their pre-bubble highs. And after gold peaked in 1980 at around US$850 an ounce, it took 28 years for the price to return to its pre-bust perch. (Of course, even at US$1,426 an ounce, gold still hasn't recovered to its 1980 levels when adjusted for inflation.)
The reason recoveries take so long 'is that a true bubble occurs only when valuations are taken to extremes, and it usually requires at least two bear markets to bring those valuations back to historic norms,' said James B Stack, editor of the InvesTech Market Analyst newsletter.
To be sure, one could argue that the valuations of financial shares have never skyrocketed the way those of tech shares did in the late 1990s. In fact, at the end of 2007, when the global credit bubble had popped, the price-to- earnings ratio for financial stocks stood at around 17, according to Bloomberg. That's about on par with valuations for the broad market at the time.
Yet that happened because the reported profits of financial companies had soared leading up to the plunge, Mr Stack said, so that earnings - the 'E' in the P/E ratio - generally kept pace with rising prices. 'But in reality,' he said, 'many of those earnings were built on artificial sources of income that were not only going to dry up but reversed course when the asset bubble popped.'
Another reason to believe that financials may soon hit a ceiling, Mr Stack said, is that 'there are still too many people waiting to get out' of those shares. In other words, many investors are still holding onto financial stocks not out of faith, but because those shares are still so far below their October 2007 peaks - about 50 per cent, on average - that they've have been waiting for a bigger rally before selling.
Haven't financials surged over the last two years? Yes. But Jack A Ablin, chief investment officer at Harris Private Bank, notes that since the first three months of this rally - when financial stocks bounced back the most - these shares have actually lagged behind the broad market. Since the start of June 2009, the S&P 500 has gained 42 per cent, versus just 34 per cent for the financial stocks in the index.
Mr Ablin said 'conditions during this stretch couldn't have been any better for the banks', alluding to the government's efforts to keep short-term interest rates near zero, assuring substantial profits when banks relend that money to customers. 'Yet this is all we got to show for it,' he said. 'That would suggest that it could take many years for the fundamentals of this sector to recover.' As for the broad market, it's hard to imagine how much longer it can keep up the pace of the last two years, some market strategists say.
Beyond the threat of rising inflation, as well as various geopolitical risks, valuations are becoming stretched. David R Kotok, chief investment officer at Cumberland Advisors, says a simple way to judge the frothiness of the market is to consider the ratio of total domestic stock market capitalisation to gross domestic product (GDP).
'History says that when stock market capitalisation is about 55 per cent or 60 per cent of GDP, stocks are a great bargain, which was the case during the March 2009 lows,' Mr Kotok said. 'But when stocks are 110 per cent of GDP, it's time to sell.' Today, the stock market is worth about 95 per cent of GDP. 'So,' he said, 'I don't believe the market has a large strategic move upward from here in the short term.' - NYT
Valuing best stocks, buying them cheap
If you want to beat the stock market, stop trying to predict it and taking your investing cues from price
By ROGER MONTGOMERY
Business Times - 30 Mar 2011
HAVE you ever been told it's too difficult to beat the stock market? It's not. Put your computer to sleep, turn the television off and read carefully. Provided you are patient, beating the market over the long term is not difficult. You don't need a crystal ball to do it because prediction is not part of the equation.
I cannot tell you what a stock will do tomorrow, or warn you that a crash is imminent with anything approaching certainty. Neither can the financial industry, no matter how much brain power they muster.
Stop trying to predict the market and stop taking your investing cues from price. Instead of 'price', think about 'value'. And instead of 'stocks', think of 'businesses'. Approach an investment in the stock market as you would the purchase of an entire business and beating the stock market becomes a stronger reality.
Some investors have lost sight of what the stock market is - turning it into a venue for betting on 'up' and 'down'. This is no different to backing Gloria De Campeao ahead of Lizard's Desire at Kranji next month.
And that's step one: Approach the stock market as an avenue through which ownership of extraordinary businesses can be obtained.
What does an extraordinary business look like? Just as importantly, how does one avoid businesses that are less than extraordinary?
Follow me on a flight of fancy. Its 2001 and you have injected US$3.3 billion to kick off a new business. You have also borrowed US$3.3 billion from the bank. After the first year of operation you report a profit of about US$420 million, equivalent to 12.7 per cent return on your equity.
Purchasing power
Encouraged by these early profits, you manage and operate the business for another decade. By 2010 profits amount to less than US$145 million. On its own, if this was not a one-off decline in profits, the picture is bleak.
A serious erosion of purchasing power has occurred. What if I told you that not only are profits meaningfully less than what they were a decade earlier, you have, over the interim 10 years, injected a further US$2.6 billion of equity and borrowed an additional US$2.4 billion.
Some US$11.6 billion of combined equity and debt returning a profit of less than US$145 million. Extraordinary, or ordinary? Return on equity is now 21/2 per cent, significantly less than returns available in simple banking accounts. On a risk-adjusted basis, the returns from your business are, quite simply, uneconomic.
Unfortunately this is not a fictitious company. The numbers are taken from the annual reports of an iconic Australian airline, Qantas.
Extraordinary businesses do not require large amounts of debt to generate above average rates of return on equity. Clearly, Qantas does not make the grade.
But none of this matters if stock prices ignore business performance. In the short run the stock market is nothing more than a popularity contest. Prices frequently ignore the fundamentals. But in the long run, as Ben Graham said, the market is a weighing machine.
In my experience as a fund manager and author of guide book Value.able, in the long run the market price of a business does tend to reflect the performance of the underlying business. It may take as little as a year or as long as 10 years, but the stock market will follow the value of a business.
Qantas' share price today remains below its share price of 10 years ago. Indeed to assuage those who may think I haven't accounted for all the additional shares issued, the market capitalisation is less than all the money that has been put in and left in the airline over the last 15 years. No amount of 'time in the market' will help investors who purchased Qantas for the long term. Invest in this business and time will be your foe - the longer you stay, the more it will hurt.
Making a portfolio
Provided you are patient and can identify extraordinary businesses generating high rates of return on equity and whose prospects are likely to continue in that vein, you are well down the path of constructing a portfolio of extraordinary businesses whose performance should outperform the Straits Times Index. Find a business whose manager can compound equity at rates well above average and eventually your returns will reflect those of the business. Time in the market will be your friend. The longer you stay, the more extraordinary your returns.
Identifying extraordinary businesses is the first step. The second is knowing what price to pay. Turn the stock market off and focus on the underlying business. Don't miss out on acquiring shares in extraordinary businesses because of a fear that the share price will fall, and don't sell at depressed prices either. The world's best investors avoid such irrational behaviour because they focus on the value of the underlying business, not the price.
To do this, you must learn how to estimate the intrinsic value of a business and its shares. A reasonable grasp of multiplication and division is about as much arithmetic as you need to apply my Value.able valuation approach. You don't need a degree in high finance. Anybody can do this. The community of Value.able graduates at my blog is living proof.
But why take the time to do the calculations, I hear you ask?
JB Hi-Fi is one of Australia's premier retailing businesses. Their distinctive stores - music blaring behind trademark billboard style placards - sell everything from TVs to Nintendo Wii, digital clocks, DVDs and Mac computers.
In 2008, JB Hi-Fi's shares traded between US$15.80 and US$6.87. By September 2010 the share price had risen to just over US$23.
