Tuesday 30 October 2018

CapitaRetail China Trust 2018 Q3 Result

CapitaRetail China Trust (CRCT) Q3 results give a few positives. This show that China's domestic consumption is strong as the middle income grows. Results also show rise in shopper traffics and sales of tenants. DPU increase 1.7% Y-on-Y, YTD DPU of 7.8cents present a 7.7% yield at the price of $1.36. Debt has been refinance and hence no refinancing needed till 2020.

Rental reversion
Rental reversion is tremendously high for properties acquired in 2017, CapitaMall Xinnan and Rock Square.


Conclusion
Gross revenue has fallen YTD 2018 in terms of SGD however NPI( Inluding Joint Venture Rock Square) has approximately the same as YTD 2017. However, Distribution amount is higher in 2018. This is likely because of the distribution for the divestment of Anzhen.

So once this distribution from Anzhen eased, DPU should drop. I believe CRCT's  management is confident the rental reversion will continue to increase to cover up the difference.

CRCT's NAV from Q2 $1.71 to $1.57, PB ratio is now 0.87. This is maybe due to depreciation of the RMB. Gearing at 35.7%, Interest cover 5.9x.



Vested @ $1.43
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StarhillGbl Reit FY2018/2019 Q1 Results




I was skeptical that the AEI can contribute much to the DPU. Q1 StarhillGbl Reit FY2018/201, DPU drop 4.2% to 1.15cents Y-on-Y. Some people mentioned that its an increase Q-on-Q. However, past years DPU shows that Q1 always give out higher DPU and Q4 the least. Hence we cannot compare Q-on-Q.


Upon facing more decline in DPU, StarhillGbl Reit also has more than 1/4 of its lease expiring in this new fiscal year. This is a huge amount of lease, tenant move out will be bad news. Keeping the rental reversion flat is also bad for shareholders.

StarhillGbl Reit performance has been bad for consecutive for the 3rd year. AEI doesn't improve the DPU. Huge expiring leases. Probably will avoid this reit, if I have to set a TP, base on a further decline of 4-5% this year,  with 10% MOS, it gives a TP of $0.575.


Heading Typo, should be all FY17/18

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Monday 22 October 2018

IGG Inc: Owning A Game Company Just Got Complicated

This write up is overdue as I bought IGG in May 2018. Owning a game company just got Complicated due to China's freeze in new game approval.

As a gamer and now an investor, owning piece of a game company is a great idea, since I can't make or work in one. I have looked around US and Japan. I probably miss some companies in my watch-list but not all game companies are doing great (sega, konami, capcom, nintendo). Those that are doing well (Squarenix, Activision Blizzard) are overvalued.

During a stockcafe's screener in May, the result gave me an interesting list. I looked through all of them and an mobile gaming company appears in it. IGG inc, I GOT GAME is a mobile game developer, just like Tencent. 

The Gaming Industry
The Global gaming market are expect to grow at a CAGR of +10.3% between 2017 and 2021 with China the biggest market followed by US and Japan. Mobile segment will have the greatest growth as basically everyone owns a smartphone. (Source)

In Southeast Asia the market is also gaining momentum as PC Online and mobile gaming revenue hit over $2.2 billion in 2017 with expectations that it will reach over $4 billion by 2021. The number of PC online and mobile gamers in SEA is projected to reach 300 million by the end of 2017, rising to more than 400 million by 2021. (Source) [This why Singtel want a piece of the pie]



China Freeze on New Games
In August, China has halted approval of new games while the regulators are amid an internal restructuring. Twitch was banned in the following month and of any e-sport broadcast. All these in order to control the addiction and health of the minors. 

Ironically, China sent a team to the 18th edition of the Asian Games held in Jakarta, Indonesia and won quite a number of medals. The 2022 Asian Games is also to be held in Hangzhou.

Impact of China Limited
Logically, halting  of new games won't stop the growth of the China gaming market. There are still popular games in the market, gamers just need to choose from the current library.  Hence the market can still grow just that the gamers can't access to new games. However I doubt China will freeze indefinitely. Especially so that the 2022 Asian Games will be held in Hangzhou.

How can China control the access to games? Unless the regulator can control the hours a person can get access to a game as they had mentioned.  But can the regulator implement that? There will be tons of loopholes, like using another person devices, fake profiles, etc.

In terms of global growth, China represent 28% of the market, there is still 72% unaffected. E-sport is also gaining popularity in South East Asia. Although some game stocks are down, they are still trading near/higher than 20x PE.









IGG successfully transited for a browser based/client based game developer to a mobile game developer that focuses on developing, producing and licensing  games that are free to play with revenue generation coming from in-app purchases and also live streaming service.


IGG first ported games from browser/client based game to mobile and their R&D produced 30 to 50 games a year. In 2013 IGG produced it first hit game Castle Clash, after 4 years is still generating stable revenue.

