Wednesday, June 30, 2010

Nouriel Roubini is Wise. Listen to Him.

Nouriel Roubini has some of the wisest words I've heard on how to fix the banking system. Too bad congress is too dumb and too powerless to do what needs to be done.

And, some journalists just don't get it.

See also Financial Reforms 'Cosmetic,' Won't Stop More Crises: Roubini

Monday, June 21, 2010

A Trip Down Memory Lane

In October 2008, Warren Buffett wrote an article in the New York Times making a big buy call on the equities market.  In the article, Buffett said that he was buying American stocks, and that "my money and my mouth both say equities."

Fast forward one and a half years later. Singapore stocks have since gained > 50 % from the date of that article, and even more if you bought within the 6 months after its publication. Some non-blue chip stocks even surged multiples from their lows, gaining up to 10x their value.

How prescient that call turned out to be!

Friday, June 18, 2010

Keppel Appoints Tay Lim Heng as deputy CEO of KIE

In what must be a rather bizarre executive move, Keppel Corporation Limited claims that it is "beefing up its pool of senior management" by appointing BG (NS) Tay Lim Heng (郑林兴) as its Deputy Chief Executive Officer and Executive Director (Sustainable Development) of Keppel Integrated Enginering with effect from 15 June 2010.

Tay has absolutely no experience in the field of environmental engineering, KIE's core businesses, which include Waste-to-Energy engineering and Water/Wastewater engineering. Instead, Tay's experience has been in the army and the public sector where he held the administrative posts of Deputy Secretary (Development) of the Ministry of National Development (MND) and Chief Executive of the Maritime and Port Authority of Singapore.

Rationalising the appointment, Mr Tong Chong Heong, Chairman of KIE, said, “Lim Heng brings, to Keppel, his skills in organisational leadership. We are confident that given his wide experience, he will help to capture value in KIE’s environmental engineering businesses.

“One of Lim Heng’s tasks is to synergise Keppel’s environmental engineering and property development competencies to cater for the growing urban and increasingly affluent population in this region and beyond.”

Mr Tong did not make clear how exactly Tay's skills in "organisational leadership" would "capture value" in the environmental engineering business. One would imagine that instead of increasing fixed overheads with the appointment of an "organisational leader", KIE should instead be focusing on technology leadership by investing in engineering capability.

Tay's appointment to KIE comes after the departure of Chua Chee Wui as CEO in late 2009 and the appointment of Michael Chia as CEO in place of Chua Chee Wui. Ex-Minister Lee Boon Yang was appointed as Chairman of Keppel Corp in July 2009 despite having no experience in offshore engineering, civil engineering, or environmental engineering.

Thursday, June 17, 2010

GIC loses S$1.3b on BP Investment since Apr 20th, following Deepwater Horizon Disaster

GIC is one of BP's largest shareholders, holding more than a 1% stake in the company's shares.

On Apr 20, when the Deepwater Horizon oil rig exploded and sunk, GIC's stake was worth about US$1.9b. Since then, BP's share price has plummeted and GIC's stake is now worth about US$1b. This is a loss of about US$900b or S$1.3b of market value since the disaster began.

The Disaster was an unexpected by the oil industry, but in hindsight should have been avoided.

Wednesday, June 16, 2010

Deepwater Horizon Disaster is Oil Industry's Black Swan

Senator Edward Markey made the opening statement for the oil industry executives' testimony on Capitol Hill. As part of his opening statement, he made the following remarks:
For years, the oil industry swore this could never happen. We were told that technology had advanced, that offshore drilling was safe.

BP said they didn’t think the rig would sink. It did.

They said they could handle an Exxon Valdez-sized spill every day. They couldn’t.

BP said the spill was 1,000 barrels per day. It wasn’t. And they knew it.

Now the other companies here today will contend that this was an isolated incident. They will say a similar disaster could never happen to them.

And yet it is this kind of Blind Faith -- which is ironically the name of an actual rig in the Gulf -- that has led to this kind of disaster.
It so happens that I am reading a book called "The Black Swan", by Nassim Taleb. The coincidence couldn't come at a better time. Nassim Taleb in his book, describes these Black Swan Events as:
Firstly, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. ...
Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. ...

A small number of Black Swans explain almost everything in our world ...

Consider that many Black Swans can be caused and exacerbated by their being unexpected ...

