Friday, February 28, 2014

Risk management series: Foreign exchange risk

Hey guys, how are you doing? Today I will be discussing foreign exchange risk. No, this isn’t an article about FOREX trading (I don’t do that shit here). This is an article about analysing the foreign exchange risk exposures of companies. I still remember that FOREX trading was really hot a few months back with young people. Maybe it’s still going strong, or maybe they realized that it takes more than looking at fucking charts to make money and that they were just gambling. Anyway, let’s get down to business.

Investors need to identify the amount of the company’s accounts payable that are in foreign currencies. If the company has a large amount of accounts payable (relative to its total assets) that are in a foreign currency, its financial position could be compromised if the foreign currency appreciates against the company’s functional currency. This is the case as the company might have to dig deeper into its cash reserves or take on more debt to convert enough foreign currency to settle its accounts payable.  I would want a company with a large amount of foreign currency accounts payable to generate enough profits in those foreign currencies to comfortably cover its accounts payable.  Otherwise, I would want the company to either have cash & investments denominated in the foreign currency or hedge its foreign currency exposure with derivatives.

The same goes for significant borrowings (relative to the company’s total assets) denominated in foreign currencies. I would like the company to have enough cash & investments and profits in those currencies to cover the interest and principal payments of its foreign debts. Otherwise, I would want the company to hedge its foreign currency exposure.

Another source of foreign currency risk is that a company’s profitability could get impaired if there’s a broad appreciation in the currency of the country where the company’s manufacturing facilities are located. This is the case as the company’s products will become more expensive in other countries and it might lose market share. Alternatively, the company might decide to maintain market share by not passing on the increased manufacturing costs to its customers and take a hit to its profit margins instead. To reduce the risk of something like this happening, the company can establish manufacturing facilities in a few different countries.  This will allow the company to shift production to other countries if manufacturing in a certain country becomes too expensive due to currency appreciation. I personally have never investigated how geographically diversified a company’s manufacturing facilities are, so I don’t know if such information can be easily found. However, I’m interested to perform such an investigation in the future. It will be my little pet project.

A quick update on the Greedy Dragon portfolio, I recently took a position in Kasikornbank and sold my Tifa Finance shares. As always, thank you for reading. Take care, stay rational and flip off anyone who promises you easy money through forex trading.

Saturday, February 22, 2014

Analysis of CapitaMalls Malaysia Trust

Please read the disclaimer here: Enjoy the article, bitches!

Today I will be taking a look at CapitaMalls Malaysia Trust (CMMT). CMMT is a Malaysian shopping mall real estate investment trust (REIT). CMMT’s portfolio consists of 4 malls: Gurney Plaza, Sungei Wang Plaza, The Mines and East Coast Mall. CMMT trades on the Bursa Malaysia with the stock code 5180. The stock closed at Ringgit Malaysia (RM) 1.35 on Friday. RM 1 is approximately USD 0.30. I’m currently looking to increase my exposure to good quality real estate as they can become solid cash cows if bought at a reasonable price. Another reason I want to increase my exposure to real estate is of course for the ladies. I hear that some girls get absolutely wet for guys who are involved in real estate. Maybe they will think that I’m a jerk off when I tell them that my real estate holdings consist of units in REITs instead of luxury condominiums and units in trendy shopping malls. Then again, maybe some girls will think that I’m hot stuff as I managed to use my limited capital to get exposure to high quality, established real estate and a professional management team.

