Marco Polo Marine: Indonesian Cabotage Law (Part 2).

Some of the best kind of information we can collect regarding a company's prospects is from revelations by other companies in the same industry. I would like to share something I came across in NextInsight on Jaya Holdings which was published on 12 February 2013.

It was revealed that Jaya Holdings, from chartering its vessels to the O&G industry, "reaped US$7.8 million net profit compared to the paltry US$0.4 m in the same quarter a year ago."

"The jump in chartering net profit came from Jaya's charter fleet enjoying an 80% utilisation rate in 2Q2013 versus 62% a year earlier.

"The higher demand came with higher averge daily charter rates: US$12,685 versus US$9,222.

"The seas, however, have turned choppy. Jaya is expecting its fleet utilisation rate to sink somewhat in the current 3Q2012.

"A key reason is the implementation of (long-deferred) cabotage rules by Indonesia effective 1 Jan this year, which has led to the cancellation of charters for 3 Jaya vessels in Indonesian waters. That's 3 out of 28 vessels in Jaya's fleet."

CEO Venkatraman Sheshashayee revealed that chartering vessels in Indonesia was providing a decent rate of return on investment. However, now, "the rates there are probably climbing upward because now there is a serious shortage of vessels there."

Jaya's revelations bolster my strong believe that Marco Polo Marine's economic moat has strengthened and that it is positioned to benefit from higher charter rates in Indonesia this year.

The writing is on the wall and early investors in Marco Polo Marine will benefit.

To read the full article, visit NextInsight:
JAYA HOLDINGS: Strong Chartering Profit in 2Q

Related post:
Marco Polo Marine: Indonesian Cabotage Law.

China Minzhong: Indofood is a new substantial shareholder.

The reason for China Minzhong's trading halt in the last session has been published.

Indofood is paying 91.5c per share to take up a 14.95% stake in China Minzhong. Indofood is, of course, a leading food producer in Indonesia and some of us are familiar with their instant noodles in Singapore.

This surprise development is strongly positive for China Minzhong as they receive funds for further expansion of industrial farming facilities which will raise productivity and lower costs, making them more competitive. Industrial farming also means greater accountability and ease of audit which in turn should raise investor confidence.

There is also expected synergies between Indofood and China Minzhong, both established food companies in their respective countries of Indonesia and China which have huge populations which, of course, have to be fed.

However, before we send in the lion dancers and drums, Indofood is buying into China Minzhong through the purchase of new shares to be issued. So, unlike what happened in December last year when Olympus Capital Holdings sold its 10.3% stake for 80c a piece to various institutional funds and HNWIs, Indofood's buying into China Minzhong is dilutive for current shareholders.

The new shares which are being issued at a discount of about 10% from market price will water down the valuation of China Minzhong's shares by about 13%. On a per share basis, everything else remaining constant, we would see a lower EPS and a higher PER, for instance.

So, from a valuation perspective, if Mr. Market should go into protest mode on Monday and sell China Minzhong's shares at 90c a piece next week, it is actually not any cheaper than buying the shares at $1.03 this week.

If Mr. Market should go into a buying frenzy because of this development and push the share price to gap close at $1.20 per share, we should note that $1.20 is actually the old $1.38 from a valuation perspective. So, if we had a target price of $1.38 to sell, we should sell at the gap close of $1.20.

Of course, if we believe that this tie up will add fuel to the growth trajectory of China Minzhong, then, a higher PER becomes more acceptable. If Mr. Market believes this, it will be reflected in a much higher share price.

Unfortunately, there is no way to tell in which direction and by how much share price would move. We can only tell what this latest development means for the valuation of the stock.

See press release: here.

Related post:
China Minzhong: 2Q FY2013 stellar results.

Marco Polo Marine: Indonesian Cabotage Law.

Someone told me I have been blogging a lot about Marco Polo Marine lately. Well, I guess it is natural since I think this is a company that is doing well and is likely to continue doing well.

My continuing research revealed that in Indonesia, foreign vessels that perform surveys, drilling, offshore construction, offshore activities, dredging work, salvage jobs and underwater activities for the oil and gas sector are exempted from the cabotage law.

The cabotage law? Indonesia enacted a cabotage law in 2005, but enforcement was delayed for years.
The Indonesian Cabotage Law requires all vessels operating in the country’s waters to register as Indonesian-flagged vessels by 7 May 2011.

Marco Polo Marine via its Indonesian subsidiary company, PT Pelayaran Nasional Bina Buana Raya ("BBR"), reflagged all its vessels earmarked for plying in Indonesian waters to comply with the law.