Supercharging returns
Had you purchased JB Hi-Fi shares at the 2008 high, you would be showing a return of 33 per cent, excluding dividends. Not a bad return, and it does indeed reflect the importance of buying extraordinary businesses. But by combining great businesses with my Value.able method to identify when the shares are truly cheap, you can really supercharge your returns.
Had you purchased shares in the very same company at the low of US$6.87 and below intrinsic value, your returns would have been over 200 per cent, and even higher if you include the dividends.
Time in the market is no good if you pay too high a price for your shares. And time in the market is no good if you buy inferior businesses.
Acquiring shares in extraordinary businesses when they are truly cheap will produce returns dramatically different from acquiring shares in the same business at a much higher price. The simple fact is that the higher the price you pay, the lower your return.
Invest in inferior businesses and you will suffer the same low returns the business is generating. Remember Qantas? Businesses with poor economics and a reputation for poor returns on equity will erode your wealth. Airlines are just one example.
There you have it - three simple steps that will reinvent the way you invest. Turn the stock market off, think about shares as pieces of businesses in which to invest and know how to value a company.
Whether you are a full-time, part-time, first-time or sovereign investor, I wrote my book Value-able to show you that there is a simple and more successful way to invest in the stock market. Your portfolio does not need to be beholden to its intoxicating and frequently wealth-destroying influences.
'Value.able - How to value the best stocks and buy them for less than they're worth' is available exclusively online at www.rogermontgomery.com/bt
Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.
By ROGER MONTGOMERY
Business Times - 30 Mar 2011
HAVE you ever been told it's too difficult to beat the stock market? It's not. Put your computer to sleep, turn the television off and read carefully. Provided you are patient, beating the market over the long term is not difficult. You don't need a crystal ball to do it because prediction is not part of the equation.
I cannot tell you what a stock will do tomorrow, or warn you that a crash is imminent with anything approaching certainty. Neither can the financial industry, no matter how much brain power they muster.
Stop trying to predict the market and stop taking your investing cues from price. Instead of 'price', think about 'value'. And instead of 'stocks', think of 'businesses'. Approach an investment in the stock market as you would the purchase of an entire business and beating the stock market becomes a stronger reality.
Some investors have lost sight of what the stock market is - turning it into a venue for betting on 'up' and 'down'. This is no different to backing Gloria De Campeao ahead of Lizard's Desire at Kranji next month.
And that's step one: Approach the stock market as an avenue through which ownership of extraordinary businesses can be obtained.
What does an extraordinary business look like? Just as importantly, how does one avoid businesses that are less than extraordinary?
Follow me on a flight of fancy. Its 2001 and you have injected US$3.3 billion to kick off a new business. You have also borrowed US$3.3 billion from the bank. After the first year of operation you report a profit of about US$420 million, equivalent to 12.7 per cent return on your equity.
Purchasing power
Encouraged by these early profits, you manage and operate the business for another decade. By 2010 profits amount to less than US$145 million. On its own, if this was not a one-off decline in profits, the picture is bleak.
A serious erosion of purchasing power has occurred. What if I told you that not only are profits meaningfully less than what they were a decade earlier, you have, over the interim 10 years, injected a further US$2.6 billion of equity and borrowed an additional US$2.4 billion.
Some US$11.6 billion of combined equity and debt returning a profit of less than US$145 million. Extraordinary, or ordinary? Return on equity is now 21/2 per cent, significantly less than returns available in simple banking accounts. On a risk-adjusted basis, the returns from your business are, quite simply, uneconomic.
Unfortunately this is not a fictitious company. The numbers are taken from the annual reports of an iconic Australian airline, Qantas.
Extraordinary businesses do not require large amounts of debt to generate above average rates of return on equity. Clearly, Qantas does not make the grade.
But none of this matters if stock prices ignore business performance. In the short run the stock market is nothing more than a popularity contest. Prices frequently ignore the fundamentals. But in the long run, as Ben Graham said, the market is a weighing machine.
In my experience as a fund manager and author of guide book Value.able, in the long run the market price of a business does tend to reflect the performance of the underlying business. It may take as little as a year or as long as 10 years, but the stock market will follow the value of a business.
Qantas' share price today remains below its share price of 10 years ago. Indeed to assuage those who may think I haven't accounted for all the additional shares issued, the market capitalisation is less than all the money that has been put in and left in the airline over the last 15 years. No amount of 'time in the market' will help investors who purchased Qantas for the long term. Invest in this business and time will be your foe - the longer you stay, the more it will hurt.
Making a portfolio
Provided you are patient and can identify extraordinary businesses generating high rates of return on equity and whose prospects are likely to continue in that vein, you are well down the path of constructing a portfolio of extraordinary businesses whose performance should outperform the Straits Times Index. Find a business whose manager can compound equity at rates well above average and eventually your returns will reflect those of the business. Time in the market will be your friend. The longer you stay, the more extraordinary your returns.
Identifying extraordinary businesses is the first step. The second is knowing what price to pay. Turn the stock market off and focus on the underlying business. Don't miss out on acquiring shares in extraordinary businesses because of a fear that the share price will fall, and don't sell at depressed prices either. The world's best investors avoid such irrational behaviour because they focus on the value of the underlying business, not the price.
To do this, you must learn how to estimate the intrinsic value of a business and its shares. A reasonable grasp of multiplication and division is about as much arithmetic as you need to apply my Value.able valuation approach. You don't need a degree in high finance. Anybody can do this. The community of Value.able graduates at my blog is living proof.
But why take the time to do the calculations, I hear you ask?
JB Hi-Fi is one of Australia's premier retailing businesses. Their distinctive stores - music blaring behind trademark billboard style placards - sell everything from TVs to Nintendo Wii, digital clocks, DVDs and Mac computers.
In 2008, JB Hi-Fi's shares traded between US$15.80 and US$6.87. By September 2010 the share price had risen to just over US$23.
Supercharging returns
Had you purchased JB Hi-Fi shares at the 2008 high, you would be showing a return of 33 per cent, excluding dividends. Not a bad return, and it does indeed reflect the importance of buying extraordinary businesses. But by combining great businesses with my Value.able method to identify when the shares are truly cheap, you can really supercharge your returns.
Had you purchased shares in the very same company at the low of US$6.87 and below intrinsic value, your returns would have been over 200 per cent, and even higher if you include the dividends.
Time in the market is no good if you pay too high a price for your shares. And time in the market is no good if you buy inferior businesses.
Acquiring shares in extraordinary businesses when they are truly cheap will produce returns dramatically different from acquiring shares in the same business at a much higher price. The simple fact is that the higher the price you pay, the lower your return.
Invest in inferior businesses and you will suffer the same low returns the business is generating. Remember Qantas? Businesses with poor economics and a reputation for poor returns on equity will erode your wealth. Airlines are just one example.
There you have it - three simple steps that will reinvent the way you invest. Turn the stock market off, think about shares as pieces of businesses in which to invest and know how to value a company.
Whether you are a full-time, part-time, first-time or sovereign investor, I wrote my book Value-able to show you that there is a simple and more successful way to invest in the stock market. Your portfolio does not need to be beholden to its intoxicating and frequently wealth-destroying influences.
'Value.able - How to value the best stocks and buy them for less than they're worth' is available exclusively online at www.rogermontgomery.com/bt
Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.
Monday, March 28, 2011
Better take SGX queries seriously
Source: The Straits Times
Author: Goh Eng Yeow 28/3/2011
THOSE looking for tough action to stamp out problems in the S-chip sector - China businesses listed in Singapore - may well be applauding the latest efforts of the Singapore Exchange (SGX).
