Thursday, September 30, 2010

Looking at cash balances of S-Chips just ain't enough

A recent examination of the US technology sector's huge cash balances highlights an interesting parallel with locally-listed S-Chips. The connection? Cash balances aren't what they appear to be. What does this mean?

A recent comment by Vitaliy N. Katsenelson suggests that Microsoft's debt issuance makes zero economic sense, as the company has approximately US$39 billion in cash and short term securities on which it is earning lower interest that what it pays for newly issued debt. The move appears to be destroying shareholder value by increasing interest costs without any apparent benefit to the company. Or is this so?

• $1 billion of 0.875 percent notes due Sept. 25, 2013
• $1.75 billion of 1.625 percent notes due Sept. 25, 2015
• $1 billion of 3.000 percent notes due Oct. 1, 2020
• $1 billion of 4.500 percent notes due Oct. 1, 2040

"Microsoft intends to use the net proceeds from the offering for general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of stock and acquisitions." -

Now why would a company with almost US$39 billion at its disposal need to raise US$4.75 billion to fund things like stock repurchases? The answer may lie with the location of the company's cash balances - a significant proportion of Microsoft's cash may be offshore (ie. not in the US), and repatriation of that cash back to the US could induce substantial taxes. So by raising additional capital from the bond market (which sports extremely low interest rates by the way), Microsoft is able to fund things like dividend increases and share buybacks without having to repatriate cash from overseas subsidiaries. In addition, based on balance sheet strength, the company's financial position is hardly impacted by the bond issuance, given its huge (theoretical) cash horde. 

Now, how does this relate to S-Chips? We have seen various instances of S-Chip companies which have cash holdings in excess of their debt (most are usually debt-free), and even after paying off their liabilities, the company still has a cash balance which even surpasses the company's market capitalisation. On that basis, the company can theoretically purchase all its outstanding shares with its cash holdings, leaving the management with full ownership of the company at no additional cost. Now why have we not seen this happening?

A 5 Jan 2010 announcement by one of the S-Chips (China Milk) may offer some clues:

"The Board wishes to advise that the Company is still currently awaiting clearance from the State Administration of Foreign Exchange (“SAFE”) of the People’s Republic of China (the “PRC”) for the remittance out of the PRC of approximately US$170.56 million, being for the full settlement of the Early Redemption at the Option of the Bondholders (including interest). The Company believes the delay is administrative and procedural in nature and there is no legal obstacle to the remittance of the same.
China Milk was in default of its convertible debt obligations to the tune of approximately US$146 million in early 2010, and with the company yet to resolve this issue, the stock still remains suspended today. The company had a rather strong balance sheet, with sufficient cash to repay its impending puttable debt obligation. The company's bonds even traded above par prior to the default, suggesting that investors believed the company would be able to redeem the bonds.

However, facing remittance issues, China Milk has yet to settle payment with bondholders, which sends a strong message to investors who are looking for S-Chips which appear cheap based on their balance sheets. The cost (and difficulties) faced with remittance of cash held offshore may mean that cash balances on balance sheets are not what they seem. Some of this cash balances may never be able to fund a share buyback programme, or a hefty dividend payout. Sometimes, a dollar in hand (or in this case, held onshore) may be worth more than two in a bush.

Wednesday, September 22, 2010

Sep 10 Sharebuilder additions

Sharebuilder additions on 20 September 2010:

Added 31 shares of STI ETF at an average cost of $3.13 per share, and 16 shares of F&N at an average cost of $6.12 per share.

Monday, September 20, 2010

Jardine Strategic, the one that got away

Investment and emotions tend to get mixed, ultimately resulting in poor investment decisions. Our experience with Jardine Strategic is a case in point:

We sold the stock in June as the stock floated around new record highs, despite the generally weak market sentiment at the time. Our investment thesis was that market technicals were weak and we were more comfortable holding a larger cash position to capitalise on temporary weakness in the market.

The stock did slump temporarily thereafter, providing a short window of opportunity to re-enter (which we failed to do), and then rocketed out of reach.

What went wrong?

