Tuesday, January 16, 2018

Tangible Thoughts #1

Welcome to yet another recurring theme type of posts! Modeled after Xi Jin Ping penning down his thoughts for the Middle Kingdom after Mao and Deng, this series will pen down bite size thoughts from the great investors as well as other thought leaders.

Here's the first inauguration thought from David Einhorn taken from an excerpt of a talk he gave recently. He was asked this interesting question from the audience and his answer was just enlightening.

Audience: Do you sort of stick to your guns, when it comes to entering contrarian positions and holding it until it works out?

David: First of all, it's not about sticking to your guns. It's about reassessing constantly. And when the positions don't work, or they go against you, the presumption is not we were right, the presumption is that we might have missed something here. And so then, you have to go back and think about it again and again and again and understand the other side, and see if anything has changed, and see if your view has changed, if it has changed, to modify the position. And you might eliminate it, or you might reduce it, or sometimes increase it, but very rarely. 

Generally speaking, my inclination is when the position is not going well it's more likely that we missed something, so the choice is generally either to reduce or eliminate or just simply keep it if we think that it's right. On the other hand if we continue to think that we are right, then I find that patience is the way to go. And then we have to wait and let the story play out however it does, while we continue to reassess it to see if, in fact, we were wrong.

Investing is not about right or wrong with one's initial stance as every new development changes the course. Rather, it is about reassessing the situation constantly, changing our positions when things change or have the patience to wait for the market to realize our correct views.

Monday, January 08, 2018

Is the Virtual Economy Taking Over the World?

Here's wishing all readers a very Happy 2018! Thanks for all your support these 12 years! Today let's talk about world domination by the internet!

We discussed this topic some time back about how internet is taking over the world and real world and real life experiences are becoming a rarity. Today let's delve a bit further. We saw how the largest companies in the world are now dominated by internet firms. So, is the virtual economy taking over the world? If so, exactly how big is it really gonna be?

I think it will be almost as big as the real economy some day i.e. the virtual economy could become 40-50 trillion dollars, which is 80% of the real economy today. But it will not take over the real economy. It might be something quite different. More like an avatar economy mirroring our real economy. The real economy does not disappear, it takes on different forms while the overall pie grows.

Based on my estimate, the virtual economy today is possibly just 15-20% of the real economy today. While it did cannibalize some demand from traditional businesses, a big part of it is just new stuff. We shall see how new everything actually becomes. Now why do we say it is 15-20% today? Reference could be drawn from two data points:

1) The tech sector market cap of the top 100 firms is USD 3.6trn vs the total market cap of USD 17.5trn, meaning that tech firms make up is c.20% of the top 100 firms (according to a report by PWC).

Technology makes up 20%

2) Internet retail penetration is 15% in the US while it is 8-18% in other developed countries (18% in China). Although globally it should be closer to the lower bound since penetration in emerging countries would be much lower.

So my thesis is that from the current 8-18%, the virtual economy consisting of mainly e-commerce, content (movies, music, software, books etc) and gaming amongst other verticals will continue to grow to become 80% of the real economy. But as alluded to before, this doesn't mean that the real economy is going to shrink. This is an additional 62-72%. In other words, in x years (maybe like x = 2035) the global GDP would be USD 110-120trn and the virtual economy would be USD 40-50trn and the real economy would be USD 70-80trn. The real economy doesn't really decline, things just get moved elsewhere.

The stock market is usually very simplistic in thinking. If Amazon is taking over retail, then all the malls and related stocks should go to zero. To some extent, retail did get decimated, but because we all live in the real world, we don't stop going out. We stopped going to department stores and traditional malls but we spend more time at Starbucks, at Costco/Big Box or Don Don Donki (the new Japanese discount store in Singapore) for differentiated shopping experiences, at outlet malls, at theme parks and going for other experiential adventures. 

