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!

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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?


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