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Semi Annual

Investment
Forum
Programme

5.30pm – Registration
6.00pm – Market Outlook & Stock Picks
(Calvin Tan, NUS Invest Research Director))
6.30pm – Economic Overview
(Liang Shibin, Investment Analyst at Phillips
Securities) Wednesday
7.15pm – Asian Growth Story, Strategies & Insights August 25, 6pm
(Ow Tai Zhi, NUS Invest President)
Lecture Theatre 16
7.45pm – Value Investing & Portfolio Management
(Jason Low, Portfolio Manager)
8.45pm – Refreshments and End of Event Supported By:
EVENT SYNOPSIS
The Semi-Annual Investment Forum (SIF) is an ongoing initiative by NUS Invest to promote
financial literacy and provide a platform to share investment knowledge in the NUS
community. The inaugural SIF held in March 2009 features the Research Team from DMG &
Partners Securities speaking on the Market Outlook as well as the Real Estate and Oil & Gas
Sector.

The 4th SIF held on 24 August 2010 features the Research Team from Phillips Securities
providing an economic overview and listing out asset classes which are attractive to investors
in the current economic climate. Members were also exposed to the new Asia Pacific Ex
Japan Absolute Return portfolio and several conviction stock picks by NUS Invest Exco
Research Team. For the very first time, Mr. Jason Low, an experienced portfolio manager
who has managed funds in excess of US$500 million for the last 5 years, shared his value
investing tips and how retail investors should construct their portfolio.
DISCLOSURES & DISCLAIMERS
This research material has been prepared by NUS Invest.

NUS Invest specifically prohibits the redistribution of this material in whole or in part
without the written permission of NUS Invest.

The research officer(s) primarily responsible for the content of this research material, in
whole or in part, certifies that their views are accurately expressed and they will not
receive direct or indirect compensation in exchange for expressing specific
recommendations or views in this research material.
DISCLOSURES & DISCLAIMERS
Nothing in this research material constitutes a representation that any investment
strategy or recommendation contained herein is suitable or appropriate to a recipient’s
individual circumstances or otherwise constitutes a personal recommendation. It is
published solely for information purposes, it does not constitute an advertisement and is
not to be construed as a solicitation or an offer to buy or sell any securities or related
financial instruments.

No representation or warranty, either expressed or implied, is provided in relation to the


accuracy, completeness or reliability of the information contained herein. The research
material should not be regarded by recipients as a substitute for the exercise of their own
judgement. Any opinions expressed in this research material are subject to change
without notice.
Speaker Profile – Jason Low [Portfolio Manager]

Mr. Jason Low is an experienced portfolio manager, having managed funds in


excess of US$500 million for the last 5 years. Jason is no stranger to NUS Invest,
having presented at our Internal Training in September 2009.
Value Investing & Portfolio Management
[25 August 2010]
What We Will Talk About
• Value Investing
• The Stock Market and its Participants
• Price Earnings Ratio
• Earnings Yield
• Institutional Portfolio Management
• Equity Fund Management
• Retail Portfolio
• Q&A
Price vs Value
• Price of Condo – S$1mn
• Value of Condo - ?
• Investing = Price << Value
• Intrinsic Value (Fr Cashflow)
• Margin of Safety
• Good Co. vs Good Stock
– Google, Apple, Coca Cola
– Good Co. at cheap price
• The Sail: Good Property
• Is it a Good Investment?
Value Investing
• Definition: Buy A Dollar for 60c
• Price << Intrinsic Value
• Margin of Safety
• Mundane Stocks: Brick & Mortar
• Low PER, Low Price to Book, High
Dividend, Strong cashflow etc
• Robust Business Model
• Most Famous Value Investor
• Warren Buffett
• Father of Value Investing: Ben Graham
Margin Of Safety
• A Dollar for 90c - Fail
• Bridge
• Investing in 3 Words
• Everybody Calculates a Different Intrinsic Value
• Protection against Valuation Error
• Calculated Value of Co Per Share is $4.00
• Buy below $2.40
• Buy At Least 30% Below Value
Margin Of Safety
3