Of the 4 shopping malls that CMMT owns, Gurney Plaza and Sungei Wang Plaza are good quality properties while The Mines and East Coast Mall are pretty decent. The following tables break down the revenue psf for CMMT’s properties and the revenue psf for other popular shopping malls in Malaysia:        

Annual revenue psf for CMMT’s properties

Gurney Plaza
RM 137.03
Sungei Wang Plaza
RM 161.02
The Mines
RM 100.02
East Coast Mall
RM 89.95

Annual revenue psf for other popular malls in Malaysia

Sunway Pyramid
RM 139.58
RM 255.40
Mid Valley Megamall & The Gardens
RM 167.68

Notes to the table:

Annual revenue psf = gross revenue/net lettable area

There are timing differences between the annual revenue psf figures for the properties in the tables. This is the case as the easiest way to obtain net lettable area data and gross revenue data is from the annual reports, and not all of the REITs 2013 annual reports are out yet. CMMT’s properties annual revenue psf are calculated using data from its 2013 annual report. Pavilion mall annual revenue psf is calculated using data from Pavilion REIT’s 2012 annual report. As Mid Valley Megamall & The Gardens 2012 annual report included only a few months of results, just the net lettable area data was taken from the 2012 annual report; gross revenue data was taken from the 2013 4th quarter report. Sunway Pyramid’s annual revenue psf is calculated using data from Sunway REIT’s 2013 annual report (the REIT’s financial year ends on June 30).         

All of CMMT’s properties have high occupancy rates which is obviously a good thing as it could indicate that there’s strong demand for space in CMMT’s malls. The stronger the demand to rent space in a mall, the more likely it is that the mall will be able to maintain or increase the rent that it charges. As at 31 December, 2013, Gurney Plaza, Sungei Wang Plaza, The Mines and East Coast Mall have occupancy rates between 98.00%-100%. In 2013, CMMT managed to increase the gross revenue from its properties by 5.5%.

Both Gurney Plaza and Sungei Wang Plaza are freehold properties. The Mines is a 99 years leasehold property expiring on 20 March 2091. East Coast Mall is a 99 years leasehold property expiring on 18 December 2106.

Excluding fair value gain of investment properties, CMMT had earnings per unit of RM 0.0837 in 2013. Based on CMMT’s units closing price on Friday, the REIT will have a price/earnings ratio of approximately 16.12 or earnings yield of 6.20%. I think that CMMT is trading at a reasonable price. If I had to choose between investing in CMMT and investing in a new development, I will definitely choose CMMT as I think it has a better risk/reward profile. While I think that CMMT should be a decent long-term investment, I won’t invest in CMMT right now as I’m looking to be a greedy mofo and chase the big bucks. But if I were asked by a family member to put together a passive income retirement portfolio, then I will definitely consider including CMMT in that portfolio. Based on the dividends declared over the past 12 months, CMMT would have a dividend yield of 6.55%.

Well, I will have to wait a little longer to increase my real estate exposure. While I’ve never known my grandparents, I think it’s safe to say that they would be a little annoyed with me for not investing more in real estate. After all, those old school Chinese people love their real estate (a lot of them love gambling and smoking too, but that’s a story for another time). Anyway, thank you for reading. Take care and stay rational.

Sunday, February 16, 2014

Semi-annual performance report for the period ended February 17, 2014

Disclaimer: The purpose of this article is to present the performance of my portfolio. This article does not represent advice to buy or sell any stocks. I may, at any time, sell some or all of the stocks that were presented or appeared in this article. There may be errors in my calculations.

Hi, I hope you guys had an awesome weekend. It took me quite some time, but I finally managed to put together this semi-annual performance report for the Greedy Dragon Portfolio. The first contract note I received for the purchase of shares was dated 29 August 2013, so I guess it’s ok to publish a semi-annual report. Preparing this report really reminded me of my university days when I was constantly working on assignments and flirting with bitches by playing the “blur guy” who needs help with his studies. While I may not have been hot with the ladies in my university days, I hope that I will be on fucking fire when it comes to my investments.

