Portfolio Review

January has been a yoyo month, and I am guilty of being greedy. Below is my current holdings.


My portfolio cost and market value has increased because I decided to add in the cash that I decide to use for investment into the equation. As such, the percentage gain has been reduced.

Over the month, I increased my average price of First Resources to 1.05 cents (rounded up), while i divested my holdings in Bank of America. The reasons for divesting Bank of America was covered in an earlier blog post.

Palm Oil prices are recovering, albeit at a slower pace due to soybean having a bumper harvest. However, I am still bullish about the palm oil sector with the demand for biofuels increasing.

I am looking at several companies, among which is Novo Group. However, as I am unsure about the future prospects of steel, as well as the company's management, I would need to carry out more research on it.

Dry Bulk Shipping

Just an update if any of my readers were wondering about my Dry Bulk Shipping coverage.

In view of Mercator's results, I will be waiting for the release of the results of Courage, Rickmers and STX PO before updating on this sector.

Mercator's 3Q results were reflective of the Dry Bulk sector, with profits down across the board. I am not bullish about the sector, and as such I am waiting for more results from the other companies.

The Correction

The current correction has sent my portfolio into negative territory for the first time. Over here, I would like to make some recommendations to help people sleep better at night

Invest with what you can afford

As investors, whatever we plough into our stocks is usually for mid to long term, such that we can weather such corrections. Do invest with what you can afford to lose. If you have trouble sleeping at night, it could mean that possibly that you may have invested too much.

Depending on your age, you may wish to keep about anywhere between 10% to 40% of your holdings in cash. I keep about 10% of my holdings in cash. As such I haven't be losing much sleep.

So what about people trading on margin. I have nothing against margin trading, but likewise, don't overload yourself. Put into your account about 70% of the amount you can afford to lose, and keep the other 30% as cash needed just in case of a margin call. That way, you won't lose sleep over margin calls.

Avoid Contra Trading

Contra trading is to purchase a stock, and before the payment is due, usually within 3 to 5 days, the stock is sold off. The difference between the purchase price and selling price is the amount you keep or you repay, depending on whether you made a gain or a loss.

Contra trading is one of the things that will made you stand on edge. If the tide turns against you, for example if China announces changes in monetary policy, these things cannot be detected by technical analysis. Purchasing the stock there and then is also a mistake, as the company may not have fundamentals to support it through the period of time. It may result in you racking up big losses.

With these 2 pointers, I hope that you will have a better sleep over the next few days as we unwind from this major correction.

CFDs

I signed up for a CFD acct with IG markets and it was approved. I intend to put about 5k to 15k into trading, mainly to take advantage of corrections by taking up short positions to hedge my longs as well as take advantage of market corrects. I may also try to hone my technical analysis skills.

Short positions that are used for hedging will be covered in my blog, as well as shorting of overvalued companies. Purchases based solely on technicals will not be covered. I apologize for not covering techincals, but I do not have wish to recommend stocks based solely on technicals.

There are many technical experts out there which you can find on Channel News Asia Forums so you may wish to refer to, such as RallyArtist. Just a disclaimer, I am not recommending to blindly follow him, but possibly use his ideas as a starting point.

Bank of America - Divested

Divested Bank of America @ 14.98 yesterday.

I was not satisfied with the high prospect of further government intervention in the financial sector. When I bought Bank of America, it was due to reduced government intervention due to repayment of TARP funds.

When Obama took his populist stance on limiting proprietary trading and France and UK behind those measures, it would seem like a turbulent few months ahead for banks. With UK readying bankers tax, it seems like bank bashing would continue and regulation may be enforced.

As the fundamentals of the industry has changed, I divested Bank of America yesterday.

As Obama Sneezes

Obama has thrown his weight last night behind the move to curb excessive risk taking, prompting fears of a return to Glass-Steagall style regulation. Obama's plans are to curb excessive risk taking and protecting taxpayers, preventing banks from sponsoring equity or hedge funds.

What is the Glass Steagall Act?

The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business.

It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. The act was originally part of President Franklin D. Roosevelt’s New Deal program and became a permanent measure in 1945. It gave tighter regulation of national banks to the Federal Reserve System; prohibited bank sales of securities; and created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money appropriated from banks.

