Investing in Real Estate: Real Estate Investment Trusts

Grab a drink, this is a long posting.
 
I left out my posting on Ajinomoto in favour for REITs as I am looking for opportunities in another vehicle of investment a.k.a diversification, and this time by exposing myself to real estate properties. Apologies to those who looked forward to Consumer stocks, I will continue to post them when I have the time. Why not buy and sell property instead of REITs? Because REITs suit me, me only la with some pointers as below:

• Direct buy/sell requires large liquidity; cash in hand. I do not have that privilege, I am talking bout RM40,000 to RM100,000 depending on which property. And I will never borrow to do investment.
• Chasing for tenants can be tiring and chumbersome, this is handled by the trust managers of REITs. No headaches on seeking right tenants or collecting rentals, no running around.
• There is bigger risk in direct buy/sell as there are more stakes involved such as big capital spending & time spent.
• REITs do not suffer from upfront charges like unit trusts. You can buy and sell REITs from Bursa Malaysia just like any other typical stocks. Thus, what you need to do is sell your units when unit price is higher than NAV, or just sit back and wait for dividend cheque which happens every quarter.

What is a Real Estate Investment Trust?
REIT is a company that owns and operates income-producing real estate which covers commercial real estate sector. REIT can also lend money directly or indirectly to other companies to finance acquisition of real estate properties. REIT gives an average investor the opportunity to invest in commercial estate by purchasing a stake in a portfolio that they would not otherwise be able to purchase on their own. These companies are then able to finance their operations by raising money from your money through sales of common stocks.

There are established guidelines in Malaysia for a company to qualify itself as a REIT. This comes from SC (Securities Commission Malaysia) which I find difficult to get the latest one, all Malaysian website sux btw. Some of the info here might not be correct (I will update it once I get the data). This is after all an ongoing research which I just started a week ago, "Kelian" me ma.

• Allow up to 70% foreign shareholding in REIT companies. Still need the 30% for Bumiputera quota, burdens man.
• REIT not allowed to acquire non-income generating real estates like vacant land or under construction real estates more than 10% of total asset value.
• NO explicit requirement of minimum payout ratio in guidelines BUT...
• Tax exemption at REIT level provided that 90% if its income is distributed as dividend to shareholders.

Analyzing REITs: Qualitative Factors
Stability
REITs are generally viewed as more stable than other investment types besides bonds and fixed deposit because of the dividend requirement if SPECIFIED. A high payout ratio means more cash back in the hands of the stockholders on a regular basis, therefore stabilizing returns. It is also more stable due to the underlying real estate operations. Properties are hard, tangible (can touch and hold ahhh..) assets that do not fluctuate in value as quickly as other assets. Contracts in commercial real estate industry also tend to be long term in nature (I.E. leases 5 years or more by tenants).


Timing
Because the nature of being illiquid when we deal with hard assets, there should be a lag between a REIT performance and with the rest of the economy since tenants are locked into their rents until their leases expires. There's a writeup by BizTheStar on how REITs behave in relation to our KLCI here.


Operations
Investment Strategy. What does this REIT do? Determine the specialization of the REIT. Examples: YTL-REIT is focused predominantly on the retail trade via investment into Starhill and Lot 10 shopping complex. UOA and Tower REIT have their attention on office space. KPJ Healthcare REIT on investments in hospital buildings.

Portfolio Composition. Once a strategy has been identified we must look at its current portfolio health.

1. Size: Number of buildings and number of sq feet. The larger the more diverse but more complex in terms of managing the portfolio and driving growth.
2. Geographic distribution: Focus on certain markets so their relative strengths and weaknesses of its strategy must be assessed.
3. Quality distribution: Does it hold high-quality class A/premium properties or cheap one? Holding cheap ones and redevelop them into higher quality assets can be a possible strategy for the REIT so take note.
4. State-of-service: The breakdown of buildings that exists and in-service (being currently utilized by tenants) vs those that are still under construction or in development stage (for further growth).

Other Business Lines. Does it have other sources of revenue instead of rents and mortgage interest? Such as consultation work or third-party property management services.


Operating Metrics. To assess performance of portfolio & potential for growth or decline.

1. Occupancy/vacancy & trend in occupancy/vacancy over the years: A good rate will be 90% or above though vacancy provides the opportunity to increase operating income by renting the space to tenants.
2. In-place rents vs market rents: This piece of info might be difficult to get and the answer for this metric might be ambiguous. If in-place rents are much lower than market rate then higher income can be achieved by charging higher rents to future tenants.
3. Lease expiration schedule a.k.a rollover schedule: It is important to know how committed these tenants are when leasing the properties. Potential upsides of increasing rents can be obtained when a given lease expires at the right time such as when the economy and consumer sentiment is doing very well.
4. Leasing activity: As measured by number of leases signed, number of sq feet leased and average rental rates achieved. Again this might be hard to obtained.
5. Tenant financial strength and diversification: Which is the ability of a REIT's tenants to pay their financial obligations (I.E. mortgages, rents). Can get this easily via revenue contributions from top 10 tenants in the REIT company report.

Pipeline. Talking about the future of the portfolio. Reference to acquisitions, dispositions and new development that the REIT is expected to undertake for the future.

1. Development: Number of developments, total sq feet, the location, project costs and timing of launch.
2. Acquisitions & Dispositions: Absolute price in terms of price per sq feet and important to consider that in relation to comparable sales. Also the timing and size of the buy and sell of properties.

Growth strategy. Seek to understand how the company derives it earnings through growth. It is via acquisitions or developments? By raising rents? Upgrading the tenant base? Get to know the likelihood of success and failure is critical to unlock the hidden gems.


