Wednesday, April 21, 2021

Sold ADP and AENA

 ADP has been showing signs of distribution in the past month.  Falling prices on higher volume:

It could be due to India's covid situation.  But when reading charts: "Ours is not to wonder why".  

Normally I could ignore little wobbles in a company's share price.  But I think the bull market is coming to an end.

Source: Hedgeye, Jonesy's twitter

For AENA, it was a close decision on whether to let this stock go or hold it long term for dividends.  Its got a decent yield, monopoly position, and could survive a Eurozone breakup.  But I have enough dividends to live off, and it doesn't have enough growth potential - with a 5% yield while paying out 100% of their 2019 earnings.  I need more dry powder for the next cycle.

Sold 300 shares of ADP @ 101.10.  Profit SGD 8.8K, or 22% over 6 months.  And 210 shares of AENA @ 134.25.  Profit ~ SGD 5.1K, or 12%.

As a "covid recovery" trade, they've been disappointing.

Friday, March 5, 2021

Fibra Macquarie

Mexico has good demographics and its low-cost manufacturing should benefit from the China trade war and NAFTA (h/t Peter Zeihan).  So I've been digging around for Mexican Industrial REITS.

Basics on Mexico

The only things I know about Mexico are from TV.

So let's starts at the beginning.

Inflation: Mexico has had bouts of high inflation.  

Although its now under control, the steady inflation rate of 3-5% is higher than developed countries.  Since everyone in Mexico has experienced inflation, most rental leases are either tied to the CPI or in USD.  So peso inflation is not directly an issue for investors.  But when you see a peso denominated rate-of-return (interest rate or cap rate), mentally deduct 3-5% from it to account for inflation.  Mexico's official interest rate is 4%.

Property rights: foreigners can own freehold property, except perhaps up to 50km from the coastline or 100km from the border.

Crime: the drug war started in the 90's and has worsened since the Cartels splintered.  The level of violence is like something out of a movie and is unimaginable by people living in Asia/Europe.  Sometimes powerful gangs are welcomed as law enforcement.  The government does not control some areas of the country.

Fibra Macquarie

Properties,  Tenants and Leases

Fibra Macquarie has around 230 industrial and retail properties throughout Mexico:

Mostly industrial.  In 2020, 82% of the revenue and 88% of Net Operating Income (NOI) was from Industrial.  From the above map, around 1/3 to 1/2 of the industrial properties (by GLA) are near the US border.  They don't have much in Mexico city. 

83% of their NOI is denominated in USD.  98% of industrial leases are triple net (p13).  Over 70% of their industrial tenants are light manufacturing (p18).  38% are from automotive (p10).  This is a play on NAFTA, not e-commerce.

Fibra Macquarie did not list their properties or tenants in their annual report.  Their website has a browse properties page, but only shows vacant ones.  I probably can't evaluate 200+ Mexican industrial properties anyway.  Theres some talk of their properties being older than other REITs - the average age of its industrial building is said to be 15 years (p70).

The scant information I have on their tenants is from their 2019 Annual Report: the largest industrial tenant accounted for 3.9% of industrial rent.  The top 10 largest tenants contributed 25.8% of industrial rent.  Most REITs list their top 10 tenants proudly, but its strange I couldn't find any here.  What are they hiding?

WALE is short at 3.5 years.  Management stated that for leases expiring next year, current rent and market rent is similar, and they are not expecting any change (40:10).

Management and Incentives

The REIT is managed by an external party (Macquarie México Real Estate Management), who owns 4.8% of the units.  They get paid (p273 in Adobe Acrobat):

  • 1% of the REIT's market cap, annually.  
  • Plus an additional bonus of 10% of the amount of "total return based on market cap" (over a 5% hurdle plus inflation rate), payable every two years.
The first is OK, but not great.  The fee is reasonably cheap.  I thought it may encourage reckless issuing of units to fund dilutive expansion.  But this has not happened - they have instead bought back units over the past 5 years.

The second is OK, since it based on market cap.  As I read it: excluding issuances and buybacks of units and dividends.  Its reasonably aligned with shareholders.