Apart from tugs and barges, Marco Polo Marine also owns anchor handling tug supply (AHTS) vessels. What are these? They are vessels built to handle anchors for oil rigs. So, with the exemption mentioned earlier, does it mean that Marco Polo Marine's fleet of AHTS is at a disadvantage?

Further research found that there is a requirement by the Indonesian Transportation Ministry for companies to prioritize local companies as service providers in oil and gas shipping.

Local and foreign companies are required to seek Indonesian-flagged shipping companies first in a tender. They can turn to foreign firms if they fail to get local companies within three rounds of bidding. Even then, they can only use foreign vessels through a local company!

I am of the opinion that a substantial part of Marco Polo Marine's economic moat is provided by the Indonesian Cabotage Law. This allows them to charge a premium on its charter rates which OSK Research has called the company's most promising source of high margin growth.

References from The Jakarta Globe:
1. Govt Exempts Oil, Gas Vessels From Cabotage Law.
2. IPO-Bound Shipper Buana Plans to Cash in on Cabotage.

Related post:
Marco Polo Marine: Looking into the future.

China Minzhong: 2Q FY2013 stellar results.

There is a slight slippage in gross profit margins and I do mean slight but the rest looks good:

For the 6 months ended 31 Dec 2012:

Revenue improved 45.7% y-o-y

Gross profit improved 19.9% y-o-y

Gross profit margin is at 33.9%

Net profit margin is at 22.9%


Within a 6 months period, the balance sheet of the company has also strengthened with cash and bank balances increasing by 642.6% from RMB 66.2 million to RMB 491.6 million.

NAV per share improved 9.5% to RMB 7.05.

The improvement in its cash position is directly related to an improvement in cash flow from operations which increased 336.2% for the 6 months ended 31 Dec 2012, year on year.

I am still concerned about the TR which although reduced by 5.5% is still a hefty RMB 913.9 million. Out of this, RMB 158 million are overdue.

Overall, however, the results should please shareholders.

Could another round of re-rating upwards be on the cards?

See presentation slides: here.

Related posts:
1. China Minzhong: Share price to go higher.
2. China Minzhong: Partial divestment at $1.01.
3. China Minzhong: Going higher to $1.22 to $1.46.

Common but admirable people.

Once in a very long while, we might get to meet people whom we are truly impressed with and, even rarer, admire. Today, over lunch, I found such a group of people.

Although I have promised to keep the information shared with me confidential (and it will be so), I just want to share with readers how I am heartened that there are selfless people in Singapore who are doing good and trying to do more each day.

Some people have told me that what I am doing here in ASSI is noble, that I share freely with everyone what I know, that I spend so much time replying to emails and comments from readers. In fact, some might wonder why I do it?

Honestly, this blog was started mostly out of curiosity. I did not start with the primary intention to share the importance of financial freedom. What I thought and what I felt, I just blogged.

Over time, the number of readers grew and I realised many people enjoy reading my blogs. So, somewhere along the line, I decided that if a job is worth doing, it is worth doing well. Therefore, I started to write more seriously in an effort to inspire readers and to share what I know. A metamorphosis took place.

However, even though blogging feels like a second full time job for me by now, I have a day job that pays me a salary. So, I don't need to blog for a living and it doesn't matter too much that I am not being properly compensated for the amount of time I put into blogging.

Now, these people I got to know over lunch today are in a different league. They are paid very little money in their day jobs which are to share the importance of financial freedom with as many people as possible on a regular basis. Money made through their group efforts is put aside to do good in future for the underpriviledged.

I feel that this is truly noble and admirable.

I think all of us know how easy it is to feel cynical about people in this materialistic world that we live in but as we strive to become better people, it is good to know that there are people who are also striving to make the world a better place and they are making huge sacrifices to do so.

In the past, some readers suggested to me how I could conduct inexpensive and simple courses on investing in the stock market. I have, of late, thought how this could possibly be a retirement activity. Now, I am inspired that if I should do this, I could also possibly do something for the charities.

This has been a heart warming day for me.

Perennial China Retail Trust: DPU 1.96c.

PCRT declared a DPU of 1.96c that will go XD on 21 February 2013. It is payable on 18 March 2013. My long position initiated at 47.5c a share about half a year ago is very much in the black.

I have readers asking me whether this REIT is a good investment for income but this is not a REIT. It is a business trust that acquires, develops, owns and manages mostly shopping malls in China.

So, is investing in PCRT risky? Why am I invested in PCRT?

