Sunday, 16 September 2018

What To Do If You Bought Stocks Before This Correction

Straits Times Index has not been performing well so far in 2018. Year-to-date, it has dropped 7.1% and touched a one-year low of 3,103 on 11 Sept, and rebounded slightly to close at 3,161 last Friday.

Similarly, other main index in Asia had also done poorly. In fact, fared worse than STI. Hang Seng Index has dropped 12.8% this year, while Shanghai Composite has plunged 19.9% in 2018. Not a pretty sight.

STI (Black), Hang Seng (Orange), Shanghai Composite (Blue) year-to-date performance. Source: Bloomberg.com

So assuming you have started investing not too long ago in 2017, such volatility may be a rude shock as opposed to the smooth rising market we witnessed last year. And if you have bought into many stocks start of the year and are staring at some hefty paper loss, these are actually reminders that market can be merciless with its wild swing.

And this is actually how market behaves. The relative calmness throughout 2017 is actually more of an anomaly.

Market Corrects Very Often
Firstly, a correction is defined as a magnitude of drop of more than 10% but less than 20%, measured from the most recent highest point. If we look at the chart above, based on highest level attained (3,641) on 2 May, STI has retreated by 11.3% on 11 Sept. So it is still a correction, not bear market.

Bear market is defined as a drop of more than 20%. For STI to have the dubious title of reaching a bear market, it would have to fall to 2,912, still another 250 points to go.

The thing is market correction does happen often. We look at this article by Motley Fool. From 1993 to 2016, a period of 24 years, STI suffered a 10% or more draw down in 21 of those periods - a whopping 87.5% probability.

Source: S&P Global Market Intelligence

What about the recent Emerging Market drop measured by the 20% fall of MSCI Emerging Market Index since Jan 2018? Well that happened rather frequently in the past too according to this article by A Wealth of Common Sense - 24 episodes of 10% or more drop between 1994 to 2018, on average every 1.04 year we will see a drop of such magnitude.

MSCI Emerging Market Index fall of more than 10% since 1994. Source: A Wealth of Common Sense 

So the first step to do during such a time is to acknowledge that market correction is really really normal, based on info shared above. Do not over react and panic yourself into selling all your stocks.

With that established, and I hope that it calms your mind as its really not the end of the world. these are things that you can do.

Review Your Investments
You would have bought into stocks with some particular reasons, or certain opinion about its business, assets, or prospect which you have formed based on your due diligence. Now is the time to revisit them and ask yourself if those reasons still hold? Are your opinions about the companies still valid?

For example you may have bought into Comfort Delgro thinking that their business would turn around due to departure of Uber and a consolidation of local taxi industry. Look up Comfort corporate announcements, financial results and industry news to assess again if your deductions are still valid.

Maintain A Cash Buffer
Cash value does not fluctuate. They buffer your portfolio against market drop. Having cash is a form of safety net that allows you to survive the storm.

It is even the best weapon to boost your investment returns during the next market upturn, provided these cash is used wisely to pick up shares of strong companies when they are unfairly sold down to cheap valuation during correction. And the worst case is that you are all-in for stocks and have no cash on hand to buy more.

Scan Your Shopping List
Even if you have opportunity funds on hand, it is still crucial to know what shares to buy besides those stocks you are already holding. This is where your watch list comes in. Look through your watch list and review their business performance in the latest Q results. Are the prospects still as good? Are their balance sheet still healthy? Any red flags in the results? Is their valuation reasonable?

If they still pass through your assessment, now maybe a good time to start picking up these new shares cheaply.

Focus On Portfolio Performance
Usually one would have more than one stock in his holdings. If a particular company has dropped big, do not be overly obsessed about its paper loss. More importantly is to ask if that particular stock has caused too big a dent in your portfolio value? If there was proper risk management via diversification across sectors, asset class, and appropriate proper position sizing of each stock, we should not be too unduly worried about.