But on closer inspection, moves to rein in wayward S-chips are set to cause headaches for decent and well-run firms, while the warning signs on dodgy S-chips were there for all to see, if only they had taken heed of the red flags.
In recent weeks, SGX has rushed to put in place even more safeguards aimed at the problematic sector, after it had been rocked by fresh accounting scandals. These include getting companies to make it clear in their books that they have the right to hire and fire the legal representatives in their China subsidiaries. These are the people recognised by Chinese law as having the authority to execute agreements, transfer assets and negotiate bank loans on the company's behalf.
And because of the irregularities that have repeatedly surfaced over cash balances at scandal-hit S-chips, the SGX is also 'encouraging' listed firms to get auditors to perform additional procedures such as 'cash validation on an ongoing and regular basis' at their China units.
No doubt, the SGX's latest actions will find favour among those who believe that tougher action is needed to stamp out the corporate malfeasance festering in the maligned S-chip sector.
But it also begs the question as to whether the SGX is overreacting to the latest spate of accounting scandals.
In tightening the screws for all S-chips because of the misconduct of a few black sheep, the SGX runs the risk of unfairly punishing the rest of the sector for wrongs that are not of their doing.
That is unfortunate. As the experience of the past two years shows, those S-chips with excellent businesses, like Sihuan Pharmaceutical and Man Wah, will simply uproot and move to a friendlier listing destination. Both Sihuan and Man Wah chose Hong Kong.
Take a closer look at the latest moves and one pertinent question is whether it is worthwhile giving the board the power to hire and fire the legal representative at the China unit, even though China's regulatory framework allows him to stay on, unless he resigns of his own accord.
For many S-chips, the legal representative is also the founder and major shareholder of the company. Clearly, other investors have no business investing in his firm if his interests are not aligned with those of the company.
Getting companies to engage auditors to perform additional checks on an ongoing basis to confirm the cash balances of their China units is fine, if this serves to pacify jittery shareholders that the money is indeed there.
But it will just be another costly distraction for management whose brief should be to notch up the maximum level of profits for their shareholders.
So what should be done?
It is time to take a more measured and proactive approach to repair the tarnished image of the S-chip sector.
For a start, let's recognise that investor education plays a very important role in our 'caveat emptor' regime where investors are supposed to make informed decisions on their investment choices.
Having a well-educated investing public is the best defence against any unscrupulous businessmen taking advantage of investors because of their investment naivete.
Take the latest accounting scandal to hit the scene - China Gaoxian.
For the last few months, the investing public has been besotted with its plan to launch a dual listing in South Korea.
And without digging deeply into the company's financials, some analysts had taken to making 'buy' calls on the stock, based on this stunt.
The implicit assumption is that the Korean securities houses would have made thorough background checks on China Gaoxian before shepherding it into Seoul.
But China Gaoxian is a recent listing here. It is possible the Koreans gave it the thumbs up in the belief that since the firm had vaulted past regulatory hurdles here, it should be good enough for their market - without further investigations.
China Gaoxian's accounting irregularities might have continued to escape notice, if the SGX had not flagged its concern by asking why the company had drawn down on its bank credit lines and did much of its business on cash terms, even though it was sitting on a huge cash hoard.
In hindsight, the company's explanation that the increased borrowings were made to support Chinese banks in meeting their loans quota seemed ludicrous, given the nationwide efforts to clamp down on credit to stamp out inflation.
Aggrieved investors, stuck with suspended China Gaoxian shares, could have spared themselves the agony if they had paid closer attention to the type of disclosures made by the company in response to SGX's queries.
In future, when the SGX queries a company on its financials, investors should make the extra effort to sit up and study the reply carefully - if only to avoid further grief.
Querying a listed company on its financials or unusual price movements is the SGX's modus operandi in raising a red flag - and sounding the alert to the investing public to trade prudently.
Otherwise, investors will have only themselves to blame for any ensuing losses.
engyeow@sph.com.sg
Author: Goh Eng Yeow 28/3/2011
THOSE looking for tough action to stamp out problems in the S-chip sector - China businesses listed in Singapore - may well be applauding the latest efforts of the Singapore Exchange (SGX).
But on closer inspection, moves to rein in wayward S-chips are set to cause headaches for decent and well-run firms, while the warning signs on dodgy S-chips were there for all to see, if only they had taken heed of the red flags.
In recent weeks, SGX has rushed to put in place even more safeguards aimed at the problematic sector, after it had been rocked by fresh accounting scandals. These include getting companies to make it clear in their books that they have the right to hire and fire the legal representatives in their China subsidiaries. These are the people recognised by Chinese law as having the authority to execute agreements, transfer assets and negotiate bank loans on the company's behalf.
And because of the irregularities that have repeatedly surfaced over cash balances at scandal-hit S-chips, the SGX is also 'encouraging' listed firms to get auditors to perform additional procedures such as 'cash validation on an ongoing and regular basis' at their China units.
No doubt, the SGX's latest actions will find favour among those who believe that tougher action is needed to stamp out the corporate malfeasance festering in the maligned S-chip sector.
But it also begs the question as to whether the SGX is overreacting to the latest spate of accounting scandals.
In tightening the screws for all S-chips because of the misconduct of a few black sheep, the SGX runs the risk of unfairly punishing the rest of the sector for wrongs that are not of their doing.
That is unfortunate. As the experience of the past two years shows, those S-chips with excellent businesses, like Sihuan Pharmaceutical and Man Wah, will simply uproot and move to a friendlier listing destination. Both Sihuan and Man Wah chose Hong Kong.
Take a closer look at the latest moves and one pertinent question is whether it is worthwhile giving the board the power to hire and fire the legal representative at the China unit, even though China's regulatory framework allows him to stay on, unless he resigns of his own accord.
For many S-chips, the legal representative is also the founder and major shareholder of the company. Clearly, other investors have no business investing in his firm if his interests are not aligned with those of the company.
Getting companies to engage auditors to perform additional checks on an ongoing basis to confirm the cash balances of their China units is fine, if this serves to pacify jittery shareholders that the money is indeed there.
But it will just be another costly distraction for management whose brief should be to notch up the maximum level of profits for their shareholders.
So what should be done?
It is time to take a more measured and proactive approach to repair the tarnished image of the S-chip sector.
For a start, let's recognise that investor education plays a very important role in our 'caveat emptor' regime where investors are supposed to make informed decisions on their investment choices.
Having a well-educated investing public is the best defence against any unscrupulous businessmen taking advantage of investors because of their investment naivete.
Take the latest accounting scandal to hit the scene - China Gaoxian.
For the last few months, the investing public has been besotted with its plan to launch a dual listing in South Korea.
And without digging deeply into the company's financials, some analysts had taken to making 'buy' calls on the stock, based on this stunt.
The implicit assumption is that the Korean securities houses would have made thorough background checks on China Gaoxian before shepherding it into Seoul.
But China Gaoxian is a recent listing here. It is possible the Koreans gave it the thumbs up in the belief that since the firm had vaulted past regulatory hurdles here, it should be good enough for their market - without further investigations.
China Gaoxian's accounting irregularities might have continued to escape notice, if the SGX had not flagged its concern by asking why the company had drawn down on its bank credit lines and did much of its business on cash terms, even though it was sitting on a huge cash hoard.
In hindsight, the company's explanation that the increased borrowings were made to support Chinese banks in meeting their loans quota seemed ludicrous, given the nationwide efforts to clamp down on credit to stamp out inflation.
