Encounter with my childhood friend

One of good friend whom I grow up with approached me recently and asked me whether I will like to invest in CPU for bitcoin mining. He explained to me that you just need to invest about usd6k and you can get minimum usd 600 per month which is about 10-20% return per month. 

I look up online and realize you can buy all these computers from Amazon. However they consume a lot of electricity and produces a lot of heat which requires secondary cooling. It will be profitable if you stay in college or if you live in a country where electricity is free. It doesn't make sense for me to do this on a small scale basis in Singapore. 

So I explain to him that I will rather stay within my circle of competence. If he wants to do it, he can go ahead and the value of bitcoin may increase to 20k in the future. Who knows? This can be very profitable. However I just want to be in stocks and options and moving on to money management business. I told him I have limited resources and time and just want to focus on what I can make money. 

He told me" your knowledge of what's possible is limited by your knowledge of what's possible".

Ok. You win. I am contented.

Financial Consultation for my colleague

Last Friday, my colleague asked me for some advise as she felt stuck in her situation. She wanted a career opportunity with increment and annual bonus. However, I shared with her this is the riskiest choice as she is risking for a 3% increment each year when the boss is able to give her the golden handshake. I am not saying my boss will do that but he can do that. So why let your boss determine your livelihood? She is interested in how I make money while I am sleeping (according to her theory). This is slightly exaggerated but I tried to explain to her the theory of cash flow.

From the above image, if you can save $500/month which is $6,000/ year, she can generate a 4% return every year, compounded till she is 65 years, her initial capital inject of $168k will double to $324k. 

I explained to her on the differences between the Poor, the Middle Class and the Rich.

The Poor - Their income comes in at the end of the month and it will immediately goes into their expenses. They will spend all of them and sometimes spend even more than what they earn using credit cards.

The Middle Class - They use their income to gather more Liabilities. Liabilities are things that take money out of your pocket. For example, when you buy a property, you may perceive it as asset but actually it is considered a Liability as you have monthly loan repayment. Only when you fully pay off your property then it becomes an asset if it generates cashflow via rental income. Other Liabilities can be the likes of a new BMW.

The Rich - They use their income to gather more Assets which create more income (cashflow). 

End of 2nd month JC Options Fund

This is painful. In addition to the above picture, I close my LB option and roll over to next month. Overall, it is a net loss, wiping out all the gains (plus more losses) in my 2nd month of options. 

I have a list of lessons learnt from this month. You can find them here from Ally website, I can relate to quite a few of them. I will learn from my mistakes, let me think through my strategies. I read Ray Dalio's Principles and I learn that pain is good. It helps you to grow up.

https://www.ally.com/investing/options/top-10-option-trading-mistakes/

Also a lot of my friends took a hit because of FL (Foot Locker), don't give up, there is bound to be some bad calls, close it and move on. Sometimes I make money, sometimes I lose money, as long as the good calls are slightly more than the bad ones, I end up making money.

In addition, I bought a total of 300 shares of L Brands. I took a quick look and overall insider shares acquisition is increasing in 2017.

LB ticks all the boxes. I have intention to build up to 1000 shares of LB only, my new rule of thumb is keep all portfolio at about 5% of entire portfolio.

L Brand owns the following brands:

Bath & Body Works - personal care, soaps, sanitizers and home fragrance products. 1700 North American stores, Bath & Body Works has 80 stores in more than 20 other countries operating under franchise, license and wholesale arrangements

PINK- college woman and campus life 

La Senza - Fun flirty lingerie brand celebrating young, sexy and value-oriented customers

Henri Bendel

Victoria's Secrets - signature bras, panties and sleepwear, popular fragrances, body care and athletic line, Victoria Sport

Victoria's Secret Beauty and Accessories - This smaller concept started with airport travelers, focuses on award winning fragrances, body care and accessories.

Company Background

L Brands is an international company that sells lingerie, personal care and beauty products, apparel and accessories.  The company operates more than 3,000 company-owned specialty stores in the United States,Canada, the United Kingdom and Greater China, and its brands are sold in more than 700  franchised locations worldwide. 