The Flip Flop

Obama's administration have initially dimissed this idea back in Dec 2009. Lo and behold, the financial typhoon came along yesterday, sending banks spiralling down. The earnings report for Bank of America initially made me optimistic on the prospects of the company. This combined with the reports from other banking companies convinced me that there is not a need to divest my holdings in Bank of America. Now, however, I am reconsidering it.

"Obama administration officials have dismissed the idea that the financial sector should or can be changed in more fundamental ways than they are now proposing. You can't turn back the clock, they say, and the new requirements they plan to impose on big banks to hold more capital in reserve, put up $150 billion for a rainy-day rescue fund, and disclose more of their risky trades should be enough to keep the financial sector from imploding again. Many of these requirements, among others, are contained in two giant bills making their way through Congress—one that passed the House last week and another that will be debated in the Senate in the new year. "I think going back to Glass-Steagall would be like going back to the Walkman," says one senior Treasury official."

The link to the article can be found here

Obama's First Year in Office

I remembered comparing Obama to an iPhone once. The iPhone to me, was one of the coolest gadgets ever invented, however, it was not extremely useful. It was pretty comparable to a WM6 phone, less customizable (unless you jailbreak it), but everyone had the iPhone cause it was just so cool.

Same with Obama. 8 years of Bush administration made me wonder what the Americans were thinking. The previous Republican president before that was George Bush Snr, and made me wonder is their method of contributing to the economy starting wars to gain oil fields and increase manufacturing. Compared to the Clinton era (Lewinsky-gate excluded), Bush era was just a whole lot of turbulence. So when this African American guy came along with the promise to revamp healthcare, pull out of Afghanistan, he was making all the right moves. He inspired people. One just has to look at his town hall speeches and you would get a positive feeling out of it.

One year on, Obama's reluctance to address the economy and stake an all in wager on healthcare disillusioned many. Furthermore, more troops have been sent into Afghanistan. You can't help but wonder if Obama is all hot air, or what most of us describe as NATO (No Action, Talk Only). I definitely wonder from time to time what has this guy done for USA and possibly the world, and is he capable to be the President of the United States.

The key note would be the timing of Obama's backing of raising the wall between commercial banks and investment banks. Once Brown won the seat of Massachusetts, the Democrats lost their super majority in the Senate and thus if the congressmen voted along party lines, Democrats would not be able to force through the Healthcare plan. Brown's victory in a Democrat stronghold also served as a reminder that the citizens are disillusioned with Obama's inaction over the economy. As such, Obama flipped his stance, pushing for walls to be raised, and causing rising fears over a return to the Glass-Steagall era of regulation. This populist move would satisfy Americans, giving them hope over the economy. But is it too little too late?

I, for one, am terribly disappointed with Obama's administration.

Thakral Corporation

For the uninitiated, Thakral Corporation is holding an EGM on the 4th of February to seek an approval from its shareholders on a 5cent cash distribution per share. Before anyone jumps in without looking, I would hope to provide a better view for all people who wish to become vested.

About Thakral Corp

As taken from their website.

Listed on the SGX Mainboard since December 1995 with its Distribution business headquartered in Shanghai, the People's Republic of China, Thakral Corporation Ltd is involved in the distribution business of consumer electronics sector, as well as strategic property and equity investments.

The PRC, Hong Kong and India are presently the Group's key markets for its products. The Group distributes an extensive consumer brand portfolio including global consumer electronics brands such as Apple, Asus, Canon, Casio, Fuji, Kodak, Lenovo, Nikon, Nokia, Olympus, Orion, Panasonic, Pentax, Samsung and Sony. Some of the major products distributed under these key brands include digital video cameras, digital still cameras, plasma TVs, desktop and notebook computers, personal digital assistants (PDAs), data projectors, electronic accessories, mobile phones and audio products including MP3/MP4/MP5 players.

In addition, the Group has also successfully created and marketed trendy consumer products such as audio players and accessories, LCD TVs, memory cards, portable DVD players and digital photo frames under its own “YES" brand.

Cash Distribution

Cash distribution occurs when the company has excess cash and has no use for it. In Singapore, as dividends are not taxed, dividends and cash distributions are similar, except that cash distributions are usually associated as a one-time payout.