I have quite a few international (non-Malaysian) viewers, so let me quickly define the currency acronyms that I used in this report. RM = Ringgit Malaysia, IDR = Indonesian Rupiah, SGD = Singapore Dollar, US$ =U.S. Dollar and JPY = Japanese Yen. Now that we’ve got that out of the way, let’s get down to business. Here’s the summary of my performance:

Share price when purchased
Current share price
Share price gain/loss
Dividend per share (after taxes)
Total return (excluding transaction cost & forex gains/losses)
Current value of holding converted to RM 
Citizens & Northern Corporation
US$ 20 (250 shares)
US$ 19.46
US$ 0.146 per share
National Bankshares
US$ 35.8 (130 shares)
US$ 36.50
US$ 0.304 per share
Monster Beverage
US$ 52.09 (80 shares)
US$ 71.59
Bank Rakyat Indonesia Persero
IDR 6750 (7,000 shares)
IDR 8725
Tifa Finance
IDR 210 (200,000 shares)
IDR 525
eBay Inc
US$ 50.32 (100 shares)
US$ 54.77
Overseas Education Limited
SGD 0.82 (5,000 shares)
SGD 0.84
Boardroom Limited
SGD 0.63 (7,250 shares)
SGD 0.575
Kawan Food Berhad
RM 1.33 (6,000 shares)
Kumpulan Fima Berhad
RM 2 (4,000 shares)
RM 0.071 per share
Prestariang Berhad
RM 2.80 (2,000 shares)
KLCC Property Holdings Berhad
RM 6.09 (2,000 shares)

Value of portfolio at current exchange rates
Initial investment capital
Portfolio return

Stocks sold in the period
Share price when purchased
Share price when sold
Share price gain
Original investment (in RM)
Value when sold (in RM)
Total return (including transaction costs & forex gains/losses)
DeNA Co., Ltd.
JPY 2127
JPY 2223

The Greedy Dragon portfolio’s 14.69% return over the past 6 months is good. The S&P 500 and the FTSE Bursa Malaysia KLCI Index gained 12.24% and 6.78% respectively over the same period. Of course, my performance means nothing yet as it’s only the long-term returns that matter. Some of you might have noticed that I’m holding a lot of cash (23.71% of my portfolio). I maintain a significant cash balance as I think that there are some serious problems in a few major economies which could cause a global sell off. I don’t know when the shit will hit the fan, but I want to be ready when it does. I plan to further increase my cash holdings in the near future.

The Greedy Dragon portfolio’s concentration risk is at acceptable levels.  The following is the breakdown of the portfolio’s geographical exposures as well as exposures by industry:

Geographical exposure

Exposure by industry
E-commerce & payments processing
Banks & finance companies
Consumer goods
Professional services
Real estate
Education, training, software
Plantation, manufacturing, bulking

Since my cash is deposited in Malaysian banks, I considered it as a Malaysian asset. Malaysian stocks made up 16.44% of my portfolio. I know certain companies like E-Bay and Kawan Food generates a significant amount of their profits internationally. But when calculating the portfolio’s geographical exposures, I treated those stocks as if they generated profits solely from the country in which they are listed (I guess I was just too lazy to perform additional calculations).

This wraps up the semi-annual performance report. Hopefully I can sustain superior returns over the long-term.  Thank you for reading. Take care and stay rational.

Friday, February 14, 2014

Bullshit financial theories part 3: Industry price/book ratio

Hi guys, check out the graphic at the top of my blog. Fucking badass, huh? To channel Rainbow Dash from My Little Pony, the graphic makes my blog at least 20% cooler.  Anyway, in part 3 of the bullshit financial theories series, I look into how some analysts go full retard when they base their recommendations on the industry price/book value ratio.

First of all, I don’t think the price/book ratio should be used to determine if a company is overvalued or undervalued. Future owners’ earnings discounted back to the present should be used to judge whether or not a company is likely to be a good investment. A company with a price/book ratio of 0.5 is still a shit investment if it is capital intensive and has to reinvest most of its cash flow in plant & equipment. Some people might argue that the company can always liquidate its assets and pay a dividend or invest in a more attractive industry. But unless you’re ultra-rich, chances are that management won’t give a flying fuck about your suggestions to liquidate assets. Even if the company did liquidate its assets, it may not sell them for as much as their reported value.