Most of the information above needed to analyze REIT can be found by reading through the company's report & dissecting them. First, you need to answer yourself on what kind of investment you are looking for (investment strategy of the REIT), what is your financial goal & the risks you are willing to take. Once answered, we then only look at the fundamentals of the company via operational performance; where the most of the fun & learning begins.

A little bit more advanced research starts here as we are dealing with financial ratios so I will try to slot in simple illustrations to make it easy for people to understand.
Analyzing REITs: Quantitative Factors
Funds from Operations
FFO is a key measure of bottom line financial performance of REIT excluding gains or losses from sales or property and depreciation of assets. We exclude those because we are looking to capture recurring performance. Real estate is different than other investments as property rarely loses value and often appreciates unless we go to war with Singapore or Indonesia and surrender.

1. FFO per Share (net income/number of share outstanding): just like EPS measure for other stocks, a measure of how much earnings you get per share that you own per one financial year usually.
2. FFO Yield (FFO per Share/REIT stock price): much like ROE, the per ringgit return of investment. A measure of if you pay RM1, how much you get in % returns for the next financial year. If 10%, you get RM1.10.
3. Price-FFO Multiple (inverse of FFO Yield calculation): similar to P/E ratio for normal stocks. It is used to tell how many years it will take to recoup your initial investment capital back 100%. Say Price-FFO is 6, it means you will take 6 years to get back exactly RM1 on top of your initial RM1 investment. In other words, takes you 6 years to double your investment.
4. AFFO (FFO minus recurring capital costs). I personally will use this for cash flow evaluation for a number of reasons:

• More precise measure of leftover cash as it deducts out capital expenditures needed to maintain existing portfolio of properties. You need money to maintain your house too from time2time, exactly the same picture here.
• Because it is more precise, it is a better predictor of REIT's future capacity and capability to pay dividends.
• The final financial ratio that is used for price evaluation of the REIT and also I will use it to look for growth.

Dividends
The dividend payout for a REIT must be high, higher than bonds or FD rate to make it as an appeal to investors. Does this mean REIT has higher risks? Not quite true in Malaysia as our properties remain relatively undervalued in comparison to other Asean regions, thus still room for growth.

1. Dividend per Share (dividends paid/number of shares outstanding): though past performance does not guarantee future returns, a consistent and growing dividend is always a good sign, ilham!
2. Dividend Yield (Dividend per Share/REIT stock price): div yield for REITs are generally higher than other stocks or bonds fyi. 6%-8% or 10% as an optimistic yield rate (excludes capital appreciation).
3. Payout Ratio (FFO per share/Dividend per share): a measure of how much earnings are distributed to shareholders. I.E. Sunway REIT has promised 100% for the first two years 2011-2012 and 90% for subsequent years.

Operating Leverage
An important notion to consider. This refers to the breakdown of variable expenses (costs that can be adjusted based on sales volume) and fixed expenses (costs that can't be adjusted in short-term). Let me give an example, a REIT company has to pay all its real estate taxes/mortgages/maintenance (fixed) even if it is not fully occupied, say 40% occupied. This means high fixed expenses, hence said to have high operating leverage. Revenue can be lost due to vacancy which is difficult to offset by cutting expenses since fixed costs are relatively high and hard to adjust. Vacancy rates have to be very closely watched if you are involved in real estate investment. A good measure that I could think of is using ROA (return on assets=net income/total assets), a measure of how much profit a company earns for every dollar of its assets which include cash in hand, accounts receivable, property, equipment, inventory and furniture.

Capitalization Rate
Another measure of yield on investment using the formula (AFFO/asset value). A high cap rate implies that buyers are demanding high yield on their investment, thus there is good investor sentiment. This is an important gauge to know the interest of the overall market towards a particular REIT or its investment strategy (investors buy the idea). You can compare this ratio to a REIT's FFO yield which should roughly be the same, if not further check is required to find the smoking gun (accounting tricks?).

Net Asset Value
Commonly known as NAV which is the theoretical value that would be received if all of a REIT's real estate assets were sold now at market price minus away all liabilities (debts and etc). So NAV per share is practically (total assets-total liabilities)/number of shares outstanding. Once evaluated a REIT's NAV can be compared to the current stock price as a valuation metric. Example needed I know :)

• NAV per share is RM10, stock price is RM12. This would mean a premium of 20% over NAV (RM12/RM10 - 1 = 0.2 or 20%). Measure of the degree of optimism about future growth of the REIT that has been incorporated into the stock price. So what you need to do is evaluate this optimism via qualitative & quantitative factors to answer "Does it makes sense or it is overvalued to buy now?"
• NAV per share is RM10, stock price is RM6. This would mean a discount to its NAV of 40%. It could mean two things, one a hidden gem OR worse investors thinking, questioning and sitting on the fence about the potential of the REIT. Again, evaluation of this pessimism via qualitative & quantitative factors to answer "Should I buy this opportunity or this opportunity does not look like it's going to fly?"

Leverage
One of the really most critical aspect of REIT is its leverage structure. What are the various financing methods they use to carry out their operations. Leverage means using resources in which others have in exchange for what you can give back. In REITs, they use other people's money in exchange for their expertise in managing properties and give 90% of the returns back. To answer this evaluation we need to ask a few simple questions:

1. How much leverage does the REIT uses? (total debt/total market capitalization) to indicate amount of borrowings outstanding.
2. How comfortably can the REIT afford its debt payment? EBITDA/(interest expense + dividend) a measure of breathing space it has when it comes to servicing its debt payments.
3. What is the REIT's liquidity position? careful alignment of cash flow via schedule of debt maturities. It is imperative to know how the REIT funds those debts. It could be:
• short-term using cash in hand, revolving credit facility like our credit cards; spend now pay later concept.
• long-term via sales of its assets, new equity value from public may be issued.

