Saturday, March 31, 2018

Financial Independence Is Utterly Overrated

Since this blog was started about 8 years ago, the recurring theme has always been about advocating the real incentive behind achieving financial independence and how much benefits we could derive from achieving it than not.

We've always pictured financial independence as having the options to do the things that we want rather than the things that we're forced to do and having that autonomy gives us the flexibility to become happier naturally.

As human beings, I understand that we tend not to like being controlled and we like to define our time according to our own needs. Best still, we could arrange our very own FI weekly schedule to meet the needs of our body and mind instead of the other way round, dealing with the inaugural needs of the society.

When I'm not at the coffee house, I'm on the way to the coffee house

The truth is achieving financial independence is an utterly overrated phenomenon that proves to only be a general marketing gimmick led by masked bloggers like us that try to prove our points because we force ourselves to think like that.

You see, most of us financial bloggers are no different from the usual snake salesman you see on the street trying to get passerby to buy things and packages that we sell. Like them, our income is very much dependent upon hitting the group of mass market on the street who were too weak to believe in their own capabilities and therefore are being targeted so bloggers can receive more online income to sustain our self-proclaimed lies and lifestyle.

We like to influence the general public with our sexy dividend stories by publishing quarterly dividend reports and putting up a nice beach instagram photos sipping pina colada on the beach to further enhance our stories but the fact remains that the beaches in the photos are not as elegant as they were in real life and you've got to pay a premium to even pay for that benches you sat on the Patong beach.

We also know that while dividend income and capital gains are not taxable under the Singapore jurisdiction, one of the top early retirees' wish list is to actually go back to the workforce and pay taxes because workforce is actually awesome after they found out how overrated is the goal of financial independence that they've been seeking for decades.

Being in a different time zone with the norms also means that you are likely to be alone and outcast during the day when everyone is having their awesome lunch together at lao pat sat squeezing both  literally and figuratively sandwiches between the hour lunch.

You start to live your life as if the world is just about you - shopping for groceries, reading book in a library, eating in an empty restaurant without the lunch crowd and no one to talk to. The best thing that can happen is if you can find a similar clone elsewhere that lives the lifestyle like you did, but even so it is extremely rare.

As I am approaching my target destination soon on the path to reaching the dreaded financial independence goal, I am afraid of what the new life may take me to. I am afraid of having no more goals to look forward to and life would go downhill from there.

You see, I'm not trying to put a salt on the wound that may break the heart of anyone who's just starting out, but in my journey so far, it has been the case and I so very much regret my decision to pursue it in the first place.

Financial independence is utterly overrated! Urgh....

And to everyone who reads this, hope you have a good Happy April Fool's Day :)

99.9% of the above statement are probably the complete opposite
And let us instead give thanks and celebrate Easter day for the blessings for what God has given us :)


Happy Easter Sunday

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Wednesday, March 21, 2018

Sasseur Reit IPO Analysis

Sasseur Reit is the latest investment trust to file a lodging to list in the attractive Singapore Reits platform, is offering 266.6m units at 80 cents per share.



This comprises of 252.8m placement shares, which are mostly taken up by institutional investors and  public tranche of 13.8m which are available for the public.

Public can start bidding from the 21st March and closes noon on the 26th March.

It is expected to commence trading on the 28th March.


Business Overview

Sasseur Reit will debut with an initial portfolio comprising of 4 retail outlet malls located across the growing city of the PRC, namely Chongqing, Bishan, Hefei and Kunming.

Their occupancies rate as of 23rd Feb 2018 are at 96.4%, 91.5%, 95.8% and 96.1% respectively.

They are the first outlet mall to be listed as a Reit in Asia.

Business Moats

The portfolio offers an unique proposition to investors in the form of an integrated "1+N" outlet business model by providing not only a traditional shopping experience but also the various lifestyle options to shopping goers.

An outlet is defined as a form of retail trade selling private label items from past seasons, surplus stocks or exclusive lines directly to customers at a discounted price. It carries various brands, including branded and local.

The current market size of the overall PRC outlet mall is at USD7.4B, which is higher than the Japan outlet malls, but is very much smaller than their counterparts in Europe (USD16.1B) and USA (USD47.4B).



