Sunday, October 18, 2020

Positive Changes during Covid 19 situation

Before I go ahead with my next stock analysis and portfolio update, I would like to share some of the lifestyle changes and habits I have built up over time as I grow my wealth.

Batching


I learnt about this concept in Tim Ferriss’s book ‘The Four Hour Workweek’. It means delaying in doing a specific task and letting them pile up until a specific point. Actually, we do apply it in some parts of our lives, like doing laundry: we wait for the dirty clothes to pile up and then wash them. When we do a task, there’s always a set up costs involved. To send an email, I need to turn on my laptop, load the outlook application before I start typing and click on the send button. When I check and send emails in different times of the day it means multiply these preparation time by that frequency. Contrarily, if I only do it once a day or less, I keep the set-up costs at a minimum.

Recently, I have applied the concept of batching not only in checking emails, but also checking my physical mailbox (weekly instead of daily) , update my expenses tracker (once a day instead of multiple times daily) and updating my investment portfolio in StocksCafe (weekly instead of three times a week). I was also addicted to checking Whatsapp message whenever there’s a notification, even while I was waiting for the traffic light to turn green, but now I learnt to hold on to the urge to do so by checking only at specific times of the day. Sometimes I do fall back to the old habits but it gets better with time and discipline.

After trying it out for some time, I felt that my concentration has improved due to minimal switching costs. Multiple studies have also shown that, if we switch from one task to another, it takes about a few minutes to fully concentrate on that new task, as our brain at time still think about the old tasks.

When I am driving these days, I will put my phone in the wireless charging compartment, lock it up and enjoy piano music.

Set Goals (daily goals, monthly goals, and 10-year goals)

 I have read articles on new year resolutions which talks about the sad fact that gyms are always packed at the start of the year with new faces but starts thinning out after February. New Year resolutions are indeed hard to keep as they failed to follow through their goals that they set since day one. I tried setting new year resolutions to blog every week, eat healthily, but as work started piling up, I tend to do the urgent tasks instead of focusing on my resolutions and blamed it on my busy schedule.

Since the start of circuit breaker, all my overseas trips were all cancelled and physical meetings become Zoom meetings. All the driving around and rushing for every meeting had come to a stop and I felt very unnatural and awkward at the start. However, having all the time at home has forced me to slow down my fast-paced life and rethink my long-term goals. I like the way Tim Ferriss put it: ‘Being busy is form of laziness- lazy thinking and indiscriminate action’ I was guilty of that as I kept myself busy at work and at home without evaluating and reflecting if I am being efficient at work or just busy and unproductive. 

With the time I have, I started reading books which had been sitting on my bookshelves and collect dusts for very long (books that I wanted to read but never had time to). I began to think about what I truly want to achieve in life and made it a priority to sit down for a few hours to set long term goals. I used Goals Journal and 10-Year Plan by Kikki-K. These books taught me to start by defining my core values, and to visualize my dream life and a monthly planner by setting 4 goals each month and a reward if I achieve that goal. It worked very well for me, and I think  the concept by Charles Dhugg on the power of Habit: Cue -> Routine -> Reward was applied. As I began to set goals, I made some positive changes in life to fit my goals: more sleep, exercise, meditation, intentional reading, visualization of goals every day, gratitude journal.




Setting goals also helped me came out with the chart below on how much portfolio value I need to attain to achieve 195k of passive income in 10 years’ time.



After setting 10 year goal, I proceed to think of ways to reach my yearly goal. Breaking down into daily and monthly goals of spending few hours each weekend to read investment articles, annual reports and investment books to brush up my investment skills and blog on a monthly basis.

To help visualize my success, I invested in a vision board, and it helps to get me fired up emotionally to work hard and complete my daily goals that every step in the right direction counts towards my long-term success.

 


Diversify my meaning markers

Recently I have been doing quite abit of reading and through the book titled :Before Happiness by Shawn Achor, I learnt that to define my core values and my goals should not be just financial success, but to diversify my meaning portfolio. Strange but true, the more diverse your portfolio, the more routes you have to steer to your goals. In the past, my life shrinks down to only one thing which is meaningful- building wealth. But as I read further into the book, I found out that if my happiness depended on one corner of my life, I am living a pretty fragile place. Because if things don’t turn out well, I don’t have anything meaningful to fall back on.


It took a Covid 19 lockdown for me to identify more meaning markers to see how they are all connected to my life and my happiness should not be entirely dependent on my wealth. So when my stock portfolio is not performing to my expectation at times, I still be buoyed by other parts of my life to still feel meaningful to keep moving forward. After reflecting and diversifying my meaning markers, my life don’t revolve around work, I catchup with friends more often, spend more time pursing my guitar hobby, playing badminton and spend more time with my family over a phone call (as they are living abroad)

 

Value sleep and keep a low information diet

The future is indeed uncertain and sometimes the problems in life keep us up at night. There are times I can’t fall asleep despite going to bed early and feeling tired the next day. On certain days, I slept early but woke up in the middle of the night, thinking about work or simply too excited about tomorrow.

 Planning my day ahead made me realize the need to be well rested to complete the daily tasks smoothly and forced me to make some sacrifice in order to sleep well. I began setting some ground rules close to bedtime and stick to it. These days I put myself to bed at 11pm and cut off screen time an hour before sleeping and spend that hour reading books with a cup of hot rooibos tea.

Overthinking at night could be attributed to my brain processing on what is going on in my day that affected my sleep. Hence these days, I maintain a low information diet, which means watching less news, turn of all unimportant notifications and deleting apps which are time consuming and irrelevant to my long-term goals.  That comes with a cost: missing out on shopping deals or single’s day promotion. However, I began to get used to it as the price I paid is nothing as priceless as a good night rest.