About the Distribution

Thakral wished to reposition its primary business from consumer electronics distribution to real estate and related infrastructure. In view of the capital distribution announced on 1st Dec 2009, Thakral decided not to go ahead with the repositioning.

With a 5 cents distribution, share capital will be reduced to 72,528k, while EPS for the 9M09 drops to 0.15cents from 0.22cents. Equity is reduced to 92,886k from 223,692k.

Directors and Shareholders

Thakral Investments Limited has a direct interest of 7.44%, while Venture Delta Limited has a direct interest of 34.38%. The Thakral family has a deemed interest of 29.92%, with Jasvinder Singh Thakral has 5,200,000 share options under the employee option scheme. In short, Thakral Investments Limited has direct interest to SGD9.717million of the dividends paid out.

Vested?

I believe that the cash distribution is done without any harm to the company's day to day operations. However, there are 2 concerns that I wish to raise.

1) Thakral has posted a pre tax loss for 3 of the past 5 years. However, FY09 is slated to turn in a profit. My concern is what happens after the cash distribution, considering that they may not pay dividends after. Thakral has not paid out dividends since 2005.
2) The cash distribution is not approved yet, however when it is propsed on the 1st of December, Thakral Corporation moved up 3 cents, before closing at 8.5cents. Would the price drop more than 5 cents once the cash distribution is approved and XD comes around?

I am not vested but I thought I should write an article to inform people who wish to be vested in Thakral.

Valuation Problems

Since the drop of First Resources the past few days, and with DBS Vickers coming up with a 12 mth TP of 1.16 and OCBC Research coming up with a technical TP of 1.08 based on resistance turned support, some have asked me if I made any mistake in my valuation etc.

To start of, I will admit that a mistake that I have made is to average up the 2nd time by purchasing more at 1.19. However, I still value First Resources with a 6 mth target price of 1.30 to 1.40, and a 12 mth target of 1.50.

DBS Vickers has stated that there could be negative earnings surprise as earlier upgrades were based on CPO price assumptions, and downgraded First Resoures to Hold due to limited upside.

As compared to other investors, I will reiterate that I am very bullish on CPO, and with the economy recovering, the prices of CPO will increase. Besides being bullish on CPO, I believe that First Resources is still undervalued to its peers, with its peers trading at approximately 15x to 16x P/E Ratio. First Resources, based on projected earnings (FY09 Results are slated to be out in March), would currently be trading at approximately 1.30. My 12 mth target is made with assumptions in an increase of CPO prices.

Furthermore, the positive issue about First Resources is that it prefers organic growth over acquisitions, although the management has not ruled out on acquisitions. Organic growth is important because it prevents the company from overpaying for growth. Similar mistakes have been made by companies in other industries, and I believe that the management is setting First Resources on the right path.

The DBS report can be found here. The writeup on Thakral will be posted later today. I will be heading down to the Budget Terminal since I am in the vicinity to check out Tiger Airways.

M1 FY09 Results

M1's FY09 results was released today. Here is the rundown on the KPI of M1's results. All figures given are in SGD '000

KPIs

Revenue decreased by 2.4%, with a 6% drop YOY for Mobile Telecommunications and International Call services sector. Handset Sales YOY increased by 30%, from 62,122 to 80,900. Mobile Telecommunications services accounted for 72% of total revenue, with handset sales accounting for 10% of total sales.

Operating Expenses accounted for 77% of total sales, up 1% from 2008. Operating Profit decreased 6% from 2008, while Net Profit remained constant at 150,300. EBITDA experienced a 2% YOY decrease.

Leverage decreased to 2.27, however debt increased by approximately 1,000 to 581,300. ROE was 0.59, a decrease from 0.67. P/B ratio increased to 6.60 from 5.69.

Final dividend of 7.2cents were declared, giving a dividend yield of 7%. Dividend EPS ratio dropped to 80% from 86% in 2008

Total customer base increased by 40,000, aided by a 19,000 increase of postpaid customers.