Aggrieved investors, stuck with suspended China Gaoxian shares, could have spared themselves the agony if they had paid closer attention to the type of disclosures made by the company in response to SGX's queries.
In future, when the SGX queries a company on its financials, investors should make the extra effort to sit up and study the reply carefully - if only to avoid further grief.
Querying a listed company on its financials or unusual price movements is the SGX's modus operandi in raising a red flag - and sounding the alert to the investing public to trade prudently.
Otherwise, investors will have only themselves to blame for any ensuing losses.
engyeow@sph.com.sg
Saturday, March 26, 2011
China Gaoxian scandal evokes chilling parallels
China Gaoxian founder Cao Xiangbin sold 60 million shares at the point of listing.
The Straits Times, March 26, 2011
By Goh Eng Yeow, Senior Correspondent
IT MAY look like just another S-chip train wreck, but the accounting irregularities raised at textile maker China Gaoxian are far more worrying.
While China Hongxing Sports and Hongwei Technologies, which both reported accounting problems last month, listed more than five years ago, China Gaoxian made its debut only 18 months ago.
This makes this latest S-chip scandal all the more serious, because China Gaoxian listed six months after clean-up measures were implemented following a spate of earlier S-chip irregularities.
As one of the biggest IPOs of 2009, China Gaoxian was supposed to flag an all-clear signal to investors that it was back to business as usual for S-chips.
After all, its independent directors included Mr Philip Chan, a former listings head with the Singapore Exchange.
In January, China Gaoxian rode high on a strong vote of investor confidence to raise $240 million from South Korean investors after getting its stock sponsored as a depository receipt listing in Seoul.
So its trading suspension this week is a big blow to the already tarnished S-chip sector and may sound the death knell for similar fund-raising exercises by other S-chips in Seoul.
It is also worth noting the interesting parallels between China Gaoxian and steel-coil maker FerroChina, which was suspended from trading more than two years ago.
Just to jolt the memory, FerroChina was also riding high with investors when it suddenly closed shop in October 2008, purportedly because banks refused to roll-over its short-term loans.
But as some traders noted, the warning signals had been there for years, if anyone had cared to look.
Company insiders had been whittling down their stakes, selling about 155 million shares, or 18 per cent of the company, between 2005 and 2008.
And as a company purportedly sitting on a huge cash hoard, it had short-term debts of 2.33 billion yuan, with banks taking literally everything - bank deposits, inventories, buildings - as collateral for their loans.
Now take a look at China Gaoxian and one will notice more than a passing resemblance to FerroChina.
The company's 2009 prospectus showed that executive chairman and founder Cao Xiangbin sold 60 million shares at the IPO issue price of 26 cents apiece at the point of listing.
A year later when the lock-up period ended for major shareholders, Carry Luck, a company owned by one Mr Hong Rong Zhi, lost no time in selling out too.
In just two days last September, Carry Luck sold 53 million shares at 19.5 cents apiece and another 25.1 million shares at 19 cents each - both well below the 26-cent listing price.
The sales took Carry Luck's stake to 4.99 per cent from 10.42 per cent.
Another telling sign: the company had raised $78.2 million from its IPO here in 2009 and another $223.8 million from selling 600 million new shares in Seoul in January.
Yet, like FerroChina, it had behaved like a cash-strapped firm, asking customers to pay up in cash and drawing down on its bank credit lines.
It was this contradiction that prompted the SGX to put a query to the company.
In hindsight, investors should have asked why China Gaoxian needed to raise so much cash over such a short period if its growth was self-sustaining. And what happens to that huge sum now? Is it still in the company's coffers?
And shouldn't a question have been asked about the huge sales of China Gaoxian stock by a major shareholder last September, at below the IPO issue price?
It is strange that irregularities could surface at China Gaoxian with FerroChina scandal still fresh in investors' minds. And it is a chilling reminder to all investors to stay vigilant at all times.
The Straits Times, March 26, 2011
By Goh Eng Yeow, Senior Correspondent
IT MAY look like just another S-chip train wreck, but the accounting irregularities raised at textile maker China Gaoxian are far more worrying.
While China Hongxing Sports and Hongwei Technologies, which both reported accounting problems last month, listed more than five years ago, China Gaoxian made its debut only 18 months ago.
This makes this latest S-chip scandal all the more serious, because China Gaoxian listed six months after clean-up measures were implemented following a spate of earlier S-chip irregularities.
As one of the biggest IPOs of 2009, China Gaoxian was supposed to flag an all-clear signal to investors that it was back to business as usual for S-chips.
After all, its independent directors included Mr Philip Chan, a former listings head with the Singapore Exchange.
In January, China Gaoxian rode high on a strong vote of investor confidence to raise $240 million from South Korean investors after getting its stock sponsored as a depository receipt listing in Seoul.
So its trading suspension this week is a big blow to the already tarnished S-chip sector and may sound the death knell for similar fund-raising exercises by other S-chips in Seoul.
It is also worth noting the interesting parallels between China Gaoxian and steel-coil maker FerroChina, which was suspended from trading more than two years ago.
Just to jolt the memory, FerroChina was also riding high with investors when it suddenly closed shop in October 2008, purportedly because banks refused to roll-over its short-term loans.
But as some traders noted, the warning signals had been there for years, if anyone had cared to look.
Company insiders had been whittling down their stakes, selling about 155 million shares, or 18 per cent of the company, between 2005 and 2008.
And as a company purportedly sitting on a huge cash hoard, it had short-term debts of 2.33 billion yuan, with banks taking literally everything - bank deposits, inventories, buildings - as collateral for their loans.
Now take a look at China Gaoxian and one will notice more than a passing resemblance to FerroChina.
The company's 2009 prospectus showed that executive chairman and founder Cao Xiangbin sold 60 million shares at the IPO issue price of 26 cents apiece at the point of listing.
A year later when the lock-up period ended for major shareholders, Carry Luck, a company owned by one Mr Hong Rong Zhi, lost no time in selling out too.
In just two days last September, Carry Luck sold 53 million shares at 19.5 cents apiece and another 25.1 million shares at 19 cents each - both well below the 26-cent listing price.
The sales took Carry Luck's stake to 4.99 per cent from 10.42 per cent.
Another telling sign: the company had raised $78.2 million from its IPO here in 2009 and another $223.8 million from selling 600 million new shares in Seoul in January.
Yet, like FerroChina, it had behaved like a cash-strapped firm, asking customers to pay up in cash and drawing down on its bank credit lines.
It was this contradiction that prompted the SGX to put a query to the company.
In hindsight, investors should have asked why China Gaoxian needed to raise so much cash over such a short period if its growth was self-sustaining. And what happens to that huge sum now? Is it still in the company's coffers?
And shouldn't a question have been asked about the huge sales of China Gaoxian stock by a major shareholder last September, at below the IPO issue price?
It is strange that irregularities could surface at China Gaoxian with FerroChina scandal still fresh in investors' minds. And it is a chilling reminder to all investors to stay vigilant at all times.
Wednesday, March 23, 2011
33,000 is hell of a lot of unsold flats
Minister Mah's job to raise the red flag in a property market never short of thrills
By Esther Teo, Property Reporter
Straits Times on 23 Mar 2011
PROPERTY - the word alone sets the Singaporean heart racing. Those capital gains, the own-your-own-home dream all make for a potent elixir.
Every now and then, National Development Minister Mah Bow Tan has to raise a red flag when real estate gets over- heated and prices threaten to enter the realm of the ridiculous.