There has been a recurring selling point for PRC retail reits listed in Singapore market such as the recent BHG retail and Dasin Retail Trust on the spending power of the Chinese middle market, and this is not different from others. The per capita consumption pattern is expected to grow between 6% to 8% over the course of next 5 years.



The outlet spending per consumption started at an even lower base, and this is why there are much more room to grow once the industry grows and the per capita consumption goes higher.


It is expected that in the year 2030, China outlet malls will grow to become the biggest in the world, surpassing the already giant Europe and USA, with a CAGR of over 24.2% per annum. If that materializes, this could be a gem in the well making.



Rental Business Model

There are 3 business models currently being adopted in the China's outlet market.

They are the leasing model, direct sales model and concessionary sales model.

The leasing model follows a traditional model where the tenant pays a fixed rental agreement based on the agreement signed.

The direct sales model follows a model where it buys inventory from the manufacturer and borns the risk of having an unsold stock at the end of the day.

The concessionary sales model is where retailers pay a fixed sum or percentage of revenue to the operator and it outsources the running of the retail malls operations such as the merchandising, cashiering, store management back all to the operator.

The concessionary sales model is where the Sasseur Reit will be using.

What this means is in a retraction period where sales are low, they will then pay a lower overhead cost subsequently to the operator as well and in periods of good turnover sales, they will pay higher. The key lies in the margins they earn. This will cap the risk they are taking but also the gain they could be making.

Risks

Two of the properties in Hefei and Kunming are only recently operational in 2016, which means they do not have a long track record to speak with.

As written above, the China outlet industry is in the infant baby stage so a lot are just starting and they start with a low base.

The use of the land right is also usually limited to maximum of 40 years based on China regulation and owners are required to submit an extension application should they wish to extend. This is subject to the public tender bidding or auction.

The properties have a land use right of up until 11 May 2047, which gives approximately 29 years from now. This is in line with all the other properties you have with the other PRC commercial and retail reits listed here.


Why choose to list in SGX?

There are always the same queries on why companies choose to list in SGX market and not in their home country.

I believe the answer to this is because of regulations and tax laws which opens up to a lot of debates.

In Singapore where it is a tax haven for Reits offering platform, Reits listed here enjoy a preferential taxation status and Reits are considered a special vehicle income transmission tool and are thus exempted from corporate and income tax.

Under the China taxation system, your rental income first get taxed at 12% under the real estate tax law and a subsequent 11% VAT is then imposed. In addition, there are also the 25% income tax on the profit from the corporate level. Based on total, net income only amounts to 60% to 70% of the rental income received before it reaches the hand of the shareholder.



Sponsor & Cornerstone Investors

The sponsor to the Reit is Sasseur Cayman Holding and is one of the largest retail outlet operators in China. Currently, it operates 9 retail outlet malls, some of which are pipelines to be injected in years to come for outlets in Guiyang and Xian.

The sponsor will be the largest single unitholder in the range of 55%, which is a good sign of alignment of interest. The closest we can find in our local listed Reits is SPH Reit, which the parent owns around 67%.

The management fee structure is also very much aligned to unitholders as they will receive 10% base fee as distributional income and performance fee of 25% of the difference in DPU between the financial years. This is to ensure that DPU objective is aligned with investors.

They have also engaged a strong set of cornerstone investors with the likes of:

  • Adroit Ideology Limited - Subsidiary of JD.com (largest e-commerce in China)
  • Bangkok Life Assurance
  • CKK Holding - Owned by Charles & Keith group
  • Entrepolis Limited - Private investment vehicle of Dr. Yap
  • Great Achievement and Success Ltd
One thing to note however though is that these cornerstone investors do not have a lock up period but with an even spread across strong institutional investors, I think this won't be a problem.

Valuations

The offering is forecasted to be at 7.5% yield for FY18 and 7.8% yield for FY19. 

This is based on 100% mandatory payout based on their policy, which they can then reduce to provide of up to 90% the years after that.

Like most young operational Reits in its infant stage, there will be some form of financial engineering used in order to boost the operational yield.

For Sasseur Reit, they will be entitled to receive a Minimum Rent for FY18 and FY19, provided that the aggregate resultant rent of the properties do not exceeds RMB 472.9m (~S$98.2m) for FY18 (9 months) and RMB 611.4m (~$127.1m) for FY19.