You may also take this chance to do some house keeping by identifying and weeding off the weak companies with high gearing and deteriorating fundamentals. What remain would be the strong companies that would bounce back strongly when market recovers.

Do Nothing
Far too often we believe that in stock investing one has to be proactively doing something to generate good returns. But the fact is that sometimes, doing nothing is a valid strategy too. This is especially true if you have bought into strong dividend counters and solid REITs for the 6% yield, and the sustainability of their dividends are still intact. Market correction should not impact your investment in a big way since your stocks are still meeting your objectives.

Of course, at the risk of over-simplifying market correction and trivialising the possibility of it turning into a market crash, I am not suggesting everyone to ignore such market developments. It still pays to monitor company developments and stay on top of market news to form an unbiased judgement.

Legendary money managers and investors like Peter Lynch, Warren Buffet, John Templeton take such market corrections in their stride. And they have a well-devised strategy to guide them on what to do when market throws a tantrum like now.

If you still lack an investment plan to serve as your action compass in different market conditions, do attend my next seminar where I will share insights on recent China market drop and my personal action plans in the current climate. Do sign up here.

Sunday, 9 September 2018

The Worst Parents Video and Some Thoughts

There is this latest marketing video by NTUC Income about retirement planning that is very well-received.

'The Worst Parents in The World' video by NTUC Income

The advertising message aside. Being a new parent myself, this video does strike a chord with me and made my eyes teary at some scenes.

Naturally a video like this would achieve more than just selling or marketing something. To create long-lasting, maximum impact it needs to trigger some deep thoughts and subsequently, actions. NTUC says that it aims to 'challenge the notion of what 'best' meant, and get viewers to reflect if being financially secure could in fact be the best gift that parents can offer to their children'.

Parents Often Over Provide for Children
The recent AC Nielson study commissioned by NTUC that inspired this video confirmed that 'parents were motivated to place children's future over theirs and would continue to do so.'

Parents sometimes go overboard and over-indulge their young ones by giving the best of everything. The most branded formula milk, the most well-known enrichment class, the best tutor, the best school. In a society as affluent as Spore, these are usually associated with the material side of things.

No doubt these stem from our unconditional love for children, and wanting the best in everything for him/her. Its just human nature. But I feel parents should try to maintain some sanity and achieve a balance, between placing kids too high on the priorities scale and providing what are best for them within one's financial means.

We just have to be conscious about tendency to over-provide, and always assess critically especially on the big ticket items. We need to incorporate checks into the decision-making, often take a break and ask the hard questions such as 'is this really necessary?', 'what out-sized benefit does this bring to my child such that it outweighs the cost we are incurring?'.

This will not be easy, as we are bringing the left brain into a very often right-brain-dominated decision. Worse is sometimes we may even 'reason' our way out to justify these expenditures, using our right brain unknowingly.

Its fortunate that me and my wife are quite aligned in these aspects such that we can make rational decisions together, becoming the check and balance towards each other.

Major Financial Decisions Today have Ramifications in Future
Some spending are recurring, some would trigger/spawn further bigger commitments down the road.

While parents provide for kids wholeheartedly without expecting returns (most of time), over-doing it has ramifications on the parents' future. For example, helping to settle the down-payment of flats for children, or footing the bill for wedding expenses. These cause an immediate dent in parents' financials, and in the long term delay/impact their retirement planning.

These inadvertently create pressure on children to provide for parents in future. Some kids could not pursue their aspiration, relocate, have a mid-career change due to the tacit expectation exerted on them not by the parents, but by the life situations.

Recently my Father-in-law was exploring various options of better monetising its fully-paid up flat to secure his retirement. Underlying these actions is his desire to not be a burden to me and my wife.

It is fortunate that he still have some wriggling room to find a retirement solution that suits him. But many parents, do not have such luxury and they either have to keep working to earn his keep, and rely on kids' allowance - the sandwich class that often feels financially stretched.

Some of these issues could have been avoided should there be more planning, financial literacy, smart investments done during the kids' growing up phase 30 years ago where parents do not over-provide and stretch their finances really thin.

