Saturday, November 26, 2022

China reopening, oil, and doing nothing

I think China is reopening.  Rising cases occur when you reopen:

But official deaths have not gone up.  A quick google search shows a median of 18 days to die from covid, so we should know the death rate by now.  The latest numbers have 1 covid death yesterday:

Source: Worldometers.com

There's 2 risks to the reopening:

  • China numbers are bullshit, so no one knows what the real hospitalisation/death rates are.  Low level officials will make up whatever numbers they think are desired.  And I'm sure no one reports bad news to Xi.
  • Everything depends Xi.  He can reinstate zero-covid tomorrow.
We're getting a lot of confusing scenes out of China.  Protests, lockdowns and confusion.  It will be localised cycles of easing and tightening as they try to flatten the curve.  If they don't lock down soon, it will be too late, and they will have to let it spread.  So there's a small chance Xi imposes a harsh lockdown soon, and a bigger chance - growing larger by the day - that they just let it spread and try to slow it down.


My "China reopening play" is oil.  Zero-covid reduced demand by an estimated 0.5 to 1.5m bpd.  Long term I think oil goes up anyway, but China makes me buy it now.  Bought more CNQ and Equinor in the last 2 weeks, now its a 9% position (at buying price).  1% more to go.

Its a very oily portfolio: 10% in oil producers, plus another 35% in things correlated to oil (Gas pipelines, palm oil and LNG).

Also mechanically adding to my shorts as the S&P500 goes higher.  And the existing shorts are also growing bigger as the market gets higher; my shorts are now in the red:


Need to remind myself not to get too short, else the bear market rally will rip my face off.


Can't find anything to buy with the remaining 30% cash.  Despite a year-long bear market, stocks aren't cheap enough yet to catch falling knives.  I wait, either for things to get cheaper, or for the macro tide to turn so I can buy cyclicals like capex commodities.

Its hard, sitting in cash, foregoing dividend income, not going long or short.   I try to imagine myself as a multi-millionaire in the future, after the current bear market, recession and subsequent commodity bull.

Doing nothing is the hardest thing.

Friday, November 18, 2022

Bursa Malaysia (KLSE)

 Malaysia's stock exchange looks cheap based on historical earnings, lets look further.

You can't buy it with Interactive Brokers, I trade KLSE stocks with a Singapore broker.

TLDR: Everything depends on KLSE trading volume, which is unpredictable, I think this stock is too expensive now.


Malaysia is a developing country.  Its a commodity producer, and I expect commodities to do well this decade.  It also exports electronics and mid-tier microchips, so may benefit from manufacturing leaving China.

Business and Revenue Breakdown

Most of their revenue is from trading:


And most of the trading revenue is from Securities trading:

So Securities trading is the only thing we have to think about.  Derivatives trading revenue is constant, and Islamic Trading is small.  This is a company with one single business.

Financials

Good financials.  All stock exchanges seem to follow the same pattern.  As of Sep 2022:
  • Large net cash position (plus some Investment Securities), no debt
  • CFO is basically PBT plus small depreciation and small working capital.
  • 40% profit margin (after all expenses, including tax) in 9M 2022.
  • Minimal Capex with high dividends:
  • The dividends are too high:
  • They are paying part of the dividend out of accumulated "cash and investment securities".  As of 3Q22, "cash and investment securities" is worth RM 565m, or roughly 9% of their market cap (@ 6.40 per share).

Conclusion

This stock exchange is a cash generating machine.  The only question is how much you'd pay for it.

Everything depends on whether we think the big jump in Securities Trading revenue in 2020 and 2021 can be maintained.  This company is easy to understand, but hard to value.

If I had to catch a falling knife, I'd probably be willing to pay 12-15X normal earnings.  Based on 2017 to 2019 earnings, the price would need to drop significantly, to around RM 3.70 to 4.00.  Not buying it now.

Saturday, November 12, 2022

Bolsa Mexicana de Valores (Mexico Stock Exchange) : BMV

Theres a big hole in my dividend portfolio from selling my REITs.  I'm looking at several small listed stock exchanges: most of them have low debt, churn out cashflows/dividends, and their costs are not affected by inflation.  They are cyclical, so the current downturn might be a chance to buy.


First is Mexico.  It has a young, growing population, and benefits from NAFTA's (re)industrialisation.  But the Mexico stock exchange is near dead, with a matching share price.

Business and Revenue breakdown

Despite its name, the Mexican stock exchange only accounts for a small amount of BMV's revenue.  I breakdown their 2021 revenue below to get an overview of their business.