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Market Research

Intimate apparel industry is a $29 billion global market 

The largest customer base is the 45 to 54-year-old group followed by the 25 to 34-year-old group

Victoria's Secret's PINK brand dominates the growing teen market with sales of roughly 1billion.

Strength - Economic Moat

Segment Leader, sell an experience, top of mind => Branding

Sticky to the product - the products help customers feel sexy, bold and powerful, entice customers to pamper and indulge themselves and enjoy everyday lives.

Economies of scale - capitalize on production, logistics supply chain and combined with technologies to achieve cost efficiency

Enhancement of branding - has highest number of best models and photographers to advertise for their products, organize annual fashion shows to improve brand image

International presence - global footprint (in Middle East and Africa)

Ecommerce is gaining traction - strong online sales 

Weakness

The dress can be worn only in bars and movies but in real life there are few people who wish to wear such dresses

Limited market in Asian market

Opportunities

Strengthen online e-commerce stores

Open key strategic stores worldwide

Market to Men through a new brand

Threats

Competitors offer similar products - differentiation is minimum in terms of functionality

Economic downturn will affect sales 

A lot of competitors 

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Risk Assessment

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Competitors' Analysis

The intimate apparel market is also fragmented with Hanes which has sales of $1 billion followed by Fruit of the Loom, Jockey and Maidenform

Sales Per Square Feet & Sales per Store

Sales per square feet per store shows a slight deterioration.

Sales per store shows slight deterioration. In 2017, the sales level is dropping due to its change in business direction.

Another possible hit on L Brands' brands are the high rental cost and competition from e-commerce. Alibaba's Aliexpress, Wish and Amazon are driving prices down. E-commerce will deteriorate L Brands' business as the branding is not as strong as those branded stuff such as LV, Hermes, Burberry, Prada, etc.

Update on Power Assets 0006.HK

After waiting for an entire month, Power Assets did not reach my ideal price and today is the last day before ex-dividend. I decided to sell 25 lots and let go at HKD 78.3 per share. I kept 5 lots in the portfolio as the dividend and price difference will give me 3.6 lots of shares free of charge. 

Time to move on to the next idea - L Brands.

Price drop more than 50% from the peak.

Picture Courtesy from Google Finance 

P/S = 0.9 < 1
P/Cash Flow = 5.8 < 10

I will start to accumulate on this. When I have time, I will share my new position for Best Pacific International 2111.HK (again thanks to Mr Chia F.L. for his research/contributions).

Thaibev Q3 for period ended June 2017

For Spirits segment, the total sales revenue dropped -0.4% to Baht 45,284 million but net profit is still +2.4 %. Rise in net profit from normal operation excluding F&N recognition of fair value gains on financial assets is Baht 6,795 million. Recognition of F&N's fair value gains on financial assets is Baht 8,498 million. Thaibev is entering into an asset S&P with Yum Restaurant to acquire more than 240 existing and a number of developing KFC stores in Thailand. This is valued at Thai Baht 11.3 billion including VAT. This will complement ThaiBev's soft drink segment.

Beer Business
For the third quarter ended 30 June 2017, sales revenue was Baht 13,781 million, a decrease of Baht 1,051 million or 7.1%. Total sales volume of beer was 205.3 million litres, a decrease of 8.7% due to the continual effects from mourning period in Thailand. Gross profit was Baht 3,262 million, an increase of Baht 1 million, or 0.03%. This was mainly due to decrease in bottle and raw material costs, although there was a decrease of sales volume. Earnings before interest, tax, depreciation and amortization (EBITDA) was Baht 937 million, a decrease of Baht 335 million or 26.3%. This was mainly due to an increase in advertising and promotion expenses. Net profit was Baht 606 million, a decrease of Baht 311 million or 33.9%. This was mainly due to a decrease in EBITDA. 

