Reflections 1.5 years on.. Banks look great but what happened to everyone else?

[theasiareport]

It's been almost 1.5 years since I wrote a blog post and commented on forums - the last being a reflection Trump's election. Markets were strangely benign and calm until late Jan and obviously no with EM and APAC feeling some bouts of volatility. 

MSCI AC Asia Pacific ex-Japan intra-year declines average about 20% (https://am.jpmorgan.com/blob-gim/1383556...a_3Q18.pdf  - check slide 65) so this is nothing out of the blue.. What was weird was how eerily calm everything was until recently.

Some initial thoughts - although the STI hovers around 3,200 points.. it really has done nothing since 2007 where the STI peaked out at about 3,700 points in terms of capital appreciation.

The STI was driven down in 2016 to about 2,500 by a sharp fall in prices of the three local banks which hit 2008 level GFC valuations. The banks have led the way in leading the STI back up with them sharply revaluing as the credit cycle eased up especially w.r.t oil & gas.

Whats more startling to me is how other "blue chips" have fared- especially considering the three telcos and SPH. Developers which had rallied recently after a long cold winter in the property market have also entered their own "bear market" upon the release of new cooling measures last month.

SPH also faces a real structural decline with their crown jewel of print media facing what I reckon to be a permanent decline.

With regards to the three telcos..  things look grim anyway I cut it considering our mature market as well as the entrant of the forth operator. The valuations on these telcos reflect something akins of a nuclear fallout which to me is so startling considering the nature of the business.

Anyway you cut it, things just look grim at the moment outside the banks.

[chialc88]

Agree 100%.

Since Jan 2018, the downward trends really hurt many stock market operators.

Most of the financial bloggers had gone into holiday mood...

until last few weeks, seems like they had returned to action...

likely due to earning reporting...

Question:
What if a penguin turn up in your door steps?




Like what the songs, I hope to be with you, searching for the future together.
Enjoy:

[Big Toe]

It's actually a decent time to start loading up selectively even though we are nearer the tail end of the bull run.
The Trump Tariffs has injected a good dose of fear, which is good to keep markets in check.
Positive earnings guidance both locally and in the USA. China is pretty much in reasonable territory when it comes to valuations.
Quite optimistic and excited about the local bourse actually. Or I am the only one seeing good value?

[Wildreamz]

It's actually a decent time to start loading up selectively even though we are nearer the tail end of the bull run.
The Trump Tariffs has injected a good dose of fear, which is good to keep markets in check.
Positive earnings guidance both locally and in the USA. China is pretty much in reasonable territory when it comes to valuations.
Quite optimistic and excited about the local bourse actually. Or I am the only one seeing good value?

Value maybe? Quality is hard to come by in the local bourse though (many are in low growth industries, vulnerable to disruption).

Maybe only Venture Corp I'm somewhat bullish in.

(not vested in any local names)

[Big Toe]

Thank you for believing in Venture. Venture ALWAYS land a good fish(customer) with excellent margins only to abandon it some years later when the fish no longer has meat.
It is the nature of ODM/CM/EMS biz. There are just too many hungry wolves out there. They had quite a very good and long run with HP but customers nowadays require more cost reduction, 2nd/3rd source and much faster product life cycle. It is unlikely or even impossible to sustain high growth. Low growth with sustained margins for a prolonged period is already proving extremely difficult.

Venture have the very best management(excluding the one time mistake sub prime investment) and a competent RnD team in a highly competitive low margin business(but not as low as say plastics, sunningdale, fuyu) where given the specifications and quantity of a product, cost is really all that matters. Customer will not pay $0.01 more for the same product produced from Venture as compared to Flextronics, Foxconn, Celestica, Jabil etc ... Much like you wont pay more for the exact same orange from different supermarkets. Except in supermarkets, you may consider the distance your travel to get that same orange, and perhaps pay a little more if is just below where you stay or across the road.