Costco's share price at all time high despite Amazon's onslaught

There were other interesting revelations from the content industry, namely music and movies. The music industry was the first to fall prey to the internet technological disruption. Apple Music devastated CD sales, then streaming came along and took share from music download. Now Spotify seemed to be the undisputed leader and the recorded music sales finally saw growth in 2016 after years of decline, hitting revenue of c.USD 8bn in the US. But the truth is much bigger than that. The live concert industry boomed big time from 2000 to 2016 while CD sales plummeted. In 2016, Live Nation, the world's #1 live concert operator had sales of USD 8.4bn, the bulk coming from the US. This one firm's revenue outstripped the revenue of the entire US recorded music industry! You see, things in the real world don't disappear, the revenue just moved elsewhere.

Moving on the Hollywood, with Netflix, Amazon Prime, Youtube and streaming, the first level thinking is that everyone would stop watching movies in theatres. Yet worldwide box office revenue had positive growth from 2006 to 2016. It was c.USD 9bn in 2006 and today it's close to c.USD 11bn. So did we really watch less movies? Yep, we stop watching stuff we might catch on the planes or Netflix or elsewhere but we still cherish the experience at the cinemas. We choose the one or two films we will definitely watch at the theatres.

The Last Movie of 2017

In fact, we want to watch it in IMAX. If it's the one movie we want to watch this year, then we better watch it in top quality. We pay up to watch The Last Jedi, or Avengers, or Fantastic Beast: The Crimes of Grindelwald. So the virtual economy does not take over the real economy. It is always something deeper at play. Difficult to see, always in motion, the future is.

Let's talk about gaming which is now bigger than movies and music combined. A whole generation had grown up with Nintendo, Playstation and Xbox and are now having children. With mobile gaming becoming prevalent, we are also seeing seniors playing Candy Crush and Pokemon Go! on their phones. Gaming is simply part of everyday life today. Statistics have shown that people on average spend a few hours on gaming and social media. By examining this, we might catch a glimpse of the end game for the virtual economy.

Recently Wired did a piece on the lives of esports gamers. Esports is fast becoming an important industry as gaming grew so big. For the un-initiated, esports is going to be as big as NBA or NFL or the English Premier League where teams compete in games with other teams to win championships and millions of spectators watch these pros play online. These esports players train as hard as star basketball and soccer players. They work out, study hard, eat healthy and train 7-8 hours a day playing games like Overwatch together. Yes, they spend half of their waking hours on computers, in the virtual economy.

To some extent, we all spent a lot of time online as well, since we are on laptops or PCs when we are not in meetings. We might not have enough time for shopping, gaming and/or consuming content while working but as efficiencies improve, we would be able to do much more in the 24 hours. We will be able to shop, Facebook and Whatsapp with voice recognition, maybe watch short movies on the way to the office pantry and when cars drive themselves, we free up even more time to spend in the virtual world. We will have multiple avatars for different purposes. So, yes, the virtual economy can still grow. I believe it will be 50 trillion dollars.

Does it mean we should buy FAANG and BAT now? That's a very tough question. I think there is a better time to accumulate them, rather than buying them now for 40-100x PE. Meanwhile, opportunities are abound in the real economy with great franchises trading at teens PE. These are opportunities we wish to explore in 2018 and we shall also discuss A.I. autonomous driving and semiconductor chips in the future.

Meanwhile, again a very Happy 2018, together we huat!

Saturday, December 30, 2017

2017 in Review: Melting Up, Up and Away!

In a blink of an eye, we are now at the end of 2017. Last year this time, we did a similar review for 2016 and then talked about how 2017 would pan out. The following passage surmised what we discussed:

Let's talk about 2017. Remember it's not prediction but preparation. It's not easy but let's try. In my view, 2017 could see the rise in animal spirits given the very bad 2016. Investment appetite especially with the US economy recovering could pull parts of the world up. Although China and Europe should remain tough with the bad debt issues still haunting the financial sectors. So what's the preparation needed? Maybe look to deploy a bit into secular sectors, like health and fitness. Meanwhile in Singapore, 2017 could be the year the property oversupply hits a peak after which the no. of new condos would drop. Hence it might mean it's the bottom for the property market. It's could be the last chance to buy Singapore property before it becomes way too expensive. So, be prepared!