Non-Alcoholic Beverages Business  
For the third quarter ended 30 June 2017, sales revenue was Baht 4,349 million, a decrease of Baht 187 million or 4.1%. A production and distribution agreement for an OEM sports drink was expired since August 2016 which caused a decrease in sales volume of 1.3 million litres. The continued products was 432.2 million litres, a decrease of 10.0 million litres or 2.3%. There was a decrease in sales volume of carbonated soft drink of 8.0 million litres or 10.5%, ready to drink tea of 3.3 million litres or 4.4%, Jub Jai of 2.4 million litres or 17.2% and   100 Plus of 0.8 million litres or 28.6% and other drinks of 0.5 million litres or 10.7% although there was an increase in sale volume of drinking water of 5.0 million litres or 1.9%. Gross profit was Baht 1,558 million, a decrease of Baht 143 million or 8.4%. This was mainly due to a decrease in sales.  

Earnings before interest, tax, depreciation and amortization (EBITDA) was Baht 43 million, a decrease of Baht 13 million or 23.2% from EBITDA of Baht 56 million. This was mainly due to a decrease in gross profit although there was a decrease in advertising and promotion expenses. 

Net loss was Baht 215 million, an increase of Baht 41 million or 23.6% from net loss of Baht 174 million. This was mainly due to a decrease in EBITDA. 

Food Business  
For the third quarter ended 30 June 2017, sales revenue was Baht 1,727 million, a decrease of Baht 41 million or 2.3% due to slow down consumption although there were more new stores. Gross profit was Baht 785 million, an increase of Baht 57 million or 7.8%. This was mainly due to an increase in selling price and cost efficiency. 

Earnings before interest, tax, depreciation and amortization (EBITDA) was Baht 162 million, a decrease of Baht 11 million or 6.4%. This was mainly due to an increase in rental expenses from opening new stores although there was an increase in gross profit. 

Net profit was Baht 32 million, an increase of Baht 3 million or 10.3 %. This was mainly due to a decrease in depreciation from fully depreciated asset. 

Financial Situation
Net profit excluding F&N/FCL was Baht 17,546 million, a decrease of 5.6% or Baht 1,036 million.

With the acquisition of KFC restaurants, ThaiBev will take on more debts to finance this deal, further weakened the financial position but this is a cash rich business. We feel that the acquisition will boost the revenue in the 2018 but short term wise will show some weakness. This may present an opportunity for JC Fund to acquire more shares in the company.

The Financial Ratios show Current Ratio was down as there is a decrease in cash and increase in short term loan. Liquidity to Equity Ratio was down as decrease in long term borrowings and increase in retained earnings and profit for the period.

As mentioned before, overall the business is faced with headwinds both domestically in Thailand and from international businesses as well. JC Fund is confident of the business' prospect and will continue to acquire more shares.

Singtel 1Q ended 30th June 2017

Singtel's 1st Quarter 30 June 2017 Profit After Tax stands at S$886.1 m compared to S$940.5 m a year ago. I did not look into the lesser loss due to exchange differences. Operating Activities Cashflow is positive at $1,885.7 m compared to 2016 - $1,736.8 m. Free Cash Flow is definitely positive. Singtel uses 340.4 m for payment for acquisition of subsidiary, net of cash acquired. On 10th April, Singtel's Amobee acquired 100% of share capital of Turn for S$401million.

Turn develops and provides an advertising platform for marketers, brands and agencies. The company provides its solutions in areas of digital data centralization, media planning and execution, consumer intelligence, media intelligence and brand intelligence. Net assets acquired is $$50m and goodwill is S$350.6m. I think this is aligned with their strategy but whether this goodwill is overpaid will be determined within a few quarters duration. 

I do not see Singtel moving into further acquisition of national telcos due to geopolitical forces at play and protectionism at work. In addition, telecommunication business is not the sexiest and competition is intense. In Singapore, the other two telcos' stock prices are suffering after their financial results are out. 