As a plus, they are not paid any extra for making new leases, construction, acquisitions or disposals.

Overall, their administration fees are reasonable, aligned with shareholders, and easy to understand.

Mexican Fibras generally have high management fees and complex/distorted incentives:

Cashflows, FFO and AFFO

FFO is usually lower than CFO:

To get AFFO, they subtract future (non-cash) costs  from FFO.  Around 14-20%.  Mostly for property maintenance or improvements, with a little for leasing commissions and platform costs. Straight line rent is negligible:

The terms are defined on slide 39 here:

Source: 4Q2020 Supplementary Information, slide 39

In summary, they are generating cash, and provisioning 14-20% of their FFO.

Pipeline and Growth

Their last big property purchase was announced in 2016.  Since then, growth has come from expansions and redevelopment (p27):

The 11.6% cap rate sounds really high.  Maybe we should mentally deduct 3-5% from it, I'm not sure.

Management stated that they expect to be able to add 1 to 1.5m GLA a year, funded via retained FFO, new loans and opportunistic asset sales (34:50).  Thats an increase in GLA of 2.5 to 4% a year.

Seems like they continue with their slow, low-risk growth strategy of "extend and redevelop".


Net LTV is 36.4%.  Their Regulatory LTV is slightly lower at 35%.4% (p35).  The maximum is 50%.

All their loans are fixed (p36).  Some use properties as collateral: 30% of their properties are encumbered.    97% of their loans are USD.  The interest rate is pretty high, averaging over 5%.

A lot of their loans expire in 2024 (p34), loan expiry is a bit too concentrated:

All their loans are interest only, but they have being slowly paying off debt over the past 5 years.  

Management anticipates debt may rise in future to fund the development pipeline.  Short term, LTV may rise into the low 40s. (34:00).


A big tail risk is a sudden USD depreciation.  71.8% of their leases are denominated in US Dollars.  If the USD was to drop 30-40%, lets say in 2-3 years, their revenue would follow.  Their costs will be the same, except for interest, whoch is the largest cost.  If the USD dropped by 40%, I model that their 2020 operating profit before tax would drop by 40% too.  The company would survive.  The short WALE works in their favour, in this case.

Other risks are:
  • I do not know the quality of the properties or tenants
  • I do not know the property cycles in their local markets.
  • It takes a year or two to build an industrial property, so there is no moat in this business.
  • Mexican political risk.  The drug war.
  • 3D printing disrupting manufacturing.  EVs disrupting automotive.


2020 AFFO was 2.59 pesos per certificate.  Projected 2021 AFFO is 2.27 to 2.32 pesos per certificate.  So at its a price of 26 pesos, its trading around 10 times earnings (AFFO), with a 7% yield (80% AFFO payout ratio).


  • Excellent financials, and cheap.
  • Biggest long term risk is Mexico, especially the drug war. Historically, holding Mexican stocks and pesos has been a losing game.  Maybe this will change.  Like China in 2001.
  • Biggest short term risk is the lease expiries, and I know nothing about their properties or local property cycles.
In the end I bought some, its 5% of my portfolio.


Mexico's Withholding Tax is 10%.   It should be zero for Singapore residents (p7), I'll need to check if Interactive Brokers applies this later.

Other links:

  • Detailed pre-covid 2019 report on Mexican Fibras by BTG Pactual.
  • Short 2014 write up in Value Investors Club (free registration required)

Tuesday, March 2, 2021

Interactive Brokers Margin (Quick Notes)

I've been using IB's margin lending more and more.  Quick notes on how to check the margin requirements.  Because there are too many numbers and I forget.

(Assuming you only trade stocks) To see current margin requirements, in TWS: Account --> Account Window.

There's only 3 numbers I care about:

The key number is "Current Excess Liquidity".  If my account drops by that amount ($214,804), which is  50.5% (of the Net Liquidation Value), then I'm fucked.  IB can force sell my positions.

When putting on a trade, you can check the margin.  Under "advanced", there's "check margin":

This trade would add $15,660 to to my maintenance margin, deducting the same amount from my Current Excess Liquidity.

