Thursday, July 26, 2007

More Facts, this time Global Facts, don’t pray pray!

In this post, we shall examine two macro statistics, GDP and Population.

The Global GDP is USD 41trn while Singapore’s GDP is USD 120bn i.e. we make up 0.29% of global GDP, which is quite insignificant. So actually, calling Singapore a little red dot is already a compliment. So don’t be so yah-yah okay?

US, the world’s biggest economy contributes to roughly 25% of global GDP, while Europe makes up about 20%. Japan is No.3 at 11% and China is slightly less than 5%.

However, in terms of PPP which stands for purchasing power parity, a chim term which I shall explain later, China is already No.2 at 19% of global GDP, Japan at No.3 at 9% and India is No.4 at 8%. Developing countries or the new buzz word: Emerging Countries now make up close to 50% of global GDP in terms of PPP and growing fast! Maybe Singapore should call herself an emerging country, bcos that’s the in-thing now siah!

PPP tries to measure GDP by taking away the effects of exchange rate in goods and services. In layman terms, one Big Mac in US will have the same impact on GDP as one Big Mac in China. Whereas, in the conventional method of measuring GDP, the Big Mac in US will impact GDP 3-4x more than the same Big Mac in China. So PPP actually gives a better picture of how world GDP is structured.

So that’s global GDP, btw it’s growing at roughly 4% (for the past 5yrs), developed nations are growing at 2% and Asia at 7%. Singapore has been growing at 8-10% for the past 40 yrs and we might do 11% this year. This is actually quite amazing, so maybe we can afford to be a bit yah-yah. But it always pays to be humble though. Who likes a yah-yah person even when he is in a position to be yah-yah?

The other macro statistic that you should know by hard in order to call yourself a seasoned investor is population statistic.

Well if you have no clue, better memorize this list now!

Global population 6.4bn pple
China 1.3bn pple
India 1bn pple
Europe 900mn pple (this is tricky, bcos depends on how you define Europe, this no. will change)
US 300mn pple
Indonesia 220mn pple
Brazil 180mn pple
Russia 140mn pple
Japan 130mn pple
Singapore 4mn pple

Needless to say, demographics drive long-term trends. Why did the global economy grow so strongly in the past 100 yrs? A large part of it is probably bcos the human population exploded. In 1900, there was only 1.6bn pple in the world but now we have 6.4bn pple. That’s roughly 3% annualized growth rate. And we all heard about the baby boomers. It was this generation that brought about a few big trends in the past few decades, like the rise of automobiles, the mutual fund (i.e. unit trust) boom in the US etc. So bottomline, population matters! Why do you think our Gahmen keeps talking about not enough babies? Now they know relying on Singaporean babies is not enough, so can only import more pple here.

Anyways, going forward, the world population is expected to grow only 1.1% per year and will peak out in 2050 when the global population reaches 10bn pple. Will the global GDP still grow at 4%? And more importantly, will equities give you 10% return per yr? Food for thought huh.

Interestingly, here is a forecast of top 10 populous nations in 2050
India 1.6bn pple
China 1.4bn pple
Europe 825mn pple
US 395mn pple
Pakistan 305mn pple
Indonesia 285mn pple
Nigeria 258mn pple
Brazil 253mn pple
Bangladesh 243mn pple

This is why the whole world is so bullish on China and India. Though China is now in the limelight with strong GDP growth and a large population base, India is the dark horse (no pun intended!) that will win the race. India is the fastest growing population on Earth and will become the most populous country in time.

It is fortunate that Singapore has links to both countries and can definitely find a niche to play in the world theatre of tomorrow, be it integrated resorts, a private banking hub or something else.

For those interested to play the India story, I recommend Singtel (btw this is probably my first stock recommendation on this blog, so don’t bet your house on it). Singtel’s stake in Bharti will be worth more than Singtel itself in time to come. So buy it now while it’s cheap (PER 15x).

See also Secular Trends

Thursday, July 12, 2007

Facts about the Singapore Market

Hope this serves as a list of good-to-know for people investing in Singapore. These no.s can be used as some kind of benchmark when analyzing co.s and some are really quite interesting! Here is goes:

There are roughly 700 listed co.s in Singapore but only 50 in the STI index. In terms of market cap size, 6 co.s make up roughly 50% of the STI index.

11 co.s have more than SGD 10bn in market cap.
88 co.s have between SGD 1-10bn in market cap.
Slightly less than 300 co.s have between SGD 0.1-1bn in market cap.
The smallest listed entity had 6mn in market cap.
The co. probably paid more than 6mn to brokers, auditors and SGX. Hehe!

The whole of Singapore stock market cap is roughly SGD 600bn.
This is roughly 1% of the world’s market cap which is roughly SGD 70trn (or USD 40trn). This is also 3x our GDP which is roughly SGD 200bn. Rough, roughly, roughlier... The world is filled with uncertainty!