I used to own a bunch of credit cards to maximize the signup bonus and compare which is the best cashback card or highest miles per dollar. However, as my wealth grows, I learnt to simplify my life by holding on four credit cards. While I may not be optimising my credit card strategy that way, I get to free up that extra research time to spend quality time with my loved ones, and be more productive at work.



Here are four positive changes that I have made, and it makes me happier and improve my overall concentration. Circuit breaker is indeed a trying period for many (including me) and felt that time has slowed down; but I have learnt an important lesson that in order to go fast, I need to slow down.

What positive changes have you made during Covid 19? I would like to hear from you!

Thanks for checking out my posts. If you are keen to follow my posts or get updates, do like/follow my FB page here where I will update it when there's a new post.



Saturday, October 3, 2020

Why I think that JD.com share is still undervalued despite a 113% YTD return

September has been a month of correction for US market, with tech companies taking the hardest hit. Market darlings like Apple, Zoom & Tesla retreated from their all time high and I took the opportunity to take a bite at Apple stock. With the upcoming US presidential Election and the growing Covid 19 numbers, stock market might stay volatile till end of the year.

While many beneficiaries of Covid 19 companies are still trading at very high valuation, I have to be more selective of companies to invest in. One of the shares which I believe is reasonably trading below its intrinsic value is JD.com.

I bought 50 shares of JD in 2018 at the price of $37 and $41.40 when it was not profitable back them. When Liu Qiangdong was investigated on the suspicion of rape, I then added another 20 shares at $27.50. The stock price hit rock bottom at $19.27 before it recovers. I am glad that I hold on to the shares as I believe the JD has a good business model will get through this. Moreover, he was not convicted of the crime, but only accused. 

In August, I added 10 more shares at $75 and $78.8 after it reported a solid set of results. It then rallied to $80 and closed at $76.10 last Friday. Despite YTD return of 113.45%, I believe there’s more room to grow.

Diversifying their earnings with warehousing and fulfilment centres

JD , also known as JingDong, is a B2C ecommerce company founded by Liu Qiangdong and named after him and his ex girlfriend Gong Xiaojing. It is also known as the Amazon of China, as it builds and invests in its own logistics and delivery network through it’s own business group known as JD logistics. While investing in its own logistics network comes at the cost of its operating margin, it is an important part of its long-term strategy to digitalize the logistic system to manage their supply chain more efficiently. Since logistics is a business built on scale, so as they continue to grow in scale and orders, their margin should trend better. This can be evidently seen during the Covid 19 times, where delivery costs go to all time low due to increased order volume caused by the pandemic and costs controls. Check it out here

Also, having in house fulfilment means that they could have better control over the costs in the long run through and won’t be at the mercy of third-party logistics to set delivery price or impose price hike. Other than benefitting from economies of scale, they are also leveraging on 5G as well as its big data resources to build an efficient logistic system which could further lower operating costs for the long term. Just last year, it recently launched 5G-powered smart logistic park in Beijing which aims to tap into the bandwidth offered by 5G to increase its operating efficiency of JD’s Industrial Internet of Things (IIOT) fulfilment operations as well as better interaction between employees and smart machines.

JD, being a much smaller company relative to Amazon, has higher fulfilment capacity-730 warehouses (183mil square feet) compared to Amazon’s 175 ($150 million square feet). They have even formed a logistic network with the ability to fulfil 90% of direct sales in 24 hours. Hence, JD has much capacity to support its growth in sales with its current warehouse footprint. With that excess capacity, JD could offer its service to 3rd party companies to drive revenue growth. For instance, Just ten days ago, Aiqin, China’s leading maternal & infant chain store announced a partnership to outsource it’s fulfilment to JD Logistics. According to Aiqin, the number of defective goods delivered to store has reduced to lower than 7% after switching to JD logistics. 

Below is JD's Gross Profit and & Operating Margin



It’s evident its gross & operating margin has improved over the years and the trend suggest that it will continue to improve as logistics business get more profitable. JD logistics was spun off in 2017 to a separate business unit, and with many institutional investors such Tencent and Sequoia Capital as its shareholder , I believe it’s a matter of time JD Logistics will be listed in the stock exchange. https://www.bloomberg.com/news/articles/2019-12-23/jd-logistics-eyes-ipo-to-raise-up-to-10-billion-reuters-says

What this means is that will translate to higher operating margin and hence higher profitability, as logistics will not weigh into the cost of revenue and operating costs once listed. Moreover, shareholders of JD could potentially enjoy a special dividend or given shares of JD Logistics.

JD Cloud

Another way of improving its operating margin is through its cloud services. In 2019, JD announced a partnership with Cloudflare to strengthen its cloud and AI business. Currently it’s revenue stream is too small to move the needle in its total sales growth, but in the long term it is expected to form a new recurring income steam for its cloud and AI business with cloudfare paying JD to use its data centres. It’s margins may not be as impressive as AWS but sure it will go beyond its current operating margins of 2.17%.

In China, Alibaba is the leading cloud player, followed by Tencent & Baidu. Since the start, Alibaba’s cloud segment has been in a loss-making stage as they focused on growing their market shares. While  doing so, it managed to narrow its loss with time. Just a few days ago, CFO of Alibaba came out with the news that its cloud computing segment is expected profitable in 2021, sending shares up 6.16% on Nasdaq (30th Sept). This suggest that it could take a few years for JD Cloud to be profitable and with evolving technologies like AI and Internet of Things (IOT), cloud service will continue to be in demand and highly profitable.

