Invisible Poor

There has been a recent article highlighted the demographic split of smartphone users in China. You can read the article here as well as the more balanced report here.

In a nutshell, the article postulated that the primary users of Apple smartphones are users between the ages of 18-34, single and low salaried. I found this information quite close to my understanding of life in modern China.

In the last 4 years, I have traveled to China at least once a year, either on my own capacity or for work. Anyone that has been to China will be awed by the immense number of skyscrapers and high-rise buildings constructed even in tier 3 cities. But few know the harsh economic realities for the “invisible poor” powering this economic giant.

Even in the large tier 1 cities, there are many workers that are paid a monthly wage of below RMB 5k or about SGD 1k. This is way below the average required to maintain a normal standard of living in a tier 1 city where expenses can be very high.

These “invisible poor” work in typical office jobs either customer service or back office ops. Most of them start off as fresh graduates and typically do not have a very strong undergraduate degree (三本). They are seen working in offices located along the CBD fringe. These offices look very much like any other modern skyscraper in the CBD. However, most are cramped open offices where employees are expected to complete repetitive tasks that for the moment can’t seem to be automated.

The competition in China is intense and without financial assistance from their families, these workers would not be able to afford the lodgings that put them within 1 hour from their workplace, much less their source of weekend entertainment. Rental can cost close to 30% – 50% of their monthly salary.

Despite this, I couldn’t help but notice that many of them, at least in the company that I visited, were carrying the latest model of iPhones. For this demographic, it seems like trying to “strike it out” and being seen as successful is the most important indicator to others of their ability.

Understandably, due to the low pay, most just do their job and are gone as soon as they can clock out. Job hopping is also extremely prevalent among this demographic with people switching jobs for a pay rise anywhere between RMB 200-300. This is really workplace suicide, as without a long-term goal to strive for and putting in the extra effort, these people would still be in the same place many years from now.

With the gap between the larger cities and smaller cities growing ever smaller, one will wonder for how long more this source of labor will continue to power the chinese economy. For the foreseeable future at least, there will be more not less “invisible poor” people.

ESR Reit

It’s been awhile since I blogged about my big conviction stock for 2018. Since the beginning of 2018, I have seen the price fall by 16% from my buy in price. Understandably, the dilutive rights issue and overpriced acquisition of Viva industrial trust has not been kind to the stock price.

My lesson from this episode is that Reits need to be of a certain size to be able to take on acquisitions that would allow them to grow. we have seen this happen with Manulife and the recent Keppel-KBS Reit. When the Reit is small, a sizable acquisition would erode prices significantly. I certainly wished I had waited till after the merger to buy the combined entity.

From a Reit manager’s perspective, I can also understand why they needed to do the acquisition and bring in a new growth engine. If left alone, ESR would be like Cache or AIMS, slowly decaying with very little leeway to improve returns.

The big unknown is how the combined entity will perform in future. Obviously, the rosy picture painted by many analysts about the industrial leasing landscape has not panned out as expected. The weak rental reversions of the “old” ESR portfolio and the loss of rental support for UE bizhub has also not helped sentiments.

However, there are several things going for “new” ESR in the next few quarters. Other than the completion of the AEI at Marsiling and acquisition of Greenwich Drive facility we can also look forward to rental renewals for Viva’s business park portfolio which are likely to trend up.

On the debt side the Reit has done well to lower its blended cost of debt to 3.7% while extending the debt tenor to 2.4 years. The recent cancellation of the S$155m 3.5% notes also signals that the Reit is optimistic in sourcing for cheaper sources of debt.

While I am not sure what the future holds, I can say that I don’t foresee any further downside to the Reit and only with more visibility over forward income levels of the combined entity can we possibly a rerating and institutional buying.

2.57% November 2018 SSB issuance

November SSB issuance saw the average per annum interest rate raised by 0.04% from the previous month. On top of being the 2nd highest issuance this year, at 2.57% this is competitive with the current CPF interest rate of 2.5%.

Despite this issuance being only the 2nd highest for the year. What is interesting, is that the near term (Yr 1 – Yr 5) rates are increasing at an increasing clip. This provides a good alternative to leaving money in the bank.

