Investment Moats https://investmentmoats.com Wealth Mentor for Financial Independence Thu, 04 Jun 2020 00:44:14 +0000 en-US hourly 1 https://wordpress.org/?v=5.4.1 https://investmentmoats.com/wp-content/uploads/2017/09/cropped-sand-castle-3-32x32.png Investment Moats https://investmentmoats.com 32 32 28389540 Are Saxo Markets Charging a Relatively High Currency Conversion Fee? https://investmentmoats.com/money/saxo-markets-high-currency-conversion-fee/ https://investmentmoats.com/money/saxo-markets-high-currency-conversion-fee/#comments Thu, 04 Jun 2020 00:44:13 +0000 http://investmentmoats.com/?p=12105 I hope to put something out here so that some of you could help one of our readers. One of our readers signed up for Saxo Markets Online upon the glowing recommendation from some financial bloggers. He wishes to use the account to trade overseas market and thus there is a need to convert his […]

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I hope to put something out here so that some of you could help one of our readers.

One of our readers signed up for Saxo Markets Online upon the glowing recommendation from some financial bloggers.

He wishes to use the account to trade overseas market and thus there is a need to convert his home currency (SGD) to USD or GBP.

For Saxo, there is a currency conversion cost.

At Saxo’s Commissions, Charges and Margin Schedule, they explained about this currency conversion cost.

From my understanding, each conversion will cost you 0.75%. This feels like a service fee, and I am not sure on top of this fee, the firm earns a bid-offer spread from the conversion.

For reference, you can compare against Standard Chartered Online Banking’s LiveFX spread, which I talked about here and here. They are not the best but they do not seem to come to 0.75%.

My reader attempted to convert SGD$10,000 into USD so that he can purchase the stock he wanted. However, he was astounded by the total cost of the conversion.

From what I can see on the screen capture, there were some commission costs of $10 each and then 2 times 0.75% worth of conversion fee.

In total, this adds up to 1.71%!

Personally, I am not familiar with Saxo Markets. I would like to think that if they wishes to operate and thrive competitively, the conversion cost will not be so high.

This might what we term in the IT world as a “user problem”.

If you are familiar with or are currently using Saxo Market to do retail trading, and can help me make sense of what you are seeing on your end, do comment below.

Thanks a lot.

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Singapore Savings Bonds SSB July 2020 Issue Yields 0.80% for 10 Year and 0.30% for 1 Year https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-july-2020/ https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-july-2020/#respond Tue, 02 Jun 2020 00:14:53 +0000 http://investmentmoats.com/?p=12101 Here is a safe way to save your money that you have no idea when you will need to use it, or your emergency fund. The July 2020’s SSB bonds yield an interest rate of 0.80%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS) […]

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Here is a safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The 10-yr and 1-yr Singapore Savings Bonds Rate since the first issue in Oct 2015

The July 2020’s SSB bonds yield an interest rate of 0.80%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 0.30%/yr.

$10,000 will grow to $10,810 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10-year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 1.05%/yr for 10 years and 0.57%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

The Application and Redemption Schedule

You will apply for the bonds through the month. At the end of the month, you will know how much of the bond you applied was successful.

Here is the schedule for application and redemption if you wish to sell:

Click to see larger schedule

You have 02 to about 25th of the month (technically the 4th day from the last working day of the month) to apply or decide to redeem the SSB that you wish to redeem.

Your bond will be in your CDP on the 1st of the next month. You will see your cash in your bank account linked to your CDP account on the 1st of next month.

How does the Singapore Savings Bonds Compare versus SGS Bonds versus Singapore Treasury Bills?

Singapore savings bonds is like a “unit trust” or a “fund” of SGS Bonds.

But what is the difference between you buying SGS Bonds and its sister the T-Bills directly?

Both the SGS Bonds and T-Bills are also issued by the Government and are AAA rated.

Here is an MAS detailed comparison of the three:

SGS Bonds versus Singapore T-bills versus Singapore Savings Bonds
Click to see bigger comparison table

What is this Singapore Savings Bonds? Read my past write-ups:

  1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
  2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
  3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
  4. Singapore Savings Bonds’ Inflation Protection Abilities
  5. Some instructions on how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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A Wedding Photographer Pursues Financial Independence – The 10 Lessons I Learn https://investmentmoats.com/financial-independence/a-wedding-photographer-pursues-financial-independence-the-10-lessons-i-learn/ https://investmentmoats.com/financial-independence/a-wedding-photographer-pursues-financial-independence-the-10-lessons-i-learn/#comments Sat, 30 May 2020 23:41:58 +0000 http://investmentmoats.com/?p=12074 I first got to know Samuel when he reached out to me because he needed some help figuring out his plan for financial independence. He explained to me why his wife and himself are focus on accumulating for financial independence. That conversation also gave me a glimpse of the world of professional photography. I have […]

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I first got to know Samuel when he reached out to me because he needed some help figuring out his plan for financial independence.

He explained to me why his wife and himself are focus on accumulating for financial independence. That conversation also gave me a glimpse of the world of professional photography.

I have this insecurity after I wrote about how freelancers should manage their money. I wasn’t sure if what I wrote was realistic at all.

So I reached out and asked Samuel whether he is willing to share his story with my readers. He was very gracious to share with us some of his life and money stories, lessons learned that enable him to feel financially stable and secure.

You can check out his guide to the BEST wedding venues and planning a (kick-ass) wedding celebration as well as his creative works.

If you think you have a unique life & money story that you would like to share with us, do contact me.


I had big dreams when I first set foot on the land down under back in 2006.

I would ace my classes as a physiotherapy student. I had my sights on having my name upon the dean’s list. I planned to run my own physiotherapy practice. Perhaps even a chain of them.

I was going to buy a house, settle down with kids, and go fishing on the weekend. Life was going to be great.

It sounded like a perfect plan, until it all came crashing down.

My name is Samuel, and I take pictures for a living.

Most of my weekends are spent hanging out with couples making the biggest commitment of their lives, and then partying the night away in all sorts of manner possible.

I know, it’s a far cry from what I initially envisioned my life to be, right?

But let’s backtrack a little and start from the beginning.

My family left for Australia when I was midway through my national service, and I packed my bags and joined them soon after.

Life in Australia wasn’t what I dreamed it would be.

I’ll sum it up by saying that a combination of unrealistic expectations, a sudden change in culture, and a two-year-long bout of severe eczema led to a long drawn battle with depression and an eating disorder.

My interactions with my younger classmates also helped me realize that my sheltered upbringing in Singapore in a middle-class household resulted in many shortcomings. Whilst proficient academically and perfectly skilled at memorizing and regurgitating, my critical thinking skills and emotional intelligence were severely lacking. I couldn’t even hold a decent conversation, for crying out loud.

Although I was able to ace most of the exams, my poor communication and practical skills led to misunderstandings with patients and supervisors and poor execution of procedures that ultimately secured the demise of my hospital attachments. I had to repeat the year and the university removed me from my honors program. My appeals were rejected and no one, except for my honors supervisor, lifted a finger to help.

As simple as that, I lost everything I worked for over a period of three years and I lost all interest for physiotherapy.

I came back to Singapore and over the next six months, contemplated what to do with my life.

Coming back to Singapore was tough, because, besides despair, I also felt shame – I felt like I had let down everyone who had believed in me. I took those two months to think… a lot. I thought about life, the meaning of life, the shortness of it. I would also think about my dreams if I had any and what they were. At the end of my trip, I couldn’t figure out what I wanted, but I knew one thing, that life was far too short to be stuck doing something not worth my time.

So I made up my mind then, to pursue my passion and to become a photographer.

Prior to this, I had never held a part-time job for more than three months other than a short stint as a sports trainer at the soccer club. This meant that my work experience solely consisted of massaging grown men’s calf muscles and carrying them off the field when they got injured.

So I had to hustle and do photography work at all sorts of events. These jobs earn me a measly $10,000 after a grueling two years.

I was ready to give up, but I hung on and went into photographing weddings. The lack of work then meant I tried to survive by taking on jobs both in Singapore and Australia just to make ends meet, and business began to gradually take off.

My wife (who is also a photographer) and I have two independent brands. My wife serves mainly events in Singapore. I was able to have opportunities to work with clients in Perth, Australia.  It was not always easy being away from her and those trips can be rather intense that I was not able to find time to visit my family in Australia.

Our ability to deliver value to our clients has enabled us to gradually scale up our fees. Life became less of a struggle but it also opens up to some adult problems that we have to come to terms with.

I Needed to Manage My Money Better

I was rather ecstatic when I finally saw my savings account reach six figures for the first time.

You have no idea how much I cherish having enough financial buffers such that I do not have to worry if I have enough money for my expenses.

The nature of my projects-based work means that cash inflow tends to be uncertain. Our strategy, on a high level, is always to put a distance between our expenses and how many months of expenses our savings can last us.

At least this is for my wife and me. Throughout my life, I have been rather frugal.

When I started seeing my savings go up, I thought I better learn to manage my family’s money in the right way so that I will not lose what I have painstakingly built up.

Being more introverted, I would try to see if I can find out what I don’t know online. I came across A Singapore Stock Investor. Ak71’s blog was a wealth of information.

I greedily absorbed his sharing on

  1. The right insurance policies to purchase
  2. The impact of saving rates
  3. Investing for passive income to supplement our lifestyles
  4. The power of compound interest using CPF

I devoured more articles and came across Mr. Money Mustache. Mr. Money Mustache gave me a path to focus upon to escape the challenges of the photography business.

