Wednesday, November 19, 2008
A look at some yield plays
Below are a list of high yield plays I've looked at these few weeks. I think it's wise to hold a certain percentages of one's portfolio in this sector as these are fundamentally stable businesses with good distribution, a nice complement to the high flying chips that you plan to profit several times over cost in the eventual rebound (if there is). Fat dividends also keep one's mind sane in a protracted down market.
I won't bore you with the financial details. These are all reasonable buy for holding (read: not trading) with adequate yield and even considerable appreciation potential. In my view these are much better buys than bonds. However I have little confidence if these can outperform putting money under your mattress, over the next quarter or even next year.
Local consumption
GD Investment (270)
This should be the most resilient even in a recession because 80% (or more) of its profit is from selling water to the HK government. Extension terms have just been agreed with a 15% increase in tariff. GDI has some miscellaneous businesses heres and theres but none of them is interesting enough to warrant attention. GDI still has a lot of debt carried over from its last financial trouble and it'd be nice if management is more active in reducing those debt. However now that GDI has gotten in better financial shape, management seems more eager to do acquisitions to demonstrate their competency, but it is this area where GDI really has nothing to show for confidence. Profit should be comfortably above $2b and 09 prospective p/e should be around 7x or less. Yield is adequate but not as attractive though, which kind of reduce the attraction of buying in the 1st place.
TVB (511)
Champion of anti-IQ programming and broadcasting, surprising effective in capturing local viewers for more than 40 years. TVB has such dormant market position you all understand 1st hand. It is also a great business machine. It has little fixed outlay and almost no need for reinvestment (for future earnings). The only capax is the studio which is real estate and hence keeps value. 5 year average earnings are about 900m which suggests 10x p/e. Yield should be around 6/7%. Future generations may abandon TV altogether but I'm sure that'll be beyond my time. Future advertising revenue will contract certainly but share price is already at SARS level and not much above that at worst of Asian financial crisis, making any further fall rather limited.
Oriental Press (18)
Annual profit should be comfortably above $250m. The exceptional move to half the price of its 'Sun' newspaper which badly affected profits in FY06 and 07 probably won't repeat, as it didn't seem to achieve anything. Surprisingly, in the year of SARS OP actually had the most revenue and profit over the past 5 years. Maybe the internet and other new media is really having its effect slowly. This 1st half should have been tough as oil price (which seems to affect newsprint and ink cost) was high and advertising might have slowed. But it should see some relief in 2nd half when costs have come down. There's almost no debt and net cash is $1.75b after selling out its head office in Kowloon Bay. Do you know the market cap now is also $1.75b? Since the Ma family has been reluctant to distribute anything more than current year earnings, I guess overtime the market has basically written this 'cash holding' off. God knows how long you have to wait before you get to see this cash. And you need to pray daily that OP won't buy any of those funny financial products from its bankers. But even without this cash cushioning OP is still attractive at current price. It probably has the highest yield too.
REIT
GZI (405) and Champion (2778)
Both are commercial and retail REIT but at different locations. Main attraction of REIT is regulation, there's a cap of the amount of debt raised (45% on asset) and most importantly 90% of earnings have to be distributed. So you don't have to worry management getting too ambitious with your money. These two offer similar yield and face similar problems, possible falling rental. I'm not sure about the Guangzhou property market although I believe it may be more resilient than HK, but I don't know much about its property portfolio so I'll pass. Champion is more tempting with a 75% discount to NAV ($7), but I have great reservation about that figure because when new units were issued earlier this year, the issue price was only $3.6. Yet, the current price is only half of that at $1.7. The two buildings of Champion, ICBC Plaza and Langham Place are prime enough to me and both are in great locations. If I take 50% off current distribution as long term average (this implies no distribution in really bad years), the yield is about 7% over time of holding, not bad for grade A commercial properties. The return is also sort of inflation-protected too as rent should increase with inflation. However if you want deflation protection then you should probably stop reading from here and forget all stocks mentioned above.
Ports
Cosco Pacific (1199), Dalian Port (2880), China Merchants (144)
These seem interchangeable as they all have had the same dismal share price performance, even their earnings stream are quite different. CP is about 1/3 container terminal, 1/3 container leasing (mostly to parent company China Cosco), and 1/3 container manufacturing. DP is half crude oil terminal and half container terminal. Only CM is a pure container port play.