IB can sometimes change the margin requirements, have to keep a lookout for this.  They last did it during the US election.  

IB has a series of videos explaining margin.

Monday, February 15, 2021

California and New York: Selling Manulife REIT

Manulife REIT is one of my few losing stocks.  I bought before covid and its been a laggard in the recovery.  There's a lot of bad news coming out of California and New York.  Are they in a long term decline, or just a blip from covid?

What We Know

Manulife REIT's exposure to California/NY

2/3rds of Manulife REIT's assets by AUM are in California or New Jersey (NJ could be considered part of NY city):

Source: Manulife REIT Corporate Presentation Sep 2020

Are California/NY in Decline?

The news out of New York and California is bad.  Companies leaving: HP, Oracle, Schwab. People leaving: Elon Musk, Joe Rogan, Kayne West.  Crime, homelessness and tent cities in the city centers. 

The news is emotional and politically slanted, so I need numbers.

U-Haul (a self-moving company), ranks states by net migration.  Their Jan 2021 report has New York and NY and California ranked 48 and 50 out of 50.  They were 44 and 49 in 2019.

The 2020 US Census estimate says:

  • New Jersey's and New York's populations have dropped for the last 2 and 5 years respectively.
  • California's dropped in 2020.  For the first time in ten years.  Even when it was growing before, it has been growing lower than the national rate since 2016.

So the numbers say that NY/NJ have been dropping for a while.  California has been growing more slowly that the rest of the country from 2016 to 2019, and had its first drop last year.

One counterpoint: Tech firms moving in to rent out NY offices.

Operating leverage

From their 2019 & 2020 results, fixed costs are around 55% of their revenue:
  • Property operating expenses (mostly fixed, p155): 37%
  • Other Trust Expenses (audits, paperwork): 1-2%
  • Finance Expenses: 14-15%
So a 5% decrease in revenue - still assuming full occupancy - leads to a decrease in PBT around 6-9% (depends if property taxes also drop).  A 10% decrease drops PBT by 19-24%.

Financial leverage

Their property values fell by single digit percentages in 2020:

The result is that Manulife REIT now has 41% gearing, approaching MAS' 50% limit.

This small valuation drop does not seem to take into account covid.  In July, the US Bank Tower (near Figueroa) sold off for 34% less than its valuation.

What I Don't Know

Is California's 2020 population drop the start of a trend, or just a covid-19 blip?

Long term, how will WFM affect office space usage?

What I Think

The good things about Manulife US REIT:
  • Good properties and tenants.  Grade A or trophy offices, with a high number of 'blue chip' or government tenants.  They have held out through the covid crisis well.
  • Good management.  Management is incentivised to increase DPU, not make acquisitions or increase AUM.  They had a plan to grow by acquisition to be included in NAREIT, and they succeeded.
The bad things:
  • A 100% payout ratio means they will have to raise capital again if they want to expand.  If property values drop by 20%, they will have to raise capital anyway.  Bad when they are paying an 8% dividend.
  • NY and California are declining.  NY/NJ is losing population.  California has declined relative to US as a whole since 2015, and may starting to decline in absolute terms. So if you own property there, you are swimming against the tide.

Where Could I be Wrong?

The bad news may already priced into the stock.  With an 8% yield.

California and New York may decline relatively, but still survive.  As long as their cities do not turn back into crime infested shitholes, even if they stagnate and rents stay the same, the stock would be worth it.

And within these declining states, there may still be areas of growth.

Does all the bad news magically disappear after covid goes away? Or is the decline part of a long term trend?  And even if it is, is it already priced in?

So what happens from here?
  • If things recover after covid, rents and valuations rise, the dividend yield goes down to 6%,  the stock may rises 20% and they can raise capital to carry on expanding.  The happy recovery scenario.
  • If California and New York are in a long decline, rents slowly decrease after 3-5 year lease expiries, the dividend and stock price slowly drops, so do building valuations, and they have to raise money by issuing very expensive stock.  The bleed-to-death scenario.