I have experienced the volatile industry dynamics and came to the conclusion that we might not be able to figure out the outlook of my niche in the next 5 years. Due to the physical nature of our work, I felt that it was impossible to keep up with the same level of dedication well into our 40s.

By pursuing the path to financial independence, there was something in there that may give me a sense of security and not always be subject to the whims of this creative industry.

Creatives and Money

Kyith reached out to me to see if I could share my experience in managing both my money and the money aspects of my small business.

I hope that by sharing my experience, some of my peers would recognize that they have to manage the money side of their life and business well.

The creative industry is an extremely competitive industry. There are consistently new players and the rules are always changing. The consistency is that you cannot rest on your laurels.

Yet many creatives failed to join the dots between the dynamics of our industry with the money aspect.

It is not uncommon to hear of stories of someone you think was doing very well suddenly fade away. It is only later that you hear that their business hit a snag they could not recover from. Cash flow problems ensued.

I would be the first to admit I have not got the money formula sorted to perfection but I hope that some of what works for me would work for you as well.

So here is the first lesson.

Lesson #1 – Calculate Your Earnings Based on Net Profit

In our industry, the money comes in a lumpy fashion. It is not uncommon to be paid a sum that you can spend for 1 or 2 months (or even more). February and August tend to be months which are relatively quiet as well.

My observation is that some of my peers cannot match the cash inflow with their cash outflow.

Our cash outflow tends to be more recurring. Resolving between lumpy and recurring can be a nightmare for creatives.

They will think that they could consistently bring in projects that pays them a lumpy cash flow. When there is a late payment, or a seasonal period where they did not get jobs, they had to dig deeper into their savings.

I find that if we account based on net profit, it allows me to see how much we are making, net of expenses much better. When customers pay me a big lumpy payout, I do not get overly ecstatic about it as I know part of it will need to pay for some business expenses in the following months. 

Lesson #2 – Plan Ahead if You are Thinking of Applying for a Housing loan as a Freelancer.

When we came back to Singapore, we stayed in rented HDB flats.

Renting was not always a great experience. The last place we rented had such a weird layout that we just could not get a good night’s sleep. That experience was the ultimate and we decided to get a place of our own.

However, when we wanted to get a place of our own, every bank rejected our application for a housing loan, even an independent financial advisor shook his head. Apparently, it seems that as a self-employed, your credit scores are much lower than if you were an employee.

In order to obtain a housing loan, you need to provide a level of certainty of being able to service the loan. That includes two years’ worth of IRAS Notice of Assessments and CPF contributions.

Financial institutions also generally assume that as a freelancer, your income is unstable, hence they will reduce your stated monthly income by 30% when calculating your Total Debt Servicing Ratio.

Therefore, ensure that the price of the house you are looking at fits within your budget based on your level of income before applying for a loan.

Lesson #3 – Separate Your Business and Personal accounts and Set up Rain Buckets

Despite the amount of time and effort we put into our business, as a wedding photographer, there are multiple factors that can impact the amount of work we end up booking.

As a result, the income we earn can drastically fluctuate every year.

We felt that it is absolutely essential to creating separate business accounts and personal accounts.

The business accounts then pay a recurring income into our personal accounts. Then we further divide our personal accounts into sub-accounts for different goals.

Deduct your business expense from your revenue. Then pay yourself a salary.
Deduct your business expense from your revenue. Then pay yourself a salary.

Our plan can be illustrated in the diagram above.

Our business account records all invoices and expenses. From this business account, we pay ourselves a consistent salary of $5000 (as an example).

We were fortunate that our business account can pay a consistent salary. This income gives us stability. We can then accurately funnel this $5,000 into 5 different “rain buckets”, each with a particular life goal. 

The rain buckets create boundaries between the money meant for different purposes so that we know if we are overspending in some areas and whether our wealth machine is getting stronger.

We use apps to create virtual rain buckets. You can check out applications such as You-Need-a-Budget (YNAB) and Wally to help you do this.

Lesson #4 – Know Where You are and Where You Want to be

As I went deeper down the financial education rabbit hole, Mr Money Mustache taught me one of the most important concepts. This was the FIRE concept or financial independence, retire early.

Reading on financial independence where the passive income I earned could potentially cover my lifestyle expenses was a great revelation for me, and I saw a practical solution to my problems.

However, we need to know where we stand (financially), before we can plan our destination and how we can get there.

I will recommend that you tally up all your assets and liabilities and creating a statement of net worth that you can update on a monthly basis.

Here is an example that worked well for us:

Samuel's way of tracking the net worth
Samuel’s way of tracking the net worth

We use a simple tracking where we laid out all our assets (cash, equities, CPF, bonds, property), our liabilities, and net worth.

We felt more relaxed when we saw our numbers getting better. When I learn about the shockingly simple math behind early retirement, you get more motivated when you realize the math might work out in reality.

Despite earning well, our lifestyle expenditure was keeping up with our earnings and we couldn’t save much. When we start tracking these numbers, we begin noticing where the problems are. We discussed and found that some of our spendings were unnecessary and so we reduced them…

Where I learn from Kyith is to also create a separate column of essential expenses.

This allows us to have an idea if we need to really cut back (like during this Covid-19 period), we know how much we can live on, what is the quality of life, and roughly how much to cut back.

By doing this, we get a clearer picture about where we are.

We can then consider where we want to get to.

How Many Projects for Me to Reach Financial Independence?

After evaluating the formula to financial independence by Mr Money Mustache, I began to see how I can link how much we need to accumulate with our photography work.

Recently, I shared with some of my peers how I link where I want to be with my daily work:

Samuel's business plan that will lead to financial independence.
Samuel’s business plan that will lead to financial independence.

Going through this exercise allows me to see whether my goal is realistic or not. For example, based on my past experience, can I do 40 weddings and 20 pre-weddings in a year. Can I raise my rate?

It also gives me an indicator whether I am working too hard.

Instead of always focusing on a dreamy goal, I can get to business to focus on getting X number of weddings and Y number of events.

Lesson #4 – Building a Solid Emergency fund

Most financial gurus advocate for six months of emergency fund.

However, I understood early on how financially rocky it can be as a freelancer, and I felt that I needed at least 12 – 24 months of essential expenses because when shit hits the fan, it hits hard.

I didn’t predict this pandemic, but I guess I prepared for it all along.

Building up your emergency fund is so important in providing lifestyle stability during times like this when the entire industry is halted and there is no foreseeable work for the next 1-2 years, or if we encounter any crippling injury that stops us from being able to work.

In case of a recession, it also acts as a buffer to prevent us from selling our equities or bonds at a loss for liquidity.

Lesson #5 – High Savings Rate Matters for My Goal

The spectrum of profit that creatives can earn in the industry vary widely. There are some who despite their best efforts, could not put a distance between their expenses and what they earn. Then there are some who get huge revenue bumps once once in a while.

As we steadied each of our individual businesses, we were getting our work calendar filled and we were earning good money.

Yet I noticed we weren’t feeling like we were saving well. We realized that was because our lifestyle expenses crept up as our earnings increased.

Reading both Mr Money Moustache and ASSI  on savings rate helped me understand how important it was to keep expenses low, whilst increasing earnings so that we have a high savings rate.

I realize if I want to reach my financial goal, we have got to something.

Your savings rate is the percentage of your salary that you do not spend. According to conventional theory, a 20% savings rate will not cut it, and here’s why.

Assuming that you spend the remainder of your salary:

  1. Saving 50% of your salary means that for every one year that you work, you can take one year off.
  2. Saving 20% of your salary means that every five years that you work, you can take one year off.

Hence, if you want to retire for 30 years at the age of 50 and without additional wealth building tools, you will need to save for 150 years – This does not make sense to me at all, and it’s virtually impossible to retire.

However, saving 80% of your salary means that every ten years that you work, you can take forty years off.

That is why a high savings rate is so crucial for early retirement.

It’s important that we live comfortably, but at the same time minimising our expenses ensured a higher savings rate.

Early on, we made the decision to not own a car, purchase a smaller flat to reduce our mortgage payments, and to cook at home more often to build up our savings.

This worked to our advantage as we increased our wealth gap, thereby channeling the extra savings to instruments that generate more passive income.

Lesson #6 – Buy Term and Invest the Rest

Early in my career, I had an accident and broke both my wrists. I still went on to photograph a wedding the next day for twelve grueling hours with both my arms in casts – that incident solidified the importance of insurance.

Insurance doesn’t have to be expensive.

From the meager returns of my parent’s investment-linked insurance policies after ten years, I learned at a young age that those are pretty mediocre instruments for building wealth.

The purpose of insurance is to, well.. insure!

Or rather, to provide a source of income for our dependables in the unfortunate event of our passing or loss of function.

A solid term insurance plan that pays out in the event of death, critical illness or total permanent disability will solve that, and they are fairly inexpensive, especially if you start young.

A hospital shield plan is also absolutely essential in the event that we need to be hospitalised for whatever reasons. A hefty medical bill is a surefire way to diminish our savings, and it’s far better to budget a set amount to negate that unknown scary possibility.

For the above, I’ll recommend a fee-only financial planner. This ensures that they will recommend the right products for you without any reward bias in the form of commissions and kickbacks.

MoneyOwl will be a great place to start for most (this post is non-sponsored nor am I affiliated to MoneyOwl in any way).

Lesson #7 – Understanding the Benefits of CPF in an Objective Manner

As self-employed people, it is mandatory to contribute to their CPF Medisave account. However, self-employed can choose to voluntary contributions to their CPF via the voluntary top-up scheme, and retirement sum top-up scheme (RSTU).

I understand that we all have mixed sentiments regarding the CPF. Amongst the self-employed, the sentiments are even more mixed!