Indices
Pretty simple. A good way to know if your REIT is performing better than average is to compare it against specialized indices for benchmark. This is more of an informative scorecard than comparing it to a normal main board which has many hundreds of companies that are not related to real estate at all. BUT too bad, our Malaysian market does not have such index for REITs as this investment vehicle is still at its infant stages which just started in 2005. What to do? No choice la, compare against its peers then. I will use the Div Yield as a first cut comparison.

In a Nutshell
There you go, a comprehensive overview of how I would be analyzing and contemplating a REIT company, the same applies to how I checkout other types of stocks, just to give you a feel of it. There are 12 listed MREITs (Malaysian REITs) in our stock market now and soon to be 13 with Sunway (the largest in market cap) joining the boat in early July 2010. Risk level in investing in REITs would be from low to medium range. (low-FD, high-equities)

• Yes, I will be taking some time to drill each and every one of these companies. Be patient I will post them in time. Zui kelian me la.
• Yes, it may seem hard to understand all those crap I just mentioned above if not everyone would be wealthy. Learn and be rewarded.
• Yes, earning $$ from investment is way more rewarding than getting my paycheck because it is not hard work but smart work. No sweat needed.
• Yes, we can do it together just email me your interest at nick_allianz@hotmail.com.

When aboi becomes ah man perhaps then I would venture into direct buy/sell for the fun of it. For now MREIT would be a good choice as alternative asset class for investment in real estate. Remember it is never wise to borrow money to invest which is the same as when you spend using your credit card.

10MP Another 5 Years of Hell

Our nation's overall policy framework is to achieve the committed Vision 2020 which is to become a fully developed nation. How to define developed status? I also don't know as the term developed is very contentious and can be fiercely debated. However let me try by giving you a KISS ladies only (keeping it short and simple).

• Income or GDP per capita. GDP is a measure of a country's overall economic output, per capita means per individual. This indicator has been proven to correlate well with standards of living. High income economies as defined by World Bank are countries with GDP/capita of $12,000 and above. Below by World Bank 2008 report. We are thus graded as upper-middle income economy. Boleh boleh la..
• Singapore at $37,500
• Hong Kong at $30,000
• South Korea at $20,000
• Malaysia is at $8,200
  
• Thailand at $4,000
• Indonesia at $2,000

• The other indicator is Human Development Index (HDI). A gauge of the country's level of human development (life expectancy at birth, access to knowledge and standard of living). Again a strong correlation that a high HDI comes with a prosperous economy. Countries with a score of >0.800 are considered to have high standards of human development. We are under high human development countries but still one grade below first world countries (>0.900).
• Singapore at 0.944
• Hong Kong at 0.944
• South Korea at 0.937
• Malaysia is at 0.829
  
• Thailand at 0.783
• Indonesia at 0.734

I am really really REALLY sure everyone is confused with our national reforms. Needless to say there are many things to be implemented, so let me simplify it for you. The implementation of these systematic reforms can be distinguished via four key items:

• NEM or New Economic Model: represents economic transformation; the framework to guide our economic strategy or country "roadmap". NEM is the mastermind.
• GTP or Govt Transformation Plan: to transform the govt's work processes by improving delivery of activities. GTP is really only about our dear government.
• 1Malaysia: emphasize ethnic harmony, national unity and efficient governance. 1Malaysia is the peacekeeper.
• 10MP or 10th Malaysia Plan: outline strategic directions towards a high income and develop nation by 2020, macroeconomic framework and the KRAs (key area results). 10MP is the real money maker.

There you have it, the mastermind that defines the roadmap for the government to pursue our future riches via money making machines and at the same time having our peacekeeper to avoid racial tensions. Sounds very nice on paper BUT my point here is that the 10MP is full of holes, far more than your face ah no offense.

Our 10MP is targeting a GDP growth of 6% per annum from 2011-2015 lead by private sector underpinned by services sector. Another goal is to increase income per capita from our current $8,200 (RM27,000) to $12,140 (RM40,000) by 2015. In the media it says "An ambitious but achievable 10MP", I doubt the targets and especially the plan outlined in achieving them. One point to note is that we never achieved our targets for our 8MP and 9MP respectively and this 10MP is going to be no different in the long run.

First Point to aboi
The federal government's development allocation for 10MP amounts to RM230bil, the same amount for 9MP, it is stagnant. That equates to RM46bil per year. Where else our operating expenditure is RM150bil in 2009 alone and is on the rise by 15% CAGR. This is like a situation whereby you own a house (country), you pay more on your bills (operating expenses) than to renovate or upgrade features in your home (development allocation). There is a need to reduce subsidies or at least to target subsidies to people who deserve it. Refer to my earlier post on Undercovering Malaysian Budget

I am dismayed that the development allocations is not increased even though govt has said it will reduce subsidies which alone eats up RM76bil in 2009. Subsidies are meant for the poor, not for everyone (both foreigners and locals).

Second Point to aboi
The usual more and more projects, MRT in Kuala Lumpur, seven highway projects and two coal electricity generation plants and many others totaling at RM60bil++. Handing down more projects is going to fuel our motto: "First world infrastructure, third world mentality." There has to be a greater need to focus on human capital and not hardware which we have been doing since 1990s. But what is worse is that these mega projects are not made as open tenders. So the govt awards it to selected companies or in better words; cronies. Big hugs to our PM.

!! because this contradicts with NEM that says that any opportunities are given to the best proposals and to obtain best value via open tenders. Corruption will live on. 

Third Point to aboi
This one is really astounding, the 30% target for bumiputera is still ON in 10MP but if you read NEM it clearly says that everything is based on merit, competition and need. Perhaps that need is that 30% LMAO (laugh my ass off). Not just in corporate equity but also now wealth in areas of property, jobs and so on. This is not the way to create a high income nation by setting quotes that is based on needs and not on productivity. Learn to be more competitive before you start demanding le.