Hard to say what will happen.  Both scenarios are plausible.  Its the population growth rate chart that convinced me.  I think the trend of US re-industrialisation will favour Texas/Florida against California/NY, and industrial properties against offices.  And I think its a long term trend, not a cycle.  The problem for investors is to tell how much is priced into the market.

I sold my Manulife USD REIT at USD 72c today.  Loss of ~ USD 9000, which includes dividends received.

Saturday, February 13, 2021

SNAM - Italian Gas Transmission

 Italy imports most of its gas:

Which comes through 5 pipelines:

The gas pipelines inside Italy are all owned by SNAM, an ENI spin-off.  They provide infrastructure so Italians can enjoy a stable and diversified supply of gas.  For example, the TAG pipeline (on the right of the map) has just been completed - it was built to address previous problems obtaining transport capacity during peak seasons.

Long term gas usage is expected to decline in the future due to higher energy efficiency and higher renewables.  But they still plan to use gas in 2040:

Source: Italian National Trend Scenario - Jan 20201

In 2019, 76% of SNAM's revenue was from gas transmission, with the remainder from storage.  A negligible amount was from re-gasification.  

The numbers

Predictable revenues and high margins:

The main factor affecting business is regulation.  Regulatory review for gas transportation is every 4 years, the current one ends in 2023.  A real rate-of-return of 5.3% is predicted (p17).  

Their long term growth is expected to be 1% (I lost the reference).


Debt is 13bn, or just under 6X EBIDTA.  A bit high, but OK considering the debt.  EBIDTA covers interest payments 16 times.

Most of their debts is through bonds.  Maturities are well spread out over the next 15 years.  We can see the effects of the Eurozone crisis on the bonds issued in 2012 and 2013.  Since then, rates have gone down to 1% or lower.  Money for nothing:

Three quarters of their debt is fixed rate.

SNAM has a higher credit rating than Italy.


This type of company has little business risk.  The risks are 'black swan' events.

Biggest risk is Italy leaving the Eurozone.  Although its fallen off the radar, I think it will return.  The effects would be:

  • SNAM's revenues convert to lira, which means a drop of lets say 30%.  Their bonds remain denominated in Euros (no one is receiving sub-1% interest for lira bond - holders will expect it to remain in Euros).
  • New debt (bonds being rolled over) in lira cost more.  Maybe 5%.  

If that happened, I estimate they'd still be making 1.3bn in EBITDA a year in 'newly depreciated' Lira -  or 1bn current-day Euros.  After (unchanged) interest, it would be over 850m..  Thats an FFO (before tax) of 0.25 current-day Euros per share.  The stock price would probably drop around 35%.

The second risk is regulatory change.


Gas deposits in the Mediterranean (eg: Israel's Leviathan) could make Italy a transshipment hub for Gas.  Through TAG.

The gas pipes may be used to transport hydrogen.  They have already tested 5% and 10% hydrogen mix as part of a trial.  Italy may become a hub for hydrogen produced int he hot regions of North Africa.  I don't care about ESG hype, but its interesting that they've done trials in the real world.  And the ESG funds may lap it up.


In 2019, 70%of earnings were paid out as dividends.  In 2018 it was 76%.  This is decent, though probably not much room for upside.


Steady, boring company, more like a bond.  It's a nice 5% earner in a yield starved world.    With the Sword of Damocles (Eurozone breakup) constantly hanging over its head (although the fallout from this risk is quantifiable).   If I bought it, I would limit it to 5% of my portfolio.

Or wait till Italy leaves the EU.

Saturday, January 23, 2021

What I am doing

Nothing.  I'm 110% invested overall.  Still holding my long term dividend stocks while my trading positions in oil/copper producers have been on fire.  I'm buying on margin when opportunities happen and added a small Alibaba position in Dec.  I think the market continues up in the first half, albeit with the potential for a quick 10% correction.  I'm like a pig with my snout stuck in the trough.