Singtel's unsecured borrowings increases as now it includes certain bank loans of Trustwave and Turn. Singtel's Optus has a tax position paper from Australian Taxation Office due to the acquisition financing of Optus. Singtel Australia Investment would be entitled to refund of withholding tax A$89m while this year March received further notices of assessment total A$67m for penalties. Singtel will continue to defend this position and has made no provision for this.

Bharti Airtel has disputes with various government authorities in respective jurisdictions where its operations are based. Local Department of Telecommunications issued a demand for Rs 52.01 billion (S$1.11 billion) towards levy of one time spectrum charge. Airtel is having disputes for taxes custom duties for Rs 136 billion (S$2.90 billion).

AIS also has disputes amounting to THB 27.1 billion (S$1.1 billion). Globe Telecom is facing issues with Philippine Competition Commission for the joint acquisition filed by Globe, PLDT and San Miguel Corporation.

On 19th July, Singtel completed its disposal of units in NetLink Trust as well as the IPO, sold 100% stake for S$1.88 billion with cash of S$1billion and 25% less one unit in Trust. This will recognise a gain of $2 billion in next quarter. JC Fund is waiting for the special dividend to be issued in 2018 then will sold all the shares to higher ROE stocks.

Sell Put and Sell Call Option Strategies

Selling a Put

Key Factors

1. Extremely highly implied volatility (the higher, the better)
2. There is an identifiable support level
3. You want to own the underlying security

Once this trade is entered, one of three outcome will occur:

1. The stock will remain above the strike price of the put option and the option will expire worthless. In this case the writer of the option keeps the entire premium he or she originally collected when the option was written.
2. The price of the stock will fall below the strike price of the option written, the option will be exercised, and the writer of the option will be assigned (ie, required to purchase 100 shares of stock at the strike price).
3. The writer of the put option will buy back the option before outcome 1 or 2 occurs.

This strategy is used by investors who are interested in accumulating shares of stock in a particular company but who for one reason or another are not willing to commit to buying the shares at the moment. It is best suited for value investors who typically accumulate a position of meaningful size in a stock after the stock declines in price and are willing to hold the position for a reasonably long period. The most important consideration is whether you want to own the stock when you execute this trade. If the answer is no or if you are not really sure, you should not use this strategy. To understand why, let's consider the primary benefit of this strategy and the worst case scenario. Investors who use this strategy do so in an effort to acquire stock at a price below the current market price. Here is how that happens.

Say a stock is trading at a price of $85 per share. At the same time the 80 strike price put option is trading at a price of $3. You could buy the stock at $85 per share or you could write a put option with a strike price of 80 and collect a premium of 3 points or $300.  If you buy 100 shares of stock at $85 per share and it declines to $77 per share, you will lose $800. If you had written a put option at a strike price of 80 for 3 points and the stock declines to $77 per share, you would be at break even. This is the benefit.

 

The disadvantages are:

1. If the stock rallies sharply, you will not participate in that rally beyond the option premium you collected.
2. If the stock falls sharply, you will have significant downside risk.

You should use this strategy only after you have analyzed the prospects for the underlying company and have consciously decided that you are definitely willing to buy the stock. Use this strategy only when volatility is high to maximize the premium you receive for the option you write.

One method for managing stock position if assigned when the stock is put to us and its price continues to decline. You can hold the position until the option expires or the stock is put to you. If the stock is put to you, you can place a stop loss at the strike price less the premium. Or you can sell call once it is put to you.

Writing a Covered Call/Sell Call

Key Factors:

1. You have some reason to expect the underlying to pause. 
2. Option volatility is high
3. You can take advantage of time decay by selling out-of-the money options

Option offers to long term investors the ability to hedge existing positions in an underlying security. If you are holding position in a stock and wants to hedge that position, options are often the easiest and most effective alternative for achieving this objective. A covered call write involves writing a call option against a long position in the underlying security.

