Tuesday, 13 February 2018

Thoughts on market plunge and what should one do

Recent market drop has been stomach churning. If you are a relatively new investor who entered the market past 2 years when it was smooth sailing, it is only natural to be terrified by the wild swing.

In this article I share some opinions on why such drop is to be expected and offer some ways to stay afloat in such market conditions.

1 - Have a right perspective for this market drop
Majority of investors' fears were stoked by scary news headline such as 'Dow plunges 1,175 - worst point decline in history', 'Dow and S&P 500 now officially in correction'.

CNN Money headline on 5th Feb

But the fact is that US markets had one of the strongest bull run in history that lasted for 9 years since 2008 GFC. Plus, past 2 years' rise had been particularly relentless, from 16,000 to around 26,600, a 66% rise.

Even taking into account the last week's drop, Dow Jones is still up by 51% in past 2 years. So the magnitude of recent pull back is actually quite benign.

2 - Understand that market gyration is the norm
One can't expect stock market to rise in a straight line indefinitely, which means a consistent net buying volume (amount of purchase exceed amount sold), day-in-day-out non stop. It does not make sense. Surely one day buyers are going to dry up and when there is no buying, market will drop.

I read from some research (apologise that I really couldnt find the source so cant quote here) that on average, market will drop 10% once in around 18 mths, 20% once in 3-4 years, 50% several times in a century.

So being aware of these means that one should not be too surprised when recent drop took place. It's really as common as the sudden afternoon downpour despite a sunny morning in our local weather.

3 - Hasty investment decision usually turns out bad
When market drop so steep within such a short time, some could be lured into thinking that it is just a knee jerk reaction and market will spring back up as fast as it plunge. Some investors attempt to catch the rebound and earn some quick profits.

But often decisions made hastily could turn out bad. This happened last week when US staged a v-shape rebound to close 500 plus points up. Next day, investors poured in to buy the dip, but the morning market rise soon tapered off in the afternoon.

In summary such move is a difficult one especially during sharp market gyration like this.

4 - Good idea to sell all now to buy back later?
Some clients were so frightened by the fall that they wanted to sell everything and buy back later. My response to them was 'Do you know for sure that market will drop further? Even if it drops further would you really be able to buy back? And if market stop falling and rise back up how would you feel?'

Such move is rarely a good idea. Guessing market bottom and top is challenging enough in normal market conditions, leave alone during such high volatility.

*As of writing market is now up 42 points and up above 3,400. Be brutally honest with yourself. Would you be able to make a decisive action to buy now, or would you hesitate and tell yourself to observe first?

Actually many people just can't stomach the paper loss and large swing in portfolio value. Which brings me to my next point.

5 - Your mindset during this period matters a whole lot
Equities investing, besides the due diligence of selecting good company, is very often a psychological matter. For the core companies that you identified with good value and intend to hold for long, buy with an implicit knowledge that it will be worth much more in future to bring you great wealth, not with the expectation to earn xx amount of capital gain within 2 weeks. 

I suspect it is the latter mindset that many investors entered the market with. With high expectation of earning quick bucks, they are not able to accept losses.

There are hell lot of a difference between them. Buying with implicit knowledge that it will be more valuable in future, you will be more at peace with price swing. You will not be hasty to earn and take profit, and consequently less perturbed when price does not rise as per you expected. But if one buy with high hope to earn within a specific time frame, its the exact opposite. And that leads to emotional instability that causes bad decision-making.

6 - Importance of risk management and a sound investment mindset
I hope this episode can really drill the importance of risk management and mindset/psychology into one's investing DNA.

When market is good, its easy to make money. Just 2 clicks to buy and sell. Even if price drops after we purchase, it will rise back. But all it takes is just one larger-than-usual market movement like this to undo all your profits.

Similar to our life, we buy insurance to hedge against major risks such as death, disability, critical illness. Investing should have insurance too - manage your risk, watch the downside well, be aware that market WILL DROP BIG once in a while and always be prepared.

What should an investor do now?
In all honesty no one can tell you exactly what to do with your portfolio and shares. In order to do that he has to know full details about your investments: portfolio size, allocation, risk preference, rationale of buying etc.

However there are still principles that we can adopt.

