Wolf Money(portfolio update for end October 2023) part 2
Lone Wolf Fund(LWF)
Portfolio as at end of October
1.) Cash
2.) Valuetronics Holdings Limited
3.) SBS Transit
Commentary
The market is facing the dreadful prospect of having to deal with a 4% risk free yield and a higher borrowing rate in Singapore. It calls into question on the conventional wisdom of having some debt on the book is good. Having a lot of cash in the book are now considered superior. Given the high risk-free rate, a lot of money will be sucked into risk free assets like money market funds, government bonds and other types of hybrid investment close to risk free . That creates a vacuum for capital. If one can get 4% risk free, it makes little sense to invest in a low-yielding investment. Singapore stock market returns average around 6.7% annually over a 20 years period with dividends included. At 4% risk free, one is already getting close to 2/3 of long term return on Singapore stock. I suspect many companies with high gearing will be doing cash call soon to lower their debt. The faster and earlier they go to the shareholders for cash, the better it will be, as capital might be in short supply soon. Given the high borrowing rate, it is better to raise funds and return borrowings to the banks to lower interest cost than trying to squeeze out a return investing in the business. The high interest and capitalisation rate will also make any asset securitisation difficult.
(Credit: CNA; Start-up and SME struggling to repay loans)
I was asked by The Edge Singapore on my view of the potential rise in IPO listings in Singapore. I wasn’t surprised by the rush to list because it might be better to raise fund and pay back loans as the huddle rate of doing business had risen considerably. Tuan Sing in its recently issued 4 year bond issue had to pay a coupon rate of 7.5%. Which business gives you that kind of return annually? That makes Tuan Sing’s bond more attractive than its own equity. If interest rate dropped by 1% within the next 2 years, Tuan Sing’s bond value would have gone up by at least 13%. The bond issue is likely to be many times over subscribed.
The upcoming mid-Nov congressional vote on budget will likely get nasty. With the hardcore GOP dead set in trying to get Democrats’ free spending habits under control even with the possibility of a government shutdown. Democrats might be forced to address the issue of entitlements. Cutting entitlements will send the voters towards the way of The Republican Party. Unfortunately there is no silver bullet to get the budget in order without dealing with the issue of increasing revenue. Taxes are core interest of the Republicans, compromise had become a dirty word in US politics. US might be ungovernable going forward given the deeply entrenched political ideology of both parties.
China’s GDP was better than expected at 4.9% for the third quarter. If they are able to grow at a minimum 4.4% in the last quarter, they would have met their growth target for the year. The Chinese property market is in serious decline, with the back drop of falling property price and rising unemployment in China . Psychologically, it is hard for the Chinese consumers to be cheery and spend a ton of money even with the huge saving accumulated during the 3 years covid period. The poor consumers’ sentiment hitting sales of luxury brands. LVMH’s stock price declined 25% over the course of 6 months after warning of slower growth.
One way to help the US President Biden’s re election bid is for administration to offer an olive branch to China by providing a tariff holiday on some Chinese import into US so as to help lower inflation in US in time for his re election. At this juncture, it is purely my speculation. I suspect something positive might happened between China and US during the APEC meeting in Nov. The marriage of convenience works wonderfully for both. China with its excess capacity and high unemployment could export some of their deflation out to US, where as US could bring down their inflation by getting cheaper Chinese made goods. The US also needs the Chinese to play balls in absorbing some of newly issued debt to fund the budget deficit. There are signs of improved relationship between the two countries. China and US engaged in a Farm-Goods signing ceremony for the first time in six years. Wang Yi, the Chinese Foreign Minister visited Washington recently. I have hope for both to call a ceasefire on trade war during the Xi-Biden meeting in November.
SBS Transit
I was explaining to my son, a train enthusiast, about my shares purchased in the company. He is too young to understand the concept of share investment. I am making a small investment in SBS Transit just enough to cover our transport fares. I gave him a simple explanation, by tapping his EZ-Link card when he boarded the bus or train, a tinny weeny portion of that bus or train fare comes back into Papa's pocket in form of dividends. My son’s instant reaction, “not fair” 😁 . I told him most things in Singapore are fair but some rules are “fairer” towards investors. The ability to invest in companies that provide essential services is a way of getting a breather in managing the high cost of living. While some might worry about the bigger than expected increase in transport fare, shareholders can shield themselves from price increase as dividends form a natural hedge against the increase. I would be most interested to invest in Singapore Power if they ever become a listed company to cover the ever ballooning electricity bill. SBS share price was weaker amid a rising oil price due to ongoing conflict in The Middle East. Although LTA covers diesel costs, SBS Transit still needs to cover the electricity cost for running the MRT services. With the 7% increase in fare and the additional subsidy from the government, they should be able to cover the increase in electricity. SBS Transit will be providing a voluntary 3Q update in early November. I hope there might be some special dividend to celebrate the 50th anniversary of the founding of the bus company. Finger crossed. If I may suggest to the authority, in celebration of the 50th anniversary, free travel card for seniors aged 70 and above for a year should be given out. It will encourage the senior citizens to be more active in their retirement. There is an ongoing exhibition showcasing heritage memorabilia of SBS Transit at some bus interchanges and mrt stations till end November. I have enclosed a link of the CNA interview given by SBS Group CEO, Jeffery Sim, on the highlight of the exhibition. I had taken some photos during my trip to Toa Payoh Interchange.