In 2016, IGG's mega hit , Lord Mobile gain tremendous popularity. A result of IGG's marketing into worldwide. IGG's registered IP address from over 200 countries, playing their games.

IGG diversify by marketing and producing its games into different languages, to different countries and tap into different talent pool. Limiting its reliance/exposure any country or region. IGG is headquartered in SIngapore.

Some of IGG games, all have good ratings

Growth Factor
I believe Lord Mobile still has room to growth as it has not plateau yet like Castle Clash.Up coming games such as Castle Clash 2 will help with growth. IGG empathizes on/setup R&D in different regions should helps build on their success to produces to produce better quality games. Lord Mobile was launched 3 years after Castle Clash. Let's hope IGG can repeat the same success.

Growth: Live Streaming
I had read the past 6 years of the annual reports but not a word was mentioned of the live streaming subsidary. I only discovered that IGG owns a live-streaming subsidiary when I read the only analyst that is covering IGG at Seeking Alpha. The subsidiary is call PocketSocial, the live-streaming platform is called StreamCraft. StreamCraft was just released in early 2018. According to the Google Play Store, it has over 100,000+ downloads and over 5,000 reviews with a 4.5 star average.

As per article mentioned, most investors like myself will miss out this potential catalyst if not for reading the article. Just like Twitch, if successful, provide recurring income from advertisement, subscriber just like Twitch. Hence this part of IGG's business is likely not priced in IGG’s current stock price.


Streamcraft


StreamCraft



Business Risk
Risk involve making a hit games that may or may not happen as the gaming market is highly competitive, the app store drowned with games. Even though a game became a hit, how long the can the game remain relevant as gamers get bored remain to be seen. However IGG has manage to make 2 hit games so far in their 6th year as a game developer

IGG's first hit, Castle Clash well into its 6th years, extending its lifespan by regularly introducing new game features, rapidly resolving technical issues, and consistently providing excellent customer service, to build a large community of loyal gamers.

Business Moat
Popular, fun games with loyal gamers is a moat for any games. Once a gamer is devoted into a game, he will stick around for a long time. Especially truth for pay to win, If gamers(like me) who will only play for free will totally avoid or quit the game in a short period of time. As long there is new content and the gamers are happy, the game will be keep alive and hence recurring revenue.

However this moat may not last long, depend on the game popularity, like World of Warcraft, 14 years running (Apparently starting to fail with crappy content being released). But if IGG is able to build on a library of popular games that can last 14 years, recurring income will be huge, IGG as a mobile developer is only 5+ years old.
A Youtube Search Tell You How Popular the Gamer Is
 

Temasek Holdings
Temasek Holdings owns IGG through Vertex since pre-IPO. It has stake of about 9.1%, read from a 2014 article. Not sure if they are still holding on to it.

Conclusion
IGG is a relatively young company consider that is transited to a mobile developer in 2013, till now is only 5+ years. Compare to well known brands and IP like Blizzard, Capcom, Final Fantasy, there is no wonder IGG is seen as higher risk, hence the low PE. However, IGG is generating a lot of FCF, paying a nice dividend yield of 5.56% at current price of HKD8.81. It also has a strong balance sheet with no debt, current ratio is way above 1x. Riding on the growth of mobile gaming market, I believe IGG will continue to grow with the current hit, Lord Mobile and up coming games such as Castle Clash sequel. I will need to pay attention to its performance.

You can read Seeking Alpha analyst report on IGG here.




Vested @ HKD10.43

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Sunday 14 October 2018

Looking at Frasers Commercial Trust



I have been eyeing on Frasers Commercial Trust(FCOT) for awhile since I divested CapitaCommercial Trust back in 2017. However the news of Hewlett-Packard moving out of FCOT hold me back. I was informed recently that my office is moving to Alexandra Technopark.  This prompt me to take a fresh look on the REIT.

Alexandra Technopark
I believe Hewlett-Packard risk has been fully priced in. Hewlett-Packard now only occupy 3.7% of gross rental income of FCOT portfolio. AEI on Alexandra Technopark to be finished 2H2018, got some new facilities and exercise areas. Too bad no gym doh. Assuming Alexandra Technopark will continue to attract tenants, this is a catalyst for DPU growth.


55 Market Street Divestment
After the divestment completion in Aug 31 2018, gearing is reduce to 26.5% assuming proceeds are used to pay down debts. This allows more rooms for acquisition, RORF from sponsor Frasers Property. NAV pro forma is $1.70 as at 30 sept 2017, adjusted to current price, NAV should be $1.60. At current price of $1.41, PB ratio is 0.88.




Conclusion
The completion of  AEI at China Square Central and Alexandra Technopark (as well as tenant growth) will be near term catalyst. In addition there will be room for more acquisitions.

However, management fees are 100% paid in units compare to 12% in 2017. Reversing this may halt DPU growth but remain stable. In 2Q2018, 1,884,606 units were issued at $1.4192 as management fees worth $2.675 Million which is equivalent to $0.031 per unit if taken in cash. 