He can never please everybody: owners and developers love soaring prices - it means cash in their pockets; but buyers want affordable homes - until they buy one of course.
The hot-button issues don't stop there. What about the huge number of shoebox flats hitting the market, foreigners buying up property, stamp duty increases? Wherever you look, there is a mine waiting to go off.
So how to balance it all out? 'As the Government, we need to make sure that we look at the overall interest of the economy and everybody concerned, including the developers, real estate agents, buyers and then take it not just now but... down the road as well,' he said.
'What we can do is to keep a close eye... We are not trying to micro-manage the market by any means, we're just trying to make sure that the broad directions of the market are in line with how the economy is performing.'
The balancing act has become more difficult of late with a perfect storm of low interest rates, ample liquidity and record-breaking economic growth fuelling the property boom.
Trying to keep a lid on all this has preoccupied Mr Mah, 62, for much of the past 12 months.
A range of cooling measures has been adopted to take the heat out of the market, while large tracts of state land have been released to ensure developers can keep up the supply of homes.
But as the minister told The Straits Times last week, buyers should perhaps curb their enthusiasm as there are already plenty of homes around.
There are about 33,000 uncompleted units that remain unsold, and that is 'a hell of a lot of flats', said Mr Mah, enough to tide over the private market for three years and casting a shadow of a potential oversupply over the housing landscape.
'There is a risk, there's no doubt about it. That's why we have to be careful and the market must take this into account, as we will... We don't want to solve a problem but create another,' he said.
Buyers and developers must take into account this huge supply before making any big-ticket purchase decisions, he added.
Throw in the fact that interest rates will certainly rise at some point and the risk of external shocks to Singapore's economy, and the equation for a potential home-buyer becomes that much trickier.
'So when you buy and you hope to sell after your four-year period is over... don't forget that by that time there may be a lot more people trying to do the same. If your interest rates start to go up, then what do you do?' he said.
'Who would have predicted there would be an earthquake and tsunami and now possibly a nuclear meltdown (in Japan)? So many things are unknown, but at least what you do know you better open your eyes to.'
Huge global uncertainties such as the turmoil in the Arab world could also have a knock-on effect on Singapore, throwing a spanner in the works of rising prices.
But he acknowledges that the supply overhanging the market may not depress prices. If the global economy gets back on track and confidence returns, then demand will keep prices firm.
'Those are judgment calls the market has to make. So developers have to make those calls; if they get it right they will be rewarded, if they get it wrong they will get punished. We will have to watch this carefully,' he added.
The Government has a similar judgment call to make as well as it tries to cope with different scenarios.
If it misjudges and stops land sales due to an anticipated oversupply, then office and residential prices will jump sharply. But the confirmed and reserve lists of the Government's land sales programme help to mitigate these risks, he said.
Confirmed list sites go on sale regardless of interest and are often an indication of the Government's strategic development plans. Land on the reserve list is put up for tender only if developers make an acceptable initial offer.
Some home-buyers believe the authorities got it wrong last year when they failed to stem rising private home prices, which soared 17.6 per cent to reach record levels despite a series of cooling measures.
He concedes that the Government could have tapped on the brakes 'a little bit more earlier', but that finding the sweet spot remains the challenge.
'But if you ask me what I would have done in September 2009 in order to make sure that prices don't rise, I think that that would have been a pretty tough call,' he added.
He said the four rounds of cooling measures have managed to bring the market down to a reasonable level.
'Unfortunately, sometimes people don't realise it. They get caught up in the excitement of the market. They hear friends making a lot of money and they also want to jump in and I think that's the problem with the property market,' he said.
There are others who believe the Government should stay out of the private sector and let market forces reign, but he rejects the free-for-all approach.
'That argument that we should do nothing because it is a private market is quite a flawed one because there's no such thing as a totally free market.'
He cited examples of the United States and Ireland painfully picking up the pieces after their housing bubble burst, causing their economies to tank.
The challenge is in deciding where to draw the line.
One recent measure - levying stamp duty of up to 16 per cent on homes sold within certain periods - has been attacked as being too harsh.
But he pointed out that 1,101 buyers did not find it too onerous, choosing to purchase new private homes last month.
This represented a 'reasonably healthy level of activity in the market' from buyers who were mostly owner-occupiers or looking at the purchase as a long-term investment.
In a booming market with prices heading north, frustrated buyers can get angry and foreigners have been the target of some of this resentment.
But he says Singaporeans are 'over-blaming' them. Foreigners cannot buy public flats - which comprises about 80 per cent of the market - and are restricted in buying landed homes. This limits them to only a narrow sector of the non-landed private market.
The proportion of foreigners buying such homes has not increased over the years, hovering at around 20 to 30 per cent, he added.
Singapore is a small economy and people have argued that because land is limited, the Government should restrict foreign purchases.
'I would argue the opposite. Because we are a small country and a small economy, it's even more important that we keep ourselves open... (and) welcome foreigners to come here to contribute. And if we accept that, then we must allow them to invest and own homes here.'
To build a fence around the entire property market would send a very strong signal that foreigners are not welcome - which will result in even more serious implications for the economy.
Another hot issue centres on calls for more regulations over the sale of homes of less than 500 sq ft - so-called shoebox flats - but this is one the Government has decided to sit out.
'If people want to buy shoebox units and are prepared to pay those prices, why should we stop them? Some have called us to intervene, to prevent people from building and selling such units but how can we do that?... There are many other things to worry about.'
These tiny homes, which can have psf prices of up to 20 per cent more than standard flats, make up only about 5 to 6 per cent of all transactions, he said.
But if sales soar and begin to distort the Urban Redevelopment Authority's private property price index - which is based on the psf prices - the Government may consider a sub-index for shoebox homes.
'That was a valid concern that was raised to us... You don't want to distort the whole index (with) too many of these shoebox units. But I wouldn't be too concerned at this stage,' he said.
The minister is content to let market forces have their way in other areas as well, noting that builders have plenty of incentives to make the same judgment calls as the Government and buyers.
'Developers themselves of course have their own mechanisms. They can delay construction or take longer to put their properties to market or shorten it if the market is hot,' he added.
There have been some big bets made recently. CapitaLand's bid of $550 million - or $869 psf per plot ratio (ppr) - for a Bishan residential site last month is one. Analysts predict an eventual selling price of more than $1,500 psf, which would be a record for the area.
But he noted that high bid prices do not necessarily translate to high selling prices or successful projects.
'You may start launching it at a time when the market is down and if you don't lower your price then you can't sell and if you lower your price then your margins will be affected.
'You cannot assume that it is straightforward... (Developers) take a risk, if they overbid and they can't sell, they will be punished,' he said.
esthert@sph.com.sg
Out now: Mah's book on housing: Money
Q & A
Have we reached the point where we can no longer expect prices to fall below their previous peak?
I think the property market depends on many factors but the most important is confidence, as reflected in the economy - its current state but also what it is going to look like in the next three to five years.
If the economy remains strong, people are confident that Singapore will continue to grow, supply is limited and demand is strong, then prices will go up, but that's a very big if, isn't it?
Our economy also depends on what is happening in the world economy. In 2008 when the world collapsed, we went down with it, and the stock and property markets nosedived. If you had asked anyone in the market in early 2009 to predict prices at the end of the year, none of them, I dare say, would have predicted what happened.
I would be very reluctant to say that prices will keep going up and never go back to what they were before. I hope so, but we should never assume or base our decisions and judgments on that basis.
