Thursday, December 08, 2022

China has relaxed its covid restrictions

China has relaxed its covid restrictions. It has announced several changes to its restrictions during the past two weeks. The changes have been quite significant.

This decision follows protests from its residents on the impacts of the restrictions on their livelihood and social activities.

The relaxation will bring possible health risks. More people will be infected with covid, and more people will need to be treated in hospital. There is the fear that the hospital system will be overwhelmed. Deaths from covid will also increase.

This is a risk that is worth taking. If the hospital system is overwhelmed and deaths increased significantly, China can reintroduce its restrictions. At the time, the general public will understand and will agree to the measures that have to be taken.

Personally, I think that the risk will not be great. The current variant of the virus is mild, although it is quite contagious.

However, I am expressing a layman view. The medical experts will monitor the actual data and make their judgment.

I wish China all the best in the new phase of its battle against the covid virus.

Tan Kin Lian

Hyflux could have been saved

 Hyflux, the Singapore icon in the water desalination industry, went bankrupt in May 2018. Their financial problem was caused mainly because they signed a long term gas contract at fixed prices and the electricity market collapsed due to oversupply of gas.

If they were able to tide over this period, Hyflux would have been very profitable today.
Over 34,000 shareholders and bond holders, mostly small investors in Singapore, would have kept their investments intact. It was shortsighted for the government and financial community to allow Hyflux to fail.
This is just a personal opinion - not suitable for POFMA.

Satellite based ERP system

In 2016, the Land Transport Authority awarded a contract to a consortium to install a new satellite based system to replace the gantry system for ERP (electronic road pricing).

One of the benefits of the new system was the ability to charge the motorist based on the distance traveled.
The project cost was $556 million (SGD) and was expected to be operational by 2020.
Due to the covid pandemic, the project has now been delayed to 2023. Furthermore, the implementation of the distance based system, which was the main justification for this new system, has been delayed and no new deadline has been announced.
Here is a recent update.

It appears to me that a lot of money, time and effort are being spent on the new system, without any tangible benefit - at least for the immediate future.
There is a further risk - that the new system will face teething trouble. It relies on location data sent out by the satellites. This new technology has not been tested to handle a volume of over 1 million vehicles. There are many possible points of failure, and unexpected trouble may occur.
On a personal note, I would not have approved this project (if I were in charge).
Anyway, I like to wish LTA all the best in their rollout of the new system. I hope to be proved wrong, and that the new system can be the model for other countries to adopt.

Wednesday, December 07, 2022

Wisdom of the Crowd - New Issues

1. What should be done with a mortgage loan when interest rate rises with the market?

2. Should social media platform exercise moderation of the content?

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Mobilize domestic savings

 Developing countries have a small middle class and some wealthy people who have savings.

Unfortunately, these savings are channel to the developed countries, and come back to the developing countries in the form of loans in hard currencies at high interest rates.
Developing countries should find a new mechanism to mobilize their domestic savings, instead of relying on international institutions as the middlemen.

Wisdom of the Crowd - New Issues

1. Will the PAP govt be able to moderate the cost of living in Singapore?
2. Should the govt help homeowners who are squeezed by higher mortgage payments?

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Mortgage on fixed payment

A homeowner takes a mortgage loan to buy a home and repays the mortgage over a fixed period, say 20 years.
The ideal situation is for the bank to offer a fixed rate mortgage, so that the monthly repayment remains the same over the period of repayment.
In many countries, such as Singapore, the bank is not able to offer a fixed rate mortgage because their source of funding is on variable interest rate.
It is the practice for the bank to offer a variable interest mortgage. In some cases, they can fix the rate only for a short initial period, say 3 years.
When the market interest rate rises, such as the case in 2022, they have to adjust the interest rate on their mortgages. With higher interest rates, the monthly repayment increases for the home owner.
Initial Interest Repay Annual Monthly
Loan rate Year repayment repayment
800,000 2% 20 48,925 4,077
800,000 5% 20 64,194 5,350
The above example shows a mortgage loan of $800,000 to be repaid over 20 years. When the loan was taken, the interest rate was 2%. The monthly repayment was $4,077.
When the interest rate increases to 5%, the money repayment increases to $5,350. This is a 31% increase in the monthly payment, compared to $4,077 previously.
Many home owners are not able to afford the higher monthly repayment, due to their tight budget. They are not able to pay the additional $1,273 from their monthly income.
A better arrangement is for the monthly repayment to remain fixed at $4,077 and for the loan to be repaid over a longer period. If the interest rate remains at 5%, the loan can be repaid in 35 years.
It is likely that the interest rate will not remain at a high level for many years. When it reduces in the future, the loan can be fully paid in less than 35 years.
The home is probably on a freehold or a 99 year leasehold. Even if the mortgage is repaid over 35 years, the property still has many years of remaining lease.
This arrangement cannot be offered for properties with a remaining less that is shorter than, say, 50 years. Most properties have a longer remaining lease.
I suggest that the Monetary Authority of Singapore should require banks to offer existing home owners to convert their mortgage to this new arrangement, i.e. that they can fix their monthly repayments at the current level, and repay the loan over a longer period. The repayment period does not need to be fixed, i.e. it will continue until the loan is fully repaid.