[Wildreamz]

Thanks for the in depth analysis Big Toe.

My bullishness stemmed from my understanding that iQOS is a legit product that has lot's of legs (from all the statistics that I read), valuation doesn't seem demanding, and their reliance on a single customer seems limited, and most of their product portfolio seems to be in a secular growth trend. Now I feel that I do not understand their revenue and product mix well enough to make this call. And now it seems like it's another company that is too hard for me (hope you don't feel discouraged).

[Big Toe]

Having touched on supermarkets and oranges, Sheng Shiong comes to mind. While I have no crystal ball to what exactly will happen but I can give a comparison between Sheng Shiong and Venture. And the brief merits of each investment.

Both have excellent management. As different as they may seem, both are exceptional at 2 things
1. Having much higher margins than peers
2. Great cost control

In terms of earnings visibility, Sheng Shiong is as steady as a rock. They have not really cornered the entire Singapore market and there is still a lot of room to grow locally. Supermarkets have very very stable sales daily and it is extremely unlikely to have a major earnings miss.
Maybe there will be hiccups along the way but likely to be small. But at the same time, there is almost no chance of significant upside surprise.
And online grocery has not taken off, currently not commercially viable and is very much in the red and it is unlikely to be able to challenge supermarket's dominance anytime soon.

As for Venture, it is one of Singapore's success story on a global stage. Venture started as a very small EMS(electronic manufacturing service.) Customer base is diverse and that provided some stability in earnings but product life cycle is short nowadays. It is not likely a very high margin product remains uncontested for long. It is a matter of time before it drops to a single digit type of margin. It is a struggle to get each and every manufacturing contract and much to venture's credit, they are quite good at securing new contracts at decent margins. Expect volatility in earnings no matter how great or competent the management is, it is how the business is. The good news is the pace of innovation has quickened in recent years and it should provide venture with more new opportunities in the future. For example no one would have tied cigarette companies to "medical device"/electronic manufacturing a few years ago when there isnt even the concept of IQOS. The ability to continue securing project wins is critical to sustain growth.

In summary, given capital to start a business, the supermarket business would be a much easier business to run/manage/sustain rather than a venture type of business even with all the RND and manufacturing talents thrown in. If anyone has a couple of million dollars to spare and would start a few supermarkets, let me know.
New kids on the block trying to take a piece of the pie includes, U star supermarket, Ang Mo Supermarket, Fortune Supermarket. Some of these companies are already established in their other businesses and that provided much needed capital to expand. Hao Mart is not included as they are more in the convenience store/Minimart space competing with the likes of 7-11, cheers.

[Wildreamz]

A quick glance at Sheng Shiong financials from yahoo finance, shows that it's top line grows at ~4% every year. Though it's net income grow slightly faster around ~10%. Growth has been quite consistent over the last 3 years at least. And then there is this growing "grocery war" if you will, with Redmart, Shopee and others, trying to get a piece of the pie.

Sheng Siong right now trades around TTM P/E of 24, which is the main reason that turn me off every time I re-look that counter. 

@Big Toe: I'm sure you know much more about Sheng Siong than me (as with Venture). How should a new prospective investor view an investment in Sheng Siong at today's price? 

Personally I only shop at NTUC, I don't use much of any online services for groceries, as they are not much cheaper than their counterpart in NTUC. But that is starting to change, as certain items is very difficult to find offline, and I'm trying to explore the option to buy online instead.

[mobo]

Does anyone have access to Bloomberg or a similar platform that can instantly create a customized weighted index of the Large+Mid caps excluding the 3 banks and the thinly traded Jardine Group of companies (JMH/JSH/C&C/HKL)? How does that compare to STI or MSCI SG? I suspect there will be substantial deviations.

The reality is the local banks + Jardine are now taking up 40% the market capitalization of Singapore listed stocks, rendering any index that includes these 4 companies way too narrow to reflect the general Singapore stock market experience.