I do think that it is important to remain objective and educate ourselves to determine whether it can work to our benefit or not.

CPF is essentially a social security savings scheme to meet our housing, healthcare, and retirement needs.

To completely explain about CPF would take a few pages, so I wouldn’t dive into that.

However, as a freelancer who had zero knowledge about investing then, I saw CPF as a stable instrument with capital guaranteed and moderate returns. I also learned about the power of compound interest and calculated the possibility of having a lifelong annuity at 65 while being able to withdraw most of my contributions at 55, if I managed to reach the Full Retirement Sum in my Special account at a younger age.

I therefore worked on building up my CPF Special account with money that I don’t need for the next 12-24 months.

We also made the decision to pay our mortgage in cash if our situation allows us to. This allows our CPF OA and SA accounts to accumulate interest, and avoid the situation of having to pay back accrued interest if and when we sell our house.

Lesson #8 – Create Multiple Passive Income Streams

As creatives, I felt that we understand the concept of multiple streams of income better than my salaried friends.

Each of our clients, especially those on a retainer, are one stream of income. If my salaried friends lose their job, 100% of their income gets impacted. However, if some of our clients decide not to go with our services, it is not a 100% impact.

When people talked about multiple streams of passive income, I see that this is a progression from what we understand.

Instead of needing to physically work with clients, we do the work upfront to build up our investments and our investments provide a diversified stream of income without us needing to be there.

I’m not an investment guru, nor do I claim to know a lot.

However, I started by making sure that every dollar I had was working.

I parked our emergency cash fund in fixed deposits, and other multiple income streams are interest payments from Singapore Savings Bonds, CPF, and dividends from equities.

Kyith has a fantastic article on building a wealth machine HERE.

Lesson #9 – Invest based on your Personality and goals

Investing can be one method of achieving our financial goals faster than what we can earn through our jobs. It could also negate the detrimental effects of inflation on our spending power.

There is a wealth of information on investments out there, and it’s so easy to be confused – (Investment Moats is one website I consistently utilised to educate myself; the breadth and depth of information it encompasses is astounding.)

It’s therefore crucial to understand our personalities and risk appetite before diving headlong into the investing world.

As I am extremely risk averse, I preferred instruments that could guarantee my initial capital, such as Singapore Savings Bond, CPF and fixed deposits. However, I also understood that in order to build wealth at a faster rate, I will need a higher return on my investments.

I learned from my early experiences of dabbling in active stock picking that there’s a lot of work involved in understanding the internal and external factors that could impact a company’s value and share price. Although the returns can be high, it’s also easy to get burned if I didn’t know what I was doing.

I’m therefore more inclined towards a diversified index fund with a dollar cost averaging approach based on this book by Joshua Giersch – it explains investment concepts based on a Singapore context in an easy-to-digest format. My portfolio currently consists of the Singapore index, an international index and Singapore bonds.

There are also many formulas out there calculating how many percent of your portfolio should be dedicated to equities. One such example will be 110 – your age = your percentage in equities.

However, like they say, everyone has a plan until a pandemic smacks them in the face.

Experiencing a market crash where my portfolio went from +20% to -35% in a matter of days really helped me understand the type of investor I am and the portfolio allocation I am comfortable with. As important as building our wealth is, we should never ever underestimate the power of our emotions versus rationality and the importance of a peaceful night’s sleep during times of extreme market turmoil.

In the event of a global recession, my primary source of income could stop and I will be more comfortable with a larger cash reserve to tide my family through a long period of uncertainty. Therefore, a portfolio allocation of higher bonds and cash component and a lower equities component will suit my investment personality better.

Final Lesson #10 – Adapt to the Current Situation and Prepare for the Next Crisis.

This lesson would be my last financial lesson.

If you’ve made it this far, thank you for taking the time to read what I have shared! I hope that it has at least started a conversation in your mind about the importance of managing your finances well, especially for a freelancer.

Covid-19 have really disrupted the business of many creatives including myself. The gig economy is the first to go and may be the last to open up. All the jobs from April to August have stopped and clients are cancelling their events up till the end of this year

Almost 95% inquiries have stopped.

Everything is a standstill.

I take solace that what I learn over the course of these few years have set me up well. However, I do not know when normalcy will be restored to my photography business. And how will things look like when it is restored?

As it stands, this has definitely affected the trajectory of my financial independence plan.

I try to search for the positives.

As challenging as it is, we have to adapt as best as we can by changing our mindset and utilising our skills to build side hustles and bring in other forms of income.

At the same time, there will be other crises in the future, and we could prepare for it mentally, emotionally and financially by learning the lessons from this current one.

We should always balance our drive to be financially independent with the health of our relationships. No marriage or family is worth sacrificing to be financially independent.

Buy that cake for your daughter, take one less job so that you get to spend Christmas with your wife, these are the intangible valuable moments that mean the most.

Take care and stay woke,

From your photographer and friend.
Samuel
www.samuelgoh.com

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Reviewing the Great Eastern MaxSave Plus – 2.54% Yield a Year after 18 Years https://investmentmoats.com/saving-and-investing-my-money/review-great-eastern-maxsave-plus-returns/ https://investmentmoats.com/saving-and-investing-my-money/review-great-eastern-maxsave-plus-returns/#comments Sun, 24 May 2020 23:34:16 +0000 http://investmentmoats.com/?p=12048 I have a friend who knows that I collect the returns of these matured insurance savings plans. I wish to satisfy my thirst to find out how close or far they are off the projections that their insurance adviser showed them in the past. You can review all the past insurance endowment returns my friends […]

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I have a friend who knows that I collect the returns of these matured insurance savings plans.

I wish to satisfy my thirst to find out how close or far they are off the projections that their insurance adviser showed them in the past.

You can review all the past insurance endowment returns my friends and readers have provided me in Does your Insurance Saving Plans (Endowment) give you 3 to 5% returns?

I known my friend for some time first as a customer in my old company and then as a colleague when he joined us sometime later.

After servicing his Great Eastern MaxSave Plus for 18 years, it has finally matured and will get back his principal and returns.

The statement my friend receive recently.

My friend put in $102.40 as a forced saving every month for 18 years. The total premiums paid amount to $22,118.

The sum payable to my friend recently is $28,317. During this period, he has not taken any cash benefit and has put it back into the policy, earning a 3% return.

Many people would have computed his returns as (($28317 – $22118)/ $22118+1)^(1/18)-1 = 1.38% a year.

This is not an accurate way of computing his compounded returns since his contribution happens throughout the 18 years and not a lump sum upfront.

We often try to find out the internal rate of return of this stream of cash inflow and cash outflow of my friend as an accurate measure. For the layman, think of this as the “interest rate a year” you earned for this uneven stream of cash inflow and cash outflow.

If you have any doubts whether this is the right way to compute a policy’s return, in recent years, the insurance companies are publishing the projected policy yield that you earned based on internal rate of return.

MWRR/XIRR represents the internal rate of return for this MaxSave Plus investment.

The internal rate of return is closer to 2.54%.

In the spectrum of returns that I have reviewed in the past this one is closer to the low side.

You can then compare this 2.54% a year against the returns and risk of investments you made during this period, be it stocks, unit trust, bonds, government bonds, properties.

For reference here are a summary of the rest of the policies that I have reviewed in the past:

If you have a matured policies and are pretty OK for me to share it with readers do contact me at wealthmentor@investmentmoats.com

I started this crowdsource because I am not sure if the returns from endowment plans are atrocious or respectable.

No one shares their returns around.

If you are interested in the details of the MaxSave Plus, you can continue to browse the rest of this post.

How should we compare the 2.54% return to?

I think the returns of the 10-Year Singapore Government Bond Securities is a good comparison because the duration is long, and the asset class is closer to what makes up the participating fund of the investments behind the endowment funds.

In May 2002 the 10-Year SGS Yield is 3.44%

It will be easy to say that my friend should just purchase the less risk 10-year SGS bonds.

However, that would not be an apples to apples comparison because my friend was putting in money every year instead of a lump sum at the start.

Just use this as a reference.

What is the Great Eastern MaxSave Plus?

If I were to share my honest opinion, I would expect the yield on this policy to be higher than the 2.54% we see.

The reason is that

  1. The duration of this policy is longer, and thus the insurer can assign the money into longer duration bonds and equities that potentially have higher returns expectations
  2. Whether the reinvested interest rate is 3% or 4%, it is higher than this 2.54%

Back then my friend might be 3 to 4 years into his young career and looking for something as a form of forced saving.

Great Eastern MaxSave Plus is an endowment policy. The primary aim is to help you save money at a reasonable rate.

My friend had to commit to a fixed monthly premium payment of $102.40 a month for 18 years.

A feature about the MaxSave Plus is that from year 2 onwards, the plan pays out an annual cash benefit to you. The cash benefit of $600 a year looks to be guaranteed.

On the last year, the cash benefit payout is $2,400 instead.

I reckon this plan sells very well at that time since it is a very nice feeling to have a plan that pays out cash flow to you.

You can choose not to take the cash benefit and reinvest back into the endowment plan. The reinvested amounts grow at a non-guaranteed rate of 4% a year.

My friend choose to deposit his cash benefit instead of spending it.

I would have thought the interest rate earned on the deposited cash benefit is 4% but it seems to indicate that the interest rate on cash benefit has fallen to 3%.

This interest is after all non-guaranteed.

Projected Surrender Value back in 2002

My friend showed me the total policy benefit that was illustrated to him back in 2002:

Based on the projections, my friend would only break even on his premiums almost at maturity of his plan.

