Apple - The Case Against iPrefs

It is rather hard to see the point in Greenlight’s iPrefs proposal. At the heart of iPrefs is the exploitation of the difference in capitalisation rate between the fixed income and equity market. This may seem ingenious but the corresponding introduction of interest rate risks and reduction in capital management flexibility are hardly great trade-off.

Furthermore, there are a myriad of inputs that affect the return of iPrefs such as current yield, expected spread of iPrefs, P/E of AAPL, AAPL current share price, amount committed to iPrefs, etc. All these create a lot of uncertainties and do not appear to be something the shareholder should trade off just so that AAPL share could go to USD600.

Instead of reward, risks take precedence here.

NN 130228 The Case Against IPrefs by nonameresearch

Apple - A For Apple

Apple meteoric growth in the last five years have been driven by introduction of successful products namely iPhone in 2007 and iPad in 2010. Between 2007 and 2012, Apple revenue increased 6.5x from USD24bn to USD156bn and net income increased 12x from USD3.5bn to USD42bn. While we expect iPhone and iPad to remain dominant, it will now be increasingly difficult to significantly increase Apple large USD156bn revenue. As such, we expect Apple revenue growth to be more subdued moving forward. Nevertheless, Apple is currently trading at net cash P/E of only 8x. China sales could provide an upside surprise and cash hoard of USD120bn provides downside protection

Overall, we have a BUY on Apple with a fair value of USD600.

A For Apple by nonameresearch

The Investment Case for China

China’s growth in the last 30 years is simply astounding and unprecedented. Never before has the world seen an economy of this size grew so fast. Between 1980 and 2010, China GDP grew a massive 90x or a huge 16% every year for the last 30 years. In only three decades, China went from a non-event to the second largest economy in the world. In 1980, the US was 37x larger than China but in 2010, the US was only 2x larger than China.

Today, China is the world’s largest creditor nation and possesses the largest forex reserve, accounting for one third of world total. China is also the world’s largest exporter and FDI recipient. China is now the largest single source of demand in many markets, accounting for half the global consumption in coal, steel, cement and soybean amongst other things.

In line with China rapid economic growth, GDP per capita grew 65x or 15% p.a. over the last 30 years. A rapidly growing income and sheer population size have turned China into the fastest growing and often the single largest market segment for many multinationals. China is Apple second largest market after US with revenue growing 450% in 2011. Similarly, KFC profits in China doubled in just three years and China is now Yum Brands largest profit division.

Collectively, China’s stock exchanges are the largest in Asia. Two of China three stock exchanges are amongst the top 10 largest stock exchanges in the world. Shanghai Stock Exchange at USD2.4tn and Hong Kong Exchanges at USD2.3tn are ranked 6^th and 7^th globally. Three out of the world’s ten largest companies are listed on the Chinese stock exchanges. In total, there are close to a hundred companies that are listed on the Chinese stock exchanges that have a market cap of USD10bn and above.

Yet, despite all these, the Chinese stock markets are still accorded very low valuation. On a P/E basis, HKEX and SSE are being priced 9.7x and 11.2x earnings respectively. This is despite the fact that the average corporate earnings growth was 15% p.a. between 2006 and 2010. The dividend yields also paint a similar story. HKEX dividend yield of 3.3% is higher than the 10yr yields of UK, Canada, US, German and Japan.

In our view, there is a disjoint between current Chinese equity valuations and China underlying fundamentals. At P/E close to 10x, dividend yield of 3%, strong balance sheet, low payout ratio and high earnings growth, Chinese equities certainly deserves more attention. China is anything but expensive.

NN THEME 121027 the Investment Case for China

ETP - Much Ado About Nothing

Of late, the ETP has become the basis for sector upgrade for the investment community. It has been claimed that various sectors ranging from oil and gas to construction to property will stand to benefit from ETP. In effect, ETP has now become an investment panacea of sort.

Our view is that the ETP, far from being a panacea, is not even a well thought out plan. On the contrary, the ETP is characterised by ill-conceived and hastily developed EPPs along with indiscrimate credit taking. The ETP, instead of being a comprehensive and robust roadmap, is no more than an awkward collection of random premature ideas that falls apart quickly under scrutiny.