Isn't it strange to see an event happening precisely because it was not supposed to happen?
The Black Swan concept seems to apply to BP's Deepwater Horizon disaster perfectly. For years such an accident was thought by BP and the oil industry to be unimaginable. BP thought they had all the technology, know-how and experience that a disaster of such magnitude was completely inconceivable.
BP's US chief Lamar McKay has told a Congressional panel that there has been "tremendous shock that such an accident could happen", during his preliminary address to the House energy and commerce committee.
 Even the government agency tasked with oversight agreed with the oil industry, as Edward Markey further observed:
We now know the oil industry and the government agency tasked with regulating them determined that there was a zero chance that this kind of undersea disaster could ever happen.
When you believe that there is zero chance of a disaster happening, you do zero disaster planning. And the oil industry has invested nearly zero time and money into developing safety and response efforts.
In retrospect, we now know that BP should have seen it coming. Rigzone reports that the oil well had been described as a "nightmare" and that BP had taken safety shortcuts in order to cut costs, even having been warned of "severe" gas flow problems:
According to the letter from the panel, a BP drilling engineer told a colleague that the well had been a "nightmare well." But the same drilling engineer also emphasized the time and cost savings that would result from choosing the less-protective of two options for the casing in the well--using a single string of steel casing instead of hanging two steel liners, the letter said.

He also made a case for using six centralizers--devices to keep the casing centered--instead of the 21 called for by contractor Halliburton, according to the letter. In spite of warnings from Halliburton about a "SEVERE gas flow problem" stemming from the use of just six centralizers, BP went ahead, according to the letter, which was based on interviews with officials involved in activities on the Deepwater Horizon and documents provided to the committee
BBC also reports,
BP rejected Halliburton's recommendation to use 21 centralisers to make sure the casing ran down the centre of the well bore. Instead, BP used six.
In an e-mail on 16 April, a BP official involved in the decisions explained: "It will take 10 hours to install them. I do not like this."

Later on the same day, another official recognised the risks of proceeding with insufficient centralisers but added: "Who cares, it's done, end of story, will probably be fine."

"It appears that BP repeatedly chose risky procedures in order to reduce costs and save time and made minimal efforts to contain the added risk," the congressmen write.

"If this is what happened, BP's carelessness and complacency have inflicted a heavy toll on the Gulf, its inhabitants, and the workers on the rig," they say.
Indeed, in retrospect, it is clear that arrogance, complacency, and shortcuts are the reason that the disaster occurred. The disaster could have been avoided if BP and the oil industry were humble about their expertise and acknowledged that there were always risks of disasters happening at any time, and that maximum effort was required to minimise the risk of something going wrong. Indeed, BP has now paid the price for their arrogance.

Now that the Gulf of Mexico spill has occurred, everybody is questioning whether deep-sea drilling is safe at all, particularly Brazil, which is looking to exploit its Tupi oil field, the largest deep sea oil discovery in recent times.
Mr Lima says the accident in the Gulf of Mexico is a "general alert" to all countries with deep-water exploration off their coasts.

"Is it possible to drill in such challenging conditions with the confidence that everything is going to work fine? That's a very important question that we had to ask ourselves after the accident in the Gulf of Mexico," says Mr Lima.

"The fact that a serious company like BP was operating the field only makes this even more worrisome."
The oil industry's fundamental approach to deep-sea drilling will be changed forever, most likely with a deep seated paranoia and caution against any possible accident.

The Deepwater Horizon was previously outside the realm of regular expectations, because nothing in the past seemed to point to its possibility. However, its occurrence carried an extreme impact, all the more exacerbated by its being unexpected. Furthermore, in hindsight, we see that it occurred precisely because it was not supposed to happen.

The Deepwater Horizon Disaster is the Oil Industry's Black Swan.

The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility"