Valuation of the Company

P/E of the company was 11. Based on the the projected EPS of Singtel and Starhub, M1 is fairly valued at approximately SGD1.87 to SGD1.92 per share. I believe that M1 is currently overvalued at its trading price as of today. My target price would be SGD1.92/share

However, as M1 expands further into the broadband market, we have to be wary of extra startup costs incurred. As such, my current 12 month outlook on M1 is a HOLD.

Twitter

I decided to set up a Twitter account for this blog. In my personal life I'm not a heavy user of Twitter, but I decided that the best way to keep readers of my blog updated with news from around the world would be to tweet it. My Twitter account is not protected, so all readers do not need follow it to see breaking news. My account is accessible here.

For 2 reasons, I do hope that you add me on Twitter.
1) So that I know the number of readers possibly reading my blog.
2) You get updates on your Twitter home page along with updates of your other friends.

News Update: Singapore Exports Up 26% for December

Singapore exports jump 26 percent in December as demand for electronics soar

SINGAPORE January 18, 2010 (AP)

Singapore's exports jumped in December for the second straight month as global demand for the city-state's electronics surged.

Exports excluding oil rose 26.1 percent from a year earlier to 13.2 billion Singapore dollars ($9.5 billion), according to Trade and Industry Ministry figures released Monday. The ministry said sales abroad rose a seasonally adjusted 1.7 percent from November.

"The numbers reflect a solid rebound from the low levels of the first quarter last year," said David Cohen, an economist with consultancy Action Economics in Singapore.

Electronics — which account for 40 percent of non-oil exports — rebounded strongly, rising 25.2 percent from a year earlier after falling 6.1 percent in November.

Pharmaceuticals rose 76 percent while petrochemicals increased 64 percent, the ministry said.

Singapore's economic recovery slowed last quarter as gross domestic product fell by an annualized seasonally adjusted 6.8 percent. The government expects the economy to grow up to 5 percent this year after contracting by 2.1 percent last year.

The improvement in exports eases fears of a possible derailment of the global economic recovery, said Cohen.

"The upward trajectory in exports from Singapore and other Asian economies is a sign that global demand is continuing to recover," he said.

Non-oil exports rose 27 percent to Europe and 20 percent to China from last year, the ministry said. U.S. demand for non-oil products grew by 6 percent after falling nearly 13 percent in November.

Oil exports, which account for 32 percent of total exports, increased 60 percent in December from a year earlier.

Non-oil imports rose 9.9 percent in December, after dropping 3.3 percent in November, the ministry said.

Preference Shares

There was an article in OCBC on Investing for Ladies, which focus on preference shares as a source of income for ladies.

What are Preference Shares?

For the uninitiated, the shares that are normally traded on the exchanges are common shares of a company. Preference Shares work slightly differently from these Common Stock.

1) Preferred Stocks receive dividends before Common Stocks. Therefore, you can say that you are first in line to obtain a share of the earnings from the company.

2) In times of insolvency, Preference Shares are entitled to a share of the assets after the debtors have been paid, and receive it before Common Stockholders.

3) Preference shares provide guaranteed dividends should the company announce that dividends are to be paid out to the shareholders. Since dividends are essentially guaranteed, the price fluctuations of the Preference Shares is usually lower than Common Shares. Take note however, that there may be certain occasions that the company does not declare dividends for the year, and you will not be able to obtain your payout. These occasions are few and far between.

What does these all mean? For example, if Company A has a preference shares that is labelled Company A 5% NCPS, it means that should Company A announce the distribution of dividends to Common Shareholders, Preference Shareholders will be entitled to 5%p.a. of the offer price of the security (you can find this information on SGX). As such, Preference Shares can be considered as a fixed income security.

For the Kiasu Singaporean, it just means that you are always at the front of the queue for the dividend payout.

Why Invest in Preference Shares?

For more risk averse people, Preference Shares provide a source of fixed income. This form of passive income appeals to them as the risks are low. I encourage people who have spare cash lying around to invest in Preference Shares.

Furthermore, compared to fixed deposits or investment linked insurance, Preference Shares are more liquid, as one can sell of the shares in order to obtain your investment, which most of the time would be almost equal to the initial investment.

Risks of Preference Shares

There are occasions when Preference Shares become totally worthless. For example, Citigroup's Preference Shares were excellent to hold onto, but since the financial crisis, the Preference Shares are essentially worthless because the main attraction, and thus price, of the Preference Shares are determined by the dividend payout. Since Citigroup is unable to announce dividends, the Preference Shares have become worthless.