CP is most complicated in operation and in short too uncertain for a yield play. The container leasing and manufacturing look bleak at the moment, although I tend to believe share price discount is big enough. The worrying bit is actually the port side, where CP is increasing its investment in at least a dozen ports, along the coastline of China and overseas. I'm not really sure if the golden age of port operators has past and whether China can really support that many ports without oversupplying it, like it did in any other sector maybe except oil. CM is more focused and with less expansion, mostly because it started early. But it also has the highest valuation making its attraction average. I wouldn't count on the high earnings growth and 25x plus p/e ratio seen over the last 2 years to reappear in future. DP looks most attractive as half of its earnings is from the more profitable yet stable crude oil terminal business, which will actually benefit from the fallout in oil price. Its container port business targets the northeastern region trade which should be less developed and hence have more potential. I also like its lack of explosive earnings growth like CP and CM which means any adjustment should be slight. The only big negative is that DP invested in some funny interest rate swap in 2007, similar to those sold by Deutsche Bank and covered by David Webb already, I calculated the maximum downside to be about some $22m annually until 2015, which is not much compared to annual earnings of $600m. However in today's market if this is made known the punishment will probably be out of all proportion. That may become the opportune time to enter.
DISCLOSURE: I hold 511 at time of writing.
I won't bore you with the financial details. These are all reasonable buy for holding (read: not trading) with adequate yield and even considerable appreciation potential. In my view these are much better buys than bonds. However I have little confidence if these can outperform putting money under your mattress, over the next quarter or even next year.
Local consumption
GD Investment (270)
This should be the most resilient even in a recession because 80% (or more) of its profit is from selling water to the HK government. Extension terms have just been agreed with a 15% increase in tariff. GDI has some miscellaneous businesses heres and theres but none of them is interesting enough to warrant attention. GDI still has a lot of debt carried over from its last financial trouble and it'd be nice if management is more active in reducing those debt. However now that GDI has gotten in better financial shape, management seems more eager to do acquisitions to demonstrate their competency, but it is this area where GDI really has nothing to show for confidence. Profit should be comfortably above $2b and 09 prospective p/e should be around 7x or less. Yield is adequate but not as attractive though, which kind of reduce the attraction of buying in the 1st place.
TVB (511)
Champion of anti-IQ programming and broadcasting, surprising effective in capturing local viewers for more than 40 years. TVB has such dormant market position you all understand 1st hand. It is also a great business machine. It has little fixed outlay and almost no need for reinvestment (for future earnings). The only capax is the studio which is real estate and hence keeps value. 5 year average earnings are about 900m which suggests 10x p/e. Yield should be around 6/7%. Future generations may abandon TV altogether but I'm sure that'll be beyond my time. Future advertising revenue will contract certainly but share price is already at SARS level and not much above that at worst of Asian financial crisis, making any further fall rather limited.
Oriental Press (18)
Annual profit should be comfortably above $250m. The exceptional move to half the price of its 'Sun' newspaper which badly affected profits in FY06 and 07 probably won't repeat, as it didn't seem to achieve anything. Surprisingly, in the year of SARS OP actually had the most revenue and profit over the past 5 years. Maybe the internet and other new media is really having its effect slowly. This 1st half should have been tough as oil price (which seems to affect newsprint and ink cost) was high and advertising might have slowed. But it should see some relief in 2nd half when costs have come down. There's almost no debt and net cash is $1.75b after selling out its head office in Kowloon Bay. Do you know the market cap now is also $1.75b? Since the Ma family has been reluctant to distribute anything more than current year earnings, I guess overtime the market has basically written this 'cash holding' off. God knows how long you have to wait before you get to see this cash. And you need to pray daily that OP won't buy any of those funny financial products from its bankers. But even without this cash cushioning OP is still attractive at current price. It probably has the highest yield too.
REIT
GZI (405) and Champion (2778)
Both are commercial and retail REIT but at different locations. Main attraction of REIT is regulation, there's a cap of the amount of debt raised (45% on asset) and most importantly 90% of earnings have to be distributed. So you don't have to worry management getting too ambitious with your money. These two offer similar yield and face similar problems, possible falling rental. I'm not sure about the Guangzhou property market although I believe it may be more resilient than HK, but I don't know much about its property portfolio so I'll pass. Champion is more tempting with a 75% discount to NAV ($7), but I have great reservation about that figure because when new units were issued earlier this year, the issue price was only $3.6. Yet, the current price is only half of that at $1.7. The two buildings of Champion, ICBC Plaza and Langham Place are prime enough to me and both are in great locations. If I take 50% off current distribution as long term average (this implies no distribution in really bad years), the yield is about 7% over time of holding, not bad for grade A commercial properties. The return is also sort of inflation-protected too as rent should increase with inflation. However if you want deflation protection then you should probably stop reading from here and forget all stocks mentioned above.