We unfortunately let our emotions get the better of us, and the urge to take profit on a stock in a slumping market was too tempting to resist. We failed to relook our investment thesis for the stock (which was a compelling buy despite being at a record high), and we ended up selling an extremely high-conviction stock idea. We also had no predetermined re-entry target price, which meant that we failed to load up when the stock declined.

A mistake which we will try not to repeat:
  • Never sell higher conviction ideas; always start with the lowest conviction stocks
Even now, we would be hard-pressed to find a compelling alternative to one of the Jardine holding companies, which allow exposure (at a discount still) to their stable of blue-chip franchises. Would we buy the stock at this time? The stock is already one of the best-performing stocks in the STI YTD, and cliched investment mantras relating to chasing hot stocks spring to mind. Patience is a virtue when it comes to investments, and we may prefer to wait for the next crisis (which could be years later!) to time our entry into the stock.

Monday, September 6, 2010

New position : Pan-United Corp

Bought 9,000 shares of Pan United Corp at $0.485 today. The company was listed in 1993 and has a relatively long track of rewarding shareholders with generous dividend payouts. Pan United Corp has three main businesses - Basic building materials, Shipping and Port & Logistics. The company's subsidiary United Cement is a key supplier of ready-mix concrete, and we expect sustained demand for cement in Singapore over the next few years, as a huge supply of newly-built homes come onto the market.

We are less positive on the shipping business, but the company's handysized container vessel has the potential to be sold for a profit, which will provide cash for further investment. On the other hand, the company's 51.3% stake in the Changshu Xinghua port (CXP) looks particularly interesting. According to the company website:

Changshu Xinghua Port Co Ltd (CXP) is one of the main port terminal operator in Eastern and Central China along the Yangtze River. It is among the ten busiest river ports in China. CXP is one of the leading hubs for pulp & paper and steel products in China. In 2009, CXP registered a 6% increase in general cargo volume to 5.6 million tonnes. We are leading hub in pulp&paper, steel and logs.
CXP lies on the southern bank of the Yangtze River just 54 nautical miles from the river mouth. It is strategically located to serve Jiangsu, China's most industralised province, and capitalise on the enormous potential of its hinterland.
CXP boasts excellent natural attributes with a constant deep and silt-free water depth of 13-metres.Well sheltered, it has eight berths with a total berth length of 1.7km capable to handle vessels up to 100,000 dwt. CXP's total handling capacity is 10.0m tonnes per annum.

Macquarie International Infrastructure Trust (MIIF) carries its 38% stake in CXP at $92.8 million (last revalued in June 2010), while Pan United Corp's estimated carrying value for its 51.3% stake is a paltry $36.5 million (at cost, according to a DBS report). Based on MIIF's valuation, Pan United's stake in the port should be worth $125 million, or almost $89 million higher.

With 555,366,160 shares outstanding, Pan United's market cap is about $270 million, and CXP's market value is already half of that. The stock is also trading slightly under book value (about $0.50), which means that we are getting a further discount on the underlying subsidiaries. 

Friday, September 3, 2010

Portfolio drops 2.9% in August, STI down 0.6%

After a 3% gain in July, the portfolio fell 2.9% in August, more than the 0.6% decline of the STI. The portfolio's "NAV" ended the month of August at $0.999, a 0.1% decline from the start of the year. Wells Fargo was the worst performing stock in the portfolio, on the back of general weakness in US financial stocks in August. We added to the stock in the month as it dived to 52-week lows.

Even after adding shares of Wells Fargo, the portfolio has 20.6% in cash, and we may be looking to bring down our cash holding to 15% with the addition of one or two more attractively valued-companies to the portfolio.

August 2010 Stock Returns:


TAT HONG W130802 0.0%
SPH -1.2%
Capitaland -1.3%
STI ETF -1.7%
K-Green Trust -5.2%
WBL Corp -6.3%
TAT HONG -8.1%
Best World W130705 -14.3%

Keppel Corp $0.16
Wells Fargo US$0.05
Tat Hong $0.015
STI ETF $0.03
Cambridge $0.0068