Furthermore, as Preference Shares show little signs of capital appreciation, during a bull run, preference shares may not provide a large return as compared to Common Stock. Another point to note is that Preference Shares does not give you voting rights. That is a small tradeoff for a fixed income, don't you think?

Having said that, as I am more of a risk taker, I do not advocate dividend investing. However, for more risk averse people, Preference Shares is an excellent way to start off a portfolio for a fixed income.

This article was requested to be done for someone dear to me. Hope it will help everyone out there who are looking for passive income.

First Resources

Bought more lots of First Resources at closing. Price 1.19. Average Price 1.04

Share Price and Company Operations

How does the Share Price affect Company Operations?

A Share Price does not affect the daily operations of the company. What the share price does is to provide a reflection on how much a person will pay to lay claim on a percentage of the earnings, and should the company wind up, a percentage of the assets after the debtors are paid off.

Companies secure funding from the public through Initial Public Offerings, Secondary Offerings as well as Issuance of Rights. These are methods to obtain funding from the general public. In return, they give up a percentage of their ownership of the company.

What does the Share Price tell you?

The share price tells you how much a person would pay to obtain the percentage of earnings by the company. Therefore, if the company performs well or has high growth prospects, I would pay more to obtain a share in that company. As long as the company is improving its year on year performance, the value of the firm increases, as should the share price. A lagging share price due to inefficient markets provides opportunities for value investors.

How we lay claim to the earnings of the company is through its dividends, and/or by divesting our holdings.

Why does the Share Price not reflect the Company's Value?

There are many occasions where the Share Price does not reflect the company's value. This results in the company being overvalued or undervalued. This is due to the inefficient market hypothesis.

For overvalued companies, what will usually happen is that once the hype is over, or if investors feel that there are other undervalued options out there, the company's share price will correct, resulting in a drop.

For undervalued companies, what will happen is that should people discover that the company is underpriced, and in layman's terms, value for money.

"Price is what you pay, Value is what you get". I always keep that in mind and assess if it is possible for the company to increase its value, before deciding if I am overpaying or underpaying.

Non-Dividend Paying Companies - Good or Bad?

There are some companies that do not pay dividends. These companies could be capital intensive companies where they need to retain cash for expansion purposes. These companies could also issue rights more often than others in order to finance its operations. It results in money outflow from the investor without much money inflow.

So why should we still take into account non dividend paying companies? Companies that do not pay dividends are not necessarily bad. As the company turns in better returns, the value of the company will increase, as will the share price once the company is noticed. This would mean capital gains for investors. Furthermore, once companies have matured, they may change their policy such that they provide dividends.

Dividend Investing?

I do not advocate dividend investing as it requires a large capital to obtain substantial returns. Furthermore, REITs (one of the higher yielding stocks) are also affected by the downturn. The performance from Dec 08 to Feb 09 can be found here.

OCBC's Pain

Came across an article on a customer taking OCBC's advertisement way too seriously.

http://kitchentigress.blogspot.com/2010/01/ocbcs-birthday-cake.html

Just for Laughs

Queueing Up Singapore

This post has little to do with investing, but I have included it here as I was opening bank accounts and rearranging my finances in order to sort out how much cash I have in case I find a new company that is worth investing.

Just a background. I had an HSBC account, POSB account and OCBC account. One was from my younger days, one was an expense account, and one was my share trading account.

When I returned to Singapore at the start of this year, I wanted to top up my cashcard as it was empty. I was at Vivo, and realised that there is no HSBC atm at Vivocity (according to the Information Counter), and the HSBC atm card does not have NETS. Frustrated, I decided to change my bank account to another bank which has the NETS facilities.

So the next day, I went to HSBC to close my account. I collected a queue number at Singtel, as I wanted to get the iPhone. I went to close my HSBC account, which went pretty smoothly, and went back to Singtel which had 3 people in front of me. The wait however, took approximately 20mins. Finally when it was my turn, I went to the counter and said i wanted the iPhone Black 16gb, only to find out that it was out of stock. The person said that the last set must have been taken when you were queueing up, and please come back tomorrow to queue again. I was shocked and after much argument, the next day I could come back and find one of the employees there.