In the case of Amazon, just look at the chart below on how much AWS makes a difference in its operating profit.


Amazons’ revenue stream comes from 3 segments: North America, International and AWS.

AWS made up only 12% of revenue but contributed 58% of total operating income.

The latest report shown an operating income margin of 5.98%, however without AWS its profit margin only come in at 2.37%.






Valuation

Presently, at the price of $76.10, and with current FCF (TTM) of USD 3.217 Bil and 1.56 Bil shares outstanding, it is trading at Free Cashflow Multiple multiple of 36.9. In my opinion, it is cheaply valued, considering that not many companies with potential growth of 39% y-o-y (see below) is trading at 36.9x FCF.  Its closest peer I can think of is Amazon and it is trading at P/FCF of 58.

Below is the JD's FCF since 2013. Its cashflow has generally been on an uptrend with the exception of 2018. The 2Q 2020 report highlighted that it was a one off due to decrease in advance payments from customers for their marketplace. 



Year on Year Growth (2013-2019) is 39.7%


Historically its FCF was growing 39% (2013-2019) and with possible listing of JD logistics, its capital expenditure could be significantly reduced and hence a higher FCF. Also, JD cloud is still in its early days and could generate stable cashflow for JD once it turns profitable like Alibaba Cloud.

To calculate present value, I would assign a discount factor of 8%, with a growth rate of 30% (Year 1 to Year 5), 15% (Year 6 to year 10) and 5% (Year 10 to 15). 

Sum of PV of Cashflows= 1014.96 Bil RMB.

Total shares outstanding= 1.56 Bil

Present Value (RMB) = 650.6154

1USD: 6.79 RMB

Present Value (USD)  =USD 95.82

Potential Upside = 25.9%

What are your thoughts on JD? Do you see its potential in the long term? If yes, will you consider adding at current levels?


Thanks for checking out my posts. If you are keen to follow my posts or get updates, do like/follow my FB page here where I will update it when there's a new post.



Monday, August 31, 2020

US Portfolio



(For Stocks Cafe users, remember to adjust your Apple shares for stock split) 
What I did was to add a sell transaction at last Friday'sclosing price and buy back 4x more at its adjusted stock split closing price.

It's been a really hectic month for me since the start of August hence I didn't have the time to analyze shares and haven't been making much changes to portfolio. So to keep my blog alive, I will be sharing my US portfolio which I have started since 2018 but only began adding more stocks since middle of 2019.

I was fortunate to have started this portfolio and it has been perfoming well the past 2 years, outperforming the Singapore stocks which I have invested. During the start of Covid 19, the stocks tanked quite abit yet I am glad that I made the right decision not to panic sell , as many are beneficiries of Covid 19, especially with the speeding up of digital transformation.

Most US stocks which I invest in are tech companies traded in Nasdaq with high valuations. However, in analyzing growth stocks, it's important to look beyond earnings. Many companies in my US portfolio are still in the red yet prices continued to soar as it is valued for it's strong topline growth. In the past, companies like Amazon also did not register any profit till recent years, and today it continued to be valued at 130x price to earnings ratio.

For growth companies in its initial phase, the focus is on acquiring more clients and hence it's expected to have high Operating Expenses i.e. sales and marking. As today's competitive advantage may end up becoming tomorrow's obselences, Tech and healthcare have to constantly invent or redesign their products and services to keep up to date in this everchanging digital world as there is always a threat that newer technology will replace it, which means heavy spending on Research & Development.

Once it has captured a significant market share, expenses will plateau relative to revenue it will become profitable (in many cases). 

Here are the few 'must have' metrics which I look out for to satisfy my investment criteria.

1. 'Growing' Free Cash Flow

Free Cash Flow= Operating Cashflow - Capital Expenditures

During uncertain times, cash is king and this applies to for growth companies. It's the amount of cash generated by its operating after funding for it's operations and deducting capital expenditures. It also shows how efficient the company is in generating cash. One of the pitfalls to look out for is an increase in profit but deteriotating free cashflow which could be due to it's changes in working capital, with build up receivables and decreasing payables i.e. means that it is slow in collecting cash from its customer and not stretching its accounts payable. If the company is unable to generate free cash flow, it will have to boost its debt to have the liquidity to finance its operations. 

For growing companies, I am ok with losses, but the trend of growing free cashflow is important. If you think about it, a firm that generates excessive high free cash flow can do all sorts of things with money such as saving it for investment opportunities to acquire it's competitors, buy back shares without relying on capital markets or shareholders to fund its expansion.

2. High Deferred Revenue

It's commonly seen in balance sheet for SAAS companies. It's the amount which subscribers pay to the company and the service is not delivered yet. Once it is delivered it will be recognized under Revenue. Hence a growing deferred revenue tells you in advance to expect a growing topline in the next quarter and still in its stages of growth.

Growth companies like Crowdstrike tend to have high deferred revenue, a sign that its expected to report higher revenue in the following quarter.

3. Strong growth in Revenue & High Gross Profit Margin

Gross Profit Margin= (Revenue-COGS)/Revenue X 100%

You will commonly see performance of growth companies measured by it's price/sales ratio rather than the popular pe ratio. For growth companies, they tend to concentrate on growing its topline at the expense of their profitability hence they will spend aggressively on the marketing expenses on client acquisition, hence may expect an operating loss. However I will watch out for its gross margin and compare with companies of its similar industry to ensure that it's continue to outperform its peers. 

I also browse through the past quarters' earnings to ensure the profit margin is consistent. Companies with high profit margin could signify that the sector is lucractive and could attract competition, therefore the stability of the margin means that the company is able to withstand compeutition and keep competitors at bay.