But long-term, if we continue to grow the economy and Singapore continues to do well with the region and the world growing, then yes of course. But short-term fluctuations, it happens.
What are the specific indicators the Government looks at to determine if another round of cooling measures are needed?
We don't have specific indicators, we don't have an algorithm that says that if this happens then we press a button. It's not on autopilot, it's basically a judgment.
We look at numbers from the Urban Redevelopment Authority, the Monetary Authority of Singapore and listen to market feedback and anecdotes. We also look at what analysts and developers are saying, what reporters are writing, newspaper ads, and take all these into account to have a sense of what is happening.
And then we make a judgment call: Are things getting out of hand? Is there irrational exuberance or not? There is no set of numbers somewhere that says if this happens we act, if this doesn't happen we don't act.
What are the factors that influence the property cycle?
The economy is the main one. But it does have a life of its own sometimes. Like now the property market is rising at a much sharper gradient than the economy. It is very sentiment-driven and it can get carried away. And when people and the market get carried away and the Government says that it's not going to intervene and let the market carry on, that's when trouble starts.
By Esther Teo, Property Reporter
Straits Times on 23 Mar 2011
PROPERTY - the word alone sets the Singaporean heart racing. Those capital gains, the own-your-own-home dream all make for a potent elixir.
Every now and then, National Development Minister Mah Bow Tan has to raise a red flag when real estate gets over- heated and prices threaten to enter the realm of the ridiculous.
He can never please everybody: owners and developers love soaring prices - it means cash in their pockets; but buyers want affordable homes - until they buy one of course.
The hot-button issues don't stop there. What about the huge number of shoebox flats hitting the market, foreigners buying up property, stamp duty increases? Wherever you look, there is a mine waiting to go off.
So how to balance it all out? 'As the Government, we need to make sure that we look at the overall interest of the economy and everybody concerned, including the developers, real estate agents, buyers and then take it not just now but... down the road as well,' he said.
'What we can do is to keep a close eye... We are not trying to micro-manage the market by any means, we're just trying to make sure that the broad directions of the market are in line with how the economy is performing.'
The balancing act has become more difficult of late with a perfect storm of low interest rates, ample liquidity and record-breaking economic growth fuelling the property boom.
Trying to keep a lid on all this has preoccupied Mr Mah, 62, for much of the past 12 months.
A range of cooling measures has been adopted to take the heat out of the market, while large tracts of state land have been released to ensure developers can keep up the supply of homes.
But as the minister told The Straits Times last week, buyers should perhaps curb their enthusiasm as there are already plenty of homes around.
There are about 33,000 uncompleted units that remain unsold, and that is 'a hell of a lot of flats', said Mr Mah, enough to tide over the private market for three years and casting a shadow of a potential oversupply over the housing landscape.
'There is a risk, there's no doubt about it. That's why we have to be careful and the market must take this into account, as we will... We don't want to solve a problem but create another,' he said.
Buyers and developers must take into account this huge supply before making any big-ticket purchase decisions, he added.
Throw in the fact that interest rates will certainly rise at some point and the risk of external shocks to Singapore's economy, and the equation for a potential home-buyer becomes that much trickier.
'So when you buy and you hope to sell after your four-year period is over... don't forget that by that time there may be a lot more people trying to do the same. If your interest rates start to go up, then what do you do?' he said.
'Who would have predicted there would be an earthquake and tsunami and now possibly a nuclear meltdown (in Japan)? So many things are unknown, but at least what you do know you better open your eyes to.'
Huge global uncertainties such as the turmoil in the Arab world could also have a knock-on effect on Singapore, throwing a spanner in the works of rising prices.
But he acknowledges that the supply overhanging the market may not depress prices. If the global economy gets back on track and confidence returns, then demand will keep prices firm.
'Those are judgment calls the market has to make. So developers have to make those calls; if they get it right they will be rewarded, if they get it wrong they will get punished. We will have to watch this carefully,' he added.
The Government has a similar judgment call to make as well as it tries to cope with different scenarios.
If it misjudges and stops land sales due to an anticipated oversupply, then office and residential prices will jump sharply. But the confirmed and reserve lists of the Government's land sales programme help to mitigate these risks, he said.
Confirmed list sites go on sale regardless of interest and are often an indication of the Government's strategic development plans. Land on the reserve list is put up for tender only if developers make an acceptable initial offer.
Some home-buyers believe the authorities got it wrong last year when they failed to stem rising private home prices, which soared 17.6 per cent to reach record levels despite a series of cooling measures.
He concedes that the Government could have tapped on the brakes 'a little bit more earlier', but that finding the sweet spot remains the challenge.
'But if you ask me what I would have done in September 2009 in order to make sure that prices don't rise, I think that that would have been a pretty tough call,' he added.
He said the four rounds of cooling measures have managed to bring the market down to a reasonable level.
'Unfortunately, sometimes people don't realise it. They get caught up in the excitement of the market. They hear friends making a lot of money and they also want to jump in and I think that's the problem with the property market,' he said.
There are others who believe the Government should stay out of the private sector and let market forces reign, but he rejects the free-for-all approach.
'That argument that we should do nothing because it is a private market is quite a flawed one because there's no such thing as a totally free market.'
He cited examples of the United States and Ireland painfully picking up the pieces after their housing bubble burst, causing their economies to tank.
The challenge is in deciding where to draw the line.
One recent measure - levying stamp duty of up to 16 per cent on homes sold within certain periods - has been attacked as being too harsh.
But he pointed out that 1,101 buyers did not find it too onerous, choosing to purchase new private homes last month.
This represented a 'reasonably healthy level of activity in the market' from buyers who were mostly owner-occupiers or looking at the purchase as a long-term investment.
In a booming market with prices heading north, frustrated buyers can get angry and foreigners have been the target of some of this resentment.
But he says Singaporeans are 'over-blaming' them. Foreigners cannot buy public flats - which comprises about 80 per cent of the market - and are restricted in buying landed homes. This limits them to only a narrow sector of the non-landed private market.
The proportion of foreigners buying such homes has not increased over the years, hovering at around 20 to 30 per cent, he added.
Singapore is a small economy and people have argued that because land is limited, the Government should restrict foreign purchases.
'I would argue the opposite. Because we are a small country and a small economy, it's even more important that we keep ourselves open... (and) welcome foreigners to come here to contribute. And if we accept that, then we must allow them to invest and own homes here.'
To build a fence around the entire property market would send a very strong signal that foreigners are not welcome - which will result in even more serious implications for the economy.
Another hot issue centres on calls for more regulations over the sale of homes of less than 500 sq ft - so-called shoebox flats - but this is one the Government has decided to sit out.
'If people want to buy shoebox units and are prepared to pay those prices, why should we stop them? Some have called us to intervene, to prevent people from building and selling such units but how can we do that?... There are many other things to worry about.'
These tiny homes, which can have psf prices of up to 20 per cent more than standard flats, make up only about 5 to 6 per cent of all transactions, he said.
But if sales soar and begin to distort the Urban Redevelopment Authority's private property price index - which is based on the psf prices - the Government may consider a sub-index for shoebox homes.
'That was a valid concern that was raised to us... You don't want to distort the whole index (with) too many of these shoebox units. But I wouldn't be too concerned at this stage,' he said.
The minister is content to let market forces have their way in other areas as well, noting that builders have plenty of incentives to make the same judgment calls as the Government and buyers.
'Developers themselves of course have their own mechanisms. They can delay construction or take longer to put their properties to market or shorten it if the market is hot,' he added.
