Month: May 2016

Differences between investing in SGX listed vs US listed companies

                   26) US vs SGX 23052016.jpg

I’ve been asked to write about this topic, and whilst I think there isn’t much difference in terms of quantitatively analyzing the companies, there are certainly differences that one must consider when trying to invest in US listed companies.

Of course, the differences are also very much dependent on the specific type of company itself. The points below refer to the overall market and of course, involve a lot of generalizations. Here goes:

27) US vs SGX complexity 23052016

Complexity – US listed companies tend to have much more complex financials to consider. It is a norm for US listed companies to have debt on their balance sheets, with many different levels of seniority of debt with different maturities.

There is also a much higher level of complex corporate actions such as using equity for mergers and acquisitions (M&A), equity for debt swaps, preferred shares, mezzanine debt and debt with various covenants attached.

It’s best to illustrate this with a real life example:

Chesapeake Energy (CHK) (which I am vested in), successfully conducted a debt swap with a senior lien new debt early this year. In other words, they managed to convince existing debt holders to swap the debt that they hold for new higher lien (higher priority) debt, at less than the full value of the debt. 

What this means is that if you were one of the original holders of the debt, for every $1 that you paid, CHK offered to redeem the debt from you at say $0.70, and even then its not in cash but in terms of new debt that is more senior than the existing debt, and has longer maturities (aka higher risk to the bond holder)

Why would the debt holder accept this lousy deal?

Because the alternative is possible bankruptcy for CHK and the debt holder would then probably get back close to nothing. By successfully executing this swap, CHK effectively cut off 30% of their debt (for the debt that was converted), without coughing up with a single cent.

To convince debt holders to tender their debt for this conversion though, ironically, it was in the interests of the company that it was perceived to be going bankrupt.

Afterall, if you are a bond holder, and if you think CHK would be able to fully pay back the bond at maturity, you wouldn’t want to accept such a swap and get a haircut right?

I can’t think of any instances where such a thing happened for SGX listed companies.

The complexity and the wide variety of deals involved, means it’s a haven for intelligent and crafty financiers who can grasp and take advantage of complicated deals. If one is not as well versed, or inexperienced, it’s better to steer clear of situations that involve such complicated deals.

I would imagine that someone like Carl Icahn would have a very tough time if he could only invest in SGX listed companies. He’d probably be bored to death.

Another obvious example is non-GAAP reporting. US listed companies are allowed to report non-GAAP results if they feel it reflects their business more accurately. This obviously adds on a layer of confusion for the fundamental analyst, who has to find out what are the items added in or not added into the non-GAAP results to make it non-GAAP.

SGX companies do not report non-GAAP results. In contrast, the companies’ financial statements are relatively easy to understand, and the reporting structure is IMO clean, and standardized.

28) types of companies 23052016.jpg

Types of Companies – There is a much wider variety of companies with different businesses listed in US stock exchanges, compared to SGX listed companies. For example, a Singapore-based company, 8I Holdings Limited, is listed on the Australian exchange. The founder candidly said during an interview that they had trouble getting approval to get listed on SGX as the authorities didn’t accept purely investment holding companies. Well, 8I actually does educational courses in investing too but nevertheless, they apparently had trouble getting listed locally.

My personal experience is that SGX generally has only a few varieties of companies compared to most other foreign exchanges, not just the US listed ones.

29) Volatility 23052016

Volatility of share prices – IMO,US listed equities generally show greater swings in share prices compared to SGX ones. This makes sense as the pool of participants in US listed companies is much larger than SGX listed companies.

Correspondingly, the optimism and pessimism cycles are greater. Volatility is hence much larger.

This point is important to understand, especially so for technical analysts. Even fundamental analysts must be aware that things that look cheap, can get much cheaper or stay cheap for a prolonged period of time compared to a SGX listed company.

Taxes – This is probably one of my pet peeves about US listed equities. Taxes, taxes, taxes.

The US government practices double taxation (sometimes triple!). Meaning that the company pays corporate taxes on its earnings, and on top of that, any distributions (dividends) are taxed again at the shareholder level.

Capital gains are taxed as well. For foreigners, the taxes due are usually withheld by the brokerage firm that you use, so the taxes are deducted from your dividends or profits.

In contrast, Singapore has no capital gains tax, and does not practice double taxation.