From a top down perspective, with domestic consumption only a third of GDP in China, there is much room for it to grow and China will need more malls. This is especially so with the government's determination to make domestic consumption another engine of growth for the economy.

From a bottom up perspective, PCRT's numbers have improved and so have its prospects. Regular readers might remember how I did not think PCRT attractive at IPO. It was offered at 70c a unit at IPO with a distribution yield of 5.3% which I thought was too low for the level of risk investors were being asked to take on. This was in the middle of 2011, if I remember correctly.

Anyway, we know what then happened to the unit price of PCRT in the following months.

I initiated a long position in PCRT at 47.5c because the distribution yield of 8+% at that price offered a more acceptable level of compensation for the risk I would be asked to assume.

I also took comfort from the fact that the Trust saw Pua Seck Guan increasing his stake and Kuok Khoon Hong and Martua Sitorus becoming substantial shareholders. They have a very strong incentive for the Trust to do well.

To invest in PCRT is to believe that it will generate stronger cash flow in the next few years. We will need a longer time horizon as by 2015, we could see 4 more malls operational. 

Now, the management has to work hard to increase the occupancy of the malls which are already operational. With occupancy at about 70%, there is much room for improvement.

What are the negatives, currently? Much of the profit declared comes from fair value gains at the moment. Much of the distributable income comes from earned out deeds at the moment. These are probably points of contention.

However, when we invest in growth stocks, if we have looked at the probable downside and find the numbers acceptable and we have to be a bit more adventurous in certain instances, we just have to be patient. If we have taken care of the downside, the upside should take care of itself.

In PCRT's case, gearing is at a comfortable 19.9%. Interest cover ratio is more than adequate at 6.9x. Weighted average interest rate is 4.62% with no debt due till 2014 and 2015. NAV per unit is at 70c and a case has been made that it should be at least 6c higher.

The management, in the presentation slides, states that the development risk present during the Trust's IPO in 2011 has been largely reduced as more than 90% of its IPO assets are now operational. This is a fact. Two more malls will be operational this year and they are working hard to secure tenants. This is also a fact.

I like the story and I like how investing in PCRT is less risky now than back in 2011.

Would I buy more at the current price? I don't think so. Why? Because I am corrupted by TA and the negative divergences I see suggest a possible pull back sometime in the future. 59.5c at XD? Could happen. If I wasn't already invested, I could initiate a smallish long position as a hedge which I sometimes do.

See presentation slides: here.

Related post:
Perennial China Retail Trust: Weak debut?

Mark Mobius on China.

The long weekend saw me doing more reading than usual. I also read why Mark Mobius, the executive chairman of Templeton, thinks the time is ripe to invest in Chinese equities.

Consumers have more disposable income:
Many consumers in China have been getting annual increases in wages of 20% or more. More personal assets could be funnelled into savings and investments.

Government spending:
The government is devoting more resources to infrastructure and subsidised housing as well as extending social security, education and health benefits to new migrants to the cities.

Fuel for the economy:
Between 2010 and 2011, interest rate in China increased 5x and are now at a 6% lending rate. The government has a lot of room to reduce rates if they need to stimulate the economy.

Volatility brings opportunity:
This year is likely to bring volatility which brings opportunity. We plan to go along for the ride.

I am holding on to my investments in Sound Global and China Minzhong, believing that they are good proxies of the continuing growth story in China. If Mr. Market should decide to offer much lower prices for their stocks in the meantime, I would buy more.

Related post:
China Minzhong: Share price to go higher.

LMIR: Divested 42.5% at 52.5c

Last night, I made a decision to sell a large chunk of my investment in LMIR. Today, my overnight sell order was filled.

By selling at 52.5c, I am giving up a distribution yield of approximately 5.7%.

As I went through my records to cancel out the units which were sold, I found out that the majority were purchased in late 2008 through 2009. 

I made fewer purchases in 2010 and 2011. 





Of course, the total number of units doubled during the rights issue in late 2011 at a price of 31c per rights unit.

Since the rights issue more than a year ago, the performance of LMIR has been unimpressive. 

I blogged about how unitholders who did not take the opportunity to buy more nil-paid rights as it was sold down aggressively then would have been better off without the rights issue and the subsequent acquisitions.

What is immediately positive about the divestment?

Given my entry prices, the divestment locks in a hefty capital gain. 

A big part of my remaining investment in the REIT is now "free", in a manner of speaking.






I have also put in a sell order at 53c. 

This is for the rights units converted from nil-paid rights bought in the open market in late 2011. 

If the sell order should be filled, it would reduce my investment in the REIT by another 30.5%. 