There are other factors to look out for such as Total Addressable Market (TAM), understanding GAAP and non- GAAP, and economic moat which I will cover more when I have the time.

How's your portfolio performing during the Covid 19 season. Have you made any changes to your investing strategy?



Saturday, July 25, 2020

Why I added Crowdstrike Holdings CRWD (NASDAQ)

With Nasdaq trading at its all time high, there's not much low hanging fruits left and I have to look elsewhere for more unfamiliar tech companies and came to know Crowdstrike Holdings. It is not exactly trading at a cheap valuation, with 33.5 times price to sales. On 6 Jul 2020, I bought 10 shares at $109.12 because of I am convinced there are still plenty of growth ahead and it demonstrated a strong ability to secure clients and high retention rate. As a result, the company had a good run, and recently showing some weakness at $100 range, declining from its overbought level. Moving forward, I will be keeing much cash to potentially buy more on dips.

Crowdstrike Business

Crowdstrike is recognized by Gartner as one of a few leaders in endpoint security . Unlike antivirus (AV) protection where it protects an indivdual personal computer or a device, endpoint security detects malicious activities and protects the whole network including servers and devices from a malware attack. It is more frequently used in enterprises and organizations rather than individual or home use. New corporate cultures such as working from home and bring your own device policies in light of the current situation has made endpoint security more relevant than ever. In fact, Crowdstrike has gotten a boost from Covid 19.

Another difference between a traditional AV and Crowdstrike's endpoint security is that the former blocks the intrusion of virus or malware by relying on its signature. Hence if the malware was not captured in it's antivirus database or a software experiences a zero day attack, it could end up firing blanks or left undetected. The latter is cloud based and uses machine learning, realtime monitoring of events to diagnose if a particular file or application is malicious. If it detects a suspicious application, it uploads the particular file to cloud, sandbox it and monitor it realtime for any malicious activities. Hence Crowdstrike is benefitting from sort of a 'network effect': the more clients they acquire, the more signals it gets which results in a better threat graph.




Financials



At first glance, it appears that Crowdstrike has relatively high debt. Yet a huge poportion of debt is made up of deferred revenue, which is a plus point to me. Deferred revenue is an unearned revenue  Crowdstrike received in advance which its service has yet to be delivered. It is very common in SaaS companies, when a year of subsciption fees are billed upfront. Once delivered, it will be poportionally recognized and show up in income statement under Revenue.

Strong Growth in Deferred Revenue

A strong growth Deferred Revenue shows that they have managed to secure new contracts which will be delivered during contractual period. Hence, we should keep an eye on its deferred revenue as any signs of slowing deferred revenue will point to a weak sales growth in the next few quarters.

Valuation

Since Crowdstrike is not profitable yet, there are not much valuation metrics which I can apply to this stock. I will be analysing its free cashflow from Q4 2019 to Q1 2021.

As the revenue grows, so does the Net Cash Provided by Operating Activities, with exception of Q1 2020 and Q2 2020. I digged deeper into the financial report to analyze what could have caused a  negative operational cashflow in Q2 2020. That quarter showed an exceptionally high General & Administrative Expenses yet there is no explanation on the sudden spike in G&A; but management expects G&A to decrease as a percentage of revenue over time. It could be that G&A expenses incurred in Q1 2020 were only registered in Q2 2020 as Q1 shown relatively low G&A.

Percentage of G&A by Total Revenue

I plotted the percentage of G&A by GAAP total Revenue and the results seemed to align with management's anticipation. Hence, it would be fair to assume that the spike in G&A is just a one time off.






The past few years has seen strong revenue growth but management's revenue guidance for FY 2021 of USD 723-733mil  i.e. 53% increase, meant growth will be slower than the prior years.

To value the stock, I will be using a discounted cashflow by extrapolating its growth and then poject its relation to free cashflow through the Free Cashflow Margin. 
Using CAPM to calculate Discount Rate:

E(R)= Rf + β (Rm - Rf )
= 0.69+ 0.91 (5.5)
=5.695

According to MarketWatch.com, CrowdStrike has a beta of 0.91, and that gives a discount factor of only 5.695%. I am a little hesitant to adopt a low discount factor for this growth stock and revise it to 8%.


Revenue Growth and Terminal Growth Rate
As Revenue are still growing at high figures, I think that average growth of 30% for the next ten years is conservative for Crowdstrike's growth.

DCF has two major components: forecast period and Terminal Value. As forecasting gets more challenging when time horizon grows longer, a perpetuity growth rate of 2% is assigned with the assumption that revenue will continue to grow, albeit at a slower pace. 

Net Cash Provided by Operating Activities as a % of Revenue
Cash Generated by Operating Activities making up 50% of revenue may seem to be on a high side when Form 10K showed Crowdstrike generating positive cash flow from Operations in Year 2020 with only 21% of Revenue. If we analyze its quarterly reports, cash generated from Operating Activities only started turning positive in 3Q 2020, making up of 31% of Revenue in 3Q 2020 and 43% at 4Q 2020.  Hence its net cash generated as a percentage of Revenue in 2020 was actually marred by first two quarters of negative cashflow. It continued to grow with 1Q 2021, making up 55% of Revenue. Currently, Crowdstrike is in its growth stage and its emphasis is on acquiring clients instead rather than profitability and ability to generate cash. Over time, costs as a percentage of revenue could decrease once they have captured a larger share of the market and lesser costs is required to retain existing clients. (see below)

Operating Expenses as a Percentage of Revenue (quarterly) decreases with time

Operating Expenses as a Percentage of Revenue (Yearly) decreases with time


Purchase of PPE
Past three quarters' average was 13% and I would assume a 15% for 2021 onwards.