After that I went to OCBC to do a bank transfer (I do not have internet banking for OCBC), and promptly waited half an hour just to reach the front of the queue. I did the changes, and went to DBS to open my bank account. At the receptionist, the person stated that there were 10 accounts waiting to be opened and it would take about 1.5hrs, and I could leave my phone number behind. I decided to hop over to UOB and there were only 3 people in front of me so I promptly opened my account with UOB.

I do not have a grudge against queueing, and I hope I do not come across as complaining for the sake of it, but I am pointing out the inefficiencies that exist.

1) Customers should be allowed to sign up for a new line with all their details, and collect the phone the next day. The form should be left open so that the IMEI number can be filled in. This would reduce the dissatisfaction of the customer.

2) Shops should have more counters, and streamline the process of opening accounts or doing bank transfers - the point that I would like to state that is I really wanted to open a DBS banking account to make it easier to transfer money from POSB to DBS, but instead now UOB has me as a customer. I don't contribute much money to them though. Even at OCBC, a counter closed when the queue was extremely long. I would have applied for an M1 account if I didn't have to wait just as long.
Alternatively I should just sign up for Internet Banking.

3) Have a message system - I am pleased that Singtel and DBS have a message system, but Singtel's message system informs the customer too far in advance.

Having said that, I am pleased with my new iPhone, and happy to have everything settled.

News Updates

Palm oil extends 2009 rally on crude oil rise
Bloomberg / January 05, 2010, 0:15 IST

Palm oil climbed to the highest in more than seven months, extending the best annual gain in 12 years, as gains in crude oil prices increased its appeal as a substitute used in biofuels.

Palm oil rallied 56 per cent last year on rising demand from India and China, the top consumers, and amid tight supplies of soybean oil because of drought in South America. Oil surged 78 per cent in 2009, the biggest annual advance in a decade, and soybean oil rose 21 per cent.

“In 2010, the world will come to appreciate the crucial role of palm oil in the supply equation of vegetable oils,” Dorab Mistry, a director at Godrej International said today. He had forecast on December 15 that palm oil will reach 2,800 ringgit to 3,000 ringgit by the end of March. Godrej is one of India’s biggest importers of vegetable oils.

March-delivery palm oil gained as much as 1.2 per cent to 2,696 ringgit ($788) a metric ton on the Malaysia Derivatives Exchange, highest since May 15 in intra-day trading. It traded at 2,690 ringgit at 5:13 pm local time.

Crude oil for February delivery in New York gained as much as 1.3 per cent to $80.39 a barrel. Oil hasn’t closed above $80 since November 4. Vegetable oils, which are used as biofuels, track movements in crude.

China Telecom Likely to Be Global Largest CDMA Operator

BEIJING, Jan 04, 2010 (SinoCast Daily Business Beat via COMTEX) -- China's CDMA mobile phone sales volume approached 30 million in 2009, nearly quadrupling the highest historic record, disclosed Ma Daojie, general manager of eSurfing Telecom Terminal Co., Ltd., saying that the market share of his company has risen from 5% at the beginning of last year to 17%. In provinces of Jiangsu and Gansu and Xinjiang Autonomous Region, the figure reaches 30%.

He predicts that China Telecom Corporation Ltd. (NYSE: CHA and SEHK: 0728) will become the world's largest CDMA network operator in terms of user base by the end of 2010.

Judging from operational data, the company's performance is surprising. Before October 2009, the number of its CDMA users has surged from 27 million when the network is taken over former China Unicom Ltd. to 49 million. The figure topped 50 million in the full year.

By far, distributors procure 72% of the CDMA mobile phones and sell 50% of them. Only a small proportion is sold by China Telecom's outlets and direct sale centers. The company hopes that the figure would reach 60% to 70% for distributors in the future.

In July 2009, China Telecom created a conception of CNY 1,000 3G mobile phones. Since there are currently homemade 3G terminals sold at CNY 500, the company plans to launch CNY 1,000 3G smartphones. While the selling prices of 3G mobile phones become lower, more users would choose 3G services.