SIF ICAP

16% of revenue.  SIF ICAP is an inter-dealer broker handling transactions between financial institutions.  They deal in govt/corporate bonds, and OTC derivatives (customised contracts that aren't traded on an exchange) such as interest rate swaps and forwards.

2/3rds of SIF ICAP revenue is from Chile, the remainder from Mexico.

Historical revenue:

Information Services

16% of revenue.  70% of that is from BMV market data, 30% from VALMER (Operations Valuation and market Reference, eg: used to value bonds).

Market Data historical revenue:

Valmer historical revenue:

Equities trading and clearing

13% of revenue.  From stocks traded on the BMV.  This includes foreign listings on the BMV.  eg: Apple or an S&P500 ETF, listed in Pesos.

BMV has a problem with their stock exchange.  Only 144 companies are listed, very few for the 15th largest economy in the world.  3 companies delisted this year, at least one of those wanted to re-list in the US.  One company listed this year.  The usual complaints are about low liquidity.

In 2018, a competing privately-owned stock exchange BIVA, was setup with lower listing requirements aimed at medium sized companies.  At its debut it had 52 listings, now it has 88 listings (not sure if they are all equities, or some bonds).

The value and number of BMV IPOs in recent years is below.  With only 15 listings since 2018, its growth is trailing BIVA:

Listing and Maintenance fees

13% of revenue.  In 2021, almost all of it were Maintenance fees.  This is recurring, unless companies delist.

Only 1/3rd of the maintenance is from shares. While half of it is from corporate or govt bonds:

Derivatives Trading and clearing

7% of revenue.  These are derivative products listed on an exchange.

Central Depository

33% of revenue.

A Central Depository allows every trade to be recorded, so ownership is recorded by them instead of your stockbroker.  After you make a trade,  the confirmation is sent to you independently by them.  This makes if hard for your broker to commit fraud, and theres no risk of loss if your broker goes bankrupt.  This process is slower and more expensive than just relying on your broker (like Interactive Brokers) to hold your stocks.  I do not know what percentage of individual trades go through the central depository, and what percentage go through a broker.

The Central depository records holdings from the above segments:

  • SIF ICAP (probably only Mexican, doubt it does Chile)
  • BMV.   Probably BIVA too (?)
  • and Derivatives.  

Financials

The financials seem almost too good to be true!

  • Operating margins (after all expenses, including taxes) are exceedingly high:
  • As of 3Q22, cash on balance sheet is greater than all liabilities (not just debt).
  • Cashflows follow profits closely.  Depreciation and working capital are minimal:

  • Minimal Capex:

Valuation

Reasonably priced now, not really cheap.  At MXN 36, its trading at 12-15X recent years (probably peak) earnings:


Currently at a 5% yield (before witholding tax).  The dividend payout ratio is usually around 80%:

Conclusion

Pros:
  • Excellent financials and profit margins.  
  • Mexico has long term growth potential with as NAFTA's low cost manufacturing hub.
  • Stock exchanges are a good hedge against inflation.
Risks:
  • The Mexican stock market has structural problems (low liquidity, leading to lack of investor interest, leading to lack of listings).  Note the downward trend in Maintenance fees from 2019 to 2021.  From a Mexican's point of view: if I lived next to the largest economy and stock market in the world, I'd probably want to list and trade there too.
  • Competition from BIVA.  I estimate that long term this might affect 25% of revenue ("Equities trading and clearing", plus some "Central Depository" revenue).
  • I don't know about competition or cyclicality in the SIF ICAP segment.
  • Not yet cheap, but reasonably priced.

Misc

Singapore residents pay 30% witholding tax on dividends through Interactive Brokers.

Article on VIC from 2020.

Friday, November 11, 2022

Bear Market Volatility

11th Nov 22.  My portfolio was down 2% last night.  But because I'm only half invested, it felt like 4%.

My shorts got killed, with energy only up a bit.

This rally might last a few weeks - more shorts need to be killed.  A bear market rally of 20% is common, and 30% is historically possible.  Right now, the S&P 500 has only rallied 13.3%.  And last nights 5% Nasdaq one day rally is a small one.

I plan to keep short, as I don't think the market can be predicted a few weeks out.  And I think we are still in a bear market.  May add small short positions if the S&P rises to 15%, 20%, 25% and 30%.