Ports
Cosco Pacific (1199), Dalian Port (2880), China Merchants (144)
These seem interchangeable as they all have had the same dismal share price performance, even their earnings stream are quite different. CP is about 1/3 container terminal, 1/3 container leasing (mostly to parent company China Cosco), and 1/3 container manufacturing. DP is half crude oil terminal and half container terminal. Only CM is a pure container port play.
CP is most complicated in operation and in short too uncertain for a yield play. The container leasing and manufacturing look bleak at the moment, although I tend to believe share price discount is big enough. The worrying bit is actually the port side, where CP is increasing its investment in at least a dozen ports, along the coastline of China and overseas. I'm not really sure if the golden age of port operators has past and whether China can really support that many ports without oversupplying it, like it did in any other sector maybe except oil. CM is more focused and with less expansion, mostly because it started early. But it also has the highest valuation making its attraction average. I wouldn't count on the high earnings growth and 25x plus p/e ratio seen over the last 2 years to reappear in future. DP looks most attractive as half of its earnings is from the more profitable yet stable crude oil terminal business, which will actually benefit from the fallout in oil price. Its container port business targets the northeastern region trade which should be less developed and hence have more potential. I also like its lack of explosive earnings growth like CP and CM which means any adjustment should be slight. The only big negative is that DP invested in some funny interest rate swap in 2007, similar to those sold by Deutsche Bank and covered by David Webb already, I calculated the maximum downside to be about some $22m annually until 2015, which is not much compared to annual earnings of $600m. However in today's market if this is made known the punishment will probably be out of all proportion. That may become the opportune time to enter.
DISCLOSURE: I hold 511 at time of writing.
Comments:
<< Home
I have a question about the REIT:
The regulation required the total debt to be less than 45% on asset. How about if the Property Value (NAV) decreased significantly in the coming years? It may need to decrease the debt (by selling the asset?) or increase the asset (by placing new shares?) in order to satisfy the 45% regulation. Both ways may affect the coming yield significantly.
Am I correct in understanding this issue?
The regulation required the total debt to be less than 45% on asset. How about if the Property Value (NAV) decreased significantly in the coming years? It may need to decrease the debt (by selling the asset?) or increase the asset (by placing new shares?) in order to satisfy the 45% regulation. Both ways may affect the coming yield significantly.
Am I correct in understanding this issue?
I've got the followings from the prospectus with minor editing. Management is not required to sell down assets but need to right the situation promptly [how is not said]. SInce property value is based on valuation, there's more flexibility than it appears. Plus 45% on asset is already a very safe standard, since most banks lend on 70% on value and you seldom see foreclosure just because of 'negative equity'.
Champion REIT is expected to use leverage in connection with its investments. Its borrowings are
limited by the REIT Code to no more than 45% of its total gross asset value. From time to time Champion REIT may need to draw down on its banking facilities and use overdrafts but may be unable to do so due to the 45% borrowing limit. A downward revaluation of assets may result in a breach of the borrowing limit under the REIT Code. In the event of such a breach, Champion REIT would not be able to incur further borrowings. In such circumstances, while Champion REIT may not be required to dispose of its assets to reduce its indebtedness where such disposal is prejudicial to the interest of the Unitholders, the Manager must use its best endeavors to reduce excess borrowings, which may constrain its operational flexibility.
Post a Comment
Champion REIT is expected to use leverage in connection with its investments. Its borrowings are
limited by the REIT Code to no more than 45% of its total gross asset value. From time to time Champion REIT may need to draw down on its banking facilities and use overdrafts but may be unable to do so due to the 45% borrowing limit. A downward revaluation of assets may result in a breach of the borrowing limit under the REIT Code. In the event of such a breach, Champion REIT would not be able to incur further borrowings. In such circumstances, while Champion REIT may not be required to dispose of its assets to reduce its indebtedness where such disposal is prejudicial to the interest of the Unitholders, the Manager must use its best endeavors to reduce excess borrowings, which may constrain its operational flexibility.
Subscribe to Post Comments [Atom]
<< Home
Subscribe to Posts [Atom]