2.5

2
Value
1.5
Price
Margin of Safety
1

0.5

0
1 3 5 7 9 11 13 15 17 19 21 23 25
The Stock Market
• A Place to Buy a Part of a Business
• Selling Prices for Businesses are quoted Daily
• Value of a Business does not change daily
• Should not be used as a Gambling Den
• 0.00000025% of Singtel
• You are the owner!
• Do you Buy and Sell your business like Old PDAs?
• Do you Buy a Business and Sell It 2 Days later?
• For 10% Profit?
• To the next Greater Fool?
Traders vs Investors
• Trader focuses on Price
– Analyze past prices to forecast future prices (like
analyzing past roulette no.s to forecast the next no.)
– Intrinsic value is of no use to a trader
– Buy signal: when he is confident of selling to a Greater
Fool at a higher price

• Investor focuses on Value


– Analyze fundamentals of a business, financial capability
of a company to determine the intrinsic value
– Price indicate how much he actually has to pay for that
value
– Buy signal: when price is significantly lower than value
Price Earnings Ratio
• Price Earnings Ratio – a Valuation Method
• Say Property at River Valley can rent for $5,000/mth
• After tax and costs, how to calculate the Property Value?

Year 1 Year 2 Year 3 Year 19 Year 20


S$40,000 S$40,000 S$40,000 … S$40,000 S$40,000

$Ppty Value
Value = Rental x Multiple
= $40,000 x 20
= $800,000

• Property Price $1.2mn – What does this says?


Price Earnings Ratio
• Price Earnings Ratio – a Valuation Method
• Say SGX earns 40c per share (EPS) for the next 15 years
• What is SGX’s Value?

Year 1 Year 2 Year 3 Year 14 Year 15


40c 40c 40c … 40c 40c

$ Value
Value = EPS x Price Earnings Ratio
= 40c x 15
= $6.00

• SGX Stock Price is $8.00 – What does this says?


Price Earnings Ratio
• Why PER 15x?
– Can think of it as no. of years to get back capital
– As it is, 15 years is a long time
– But PER seldom gets less than 15x (over a 5 to 8 yr period)
– Anything more than 15x should be considered Expensive
• More traditional PE calculation
• PER = Price / EPS
• Solve for PER of SGX: $8.00 / 40c = 20x
Price Value
PER Solve Dictate
EPS Known Known
Price/Value Known Solve
Earnings Yield
Return for Various Asset Classes

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16%
14%
12%
10%
8%
6%
4%
2%
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• Another way to Explain - Why 15x?


• Think Reciprocal of PER
• Earnings Per Share / Price
• Earnings yield of SGX : 1/15 = 0.067 or 6.7%
• Singapore 10 Yr Govt Bond gives 3%
• Do not accept a Yield of less than 6%
Institutional Portfolio Management