However, some insiders point out that China Telecom is hasty to enlarge its user base. As a result, its users are mostly from the medium- and low-end market.

For example, eSurfing service package for students include 30M traffics and 150 short messages for CNY 19 per month, and that for medium- and low-end users only charges for CNY 39, and Nokia-branded mobile phones are presented with the service. Hence, China Telecom's average revenue per user is very low.

The company has been aware of its shortages. Ma reveals that China Telecom is promoting 3G smartphones simultaneously compatible with CDMA2000, EVDO, WAPI, CDMA, and GSM.

First, the mobile phone is dual standby for EVDO and GSM formats. Secondly, users could use Wi-Fi, EVDO, CDMA1X, or WAPI for Internet access. Currently, China Telecom provides 100,000 Wi-Fi hotspots, and the number is likely to be boosted to 130,000 to 150,000 in the future.

Last week, China Telecom inked an agreement with Research In Motion Limited (RIM; Nasdaq: RIMM) on the introduction of BlackBerry smartphones. The Chinese leading mobile carrier's plan include the promotion of Storm 9530, the most high-end EVDO BlackBerry smartphone, and Palm Pre, a knockout model built up by Palm Inc. (Nasdaq: PALM).

First Resources

Just an update. I averaged up on First Resources @0.985, bringing my cost up to 0.97.

I believe that nothing has changed fundamentally with the company, and that First Resources is still undervalued. I am not accurate with TP, but I foresee a 12 month TP of 1.50 based on its performance over the past year and its projected TP as compared with the industry.

China Telecom

The last major development in the Telecommunication Industry in China was in 2008, when China Unicom bought over China Netcom, with China Unicom’s CDMA unit heading over towards China Telecom. This gave China Unicom access to the Fixed Line market, as well as the broadband market, while China Telecom gained access to the mobile market. Most of China Netcom’s fixed line business is in the North of the country, while China Telecom’s fixed line business is in the South. By diversifying into the mobile sector, China Telecom is able to further increase its revenue. China Telecom’s network operates on a CDMA, while the China Mobile and China Unicom operate on a GSM network. The difference will be explained in the next section.

China Mobile also has access to the internet sector, despite it not having a market share in the fixed line sector. It gained this access via its acquisition of China Tietong in 2008.

Difference between CDMA and GSM

CDMA and GSM are essentially the same thing, with CDMA’s 3G network boasts speeds between 300kbps to 700kbps, while GSM’s 3G network speeds are between 275kbps and 380kbps. The SIM card that we have all come to learn to love is used for GSM phones, while their equivalent for CDMA phones are R-UIM cards. This however, is not available on all carriers, with some carriers linking the number to a phone, meaning that when changing phones, the old phones must be deactivated for the new one to be activated.

The weakness of CDMA is that it is not as good in rural areas, and the charge is significantly higher should they wish to contract GSM cells to provide roaming services for them.

The above information is taken from Wisegeek. Please visit their site for more information on the differences.

Narrowing Down to 2 Carriers

China Mobile’s business model is heavily dependent on their mobile income, and China has a history of breaking up large companies in order to increase competitiveness. As such, any intervention by the Chinese government would most likely be detrimental to China Mobile, considering that the fixed line and internet sector is evenly distributed as compared to the mobile sector.

Analysis

Performance wise, for year ended 2008, China Mobile’s has a profit margin of 29% and an EBITDA margin of 57%. On the other hand, the profit margin for China Unicom was 4% and EBITDA margin of 39%. China Telecom had the worst performance among the 3, with a profit margin of 1% and an EBITDA margin of 32%. EBITDA would have increased to 47% and 45% for China Unicom and China Telecom respectively if impairment cost was taken out of consideration.

There was no breakdown provided into segments for China Mobile, but for China Unicom, their GSM revenue contributed to 43% of total sales while fixed line was 55% of total sales. China Telecom had a total of 52% of sales contributed by fixed lines, 2% contributed my mobiles and 22% contributed by the internet.

For 1H2009, for China Telecom, the YOY operating profit decreased by 24%, while YOY profit for the period decreased by 29%. The decrease is attributed to higher operating expenses. Operating Revenue increased by 13 billion RMB, an approximate increase of 14%. Mobile Voice services accounted for 8.7% of operating revenue, with Wireline Voice and Internet Services accounted for 39.8% and 23.7% of total revenue respectively. There was a decrease in the revenue of Wireline services from 50,485million RMB to 41,060million RMB for 1H2009.