Capitalized Internal-Use Software 
The yearly trend showed a modest increase in Capitalized Internal-Use Software and only comprised of 1% of the Total Revenue for the last two quarters. 



Summing up present values= USD 143.28

Potential upside of 43%. (current share price of $100.03).

Whats your take on Crowdstrike Holdings. Would you purchase at current levels? 

p/s Indeed its hard to swallow at today's price to sales of 33.5 times, but such levels simply indicates that market expects strong growth in upcoming earnings. If the upcoming financial results can exceed these demanding valuations, it can still be undervalued.

Anyways, I hope you find this analysis useful or as a starting point to do research on this stock. If there is any particular stock that you would like me to analyse, feel free to drop a comment down below! :)

Thanks again for reading. Happy investing and if you are keen to follow my posts or get updates, do like/follow my FB page here where I will update once there's a new post.

My Transactions



Wednesday, July 8, 2020

Arista Networks- riding the cloud computing wave with potential upside

I got to know Arista Networks (NYSE:ANET) through Motley Fool's article back in 2019 as I was browing through its website. Back then, the stock was trading at its peak level of $324 and it rode on the growing demand of cloud computing. I added 5 shares without giving a second thought and 6 shares at $195.77 to average down. Currently it is trading at $210.78 (8 July).

It had a good run since it was listed in NYSE and the stock trended downwards after it reported its first quarter earnings on 2nd May. Although results showed a solid set of numbers with revenue growth of 26%, the drop was attributed to forward guidance on slowdown in orders from tech titan, which was believed to be Microsoft. Despite assuring investors it was a short term issue, it gapped down and opened at $261 the following day.

Earnings forecast continued to disappoint on 3rd quarter with another cloud titan cutting down orders. Despite several quarters of earnings disappointment,  I felt that its current pe ratio of 21.66  is whole lot more reasonable in valuation compared to the past years. Here's why:


Very strong Balance Sheet


Today, many tech companies listed in Nasdaq reported earnings loss, huge pile of debt and analyst continues to be bullish on its outlook. They could be in their growth phase with much growth catalyst. However, Arista Networks is unlike any of these. It has a strong balance sheet with minimal debt and large pile of cash. In fact during uncertain times that we are going through, companies with strong balance sheet stands the test of time and could emerge stronger post covid. Its cash & cash equivalents and marketable securities accounts for more than 50% of its balance sheet because it is able to consistently generate free cash flow. Its cash has been growing every year too.  I remembered reading investment books in the past which describes two kind of stocks investors should own: growth stocks or value stocks. In the case of Arista, you have can have the best of both worlds, tapping onto the growth in cloud computing and trading at relatively attractive valuations.

Its future growth in Data Centre Network & Artificial Intelligence

Under such challenging time, when many companies earnings forecast are in doubt, I think this company could be one of the Covid 19 beneficiary. The virus has actually speed up the adoption in digital transformation. CEO of Microsoft , Satya Nadella said: We have seen two years worth of digital transformation in two months.

It is a matter of time when the world recovers from Covid19 with more face to face interactions, but the new normal will change the way we do business, socialize and leisure.Given a choice, employees would still opt for online meetings to save traveling time and more cost effective. Consumer may prefer to catch the latest Netflix show at the comfort of their home over a cinema trip.

All these meant a rising demand for strong network infrastructure and Arista stands to benefit from the growth. When consumer are obsessed with online games, Facebook streaming and riding on the Netflix bandwagon, it will cause an sizable strain in the Ethernet connectivity, speaking from the server side of things. While the current 400G switches were only developed around two years back, 800G is getting underway - currently in its stage of standards perfection and testing before rolling out. This meant that Arista will stand to benefit from sales of network switches as companies constantly upgrade their switches to accomodate higher networking speed.




Leader in Data Centre Networking





Arista has been stealing Cisco's market share in switch market share in the past years, however, there's still much competition among big names, such as Juniper Networks, Huawei etc. One of the reasons which makes Arista stands out is its amazing operator experience i.e. great customer experience. In the video, Arista's COO mentioned that it only takes 18 seconds for a person to reach a real life Arista staff to assist in his query, and not a machine and they are the not operator assistance to transfer your call to a technician, but are trained support staff who can solve your problems. Checkout the video here: https://www.youtube.com/watch?v=6FTrdjF3Hoc&t=314s

Secondly, in terms of  Data Centre Networking, Arista has beeen ranked as a leader in 2019 Magic Quadrant for 5th Consecutive Year. To be ranked as a leader means excelling in both vision and execution. This means that they have a clear understanding of market needs, and ability to stay competitive and come out with innovative solutions to be well postioned for tomorrow.




Valuation

Since Arista doesn't pay dividend, valuing the stock using Dividend Discount Model is not possible. I will use DCF since it generate substantial Free Cash Flow.

I will use CAPM to determine the Discount Rate.

Beta=1.16 (as of 5th July)

Market Risk Premium =5.6%



Risk Free Rate= 0.69


Discount Rate= Risk Free + Beta x Market Risk Premium
                      =  0.69 + 1.16 x 5.6
                      = 7.186

I would use a growth rate of 5 % till 2024 and a terminal growth rate of 2% from year 2025 onwards.

Capex = Purchase of Property Plant & Equipment + Business Acquistions. 
Arista Networks aquired Mojo Networks in 2019 and purchased Big Switches in 2019. As it is more of a one time purchase, I won't be including any projection of business acquisition for 2020 onwards.