Firstly, ensure that your overall personal finance and cash flow management still intact - there is regular savings going into your investment account. Then you can buy cheaply when market offers you an even better price than now.

Go back to your investment plan. By investment plan I mean the tactical moves you would make under various scenario of price movements. Example how much more to buy at a particular lower level price, where is the stop loss, where to take profit, should you re-balance etc.

If you are the pure fundamental investor that look at only company's performance, simple. Are the companies still strong fundamentally? If yes, keep. If not, consider selling.

If you are still upset by the paper loss, consider reducing the size of that position. Sell partial, or fully, till you can sleep soundly at night. Being mentally disturbed by your portfolio is a big no no in investment.

Thursday, 1 February 2018

6 Things I Learned from Jumbo Group AGM

*Disclaimer: I own Jumbo shares. This is not a buy or sell call.

The next company in my AGM series is Jumbo Group - the restaurant chain synonymous with chili crab.

My favourite is still Black Pepper Crab. But Chili Crab is not bad too.. What about you?
 As usual, AGM started with CEO Mr Ang Kiam Meng giving a presentation on business overview, expansion developments and upcoming plans, followed by CFO presenting on company's figures. Presentation slides can be found here.

AGM Held in Grand Ballroom of Chui Huay Lim Club. 

From Left: CFO, CEO Mr Ang, Chairman and Company Secretary conducting AGM
China Holds the Key to Jumbo's Future Success
The group has had great success with their expansion in China since 2013, opening 5 restaurants in 4 years. While there are franchise deals in Taiwan and Vietnam, China will be the key area of focus - so crucial that management formed one expansion team solely for China, while another team looks into the other markets.

It is not difficult to see why. Jumbo has tasted success with its expansion in Shanghai and Beijing thus far and they are ready to replicate the success model in other cities. China is vast and many of their cities are a worthwhile market on its own with population few times larger than Singapore's.

So, instead of spreading wide, management has chosen to stay targeted. Shanghai, Beijing, Guangzhou and Shenzhen - the 4 first-tier cities -, has been identified as focus areas given their size and consumers' spending power. So we will see many outlets clustered around few key cities, to reap economies of scale and improve operation efficiency.

Mr Ang also shared that they are on track for China's expansion plans as final phase discussions are underway for 3 more outlets to open by end of 2018.

As for other cities, the group will consider if the market shows good potential and there are strong local franchisers. If prospect is bright, management will also consider Joint Venture (JV) to operate their outlets.

Other Market Expansion Remains On Track
Taiwan's first franchise outlet is performing well, attaining positive Net Profit After Tax in second month of operations. There is also potential to franchise Ng Ah Siok Bak Kut Teh in Taiwan.

Jumbo is also working towards opening their first outlet in Thailand by year-end.

As for Hong Kong, management is having some issues with the Chinese name of restaurant '珍宝‘, as the name has already been used.

Unique Branding in China
Jumbo is synonymous with Chili Crab. The group is staying true to this unique identity overseas. In China, they have positioned themselves as, I quote Mr Ang, 'Big Crab Specialist' that sells Sri Lanka Mud Crab, Alaskan King Crab etc, distinct from the small hairy crab favoured by Shanghai locals. Mr Ang shared that someone asked why not consider selling hairy crab during season in Shanghai to cater to locals' taste. His response was no as the group should preserve its distinct branding.

However, consumer taste can be fickle and the Chinese are enterprising. Local versions of Chili Crab conjured up by local copycats have appeared.

Management shared that so far these have not impacted its results. The group is aware of competition and would continue leveraging its brand as a premium Singapore seafood restaurant selling big crabs to further its growth.

Consistency of Crab Supply Quality A Key Risk
Management shared that quality and quantity of crab supply is affected by its living environment. Global warming and other climate issue such as El Nino does not help too. While Jumbo has good relationships with its crab suppliers that provide sufficient quantity, management is keeping a close watch on this front.

One investor asked if Jumbo considered expanding upstream to acquire crab farms to secure its own supplies. Mr Ang answered that this is certainly an option, but see no immediate need for such a move at this moment as their crab supply is safe.