Monday, June 14, 2010

Keppel Corp's K-Green Trust: Things for Investors to Note

I previously made a brief post on the K-Green Trust, and this post has received a lot of hits since its publication. In this post, I will elaborate on some pointers for Keppel Corp investors to consider when they are thinking about the Infrastructure division of Keppel Corp and the K-Green Trust.
  1. Why Dividend-in-Specie and not IPO? When Keppel was announced as the winner of the NEA's tender to acquire the Senoko Incineration Plant (SIP), it was stated clearly in the Sep 2008 press release that the listing of the KGT was meant to be as an IPO. Later on, when the financial crisis hit, the IPO was shelved due to adverse market conditions. Since then the markets have returned to relative normalcy, however, instead of going ahead with the planned IPO, Keppel suddenly changed the listing structure to a dividend-in-specie and not an IPO. Why did Keppel not go ahead with the IPO? Wouldn't it have made sense to monetise the trust in the equity capital markets so that Keppel Corp would have cash, especially if the market valuation was going to be a higher one than the price Keppel originally paid for the assets? 
  2. What is the value of the Senoko Incineration Plant? The bulk of the value of the trust is in the value of the SIP. The value of the SIP as listed on Keppel's balance sheet is the purchase price that Keppel paid to NEA. "The purchase price of SIP was mutually agreed within the indicative price of S$462 million between KIE and the Singapore Government on a willing-buyer, willing-seller basis." (source: Keppel press releaseKeppel is also investing a further $48 million to upgrade the SIP, bring the net cost of the SIP to Keppel to $510million. This $510 million is for a 15 year PPP contract, meaning that at the end of the contract, subtrust will have ZERO residual value. In contrast, the government originally built by the government for $560 million in 1992 (17 years ago), expecting it to last about 30 years. (source: NEA) Does it make sense for an asset expected to last 30 years and costing $560m, to be worth $462m +$48m after 17yrs of depreciation?  Investors need to ask themselves whether the price that Keppel paid for the project assets is a fair price for the assets. If not, how to determine the value of the assets? 
  3. Independent valuation of the Trust. There is an independent valuation report in the prospectus for the KGT dividend-in-specie (see Appendix F of intro doc). They state that their valuation of the trust is in the range of $674-731 million on an aggregate basis i.e. they do not break down into the valuation of each of the sub-trusts, and that is all they say. They do not state their methodology of valuation (DCF, multiples, book etc.). They do not state the details of their methodology (if DCF, what is discount rate?) They do not break down the valuation into each of the 3 assets. Why? why? why?
  4. Is Yield the correct method for valuation? So far the analyst research reports (all bullish) state their valuation method as depending on the trust yield. Is this the correct method for valuing the underlying projects?
    • Finite life projects with zero terminal value The sub-trusts contain projects which have a finite lifespan with ZERO TERMINAL VALUE. Once the contracts expire, UNIT HOLDERS WILL BE LEFT WITH NOTHING. Is yield the correct method to value such assets? Yield was originally used as a concept to value stable blue chip companies with steady dividends that were expected to be around a long time. In contrast, the KGT has projects that last only 15,20 and 25 year with zero terminal value. Yield valuation was not meant for these kind of projects!
    • Mismatched Life of Assets The biggest project of the 3 is the Senoko plant which has a contract lifespan of only 15 years. The NEWater plant is contracted for 20, while the Tuas DBOO plant is contract for 25 years. That means that there will be a significant decline in the cash flows from the KGT in year 16 and year 21. And ultimately to zero after the Tuas project expires. Isn't the yield concept supposed to describe steady, consistent cashflows that do not diminish to zero???
  5. Capital structure of the Subtrusts The KGT prospectus doc describes the capital structure as "KGT will not have any debt as at the Listing Date which will provide it with an optimal debt financing capacity for future investment opportunities." Is zero debt = optimal capital structure??? LOL. Infrastructure projects backed by PPP contracts are usually leveraged to a significant level, up to 80%. Banks are willing to take this leverage levels because the counter-party to the contracts is the triple A rated Singapore government. So why is Keppel funding the KGT projects with 100% equity which usually has a required rate of return of 15%, when banks are willing to fund the AAA rated projects with term loans  that typically have a cost of debt of 5% max? Is the KGT's zero gearing structure really optimal? And if it isn't, who is getting the short end of the stick???
I could go on and on, but I think readers will get the point. I will not state my conclusions but I think the above questions are plentiful enough for readers to hunt for clues and come to their own conclusions.

Chinese Labour Strikes Put Singaporeans to Shame

The recent labour strikes in Honda factories by Chinese workers have been all over the global news. Chinese workers are demanding better work conditions and better wages, and they are willing to go on strike for their demands. The recent incidents have been reported by New York Times, Bloomberg Businessweek, EconomistAFP and many others. In one of the NYT article, was the following comments:

striking workers at another Honda plant less than 100 miles away in Zhongshan marched in the streets on Friday and made a new demand: the right to form an independent labor union.

“This is a remarkable development,” said Anita Chan, a labor expert at the University of Technology in Sydney. “Most strikes in China tend to be about not being paid or being mistreated. This was different. The workers were demanding very high salaries. And they want to elect union leaders democratically.”
In Singapore, workers have been intimidated and cowed into submission by the People's Action Party. They are told to be cheaper, better and faster. At the same time they have to accept competition from cheaper foreigners on their very own shores. And for the Singaporean men, they even have to sacrifice 2 years of their lives to protect the soil on which foreign labourers are working on. On top of that, Singaporean workers have to accept record housing prices, a congested transportation infrastructure, and even declining real wages.

They have to suck all of this in without a whimper or a sound. And they do.


Because they are pussies.

Singaporean workers would never dare to strike or speak out against the ministers. They would never dare stand up against an elite which pays itself millions of dollars in salaries while the aged uncles and aunties have to work in their 60s and 70s for subsistence pay.