Only 5 co.s generate more than SGD 10bn in sales.
These 5 co.s are: 1 electronics company, 1 airline, 1 telco, 1 shipping co. and 1 distributor for cars.

Only 50 plus co.s generate more than SGD 1bn in sales.
The smallest 8 listed co.s in Singapore generate less than SGD 1mn in sales. (Pathetic right?)
Makes one wonder whether we should ask some of our ministers to list themselves on the stock exchange since they could generate more than that.

Only 5 co.s generate more than SGD 1bn in operating profits (or OP). So much so for Singapore Inc huh? Btw, 1 Integrated Resort will probably generate only SGD 150mn in OP.
Only 2 of the top 5 sales co.s are in the top 5 OP generators.
3 of these co.s are banks.

55 co.s generate SGD 100mn-1bn in OP (IR goes here!).
Slightly less than 200 co.s generate between SGD 10-100mn in OP.
Slightly more than 200 co.s generate between SGD 0-10mn in OP.
Which leaves slightly more than 100 loss-making co.s that are listed in Singapore.
This means 1 out of 7 co.s listed in Singapore are loss making!

About 150 co.s have more than 10% Return on Capital or ROA.
The average Return on Capital is 0.5%.
You have 20% chance of picking a winner, if you picked a loser, you might as well put that money under your pillow. Stock-picking is a dangerous game.

About 150 co.s have more than 5% Earnings Yield
(or a PER of less than 20x).
The average Earnings Yield is 4.2% or PER of 24x.
This means: even if you picked the winner, chances are it's already in the price. i.e. dating a chio babe at an expensive price.

About 60 co.s meet the above 2 criteria which is:
ROA greater than 10%
Earnings Yield greater than 5%.
If you buy all these 60 co.s today, you probably have a 12% chance of outperforming the STI on a 1-year investment horizon. Stock-picking is a bit better than Toto or 4D.

Other financial ratios of the Singapore stock market include:
Average Dividend Yield is 3%
Average Price to Book is 3.5x
Average Debt to Equity is 0.6x
Average ROE is 9.5%

These no.s are quite different from those listed on conventional sources probably bcos I included the a lot of kuching kurau names which have ridiculous ratios like ROE of -200% and Dividend Yield of 100% etc (no time to clean them mah, I can’t just blog whole day, can I?).

Anyways, hope these info help next time you need to analyse something. In investment, knowledge is power!

Saturday, July 07, 2007

Return on Equity, Episode III (ROE-EP3): Du Pont Decomposition

Return on Equity can be broken down into three different parts. This famous decomposition is known as the Du Pont Decomposition. Does it have to do with the chemical giant Du Pont? Probably yes, but for those interested, you can go Google and Wiki it up, now we are at the climax of the trilogy, so let’s move on. Recall that:

ROE = Net Profit / Shareholders’ Equity

This can be broken down into

ROE = Net Profit / Sales x Sales / Asset x Asset / Equity

Mathematically, this makes no sense as Sales and Asset are all cancelled out, why include them in the first place? Engineers cannot understand this. But when we break down ROE into these three elements, ROE can be re-written as

ROE = Net margin x Asset Turnover x Leverage

There are still a few twists and turns to the climax of this trilogy but to cut the story short it simply means that ROE is impacted by these 3 things

1) Net margin (which is Net Profit / Sales)
2) Asset Turnover (which is Sales / Assets)
3) Leverage (which is Asset / Equity)

In order to increase the company’s ROE, we just need to improve either one of the 3 things mentioned above.

We can reduce cost, hence even if sales remains the same, net margin goes up, ROE goes up. We can increase asset turnover, i.e. by making our existing asset work harder to generate more sales. Or we can increase debt.

Now (1) and (3) are easy. For (1) you just fire a whole bunch of people, make the rest work harder, or hire 10,000 cheap workers from emerging countries to replace those you fired. For (3), it is even easier, just borrow more. By borrowing, you increase the liabilities that your co incurs thereby increasing your asset base (usually as an increase in cash) which can translate into more sales and profits if those cash or assets are used correctly and hence ROE goes up.

To improve ROE by improving (2) i.e. increasing Asset Turnover is one hell of a job. I have got a post on that. Read this! Basically, when you see a company with high ROE, it pays to see how this high ROE came about. If it is due to high debt, then maybe it’s a Decepticon! So beware, there is more than meets the eye!

If it is due to either (1) or (2) then, probably it’s still ok. But if you see a company’s ROE improve over the years and it’s due to only (2), increase in Asset Turnover, then give the management some respect. It’s a job well done! And it is time to load the truck with stocks of this company!