• Institutional Portfolio Management


• Traditional Approach: 50/40/10
• Domestic vs Global
• Tactical Asset Allocation
• Markowitz Portfolio Optimization
• Proliferation of Asset Classes: RE, Private
Equity, Commodities, Alternatives
• More about Beta than Alpha
Equity Fund Management
• Benchmark and Alpha/VA
• Overweight and Underweight
• Relative Return: Stock Return – Benchmark Return
• Stock and Sector Bets
• Pressure to Do Well Short Term
• 90% of all PMs Fail To Beat Benchmark
• Shifting To Absolute Return
• Long Short Strategies
• Latest Vogue: High Frequency Trading
• Value Investing: Not In Vogue
Retail Portfolio
• Size: Less Than 20k - ETF, or Good Trade
• Size: 50-100k, ie 5-10 Stocks
• Look For Value Stocks
• Think about Portfolio Yield
• Singapore or Global
• Industry Diversification
• Geographical Exposure
• Some ETFs, Fixed Income Instruments
• Avoid Bad Management & Value Destroyers
• E.g. Airlines, Container Shipping, Most of Tech
Q&A
Forward PER
• Stock market is not interested in the past
• The market is always forward looking
• Need Earnings Per Share for the Future
• Consensus Estimate = Average of all 1-Yr
Forward Sell-side Earnings Estimate
• Sustainable Forward EPS for next 15 Yrs
• How to calculate?
• Investing is about Hardwork
P/E and Earnings yield
• For markets 10x to 100x
• For single stocks 2x to infinity
• Average stock PER 20x
• Price << Value
• Margin of Safety
• Buy stocks with PER < 15x
• Or Earnings Yield > 6%
• Look at LT averages
• Low PE comes rarely!
• Easier said that done!
Stock Picking
• It must be Cheap
• It must be a Good Business
• It must have a Good Management
• It must have a Strong Balance Sheet
• What is the Investment Thesis ?
• Dividends ?
• Risks ?
• Pick for the Long Run
• Nobody Remembers
Miss Universe 2007
Good Businesses
• Pricing Power
– Ability to Raise Prices
– Sustainable Price Hikes

• Recurring Sales
– Razor and Blade
– Consumables
– Necessity items
• Low Capex
• Exposure
– Asia
– Age Groups
– Industry
Good Businesses
• Barriers to Entry • Other Porter Forces
– Brand – Threat of Suppliers
– Share – Threat of Customers
– Patents – Substitutes
– Competition
• Regulations
• Moral issues

• Phase of Growth
– Not Film
– High Single Digit
Cerebos Pacific
• PER 13x, FCF Yield 5%
• Tonic Drink and Package Food
• Recurring Sales, Minimal Capex, Pricing Power, Brand
• Thailand, Developed Asia
• Competent Management, Shareholder Friendly
• Minimal Debt
• Dividend yield 7.5%
• Risks: China - Marketing expense overshoot
Ratios and Composition

High margin
Concerns and Questions
China Suntory bought at $8.25 in 1990
Sales in 2009 S$13mn (estimate)
Losses S$14mn or so (estimate) Advertising, promotion, distribution cost
China past yr sales S$180mn (for overall co.)
S$mn Sales OP
03 10 -4.7 Director’s remuneration
04 10 -5.7 Total S$15mn
High margin
05 13 -8.4 Koike S$1.5mn
06 13.6 -6.2
07 15.5 -7 Questions
08 18.5 -9.8 How much was due to recall in US Brand’s
products?
Need to grow sales to S$20mn Will Suntory and Kirin do anything?
in order to breakeven Advertising, promotion cost in China?
Room for Thailand to grow?
They have changed distributor
Targeting students and young workers TARGET PRICE: 0.25c x 15 = S$3.75
Focus on Guangzhou, Shanghai and BUY at S$2.60
Beijing only
Winners
Ticker Short Name Ind Subgroup Price Mkt Cap E_Yld OPM PBR ROE ROA D_Yld
ST SP Equity SINGAP TELECOMM Telecom Services 3.01 47,941,861,376 7.21 25.39 2.57 19.66 11.07 2.74
DBS SP Equity DBS GROUP HLDGS Commer Banks Non-US 11.58 26,420,660,224 7.02 N.A. 1.48 9.72 0.89 2.89
UOB SP Equity UNITED OVERSEAS Commer Banks Non-US 14.26 21,731,250,176 7.03 N.A. 1.64 11.86 1.22 3.24
OCBC SP Equity OCBC BANK Commer Banks Non-US 6.73 21,495,209,984 6.81 N.A. 1.66 11.49 1.12 2.55
KEP SP Equity KEPPEL CORP LTD Diversified Operations 6.96 11,088,390,144 6.57 11.02 1.97 16.03 4.24 3
SGX SP Equity SINGAPORE EXCH Finance-Other Services 7.13 7,623,372,800 5.03 N.A. 4.86 23.36 11.54 4.51
SPH SP Equity SINGAP PRESS HGS Publishing-Newspapers 3.12 4,967,465,984 5.85 36.67 3.68 21.61 13.85 3.41
GE SP Equity GREAT EAST HOLD Life/Health Insurance 10.4 4,922,518,016 6.2 N.A. 3.04 21.26 7.01 1.97
APB SP Equity APB BREWERIES Brewery 11.54 2,979,406,080 5.39 12.36 2.52 12.9 8.14 4.08
SIE SP Equity SIA ENGINEERING Commercial Services 2.76 2,976,802,048 8.26 14.83 3.01 31.33 21.57 2.84
MRT SP Equity SMRT CORP LTD Transport-Services 1.72 2,607,918,080 7.58 19.19 2.79 21.44 6.67 4.21
SATS SP Equity SINGAP AIRPORT T Airport Develop/Maint 2.15 2,320,369,920 9.49 21.73 1.89 19.12 12.52 3.51
PWAY SP Equity PARKWAY HLDGS Medical-Hospitals 1.67 1,887,757,056 5.17 20.71 2.76 15.59 6.88 3.23
CER SP Equity CEREBOS PACIFIC Food-Misc/Diversified 3 944,468,416 6.59 13.66 2.47 16.19 9.73 2.16
DELM SP Equity DEL MONTE PAC LT Food-Canned 0.61 659,886,528 9.44 15.64 2.09 19.51 13.11 6.11
RFMD SP Equity RAFFLES MEDICAL Medical-Hospitals 0.98 508,109,792 3.88 11.18 2.08 9.4 7.04 2.12
FEH SP Equity FOOD EMPIRE HLDG Food-Misc/Diversified 0.32 169,294,096 15.37 14.24 1.56 24.48 17.62 2.33
VCM SP Equity VICOM LTD Transport-Services 1.8 154,034,096 10.45 25.54 1.67 17.84 13.42 5.66