Furthermore, Malaysia would achieve, on her own, a GNI per capita that is higher than ETP target of RM48,000 based on just historical growth rates. The ETP is thus irrelevant. In fact, growth in nominal GNI per capita is actually forecasted to decline and not increase in the period under ETP.

In summary, the ETP is a non-event and does not warrant a place in the investment decision making process. ETP will not make house prices go higher, ETP will not create a massive infrastructure demand and ETP will most certainly not have any material impact on any industries at all. ETP will not do all the above because ETP does not require Malaysia to continue growing at the rate beyond what she has been growing in the past.

NN THEME 120930 ETP - Much Ado About Nothing

Malaysian Property Bubble I - The Facts

In this paper, we address the question of whether the Malaysian property sector is in a bubble. As the property sector is very diverse, the enquiry is restricted to the residential sector in the four key economic states of KL, Selangor, Johor and Penang. Collectively, these four states contribute 75% of total residential sales and 60% of total residential transaction volume.

Based on both statistics and income analysis, the Malaysian property sector is in a bubble. From a statistical perspective, measures of property activities such as property sales, transaction volume and sales to GDP ratio have all shown a marked departure from historical trends since 2007. From an income perspective, property prices are now unaffordable to the average household. Due to property prices growing at almost 3x the rate of income in recent years, Malaysia median multiple has leapt to 6.1x, well above the 3x mark that is considered affordable globally.

We estimate that, in general, the average Klang Valley household can only afford a property in the RM400,000 range implying that the farther removed property prices are from this range, the more exposed they are to a correction. Specifically, considering that most listed property developers are still launching units at the RM500,000 to RM700,000 range even for the low end of their sales portfolio, we believe they are vulnerable to a correction. Too many developers are attempting to sell too many units to too few people at too high a price.

The cause of the bubble can be traced to callous policies by the government and financial innovation by the property developers that took place in the last five years. In particular, the main culprits are the removal of RPGT in 2007, the all-time low interest rates in 2009 and the DIBS scheme introduced by property developers in 2009.

In summary, driven by low interest rates, accommodative administrative policies and financial innovation through DIBS, the Malaysian residential property sector is currently in a bubble. Furthermore, the bubble is now at its end stage as prices are now too far removed from fundamentals. Investors should adopt a cautious stance as the sector will have limited upside potential and a sudden correction is possible.

NN THEME 120918 Malaysian Property Bubble I - The Facts

IJM Land - Low Sales Growth a Concern

Despite the property upcyle in the last few years, and in contrast to its peers, IJMLD failed to capitalise on the positive sentiments and consequently sales growth was erratic and subpar. Furthermore, there does not appear to be any imminent positive catalysts ahead. On the contrary, there are more potential negative catalysts as IJMLD product pricing is still high and we believe the overall property sector is now at precipice of a downcycle as property prices are now overstretched. As such, we believe IJMLD will find it difficult to achieve any significant sales growth moving forward.

Based on RNAV, we derived a fair value of RM2.50 for IJMLD. We have also assigned an Average conviction rating to IJMLD. Overall, we have a NEUTRAL on IJMLD.

 

NN IJMLD 120828 Low Sales Growth a Concern

Gold I - Gold Primer

Gold price began its ascent in April 2001, moving from USD273 to USD1,700 in 10 years translates to a huge growth rate of 20% per annum.  Furthermore, gold never had a down year between 2001 and 2011. Gold consistently put in a positive return every year in that decade.

The demand for gold can be subdivided into three major components; jewellery, industry and investment. In 2011, jewellery constituted 48% of gold demand while investment and industrial constituted 40% and 12% respectively. In recent years, the demand for gold has been driven by investment demand in particular the growth in demand from gold ETFs.

On the supply side, the supply of gold can be divided into three major components; mine supply, official sector sales and recycled gold. The supply of gold is very inelastic. Despite the rise in the price of gold, there has been no persistent increase in supply.

NN THEME 120809 Gold I - Gold Primer