30) Yields23052016

Brokerage and other Transaction Fees – In addition to brokerage fees, some brokerages levy additional monthly charges on foreign holdings. This varies between the various brokerages so it’s better to check with one’s broker regarding the monthly fees, if any. There are also usually additional fees levied on dividends and share distributions for US listed holdings.

On a related note, its better to utilise one of the international brokers when investing in foreign shares. The brokerage charges are way lower than the local ones like OCBC, UOB or Phillips. For eg. Using a prepaid cash management account for POEMS, each US exchange transaction costs a flat US $20. In contrast, using Interactive Brokers, the commission charges are usually way lower. It can  even be as low as US $1.

The fees these international brokers charges even for SGX listed companies, are way lower than our local brokerages. However, Singaporeans are not allowed to buy SGX listed companies using these international brokerages, only non-Singaporeans are.

Why? I have no idea. My guess is the foreign brokerages are not MAS approved, so the shares that you bought would be held in a custodian account and there’s counterparty risk. In other words, if the brokerages collapses, there’s no recourse to get back what you own.

Although all these brokerages are huge, have international operations, and are obviously well funded, in this day and age, it’s hard to say something will never collapse aka do a Bear Sterns.

Shareholder Activism & Engagement with Management – This is kinda obvious. There is hardly any shareholder activism in the local SGX listed companies. There’s only 1 AGM mandated for SGX listed companies. In US exchanges, the companies usually have quarterly conference calls together with the quarterly results release. During these conference calls, analysts can put forth questions and management has to answer them.

In my experience, the involvement of shareholders is much greater in US listed companies compared to SGX. In terms of shareholder engagement, I’d have to say of all the SGX listed companies I’ve owned or analysed, Boustead Singapore takes the cake. They have annual conference calls and regular email updates.

Like I said, Carl Icahn would’ve a tough time if he could only invest in SGX listed equities.

Yields – US listed companies generally have lower yields compared to SGX listed companies. More US listed companies distribute dividends on a quarterly basis, compared to SGX listed companies.

Forex risks – The recent volatility in the USD-SGD brings to the forefront the importance of forex. Forex plays a substantial role in determining your overall returns when investing in foreign markets. In the past 1 month or so, the exchange rate has done this:

31) USD-SGD 23052016.jpg

This means even if the share price of your US listed holdings have not changed, you’d have enjoyed a nice 2.21% gain in 1 month. If the share price increased, you’d have enjoyed a much bigger boost due to the compounding of this 2.21% gain on both your initial capital, as well as the capital increase.

Conclusion

These are some of the differences between investing in SGX listed vs US listed companies. These are derived from my personal experiences and my opinions.

Regarding portfolio construction, I don’t think it’s necessary to own US listed companies simply for the sake of diversification. The true intrinsic value of the company vs the price at which it can be attained at, regardless of the exchange it is listed on, should be the key consideration. However, if one ascertains value and would like to make an investment in a US listed company, then it would only be wise to be aware of these differences before committing to the investment.

 

CDW Holding Limited

23) CDWlogo 21052016

I invested in CDW Holding in March 2015, with an initial investment of 400,000 shares at around $0.18. Since then, the company has distributed generous dividends of 1.2 US cents annually. Which is a nice yield of around 9% or so.

CDW Holding is in the business of manufacturing light guide panels which are used mainly in smartphones, laptops and notebook computers. It also has a smaller division manufacturing precision parts for office equipment and electrical appliances. Most recently, it branched out into F&B, acquiring a ramen business in Japan.

CDW is what I’d describe as a “unique situation” investment – these are defined by me as situations where the valuation may not be the absolute key. Rather, the key to whether the investment is successful in the short to mid term depends on a certain factor or catalyst.

Earnings

Here is CDW’s multi year income statement:

24) CDW incomestatement 21052016.jpg

The earnings are “diluted” as there are currently 19,000,000 share options awarded as part of employee remuneration, and these are mostly “in the money” and likely to be exercise when they can. Instead of using a “weighted” approach to including the share options, my own calculations are more conservative by including ALL the shares since they are likely to be exercised.

As one can see, the earnings have declined in the past 4 years. In the latest FY16Q1 results, the earnings dropped even more drastic compared to the FY15Q1 results, dropping a whooping 97.5%. What happened?