Jpot and Ng Ah Siok Face Stiff Competition
Not all is rosy with Jumbo's F&B brands in particular JPot and Ng Ah Sio. According to Management, Singapore has witnessed a 1.5 times increase in number of Bak Kut Teh outlets among the top 5 brands in recent years  (think Old Street BKT, Song Fa BKT etc.).  As a result, some of Ng Ah Siok outlets are losing money. Management shared it could be a location issue and they are looking at re-locating these outlets to non-central areas for cheaper rent.

Similarly for JPot - its facing competition from Imperial Treasure, Paradise, Hai Di Lao etc that offers premium a-la-carte hotpot. The JPot outlet at Parkway Parade has been closed due to loss.

Management is now reviewing its product offering, to scale down the non-earning brands so as to maintain profitability.

Other Growth Areas
The Group has identified Catering and Events as a growth area. There is scope for expansion in the local catering market for consumers and corporate events. However, Jumbo has resource constraints, basically insufficient manpower for the catering business, which has to shut down completely during the CNY period when seafood restaurants face overwhelming sales. So this is an area that can be ramped up moving forward.

My Take
CEO Mr Ang seems to know the industry well, and articulated clear strategy for company growth plans and solutions to address key issues. He repeatedly stressed that profitability will not be compromised at the expense of corporate expansion drive, and the group is being very selective about local franchisee. They want to work with committed and competent partner to ensure the success of business.

Jumbo is a growth stock no doubt. It is in my portfolio for growth purpose - to boost investment returns through big price rise.

But I am also aware of the pitfalls of growth stocks - growth not materialising and falling short of expectation, resulting in 'double whammy of earnings disappointment'. Hence the proper way to deal with this is to truly understand the company's business, closely monitor its performance, and be prepared for larger price swing which is commonly associated with high growth companies.

This is my high conviction growth counter this year. And I am looking to add more at lower price.

On a lighter note, towards the end of the Q&A session, an investor asked if Mr Ron Sim, founder of Osim who is a Non-Executive Director, would sponsor some Osim U Divine massage chairs in Jumbo outlets, to match up to the service standards of Hai Di Lao Hotpot. Fortunately Chairman came to Mr Sim's rescue by saying that he would consider and personally persuade Mr Sim to do so.

I personally think its not a bad idea. Worth exploring. : )



*Attending company AGMs and summarising key corporate insights is part of my work as a remisier. My clients have first hand info, and have been updated on this as my value-add service to them. 

Should you wish to have me as your remisier for a more profitable investment experience, please drop me an email or fill up the contact form on the right.

Wednesday, 24 January 2018

AGM Series - Frasers Centrepoint Trust FY17

FCT is a long term holding in my core portfolio and I have written quite a few articles about it. See here, here, here and here.

Despite following its performance for long, I still learned new things about the Reit after attending its AGM yesterday.

In this article, I share some key takeaways and candid opinions expressed by Dr Chew Tuan Chiong, the CEO of FCT.

FY 17 DPU Increased Despite Northpoint City AEI
The AGM started with Dr Chew presenting the FY17 results. He commented that the Reit achieved a record high 11.90c Distribution Per Unit (DPU), despite a lower revenue and Net Property Income (NPI) due to Northpoint City's Asset Enhancement Initiative (AEI) during most of FY16 and 17. It is more commendable that according to Dr Chew, the management still retained a small amount of earnings last FY for future usage.

A shareholder praised the management team for such a 'miracle' he called - achieving 11 years of steady DPU growth. He wonder how does the management do it

Management Fees Tilt Towards Payment by Units to Maintain DPU Payment
The secret to the DPU performance, according to Dr Chew, is actually quite simple. The management opt to receive more of its fees in units, instead of cash, to conserve cash for DPU payment. In a usual year, management fees typically comprise of 80% cash and 20% units. In FY17, the proportion went up to 30% cash and 70% units in view of Northpoint City AEI.

My take is this shows management places shareholders' interest at the heart of its distribution policy. And they are doing this moderately only during the years when revenue is expected to fall. Fees paid in units also increases their stake in the Reit for better alignment of interest with shareholders.

Acquired Yishun 10 with a Long Term Plan
The old Northpoint is an L-Shaped building occupying a land plot with Yishun 10 Cineplex situated  at the top left corner, separated by a road. Bearing in mind the new Northpoint development, management acquired Yishun 10 (albeit just the retail podium at ground floor), with the grand vision of eventually amalgamating it into the Northpoint Complex.