Parents This Age can Prevent Same Situation in Future
We are definitely way ahead than our parents' generation in terms of awareness and literacy level of wealth planning and financial management. Information are readily available online, investment options are much more diverse.

Conversely we are also more at risk of over-providing due to much greater affluence and a consumeristic society.

Based on my interaction with clients and peers observation, increased wealth management knowledge and availability of investment options, still do not translate to an urgency in retirement planning and corresponding actions. Perhaps its due to competing priorities at different stages of life. And retirement planning sounds so distant away that one assume it can be out on hold till other more important life issues are settled, then come back to work on it.

But retirement planning is an issue that the earlier you start, the easier it is, and the better future results one will get due to long runway for snowballing. Look at it this way, its something one has to do sooner or later, and the earlier one embarks on it, the easier it is.

So why not start now?

I hope that the young working adults today can recognise the single biggest advantage they have on retirement planning - time, and make good use of it. Make an informed decision on the right wealth instruments to grow wealth towards retirement, plus a holistic multi-asset investment approach with proper asset protection put in place, it is a journey that will be fruitful.




Friday, 31 August 2018

Is Tencent Holdings Limited Still a Buy Now?



I intentionally held off writing about Tencent's earnings. One reason is I want to see market's reaction to the earnings, and also to allow myself a more objective analysis after much of the media hype and noises had died down.

I will just be comparing year-on-year figures as quarter-on-quarter change is too short a period to form any meaningful analysis. 

For a company that is still growing strongly I will be looking at just the revenue and profit, margin, and cash flow, as I seek to find out if the growth rate is still intact. 

Earnings


Source: Tencent 2Q 2018 Results Presentation

*figures in bracket is 1Q yoy growth

All segments showed healthy growth margin, except for Online Games that increased 6%. Online Games further split into Smart Phone Games and PC Games. For Smart Phone Games, revenue was up 19% yoy (68%), while PC Games revenue was  -5% yoy (flat). 

For Online Advertising, revenue expanded 39%. (55%). In particular under Social and Others which pertains to mainly Wechat/Weixin Moment advertising, revenue increased 55% (69%).

For Operating Profit, I will be looking at Non-GAAP figures as I want to know the true profit attributed to its core, day-to-day operations not affected by one-off, irregular or non materials items. 

Ops profit and Net Profit to Shareholders grew 11% (36%) and 20% (29%) respectively. Ops Margin 30.2% is -5.2% yoy (1Q Ops Margin -3% yoy).

Net Ops Cash Flow for 2Q is still a healthy RMB21.5 billion, compared to RMB19.8 billion in 1Q.

Market Reaction is Negative. Are You Negative Too?
Clearly the top line results, while still showing good yoy growth, has slowed considerably compared to last quarter. Just look at the figures above and those in bracket. 

Market is especially spooked by slowdown in Online Games segment that is the largest revenue contributor. This is mainly due to non-monetisation of key tactical tournament games and delay in new games release. The former is ultimately due to the delay in monetisation approval by China's regulation body due to a restructuring at the top level. 

So the crux is if such delay in games monetisation approval is a temporary issue or a permanent one. The suspension might come as a surprise to many, but that is a government regulatory issue that is due to restructuring at the top level. And restructuring does not go on forever. Once the seats are warmed up and the new government heads are comfortable in their position, the approval process should restart and things should go back to normal. 

I highly suspect this is a temporary issue, not a structural damage to Tencent's Gaming segment. Near term outlook could be muted, but the popularity of their games remain intact. I would be worried if the DAU and MAU figures start falling, or their games start falling off the popularity ranking. 

And with market's propensity to focus all attention on the negatives, neglecting other bright spots in Tencent's earnings, there seems to still be much growth opportunities in other areas of its business. 

Insights from Earnings Call Transcript
So i read through the earnings call transcript and extracted relevant information below. 

On temporary suspension of approval for games monetisation. Tencent has at least 15 games already approved for monetisation, a mixture of high Average Revenue Per User (ARPU) and low ARPU games. 

