Friday, December 2, 2011

PBoC news

Here is collection of various reports  concerning PBoC....


M2 statistical coverage has been changed.

It now includes 2 new items...
1) Deposits of non-deposit-taking financial institutions (Investment Banking, Wholesale Banking)  in deposit-taking financial institutions
2) Deposits of housing provident fund
The change is to reflect and take into account the development  and use of  newer financial instruments. Both are already in substantial volume and have relatively large impact on money supply.

Based on the expanded coverage,
M2 posted 81.68t RMB (in Oct 2011)  and 72.35t RMB (in Oct 2010),
OR 12.9% yoy UP.
That is, (81.68-72.35)/72.35*100%=12.9%.

Note that this is  already reflected in the Oct 2011 statistics

FOREX Reserves

Officially stands at  USD 3.2t

 Home Prices

A Reuters report dated December 2, 2011, says that the PBoC think that Home Prices are at a turning point.
          BEIJING -
Chinese home prices are at a turning point and banks are concerned about a possible 'chain reaction' if they were to fall by 20 per cent, the central bank said on Friday.
'Real estate investment growth eased, developers' cash flows tightened, land transactions and prices fell, property loan growth moderated and there are early signs that property prices are at a turning point,' the People's Bank of China said in a statement published on its website.
Chinese home prices fell in October from September for the first time this year, official data showed, but a private survey has indicated that November could mark a third consecutive monthly fall

What does this means, in policy terms?
Likely, there will be a turning point in the monetary policies.
The polcymakers wants to see a gradual incremental trend in housing prices.
NOT a precipitous 20% drop that will have drastic consequences on banks and their NPLs.

PMI News


US ISM Manufacturing PMI was the surprise this round.

New Orders

If seen together with the ADP Employment data, the US Private Sector, in particular the Manufacturing sector seems to be on the mend.


 China's CFLP PMI (at 49.0%) and HSBC PMI ( at 47.7%)  both correlates and tells the story that policymakers have over tightened and that the Manufacturing Sector is in contraction.
These two sets of data is likely the key reason for the announced cutting by the PBoC, of the RRR by 50 basis on 5th Dec. This can be seen as an inflexion point where the policies could be reversed (i.e. loosened) from now on.


Eurozone PMI data is rather bleak.
Countries ranked by Manufacturing PMI® (Nov.)
Ireland 48.5 2-month low
Germany 47.9 28-month low
Austria 47.6 28-month low
France 47.3 29-month low
Netherlands 46.0 29-month low
Italy 44.0 2-month high
Spain 43.8 2-month low
Greece 40.9 2-month high
Both the Core and the periphery are in contraction .

Thursday, December 1, 2011

MAS must clarify threshold levels for demanding a Poll

The following BT article by Jamie Lee, dated 1/12/2011  and titled
"Sale of KepLand's Ocean Financial Centre stake to K-Reit surprises analysts.
They say it may have been disadvantageous to the Reit's unitholders" have higlighted some points that MAS must clarify...


(SINGAPORE) The sale of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion has raised eyebrows.

Several analysts who spoke to BT on condition of anonymity argued that the deal may have been disadvantageous to K-Reit unitholders.

For one thing, while the prime Grade A office building in Raffles Place has a tenure of 999 years, K-Reit will get the stake with only a 99-year lease for now, though it can exercise a call option to re-gain the property after 99 years.

Without the income support from Keppel Land of up to $170 million, the sale price of the office building translates to about $2,400 per square foot (psf), which K-Reit unitholders deem high at a time when the economic prognosis is grim.

In a third-quarter report, Colliers International noted that the office market has cooled further, with many companies taking a longer time to commit to new space amid caution over expansion plans.

The office market remains highly correlated to the country's economic performance and employment in business and financial services, CBRE said in a recent report.

'They should have left some meat on the table for both parties. Otherwise, what is the point of a Reit if the trusts are stuffed with assets at high prices,' said one analyst.

A second analyst said: 'Given the economic uncertainty, the deal is overpriced. The crux of the matter is that the deal was done when the office market is at an inflexion point.'

Another analyst noted that after stripping out the income support, the yield of about 3 per cent is not attractive. 'The price is at the top of the market. Granted that it's a Grade A office building but why now? Why acquire at a time when the macro-economic situation is deteriorating?' he said. 'The deal is skewed towards the parent.'

He also criticised the 17-for-20 rights issue that would raise about $976 million used to foot the bill, arguing that it is dilutive to existing shareholders. 'It's a good idea if it is being used to purchase depressed assets,' he said.