Quite miraculously, we got many things right! We saw animal spirits coming back which led to the rising bull markets globally. The US markets are up 20-25%, Europe up 21%, Japan up 19%. Hong Kong up over 30% and China 25-50% depending on which index we took. The US economy recovered well enough that market participants are talking about things being too heated up. Elsewhere investors shrugged off Europe's lingering issues and China's debt problems and looked for excuses to bid things up.

The crazily prominent example of this is Bitcoin. 2017 saw the bubble formation of bitcoin in its final stages and we are now witnessing the meltdown. During the same time last year, bitcoin was trading at $800. A few week ago, it hit an all time high of nearly $20,000 before crashing 50% to $10,000. At its peak, the total market value of bitcoin hit USD 300 billion, which is bigger than Singapore's GDP. Alas, all good things come to an end, we should be seeing bitcoin crashing back to earth and then forgotten, as with the tulips, internet has-beens and pencil buildings in Japan constructed voraciously durring the 1990 property bubble.

Bitcoin Mania

For Singapore, 2017 also had some significance. We saw the public dispute of the first family being brought to public while our property market staged a nascent recovery. The markets were oblivious to the spate, investors' confidence in both stock and property markets remained strong. Who cares if Oxley Rd becomes a museum or another luxury property address in the little red dot? Singapore will be the rich and famous playground in South East Asia, the Monaco of ASEAN.

However the saga also marked the signs of tumultous times when power transfers occurred, alongside other incidents such as the seizure of our Terrex armoured vehicle by China and my personal favourite: Tesla cars being taxed as environmentally unfriendly by our beloved LTA so much so that Elon Musk called our PM to settle the issue. Longer term, I cannot help but worry. We came far on the foundations built by the first generation of forefathers but the infrastructure (both the soft and the hard ones) is not robust. There are issues with our education, healthcare and transport systems, amongst others. Big issues!

In five to ten years, we will have a new prime minister and his new team, untested and unproven. We must give them support and we have to fix the abovementioned issues if we want Singapore to be relevant beyond 2050. But meanwhile, property should be okay. Fortunately or unfortunately, Singapore will become a safe haven for global wealth to find their ways into private properties in District 9, 10 and 11. Alas, most Singaporeans will not be able to afford condos in the not too distant future as we see $2,000 to $3,000 psf condos become the norm as with HK, London and Monaco (and the most exorbitant to hit $10,000 psf). The 5C dream shall remain a dream for 90% of Singaporeans.

Well, that's the future, back to the present moment, so what's installed in 2018?

I think the apt phrase to describe 2018 might be what is alluded to in the title. We will witness the markets melting up, up and away! What's that? Well, essentially, we might see a bubble. But exactly, what's a melt-up?

Meltdown? Melt Up?

Here's a definition from Financial Times:

A 'melt up' is the informal term used to describe markets that experience a rapid rise in valuations due to a stampede of investors anxious not to miss out on a rising trend. Gains caused by melt ups are usually followed quite quickly by melt downs. 

In my opinion, a melt up is probably indistinguishable from a bubble. It might be a semi-formed bubble and not a full blown one that we saw in 2000 but really, what's the difference? It just means that we will see prices going up, our portfolios showing gains but nothing much fundamental really changes. The prudent investment strategy during melt-ups or bubbles is to sell incrementally. But this is easier said than done. Because after every sale, we feel damn stupid as we see the stuff we sold going up further and we question whether we sold correctly. Maybe we should have waited for a higher price. That is the dilemma. So that is why a better strategy might be to sell in tranches. Ideally we keep selling until we are 50% or more in cash at the peak of the melt-up so when it finally crashes, we will have the firepower to buy. So 2018 might be the year we need to raise cash substantially if we are fully invested now.

The other interesting investment angle, as with what happened during dotcom was to buy good old economy stocks at cheap valuations. We are seeing some of these opportunities presenting themselves as every market participant out there is just thinking about buying FAANG (Facebook, Apple, Amazon, Netflix and Google), BAT (Baidu, Alibaba and Tencent) and the rest of the internet powerhouses at 30-100x PE. At the other spectrum, great companies in consumer staples, pharmaceutical and healthcare are trading at teens multiples. Hopefully we can uncover more of these awesome stock ideas in 2018.