Banks are a bit different as the reported value of assets such as loans & marketable securities are more objective than the reported value of buildings & equipment. But even with banks, the price/book ratio has limited utility. I guess that a bank is probably undervalued if its price/book ratio is below 1 or slightly above 1. But other than in very obvious situations, the price/book ratio doesn’t tell me much.

I think that analysts that recommend a bank mainly because its price/book ratio is lower than its peers should take their fancy degrees, shred it, put it in their pipes and smoke it.  Just because a bank has a lower price/book ratio than its peers doesn’t mean it will make a better investment. The bank could deserve the lower price/book ratio as it may have a significantly higher cost of funds, is terrible at managing credit risk or etc. And just because a bank has a lower price/book ratio than its peers doesn’t mean it’s undervalued, the bank could be overvalued and its peers could be even more overvalued. While I didn’t make it to the dean’s list, I think it’s a mistake to invest in something that’s overvalued, even if it’s less overvalued than its peers.

Well, I guess I will conclude the article here. I’m currently working on the performance report of the Greedy Dragon portfolio. I should be able to publish it by this weekend, so please check back then if you’re interested. As always, thank you for reading. Take care and stay rational.

Sunday, February 9, 2014

Analysis of Banco de Chile

Please read the disclaimer here: Enjoy the article, bitches!

In this article, I will be analysing Banco de Chile. The bank’s American Depositary Receipts (ADRs) trade on the New York Stock Exchange. Banco de Chile closed at USD 74.07 per ADR on Friday. Since I can’t make any stereotypical jokes as I don’t really know anything about the Chilean culture, let’s just get down to business.

Banco de Chile generates impressive returns on capital. For the nine months ended September 30, 2013, the company achieved return on average equity and return on average assets of 23.98% and 2.09% respectively (figures are annualized). Part of the reason for the bank’s superior profits is that it has been managed efficiently. The company achieved an efficiency ratio of 46.34% for the 9 months ended September 30, 2013.

Banco de Chile has been growing its deposits at quite a healthy pace. The bank grew its deposits at a compounded annual rate of 5.95% for the 5-year period of 2008-2012. For the 9 months ended September 30, 2013, the bank grew deposits by 7.80%.

Banco de Chile has a decent capital cushion to absorb losses. As at September 30, 2013, the bank had a tier 1 capital ratio (on total assets) and a total capital ratio (on risk-weighted assets) of 7.6% and 13.2% respectively. Banco de Chile’s tier 1 capital ratio (on total assets) and total capital ratio (on risk-weighted assets) were above the minimum requirements by 4.7% and more than 3% respectively.

Management has done alright in terms of managing credit risk. Banco de Chile’s customer loan charge-off rate was between 0.90%-1.42% and an average of 1.11% for the 5-year period of 2008-2012. The bank’s customer loan charge-off rate was 0.98% (annualized) for the 9 months ended September 30, 2013. Banco de Chile’s charge-off rates are reasonable, considering that it has a net interest margin of 4.41% (annualized).

The following is the breakdown of Banco de Chile’s loan portfolio:

Commercial loans
Mortgage loans (mostly residential)
Consumer loans

According to Google Finance, Banco de Chile’s ADRs have a Price/Earnings ratio of 11.88 which I think is reasonable. According to Bloomberg, Banco de Chile has a gross dividend yield of 5.74% which is really sweet. I would be quite happy to take a small position in the bank, but I need to take a look at my portfolio first to make sure that I’m not already overexposed to the banking sector. I think that Banco de Chile is an above average bank and that Chile is a stable country, so if I do decide to invest in the bank it will be for the long-term.

Before I end this article, there’s something I would like to say to all my fellow value investors out there. I get fucking crazy over here at the Greedy Dragon. You know what I do here? I try to value businesses. I’m not like those bitch ass investment bloggers that use technical analysis because they don’t have what it takes to actually research a business. If you guys like my articles, please share it with your friends that are interested in investing as I would really love to have a larger audience to show my passion and ability to. Thank you for reading. Take care and stay rational.