A big swt as this will not bode well in attracting foreign direct investments (FDI) because it does not distinguish between the rich and poor Bumiputeras. Also, will projects or opportunities be awarded based on competitiveness and transparency or just merely wanting to hit the 30% quota? This kind of dilemma will make us unattractive to foreign investors.

Fourth Point to aboi
GDP growth 6% pa until 2015 using private investment to fuel it by growing 12.8% pa is an extremely tall order to achieve. You have to be an ultra-optimistic if there is such word to hit that target. Our last MPs our GDP was 4.7% and 4.2% on average with growth driven by public sector and private investment only 2%. In order to grow 12.8% pa, we need more FDIs which is something we are not just lacking but losing! FDI has only been growing at 1% per annum, which pales in comparison to China’s 10% and Singapore’s 9%.

Be more realistic with the targets, if the govt intends to attract more FDIs, there is a need to be more transparent such as open tenders, no more quota, liberation of some services & improve efficiency. There is no way we can turn quickly from 1% to 10%-12% for FDIs to hit our 10MP targets.

Fifth Point to aboi
Education. RM280mil sum for all government aided schools for renovation and upgrading through 2011-2012. RM280mil is very minuscule! We have 1,900 govt aided schools which amounts to RM75,000 per year per school. Is that a lot? I don't think so. There is a need to readjust the allocation to education sector, not just infrastructure wise. I still remember I had to learn PC in school using Windows 98 when my house is already equipped with Windows XP. There is also a lack of quality teacher as many do not have the passion, interest or motivation. Being a teacher is quite a 'last resort profession' in this country.
Aboi says pour more funds into education but ensure it is being used wisely, stop the habit of changing syllabus every time the education minister changes, make teacher the first choice like China; paying 100% salary as pension. Perhaps then aboi will change profession and quit current job :) I like what Lim Kit Siang said, In Malaysia, we pay peanuts and so we get monkeys.” 

There are many other faults with the 10MP but the above five points (aboi 5 - 0 government) are really the highlights we need to overcome if we are to achieve Vision 2020. The 10MP is most likely, if not highly probable to be another flop, if you don't believe it accept my bet lor and I can be tai ee long (money collector) in 2015. All I can say is we are going to have another 5 years of hell and that is the end of it, we are never going to achieve Vision 2020. Change to 2050 la, boleh boleh everything also boleh..

What can you do or expect?

1. Vote for change. Between two evils, choose the lesser one since the greater evil is already sending us to 'Holland'. The word evil refers to our two main political parties.
2. Spread the word. Be a teacher yourself, let others know what you know. Re-educate yourself with the news around you and you will know what lies ahead in your life and your family as well.
3. Don't be complacent. Just because you have a secure job it doesn't mean it is going to be there forever. With the rate our country is going especially with FDI, I am quite afraid, you should too.
4. Don't complain expensive. If you truly want things to change, subsidies have to go no matter what. Govt manja us for far too long, it should be time to face the reality of actual market prices. Spend less lor, will you die if you stop eating in restaurants and cook yourself or eat at hawker stall? No right.

I am no economist nor do I own any certification in finance but I dare to say I am not dumb to be fooled by unachievable gains or unfairness that is plaguing our god forsaken country. Long live our king and country! (I hope).

Lazy: The highlights of the 10MP can be found at Business Times
Kut Lat: The details of the 10MP can be found at Economic Planning Unit (EPU)

Is Insurance Really Necessary?

Introduction 
Before we start, how do we define 'need' vs 'want'? Need is something you must have in order to survive; food, drink, sleep and sex!? (cause we need to reproduce to survive ma), very basic stuffs. Want is something you would like to have but is not absolutely necessary but still good to have. With this definition it would be honest to say that insurance is not a need but a want. So next time when you go buy an insurance tell the agent it is not that I need but I want and he or she will ughh?

So what do most people want from having insurance? The answer is love (3rd-level in the Maslow hierarachy of the needs and wants of humans). This means that the act of insuring yourself or any of your loved one is purely an act of love. Sounds romantic? Not so right. If anything unfortunate should happen to you, the money obtained from insurance is supposed to adequately shield you and your loved ones from a sudden financial crisis and generate enough time for you to recover from the loss.

To be frank I still really do not understand, maybe I never will, why that some people do not have any insurance coverage at all. Do they think it is a scam? Do they think it is a waste of money? Do they think it is supposed to generate some wealth for them? Are they ignorant? If I am healthy why do I want it? I will try to answer all these later. For now, accept this statement that having no insurance is equivalent to not loving yourself and your loved ones & your life is worth nothing and I mean it. Nothing, kosong! 

Types of Common Insurance Coverage
Personal Accident Insurance: Easily the most affordable of all coverages, it protects you from accidental risk; injury or death caused by accidents. The charge rate is the same from cradle to grave meaning it is fixed. If you are married, get a Family Accident coverage then which is cheaper than by individual. I have a coverage of RM500,000 for RM500/year, which can be increased to a million for double the price but I don't want that much yet.

• "If I am healthy I don't want it" - even if you are superbly healthy with big muscles, can that prevent accidents from happening?
• "Kena accident like hitting Magnum jackpot nia" - then why you buy jackpot in the first place? Because there is a chance that it will happen right. If you kena both also give you money, any difference?

Medical & Hospitalization Insurance: After having met an accident, you could probably end up dead or in most instances land yourself in a hospital and to stay overnight. And this is going to cost you money especially if you are admitted to a private hospital. The coverage includes Room and Board (R&B) usually in RM100, RM150, RM200 and RM300 with some annual & lifetime limit. There is also co-insurance which means you need to pay a certain % from the total claims made, usually 10% with a cap limit. I have R&B RM200/day, Hospital Benefit RM300/day with annual limit of RM75,000 and lifetime limit of RM225,000 which I find adequate.