On growth prospect of gaming. Fundamentals remain strong, based on solid DAU growth yoy and strong overseas expansion. Arena of Valor has achieved over 15 million DAU overseas and US$200m user spend in first half 2018. Player Unknown Battle Ground, 14m DAU overseas, US$20m user spending per month. Aside, Tencent is still finding ways to deepen player engagement from existing hit title such as Honour of Kings, China's top gamr in terms of users and revenue. New high ARPU game such as MT4, ranked top three in iOS Top Grossing Chart, has been launched in Jul.  

The only problem is the delayed monetisation of PUBG Mobile, which management is very optimistic about, based on its large DAU base, intensive and cooperative nature of game that historically is a good indicator of monetisation potential. For info, PUBG overseas monetisation rakes in monthly gross billing of US$20m. 

On Monster Hunter blocked-launch in China, one of its expected blockbuster game in 2018. mnagement shared that it is a one-off event as the content did not comply with regulations, and company is working with developer for adjustment. The game has been approved for monetisation. 

On news/media feed under Online Advertising segment, the total daily page views through the two largest platform: QQ Browser and Kandian increased 55% yoy, and number of short video views is up more than 3 times. WeChat Moment ad load had been increased to two per day, just a fraction of its international competitors. Management is taking a moderate approach here to balance between user experience and pricing/advert positioning. 

On Mini Program. This is a 'sub-app' smaller than 10mb hosted within WeChat that can be lauched instantly. It has DAU of 200m. Mini Programs offer connection and touch points of 1 billion WeChat users to many more offline businesses and entities that may not have the chance to do so previously, without the hassle of users downloading new apps. And it further perpetuates brand name via the social sharing function. 

So it seems to me that there is this gapping hole in Tencent's main revenue generator, gaming, while other areas of growth remain well on track, thrown in with clear strategies and upcoming initiatives to reignite revenue growth. 

Latest News
Just late last night came another news that China regulators plan to restrict number of new online games and limit time spent on gaming by minor.

This definitely adds more overhang to the gaming sector outlook, considering that ramifications will be more material as it reduces time spent -hence engagement and monetisation potential- on games, and decrease the number of games that can be launched.

Details are still scant. But without guessing what the actual new policy would be, I try to decipher its impact on Tencent.

Firstly, are young children, teenagers, minor a big component of its gaming customers? I don't have info on this. And how much gross spending comes from this group, considering their relatively young age and lower earnings? If play time was limited on this group, would there be a big impact on gross spend from perhaps a not so high expense level?

This is also not the first time Tencent come under government criticism and Tencent has been able to respond quite well to government's request in name of social order and health. For example, earlier on when WeChat was accused of spreading fake news, Tencent blocked 500 million postings. One of its video streaming subsidiary, Kuaishou, was criticised for teenage mom videos. It issued apology the next day and took action to clean up these videos.

The policy stems from a health standpoint - reduce screen exposure time and manage myopia among young children. Can Tencent actually develop healthier games with milder content suitable for the young, and benefit from there?

Conclusion
Disclosure: I hold Tencent shares so I might be biased.

The once seemingly invincible internet giant seem rather weak now. For a company as big, as influential and as intertwined with China people's daily life, as Tencent, government regulations seem to be the only market force that is able to make or break them.

I really do not think the growth story of Tencent has ended. Far from it. But I do recognise that its turbo-charged growth is probably curtailed in the immediate term of next one or two quarter until there is more clarity on the games approval, and policy on limiting youngsters usage.

Its fundamentals are still intact, and its business moat is still formidable. Opportunity funds are ready for deployment once I sense some light at end of tunnel. But it may come swift and sudden considering the extent of its drop so far, so do catch it. 

What To Do If You Bought Stocks Before This Correction

Straits Times Index has not been performing well so far in 2018. Year-to-date, it has dropped 7.1% and touched a one-year low of 3,103 on 11...