• Big Cap and Blue Chips (except last 2 names)


• Stable Growth, Dividend Income, Safe Buys
The Real Stock Picing Begins
Ticker Short Name Ind Subgroup Price Mkt Cap E_Yld OPM PBR ROE ROA D_Yld
JCNC SP Equity JARDINE CYCLE & Distribution/Wholesale 18.74 6,598,150,144 15.14 6.66 1.37 19.02 7.06 3.88
SMM SP Equity SEMBCORP MARINE Shipbuilding 2.7 5,592,819,200 6.26 8.12 2.48 13.67 6.47 2.56
SCI SP Equity SEMBCORP INDUS Engineering/R&D Services 2.99 5,338,201,088 10.16 5.42 2.15 19.66 5.34 2.61
SPC SP Equity SINGAPORE PETROL Oil Refining&Marketing 6.21 3,206,753,024 11.07 3.46 1.19 16.84 7.21 4.95
COS SP Equity COSCO CORP SINGA Shipbuilding 1.25 2,799,055,872 7.03 21.85 3.95 21.33 7.44 2.37
VMS SP Equity VENTURE CORP LTD Electronic Compo-Misc 6.98 1,914,290,048 6.41 7.35 2.94 16.97 11.83 2.98
STRTR SP Equity STRAITS TRADING Metal-Diversified 4.05 1,319,883,008 10.13 N.A. 0.76 8.6 6.12 1.94
METRO SP Equity METRO HOLDINGS Retail-Misc/Diversified 0.56 353,235,008 19.33 12.59 0.56 11.74 8.06 4.91
CH SP Equity CHUAN HUP HLDGS Transport-Marine 0.26 256,215,696 9.6 59.27 1.13 23.01 18.55 4.63
SUPER SP Equity SUPER COFFEEMIX Food-Flour&Grain 0.47 252,282,496 7.82 11.69 1.23 10.2 6.43 2.48
OSIM SP Equity OSIM INTL LTD Consumer Products-Misc 0.38 251,653,600 -22.91 8.51 2.92 12.36 5.95 1.06
ELEC SP Equity ELEC & ELTEK Circuit Boards 1.22 219,093,792 12.46 12.78 1.33 16.13 9.22 7.17
GPI SP Equity GP INDUSTRIES Electronic Compo-Misc 0.32 181,629,600 14.94 0.73 0.89 13.43 6.77 4.42
UOI SP Equity UNITED O/S INSUR Property/Casualty Ins 2.67 163,283,904 9.6 N.A. 1.1 11.25 6.02 204.81
SRE SP Equity SINGAP REINSURAN Reinsurance 0.23 136,174,496 8.7 N.A. 0.84 8.15 2.96 6.08
Computers-Memory
DT SP Equity DATAPULSE TECH Devices 0.19 112,997,600 6.59 17.86 1.79 12.84 9.95 4.69
POP SP Equity POPULAR HLDGS Publishing-Books 0.16 100,285,696 8.9 4.81 1.32 11.97 6.34 2.72