We can also see that the projected investment rate of return is much higher at 6.75% and 3.75% versus the 4.75% and 3.25% we use nowadays.

The strange thing is that based on the surrender value, it already projected that the MaxSave Plus plan would yield my friend just 2.5% a year.

That does not look very attractive to a lot of people. I guess the appeal of a policy will depend on how the policy was explained to my friend.

The idea of getting an annual cash benefit of $600 a year do sound good. What would be hard for most of us to get around is that to get that 2.5% a year return, you cannot take out the $600 a year cash benefit, which defeats the cash benefit feature.

Projected Maturity Value Reduces as Time Passes

The total maturity value at maturity was supposed to be $29,523. However, if we review the bonus statements my friend receive from 2007 to 2009, we would notice that the projected maturity value indicates the maturity value will be much lower:

From $29k to $26k.

Then to $15.3k.

Then back up to $15.8 k.

Eventually, at maturity, my friend received $28,317 in total.

The return that my friend get does not look too far from the original returns projected in 2002.

I wonder if the insurance firm revised the projected maturity value lower, would they eventually bumped it up if the investment return does better?

My hunch is that in reality it is very unlikely that the insurance firm will revised the maturity value higher for two reasons:

  1. The insurance firms are rather careful in projecting the returns. Majority of the portfolio are lower in volatility and more predictable and as such a large percentage of the returns should not surprise
  2. Markets seldom surprised on the upside so suddenly that will make the most recent revised projected maturity look too wrong

I suspect that if my friend does not take all his cash benefits, the eventual maturity value based on the original projection in 2002 should be closer to $29,523 + $12,000 = $41,523.

However, based on the actual performance, the insurer can only pay out $28,317.

The Lessons That You Can Learn from this Review

Some of my blogging friends will say if there is one lesson to learn about reviewing the actual returns, it is that you should only trust guarantee returns in the projection.

I find that to be hard to accept because, if you look at the guarantee returns of recent policies, the guaranteed returns projection is very, very low.

Like 0.9% low.

If you are locking in your money for 20 years, you should expect some premium to having your money locked up.

If you are only expected guaranteed returns, and the returns barely break even, then why do you lock up your money at all?

The only reason you will invest is that you are alright with the returns of a conservative investment return projection.

That tends to be 3.25% instead of the 4.75% that the insurer would like to anchor your brain into.

If there is one lesson to be learn, it is that

  1. Projections are projections. Expect the Reality to be different.
  2. You do not like the unpredictability and volatility of other financial assets. The underlying instruments of the endowment plans are the same volatile instruments, so the projected values are going to be volatile whether you like it or not
  3. The biggest volatility you will face is the volatility between the projection and the expectations in your own head. You will only know whether your decision is right or not 20 years from now.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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Long Term Ramifications on Demand for Commercial Offices https://investmentmoats.com/money-management/reit/ramifications-demand-commercial-offices/ https://investmentmoats.com/money-management/reit/ramifications-demand-commercial-offices/#comments Sat, 23 May 2020 23:35:54 +0000 http://investmentmoats.com/?p=12041 Out of the many things I have read, it was a post at Housing Wire that made me wonder whether we are thinking too much in the present and not stepping back and referencing back to the baseline. Real estate are traditionally less correlated with the equity markets. This time they are really showing less […]

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Out of the many things I have read, it was a post at Housing Wire that made me wonder whether we are thinking too much in the present and not stepping back and referencing back to the baseline.

Real estate are traditionally less correlated with the equity markets. This time they are really showing less correlation. Various segments are dying together with the equity markets bar a few real estate segments, who are thriving instead.

Tenants have zero revenue and therefore cannot pay rent. The whole chain of parties from landlords, corporate lenders, shareholders, suppliers are all affected.

Many commentators are saying people in history will reference the period before Covid-19 and post Covid-19 as a pivotal period where all things change.

I think they are right but like always it is the extend of the change that may matter more. One of the tough thing to do in investing is valuing businesses because the nature of the business changes and this affect the intrinsic value of the company.

Usually, we are able to put our money down when we have higher conviction. Usually, certain aspect of that company we are certain about. What Covid-19 did was to make us question whether what was once certain will continue to be certain after this or will change entirely.

The real estate sector have been certain for a long time. Even within the sector, there are changes in trends. However, they take place in a past that every stake holders can adjust to.

Now, everyone seem to think that with work from home, there are no need for offices. I think there will be moderation, but this is not new. It will be the pace we are talking about.

Even with 10-20% overall vacancy will kill the valuation of certain property portfolios.

How big will the effect be? I am not sure.

In this post, I pulled together some of the things I have reader on this subject. I will list out some of the main points that stood out to me.

Everyone Down the Line is Affected

Animal Spirits: Investing in Corporate Real Estate >>

An interview with the manager of a USA ETF that focuses on triple net lease REITs, or REITs whose tenant pay for almost all the costs. I first shared about the appeal of net-lease REITs in this post here.

The parent company of the ETF is collaborating with huge asset manager Brookfield Asset Management to carry out sale-and-leaseback deals to help businesses that are hit a deal with cash flow better.

While there are aids provided by the government, it is not enough. The banks are not lending out as they should.

Some of the triple net lease REITs were affected because the tenants are Restaurants, Gyms, Day Care.

Surprisingly multi-family homes may be affected in the long run because of people relocating to other cities.

The appeal of net lease properties is that the tenants have long term contractual obligations. The tenants cannot break the lease easily.

The net lease REITs are taking the approach of working with their tenants to defer the rent, and then amortizing the rent over the rest of the contractual terms.

Everyone becomes a loser:

  1. Tenant cannot pay the rent
  2. Landlord takes a hit
  3. Corporate borrowers take a hit
  4. Shareholders take a hit as well

When tenant goes bankrupt, everyone down the line takes a hit as well.

In order to invest, you have to believe that in the long term, things will go back to normal.

That is, you will drop off your kids at day care, you will go to restaurants to eat.

They are seeing business picking up in different industries. Consumer behavior changes and so does how business is carried out. And so the revenue are recovering as well.

They also observed that suburban real estate is really growing.

Facebook CEO’s Future Office Policy in Full

Ramp Capital LLC: What we can learn from Global Workplace Analytics

The Death of Cities >>

Accroding to Gallup, Americans don’t want to live in big cities, they want to live in rural areas. The reason they live in big cities are for jobs and opportunities.

Data from Global Workplace Analytics:

  1. Only 3.6% of U.S employee workforce currently work from home 50% of the time or more
  2. 43% of employees work from home with some frequency
  3. 56% of the employees have a job where at least some of what they could do could be done remotely
  4. Studies show desks are vacant 50-60% of the time
  5. 80% of the employees say they would want to work from home at least some of the time
  6. 35% of employees would change jobs for opportunity to work remotely full time (Millennials much more than Boomers)
  7. 37% of employees would do so to work remotely some of the time (Millennials much more than Boomers)
  8. Greater than 33% of workers would take a paycut of up to 5% in exchange for the option to work remotely at lease some of the time. 25% would take a 10% paycut. 20% will take an even greater paycut

Moving to suburban places are more appealing. The rents in major cities are too expensive.

The cities with affordable housing and zero state income taxes may become very appealing to educated and rich workers.

On Facebook’s new policy: If you move away from the city, you are most likely to take a pay cut. There are trade-offs and you have to think about it. It might just be worth it still.

Major tech firms may not need to be headquartered in big cities. This will not kill the cities but will set growth back.

We may see tech firms moving to the suburbs. It will depend on whether the firms take the lead. The workers will follow.

The Increase in Remote Work or Work from Home Job Searches

WSJ: For Many, Remote Work Is Becoming Permanent in Wake of Coronavirus >>

“Just as Intel, HP, and others originally defined how we operated for decades in tech, we’ll see a redefinition for the 21st century by new digital companies.” – Aaron Levie, CEO and co-founder of Box Inc

LinkedIn recorded a 28% increase in remote job postings and a 42% increase in searches using the terms “remote” or “work from home”.

“The response to the pandemic has revealed the viability of remote work for many businesses that had access to the necessary technology, but were hesitant to expand the practice.”

The physical desire among humans to be physically present is hard-wired inside of us.

Jeffry Carter, General Partner at West Loop Ventures: Work From Anywhere >>

The last 10 years have seen a move towards urban city center vertical office campuses. Things might change so that worker can get outside in a less crowded space.

“You strip out a commute and you strip out having to get on an airplane for business meetings and you kind of remove a lot of these other things that crept into the work that you had to do.” – Aaron Levie

Conferences and meetups have more value compared to when on Zoom.

There are things that happen spontaneously in offices because people are in physical proximity with each other. These are the random stuff and conversations and comments. These spark ideas.

Even before Covid-19, CEO have a problem recruiting for their offices in areas like San Francisco, Los Angeles, NYC and Chicago. They were looking for a way to leave or reduce their headcount there.

Covid-19 gave them the perfect opportunity.

There are states that wishes to raise more taxes and there are states that are more “free”. Migration by firms may take place and this may impact not just state policy but also federal policies.

Since 2012, Jeffry have been noticing a trend towards co-working. Home space tends to be too cramped up. It may not be WeWork but other companies will take its space.

Avoiding Our Cognitive Bias to the Analysis of Larger Homes and Office Spaces

HousingWire: Could the coronavirus crisis lead to larger homes and office spaces >>

There are predictions that home size and office space have to increase but may be predicated upon the assumption that the prospect of a viral outbreak is the only factor a buyer considers.

Owners can have 50% of workers that are productive working from home to work from home and another 50% to work in office with better spacing. This may mean status quo.