Friday, October 28, 2022

Added to My Shorts

Added a little to my shorts in the past 2 weeks:

My short position has also increased due to the bear market rally.  Will add a little more if it continues.  SPY is up 11% now, a 20% rally would be normal.  Wild swings in the market and the value of my short positions:


Still holding them.  At least till December.

Fundamentally, I'm not seeing anything to buy yet, except energy.  China/HK is out due to political risk.  Rising rates, a recession and an energy crisis fuck up lots of things.  Good quality companies are not yet cheap enough that I'd stick my hand out and catch a falling knife.

Monday, October 17, 2022

MetalsX (ASX)

My last piece on Tin.  There's 3 listed tin producers.  The third one produces in the DRC which is un-investible.  This one is in Australia, which is safer.

Business

A 50% JV in the Renison Tin mine, a hundred year old mine in Tasmania which is still producing.  Mine life is projected until 2030, with scope for further extension.

They also own 50% of Rentails: tailings dams from historical mining operations containing around 100,000 tonnes of tin.  Significant capex is required to bring this into production.  A new DFS should be completed this year to make a decision in 2023.

They used to own copper and nickel interests but these lost lots of money.  They sold them off and are now purely focused on tin.

Balance Sheet

All numbers are from their June 2022 Annual Report.

They has a windfall from FY2022's high tin prices.  They used it to pay down their debt, and now have 110m in net cash.   Held  as AUD.

Quick side note: They have 28m of convertible notes receivables.  After selling their Copper/Nickel operations, they lent money to develop them, and should be paid back in (MetalX's choice of) cash or shares in March 2025.  New mining operations are dodgy, especially in a recession, so let's wait to see if they get paid back.

Despite the 2022 windfall, they have not paid dividends.  I think they need the money for capex.

Capex

Sustaining capex is 8-10m per year (p10).

In addition, to continue production at Renison until 2030 (Area 5), they need 50-55m capex (p5).

Both the above can be covered by their 2022 windfall.

In 2023 they should make a decision on rentails.  An old 2017 estimate is 205m (or around half of this for MLX's share - p14).  Lets say 100m in 2017 dollars, which might be 150-200m today.  Can be funded from their cashflows if we get another tin spike in the coming years, but don't expect MetalsX to pay dividends anytime soon.

Earning, Cashflows and Breakeven

Our starting point is always the tin price:

Its hard to look at their long term profitability because past tin results are overshadowed by their money losing copper/nickel operations.  Their 2021 AR was the first time they stripped these out. My breakdown of their profits from 2020 onwards, important lines in blue:

As expected, the biggest factor affecting profits is revenue (ASP).  This company is highly cyclical.

I estimate their cash breakeven tin price at around AUD 17-22k/ton.  At that price their Cashflows from Ops would be zero.  If we also cover sustaining capex of 10m per year, we get a required tin price of AUD 19-25K (or 11.8 to 15.5K USD today).   The company estimated their AISC at AUD 17K/ton (p3), which I guess is too low.  Estimates in AUD are tricky because the AUD is so volatile.

Don't think they've been hedging the tin price, there was no mention of commodities derivatives.

Reserves

Excluding Rentails:

Misc

Information is quite skimpy.  I could not find any quarterly results on their website or ASX.  Nor any transcripts of shareholder meetings.

Yunnan Tin is the logical acquirer of this company (their 50% partner in the JV).  Unlikely to happen now since everyone hates the CCP.

Don't buy right now:

Covered copper short

Covered my COPX 4% short position on Friday.  Now around 38% short.  Specifically to do with copper, not the market.  I am following Hedgeye for my shorts.

Want to put some more shorts on to replace it, but its hard.  No one knows when a 20% bear market rally will appear.  Or if the market keeps going straight down.  If I don't make trade short term trades, I have 2 choices:

  • wait for a bear market rally (which may not appear), and scale into it, or 
  • just close you eves and stab, hoping you hit something.

Also added 1% more uranium (SPUT) last week.

Tuesday, October 11, 2022

Sold most REITS

Sold most of my remaining REITS.  Now just holding a little Frasers Centerpoint Trust.

Uncomfortable with these REITS due to their exposure to higher interest rates and inability to hedge long term.  I'll find something else to buy later.  We are still in a bear market, heading into a recession.

Saturday, October 8, 2022

Malaysian Smelting Corporation (KLSE)

MSC is a Malaysian tin miner and smelter.  Most profits are from mining and are highly cyclical.  It will benefit from any future tin bubble

Its listed on the KLSE (not accessible from Interactive Brokers).  Illiquid enough that only retail players can buy it.  A secondary listing on SGX (accessible from IB) is too illiquid even for retail - some days only a few thousand shares trade.