• "I go to public cheaper than private" - if you have time ok, but what if you don't have time on your side, can you afford to queue and wait?
• "This co-insurances sounds like a scam, why I still need to pay a bit" - it is to ensure that you do not under insure yourself.

Critical Illness Insurance: The moment you are diagnosed with any of the 36 critical illnesses, check it out here you will get a cheque for the full amount of your coverage. Usually both medical & hospitalization insurance and critical illness insurance comes together as a single package, such as whole-life policy or the recently more popular investment-linked policy. I am covered with a RM100,000 insured sum for this. Why RM100,000? I am assuming at worst case I get hit by any one of the below just to name a few (by wallet damage). You can easily see that you need at least a bare minimum of RM100,000 coverage.

Heart Attack: up to RM30,000

Stroke: up to RM75,000

Cancer: up to RM150,000

Kidney Failure: up to RM150,000

Pulmonary Hypertenstion (high blood pressure): up to RM120,000

Alzheimer's Disease: up to RM75,000

Chronic Liver Damage: up to RM120,000

Brain Tumor: up to RM120,000

Bacterial Meningitis: up to RM120,000 

Types of Common Insurance Policies 
Endowment Policy: Structured more towards a savings account than an insurance policy, what I call a forced savings. The savings component, you can opt to save for a certain period of 12, 15, 18, ... 30 years. At the end of the period (policy matured) you will receive a cheque from the insurance company.

As for the insurance component, in the event of death or total permanent disability (TPD) you will be paid the insured amount. If you are diagnosed with a Critical Illness, the premium will be continually paid by the insurance company. Hence endowment is very suitable as a passive retirement fund by forcing you to save to pay for the premium and take back the returns when it matures. If you don't have an EPF account, this is a viable alternative a.k.a. Create Now, Save Later concept.

Example paying RM5,000/year for 30 years period with no withdrawals and getting RM300,000 by the 31st year. You create a paper value of RM300,000 for yourself first and then save later to pay for the premium. It focuses on generating cash value and providing minimal insurance benefit.

Annuity Policy: Almost the same as endowment but does not mature at a specific date. Instead it pays out yearly income throughout your retirement more like a pension fund, not a lump sum. I do not have both these policies because I have my own retirement fund via investing & I would probably get an endowment if I have children one day to show daddy's love to them.

Whole-Life Insurance Policy: An insurance contract that goes on until you have drawn your last breath whether accidental or non-accidental. It also comes with TPD. Riders can be attached such as critical illness & accident coverage. Usually a participating policy which means all premiums are tied together for investment and any returns made are redistributed via cash bonuses. Most whole-life insurance policies do not invest in equity market, therefore the risk is very minimal. 

Term Insurance Policy: Very much like whole-life insurance but does not participate in any investment or income-generating activities. This means that 100% of your premium is used to pay for insurance charges. A good alternative if you are on a tight budget.

• "The returns are so low le" - Cash bonuses generated are supposed to be a method to finance your insurance charges not give you wealth. An insurance is always a risk management tool not an investment tool.

Investment-Linked Insurance Policy: Basically hybrid of a unit trust and the insurance contract. It consists of two major elements - the Policy Contract & Investment Fund. The policy has the usual Basic Sum insured upon death or TPD and can be attached with other riders like Critical Illness or Medical & Hospitalization. At the investment fund element, you have a variety of funds to put your money into; namely Conservative, Balanced or Aggressive. An ILP has very comprehensive coverage at affordable start-up cost. I have this together with my add-ons of Critical Illness and Medical & Hospitalization coverage. The reason I choose is because ILP is very versatile, if I feel that I do not need that much protection, I will funnel some of my premium into the investment fund.

Picking An Insurance Company
You should do a little research on the financial standing of the insurance company before you get a policy from them. Some useful indicators include the financial strengths, company spending and policy claims. All of these can be obtained from BNM Annual Insurance Statistics

• Financial strength: look at more assets than liabilities, look for more cash & deposits in hand so they are more likely to pay claims easier.
• Company spending: how much they spend on agency remuneration, management payouts and day-to-day operations. Must be in tandem with their financial strength.
• Policy claims: amount of claims paid to policy holders in the event that it is claimable. Must be in tandem with their financial strength.

For my view, it does seem that Great Eastern, AIA and Prudential are the sound companies that have strong financial backing. Remember agents are also important not just the company.

"Why some people feel cheated from insurance especially those bought in the 1980s to mid-1990s". This has got to do with Critical Years. What happened was that many agents were convincing people that they only need to contribute to the premium for a number of years (critical years) and after that the policy will be self sustaining. And they said 'guaranteed'. What people don't know is that it is projected and will always be projected and if they have read the policy closely, it never mentions the word guaranteed. If you want a guaranteed return go dump in Fixed Deposit la.

I blame people for listening them 100% and not do research on their own. I will also blame those agents who want to suck in more bad karma and think about their own gains. It is important for you to find a good insurance agent as the turnover rate for this industry is 90%. This is exactly what is happening to unit trust as well, it is the sole reason why large equity funds are so hot yet people still pour in money to get lower than average returns. After another decade, they gonna say they "kena tipu" again but in fact they bluffed themselves. If you are looking for good agents, you can ask me hehe. I cannot stop stressing that you need to do your own research as well or ask your friends opinion who knows investing in and out, remember the 5% kind of people :)

Last Words
The closest reason why I think some people take insurance lightly is because it is a financial tool. Like it or not most people have very little money knowledge, schools don't teach ma. Most people live from paycheck to paycheck, spend more than they make or save too much but don't know how to use it. They don't realize the importance of having it and think that they can always "get it later." Insurance is like the analogy of a parachute: "When you need it and you don't have it, you'll never need it again." People keep on preaching that gambling football or etc is bad, but let me tell you this last statement. Without insurance you are gambling your own life and the protection of your survivors, to me that is the WORST BET that you can gamble and you gamble it every single minute of your life.