Long term productivity is also unknown.

“The Spanish flu wreaked havoc on the U.S. economy, and many predicted it would lead to a decades-long recession – but instead, the pent-up demand to spend and enjoy life spurred the roaring 20’s. No one has a crystal ball to tell the future. But we do know that cultural change is usually slow, methodical, and the result of many social inputs. The accuracy of any prediction is incumbent on capturing as many of those input as possible and avoiding the cognitive bias of “What you see is all there is.”

Mass Commuting and Singapore Office

Mass telecommuting will shake up S’pore’s CBD, end work and office life as we know it>>

Human resources technology start-up EngageRocket, the Institute for Human Resources Professionals and the Singapore Human Resources Institute — has gathered more than 2,700 responses on workplace sentiments in Singapore since April 13.

  • 8 in 10 employees in Singapore wish to continue working from home at least half the time or more after the circuit breaker
  • 40% of younger workers said they were less productive than before. 49% of older workers said they were less productive than before
  • Companies cannot just manage employees based on face time
  • Peak hour traffic might be a thing of a past
  • Grade A office rent will get affected short term
  • Companies will fold or they might have multiple offices around Singapore
  • Office space might be re-design
  • The retail shops, Gyms catering to office crowd are badly affected as well

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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Which is My Best Option to Fund My Condo Purchase? https://investmentmoats.com/money/best-option-fund-condo-purchase/ https://investmentmoats.com/money/best-option-fund-condo-purchase/#comments Sat, 16 May 2020 23:45:46 +0000 http://investmentmoats.com/?p=12030 A long time reader wishes to purchase a condo that is valued at $1.65 million. Currently, the family is staying at a 5-Room HDB valued at around $500,000 that is fully paid-up. This HDB can potentially rent for a gross rental income of $2,500 a month. He considered 3 options. Option 1: Sell current HDB […]

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A long time reader wishes to purchase a condo that is valued at $1.65 million.

Currently, the family is staying at a 5-Room HDB valued at around $500,000 that is fully paid-up. This HDB can potentially rent for a gross rental income of $2,500 a month.

He considered 3 options.

Option 1:

  1. Sell current HDB
  2. Use the sales proceed + CPF + cash to buy the condo
  3. Do not leverage up

Option 2:

  1. Sell current HDB
  2. Use the sales proceed + CPF to purchase
  3. Also loan $300,000

Option 3:

  1. Keep HDB
  2. Use CPF + some cash to buy a condo
  3. Also Loan $900,000
  4. This will incur an additional ABSD of $198,000 since this is the second property they would own.

Other assets the family own include:

  1. CPF OA: $900,000
  2. Cash: $500,000
  3. Stocks and Bond: $1,500,000

So he asked for my second opinion. I can’t give much advice since I am not his planner. But I think I can provide him some guidelines how he can go about to identify which option is most ideal for his situation.

He needs to know what is the life he wishes to live

The toughest thing to work out is if you do not know what you want.

If you want everything, then it is tough because that would mean you need a lot of resources.

A plan that gives you a lot of flexibility often comes either with greater hidden costs or needs a lot more resources.

My friend here knows roughly what he wants:

  1. Move closer to their workplace to cut traveling time
  2. Their child is older and do not need to be near the HDB anymore
  3. Retire in X number of years

Given this, we can at least apply some sound, fundamental planning concepts to it.

He needs to have One Eye on the Longer Term Ideal Life

Buying a home that provides a better lifestyle today needs to fit in with his longer-term goals.

Sometimes by trying to satisfy one goal, other goals get impacted.

My friend would need to ask what is his desired retirement lifestyle.

A typical one would be living in this prospective condonmium, with enough assets to provide an income to last for X number of years.

Typically, you would like to have a peace of mind in retirement, you would prefer to pay off the mortgage for your residential property you reside in. Or at the very least, you can service the mortgage but have enough cash to offset that mortgage.

With that in mind, the best option would be the option that allows him to

  1. Fund his condo purchase and pay off the mortgage at retirement
  2. Accumulate enough for retirement

The option that allows him to do #1 and #2 the earliest as possible is the best option.

Calculate Which Option Gives the Greatest Net Wealth at Retirement Date

  1. Each of his current assets have a rate of return. Cash earns something, Stock portfolio earns something, Mortgage incurs some interest, CPF earns something
  2. Use the least costliest or lowest return asset to fund the property purchase and loan repayment
  3. Leave the assets that earns the highest rate of return for accumulating towards retirement

So what he can do is that if his targeted retirement date is 55 years old, then for each option:

  1. Fund the purchase of the home and pay the mortgage if the option requires a loan
  2. Any residual surplus from his work income after expenses will go towards wealth accumulation, together with his other assets
  3. At retirement, clear off any outstanding loan with his other assets

Compare his net wealth for each option less the value of residential property.

The highest net wealth is probably the best option.

Do we need to care about which assets are More Suitable for Retirement Income?

Money is fungible.

If you grow your money with Bitcoin till US$5,000,000 and that is not suitable to provide retirement income, just rebalance that US$5,000,000 into a portfolio that is more suitable to provide retirement income.

The important thing is to grow your money to the right targetted amount that can conservatively give you that retirement income.

For example, if you need $4,000 a month 10-years from now, a suitable way to generate retirement income is a low cost, portfolio of diversified equity, and bond. If we factor in the return profile of this equity and bond portfolio in retirement, the math estimates this person needs $1.8 million at least.

So your job is to grow your cash, CPF OA, stocks and bonds, HDB flat equity value + rental income to hit $1.8 million. If there is another asset that gives you a greater chance to do that, then go ahead and switch to it.

Too much opportunity is lose by people believing they need an instrument that throws out passive income so they lock their money in a plan that provides that mechanism but the actual returns during accumulation is rather lacklusture.

How to Model The Option of Keeping the HDB Flat for Rental Versus Selling It Off?

In order to evaluate which of your asset is the least costliest or lowest return, you need to know the return of your HDB flat.

This is probably a bit tough to do. How do you get a rate of return to compare against the CPF OA, cash and stock portfolio?

In some previous article, I worked out the longer term internal rate of return for some private condos. We can do the same thing here.

In planning we try to be realistically conservative. If the actual performance is better, then we can reach our goals earlier.

I try to estimate the net rental yield of his place and it works out to be around 4.7%.

I use a property growth rate of 3% a year.

I have also worked out the range of internal rate of return that he can get for holding on to his property over different timeframe:

Internal Rate of Return for Holding HDB Flat and Selling Off the Flat at Different Point in Time

If he held on the property for 10 years, earn rental from it, and then sell off the flat before retirement and shift it to something else, the internal rate of return is 6.6%.

That looks good. If the capital growth rate is 1.5% instead of 3.0%, at the same point, the internal rate of return would be 5.35% instead.

Now the difference is that if he held on to the HDB, he would need to incur the additional buyer stamp duty (ABSD) which comes up to $198,000.

We can factor in this ABSD into the cost of this HDB flat as a first-year cash outflow. Then we re-compute the internal rate of return.

At the 10 years mark, the internal rate of return fell to 2.11% instead of 6.6%.

Conclusion

Unfortunately, I could not determine which is the better option (nor do I wish to cross that chasm to do that).

I suspect the mathematical, better option is to borrow as much as he can, then for the rest, take the cash and invest well to capture returns at the appropriate risk levels.

The reason is that if you look at the returns/costs of what is available:

  1. Cash: 0.25% or less
  2. CPF OA: 2.5%
  3. Stocks portfolio: 4.5% (assume as a conservative estimate)
  4. HDB Rental + ABSD for new Condo: 0.9 to 2.11% (depend if the growth rate is 1.5% a year or 3.0% a year)
  5. Mortgage Interest: 1.3% to 1.5%

The return/cost rank from the lowest to highest is Cash, Mortgage Interest, HDB Rental+ ABSD then Stocks Portfolio

We can see based on the guidelines what may be the most appropriate steps to take.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Which is My Best Option to Fund My Condo Purchase? appeared first on Investment Moats.

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How to Help Your Kid Transition to Emerging Adulthood Better https://investmentmoats.com/money/how-to-help-your-kid-transition-to-emerging-adulthood-better/ https://investmentmoats.com/money/how-to-help-your-kid-transition-to-emerging-adulthood-better/#respond Sat, 16 May 2020 00:11:10 +0000 http://investmentmoats.com/?p=12025 One of the bigger problems that I have growing up was in the conflict with my dad. You can attribute that to partly adolescent insolence and immaturity but there were a lot of cases that he mistook that I refused to carry out some chore because I was lazy. Some times I was lazy, but […]

The post How to Help Your Kid Transition to Emerging Adulthood Better appeared first on Investment Moats.

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One of the bigger problems that I have growing up was in the conflict with my dad.

You can attribute that to partly adolescent insolence and immaturity but there were a lot of cases that he mistook that I refused to carry out some chore because I was lazy.

Some times I was lazy, but a lot of times… I really do not know how to do that thing!

Like how to wash the clothes when the washing machine is just stting there for me to use? The reason why I procastinate to do it, or refuse to do it was because… the washing machine does not come with a user manual.

I do not know how to use it.

The problem is I did not tell him I do not know how to do it, and he assumed that I know.

This could very well be resolved by showing me how to do it.

The tough part of transiting from being a poly kid and a junior college kid to becoming a young adult is that people expect that after school you become a young adult and are fully equipped with all you need to know about being a successful young adult.

I came across this podcast that resonated with me and I wrote about it over at Providend. You can read 3 Areas to Help Your Youth Ease into Adulthood More Successfully here.

