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.

Financial Confidence

I came across this term while watching a Youtube video by this person called Dan Lok. He is a Canadian entrepreneur/consultant who specializes on big account closing. While he isn’t a Warren Buffet I thought what he mentioned about financial confidence resonated with me.

Most people are familiar with the words “financial freedom” or “financial security”. Both terms connote having or building a cornerstone of wealth to tide you over bad times. Even though FIRE is all about increasing your value, saving and investing, most conventional blogs focuses more on the “saving and investing” part.

“Financial confidence” is like FIRE’s answer to increasing value. Like its name, “financial confidence” is all about having the skill sets and knowledge to build wealth. So even if the world does come crashing down on you one day, you are still resilient and able to create new value in an ever-changing world.

These themes resonated with me a lot as most conventional financial literature focuses on using the power of compounding to help build wealth over a long period of time. But I realized that if the roof was truly on fire, I don’t have the time or resources to live twice as long.

I am on the wait list for his book F.U. Money and will post a review after I am done with it.

Active Income

I’ve always thought of the FIRE game as math’s, plain and simple. At some point you realize that there is a limit to how much you can save and that the next step is to increase your income.

I’ve never been good at increasing my side income skills. Frankly, aside from dividends, which has provided some level of passive income over the last 2 years, I’ve never really dabbled in other ways to make more cash.

That’s before I met Gary Vaynerchuk and his 2017 Flip challenge. Okay never mind, that this is Yr 2018 and I am 1 year behind the curve. This guy is a serious eye opener and in my opinion a very shrewd observer of the changing tech scene, especially when it comes to small businesses.

You can watch his video here

It has barely been a month since I’ve started this exercise and I’ve already sold 3 items. I’m seriously contemplating going down to the thrift store this weekend to see if I can find something valuable to flip for free.

Given my skills, the S$20,170 target looks like miles away, but I guess the process is more important than the product. Imma chip away at it one step at a time.

2.42% October 2018 SSB issuance

The latest SSB issuance is out, and is frankly not that exciting. Overall, the interest rates have remained fundamentally the same. The overall yield has fallen by 0.02% from the previous month and the 1-year yield is down by 0.01%.

2.44% Sept-18 vs 2.42% Oct-18Nothing fancy about the issuance, but investor’s who have a time horizon of 2 years for the bond can note that the 2-year yields are slightly higher than the last issuance.

I think the bond issuer’s are fully cognizant about how the SSB’s are not supposed to be “high yielding” investments. Especially since there have been reports of falling savings rate in the banks. Not a surprise either since their interest rates are so low.

Here is an incomplete list of the past SSB issuances.

Dividend recap 3Q2018

In total, I received $509 in dividends for the third quarter. This amount is progressively getting larger as I switch towards dividend paying stocks instead of growth stocks. In the previous year, the amount received was only $107.

Breaking the $500 per quarter mark is a good sign that the portfolio is progressing. In time, I do hope that this will grow to $750 and hopefully $1000 per quarter.

Dividends received Reit: $367.24

  • Capital Retail China Trust – $111.41
  • AIMS AMP Capital Reit – $50
  • Mapletree North Asia Commercial Trust – $29
  • ESR Reit – $176.83

Dividends received Non-Reit: $152.3

  • Singtel – $107
  • Wilmar -$35
  • Raffles Medical – $10.3

Homeowners can retain up to $20K in CPF-OA when applying HDB loans

The latest news that homeowners can elect to retain $20k in their CPF-OA when applying for a HDB housing loan, is to me a welcomed move.

Previously, homeowners had to completely use up their OA balances, before being able to take a loan with the HDB. This meant that not only are they left with minimal buffer space in their CPF, they also miss out on the additional 1% interest from the first $20k in the CPF-OA.

Some may ask, why bother to retain the money in the OA when you can be paying down the loan and avoiding the interest? I think that an immediate advantage is to let the first 20k sit in the OA garnering an additional 1% of interest, while funneling the rest into the SA, where it earns an additional 1.5%.

The new rules are a boon for soon-to-be homeowners like myself, who see the SA as a cornerstone to their retirement plans. In fact, if you continued to funnel everything above the first $20k into the SA. I’d reckon that the FRS would not be too difficult to achieve.

Repaying the housing loan (Part II)

I pared down a small chunk of the amount outstanding on the CPF housing loan. While not as much as the previous amount in March, it is nonetheless a significant amount and would otherwise mean that the hitting the investment target of setting aside 50k for the year would likely be out of reach.

This was not an easy decision to arrive to, as it would thus make the following year’s target of 75k that much harder to achieve. Also, there is still another small sum required to fund the SA top up for the year. These two put together would mean the likely investment amount set aside for the year end would stand closer to the 40k mark instead of 50k.

On the flip side, this would mean I have repaid almost 2/3 of the amount borrowed on the house. If everything goes according to plan, I calculated that we stand to save more than 40k over the life of the loan. Also, the 5% in paid up home equity will allow more cash to be returned should we want to move or sell our place in future.

It’s never easy to make tradeoffs. But I know that a dollar saved is a dollar earned. Given the poor outlook for the year, valuations still look rich. I’ve narrowed my sights to a few counters which I think can bring genuine return over the long term and would be hoping to add more if the opportunity presents itself.