However, Dr Chew stressed that this would not happen anytime soon. Management is simply being forward looking and acquired the asset as a strategic land bank for future developments.

Changi City Point Growth Not Up to Expectation
One shareholder pointed out that Changi City Point (CCP) had flat revenue and NPI in FY17, despite the newly-opened Downtown Line. This is a valid concern because CCP is a substantial asset in FCT's portfolio and its performance would impact FCT's overall figure.

Dr Chew agreed to his point. CCP was able to raise its occupancy rate from 81% to 88%, but management was not able to raise the rental. While CCP has a base crowd from nearby offices, institutions/university and Expo event goers, the lack of local catchment means its footfall is seasonal. One way to address this is to fine-tune its positioning as either an outlet or food-focused mall. Management is awaiting the completion of Jewel @ Changi Airport-just a stone throw away, before making a decision.

Bedok Point Continues to Be a Drag
Bedok Point sticks out like a sore thumb in FCT's suite of solid assets. Its revenue and NPI continued to fall in FY17. One shareholder asked what would management do to this asset, and suggested divesting it.

Dr Chew replied that Bedok Point's location a distance away from MRT station severely handicap its performance. For this mall, the key is to refine its tenant mix to attract passer by. Management is also exploring all options to derive maximum value for shareholders. One option was re-development, but as the mall was built on land previously occupied by 2 carparks and 1 cinema, there are much restrictions here.

Personally I feel turning Bedok Point around is a tall order. Efforts have been ongoing for a while but yielded no results. Perhaps the best option is to divest it. Plus, Bedok Central is showing some signs of retail saturation, with competition from Heartbeat and other non-mall retail shops. CapitaMall's Bedok Mall also had negative rental revision in Q3 earnings.

Rationale of Its Hektar Reit Investment
A shareholder felt that FCT's investment in Malaysia-listed Hektar Reit does not seem to be strategic considering that it constitutes only about 3% of FCT's revenue, and a starkly different retail environment in second-tier Malaysia cities.

Dr Chew explained that when FCT first invested in Hektar, it contributed about 7% of the revenue. But over years due to the weakening Ringgit and a growing Singapore portfolio, the percentage has shrunk to 3%.

And here is the interesting part. Dr Chew shared that FCT's investment mandate actually covers worldwide properties. While Malaysia's retail landscape is distinct from Singapore's, both markets share similarities in culture, heritage, and consumer tastes. Should FCT decides to expand overseas, it would be into markets where the Frasers Group has a presence, which include Malaysia. Its Hektar Reit stake allows FCT to understand the market better, before taking a bigger plunge (if that happens).

Local Retail Landscape Remains Challenging
While FCT boasts an asset portfolio of resilient suburban malls near MRT stations, it is also impacted by a challenging local retail landscape. Its portfolio occupancy cost, defined as tenants' gross rental to tenants' sales turnover, has increased in the past 3 years. In addition, all properties showed decline in tenants' sales in FY17.

Source: FCT  FY17 Annual Report

Dr Chew shared that a 16.6% occupancy cost is still manageable. However it is worrying if it rises above 25%, which will force most retailers out of business even for the high end shops with thicker margin. Management will proactively manage their malls and pursue its proven strategy of growth via acquisition, asset enhancements, organic growth.

Conclusion
Dr Chew's response showed that he has a good grasp of FCT's operational details and local retail environment. He also came across as a sincere and grounded CEO who shares openly about FCT's shortcomings and ways to address these issues.

Undoubtedly, the retail industry will continue to face headwinds. It is a sector-wide problem, also impacting other retail Reits. But I think FCT stand a good chance of continuing its good performance, due to its unique offering of suburban malls catering to non-discretionary needs, and management's competency shown thus far.

I will continue to hold my shares.

Lastly, FCT announced its latest quarter results last night, with improvement across key figures: DPU 3c (up 3.8%), Revenue $47.9m (up 8.7%), NPI $34.5m (up 9.1%).

Thoughts on market plunge and what should one do

Recent market drop has been stomach churning. If you are a relatively new investor who entered the market past 2 years when it was smooth sa...