I like the article because it comes from not a researcher, but someone who have been helping parents who have a frustrating time with their kids.

He identify 3 main areas parents can better communicate or do to help their kids ease into adulthood better.

The 3 areas he shared that parents can help work their kids on are:

  1. Be more responsible by asking them to do the mundane, administrative things well. Provide instructions to them
  2. Be more of a consultant rather than a supervisor. Your kid is already 17 years old. You cannot use the style of parenting more suitable for a child
  3. Be more relevant. They are leaving a structured world for a very unstructured world. You need to make them see that in the past, you have struggled as well and it is not special to struggle when you are transiting to adulthood.

For those of us who are young adults, you can read it and see if you identify with some of the problems Mark McConville shared.

For those readers with kids and struggling with them, let me know if this is of any help.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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Which Singapore REIT will Survive and Thrive Better During this Challenging Period? https://investmentmoats.com/uncategorized/singapore-reit-survive-thrive-better-stress-test/ https://investmentmoats.com/uncategorized/singapore-reit-survive-thrive-better-stress-test/#comments Thu, 14 May 2020 00:36:56 +0000 http://investmentmoats.com/?p=12008 DBS has a pretty good report out which shows some of the “stress-test” they put the REITs listed in Singapore through. For those serious in investing in REITs, this is a good blueprint how you can assess the defensiveness of REITs in times of stress. This kind of assessment is very quantitative and should not […]

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DBS has a pretty good report out which shows some of the “stress-test” they put the REITs listed in Singapore through.

For those serious in investing in REITs, this is a good blueprint how you can assess the defensiveness of REITs in times of stress.

This kind of assessment is very quantitative and should not be the only way you assess the REIT’s defensiveness. You have to layer the qualitative aspect as well.

Let me share some of the main takeaways.

The Metrics that DBS uses to Measure Whether Each Singapore REITs Will Survive Better

Firstly, we have to be clear what they mean when they measure the survivability of the REITs.

I do not get a clear statement from the report but after reviewing the report, a REIT survives better by coming through this testy period in a much better condition than before they enter it.

  1. They have enough cash flows after paying all the necessary expenses so that they do not need an additional external capital injection
  2. When their assets are re-valued downwards, their overall debt to the asset is still within the MAS gearing limit (now it is at 50%)
  3. The lower amount of debt that needs refinancing in the short term
  4. Able to sustain the dividends better
  5. Most importantly, investors have less risk that they will need to inject equity capital by way of rights issue into the REIT, to shore up capital when no one wants to loan them money they really need

These are more fundamental measures and less about the stock price. However, stock price tends to reflect over time the health of the REIT.

Key Metrics Show the Singapore REIT Sector is in a Better Shape Than the Previous Downturn

The Singapore REIT Sector Health

DBS compares current REIT sector industry metrics against the 4 years before and after the Great Financial Crisis (GFC) from 2007 to 2010.

DBS noticed that during the GFC:

  1. Interest coverage ratio remain stable at greater than 4.0 times
  2. There are more stress on the balance sheet
  3. Asset valuation decline by 2% to 15%
  4. Office sector was the most hard hit

Currently, the overall sector is in a much better position:

  1. The gearing level was similar to 2007
  2. Interest rate today is much lower
  3. REIT sector enter this challenging period with a lower portfolio encumbrance (this means that the amount of debt secured against their properties is lesser. That means they have more properties unsecured to collatorised during refinancing shoudl they need it. Financing companies find you less risky if the debt is secured with properties. In the event the REIT defaults, they can possess the property)
  4. With the recent changes to the MAS leverage limits from 45% to 50%, this provides greater flexibility for the REIT to manage their capital structure in times of financial stress

Personally, when I reviewed DBS’s data, it does not give me the idea that current situation is much different from the previous years they compared against.

If we are in a bad shape back then, the data does show that we are in a bad shape now. Vice-versa.

The only takeaway is that this may be reflective of the overall health of the larger REITs. These larger REITs will shape the table above. It seems to tell me things are not so different for the larger REITs compared to back then.

DBS’s Framework for Stress Testing the REITs

DBS decided to put our REITs through some stress tests.

These are their parameters:

The criteria of evaluation in this Singapore REIT's stress test
The criteria of evaluation in this Singapore REIT’s stress test

DBS look at

  1. potential asset devaluations on gearing level
  2. lower cash flow on interest coverage ratios (ICR)
  3. whether a REIT will breach DBS’s more conservative leverage threshold of 40% after their property devalues 15%
  4. trading below revised NAV (assuming that the REIT needs to be re-capitalized with a rights issue)

And the results is below:

So the more green ticks each REIT have, the better they will emerge oiut of this.

We can see some with 4 to 6 ticks:

  1. SPH REIT (6)
  2. Capitaland Mall Trust (5)
  3. Lendlease Global (4)
  4. Mapletree Commercial Trust (4)
  5. Ascott REIT (5)
  6. Ascendas India Trust (5)
  7. Mapletree Industrial (5)
  8. Keppel DC (5)
  9. Prime REIT (6)

Then there are some REITs that have 1 tick or less:

  1. Suntec REIT (1)
  2. ARA LOGOS (1)
  3. ESR REIT (1)
  4. EC World (1)
  5. Manulife US REIT (1)

1. Which Singapore REIT have a More Conservative Capital Structure?

A lower gearing limit:

  1. Gives financial flexibility to tap debt capital markets if needed
  2. Cost of funds is cheaper
  3. Ability to leverage up to acquire distressed assets

2. The Interest Coverage Ratio Test

The interest coverage ratio test is one that I appreciate less because…. I omit a situation where a REIT, with a diversified tenant base… can suddenly have no income…

DBS stress test the REITs by cutting the REIT’s EBIT by 50% and 75%. What DBS got is a “cash-backed ICR”

They assume that every quarter of delay in collections will lower the EBIT by 25% . In the even of a 6-month and 9-month delay, this will reduce the EBIT by 50% (unlikely) and 75% (highly unlikely).

In this higher stressed scenario, the ICR range is reduced to 1.1 times to 7.9 times. With a 9-month delay, some ICR can go below 1 times.

This stress test is good, but in reality it is very broad stroke. Some type of REITs such as office should be less affected such that their EBIT broadly falls by 50% and 75%.

So you do have to be a bit qualitiative about it.

Out of the troubled hospitality and retail REITs, SPH REIT and Lendlease looked particular strong despite this very stressful test.

3. Which Singapore REIT is More Sensitivity to Decline in Valuations

While the REIT managers did not give clear indications, history tells us that it is likely the REITs will face a decline in valuations.

DBS tested the REITs gearing levels to a 5%, 10% and 15% drop in valuations.

All S-REITs did not breach the 50% gearing limit set by MAS. However, if we use DBS’s more conservative 45% threshold the following REIT would touch the limit first:

  1. OUE Commercial
  2. Suntec
  3. Far East Hospitality REIT
  4. ARA LOGOS
  5. ESR REIT
  6. Mapletree Logistic Trust
  7. Soilbuild Business
  8. EC World

4. Which Singapore REIT can Sustain the Dividends with the Help of Short-Term Debt?

DBS stress test the REITs ability to sustain the dividends by temporary take on debt. This would corelate to the REIT’s individual debt levels and gearing limits:

The Singapore REITs could maintain the dividends, but some of the REITs will break a 40% gearing level.

5. Which Singapore REIT Trades Below NAV Even After Potential Decline in Value?

Since DBS stress-tested the Singapore REITs with lower valuation, they also presented the data in terms of attractiveness in terms of valuations.

One of the risk in investing is to use historical data and come to a conclusion that this stock is cheap. The right way to do is to do what DBS did, which is assume a discount in value that may happen and see which one still look attractive:

Those that are highlighted in green are the REITs that, after a decline in portfolio value, still has a net asset value (NAV) per unit higher than current REIT unit price. This indicates even after both price decline and NAV decline, the REIT looks attractive.

On a NAV basis, DBS believes that many REITs are trading at an implied 15% decline in portfolio valuation.

Capitaland Mall, Starhill, and Lendlease are trading at a greater than implied 15% decline in portfolio valuation.

6. Singapore REIT Re-capitalization Risks When Property Value Declines

When the REIT portfolio decline in value, the gearing level increases.

Some REIT might potentially need to raise capital via rights issues, placements.

This will dilute and reduce your dividends because you are not buying properties with this capital but the number of shareholders increases to share the same pot of rental earnings.

DBS stress test this by simulating:

  1. the REIT does an equity fund raising if gearing goes above 40%
  2. the rights issue is priced at a 25% discount to current trading price

The REIT highlighted in green are the REITs that after a 15% decline in portfolio value, they did a necessary rights issue, and their NAV per unit is still higher than current share price.

Based on DBS’s assumptions, 50% of Singapore REITs in their coverage will not require any equity fund raising even if property valuations fall by 10%.

If property valuations drop by 15%, those that need to recapitalize will see their NAV per unit drop by 23% to 34%.

10 of them are trading at prices that are even below the revised NAV. They are mainly in the retail and hospitality sector.

The table above shows the potential effects of the equity raising dilution on dividend yield. With the rights issue, the DPU should be diluted.

However, even after that decline scenario, some REITs are still trading with a dividend yield that is higher than their 10-year historial average yield.

Those are highlighted in green.

On average, the dilution on DPU Yield is about 1% – 2%.

The Singapore REITs that potentially will experience the largest declines in DPU Yields are:

  1. ARA LOGOS (1.3% decline)
  2. ESR REIT (1.3% decline)
  3. Soilbuild Business (1.1% decline)

For some, even after this decline, the REIT is still traded at attractive yield.