I think the rally ends around June/July.  Look to sell my copper/oil then.  Might be time to buy protection/volatility.  Gold and TAIL.  I expect a small sharp correction like Dec 2018, 

I also need to reconsider my Manulife REIT holdings, it has lot of properties in California and New Jersey.  News from those states is not good.

Other than that, nothing to do.  The market is rising like its on cloud nine.  Lay back and enjoy it.

Thursday, January 7, 2021

Fufeng (HK:546)

 An ingredients and animal nutrition producer, Fufeng is the largest and lowest cost monosodium glutamate (MSG) producer in the world.

1H20 breakdown by revenue: 40% from MSG, 30% from animal nutrition (half of that from corn products), and 30% others.

Industry Overview

MSG is a commodity - producers have no pricing power so the lowest cost wins.  It takes 2.4 tons of corn and 2.6 to 3 tons of coal  to produce 1 ton of MSG.  Fufeng's production plants are in the north of China near cheap coal and corn, giving them a cost advantage over their competitors.

Source: CICC Research 2013 (Meihua Holdings)

MSG Demand is not affected by the economic cycle:

My research (the first google result) sees MSG demand rising around 3% per year for the next 5 years.

The MSG industry is concentrated.  Fufeng has an estimated 31% global share of MSG by volume, and is the largest in the world.  It has an estimated 57% volume share in China, with the top three producers having a 90% domestic share.  The industry in China has experienced 3 consolidations and 2 booms in the past 20 years (p5).  The number of companies has dropped from over 200 to the current 3 major players (plus a handful of minor ones).  The last boom was in 2008-2012, followed by a bust in 2013-2018.

Their main cost is raw materials, especially corn.  In 1H20, corn kernels were the company's largest cost (55%), followed by coal (15%).  As well as MSG, half of their animal nutrition business is also from corn based products.  Other costs are depreciation (8%) and Employee Benefits (5%).

So this business takes corn & coal and processes them into bulk food materials, for which there is steady or rising demand.  Profits depend on total industry production vs demand.  Long term profits depend on how much new production capacity is added industry-wide.

The company's production capacity:

Source: Fufeng Group: A Leader in an Oligopolistic Market (July 2019)



CFO is usually greater than profits, which is expected due to depreciation:

The wild swings in the difference are caused by changes in working capital.

Inventories and Receivables levels swing wildly, but at least they are not trending upwards:

Debt and Equity

As of 1H20, total debt is equal to roughly the last 3 years PBT.  And 40% of this debt is covered by cash.  They have some USD debt.  Overall, their debt is small enough not to worry about.  

The company issues stock options to staff.  Potential dilution from options issued is less than 1% of existing shares (p85) as of end 2019.  But the company is authorised to issue up to new options for up to 8.4% of existing shares.  Something to watch out for.

They had convertible bonds which were redeemed in 2018.


First risk is the trade war reducing their exports.  With the effect of increasing supply in the domestic China market.

Second risk is the industry going back to being irrational, with new players coming in and adding more production.  Fufeng and the leading players need to keep adding just enough new capacity to discourage them.  Should be possible with the current industry structure, but in China - where new production capacity is not always driven by economics - it may not.

People may switch from MSG over health concerns.

Rising corn/coal prices.

Any China company can be a fraud.  This one does not fit that profile, generating cash (but not holding too much), paying a dividend, and producing a bulk tangible product.  It would be difficult to fake production of 30% of the world's MSG - many people might notice their food has no taste.


At a price of HKD 3:

  • Their TTM dividend is HKD 13.8c, giving a yield 4.6% (4.1% after 10% WHT), with a payout ratio under 40%.  I did not see a dividend policy.
  • Its trading at a PE of 4.5 to 6, if we use 2018 or 2019 profit numbers (excluding exceptional items).


Worth a bet at current prices.  They produce an essential ingredient in an oligopolistic market.  There may be short term fluctuations due to rising corn prices and its hard to know where we are in the cycle.  But in the long run they should make a good return if the industry remains rational.

Bought this for 2% of my portfolio.  Limit to 2% because its a China stock and I can't follow this industry closely.  Also cause I got no more money.