Based on the prospectus,  the DPU and distribution yield for the initial portfolio will be $0.05 or 7.5% based on annualized basis for FY18 and $0.06 or 7.8% based on annualized basis for FY19. In the absence of the financial engineering, the DPU and distribution yield for the initial portfolio will be $0.04 and 6.1% based on annualized basis for FY18 and $0.06 or 7.8% based on annualized basis for FY19.

This is way much smaller form of financial engineering as compared to other Reits like Dasin Retail Trust, which trades at an attractive P/BV level and close to 9% yield but take away the financial engineering and it will collapse to sub 4% yield. It's interesting to see what will happen to Dasin later in 2021.

Final Thoughts

Overall, I thought the offering was fair and it is currently at an infant stage where it can provide explosive growth if the cards are play right.

I also like the fact that the financial engineering is kept to the minimal which means it can functionally operate at sustainable yield in the future and also participate in future growth and acquisitions.

The strong cornerstone investors also provide a butterfield stamp that they are into this and the sponsor holding a large stake similar to SPH would mean that they would be in control and are align with the expectation of investors.

Based on the past results of BHG and Dasin, this seems like a 1 to 1 ratio for balloting and in view of this, I will be applying for a small 20,000 shares on this in view that I like the business model and other criterias abovementioned.





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Friday, March 2, 2018

"Mar 18" - SG Transactions & Portfolio Update"

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
Comfortdelgro
85,000
2.00
170,000.00
27.0%
2.
M1
75,000
1.80
135,000.00
21.0%
3.
Fraser Logistic Trust
100,000
1.08
108,000.00
17.0%
4.
Ho Bee Land
30,000
2.55
76,500.00
12.0%
5.
Starhill Reit
100,000
0.73
73,000.00
11.0%
6.
Vicom
8,000
6.05
48,400.00
8.0%
7.
Tuan Sing
40,000
0.445
17,800.00
3.0%
8.
Singtel
4,000
3.35
13,400.00
2.0%
9.
Warchest
-
-
  2,000.00
1.0%
Total
644,100.00
100%








I'm updating the portfolio rather earlier than usual during the month as I'll be heading off to my Taiwan trip next week and will spend quite a bit of time there and only be back towards the last week of the month.

The blog will take a break meanwhile while I'm away.

This was a relatively easy month to update as there's not a large movement from the previous month to this month.

In fact, the closing price of my top 3 companies - Comfortdelgro, M1 and FLT was exactly the same today as my last update in the month of February. So no change there as I will continue to hold on.



This was a good month for me.

Hobee Land reported a good set of results which send its price soaring and boosting the portfolio for this month.

I have also managed to divest ST Engineering this month after it reported their full year results which I sold it off at $3.43 following after. I'm not yet convinced the marines would recover as fast as what many analysts have touted and also the other sectors. My take is it will be a flat year in the next few years until the growth is evident. Meanwhile, I'll put this in the watchlist under the 4-5% radar zone yield play.

With the funds from the divestment, I purchased 100,000 shares of Starhill Global Reit at 73 cents. This is one retail reit which I have always been following but never have the chance to get because it was all about CMT and FCT in the past, and now I want a piece of the play from Starhill.

With the AEI ongoing over their properties, I am expecting FY19 to be a solid turnaround for Starhill, which meanwhile I will sit and wait for their 6.4% yield.


Net worth portfolio

The portfolio has increased from the previous month of $633,860 to $644,100 this month (+1.6% month on month; +28.5% year on year).

In fact, it is during this period last year that I managed to scotch through the $500k milestone. How fast time flies.

It is also the second time this year that the net worth has set its record high. This shows investors have a relatively easy period in the market where most of bulls prevails.

I like so far what I've been doing with my strategy this year.

I've been a little bit more passive, less active in the market and focusing on a few companies which I'm more familiar with and putting in conviction sum of money. 

There are a couple of friends who've encouraged me to look at other HK and US sectors. I've not been able to do that due to other commitment but I'm relatively happy so far with my investment. When the time is ripe, I'll venture into other sectors in other countries.

I don't entirely agree when someone says SG is a dead market and you cannot grow wealth in it other than receiving dividends. I think it still boils down to the right entry and exit strategies for the right companies and across the past 8 years I think it works fine for me.

Anyway, enough rambling from me for now.

I'm sure there are enough meats for every player in the market. We just have to be patience in it.


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