Covered call is most commonly misused option strategy. Most traders never consider writing covered calls, once they do, they rarely stop to consider the reward and risk ramifications. At best, writing a covered call allows income generation from an existing position and to obtain a little downside protection. At worst, this strategy limits your upside potential and provides only a limited amount of downside protection. There are a number of different ways to use this strategy. For instance, some traders buy a stock they consider oversold and simultaneously write a call option against that position. This is referred to as a buy-write and is employed by an investor who is focused on total return.  Or you can write options against stocks you already held. Use this strategy after a security you are holding has experienced a significant rally and you expect it to consolidate or decline in the near future.

In sum, if a security you are holding has experienced a sharp advance in price and implied volatility rises to a very high level, thus inflating the amount of premium available to option writers, you may benefit from writing a covered call.

In deciding how to manage a covered call position, you must address two risks:

1. The first risk is that the stock may fall by more than the amount received when the call option was written. Once that happens, the covered call provides no additional protection, so the potential loss becomes unlimited. Technically the risk is not unlimited since the stock can only go to zero.
2. The second risk is that the stock may rally sharply, causing the option that we wrote to trade in the money. Once the option trades in the money, there is a possibility that the holder of the option may exercise the option and our stock will be called away. If we do not want to give up our stock position, we must plan to buy back the call if the stock price rises.

Before writing a covered call, you must decide what you will do if the stock drops sharply or rallies sharply. If the stock drops sharply, your choices are these:

• Sell the stock, buy back the call, and exit the trade completely to avoid additional losses.
• Hold on both positions and hope the stock bounces back
• Roll down. Rolling down involves buying back the call option written initially and selling a new call option with a lower strike price.

If stock rallies sharply, you may do one of three things:

1. Let the stock be called away
2. Buy back the call option you wrote (possibly incurring losses)
3. Buy back the call option you wrote and sell another further out of the money call option

There is one way around the limited profit potential conundrum that offers the benefits of covered call writing while allowing you to participate in favourable movement by the underlying: avoid writing covered calls in a 1:1 ratio. You need to have more than 1 contract to do this. If you are holding 1000 shares of stock, you might consider writing 8 call options instead of 10. By doing so, you will still have option premium which offers some downside protection and opportunity to earn extra income.

 

JC Fund 2nd month options trade

Recently, things are just not going smoothly. I believe the first month was just sheer luck and now I am trying to figure out things. I was reading up more on options as I want to go deep into the subject. 

There are a lot of techniques and skills which I am trying to learn. Option can be useful in mitigating risk and help to hedge against position, it can also help to maximise your gain if used correctly. Another thing I learn is not just simply go for premium and did not understand the volatility, the earnings reporting period and deterioration of the fundamental. It is apparent that I let greed get the better of me.

It is not too late but just the start. I saw a Facebook advertisement of my army friend. He has grown his portfolio from USD 5k to USD 120k over the last 7 years and has declare that he achieved financial freedom, quit his corporate life and become a full time options trainer. I respect him for two things, 1) he has the guts to call it a day and run his own business whereas I am still happy that someone is paying me at the end of every month 2) he is disciplined enough to pursue his dreams and keep moving forward. These two factors won my respect. I think I should my dreams sooner rather than later.

Memos from Howard Marks Look for "There they go again"

I agree that valuation is getting higher and not much (very few) undervalued stocks are available. 

I just borrowed this book "The Tao of Charlie Munger" and I realised that many years ago, Charlie was fully invested when he experienced the crash whereas Warren had placed his money with the Treasuries. Charlie waited for a while for the stock prices to recover whereas Warren pumped in and bought all the underpriced companies. I think by end of this year, I need to complete my rebalancing of stocks. I have sold some of my SG and US counters. I am thinking of standing by a pot of $200k in cash or in bonds ETF. 

13/8/2017 
Recently, the stock market took a plunge and it is painful for Options Fund. Initially, it was a loss at US$100, then the loss widens to US$600. It has been a long while since I cut loss as I seldom trade these few days.

I was too greedy and just focus on the premium without understanding the risk level involved.