Average 5 year of Purchases of PE = $19,254,000. Its 5 year trend did not show an increase in purchases of PE with a rise of Revenue over the year, hence I would set the future Capex to be $20mil.


Summing the all the years of Free Cash Flow per share= $263.48

Since Arista is in a net cash position, and sitting on a pile of cash, I am inclined to include its cash & Equivalents and Marketable Securities to calculate intrinsic value. It was mentioned in its annual report that marketable securities are highly rated securities with the objective to minize potential risks of principle loss. Returns may be low but it's also for the purpose to meet working capital needs when they may require access to liquditiy. Moreover Cash, Cash Equivalents and Marketable Securities were lumped as one category in Consolidate Balance Sheet Data in its AR

Value of Cash+ marketable Securities= $2,724,368,000
Outstanding shares as of 2020 =76,264,000
Cash+ Marketable Securities/share= $35.72

Present Value of Arista Networks= USD 299.20

My Transactions



What's your view on Arista. Would you invest at current prices?


Thanks for checking out my posts. If you are keen to follow my posts or get updates, do like/follow my FB page here where I will update it when there's a new post.


Monday, June 15, 2020

Why I think Link Reit (HKG: 0823) is severely undervalued


The protests hit Hong Kong to usher in a low key traditional new year celebration, with many locals looking forward to a better 2020. While many are hoping that city will turn a corner, it’s been unfortunately hit by the Coronavirus. As the virus began to abate, the protests started gaining momentum again. Since mid-2019, many mainland tourists and foreigners have largely avoided travelling to HK, and even travel insurance companies started imposing exclusion for injuries sustained during the protests (even if you are a victim).

Hong Kong shares naturally took a beating, including Reits with exposure to Hong Kong. Despite the doom and gloom, I think there are still some bright spots in the Hong Kong stock market. One of the Reits which I believe is resilient and has much growth potential is Link Reit.

Link Reit is one of the largest Reit by market Capitalization in Asia. Despite a drop from its peak at HKD 99.8 to current level of HKD 67.1 (price as of 12th June)  it’s market cap is HKD 138 bil (SGD 24.8 bil).  In Singapore, the largest market cap Reit is Capitaland Mall Trust, with a market cap of (only) SGD7.3bil.



Some history of Link Reit

Link Reit’s properties was formerly own by Hong Kong housing authority, which consisted of shopping malls, carparks, wet markets and welfare centres. Most of the units are located near housing estate, serving the poorest, and elderly people with disabilities. Government then made the move in 2005 to privatize and list in the stock market. Since it was privatized, it was managed in a ‘business school fashion’, with the cash generated from housing properties to venture into commercial properties, and undergoing asset enhancement works and sending rental price soaring. This drove out cheap family run shops, and less business opportunity for lower income people who cannot afford the rent.

Hence housing estates termed Link Reit as a ‘Blood Sucker’, ‘Corporate Monster’ and the ‘ugly face of Capitalism’. The rental increase has been an increasing concern that the matter was brought to Carrie Lam to propose capping rental increase in Link Reit.

Despite the unhappiness among residents, Link Reit has done well for shareholders and outperforming Hang Seng Index. Unfortunately, it has given most of that back since the onset of protests.

However, I felt that the decline in Link Reit price is overdone and below are some of the points on why I think it is undervalued.

Here’s why.



Suburban Malls located in heartland Areas

Earlier this month, Link Reit announced its full year results ending Mar 2020. Despite the protests and Coronavirus lockdown, Link Reit achieved a revenue growth of 7% year on year and managed to increase its distributable Income by 4.23%  It’s occupancy rate for Hong Kong properties stands at 96.5% and 97.8% for mainland China property.

Link Reit Malls are mainly situated in suburban areas close to residential properties, hence it’s properties are less affected by disruptions or roadblocks caused by the protesters, as compared to shopping malls in central HK. Even as protests continues, life will still go for Hong Kongers. Residents will continue with their daily life shopping for groceries, necessities and ordering food.

Here’s the breakdown of it’s Trade Mix.



From the chart, its Food Related Trades: Food & Beverage, Supermarket & Foodstuff and Market/Cooked Food stalls account for 64.1% of the total portfolio as of 31st March 2020. With the bulk of it’s rent deriving from food and retail, it’s earnings should remain resilient despite the ongoing economic challenge.  Although Food & Beverage suffered a dip in rental tenant, its drop of 3.4% in sales growth was caused by social distancing measures in Hong Kong and China during the lockdown period rather than the HK protests.


In FY2019 ending September, Food & Beverage manage to register a growth of 2.1% Year on Year in growth in gross sales psf despite the ongoing protests. This shows that the protests have minimal impact on F&B sector. Management has also said in the results briefing on 1st June that things are slowly returning to normal. F&B, especially fast food outlets are experiencing a positive surge in the takeaway orders. As for retail stores selling discretionary goods, online orders help to make up for the decrease in footfall. The same is happening in China as well. 

Hence, should the economic situations and protests worsens, the overall retail portfolio stays resilient with trade related tenants accounting for 64.1% of retail portfolio’s Revenue.

Leverage within ‘A’ Rating

Since the start of the year, many Reits got a credit rating downgrade due Coronavirus, especially Hospitality and retail sector. This is especially true in Hong Kong.

Whereas for Link Reit, they managed to maintained their credit rating. In general, the better the credit rating, the lower the costs of debt.



To qualify as a reit, a company must have a bulk of assets & income related to real estates distributes 90% of the taxable income to shareholders. Hence Reit tend to hold lesser cash reserves and dependant on raising of cash in order to fund property acquisition. Cost of Capital is important is important to Reit, especially it comes to debt financing. It is the 2nd cheapest option after funding via retained cashflow. The formula for REIT’s cost of capital is Total Interest Expense/ Total Debt.