There have been some big bets made recently. CapitaLand's bid of $550 million - or $869 psf per plot ratio (ppr) - for a Bishan residential site last month is one. Analysts predict an eventual selling price of more than $1,500 psf, which would be a record for the area.
But he noted that high bid prices do not necessarily translate to high selling prices or successful projects.
'You may start launching it at a time when the market is down and if you don't lower your price then you can't sell and if you lower your price then your margins will be affected.
'You cannot assume that it is straightforward... (Developers) take a risk, if they overbid and they can't sell, they will be punished,' he said.
esthert@sph.com.sg
Out now: Mah's book on housing: Money
Q & A
Have we reached the point where we can no longer expect prices to fall below their previous peak?
I think the property market depends on many factors but the most important is confidence, as reflected in the economy - its current state but also what it is going to look like in the next three to five years.
If the economy remains strong, people are confident that Singapore will continue to grow, supply is limited and demand is strong, then prices will go up, but that's a very big if, isn't it?
Our economy also depends on what is happening in the world economy. In 2008 when the world collapsed, we went down with it, and the stock and property markets nosedived. If you had asked anyone in the market in early 2009 to predict prices at the end of the year, none of them, I dare say, would have predicted what happened.
I would be very reluctant to say that prices will keep going up and never go back to what they were before. I hope so, but we should never assume or base our decisions and judgments on that basis.
But long-term, if we continue to grow the economy and Singapore continues to do well with the region and the world growing, then yes of course. But short-term fluctuations, it happens.
What are the specific indicators the Government looks at to determine if another round of cooling measures are needed?
We don't have specific indicators, we don't have an algorithm that says that if this happens then we press a button. It's not on autopilot, it's basically a judgment.
We look at numbers from the Urban Redevelopment Authority, the Monetary Authority of Singapore and listen to market feedback and anecdotes. We also look at what analysts and developers are saying, what reporters are writing, newspaper ads, and take all these into account to have a sense of what is happening.
And then we make a judgment call: Are things getting out of hand? Is there irrational exuberance or not? There is no set of numbers somewhere that says if this happens we act, if this doesn't happen we don't act.
What are the factors that influence the property cycle?
The economy is the main one. But it does have a life of its own sometimes. Like now the property market is rising at a much sharper gradient than the economy. It is very sentiment-driven and it can get carried away. And when people and the market get carried away and the Government says that it's not going to intervene and let the market carry on, that's when trouble starts.
Friday, March 4, 2011
Choosing best high yield dividend stocks for your portfolio
Posted by Drizzt
March 4, 2011
I read a good piece on high yield investing over the weekend on The Edge. Personal Wealth featured Bruno Lippens of Pictet Asset Management,which is one of the world’s best performing high-dividend funds.
The fund focus on investment opportunities with predictable but stable cash flows while limiting volatility.
I find that Bruno highlighted all the good opinions on how to structure your dividend portfolio
Does not go for 10% high yield stocks. “They are probably in real estate, financial services or other very cyclical sectors” “What we strive for is not just dividends but a stable flow of dividends over a long period”
Studies show that companies that consistently pay higher dividends over a period of time tend to outperform those that pay very little or no dividends.
Global high yield infrastructure investments have tended to outperform when dividend yields exceed bond yields. “What we like about these companies is that you don’t have to be a genius to predict how they perform – Whether you are headed for double-digit inflation, a sharp recession or are in a midst of a slow recovery.”
Dislikes: financial services companies, business trusts, REITs and blue chip companies vulnerable to business cycles. Purchase companies that don’t swing much even during recession.
Likes: Utilities, Telecoms, toll roads, independent power plants, waste management and pipelines. They are not cyclical or less cyclical and don’t face much competition.
How dividend stocks will thrive in inflationary environment – “The case for investing in a high-dividend fund right now is simple-you get better yield than you might get from a similar fixed income fund with similar risks.” “If inflation goes higher, our investee companies will make more money and pay out higher dividends”
His fund is heavy on regulated utilities that are able to raise tariffs as their costs go up. The fund managers did a study on high inflation 1970s. “Because of all the inflation protection built into their business models, their tariffs go up, their revenues go higher, their cash flow is bigger and their nominal dividend is higher.”
Over the long term, dividends to them matter more than stock buy backs.
Currently they are looking into pipelines, utilities and water stocks
They don’t think telecom stocks are so yesterday. “There are several drivers in the telecom space, particularly mobile, which are doing well on the back of the boom in smartphones such as iPhones and tablets such as iPads”
The next opportunity may be water infrastructure.
They are not into Hutchison Whampoa’s HPH Trust. “If we were to find a port in a regulated environment where there was a lot of visibility on how the traffic goes throughout the cycle and it had a very stable and predictable cashflow, we might look at it” “But ports are a cyclical business. During a recession, port traffic can fall off a cliff.”
Some of their biggest holdings are Centrica, Southern Co and Vodafone Group.
Their Asian biggest holding is China Mobile. “It has a predictable cash flow, it is growing, it is committed to returning cash to its shareholders and ability to raise dividends”
The only company in Singapore they wanted to put money into was Singtel. “I am a little disappointed with SingTel’s unwillingness to commit to a dividend policy” “Unless we have an assurance that the company is committed to return cash through dividends, we won’t invest in it, no matter how good its earnings or fundamentals”
That was a particularly interesting mentioned of dividend stocks in Singapore! So many and they are only interested in probably 2 listed here which is Singtel and China Mobile ADR.
This could give local investors a good hint where to park their money if they are looking for low volatility and growing dividends.
March 4, 2011
I read a good piece on high yield investing over the weekend on The Edge. Personal Wealth featured Bruno Lippens of Pictet Asset Management,which is one of the world’s best performing high-dividend funds.
The fund focus on investment opportunities with predictable but stable cash flows while limiting volatility.
I find that Bruno highlighted all the good opinions on how to structure your dividend portfolio
Does not go for 10% high yield stocks. “They are probably in real estate, financial services or other very cyclical sectors” “What we strive for is not just dividends but a stable flow of dividends over a long period”
Studies show that companies that consistently pay higher dividends over a period of time tend to outperform those that pay very little or no dividends.
Global high yield infrastructure investments have tended to outperform when dividend yields exceed bond yields. “What we like about these companies is that you don’t have to be a genius to predict how they perform – Whether you are headed for double-digit inflation, a sharp recession or are in a midst of a slow recovery.”
Dislikes: financial services companies, business trusts, REITs and blue chip companies vulnerable to business cycles. Purchase companies that don’t swing much even during recession.
Likes: Utilities, Telecoms, toll roads, independent power plants, waste management and pipelines. They are not cyclical or less cyclical and don’t face much competition.
How dividend stocks will thrive in inflationary environment – “The case for investing in a high-dividend fund right now is simple-you get better yield than you might get from a similar fixed income fund with similar risks.” “If inflation goes higher, our investee companies will make more money and pay out higher dividends”
His fund is heavy on regulated utilities that are able to raise tariffs as their costs go up. The fund managers did a study on high inflation 1970s. “Because of all the inflation protection built into their business models, their tariffs go up, their revenues go higher, their cash flow is bigger and their nominal dividend is higher.”
Over the long term, dividends to them matter more than stock buy backs.
Currently they are looking into pipelines, utilities and water stocks
They don’t think telecom stocks are so yesterday. “There are several drivers in the telecom space, particularly mobile, which are doing well on the back of the boom in smartphones such as iPhones and tablets such as iPads”
The next opportunity may be water infrastructure.