Still other analysts, while cautious, were more optimistic over the deal.
'It is too premature to pan the deal, especially when unit prices of office S-Reits have probably over-discounted the severity of the forthcoming downturn,' said a Daiwa report. The big concern is whether the income support is sustainable, it added.

Ocean Financial Centre has a committed occupancy rate of 80 per cent, with existing leases at about $9 psf. The income support, by Daiwa's estimates, should raise the overall current rent to $14 psf and be 'just enough' to last until 2016.

If in 2015 and 2016 - when nearly 30 per cent of the leases are up for renewal - spot rents hit $10.60 and $11.70 respectively, there would be 'significant decline' in Ocean Financial Centre's contribution in 2017, it said. 'However, if spot rents reach the mid-teens when the renewals take place, there might not be much drop-off, if any.'

In a client note, Credit Suisse said 'admittedly, market conditions are a little uncertain, and perhaps timing may not be perfect'.

But comparing with the Marina Bay Financial Centre transaction that involved K-Reit and Suntec last year, the acquisition price is fair from a long-term view, it added.

The approval from unitholders also came via a show of hands at the extraordinary general meeting - a practice that the Code of Corporate Governance no longer accepts as sound governance - and amid criticisms from minority unitholders over the price and timing.

'Given the size of the deal and the fact it was a related-party transaction, the vote should have been carried out by poll, with the results tabulated to include the percentages of voting for and against the acquisition,' said Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, in a blog post for the institute.

A K-Reit spokeswoman said minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present. But the poll request, led by one institutional unitholder and supported by a few retail unitholders, fell short of this number.

All interested parties that included Keppel Land were not allowed to vote.
BT also understands that a proxy voter holding a significant block of 46 million units had already been instructed to vote in favour of the deal.
Keppel Land said the sale would 'unlock part of its investment holding especially given the strategic commercial reasons and the volatile economic climate'.

As for K-Reit, the acquired Ocean Financial Centre will also provide strong branding, making it a key office landlord in the Marina Bay and Raffles Place areas, with the transaction boosting the size of its assets under management from some $3.9 billion to about $5.9 billion.

The deal is also expected to be accretive to the Reit's distribution per unit from the cash flows generated, and should improve K-Reit's lease expiry profile such that no more than 11 per cent of its portfolio by net lettable area will expire in any one year over the next five years.



My Thots....

Much of the issues raised in this article has been discussed.

The section highlighted in blue, however raises issues that MAS/MoF must clarify....

In June 2011, there was actually a Rule Change Proposal by SGX to mandate compulsory polling at all shareholder meetings; see proposal.

Unfortunately, after public consultations, the recommendations was that a poll was deemed NOT a necessity altho if U attend any CMA or Capitaland-related AGMs or SGX AGMs or SingTel AGMs (i.e. the more progressive and transparent listcos) , U will have been given a electronic polling device and polling would be conducted; irrespective. Remember all dual listed listcos (i.e HKEX and SGX) must comply with HKEX rules.

What happened, was that at the KReit Asia EGM, the electronic polling device was distributed and the expectation was that polling will be done. So at one stage there was confusion, when the Chairman said polling will not be done becos there was no requirement.
No explanation was given!!

So those who were more knowledgeable, guessed that they were invoking the 10% rule.
See Recommendation 2.2 and a few of us went to the back of the room to register our shareholdings with the scrutineers to see if we had 10% shareholdings.

It was later announced that we did not satisfy the "requisite" holdings requirement and a show of hand voting commenced, immediately, to which those opposing were Out-Voted. But it was never clearly stated what was that % requirement, that we did not meet, during the EGM.

Later, I checked and found that the required % shareholdings threshold have been reduced from 10% to 5%!!!
After the EGM,  I went to read Recommendation 2.2, again and it appears that there is  a 5-members request rule---there are in effect two thresholds in section 178(1)(b)----- the 5 member rule in i) and the now effective 5% rule in ii) !!

In effect, a polling had to be carried out as there were more than 5 of us demanding a poll. We have been "robbed" of a fair poll which Kepcorp and Kepland as IPTs and together own 76.3% of votes, had to abstain.
Yet, we were denied!!!
A poll would be more favourable to dissenting unitholders, since we have some IIs (Institutional Investors) and some big unitholders amongst us!!

 This BT article appears to imply that a 10% threshold was used; which does NOT conform to the Companies Act.

Will MAS or MoF, please clarify!!!

4 Positives

Positive One
ADP Employment  report

The ADP Employment Report  for Nov 2011 has continued to trend up.