For 1H2009, for China Unicom, the YOY profit decreased by 41%. Although Expenses were approximately the same as 1H2008, the Operating Revenue decreased by 7%, resulting in the large decrease in YOY profit. 44.8% of operating revenue was attributed to GSM revenue, while 52.6% was attributed to fixed lines. There was an increase of 1.84billion RMB in GSM revenue, while a decrease of 5.138billion in fixed lines.

Projected P/E for 2009
China Telecom – 13.2
China Unicom – 16.1
China Mobile – 11.6

I believe that China Telecom’s ability to increase operating revenue is a key performance indicator for me. Furthermore, as a market leader in the South for fixed lines, as well as being one of the market leaders for Internet services, it will gain a steady stream of income. I believe that China Telecom’s Mobile sector will provide an increasing percentage of its operating revenue. China Unicom’s decrease in operating revenue is a cause of worry, mainly because after selling off the CDMA network to China Telecom, it has another competitor in the Mobile sector, while gaining control of the less lucrative North in fixed lines would mean that its growth would have been reduced.

*Disclaimer: I am vested

Portfolio Review

I have started investing since Nov 09, and this is my first update. Over the past 2 months, I have bought 4 shares. Transpac, First Resources, Bank of America and China Telecom. Below is the performance of the shares over the past 2 months.

I made a 1.5% gain over the past 2 months, which to me is relatively average but it's always better than being in the red. I have confidence in First Resources' Management as well as CPO, and I will look to increase my holdings in that in the next year. I will not be rearranging my portfolio for the next month, but I will look to increase my current holdings, and look towards a network service provider.

Analysis on Telecommunication Sector

The telecommunications industry can be broken down into 2 main components – Mobile and Fixed Lines. However, several companies are able to provide broadband services via the fixed line.

In Singapore, all companies provide fixed line, mobile line and broadband services, with Singtel using the ADSL method of accessing the internet while Starhub uses the cable point for the television. M1 taps onto either the Singtel or Starhub to provide internet to its users. Starhub and Singtel have another source of income via Starhub Cable and MioTV respectively.

In China, China Mobile is the market leader in the mobile line sector, with China Unicom second and China Telecom third. In the landline industry, China Telecom is the market leader, followed by China Netcom and China Mobile. China Netcom was acquired by China Unicom, in a 2008 deal which saw China Telecom taking up China Unicom’s CDMA technology, giving it a foray into the mobile industry.

Statistics

In Singapore,
Fixed Line Penetration Rate – 96% (total of 1,117,000 households, up from 1,104,500 in 2004)
Mobile Penetration Rate – 135.3% (total of 6.7million, up from 3.7million in 2004)
Internet Penetration Rate – 58.6% (total of 2.7million)

In China,
Fixed Line Penetration Rate – 24.4% (total of 318million, a decrease of 22.07million in 2008)
Mobile Phone Penetration – 54.3% (total of 739million, an increase of 97.32million from 2008)
Internet Penetration Rate – 25.3% (total of 338million, up from 94million in 2004)

Another noteworthy point are that in China, the fixed line penetration rate has dropped over the past year.

Singapore or China?

In Singapore, the opportunity for companies in the telecommunications industry is limited. With the mobile penetration rate capped at a maximum of 200% (it is not foreseeable to have three phones unless of course you need a phone for wife, work and mistress), the growth opportunities are limited. Furthermore, as more people move towards mobile lines, the need for land lines is greatly reduced. However, all three telcos provide high dividends, and is a good defensive stock to complement a portfolio.

In China, the opportunity in the telecommunications industry is large. Mobile penetration is ever increasing as well as internet penetration, giving rise to a lot of opportunities. Likewise, the need for landlines is reduced as people move to mobile lines. However, with more companies moving into China, the demand for land lines is still present.

For me, I invested in China Telecom on HKex. Personally, I believe that China Telecom or China Unicom would be a good choice for investment, but I went with China Telecom. The reasonings of why I went with China Telecom will be covered in the next post.