CDW has been frank about the challenges the business is facing:

“In addition to a very challenging macro-environment, the Group’s key customer, who is focused on the high-end smartphone market, is facing very difficult times from the slowing global demand for smartphones. The key customer’s situation has led to a drop in orders and cost down pressure for the Group over the past year. This situation does not look to improve any time soon and may even deteriorate, depending on how well the key customer and other market players perceive the Group’s new generation light guide”

It is believed that CDW’s main client is SHARP, who is currently financially distressed. The smartphone market, which accounts for the bulk of CDW’s sales, has also been very competitive.

From my discussions with management, I came to understand that upstream suppliers like CDW have to go through a stringent process to get approval as one of the suppliers. This process can take anywhere from 1-2 years, although management said that it is getting shorter.

My opinion is that this forms a natural sort of moat. Clients would be less likely to switch suppliers over a small pricing difference if the accreditation process is so lengthy, and that’d likely involve costs as well.

CDW has recently developed a new generation light guide panel, and given samples for potential clients to assess. This new light guide panel was co developed with a Taiwanese partner (rumored to be Foxconn), and if it is Foxconn, that can only be good news.

These samples have “passed the key customer’s product testing, and the key customer is currently in talks with the end customer“. CDW sits right at the top of the entire supply chain for smart phones. CDW supplies the light guide panels, which are used by smartphone manufacturers to actually assemble the smart phone, which are given to the smartphone companies to sell.

It is this new light guide panel that will determine in a large way, how well CDW does in the short to mid term, possibly the long term as well.

Which is why I describe this as a “unique situation” type of investment. Valuations wise, CDW is certainly on the radar of several value oriented investors.

I won’t get into detail of how undervalued it is, but this is a company that is currently trading at around $0.14+, and it has actual cash on hand of $0.104. The company gives out very attractive dividends of 1.2 US cents, which is approximately 1.65 SG cents, giving a yield of >10%!

How well can this yield be sustained? Let’s take a look at the free cashflow to get a sense of how much cash the company generates, and how of this cash does it get to keep.

25) CDW cashflow 21052016

Not too bad, generally over the years, pretty FCF generative.

Based on a dividend of 1.2 US cents, the company pays out approximately $6mil in cash in dividends (taking into account the dilution from the share options). In the most recent quarter, it has currently $51.4mil in cash on hand. My opinion is that the FCF and the cash on hand is able to support this dividend at least for the next few years.

Of course, one would’ve observed that the earnings have been declining, and have dropped drastically in the most recent quarter. On top of that, the 1.6 US cents of earnings in FY15 is actually misleading, as there’s an extraordinary gain US $4.9million from the liquidation of a subsidiary, CD Suzhou. Exclude this extraordinary gain, and the earnings is only 0.61 US cents, instead of 1.64 US cents.

As such, the key factor to the immediate future of CDW is the new generation light guide panels. If CDW is successful in getting the key client to place orders, the share price will improve dramatically on such a news. This is because the bulk of the earnings depend on this client. Simply put, the relationship looks like this:

CDW Holding —> Sharp —> Apple

Of course, in reality it’s a bit more complicated than this. Most smartphone companies do not use only 1 manufacturer. They have several manufacturers, with 1 or 2 that becomes their main supplier.

Sharp’s LCD division has been acquired by Foxconn, which is of course known as the manufacturer of Apple phones.

CDW has guided that if they are successful in garnering orders, the manufacturing is due to start in 2HFY16. Which is pretty soon.

I could go on about the detailed analysis of CDW, but that’d make for too long a post and too lengthy reading. The dividends are well supported by CDW’s cashflow and CDW has a long term track record of maintaining, as well as raising it’s dividend. At a yield of >10%, it is indeed very attractive.

CONCLUSION

Here we have a company that’s very attractive valuation wise. But it is not the valuation that’s the key. Rather, it’s “qualitative” factors that’d determine the share price in the mid term. Without the contract win, CDW would likely remain in the doldrums. With a win though, that’d be the key catalyst for a huge jump in the share price.

It’s hard to tell with certainty how it’d play out. I’m betting on a contract win in the 2H of this year. Of course, CDW doesnt form a large part of my portfolio considering that how it’d turn out is currently a known unknown.

At the current share price of 14.6 SG cents, the yield is around 11% +.

At this price, I’m happy to get paid to wait. Might even continue to add a bit to my holdings.