Last Word

I feel that DBS tried its best to provide some rational negative operation assumptions.

They did a lot of hard work there and we got to thank them for that.

In this whole exercise DBS is trying to help us assess, based on current price, what are some of the scary stuff that may have been priced in.

It is to help us see in the spectrum of very undervalued to very overvalued, where each REIT is right now.

However, I believe the markets and fundamentals are rather fluid here as well. When the property value actually goes down, the share price might react very negatively, forward pricing in a potential rights issue.

If it looks attractive today, when the event happens, it might look even more attractive.

Of course, if these valuation declines do not happen, then you missed the boat.

Some investors will look towards this for attractive mis-pricing. Others will use this as a way to assess their Singapore REIT on the risk spectrum better.

Let me know which REIT caught your eye or some realization you have after this review.

I have a FREE REIT Training Center. The link is below.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

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Citic Telecom (1883) – A Tiny Dominant 7.3% Dividend Yielder https://investmentmoats.com/stock-market-commentary/value-investing/citic-telecom-1883-dividend-yielder/ https://investmentmoats.com/stock-market-commentary/value-investing/citic-telecom-1883-dividend-yielder/#comments Sat, 09 May 2020 23:30:02 +0000 http://investmentmoats.com/?p=11992 In 2018, I spotted a telecom operator that has in excess of a 10% free cash flow yield. So I took a look at it. Till today, I could not increase my conviction in this stock due to the limited information that I could uncover about the business. It is not a very sexy business […]

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In 2018, I spotted a telecom operator that has in excess of a 10% free cash flow yield. So I took a look at it.

Till today, I could not increase my conviction in this stock due to the limited information that I could uncover about the business.

It is not a very sexy business and I think in recent years, not many folks would touch it due to the challenges in the industry.

My posture has always been to let the company’s result tell me if I was wrong, or that I was cautiously right. The world is different today, but the share price is not too far off from where I first pick it up

A Brief Introduction to Citic Telecom

Citic Telecom (stock code: 1883) was established in 1997 and listed on the Hong Kong Stock Exchange in 2007.

The company provides a whole assortment of telecommunications service mainly to the people in Macau and coming into Macau.

Citic Telecom owns 99% of Companhia de Telecomunicacoes de Macau, S.A.R.L. (“CTM”). Before 2013, Citic Telecom owns only 20% of CTM. In 2013, Citic Telecom purchase the other 79% of CTM that it does not own from a wholly owned subsidiary of Cable & Wireless Communications and Portugal Telecom.

The purchase consideration was US$1.16 billion or equivalent of HK$9 billion then.

Macau Post, an entity controlled by the Macau Government, owns the remaining 1% equity in CTM.

  1. CTM held a 41% market share in the Macau mobile market. This was down from 43% in 2018.
  2. CTM held a 42% market share in the Macau 4G market. This was down from 46% in 2018.
  3. CTM held a 97% market share in Macau’s broadband services with a broadband penetration rate greater than 91% at end 2019

A substantial shareholder of Citic Telecom is Citic Group. Citic Group, a large state-owned enterprise in China owns 58% of Citic Telecom.

The Macau Telecom Market

Macau boasts a sophisticated, independently regulated communications market. Liberalization has now fully opened the telecoms market.

Demand for telecom services is significantly driven by the millions of visitors that visit Macau every year. 87% of visitors classified as residents of mainland China or Hong Kong.

Macau’s mobile market is very competitive. There are four mobile network operators (CTM, Hutchison 3, SmarTone, and China Telecom Macau) and a mobile virtual network operator (MVNO) offering services.

Mobile penetration is in excess of 200% due to multiple SIM card ownership as well as sales of SIM cards to visitors.

Macau have a population of 650,000.

Citic Telecom’s Business

Like most telecom operators, Citic Telecom’s revenue is derived mainly from

  1. Mobile sales and services.  Sale of handsets and providing 4G and in the future 5G mobile services. This is their main bread and butter.
  2. Internet services. This would be broadband services.
  3. International telecommunications services. Voice services, SMS, and their “DataMall” services.
  4. Enterprise solutions. Citic Telecom through its subsidiaries provides info-communications and technology services (ICT). Customers are mainly global MNC. This business spans more than Macau but includes Europe, Russia, China (those countries along the One Belt one road), South East Asia. Services include Cloud computing, VPN services, Datacenter services, systems integration.
  5. Fixed-line services. This is the declining phone line business. While they own a monopoly on this, it has been declining and will decline over time.

The unfortunate thing with Citic Telecom is that they would only provide breakdown of their revenues by segment. In this way we have no idea how well each segment is doing.

The Challenges for Telecom to Diversify Away from Traditional Profit Sources

We do know that overwhelmingly the mobile services and internet services enjoy the best EBITDA margins of around 20-30%. The enterprise solutions segment should command around 10 to 15% margins.

The one thing I realize as I read a few annual reports of telecom companies is that they will describe the great potential of their various segments.

However, at the end of the day, majority of what drove profits is the mobile and broadband business.

The rest of the enterprise, advertising, internet content, data center segments often are either still losing money or a small portion relative to the mobile and broadband business.

This is also where telecoms struggle with as they have become more like commoditized utilities. We subscribe to one provider but we are so fickle that when another provider lowers their price, we switch over.

With greater number of players, this will reduce a very high EBITDA margins down. Since the mobile and broadband EBITDA margins are so much higher than the rest of the new segments a telecom operator is trying to develop, telecom operators’ results live and die by the mobile and broadband segment.

However, despite what I mention, the telecom operators have no choice but to explore these new segments.

The main reason is that; they already have the infrastructure. By developing new users around the technology infrastructure, they encourage greater use, and may be able to charge enterprise clients, SME at better rates.

5G brings a lot of promise (and also lots of CAPEX) but at this point, it is just potential.

Citic Telecom’s Segmental Revenue

Citic Telecom Segmental Revenue

While Citic Telecom is adding mobile subscribers, revenue did not seem to move much. Fixed line services is on a declined.

The surprise was the boost in international telecommunication service in the past 2 years due to SMS and voice. I wonder whether that will continue.

Mobile Subscriber Growth

While there can be more mobile penetration over time, it does not mean it translate to revenue. This is because ARPU tends to go down over time as well.

Here are some of the latest Citic Telecom subscriber numbers we have:

  1. 2019 Postpaid Subscribers: 350,000
  2. 2019 Prepaid Subscribers: 796,000
  3. 2019 Broadband Subscribers: 193,000

Here is the growth of Macau prepaid sim cards over the past 10 years:

Probably not the most up to date but better than nothing. Citic telecom probably have slightly less than 50% share of this.

The compounded growth is 12% a year.

Here is the growth of Macau mobile subscribers over the past 10 years:

I think I would trust Citic Telecom when they tell me that by 2019 their market share would be 41%.

The compounded growth was 7% a year for the past 10 years.

Given this kind of consistent subscriber growth, and that Citic was able to capture enough market share, it cannot be revenue stay stagnant for so long. The only explanation is that in terms of the operating dynamics, it is unfavourably deflationary.

A2P SMS

What have been driving this have been A2P SMS Business. A2P stands for app to person.

There seem to be an increase in the pace of global expansion of major PRC internet companies and with that a growing demand for authentication SMS from financial institutions.

  1. In 2018, SMS revenue grew 38% or 146 mil.
  2. In 2019, SMS revenue grew 74% or 287 mil.

International Telecoms have been declining and suddenly this turned around.

Amazing.

If you bank with Bank of China in Singapore, you will know how crazy their 2FA SMS can be. Almost every action generates an SMS.

According to a survey done by Ovum and Tata Communications, SMS is the primary mobile specific service that companies use to communicate with customers.

A2P have been gaining momentum for a few reasons:

  1. Consumers prefer their communication to be short and personalized and on their terms
  2. SMS open rates are higher and faster than email open rates. 98% of SMS messages are read versus 20% in email
  3. Increase two factor authentication

Ovum forecasted that by 2022, revenues from app to person SMS will exceed revenues from person to person SMS. This is despite the traffic from A2P to be half that of P2P SMS.

“Unfortunately for most telcos, P2P SMS has become essentially value-less, since they have had to bundle unlimited SMS into mobile tariffs to remain relevant to their customers, an increasing number of whom use chat apps such as WhatsApp, WeChat and Facebook Messenger.

However, telcos can still charge a per-message termination rate for A2P SMS, which means it remains a more valuable source of revenues, since enterprises still value SMS for its global reach, affordability and mature ecosystem. However, chat apps, which Ovum forecasts will have 3.2bn unique monthly active users (MAUs) by 2020, are also connecting enterprises with consumers via their platforms. Telcos and the wider ecosystem are therefore under pressure to protect their A2P revenues, driving them to upgrade from SMS to Rich Communication Services (RCS),” – Ovum

Enterprise Growth

The growth area is definitely in internet services and enterprise. Part of the boost in Enterprise have been acquisitions:

  1. In Oct 2016, they acquired Acclivis Technologies and Solutions Pte Ltd. You might be familiar with it because it used to be a subsidiary of DeClout Limited. It provides comprehensive cloud facilities and owns Pacific Internet in Singapore and Thailand
  2. In Feb 2017, they finalized the acquisition of Amsterdam-based Linx Telecommunications. This includes Linx’s 470 KM submarine fiber network in the Baltic Sea, its network operation centers (NOC) in Moscow and Talinn, Estonia. It also includes a data center in Estonia serving Estonia’s largest internet exchange.
  3. In 2016, Citic Telecom acquired Citic Telecom Tower (CTT) in the data centre cluster in Kwai Chung, Hong Kong. Their intention was to turn this into a high grade data centre with more than 4000 racks. They completed this in late 2018. In 2019, they sold out all the racks and proceed to expand with 500 more racks. This should be completed this year or next year.  