With its sound financial position, and cash balance of HK$ 7.8b, it’s average costs of debt stands at 2.94%. Recently, it managed to issue green bonds at an interest of 2.875%, rated A2 and A by Moody & S&P respectively yet purchase HK$2.8bil investment grade bonds of BBB+ on average, yielding 3.5%, benefitting from the spread in interest rate. This is done so to manage surplus cash and enhance returns to shareholders.

Hence under challenging times, Link Reit is well positioned to acquire more properties with lower cost of debt. It’s low gearing also gives Link Reit ample room to take on more debt and acquire properties under distress during market downturn.

Pipeline of Cashflow generating properties & Good AEIs to come

Link Reit also seeks to strengthen it’s portfolio through Asset Enhancement Initiatives. Since IPO till date, it has completed 85 enhancement projects. Generally Retail Reits tend to benefit from AEI as it unlocks the potential value of the mall by enhancing the retail environment and strengthen its appeal to shoppers.  

Being one of the largest Reit has it’s advantages. It has the financial clout to acquire more properties with better terms and favourable deals. Reits of such size also has ability to undergo more AEI without impacting its DPU significantly. For instance, a Reit consisting 10 properties undergoing AEI for two shopping malls will have greater impact on its overall on its NPI compared to Reit with having 132 properties.

Currently it also has pipeline of 23 AEI projects, with 19 projects under planning which will improve its DPU once completed. 

Valuation

Unlike the size of Champion Reit or Mapletree NAC Trust , Link Reit has a portfolio of 131 properties hence, I am unable to analyse individual properties in depth. I will be valuing based on 3 stage dividend discount model.

It is interesting to note that the management has been actively conducting share buybacks and cancelled the shares prior to the financial year end, a positive sign to investors which signals that it not only has sufficient funds to acquire properties, but positive outlook on the company’s future prospect. It's different from the buyback seen in SGX, where management conduct buyback shares but only held as treasury shares and to be issued to management for share vesting purposes or when stock options are exercised.






As management highlighted that retaining tenants is the key over increase in rental, I will assume a zero revenue growth from Mar 2020-2022, followed by a growth of 7% growth for the next 5 years 2022-2027 and terminal growth rate of 2%.

The average YoY drop in unit since 2015 is 2.13%. For units in issue, I will assume a 1.9% YoY decrease


NPI Margin
Although the average NPI margin is 74.9%, I am inclined to use NPI margin of 76% throughout because FY2018 results onwards shown a NPI margin above 76% and it’s improving year on year. Hence NPI Margin= 76%

Ratio of Distributable Income/NPI
Ratio of Distributable Income/NPI is fairly stable at low 0.70 range. I shall use the average of 0.73.

Discount Rate
Discount Rate= E(R)= Rf + β (Rm - Rf )
= 0.543+ 0.6 ( 5.43 – 0.543)
=3.4752.

According to CAPM, Link Reit has a low discount rate attributed by its low beta.

I will be more conservative and assume a discount rate of 5%.



Summing up all present values = 2.8+2.7+2.8+2.9+3.1+3.2+3.3+116.4= HK$ 137.3

If one holds a pessimistic view on Hong Kong's future after 2047, and Chinese government officially takes away all HK properties and Link Reit cease to exist.

We can find its intrinisic value by calculating perpetuity cashflow from 2047 onwards and discounting it to present value.


Hence, intrinic value of Link Reit= 137.3-64 = HK$ 73.3. It's still undervalued even with such conservative standards.

Anyway, my belief is that Chinese government will want to maintain Hong Kong's 'One Country, Two Systems' framework beyond 2047. I think there are many reasons to do so, one of which is HK's status as a gateway for global capital, benefitting Chinese companies listing in HKSE to raise funds. 
Also most of the properties owned by Link Reit have a leasehold of 50 years from 2005-2009 onwards, hence, it's very likely that Link Reit continue to exist beyond 2047.

There are many many more positive points on Link Reit which I did not touch on, as well as other commercial properties and carpark which it owns. As spoken in my previous posts, I would like to maintain the momentum in blogging. The key is to blog consistently and not to break the chain, rather than to blog a very long post.


What are your thoughts on Link Reit? Do you think current price is undervalued?

Thanks for checking out my posts. If you are keen to follow my posts or get updates, do like/follow my FB page here where I will update it when there's a new post.



Sunday, June 7, 2020

A simple way to calculate much dividends/month you want in 10 Years time


I hope everyone is keeping well during this season of circuit breaker. Though Phase One has just started and I can't wait for to Phase Two to kick in.

During the months of circuit breaker, while I am (still) stuck at home, I am happy that my time is well spent on making some positive changes- to wake up early and exercise, improving my cooking skills, read more self help books and more quiet time daily.



I have been spending less time at work but more time on planning. As most of my time is spent at home with less travelling, only occasionally drive out to buy groceries, I have more time for myself to set goals, and think about how do I want to see myself in the next 3,5 and 10 years- in terms of health, career, and wealth.

In terms of my finances, I managed to finally set aside time to look at my spending, and how much I am saving to invest in stocks and shares. In terms of my investment, I think did reasonably well this year. To me, investment performance isn't measured by absolute percentage returns, but about how well you beat the index. I am glad that I started investing in US stocks last year and having the courage to hold them and add more positions during the Covid-19 during times of fear, and it really paid of well. The stocks that brought down my overall returns are generally SG and HK stocks, and I sold off a few stocks which didn't fit into my investment objectives anymore. I sold Raffles Medical Group at $0.84, UOL at $6.67, CapitaLand at $2.91 and injected the cash into US stocks and SG Reits. Moving forward I will be investing in US stocks primarily for Growth, SG and HK stocks for dividends, except for Tencent Holdings, PingAn Insurance and Xiao Mi.