Since repaying part of the home loan in Mar and Aug, my hurdle rate for CPF-OA has since fallen to 2.5%. As such, I have decided to take a small slice of this issuance as part of the wedding savings plan.

Mth Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Average
Jan 1.32% 1.58% 1.71% 1.82% 1.99% 2.22% 2.43% 2.65% 2.86% 3.06% 2.13%
Feb 1.55% 1.59% 1.67% 1.77% 1.91% 2.07% 2.26% 2.44% 2.61% 2.75% 2.04%
Mar 1.42% 1.55% 1.73% 1.92% 2.08% 2.23% 2.38% 2.53% 2.69% 2.87% 2.11%
Apr 1.42% 1.77% 2.02% 2.25% 2.41% 2.51% 2.59% 2.67% 2.79% 2.97% 2.31%
May 1.65% 1.95% 2.14% 2.28% 2.42% 2.54% 2.62% 2.72% 2.84% 3.00% 2.39%
Jun 1.68% 2.14% 2.21% 2.21% 2.30% 2.52% 2.67% 2.81% 2.96% 3.12% 2.43%
Jul 1.72% 2.19% 2.35% 2.42% 2.56% 2.77% 2.91% 3.06% 3.22% 3.41% 2.63%
Aug 1.78% 2.16% 2.37% 2.54% 2.67% 2.76% 2.81% 2.86% 2.95% 3.11% 2.57%
Sep 1.75% 2.02% 2.22% 2.39% 2.52% 2.60% 2.66% 2.73% 2.82% 2.97% 2.44%
Oct 1.74% 2.08% 2.22% 2.31% 2.42% 2.55% 2.63% 2.72% 2.83% 2.97% 2.42%
Nov 1.80% 2.09% 2.27% 2.42% 2.54% 2.63% 2.69% 2.75% 2.84% 2.98% 2.48%
Dec 1.89% 2.19% 2.38% 2.54% 2.66% 2.73% 2.77% 2.82% 2.90% 3.04% 2.57%

SSB highest interest rates in Jul (2.63%), followed by Aug & Dec (2.57%)


Quick and dirty for Keppel KBS Reit

Keppel KBS Reit’s share price has been on a freefall after the announcement of an impending right issue. The question that I wanted answered was, is if this price would be a good time to jump in?

Here are some details of the Issuance

  • West park Portfolio Acquisition Price: USD 93.1mil
  • Loan: USD 80mil, 5year tenure

By book value the Westpark portfolio would be the 5th largest property in the Reit’s portfolio, but due to the small size of the Reits portfolio (<USD 1bn), this relatively sizable issuance is likely to erode the face value of the Reit.

Balance Sheet figures, All Figures in (mil)

StatusAssetsLiabilityA/LSharesNAVLast PriceDisc to Bk
Prior to Acquisition8693192.72x6320.870.71517%
Post Acquisition9623992.41x8180.680.5617%

*Figures taken from presentation of Keppel KBS Reit annual report

Based on a discount to present book value, it does seem that the current price of USD 0.56 is trading at a similar level to the past book.

Income statement figures, All Figures in (mil)

StatusYTD dis Income4Q dis incomeTotal IncomeDPU
Prior to Acquisition33,5389,469143,0076.8%
Post Acquisition33,5389,942243,4805.3%
1 Assume that 4Q distribution of the Reit would remain same as 3Q
2 Assume that the Westpark portfolio would bring about a 5% increase in income per quarter

From the income statement, it is evident that the Reit is facing headwinds. Not only is the revenue falling, it’s 3Q figures are below the mean of the consolidated YTD figures. Which is likely the reason why they need to inject a new building.

The Reit’s management has also guided that for “every +/-50bps in LIBOR translates to -/+ 0.06 US cents in DPU per annum”, which does not bode well considering how interest rates are trending up in the near term.

Given that the annualized distribution yield demanded by investors prior to the acquisition was hovering at 7.5%. I would thus expect the price to continue to correct until the next set of results are unveiled.