Industrial Products: Top Glove Corporation Bhd

Introduction
Malaysia is the world leader (Boleh la!!) in rubber gloves, with a market share of ~60%, followed by Thailand (~25%), Indonesia (~10%), China and Sri Lanka. Following consolidation of the many players in 1980s & 1990s, they are now just a few of them and enjoying an oligopolistic (very dominant) position, this will make it harder for new entrants to achieve economies of scale (make more & sell them cheaper through bulk selling).

Here comes Top Glove Group which was established in 1991, an ambitious and nimble company that has grown to become the world's largest glove manufacturer under founder Tan Sri Dato Sri Lim, Wee-Chai and is still the Chairman. It has 19 factories across Malaysia, Thailand & China (as of August 2009) with 355 production lines making 33 billion pieces per annum. Top Glove alone supplies 23% of the global market, exporting to more than 180 countries especially to USA, Europe and Far East (Japan, HK and Taiwan).

The demand for rubber gloves is expected to grow around 10% pa, owing to better health awareness and standards. Demand for growth is quite recession-proof because a large % of them are being used in healthcare sector. With the increase in fast food consumption (good correlation with health problems), growing aging population, health threats like SARS/H1N1 & emerging developing countries like BIRC (Brazil, India, Russia and China), I find that the 10% pa figure by economists to be optimistic. Good news for Top Glove and other rubber glove companies in Malaysia (which are competitors):

• Supermax Corp Bhd (14 bil pieces per annum)
• Kossan Rubber Industries Bhd (11 bil pieces per annum)
• Hartalega Holdings Bhd (6 bil pieces per annum)
• Latexx Partners Bhd (6 bil pieces per annum). A good friend of mine made this research already here at The Fool Investor

Fundamental

1. Does the company have an identifiable durable competitive advantage?

Being the largest rubber glove company in the world, it can produce high quality gloves with efficient low cost. Economies of scale & its dominant position are Top Glove's competitive advantages.

2. Do you understand how the product/service works?

Rubber gloves are not only used in healthcare but also in the food and services industries for hygiene purposes. As such, it is anticipated that the demand to stay resilient (stable) even with the global economy being sluggish.

3. What is the chance that it will become obsolete (KO) in the next twenty years?

Definitely NO. Ask yourself, is there any substitute for rubber? Is like asking what other material apart from rubber can be used to make condoms :)

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes, they are moving forward in a two-prong growth strategy. Vertical strategy on the downstream via overseas marketing offices, upstream via take overs of smaller companies involved in the rubber sector. Horizontal strategy by increasing sales in new flavours via R&D and value added products.

5. What is the company's financial history and status?

• Net Profit Margin is in the 10-15% range. Nothing special as the other competitors have these kind of figures as well, though Top Glove enjoys better average margins most probably due to its economies of scale.
• Return of Equity which means how much shareholders get in return of investment is in the 20-30% range over the last 10 years.
• Revenue Growth Rate saw a tumble since 2007. This is due to the drastic increase in the cost of raw materials of latex and fuel. Also affected slightly by the strengthening of the ringgit vs the greenback (USD). Soon after that, the world was hit with the 2009 financial crisis and further weaken the growth rate.

• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years. If one compares this with the stock price, you can clearly see that the stock price is affected by human emotions (panic & greed) even though the company is growing steadily well. Once again I would like to stress that you should value a company from it's financial ratio/numbers, not just purely from stock price.

6. Is the company conservatively financed?
Yes, with RM185mil in cash and bank balances enabling the company to deal with rising commodity prices like latex and to fund potential expansion plans. They did have do have the occasional short term borrowings but has been paying back effortlessly thanks to a good balance sheet. D/E ratio is at 0.02 (which is negligible) while in the last 5 years has never exceeded my trigger limit of 0.5.

7. Is the company actively buying back its shares?
Amount of treasure shares (buy backs) stands at 6.6 million units. There has also been a 1:2 share split in Year 2005 and also many bonuses. All of these add value to shareholders in terms of equity.

• Year 2002: 3/10 Bonus
• Year 2003: 2/5 Bonus
• Year 2007: 2/5 Bonus

8. Is the company free to raise prices with inflation?
According to Dynaquest, they did pass on the cost increase to its customers in the year 2009. With the increasing thrust & volatility of latex and oil prices, passing cost to the customers is inevitable not just Top Glove but to the rest as well.

9. Are large capital expenditures required to update plant and equipment?

Because it is a manufacturing company, capex are always required to boost production capacity via upgrades or expansion. Top Glove is no different and is investing about RM100mil to increase production of its five plants in Malaysia. This will up the capacity to 41.25 billion from 33 billion by 2011 (looks like company is anticipating at most a 10% growth in demand).

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that TOPGLOV's revenue growth rate is at 10% averagely following demand %, with 85% operating cost margin, 25% corporate tax, 2% re-investment (~RM30mil a year) but a growing working capital in tandem with revenue growth at 10% for the next 5 years. Having computed all these in my opinion it is fair to buy..

TOPGLOV at RM6.90 to RM8.40 for ~15-13% discount rate.

From its listing in 2001 to 2010 the stock would have appreciated by 1200% not accounting dividend reinvestment which would give you more. Is the stock overvalued? I would say Yes based on FCF (free cash flow) & some technical indicators, a value of ~RM12.00 is only appropriate if I did assume the revenue growth rate at 15% but as an optimist and the company's expansion plan, 10% is more sensible. Having bought them during the start of the bull run and sold at ~RM11 this is merely short term profit riding for me on bad times > good times. One would only do this sort of profiting if I find that the underlying fundamentals of the company is good and NOT solely because of stock price as have been explained earlier.