https://youtu.be/mJI6kdtWy-k?si=-xSI2rO_bxq_-MHj
The company was given an extension by sgx until 14th Nov to come out with an exit offer for Boustead Projects. The company will be releasing their half yearly-result by mid November. I am expecting them to report a stronger result due to their healthy order book. Boustead’s oil and gas business is likely to show a marked improvement in result due to rising capex budget among oil majors. Europe is also pulling up their socks by increasing their investment in energy sector to improve energy security after the Ukraine-Russia war stopped cheap Russian oil from flowing into the continent. It will be interesting to know Boustead’s outlook for their business. I love to see an increase in half yearly-dividend too.
Thanks to the good people at COMO Metropolitan Hotel(Boustead is the majority owner of the property), I managed to get a sneak preview of their hotel room and infinity pool. They look awesome and luxurious. I love to come back for a staycation with my family.
Valuetronics
I don’t usually buy shares in contract manufacturers. I never took an interest in them previously as I felt most have very little competitive advantages as a business. I was shown the many opportunities in the contract manufacturers space in the past from people who are experts investing in the sector but I never fancied investing in them till this month. Maybe my perception of a tough business came from a friend who used to work for a manufacturer, brand principal will come asking for a quotation on a DVD player. If the price is right, they will give the manufacturer the order. Next year they will continue to give the manufacturer the order provided they could meet the new unit price at a 15% reduction from last year. Manufacturers made money by flocking the machines hard, efficiency plays an important part. Valuetronics continue to pull rabbits out of their hat maintaining a high margin, they are the leading EMS in Singapore in term of margin. This small purchase in Valuetronics can be considered as a milestone, my first investment in a contract manufacturer in decades. Valuetronics main attraction is the cash in the company. The insanely high cash to market capitalisation is the main draw. Secondly a business generating healthy cashflow is another strong merit of investing in the company. Thirdly the company was able to spend $200m HKD to build their factory in Vietnam without getting a loan and still have a billion HKD sitting comfortably in the bank, on top of that the company pays a decent dividend to shareholders. The diversification of operations into Vietnam allow them to win 4 new customers. All these indicators point to having superior capital management. I have written my piece on the company. Please refer to the link. Valuetronics will be reporting half yearly result on the 9th November before the market opened.
Cash
It is a good time to be a saver. Choices of risk-free instruments ranging from 3-4% are aplenty. Singapore Savings Bonds yield surged to a 12 months high. I continue to roll over the lower yielding SSBs to the current higher yielding issue.
Summary
A lot of considerations were made on what to buy for my portfolio. I have taken baby steps into the market given the attractive valuation. Our market is trading at only 10x p/e. The market has been extremely difficult to navigate especially for me given my bias to operate predominantly in the Singapore market. The Singapore market was down close to 5% for the month of Oct. Lone Wolf Fund fell 2.5 % for the month of Oct which is inline with broad market weakness. Portfolio ytd gain stands at a positive 2.5%(excluding dividend and cash yield). My portfolio was lucky to be positive at this stage of the year given the terrible performance of our market. An old wisdom always holds true “One is better off being lucky than to be smart in the stock market”. I was saved by the skin of my teeth due to better performance in the first half of 2023. It would have been a lot worse if I had been more aggressive. I survived another month, rode my luck and counted my blessings. For those interested in technical, S&P 500 major support will be around 3945. STI Index major support is around the 2960.
The elephant in the room is the YCC(yield curve control) on interest rates by the Japanese Central Bank. The carry trade had been on going for decades, any missteps on rates by JCB can be catastrophic to world financial market. This is one potential problem the market can live without, given the host of other problems the world economy is facing. My mind is telling me, there might still be one last swan song before the market participants heads for exit in a big way. Let me give you a few hypothetical scenarios, if the Fed paused on rate hike, the market might take it as an indicator to buy. Is it wise to try to make money in last leg of the bull market or is it the time to sell and sit out if that happens? What if the Fed continues with it hike to beyond 7%? These are important questions an investor need to ask themselves before investing as an era of sea change in the investment world might be upon us. God bless 🙏
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Disclaimers
All investments is highly speculative in nature and involves substantial risk of loss. We encourage our reader to invest very carefully. We also encourage reader to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. Much of our information is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way whatsoever warrant or guarantee the success of any action you take in reliance on our statements. All information provided are for education only. Buyer beware,do you own due diligence.
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