Who says that democracy is not part of Asian values? Who says that strikes and democratically formed labour unions are not part of Chinese culture?

The Honda strikes in China have put an end to this utter nonsense.

Another NYT article reported:

Reports of the recent labor strikes have been unusually public here and have appeared largely uncensored in China’s state-run media.
Until now, the government has discouraged strikes and censored reports about labor unrest, apparently out of fear that the reports could fuel other strikes and lead to social unrest. But in the last few weeks, there have been reports — some in state newspapers — of several large strikes around the country.

This week, for instance, a local government-controlled union in the city of Shenyang has been negotiating with KFC, the fast-food giant, to secure a nearly 30 percent raise for workers.

Last Sunday, in another action, about 500 workers at Merry Electronics, a Taiwan-owned components maker, held a walkout that the company said was over a work dispute. Later that day, the company announced a 22 percent pay increase, though a spokesman said the raise was unrelated to the strike.
The PAP asks Singaporeans to be cheaper, better, faster. The PAP asks them to suck in the foreign cheap labour. Meanwhile,
The Chinese government has also encouraged local governments to raise minimum wage standards, and even called on companies to treat workers with more dignity. - NYT
Singaporeans vote in the PAP time and again with overwhelming majority - they keep in power the very hand that oppresses them. And they seem to love doing so.

The only possible reason is that this is because Singaporeans are cowards - sibei kia see!! Either that or they are bloody stupid to keep on believing Lee Kuan Yew's machinery which keeps them deceived with the propaganda straits times. Or they are masochists who love inflicting pain on themselves.

Which one is it???

Singaporean workers - time to wake up!!!!

Saturday, June 05, 2010

K-Green Trust: Keppel Corp pulls a fast one past the Research Analysts

A couple of research analysts have released their research notes on keppel corp's K-Green Trust. Keppel recently released the listing documents for the KGT, which you can find here. It is interesting to note that both the research reports I have found so far are bullish on the KGT, and both suggest significant upside to the listing valuation.

My personal take on the KGT is that it is a structured finance vehicle (not unlike a CDO) meant to house junk project assets that Keppel does not want to have on its balance sheet. By hiving off the 3 project assets (Senoko & Tuas Waste-to-energy plants, Ulu Pandan NEWater plant) into a business trust, Keppel can obfuscate the substance of the assets and divest it to the fools in the market who haven't got a clue what they are buying into.

And, judging by the comments of the research analysts, it appears they have been comprehensively fooled. They have completely missed the substance of what is going on here and are acting as cheerleaders to what in my opinion is fundamental destruction of shareholder value by the Keppel Corp management.

I am very interested to see what more analysts think of the KGT and if any of them will actually call Keppel out on what is actually going on here. But judging by what happened with structured finance vehicles in the USA in the years past, I doubt any of the analysts have the brains to figure it out. And even if they do, none of them will have the guts to call Keppel out on its bullshit.

Update: I have elaborated significantly on my thoughts of the KGT here.


Lim & Tan Securities

Based on projected distribution of 3.91 cents for 6 months and 2 days in 2010, and 7.82 cents for ye Dec ’11, the yield at $1.13 would be 6.82% (annualized) and 6.95% respectively. As a comparison, City Spring offers a trading yield of 7% at 60 cents (DPU of 4.2 cents). Note however two key differences between the two:
  • KGT is Singapore-centric whereas 50% of City Spring is accounted for by Basslink in Australia;
  • KGT is debt free vs City Spring’s high gearing, which has implications for KGT’s growth strategy going forward.

We believe KGT is attractive. KGT’s listing is expected at end June, and results from the distribution-in-specie by Keppel Corp on the basis of 1 KGT unit for every 5 Kep C shares, valued at 22.6 cents per Kep C share.

Kim Eng Securities

The listing price for Keppel Corp’s Keppel Green Trust (KGT) has been set at $1.13 per unit. Keppel projects a DPU of 3.91 cts for the remainder of FY10and 7.82 cts for FY11. This generates a yield of 6.82% in FY10 (annualised) and 6.95% in FY11. We see fair value of KGT at $1.53, with the implied yield of 5% derived from a highly stable cash flow.

Morning Bulletin 27 January 2010
Top Ideas

23-ct dividend in specie from KGT distribution
Shareholders will receive one K-Green Trust (KGT) unit for every 5 shares as a dividend in
specie. 50.5% of the trust will be distributed to shareholders. The effective value per unit is
therefore S$1.16. Financial details such as expected DPU, earnings and yield will be
forthcoming over the next few weeks, with a listing by 2Q10. We expect the terms to be
attractive, and to provide long-term, regular and predictable distributions to its unitholders. We
also estimate that KGT’s listing could see up to 40% upside from its base NTA valuation of