What Do I Think? 

The time to buy is too late, over the last three months has seen the price hovering at RM12.00 level (saturated). Also with this industry being quite competitive and at most times volatile (revenue margins dependent on latex and oil prices), there is a lot of risks at stake and it is in my honesty to say that it only makes it harder to value such company. I do like the fact that Top Glove has consistently being rewarding their shareholders with dividends & bonuses.

TOPGLOV is a good stock if one follows the trend in commodity prices & also to follow the demand of rubber gloves of different categories such as powder-free latex gloves & the increasing demand of nitrile gloves. Plus be on the lookout for the next global pandemic (if you watched Discovery Channel like me) you will know that viruses keep mutating so it is not a matter of will it but when.


Because the rubber glove and plantation sector in Malaysia is one of world-class, their stocks tends to be on the limelight thanks to hot news & bullish analysts. The result? Simply panic & greed. The prices of these stocks will fall hard during bad times and go up high when it is in Disneyland especially the blue chips. 

My strategy is simple, if I need short term funding, buy during bad times and sell at good times. If I look forward for long term then I will need to monitor closely perhaps by quarterly. This stock is not as easy as buy, hold, sleep and wait as they are just too many uncertainties for me to relax.

**I would one day like to compile a grandmother story with a side-by-side comparison of all the major rubber gloves companies as well as plantation companies for they are world-class Malaysian companies. It is wise to know in depth how these companies compare to each other and why they are important to Malaysia. There are many other financial ratios I look at as well but to put them into my usual blog writing will make most people blur blur & zzzz...until I get that long writeup done I feel that a short sharing will interest some people to pick up investing as a life skill & dump the gambling mindset that most people have away as a start.

Day 2: Still Suzhou

Woke up the next day by a morning call at 7am & not by sunshine :( Still in the vicinity of Suzhou (city with a population of 6 million) and heading to the famous Suzhou No.1 Silk Factory Co. Ltd. The tour guide apparently said that Suzhou has the prettiest girls in all of China but I have only seen old women and just OK girls...was Tertipu! Maybe her plan to wake us up.

Anyway no pictures were allowed to be taken inside the factory & production area. Sadly I had to use other pictures (not taken by us) but looks almost identical, just imagine/visualize lor.

• Step 1: To sort and treat the killed cocoons with boiling water to separate the filaments bound together and to easily locate the end of the thread. One cocoon can generate a thread of about 1km!
• Step 2: Combine the threads as one is too thin so workers locate the end of 8 threads and unite them before putting them into the spinning machine.
• Step 3 & 4: These are then weaved before being stretched to be stocked as a pile. The pile can be used to make high quality silk items like beddings, quilts & women underwear. Did I say underwear?

Yes, we did made some grand purchases here but not going to disclose more because it is PnC haha. Lunch was awesome at a place called Zhou Xin where we had some 'very the keat' Ramen with fortified pork belly (see for yourself). Again the ramen is drenched in oily soup, a culture of standard Chinese food in China.

With no time to waste we forged ahead to Ruiguang Pagoda which has the longest history considering it was built during the Three Kingdoms period. At 43.2 meters tall, it is a structure of seven storeys built using bricks and wooden beams. There's also the Tiger Hill; gardens with waterfall near the auspicious Light Pagoda.

The famous historical landmark Pan Gate Scenic Area estimated to be around 2,500 years old. It is part of an ancient city wall that surrounded and protected Suzhou from invaders during the Warring States period.

Outside the water gates, we went for a boat ride on Jing-Hang Yunhe (Beijing-Hangzhou Canal) which is a series of waterways in eastern and northern China that links Hangzhou to Beijing. It is the longest man-made waterway (1,747km) to supply grain to capital cities and large standing armies in the north and was built using raw man swt, no machines! Truly a magnificant second wonder only second to the Great Wall.

The last stop for the day was a shopping district of Guan Qian street, center of Suzhou commerce. Books sold in China were darn cheap, the Chinese seem to have more purchasing power than a standard Malaysian when it comes to reading hence the books are 50% cheaper than ours. This explains why Msia pirated DVD is insanely cheap. Because we like to watch TV more than read le.

Back to the hotel after a boleh boleh dinner, at least it was not Ho Au one.

Trading/Services: Genting Malaysia Berhad

Introduction 
Genting Resort was the brainchild of the late Tan Sri Dato Seri (Dr.) Lim Goh Tong, spent all he had in his life without earning an income to develop and expand Genting Highlands without any help from the government until it was completed and opened on 8 May 1971. Now, it is one of the most successful Casino resorts in the world and a primary tourist attraction for Malaysia.

Genting is now a group and has diversified into many other industries such as plantations, property, paper, power generation, oil and gas exploration and cruise boat industries. Distinctive names namely Asiatic, Genting Sanyen and Star Cruises are part of Genting Group. Now Genting is being managed by his son, Tan Sri Lim Kok Thay.

Genting Resorts acquired the entire gaming, hotel and resort-related operations from Genting Malaysia in a restructuring exercise in 1989.  Known as Resorts World Genting now, the resort offers six hotel with 10k rooms, over 50 fun rides, 170 dining and shopping outlets, mega shows, business convention facilities and endless entertainment - all under one roof. Resorts also owns and operates two beautiful seaside properties named Awana Kijal Golf, Beach & Spa Resort in Terengganu and Awana Porto Malai in Langkawi.Is Asia's leading leisure & hospitality company with a market capitalisation of RM17 billion.