Wishing all readers a Happy New Year! Huat Ah!

Monday, December 25, 2017

Chart of the Month #7: Living Longer

Here's another Economist chart depicting one good reason that we are living longer - we are winning the war against cancer! We are seeing close to 100% five year survival rate for some types of cancer thanks to drug innovation and medical advances.

As you might know, cancer is not one disease but actually many different types of ailment manifested in different ways. Some are caused by viruses while others are related to lifestyle choices like smoking, eating too much red meat, exposure to carcinogens and what not.

But advances in medicine is slowly but steadily postponing death. The amazing drugs launched in recent years help to activate our own immune system to fight cancer cells by successfully labelling them with ingenious techniques - which unfortunately is beyond me to explain how and why in detail. 

What I know is that reason why we had failed to tackle cancer in the past was precisely because our own immune systems always think that cancerous cells are our own body cells and hence allowed to multiply and grow, causing havoc to the rest of the body. But these new drugs found a way and they are working.

Hopefully, with more innovations in the next few years, we can finally eradicate this death sentence for good!

And with that positive note, here's wishing all readers a very Merry Christmas!

Tuesday, December 12, 2017

Chart of the Month #6: Pearl River Delta

Here's an interesting report from the Economist a few months back. It described how the Pearl River Delta of China is now an innovation hub and a region of the future. The left chart shows that number of international patent applications. The data ends in 2016 but I suspect that China had already surpassed the US in 2017. China is now world's largest patent market today.

The right bar shows that the bulk of the patent filing comes from Shenzhen, arguably already surpassing the Silicon Valley. The city that Deng Xiaoping first visited on his Southern Tour and declared that China will rise, starting from the Pearl River Delta. Indeed, we have seen that transformation especially with the internet big names like Tencent and Huawei. 

Here's a list of the most innovative and interesting Shenzhen based companies other that the two mentioned above:

1. BGI (Beijing Genome Institute - shifted to Shenzhen)
2. BYD (automobiles)
3. ZTE (mobile phone)
4. Mindray (medical device)
5. Vanke (property developer)
6. SF Express (logistics)
7. Hangzhou Hikvision (security camera)
8. DJI (drone)

In 2013, we discussed that China had a huge conundrum because it lacked certain decencies, corruption, deceit and counterfeit ruled the day. But it seemed that things are changing. The anti-corruption campaigned started by Xi Jin Ping since those days had continued and might really be working. Deceit increasingly doesn't pay as society matures and businesses look for recurring customers and building trust brings more money that cheating. The shared economy and e-commerce require trust as a bedrock principle to work, which is why China internet companies need to establish that asap. And lastly with innovation, China is beating counterfeit left-right-centre.

Hence, the 21st Century truly belongs to China. It might still take some time to get to where US and Japan societies are in various aspects but it may not be 50 years as described in the conundrum post. That's the thing about prediction! Nobody ever gets it right!

Tuesday, December 05, 2017

Inspecting the Vicom Story - Part 2

This is a continuation of the previous post.

Okay, in the last post, we discussed the basic stuff about Vicom. It is hugely cash generative and we are getting it at low teens PE, 13x to 16x PE for a 30% operating margin, 20% ROE business. This is really not expensive, albeit the growth angle could be questionable. Singapore is a mature economy, our vehicle population is maxed out, we don't have enough roads for more cars. So how to grow?

Maybe Vicom is cheap because there is no growth. Or is there really no growth?

This is where it gets interesting. In stock investing parlance, we call it optionality. Optionality refers to potential upside that is there but we do not know if they would materialize. Usually, if they do, it means a lot more upside but if they don't there is also not much downside. It is said that the best investment portfolio is simply a portfolio of free optionalities.

To delve further, this optionality concept comes from the big branch topic in finance simply called options which were created as early as 600BC by Greek mathematicians but only well understood when two Professors put on their thinking hats and solved the puzzle in the 1960s. Their theory won the Nobel Prize and today, all finance students have to study what they created - Black Scholes Option Pricing Theory. Rings a bell?