U.S. Nonfarm Private Employment Highlights – November 2011 Report: Total employment: +206,000
 Small businesses:* +110,000
 Medium businesses:** + 84,000
 Large businesses:*** + 12,000
 Goods-producing sector: + 28,000
 Service-providing sector: +178,000
 Manufacturing industry: + 7,000

As with previous mths, the Service Producing Sector  and Small and Medium Bizs continues to be the star performers.
The surprise is that manufaturing carved out a 7K gain; giving the previously moribund Goods-producing sector aboost to 28K jobs added.

This set of data which correlates well with BLS data bodes well for the Friday release.

Postive Two
CBs Act


Central Banks (CBs) take co-ordinated actions by providing liquidity swaps.
Mainly, involves ECB and the FED; to ease the credit crunch in Europe.
There is apparently a  credit crunch in the USD wholesale market and the FED is opening swap lines for the ECB to ease that crunch.
The participation of the CBs from Canada, England, Japan and Switzerland helps to boost the Bazooka effect  and shows that the CBs are united in helping the ECB , if  indeed it needs the help.
It shows  that ECB's head Mario Draghi, may be stepping up--- now  that it is clear that the politicos (Merkel & Sarkozy)  have agreed that the path to fiscal union is the way to go.

Positive Three
US NAR Pending Home Sales

Pending Home Sales Index for Oct 2011; which is a leading indicator of EHS ( Existing Home Sales) jumped 10.4%

Positive Four
China cuts RRR

In my last post on this topic, Reuters suggest that the cuts in RRR will happen, only next year .
As in the past, the PBoC wrong footed them again.
The RRR will be  cut by 50 basis pts from Dec 5.
This suggests that the policymakers are ready to ease the tightening measures that have made credit difficult to get for many SMEs .

Sunday, November 27, 2011

Return on Capital for Reits

Return on Capital
Given the propensity for cashcalls (i.e. Capital Outlays) in SG Reits, the correct metric for a Value Investor, should not be the dividend yield but the ROC ( return on capital).
Teh Hooi Ling of BT's, "Show Me the Money" series, did a calculation for the ROCs of 22 Reits listed on the SGX .

On that metric, of the 22 that she studied, only 17 made it to positive territory.
She did not state the date for the prices she used. But if we take her "prices today" (as at 25/11/2011), then we are taking prices at quite a trough, given current bear market conditions.

KReit Asia Positive ?
For the emblematic KReitAsia, which has been the most prolific in issuing rights, the surprising outcome is that it still managed to eke out a positive return on ROC, even tho the rights issue (at 85c) has pushed prices on that day to 86.5c.
So Reit, has a place in a value investor portfolio, just as Ben Graham, advocated in his book "The Intelligent Investor". Better still if they are trading below intrinsic book value.

But, the issue as highlighted in the EGM is the timing and frequency, with which the cash calls are made. In effect, the sponsors have abused the Reits vehicle, so that their interests (to monetise the assets at their  timing to recycle cash for sponsor use)  have been done at the expense of unitholders who are subjected to nasty surprises of cash calls, at a time when the markets are on the precipice  of falling and huge opportunities for purchases of  contending "stocks' could be on the horizon.

Against Sponsor's own interests
As pointed out in the EGM, these nasty surprises, if repeated often, work against the long term interests of the sponsors. Such frequent calls necessitate sponsors having to underwrite to take up any excess rights, reducing trading liquidity as the shares are concentrated in the hands of the sponsors. Loyal unitholders and IIs (institutional holders) with high stakes have to rejig and make sudden changes to their "Portfolios"; including selling in a distressed market to cough out the cash. Worst still, retirees and Mom N Pop investors who buy the Reits for dividends only (i.e. defensive plays) may not be able to cough up the extra cash at such short notice, leading to dilution or a need to sell their rights/shares at  "rights"-depressed prices. Other Unitholders, tired and fed up with the frequent and hasty cash calls, will sell.
In the end, the Reit vehicle which is the last piece in the food chain for the "asset recycling model" may fail, much to the detriment of the sponsors own interests.

MAS must act
Growth should never be the over-riding aim of a Reit; and growth for the sake of growth must never be the excuse for any acquisition.
As I have highlighted many times, accretive  property acquisitions ( to DPU) should only be made when it is certain that the property market has more or less bottomed (test is that valuations  are less than NPV for DCFs) or when the property market is stable; not anticipating a fall. The Reits biz model have that luxury to wait  and the regulators (MAS) should see to it that the sponsors stop ramming their cash calls down unitholders throats as and when they fancy!!
The Reits must be  a vehicle where the recurrent incomes have stabilised; those that have not stabilised must be incubated at the Sponsor level, NOT Reit level. Rental support is a gimmick and must be stopped.
Incentives for Reit Managers must be aligned with unitholders, NOT sponsor's interests!!

"Wisdom is purified by virtue and virtue is purified by wisdom. Where one is, so is the other."