Tuesday, December 06, 2022

WOTC - Fight inflation

Wisdom of the Crowd: 64% of the respondents said that the best way to fight the rising cost of living is to provide a subsidy for energy and food.

Poor countries can mobilize internal savings

Many developing countries need funds for their economic development. They issue bonds in US dollar in the international markets. When the US dollar rises, as has happened in 2022, the developing countries find it costly to repay the borrowings. Some have defaulted in the process.

Many developing countries have the means to mobilize their internal savings for their economic development, but failed to do so.

What happened?

In any developing country, there is a middle class that have personal savings. They put their savings in local banks at low interest rates. Part of the savings are invested in the international markets.

The wealthy in the poor countries put their savings in international banks and invest in overseas assets.

The money in the international financial markets return to the developing countries as loans that are denominated in a hard currency, mainly US dollar, at high interest rate.

In essence the international financial system uses the savings from developing countries to provide expensive loans in hard currencies.

It is probable that some development funds are taken from the excess savings of the developed countries. However, the domestic savings of the developing countries could be mobilized to reduce the dependence on foreign funds.

How can this be carried out?

1. The developing country can set up a development fund and issue equity and bonds
2. The bonds will carry an interest rate that is higher than the rate offered by the local banks.
3. The equity will earn the return from the productive assets.

If the development fund is managed professionally and ethically, it should attract the local investors, and maybe international investors.

The developing countries are now paying a high price for funds from international institutions. It will be less costly for them to tap their own development fund. They will reduce their borrowing cost by removing the excess profit margin earned by the international institutions.

While this approach may be difficult to implement, it is not impossible. I hope that the some of the developing countries can succeed with this approach.

Tan Kin Lian

Monday, December 05, 2022

Invest in China stocks

 Here are the reasons why I prefer to invest in China stocks.

Contrarian approach towards investing

 The recently retired CEO of Temasek Holdings said that the fund adopts a "contrarian" approach towards investing. She made this reference in reply to questions about how TH decided to invest in FTX.

I do not understand what she meant by being "contrarian" in that context. 

I adopt a contrarian approach in my investing strategy. Let me explain how my approach works. 

1. By being contrarian, I do not follow the general trend in the market sometimes.

2. If a stock that I invested in had dropped significantly due to market sentiment, and if the price is now below what I considered to be its underlying value, I keep the stock. I may even buy more shares at the depressed price.

3. I do not consider investing in risky startups and highly valued stocks to be "contrarian". I consider it to be speculative gambling. I do speculate in some of these stocks, but I do not describe it as "contrarian".

I wish to share this example of being "contrarian". 

Prior to 1997, many large blue chip companies have the local and foreign tranches of the stocks. The local tranche could only be held by local residents and institutions. The foreign tranche could be invested freely, and could be bought by foreigners.

The price of the foreign tranche were about 50% higher than the local tranche. Many fund managers, including those managing funds for local institutions, preferred to invest in the foreign tranche, as they appeared to be giving better investment gain.

I was the CEO of a large local insurance cooperative. I set an investment policy to invest sole in the discounted local tranches of the stocks. They get the same dividend as the highly priced foreign tranche.

My decision was contrary to the prevailing thinking of the asset managers at that time. I was being "contrarian".

When the government decided in 1997 to merge the foreign and local tranches into a single tranche, the value of the local tranche stocks went up about 50%. My fund made a large gain of over $300 million. It represented many years of the normal profits of the fund at that time. It was a large gain that put the fund into a strong financial position that lasted for several decades.

This is my "fundamental" approach towards investing.

1. For each stock, I make a best estimate of its earnings per share (EPS).
2. I consider a multiple of 15 times of the EPS to be a fair value, i.e. PER of 15 times.
3. If a stock trades below this benchmark, I consider it to be undervalued. If it trades above the benchmark, it is overvalued.
4. I do not worry if the stocks drop significantly below its fundamental value. I consider that some investors had to sell the stock for their own reason, e.g. liquidity, and that reason does not apply to me. 
5. I hold a contrarian view by refusing to sell stocks that are grossly undervalued, nor to invest in stocks that are grossly overvalued.

Tan Kin Lian

Return from Temasek Holdings

Temasek holdings was formed in 1974. The portfolio size is now $403 billion.

Its annual report showed a 10 year TSR (total shareholder return) of 7%, 20 year TSR of 8% and a 40 year TSR of 12%. These numbers appear impressive, compared with the inflation rate.

I believe that the TSR are inflated, due to their accounting practice.

I believe (but not verified) that SingTel was transferred to Temasek Holdings at its book value before 1994. It was listed in 1994 at a huge gain. This was probably included in the calculation of the 40 year TSR.

In July 2009, Changi Airport was transferred to TH for $2 billion. I suppose that it was the book value, and that the airport was highly profitable at that time. The real value of the asset should be much higher than the book value.