Stocks Cafe

 I have finally updated my blog last month after stopping for more than six months- check out my analysis on Mapletree NAC Trust here. I realize that I spent too much time on writing every single blog post. Every post is quite lengthy and involves a lot of analysis hence I lacked the time to do very in-depth research when work gets busy. Blogging consistently really requires self-discipline and the motivation to do so. My goal moving forward is to blog on a weekly basis (or at least 2 blog posts/month when work really gets busy, or when I am taking a break overseas). I read somewhere online which states that one of the ways to find motivation to blog is to 'Remind Yourself Why you get into Blogging' in the first place. To me I started this blog in mind to have the discipline to search for good stocks and share my research and my views and also learn from inputs by other financial bloggers/viewers. Blogging also served as sort of an online ledger as I build my financial foundation towards the path of financial freedom. I have never thought of making money through blogging. It's more of a hobby rather than a revenue generating machine. From now on, I will make it habit to blog on a weekly basis just to keep the momentum going but keep my blog posts shorter.

Recently, one of the financial goals I have set for myself is to have $10,000/month in dividends in 10 years’ time. If we assume a 5% inflation, monthly dividend is $16,288.95. That translates to $195,467.40 And I would like to share with you one of a simple excel chart I did to breakdown the 10 Year goal into a yearly goal.


A few questions to ask yourself before you crunch in the values.

1.      Type of stocks to hold (during the 10 years)

There are many strategies to achieve $195k of annual dividends through stocks & shares. One of the ways is to invest in growth stocks all the way and focus on the capital growth for the next 10 years and convert the basket of growth stocks to dividend playing shares on the 10th year.

Another way is to hold on to a basket of high dividend paying stocks/reits, and consistently reinvest the dividends and achieve $195k of dividends in year 10.

Or to have a mixture of both dividend paying stocks and growth stocks. 

For my case is abit more unique. I will be adopting a mixture of both growth and dividend stocks for my portfolio even after the 10th year and yet still yield me $16,558/month. 

2.      After 10 Years, what would be your dividend yield for the stocks you will be holding?

I use StocksCafe to track my stocks and the average yield is around 3.8% due to a significant proportion of growth stocks in my portfolio. My dividend stocks are yielding an average of 7%. If the market is bullish on the 10th year and interest rates stays very low and with the growth stocks I will still be holding, I may not be able to get an average of 7% yield. In my case I would assume a 5% dividend yield (it’s really up to you, but I recommend somewhere in the range of 4% to 7%).

3.      Perceived Inflation?

Inflation has been at low levels the past few years with last year’s core inflation was 1.4%. It is measured using a basket of goods, and there are certain consumer goods that inflate more than others. When doing budgeting for myself, I won’t be using 1.4% because it doesn’t reflect my spending habits or the way I spend money. I have a soft spot for travel and good food, and in my case, my perceived inflation is 5%.

4.      What is your desired monthly dividend in 10 years’ time?

In my case, I want to enjoy $10,000 dividend/mth in today’s value. My suggestion is to set a higher goal and motivate yourself working towards achieving it. There are many ways to achieve it: you can read up on investing and research on undervalued stocks, or even force yourself to save more to invest. If you are stuck in a job that you don’t like and isn’t paying you well, then find another job that pays you well or a career that you are passionate about. There are many full-time employees doing part time freelancing to supplement their income as well which you can consider.

5.      What is your starting portfolio value?

Your current portfolio may not be your starting portfolio value to achieve $10k/month. If you have plans to liquidate part of your portfolio for child’s education in a few years’ time, or even to buy a house, you should exclude the amount from starting portfolio. It should be set aside untouched for 10 years, only money in & no money out. Let time do the magic for you.

I have two portfolios, hence will use one of my portfolios for this exercise. If you have liquid cash which to be injected into the portfolio you can include that amount as well

So with the above assumption, we have the following information:

1.      Type of stocks – growth and dividend paying stocks
2.      Dividend Yield on the 10th year onwards – 5%
3.      Perceived Inflation – 5%
4.      Desired monthly income in 10 years’ time (present value) –$10,000
5.      Starting portfolio Value- $343,000 (stocks) + $20,000 (cash) (as of May 2020)

I have decided to withdraw rest of my cash to clear off my car loan, and pay off my income tax at one go, hence will start with $20,000 of cash. It’s not the best use of money with the low interest, but just want to get all these liabilities off my mind.

Future Value of $10,000 in 10 Years’ time= $10,000 X 1.0510 = $16,288.95
Annual Dividend= $195,467.50

To calculate how much growth in dividends per year, we take


In my case, it would be


It means my dividend growth per year has to be 26.829%


Annual dividends compound at 26.829% per year.


Year 1, Annual Dividends =           18,150* 1.26829               = $23,020
Year 2 Annual Dividends  =           18,150* 1.26829^2           = $29,196
Year 3, Annual Dividends =           18,150* 1.26829 ^3          = $37,028

Relationship between Annual Dividends and Portfolio Value

Annual Dividends/Dividend Yield= Portfolio Value.
In my case Portfolio Value * 5% = Annual Dividends

If you would like the excel sheet, drop me a message on my Facebook Page or leave a comment on this blog post with your email address and  I will send it to you!

Lastly take care and stay safe! Hope you will make good use of this time to make some positive changes to your life!