For the past 4 years, the enterprise segment has grown 15% a year. If we assume that the conservative operating margin of 10% a year, this will add 4.5% a year to Citic Telecom’s profit.

However, if I look at Citic Telecom’s profit growth in the past, I am probably either too optimistic in the segment growth or operating margin, or there were administrative overheads.

Review of Competitors

For some reason Macau has got to be the most opaque telecom market to do research.

Out of the 3 competitors, Hutchison 3, Chine Telecom Macau and Smartone, I can only find the results of Smartone.

For such a small city of 650,000 people, they have 4 telecom operators and one MVNO.

This is one of the reason I was pretty cautious on this investment.

Intense competition has sort of kept Citic telecom on their toes. During the time where I remain invested, telecom operators around the world have been struggling due to competition. For some reason, Citic telecom has remained a bright spot among the telecom operators.

Smartone revenue, EBITDA and Profit in Macau

Citic Telecom’s Revenue Growth

Citic Telecom’s revenue have not been great for the past few years since they acquired almost all of CTM’s stake. The most meaningful boost to revenue was from 2017 to 2018.

$1 billion of that came from handset sales, and another large contributor was from… SMS-based services. SMS revenue in that year was up 386 million, which is a 37% increase.

Just when we thought SMS is dead, we did not realize that the demand for greater security have also increase the need for 2FA authentication. One common way is through SMS.

Citic Telecom’s Profit and Cash Flow Trend

Given the revenue profile, it is a little surprising that Citic Telecom’s profit growth has been pretty decent.

Citic Telecom 2013 to 2019 profit and profit growth

For the past 6 years the profit growth averages 5.5% a year. Citic Telecom profit margins have held up pretty OK.

We are not sure what the future may bring, but it is likely the growth will not exceed this range unless 5G surprises me on the upside.

Given how intense competition has been in the telecom space, I would not be surprised if the compounded average growth slows down to 2-3%.

While Citic Telecom’s profit growth looked decent, their free cash flow growth looks much better, especially in 2019.

2019 was boosted by higher depreciation and slightly higher net profit. Free cash flow growth over the past 6 years have been 16% a year.

I should warn readers that my free cash flow is computed by using operating cash flow before working capital. This will give a more consistent free cash flow. However, I am not glossing over working capital.

For the most part, Citic Telecom’s net working capital is quite in control, and I did not detect any signs that it will manifest into a greater issue. (If you would like to learn to differentiate each of the cash flows used in investing, you can read my comprehensive cash flow article here)

I have also listed the dividend paid out each year, relative to net profit. The dividend payout ratio starts off low at 24% and progress upwards closer to 70%.

If you look at the dividend paid out relative to profit or free cash flow, the payout has been rather conservative.

The issue with telecom operators is that they have to sink in greater amount of funds for capital expenditure but they could not earn incremental value from it.

Citic Telecom’s capital expenditure over the years have gone down quite a fair bit. However, Citic Telecom have indicated that once they have the 5G approval they will roll out the deployment of their 5G network in the first half of 2020 (it remains to be seen if Covid-19 will affect this plan).

Macau will be one of the first few cities in the world to have full 5G network technology coverage.

With the roll out in mind, it is likely that the capital expenditure in 2020 could be higher than the average Capex trend of the last few years.

Whatever cash flow that is left over from capital expenditure is mainly channelled to reducing their debts over time. Citic Telecom’s debt to asset have reduced from a less than comfortable 44% to a more comfortable 29%.

The Impact of Hong Kong Protest on Citic Telecom Results

I was also interested to review the full year 2019 results because from the segmental reporting, a large portion of revenue comes from Hong Kong.

The issue is that I am not sure if this was derived by customers in Hong Kong or that it is due to a subsidiary domiciled in Hong Kong.

I have a feeling it is the latter.

In any case, the unrest in the second half of 2019 did not affect Citic Telecom much. This was quite fortunate.

The Potential Impact of Covid-19 on Citic Telecom

Covid-19 is a different challenge altogether. I think I was quite lucky that out of all the stocks I own, I have a fair bit of telecom holdings in 2 of the stocks.

An industry that most investors do not like turn out to be in a better position than a lot of the industries that most investors like.

Telecommunications became very essential now.

However, certain segments of Citic Telecom would be affected by this:

  1. A portion of revenue comes from people visiting Macau. With lock-down restrictions, and very, very low tourism numbers, part of mobile revenue will be affected.
  2. A part of ICT revenues should come from on-going projects. This may be adversely affect when some projects are put on hold.
  3. International telecommunication revenue likely going to be affected as well

Macau depends on tourism. It is likely some of Citic’s main ICT customers are the casino and resort operators.

For this reason, I am not optimistic about their upcoming results.

Some numbers:

  1. 2017 Postpaid (exclude Internet of Things and SIMN) ARPU: HK$206
  2. 2017 Postpaid (Internet of Things and SIMN) ARPU: HK$30
  3. 2017 Prepaid ARPU: HK$11
  4. 2019 Postpaid Subscribers: 350,000
  5. 2019 Prepaid Subscribers: 796,000
  6. 2019 Broadband Subscribers: 193,000

Most likely, the Postpaid revenue is 7 to 8 times that of Prepaid. I think the impact of this is quite controlled. However, I cannot be certain of the aggregate impact.

The graph above shows the 5 year Macau mobile telephone subscriber growth. There was some craze spike from Sep 2019 to Dec 2019 where the number of subscribers went from 2.1 mil to 2.8 mil.

Note that a large amount of these are likely to be pre-paid subscribers.

I suspect that this was due to the unrest in Hong Kong diverting the amount of people there.

In any case, Covid-19 has totally collapse this:

  1. 2020 Feb: 2.44 mil
  2. 2020 Mar: 2.29 mil

I suspect this drove the spike in A2P revenue. For the next 6 months’ result, Citic Telecom probably will reverse that A2P revenue.

Valuation

For a business with recurring cash flow, earnings yield and free cash flow yield seem to be the better way to evaluate whether Citic Telecom is attractive or not.

EV/EBITDA is another one.

Citic Telecom have 3.65 billion shares outstanding. At a share price of $2.89, this puts Citic Telecom’s market capitalization at $10.5 billion.

With a net debt of $4.9 billion, this puts Citic Telecom’s Enterprise value to be at $15.4 billion. Citic Telecom’s 2019 EBITDA is $2.49 billion.

This gives Citic Telecom an enterprise value of 6.2 times. This is pretty attractive.

With a net profit of $1 billion and a free cash flow of $1.5 billion, this gives Citic Telecom earnings yield of 9.5% and free cash flow yield of 14.3%.

Currently, Citic Telecom have not gone ex-div yet. The share price bakes in a $0.15 dividend. If we backed that out, the market capitalization you are buying Citic Telecom at is $10 billion. Likely the valuation will not differ much.

In any case, the risk to this valuation is that things do not return to normal with social spacing. It will affect the number of people visiting Macau. Of course, Citic Telecom have the potential to offset this by the increase demand in their ICT business.

Based on the latest dividend per share of $0.20, this gives Citic Telecom a dividend yield of 7.3% (if we use the ex-div price of $2.74).

Investing in this climate is tough because there are a lot of uncertainty. If you look at Citic Telecom, the valuation does not look expensive, but they are operating in an area where prolong shut downs will definitely affect the business.

We will have to see how this unfolds.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Citic Telecom (1883) – A Tiny Dominant 7.3% Dividend Yielder appeared first on Investment Moats.

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Singapore Savings Bonds SSB June 2020 Issue Yields 1.05% for 10 Year and 0.57% for 1 Year https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-june-2020/ https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-june-2020/#comments Wed, 06 May 2020 23:30:55 +0000 http://investmentmoats.com/?p=11987 Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund. The June 2020’s SSB bonds yield an interest rate of 1.05%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks […]

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Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The 10-yr and 1-yr Singapore Savings Bonds Rate since the first issue in Oct 2015

The June 2020’s SSB bonds yield an interest rate of 1.05%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 0.57%/yr.

$10,000 will grow to $11,067 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10-year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 1.39%/yr for 10 years and 0.96%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

The Application and Redemption Schedule

You will apply for the bonds through the month. At the end of the month, you will know how much of the bond you applied was successful.

Here is the schedule for application and redemption if you wish to sell:

Click to see larger schedule

You have 02 to about 25th of the month (technically the 4th day from the last working day of the month) to apply or decide to redeem the SSB that you wish to redeem.

Your bond will be in your CDP on the 1st of the next month. You will see your cash in your bank account linked to your CDP account on the 1st of next month.

How does the Singapore Savings Bonds Compare versus SGS Bonds versus Singapore Treasury Bills?

Singapore savings bonds is like a “unit trust” or a “fund” of SGS Bonds.

But what is the difference between you buying SGS Bonds and its sister the T-Bills directly?

Both the SGS Bonds and T-Bills are also issued by the Government and are AAA rated.

Here is an MAS detailed comparison of the three:

SGS Bonds versus Singapore T-bills versus Singapore Savings Bonds
Click to see bigger comparison table

What is this Singapore Savings Bonds? Read my past write-ups:

  1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
  2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
  3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
  4. Singapore Savings Bonds’ Inflation Protection Abilities
  5. Some instructions on how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

The post Singapore Savings Bonds SSB June 2020 Issue Yields 1.05% for 10 Year and 0.57% for 1 Year appeared first on Investment Moats.

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