Call option chart

The simplest option chart (above) shows how the downside is capped if the stock does not move or in the unfortunate event, even if it goes down a lot, the option buyer only loses his premium (capped at $200 in the chart above) and face no further downside loss. But in the event that the stock price goes up, the option buyer stands to benefit from all the upside. The catch is that options expire and the deal is off once the option hits expiration date.

In a more general context, optionality refers the similar asymmetry in risk and reward but with no expiration date. The catch is that most optionality do not really materialize which is why it is not worth much in the first place and the market refuses to pay for it. The sector with the most optionality examples would be the pharmaceutical sector. Pharma companies are always researching on new drugs and nobody knows which ones would be the next blockbuster drug. The example that comes to mind would be Pfizer and Viagra. 

Back in 1996, Pfizer was just another pharma stock trading at $5. It was not small though (market cap at that time was already USD 40bn!). It generated a billion plus dollars of free cashflow with its huge portfolio of drugs. But in the same year, it filed the first oral drug for erectile dysfunction (ED) - Viagra. Nobody knew how big the market would be. There wasn't such a market in the first place. Men with ED just lived with it, unless it's super serious then they go drink Tongkat Ali or eat oysters or something. There wasn't any medical treatment for ED. If the drug failed, then Pfizer would just continue to make its billion dollar annually with its huge portfolio of legacy drugs and the stock would be $5. As it turned out, Viagra became the biggest hit ever, allowing old men to have sex again and the stock went 5x to $25. At its peak, Viagra sold roughly $3 billion annually. 

Tongkat Ali, herbal treatment for ED in S.E.Asia

So that's optionality. Pfizer was (and still is) a blue chip (now with the blue pill :), if one had bought it then at $5, one could enjoy the blue chip growth (maybe just single digit) and collect a stable dividend (2-3% dividend yield). If Viagra didn't happen, then it's decent growth, or rather, just blue chip growth and dividend. But when Viagra happened, then we are off to the moon. In fact the stock raced very early on as the market simply got excited even before the drug was launched. It more than doubled from 1996 to 1997 despite cashflow being weak in 1997 at only $600m (normally it should be above a billion dollars. Today Pfizer is a $200 billion market cap company.

Let's move back to Vicom. So what's the optionality? I see a few:

1. Price increase for inspection
2. Overseas growth
3. Buyout by ComfortDelgro

The first optionality is just about the timing of price increase. At some point, prices go up like everything else in Singapore. We just don't know if it is 2 years or 5 years. The history shows that the industry had a habit of raising the inspection fee every few years. It was $50 in 1997, then it was raised to $54 in 2001, then $56 in 2005 and then $58 in 2006. Based on its website, current fees are $62 inclusive of GST. This relentless price increase would simply continue bcos first it is nothing compared to the price of the vehicle (more than S$100k in Singapore today for a 1.6L car) and the other costs such as fuel, maintenance and what not. Every price increase again drop directly to its bottomline since there is very little cost in between. So even with the population of vehicle stagnates, Vicom can enjoy revenue growth. This is the beauty. Guaranteed revenue growth. Of course, the cherry on the cake is that Singapore's vehicle population will only go up. We need more buses, trucks, taxis every year. Passenger cars will also just keep growing bcos it is an aspiration to own an expensive car in this warped bubble on a little red dot. The market doesn't see this now, but when it does, that's when our option gets exercised!

Overseas growth is a new angle that is not being talked about right now. But the potential is huge. Singapore, for good reasons, is seen as a leader in standards by our neighbours and a few of them are very happy to bring Singapore companies into their country so as to learn from us. Vicom talks about opportunities in Vietnam. In the same vein, countries like Myanmar, Laos, Cambodia would one day require inspection and testing. Imagine if Vicom could just get 1 or 2 of these markets, or rather just a small slice of one of these markets, the potential is a huge increase in revenue. Vietnam alone has 100m people. Of course, this scenario is still pretty remote. There is nothing concrete yet. 