Business

Most of their mining is from their RHT mine in Perak, the largest hard-rock open-pit tin mine in the country, operating for over 100 years.  Their lease expires in 2034.  They also have some mining at their 80%-owned subsidiary SL Tin in Pahang (Sungei Lembing), currently producing ~1% of their production, it may ramp up to 40+% in the next few years.

For smelting, they are the world's third largest refined tin producer.  "Over 10% of MSC’s smelting input is supplied by RHT, while the remaining intake comes from local artisanal tin miners and third-party tin mines outside of Malaysia, such as Australia and Africa."

I'm concentrating on mining, as its the most profitable segment and where I expect the next bubble.  Tin smelting is easy - its been done for thousands of years and you can do it in your back yard.

Resources

MSC gives "Resources", not "Reserves".  Resources infer how much of the resource exists in the ground, while "Reserves" are those "Resources" that can be economically extracted.  This is the first commodity company I came across that does not give "Reserves".   I've heard that for tin, the volume and grade of ore inside the ground is unimportant, what matters is the ore type and grain size (paid link).

Most of their exploration is around their existing mine, which is the best place to look for new tin.  It still took years of drilling and false starts to find a new ore body:

2021 tin production was 2408 tonnes, so they have 10 years of extraction remaining (assuming half of the resources can be economically extracted).

Balance Sheet

Quite clean.  As of June 22, borrowings and lease liabilities were under RM 500m, cash was RM 185m, while 6 month profit-before-tax was ~ RM100m (albeit in a boom period).  So they could pay off their debt in a couple of years in a boom.

No new shares have been issued since at least 2012.  A stock-split and bonus issue quadrupled the number of shares in 2018 (without issuing new equity).

Profitability

Profitability follows the tin price:


And the stock price has also followed the tin price:



Since 2021 was an outstanding year, they paid out 25% of 2021's net profit.  I found no dividend policy.  The shares are too illiquid for buybacks.  I like that they paid some profit as dividends to reward shareholders - too many tightly controlled Asian companies become value traps.

MSC is 52% Owned by Singapore company Straits Trading.  Might be good, as it prevents any hostile takeover (....except by Straits Trading).  I want the shares to stay listed to participate in the bubble.

Conclusion

Safe business, with highly cyclical profits, operationally levered to tin prices.  Could be a great tin play in the next bull market.  As a micro cap, it may not move till late in the cycle.

Don't buy now as we're still in a bear market heading into a recession.

Monday, October 3, 2022

Sold half my REITS

Sold half my positions Frasers Centerpoint Trust, Frasers Logistics and Commercial Trust, Ascendas India Trust, Leandlease REIT and Fibra Macquarie.

Rising rates make it too risky to hold 30% of my portfolio in REITS, and these had all their fixed-rates expiring in the next 5 years.

Sold now because I think October is either gonna be a bear market rally or a crash.  Leaning towards the latter.

Need to relook at my plan to get a modest income from dividends.  Probably buy banks in the upcoming recession.

Current holdings:


Saturday, October 1, 2022

Effects of Rising Rates on My Portfolio

Half my portfolio are companies that rely heavily on debt.  REITs or infrastructure.  Need to quantify how much rising rates could affect them.

Powell has said he will raise rates as high as necessary to curb inflation.   I''ll assume he gets to 5% in 2023, same as in 2006:

Source: https://www.mortgagewise.sg/interest-rate-cycle/

I expect a fed funds rate of 5% in 2023 to cause a recession.  Then lower rates in 2024/2025, maybe 2-4%, which cause inflation.  Then higher rates of 5-6% after that.  Don't think we'll get back to zero.

I'm testing 2 scenarios:
  • Scenario 1: By end 2023, we get a Fed Funds rate at 5% and SOR at 3.5%.  BBB rated companies pay 7.5% for USD debt, and 5% for SGD debt.
  • Scenario 2: Extend the same rates to the end of 2027.

Williams Companies

14% of my portfolio.  Their debt is all fixed rate and widely spread out till 2051:

I assume refinancing at 7.5% for notes and 9% for debentures:

  • For scenario 1: 2021 CFO would have dropped by 3.3%.
  • For scenario 2: 2021 CFO would have dropped by 10%

Frasers Centerpoint Trust

11% of my portfolio.  Most of their borrowings are from bank loans, with a small amount from MTNs:



I could not find whether these bank loans were fixed or variable, or their interest rates.  Despite scrolling through years of SGX filings.  Note 16 in their Annual Report has 3 pages of numbers, but I could not find the tenor or terms of the majority of their borrowings.