• Quant models have limitations, crappy names get included


• Qualitative Analysis and Experience to filter out the real winners
Stock Picking is Dangerous
• Picking stocks and building a portfolio
usually will not beat an index return
• Index return 10% p.a. on average
• Portfolio < 10% p.a. on average
• Only 10% chance to beat index
• The best way to invest is to buy index
funds or ETFs!
• SGX has about 40 ETFs now
Selected List of ETFs
Ticker Index Expense Mkt Cap (mn) PE PB Dividend PCF PS Stocks
Lyxor Thailand THA SP MSCI Thailand 0.65% $17 17.6 1.7 2.7% 10.3 0.9 24
Lyxor E.Europe CEC SP CECE Europe 0.50% $12 14.9 1.3 6.5% 3.0 0.7 29
Lyxor World WLD SP MSCI World 0.45% $26 _ _ _ _ 0.9 2000+
Lyxor E.Mkts LEM SP MSCI E. Mkts 0.65% $31 13.0 1.8 3.1% 6.2 0.9 777
Lyxor Japan JPN SP Topix 0.50% $39 41.4 1.2 2.1% 4.9 0.5 1000+
STI ETF STTF SP STI 0.30% $538 15.8 1.4 4.0% 8.1 1.2 30
Lyxor Latam LTM SP MSCI Latam 0.65% $12 13.3 2.4 3.1% 10.4 1.3 126
Lyxor China H ASI SP HSCEI 0.65% $50 17.4 2.2 1.6% 22.9 1.6 44
Lyxor Nifty LNFU SP Nifty 0.85% $81 17.6 3.0 1.3% 10.4 1.6 51
Lyxor Hang Seng HSI SP Hang Seng 0.65% $33 16.6 1.8 2.2% 6.7 1.9 43
Lyxor India INR SP MSCI India 0.85% $116 19.0 3.2 1.3% 12.8 1.9 63
FT China25 XX25 SP FT China 0.60% $275 _ _ _ _ _ 25
FT Vietnam XFVT SP FT Vietnam 0.85% $96 _ _ _ _ _ _
Lyxor Commodity CRB SP Reuters/Jefferies 0.65% $84 _ _ _ _ _ _
Lyxor Non Ergy CRN SP Reuters/Jefferies 0.70% $21 _ _ _ _ _ _

• Singapore and Emerging Markets Look Cheap


• China – The story for 21st Century, have to get in at some point!
Conclusion
• Value Philosophy
• Price << Value (Margin of Safety)
• Don’t Trade
• What’s the Yield?
• Stocking Picking is for the Gung-Ho
• List of Winners!
• ETFs will help you Build Wealth
• Lyxor Hang Seng China
Additional Topics
• Good Businesses, Strong Franchises
• Solid Management
• Financials
• Return On Equity
• Net Cash to Market Cap
• Free Cash Flow Yield
• Investing Wisdom
• DCF: Discounted Cash Flow
• Homework on ETFs
Solid Management
• Shareholder Return • Succession Planning
– Dividends
– Share Buyback
• Execution
– Past Promises
• Capital Prudence – Restructuring
– Aggressive Capex
– M&A
• Background
– From the Industry?
– Cash Hoarding
– Ex-bureaucrat?
• Compensation • Owner-Manager
– S$20mn?
– Not out to screw minority
• Industry Knowledge – Not cashing out
– Knows the Competition
– Reading Future Trends
• Other Commitments
Capital Prudence Industry Knowledge Compensation