The last optionality is similarly remote though not zero probability. ComfortDelgro (CD) today owns 67% of Vicom and it is not inconceivable for them to buyout Vicom given that it's such a lucrative business. Why give away that 33% to others? Of course they also want to buy back at a good price which is why nothing has been done all these years after the stock ran from 50c to $5. So the other way to look at this is that if Vicom falls too much, Big Brother CD will just buy it out. Hence there is an inherent floor price to this stock. Our downside is capped much like a call option.

In a red dot not so far away... car wars

But given that Vicom is now a $500m company. CD needs to raise $150m to buy the 33% it doesn't own. With its woes, thanks to Uber and Grab, it would rather put money into this car sharing war to defend itself than to buy back Vicom. (CD only made $100m in free cash flow last year. So it's not a small sum for them, although one could argue that effectively they only need to raise $50m since Vicom has $100m on its balance sheet!) In any case, it might just be status quo for now. Some day they might buy Vicom, but not today.

To sum it up, Vicom has all these optionalities, but it is hard to put them into numbers. So we are paying c.$400m (after accounting for the $100m on its own balance sheet) for a steady $30m free cash flow. This translates to 7.5% free cash flow yield or 13x PE after adjusting for cash. The rest of the options, if it happens, comes free. With bank account interest rate at 1%, property rental yield at 2%, I would say 7.5% yield is pretty decent. In fact, 4% (or more in the future) would come back annually as dividends since they don't know how to deploy the huge amount cash coming annually.

That's basically why Vicom is a buy! Read from the first post.

This author owns Vicom.

Monday, November 27, 2017

Inspecting the Vicom Story - Part 1

Vicom has been one of the most amazing multi-bagger in the Singapore stock market. It was trading at 50 cents 10 years ago, with a market cap of S$150m and over just one decade, it became a $5 stock with a market cap of S$500m, generating S$30m of free cash flow per year on a revenue of S$100m and piled up another S$100m of cash on its balance sheet. Despite such a huge run, I took a look at this stock again and believe we can still squeeze some juice out of it. In fact quite a bit of juice especially if some of the optionalities come true.

Ok, first things first, what are Vicom's businesses?

Vicom is Singapore's leading testing and inspection company with two core businesses. The first is the vehicle inspection business which it has 70% market share across 7 inspection locations in Singapore. For car owners, we know this all too well, as we need to bring our vehicle to these dreadful places every year and get charged $60 for some 20 min routine work which doesn't seemed clear to us why it needed to be done except to satisfy the regulator.

The second business is industrial testing and certification which is done by its subsidiary SETSCO which provides calibration, testing and certification services to various industries. The important ones being construction, oil and gas, aviation. This business makes up 2/3 of its sales but only c.40% of its profits. There is some cyclicality in this business as industries grow or falter with global trends. In the recent years, the slowdown in both the construction and oil and gas sector had impacted earnings. 

So, now that we know more about Vicom, what's the story or rather the investment thesis? The investment thesis is the reason why we want to invest in some company and it should be simple enough for primary school kids to understand. So here's the version for Vicom.

Vicom is a stable, cash generative business (6-7% free cash flow yield) that is under-appreciated by the market. There is floor on its stock price underpinned by its strong cashflow and dividend but yet there are optionalities that would help boost the stock price even higher if they materialize. Vicom is also part of the ComfortDelgro group which might to take it private someday.

The stock market represents the view of all the investors and speculators and they tend to focus on the obvious and the recent events. The consensus view on Vicom is that there are now less cars on Singapore roads and most cars are brand new luxury cars then do not need annual inspections. (Only cars more than 3 years old require annual checks). Since c.60% of its profits come from vehicle inspection, so the stock is not interesting. The other business, as we discussed, is facing headwinds in construction and oil and gas. So, no story. This is why the stock did nothing for the last three years. Its stock price just hovered between $5.5 to $6 since 2014.

Cars are only 37% of Vicom's vehicle inspection business

However, astute investors, we dig deeper. We think at a higher, second level. The pie chart above shows the breakdown of inspection by vehicle type and as you can see, passenger cars only make up 37% of the total pie. The rest of it shows that 63% of the volume actually comes from commercial vehicles which require much more regular inspections. This is the reason behind Vicom's stable cashflow. Inspection is a recurring business. Taxis and buses are required to be inspected every 6 months and goods vehicle annually. There is some volatility due to the economic cycle but by and large, I would estimate that 40-50% of Vicom's overall revenue is very stable. This same argument can be made for its industrial testing and inspection business.