Fundamental

1. Does the company have an identifiable durable competitive advantage?

It operates using a traditional business model where game is emphasized and little attention is paid to the environment, this means cramped and smoky casinos. The model has suited regular patrons all these years (72% of the visitors are day-trippers, 28% are hotel guests from AR 2009). This suggest that the resort is catering to gamblers. The younger crowd now have different taste & demands such as fine dining & Western culture. This is something to think about.

2. Do you understand how the product/service works?

Gamblers will emerge whenever there are dice and playing cards. Greed is part of human and will be part of our lives. Casino (Cash In Now) serves usually three distinct markets which are premium a.k.a high rollers, mid market and general gaming. For the super-rich, not-so-rich folks and for folks who just want to have fun (theme parks, entertainment, shopping and MICE). MICE stands for Meetings, Incentives, Conventions, Exhibitions & Events. To name a few, companies like Prudential and MAA have been using Resorts.

3. What is the chance that it will become obsolete (KO) in the next twenty years?
Zero for obsolete. More competitive would be more suited for the next twenty years which is certain. I was also quite shocked to know that there are 60 casinos of different sizes just 3.5 hours away from Kuala Lumpur & 17 more alone in South Korea. This number is still growing as we all know that Asia is a sweet spot for economic growth for emerging economies like Vietnam, China, India and recently Indonesia is coming back. The last three countries has sizable population to take note.

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes, Genting Resorts only spends its capex on leisure and hospitality business but has diversified beyond the borders of Genting Highlands, for example Star Cruises Limited and the Awani Resorts in Terengganu and Langkawi.

5. What is the company's financial history and status?

• Why a big dip in 2000 (1999 finances)? Due to goodwill written off from subscription of Star Cruises shares of RM1bil. Goodwill means buying a stake of another company at more than fair value or book value.
• Net Profit Margin is averagely in the 30% figure. Another good factor of Genting is that they have consistent high occupancy rates of 77% to 90% from 2003 to 2009 which means they are truly maximizing their assets for profit!
• Return of Equity which means how much shareholders get in return of investment is in the 20% range over the last 10 years.
• Revenue Growth Rate has been bumpy. Attributable to Visit Malaysia in 2007, disposal & impairment losses of Star Cruises and etc. Nevermind that, to simplify I'm looking at growth rate over 10 years of 6.88% and over the last 5 years is 12.28% which shows improving performance. This kind of growth rate value is also known as CAGR - compounded annual growth rate.

• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years. GENM's dividend payout policy has been in between 20% to 30% per share earnings. Talk about being conservative, where else do they use their money then? Read on.

6. Is the company conservatively financed?
Balance sheet is VERY IMPRESSIVE. No debts and coffers filled with ~RM5bil of which RM3bil in bank balances and RM2bil in money markets (2009).

7. Is the company actively buying back its shares?
Yes, initiated since July 2007 and to date total treasury shares (shares bought back) stands at 208 million units. Resorts has been paying RM710mil for buy backs for the last three years even at times of financial crisis because they have tremendously strong cash balance in hand.

8. Is the company free to raise prices with inflation?
I did not find any info. Thus I took the liberty of using visitor growth rate vs revenue growth rate over the last 5 years. CAGR of visitors at 5% where else CAGR of revenue is ~13% tells us that revenue actually grows faster than the number of visitors. RWG serves the Malaysian market which is 85% of their total visitors & people are willing to spend more every year so cost (with per year our national inflation) does not seem to pose any problem with spending.

9. Are large capital expenditures required to update plant and equipment?

No, Resorts is modeled on a traditional business and does not spend a lot of capex to build nicer hotels and facilities. There is no new room capacity envisaged following their most recent sharing in Investors Forum in September 2009.

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that GENM's revenue growth rate is at 8% averagely, with 65% operating cost margin, 25% corporate tax, 2% re-investment but a growing working capital in tandem with revenue growth at 8% for the next 5 years. Having computed all these in my opinion it is fair to buy..

GENM at RM2.20 to RM2.65 for ~15-13% discount rate.

You would probably ask why the start of the drop in 1999 and the rise and fall in 2007-2008. Asian Financial Crisis in 1999 and the peak of the bull run at the end of 2007 before some profit taking takes place by smart investors and then the great collapse as we all know it. This is exactly why an intelligent investor must seek buying opportunities during a collapse (bear run) OR to buy at a discount rate from the fair value to ensure you don't overpay for it.

At RM1.30 in between 2001 to 2002 (because nobody would know what's the lowest price you can buy), the stock would have appreciated to RM2.80 in 2010 which equates to 9% returns per annum, not accounting dividend reinvestment which would give you more than a 10% figure. This assumes that you hold the stock through the 2009 financial crisis. Why would you sell anyway? Do you think a stable and rich cash company like Genting will ever see its share price drop to less than RM1 (because Genting Groups has a 50% stake in Resorts)?

What Do I Think? 

The Pros
Damn rich company. Share buy back programme (helps in increasing share price). The only licensed casino operator in Malaysia. RWS won't bite Genting Malaysia as it serves a different market. Still looking for opportunities abroad to diversify income stream because too rich ma.

The Cons
Competition is stiffing up. Gaming landscape is changing so the question is, will younger people still be interested in traditional casinos?


Last say, I would be standing on the sidelines for now seeing that GENM is quite an active stock during trading, a great buying opportunity will come when the market is actually down. The price it is at right now is fairly valued (anything above RM3.20 is overvalued) but it is still better to buy at a certain discount rate at least in the 10% range as risk compensation.

GENM is a good stock but not exactly a great one. Why? My portfolio aims for at least 15% returns per annum and GENM is not really suiting me lately. I could one day diversify and put some allocation into this stable & entrenched gaming company. I'm still young ma so find more risk lor if there is any, what I call an educated risk.