They are not into Hutchison Whampoa’s HPH Trust. “If we were to find a port in a regulated environment where there was a lot of visibility on how the traffic goes throughout the cycle and it had a very stable and predictable cashflow, we might look at it” “But ports are a cyclical business. During a recession, port traffic can fall off a cliff.”
Some of their biggest holdings are Centrica, Southern Co and Vodafone Group.
Their Asian biggest holding is China Mobile. “It has a predictable cash flow, it is growing, it is committed to returning cash to its shareholders and ability to raise dividends”
The only company in Singapore they wanted to put money into was Singtel. “I am a little disappointed with SingTel’s unwillingness to commit to a dividend policy” “Unless we have an assurance that the company is committed to return cash through dividends, we won’t invest in it, no matter how good its earnings or fundamentals”
That was a particularly interesting mentioned of dividend stocks in Singapore! So many and they are only interested in probably 2 listed here which is Singtel and China Mobile ADR.
This could give local investors a good hint where to park their money if they are looking for low volatility and growing dividends.
Thursday, March 3, 2011
Investments: Be prepared to wait it out to reap benefits
3 March 2011
Lim Say Boon
Investors usually greet with scepticism bankers who come bearing messages of long-term investment.
"So you mean I won't make money in the short term?" And you know what? The only honest answer is this: You may or you may not.
Over short periods of time - periods less than a year for example - your probability of making a profit on equities is probably 50-50.
Yes, even for fundamentally sound investments. But the longer the time frame, the greater the probability of you making a profit. That is not just an article of faith. That is an observation based on historical data over many different periods of time.
Indeed, it is not the banker who comes bearing the message of the long-term you should greet with scepticism. It is the financial industry players who come bearing messages of doubling or tripling your money with this or that stock you should regard with a lot of scepticism.
You know the old saying - if it is too good to be true, it probably is not true. Does it pass the common sense test?
That is, if the guy coming to you with what the industry calls a "double bagger" (that is, a stock proposition which can double your outlay in a short time) is so confident of the outcome, why would he bother sharing it with you just to make a percentage of one per cent on commission? It is a bit like those e-mails from Nigeria promising huge profits if you transfer a sum of money into a dodgy bank account.
Few bankers will tell you this. So let me do it for you. Making money is difficult. And the sooner one accepts that, the easier one's wealth accumulation journey becomes.
Any business person - including the most successful - will testify to the difficulty of making a profit. Open market places throw competition at any money making proposition and in the process erode profit margins. Why should we expect making money from the stock market, for example, be any different? The stock market is after all a huge collection of different businesses and money making propositions.
Indeed, if I knew 30 years ago what I know now, I would be a lot wealthier today. I would not have been the only person in Singapore who has wasted lot of money trying to catch the elusive "double bagger"; wasted a lot of time waiting for the perfect moment to buy assets; wasted a lot of opportunities to make money from just buying good, buying cheap, and buying into the power of returns compounding over the years.
Assets, from properties to stocks, do appreciate over time. The logic is simple. As societies become more productive, as they become wealthier, the value of assets in that economy should appreciate.
Suppose you were a manufacturer. The technologies available to you in your business inevitably advance with time, so you can make more "stuff" in any given period with the same factory and the same workforce.
That is, your factory becomes more productive. In that way, your revenue should rise and your profits should grow. As a result, your company's net asset value rises and its share price grows with that. And the land on which your factory is located should be worth more as businesses (including yours) earn more profits from any given piece of real estate.
Of course, none of this would be true if the global economy goes into a long economic "winter" - an extended deep recession or depression.
But fortunately, over the past hundred years or so, periods of recession have generally been growing shorter while periods of economic expansion have been growing longer. There have been more growth years than recessionary years. That is the basic factor underlying the phenomenon of more positive annual returns on stock markets than negative years.
Mind you, there will always be economic and market cycles for all manner of assets - including equities, bonds, commodities and properties. But the value of assets does not fluctuate on a flat line. The march of productivity and prosperity suggests that asset values tend to fluctuate on rising trend lines. So there are cycles and there are trends.
The investor must be prepared to ride out the cycles to avail himself to the benefits of the long-term trend.
There is a line from an ancient Persian fable of Indian origins: "The nightingale which cannot bear the thorn, it is best it should never speak of the rose."
Lim Say Boon is the chief investment officer of DBS Bank.
Lim Say Boon
Investors usually greet with scepticism bankers who come bearing messages of long-term investment.
"So you mean I won't make money in the short term?" And you know what? The only honest answer is this: You may or you may not.
Over short periods of time - periods less than a year for example - your probability of making a profit on equities is probably 50-50.
Yes, even for fundamentally sound investments. But the longer the time frame, the greater the probability of you making a profit. That is not just an article of faith. That is an observation based on historical data over many different periods of time.
Indeed, it is not the banker who comes bearing the message of the long-term you should greet with scepticism. It is the financial industry players who come bearing messages of doubling or tripling your money with this or that stock you should regard with a lot of scepticism.
You know the old saying - if it is too good to be true, it probably is not true. Does it pass the common sense test?
That is, if the guy coming to you with what the industry calls a "double bagger" (that is, a stock proposition which can double your outlay in a short time) is so confident of the outcome, why would he bother sharing it with you just to make a percentage of one per cent on commission? It is a bit like those e-mails from Nigeria promising huge profits if you transfer a sum of money into a dodgy bank account.
Few bankers will tell you this. So let me do it for you. Making money is difficult. And the sooner one accepts that, the easier one's wealth accumulation journey becomes.
Any business person - including the most successful - will testify to the difficulty of making a profit. Open market places throw competition at any money making proposition and in the process erode profit margins. Why should we expect making money from the stock market, for example, be any different? The stock market is after all a huge collection of different businesses and money making propositions.
Indeed, if I knew 30 years ago what I know now, I would be a lot wealthier today. I would not have been the only person in Singapore who has wasted lot of money trying to catch the elusive "double bagger"; wasted a lot of time waiting for the perfect moment to buy assets; wasted a lot of opportunities to make money from just buying good, buying cheap, and buying into the power of returns compounding over the years.
Assets, from properties to stocks, do appreciate over time. The logic is simple. As societies become more productive, as they become wealthier, the value of assets in that economy should appreciate.
Suppose you were a manufacturer. The technologies available to you in your business inevitably advance with time, so you can make more "stuff" in any given period with the same factory and the same workforce.
That is, your factory becomes more productive. In that way, your revenue should rise and your profits should grow. As a result, your company's net asset value rises and its share price grows with that. And the land on which your factory is located should be worth more as businesses (including yours) earn more profits from any given piece of real estate.
Of course, none of this would be true if the global economy goes into a long economic "winter" - an extended deep recession or depression.
But fortunately, over the past hundred years or so, periods of recession have generally been growing shorter while periods of economic expansion have been growing longer. There have been more growth years than recessionary years. That is the basic factor underlying the phenomenon of more positive annual returns on stock markets than negative years.
Mind you, there will always be economic and market cycles for all manner of assets - including equities, bonds, commodities and properties. But the value of assets does not fluctuate on a flat line. The march of productivity and prosperity suggests that asset values tend to fluctuate on rising trend lines. So there are cycles and there are trends.
The investor must be prepared to ride out the cycles to avail himself to the benefits of the long-term trend.
There is a line from an ancient Persian fable of Indian origins: "The nightingale which cannot bear the thorn, it is best it should never speak of the rose."
Lim Say Boon is the chief investment officer of DBS Bank.
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