Then, my remaining investment in the REIT would be truly "free".





Of course, I have not taken into consideration the income distributions which I have been receiving from the REIT since 2008. 

I could check but it wouldn't serve any useful purpose other than to provide me with a way to kill time.

Still invested, I hope that LMIR's management would do better in FY2013 since I would still stand to benefit if OCBC Research's forecast for a much higher DPU from the REIT this year comes through.





Related post:
LMIR: An unimpressive 4Q 2012.

"We do not deserve to be disadvantaged this way." (FKA "Take the good with the bad if we retire to Malaysia.")

This is taken from a letter sent to The Forum Online in The Straits Times:

"My wife and I recently retired to Malaysia due to the property rules as well as the high cost of living in Singapore.

"We come back to Singapore to visit relatives and friends and attend medical appointments every two to three months.

"However, the LTA has informed me that as I am not an employee in Malaysia, my wife and I - a Singaporean and Singapore PR - are not allowed to drive our Malaysia-registered car into Singapore.

"I understand that this ruling is to close the loophole in the control of the vehicle population in Singapore, but I hope that the LTA can allow me to drive our Malaysia-registered car in based on the following..."

The writer went on to list 5 reasons, all of which I do not find convincing, ending the letter saying "We do not deserve to be disadvantaged this way."

I feel that since the writer understands that the rule exists for a good reason, then, he should not expect Singapore to make an exception for him.

I know people who moved to stay in Johor Bahru and rent out their HDB flats in Singapore for passive income. Not all are retired. In fact, a good number commute daily to Singapore for work.

I have always wondered why this is allowed since I believe that HDB flats are subsidised public housing and if these people are not staying in their flats, they should sell them to Singaporeans who need them more. It could possibly help to bring down the prices of resale flats too.

For Singaporeans who have chosen to make Johor Bahru their new home, I understand all their reasons for doing so with the lower cost of living in Malaysia usually at the top of the list.

However, understand that every choice made in life comes with consequences and we have to live with those consequences. 

We should not think that exceptions have to be made for us so that we can have our cake and eat it too, especially not when the exceptions will exact a cost on fellow Singaporeans.

5 rules for successful stock investing.

I would like to present a book on successful stock investing that comes highly recommended by a reader, Jojo.

US$ 22.95 each. Free shipping globally.

See Jojo's comments in an earlier blog post: here.

The book explains how to read financial statements, how to analyse companies and how to do valuations. It also shows mistakes to avoid and how to detect fraud.

AIMS AMP Capital Industrial REIT: Interview with CEO.

This was an interview session with Nicholas McGrath, CEO of AIMS AMP Capital Industrial REIT's management, on CNA late last year:



I like the explanation why the REIT took on a slightly higher cost of debt with its MTNs as compared to the secured bank loans which it retired. This is somewhere 2m 40s into the clip.

If my hearing serves me well, the advantages are three:

1. Broaden and diversify funding sources with dozens of debt capital market investors.

2. Able to borrow on an unsecured basis.

3. Increased the debt tenor of the REIT with 4 different maturity dates over the next 4 to 5 years.

It sounds to me like the REIT is paying a bit more on borrowings for a higher level of funding flexibility in both source and tenor. This could be a pre-emptive move against the almost certain increase in bank borrowing cost that would accompany a credit tightening in the USA if unemployment level drops to 6.5% by 2015.

Related posts:
1. AIMS AMP Capital Industrial REIT: 4.35% Fixed Rate Notes.
2. AIMS AMP Capital Industrial REIT: 3Q FY2013 DPU 2.58c.

Little Book of Value Investing.

For anyone who wants to learn about value investing, I discovered an easy to read book.

The message I got is that value investing is easy enough but most people do not have the patience for it.

"Patience is sometimes the hardest part of using the value approach. When I find a stock that sells for 50 per cent of what I have determined it is worth, my job is basically done. Now it is up to the stock. It may move up toward its real worth today, next week, or next year. It may trade sideways for five years and then quadruple in price. There is simply no way to know when a particular stock will appreciate, or if, in fact, it will."

Of course, there are many ways to make money from the stock market and value investing is probably one of the best known, if not the most popular.

Get a copy for only US$ 6.48 to US$ 7.48.
Free shipping globally.

"Buying stocks that have fallen in price and yet still offer a margin of safety has resulted in successful investments."

I enjoyed the book which I feel is a well written primer on the subject of value investing. It is also inexpensive which makes it a value for money read as well.

Related post:
Warren Buffet: The world's greatest money maker.