Some time in the future, Changi Airport will be listed in the stock exchange and the market valuation would probably be much higher than the book value. This gain would probably be counted in the TSR of TH.

It is possible to make special adjustment to remove the Sing Tel gain from at the time of listing from the computation of the TSR. I do not know if this was done.

My comment would also apply to the future listing of Changi Airport.

I do not have access to the actual numbers, so my perception and analysis could be wrong. We have to wait for clarification, if it ever comes.

Tan Kin Lian

WOTC - Pharmacies

 Wisdom of the Crowd: 42% of the respondents prefer Guardian Pharmacy, followed by Watson (40%) and Unity (19%).

Sunday, December 04, 2022

A possible bad year for Temasek Holdings

Temasek Holdings had written off US $275 million in its investment in FTX.

During the past 15 years, TH had incurred large losses in some of its investments. In 2008, TH wrote off its $400 million investment in ABC Learning Centers in Australia.
There were other bad investments, which raised much concern in the past.
Personally, I was not concerned about these large losses. For a large fund, there will always be some bad investments. They would be covered by the gains on good investments.
The correct approach is to look at the performance of the entire portfolio, and to compare it with the market indices or with the performance of other similar state owned funds.
The latest annual report of TH was for the year ended 31 March 2022. The total portfolio was $403 billion. The 10 year average return was 7%. This would be acceptable.
However, the performance for the current year, which will close on 31 March 2023, and reported a few months after, will probably be very bad.
I read a recent news report from a managing director of TH that the investments in technology, media and telecoms industry had dropped by 50% and the China stocks had dropped by 20%. These two sectors probably account for 40% of the total portfolio.
I would estimate that the portfolio values could be written down by 25% in March 2023. The write-down could amount to $100 billion, based on a portfolio of $403 billion. (This is my guess only).
This could bring down the 10 year average return to 4%, which is not so impressive.
Although the loss on FTX looks quite bad, the actual amount may appear to be small, when compared to the possible loss on the entire portfolio.
We have another four months before the close of the financial year. A possible saving grace could come from a recovery of the global stock market. This would reduce the loss for TH.

How did Temasek Holdings made its investment in FTX?

 Many people in Singapore were disappointed that Temasek Holdings invested and wrote down US$275 million in its investment in FTX.          

There were surprised and shocked to learn, after the collapse, that FTX was run by a team of young, inexperienced people, and there were no proper governance, accounting and risk management practices in place. 

How did TH carry out its due diligence, and invested a large sum into a a badly run business?

This is my understanding of how the venture capital industry works.

The people in this industry that invest large funds into startup companies, such as FTX, form a closely knit community. They know each other personally through attendance at international conferences, business introductions and joint investments in ventures. 

Often, a leading VC capitalist gets to know a startup entrepreneur and decides to fund the startup business. This VC capitalist introduces the startup to the their close contacts in the industry, and probably describes it as "an opportunity not to be missed". 

The other VC investors line up to get a share of this opportunity. They would probably not carry out their own due diligence, as it would take time, and the opportunity might go to other investors who are willing to decide promptly.

I have spent a few decades of my working career in the insurance industry. This is also how the big insurers spread their risk through reinsurance. They follow the leader and take a share of the big risks, often based on trust that the leader has carried out the proper due diligence.

The problem with this approach is that the leading VC capitalist that brings to "opportunity" to other investors might have a vested interest, e.g. they are paid a finder's fee based on the investments made by new investors.

I do not know for certain if this is the case for FTX, but it might be. The  finder fees can be quite hefty, and the payment would probably be considered legal.

Nevertheless, I consider it to be a bad practice for an institution to make a big investment based on this practice of following the leader blindly. 

Many large hedge and institutional funds are involved in FTX. Temasek Holdings was not the leading investor and not the largest investor. 

I expect that the decision to invest in FTX was not made by the portfolio manager on his own. It probably had to be approved by an investment committee. I would expect that the investment committee would include members of the non-executive board. 

I found that Temasek Holdings have a Senior Divestment and Investment Committee (SDIC) that comprised solely of the full time management. It does not appear to include the non-executive board directors. The annual report did not disclose the names and positions of members of SDIC. 

I think that this is a bad practice that needs to be corrected. Some non-executive members of the board should sit in the SDIC. Their role is to check that the full time managers are doing their work diligently.

My above view is based on my the information that I was able to obtain, and that information may be incomplete or inaccurate. 

The government has announced that they will carry out an investigation into this matter. I will wait to read the findings of this investigation. I hope that it will be released in full and quite promptly. 

Tan Kin Lian

WOTC - Vote on world leaders

 Here are the results of the votes on world leaders.

Wisdom of the Crowd - New Issues

1. Why were there protests against the covid lockdown in China?
2. Will Anwar's government be stable?

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WOTC - Food court

 Wisdom of the Crowd: 59% of respondents prefer Kopitiam, followed by Food Junction (22%) and Koufu (17%).

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