Note 14 says that 430m of their debt was hedged using swaps.   I could not see when the swaps expire.  A Phillips Securities report suggests "the tenor of the hedge is usually matched with the debt maturity profile."

So this business that is based on debt is vague about the details of its debt.  There is a reason why US stocks trade at a premium.

Effects of rising rates?
  • Scenario 1: Interest payments increase by 5.5m to 9m.  2021 Distributable income would have fallen by between 2.1% to 3.7%.
  • Scenario 2: 2021's Distributable income would have fallen by 20%.

Kinder Morgan

10% of my portfolio.  Like Williams Companies, KMI's debt is almost all fixed (pp99-100).  And its also rated Baa2 (equivalent to BBB).

I assume refinancing at 7.5% for notes:

  • For scenario 1: 2021 CFO would have dropped by 3.5%.
  • For scenario 2: 2021 CFO would have dropped by 6.7%

Frasers Logistics and Commercial Trust

10% of my portfolio.  Rated BBB+.

March 2022's debt is SGD 2.8b.  Only 170m is due in 2023:



I do not know the interest payment on that 170m, or if it is fixed or floating:

Source: Note 18 2021 AR

The percentages of loans in different currencies are:

They also use interest rate swaps (Note 14A 2021 AR).  We don't know how much the debt the swaps cover, because they give nominal amount (value on balance sheet) instead of notional amount (the debt covered).  The only useful information is that the majority of these swaps expire in 2-5 years (Sept 2023 to Sept 2026), and none extend beyond that.

Not much to go on.  Best guesses:
  • Scenario 1: Increased interest payments on the 170m for debt-due-2023.   By around  4-8m.  2021's Distributable Income (p200) would have dropped by 1.5 to 2.9%.
  • Scenario 2: All of their interest rate swaps have expired.  Only 8% of the debt extends after 2026, but since I don't know how much, I'll just assume its all refinanced.  Assume similar currency breakdown but remove the small currencies: 46% debt in SGD (at 5% interest), 18% AUD (at 5% interest) and 36% Euro (at 4% interest).  Interest payments increase by SGD 87m.  2021's Distributable Income would have dropped by 32%.

Lend Lease Commercial Trust

7% of my Portfolio.  

They provided good info in their previous AR, but debt has since doubled with the Jem acquisition.  Wait for the next AR, probably October.

Fibra Macquarie

5% of my Portfolio.  All borrowings are in USD (along with most of their revenue):


Source: Note 11: 2021 Results
Increasing rates lead to:
  • Scenario 1:  CFO drops 5.5%, AFFO drops 6%
  • Scenario 2:  CFO drops 19.5%, AFFO drops 19%
For this company, I would be concerned with the MXN/USD exchange rate.  Even though their revenue and debts are in USD, it may be a strain for their customers to pay if USD shoots up too much against MXN.  But the chart looks OK: peak to trough over the past year its only has a 9% drop, overall it looks flattish:

Ascendas India Trust

3.5% of my Portfolio.

As of June 2022 (p20):
  • 62% of their debt is in INR, 38% in SGD.
  • 79% of their debt is hedged (slide 13).  Most of it is hedged by swaps.  I could not see when the swaps expire (p196)
  • 17% of their debt is due in 2023 (slide 13).  Most of it INR.
I don't know anything about Indian interest rates, except that their central bank hiked to 5.9% yesterday.  Assume they reach 6.5% next year, and the swaps for 2023's debt expire with it. Assume AIT's INR new borrowing costs are 8.5%.  Assume all swaps expire by 2027.

We get:
  • Scenario 1: 1H2022 Income available for distribution drops 3.7%.
  • Scenario 2: 1H2022 Income available for distribution drops 17%.

Conclusion

My SGX REITs:
  • show a 17 to 32% define in distributions of the Fed Funds rate gets to 5% for 5 years. 
  • while I can't calculate the effects of rising rates for 1 year as I do not know details of their loans and hedging.
  • and (except for Ascendas India Trust) they also pay out 100% of their distributable income, meaning they can only reduce their debt by issuing shares.
Fibra Macquarie will also suffer if rates rise long term, as most of its debt is due in 5 years.

WMB and KMI as they are less affected due to their decades-long-term fixed-rate debt.