DPU for the pass few years has been stagnant, probably due to FCOT' plans for Hewlett-Packard's departure as well as the cost for the AEI. At DPU of 9.6cents, current price of $1.41 give a yield of 6.81%. With adjusted pro forma of $1.60, PB ratio 0.88. Assuming a yield of 7%,  TP to be set at $1.37 or below. I believe the worst is over for FCOT.


Vested @ $1.37
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Wednesday 3 October 2018

Owning Infrastructures: Beijing Capital Int'l Airport



An Edge Singapore article " Airport a proxy to Asia's rising middle class" sparked my interest in the airport business. (You can read a short Edge article here). If only Chang Airport is listed, I will definitely invest, a better option than SIA and maybe SATS. 

The International Air Transport Association (IATA) expects 7.8 billion passengers to travel in 2036, a near doubling of the 4 billion air travelers expected to fly this year. The prediction is based on a 3.6% average Compound Annual Growth Rate.

Singapore just opened T4 and is planning for T5 to prepare for the growth in air traffic.
When T5 is completed by 2030, it will increase Changi’s annual capacity by 50 million passengers initially and up to 70 million if needed – which would mean 150 million passengers a year, compared with the current capacity of 82 million. By the mid-2020s, China is set to become the world’s biggest aviation market and India the third largest. By 2035, the number of people flying to, from and within China and India will be 1.3 billion and 442 million respectively. (Source)

Here are the PE of some of the airports in the region:
What caught my eye is Beijing Capital Airport , the world 2nd most busiest airport.The current low PE is due to:
  • Exclusion of booking airport fees as revenue in its books from Nov 2018
  • Capacity overload, the airport is running over its max capacity. Hence growth is limited.
  • Beijing Daxing Airport to be operational 2H2019. Some airlines will be shifted from Beijing Capital Airport. Expecting a decline in revenue due to the shift.

Beijing Capital Airport is trading at great discount compared to its peers. As reason stated above, 30% of Beijing Capital Airport's revenue will be affected, therefore the adjusted PE can be estimated to be 18.16x, calculated with 70% of current EPS. In comparison,  Beijing Capital Airport is trading at a very cheap valuation. But expect short term impact from transiting into “one city, two airports”.




NOTE: All Value in RMB other than NAV.

Beijing Capital Airport non-aeronautical business has growth substantially, while the aeronautical business is growing well but limited to its capacity.

The aeronautical business includes the following:
  • Provision of aircraft landings and take-offs and passenger service facilities,
  • Ground support services
  • Firefighting services for domestic and foreign air transportation enterprises.

Non-aeronautical business includes the franchise-based operation of:
  • Ground handling agent services supplied for domestic and foreign airliners
  • In-flight catering services
  • Duty free and other retail shops in the terminals (rental and a cut in profits)
  • Restaurants and other catering businesses in the terminals
  • Leasing of advertising spaces inside and outside the terminals and other businesses at Beijing Capital Airport.
  • Leasing of properties in the terminals
  • Car parking services
  • Ground handling facilities for ground handling agent companies.
With the opening of Beijing Daxing Airport, the aeronautical business segment will shrink, probably to 38% if this segment is to affected by 30%.


Business Moat
Business moat for running an airport is super high. Running an airport requires license from the state hence usually are state run. Each airport also build to serve a particular region, due to land and environment constraint. It is unlikely to build multiple airports near one another. This provide a monopoly for the airport business.

Growth Factor
Short term, growth will be hammered down thus the low PE. Longer term, Beijing Capital Airport will continue to grow and has the option to buy over Beijing Daxing Airport from its parent company when the new airport matures. 

Business Risk
Economic slowdown will hamper growth at a slower rate. Logically, air traffic will increase over the long term as more people can afford to travel, just like more people buying cars or use private hires like Grab and Uber. 



Conclusion
Beijing Capital Airport current payout 40% of its earnings, giving a current yield of  3.16%. Not in the best shape with current ratio lesser than 1 but from the chart, it show that debt is being repaid and current ratio has gradually recovered. DBS Research projected debt to be fully repaid by end of 2019, Debt/Equity has come down significantly.

ROE and Net margin has been gradually improved over the years, ROE is above 20% net margin above 10%. Revenue will be affected in in the short term but I believe long term wise aviation will grow. Will be looking forward for Beijing Capital Airport to buy over Beijing Daxing Aiport when it is profitable in the future.

Moreover, China Passport holder amounts to 9% of their population. Even an increase of 1% will increase huge traffic growth. The same can also be said to the tourism industry or hotels.

This investment is for the long term, I am expecting a minimal of 10 years. As I think airports still a necessity for a nation/state for traveling world wide even if automated plane took over. Manufacturer or service provider companies may get disrupted. Just today I read that Serial System loses Texas instrument distribution agreement which affect 50% of its revenue.

I am Vested at HKD8.063, HKEX:694
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