About 15 years ago, this stock was undiscovered as it was too small to matter to most global investors. It also only had the vehicle testing business since it had not bought SETSCO. But when SETSCO came in around 2003, the picture changed and investors took a few years to realize the beauty of its businesses. But still, for the next few years (2005-2009) it was still trading above 10% free cash flow yield. Over time, ultimately, it got bid up and is now at 6% free cash flow yield. 

This strong recurring cash generation capability is what underpins the stock price and hence it is very unlikely that it corrects a lot. To add more colour, Vicom's assets are all fully depreciated, these centres do not need capex, nor much labour, nor marketing or other expenses. Hence the $60 that we pay almost drops directly down to its net profit. That's why Vicom stopped reporting gross margins. But when it did report last time, it reported gross margin it was 96%! That's back in 2013. Today we know that its operating margin is still 30% which had stayed almost unchanged for the past 10 years.

Given such strong cash generation, it has to pay them out or else it would just drown in cash. Actually, it's somewhat drowning in cash. Despite paying 4% dividend annually, the firm amassed S$100m of cash over the years which is 20% of its market cap. They might have to do a big special dividend or something to clean this up. Needless to say, Big Brother ComfortDelgro would probably want it to uplift some of this cash given that its taxi business is really not doing so well and Big Brother really don't mind having a bit of that S$100m buffer.

So even without discussing further, we know that Vicom is a huge cash machine that we can get at 6% free cash flow yield of which 4% comes back annually as dividends. On conventional metrics, it is trading at 16x PE but if we strip out the cash it is actually more like 13x and EV/EBITDA is a reasonable 10x. In today's world of negative interest rates and low returns, these multiples are really not expensive for such stability.

Ok, next post we talk about the optionalities!

This author owns Vicom.

Sunday, November 19, 2017

Chart of the Month #5: Total Business Person!

This came from a book on restructuring businesses with an interesting analogy on how one should improve ourselves as a good business person simply by harnessing our bodies and senses better.

How to improve ourselves as human beings?

(1) Use our senses to first receive all the different inputs well
(2) Use our brains to analyze, strategize, think
(3) Use our heart, elevate our EQ and be able to empathize others deeply
(4) Use our gut, have the courage to make the tough decisions
(5) Use our composure, exhibit strength, character, lead by example
(6) Use our mouth, to communicate
(7) Use our arms and hands, these refer to skills we have learnt
(8) Move! Get into action, stop procrastination

It's quite deep if we want to think throroughly about this. For (1), oftentimes we miss the subtle cues like body languages, the meaning between the lines and hence fail to close the deal. It is about polishing our sensory inputs to the level where we capture good signals. For some this might come as natural but for others, it would take years.

(2), (3) would be pretty straightforward. The ability to use both our left and right brains is key to be a successful business person, or rather, a decent human being. Perhaps EQ is slightly more important than IQ today.

(4), (8) seem to go together as well. Human beings are cowards and sloths by nature. We need to overcome huge inertia to just have guts and to get things started. It is overcoming the daily grind that leads to greatness.

(6) has become very important today because speaking well gives the impression of being more capable of getting things done. That is why ang-mohs always get promoted. This is a skillset our education system should really focus on.

Besides talking, there are other skillsets that would be relevant in different fields such as being able to code, or being able to use special software or hardware. This is (7). In the world of finance, it is accounting, corporate finance, stock analysis etc.

Finally, we get to (5), I would put this as "aura". When we are quite accomplished, we somehow exhibit the composure or aura to be able to lead. For some, it is harder but it is almost a pre-requisite to success. Some people are born leaders, but for most of us, we need to develop all the other seven points to be able to get better at this. I think this is the essence of it all.

So, that's the theory of total business person, corny but deep, I would say. Japan didn't become the third largest economy by chance.