Succession Planning Background Owner-Manager


Balance Sheet
• Cash to Market Cap • Interest Bearing Debt
– No Debt – D/E Ratio
– More than 20% is a Bonus! – Interest Rate
• Current Assets • Bombs
– Huge Receivables? – Pension Obligations
– Inventory? – Deferred Tax Assets
– Litigations
• Investments
– Stocks • Past Capital Raising
– Real Estate – Rights Issues
– Equity Offering
• Fixed Assets – Convertible Bonds
– Asset Light Strategy?
– Fully Depreciated Assets • Retained Earnings
Return On Equity
• Definition • Asset Turnover
– Net Profit / Equity – Difficult to Increase
– Use Long Term Average ROE – Look for High Asset Turnover
• Cost of Capital • Net Profit Margin
– ROE > Cost of Equity – Easy to Increase
– Average Cost of Capital: 4-6% – Difficult to Maintain
• Intrinsic Growth Rate • Inflated ROE
– Growth in Retained Earnings – Leverage
– G = ROE * ( 1 – Payout Ratio ) – Asset Light Strategy
• Du Pont Analysis • Global Average ROE
– Asset Turnover – Developed Countries 8-10%
– Net Profit Margin – Emerging Countries > 15%
– Leverage
Net Cash To Market Cap
• No Debt
– Or Cash – Debt = Positive
– Low Mkt Cap
– No Other Obligations
• Boustead
– Mkt Cap S$350mn
– Cash S$150mn
– Buying the Co. at 40% discount
• Other Assets
– Real Estate (e.g. CK Tang, SPH) $ 150 mn
– Listed Subsidiaries (e.g. Ali Baba & TaoBao)
– Brand Equity (e.g. Coca Cola)
• Shareholder Friendliness
Free Cash Flow Yield
• FCF Yield = FCF / EV
• FCF = Operating Cashflow - Capex
• EV = Market Cap + Debt - Cash
• FCF Yield > 6% (same as Earnings Yield)
• FCF = Net Profit if Depreciation = Capex
• Sustainable FCF for next 15 Yrs
• Debt Repayment, Cash Accumulation Rate
• Better Indicator of Good Co. and Good
Mgmt
Free Cash Flow Yield
• Sales S$14mn From S$3mn
• COGS S$7mn & Fixed costs S$5.6mn
• Net Profit S$400k
• Cashflow = FCF roughly S$400k
• 3% Decline in Sales: Losses
• Debt S$3mn
• Losses before bankruptcy S$700k
• 10 Retail Outlets (Peak 14), 200 Staff

• Best Managed Airline In The World


• Over 100 Planes, 14,000 Employees
• Ferries 16 Million Passengers Annually
• 10 Yr Average Pre-Tax Profits S$1.5bn
• 10 Yr Average Free Cash Flow S$2mn
DCF: Discounted Cash Flow
• Total Cashflow of Asset
• Say Asset produces 100c for eternity, discount rate 5%
• What is Asset’s Value?

Year 1 Year 2 Year 3 Year 99 Year 100


100c 95c 91c … 0.8c 0.7c

$ Value
Value = Sum of all cashflow = $19.84
= $1/0.05 = $20
= $1 x 20 times (PE)

• Using a PE multiple and DCF has the same end result


Investing Wisdom
• A Stock Is Forever
• Reversion To the Mean
• Income And Capital Appreciation
• Bubbles Beware
• Look Through Ten Years
• Circle Of Competence
• A Dollar For 60 Cents