Wednesday, April 19, 2017

Hospitality Industry - The Next Investment Opportunity?

Many great investment opportunities happen when the industry is still depressed and where the individual companies are undervalued. I've been looking for more investment opportunities and the hospitality industry came up on my radar.

The hospitality sector is not all gloomy for every country. The 2 stocks that I have which have direct exposure in the hospitality industry are Ascendas Hospitality Trust and CDL Hospitality Trust. Ascendas hTrust was bought quite long ago back in 2014. It has been providing me a dividend yield of about 7.5% for the past few years and price has gone up as well. Its main business is in Australia with 56% of its net property income coming from there. The rest are from Singapore (12%), Japan (24%) and China (8%).

CDL Hospitality Trust on the other hand was bought quite recently in December 2016. It is giving about 7% dividend. This is a different investment as its main income comes from Singapore (62%) with the rest from Australia (10%), New Zealand (10%), Maldives (8%), UK (6%) and Japan (4%). Investing in CDL hTrust is a different strategy which I will explain more in this post.

Understand more about the hospitality industry 

Before we go into the investment opportunities in the hospitality industry, it is crucial to understand what has happened and is happening in the industry. The hospitality industry is a broad category of fields within service industry that includes lodging, event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry. In this article we will focus more on lodging which is all about hotels and serviced residences.

As mentioned earlier, CDL hTrust has most of its business in Singapore. Some of the hotels they own are Orchard Hotel, Grand Copthorne Waterfront Hotel, M Hotel, Copthorne King's Hotel, Studio M Hotel and Novotel Singapore Clarke Quay. Sounds familiar to you?

The hospitality industry is currently not doing well in Singapore. This is the best time to look at it when it is not doing well. There are some signs of recovery but is this sustainable? Let's look at the current situation first

Oversupply of hotel rooms in Singapore

The current gloom is partly due to the oversupply of hotel rooms in Singapore. An estimated 2610 more rooms were added in 2016 and it is expected that 3767 more rooms will be added in 2017. This means that the hotels business is expected to remain competitive in 2017. However, hotel rooms supply will slow down in 2018 with only 69 more expected rooms. I read that it is harder to get a license to start a hotel business in Singapore now and the government is also controlling the number of hotel rooms supply moving forward in 2018.

Hotel Room Supply
With hotel room supply tapering off, this industry should see some recovery moving forward which brings me to the next few points on visitors arrival and the Revenue per available room (RevPAR)

Visitors Arrival in Singapore

Visitors arrival is crucial for the hospitality industry in Singapore. The more visitors, the more revenue for the hotels. Visitors arrival is still stable with about 1.36 Million tourist in Singapore in Feb 17. Visitors arrival have grown 5.1% for the past 9 years but have stagnant since 2014.

Revenue per Available Room (RevPAR)

RevPAR is a key indicator in the hotel industry to gauge the average hotel room rates in Singapore. It is similar to the rental rates we see for the property market. An improvement in the RevPAR signals the recovery of the industry. A higher RevPAR also means the hotels are able to make more revenue per room they have. Its like you have a property and you can rent out for a higher price.

RevPAR for CDL hTrust has decreased -8.6% in FY16 as compared to FY15. RevPAR for the whole hotel industry in Singapore is on a decline mainly due to the oversupply of hotel rooms. With the oversupply tapering off in 2018, we should see some recovery in the RevPAR as well.

Initiatives by Singapore Tourism Board (STB) and Ministry of Trade and Industry (MTI)

If you've been reading the news, there has been many new initiatives by STB to attract more tourists to come to Singapore. Singapore Tourism Board (STB) and The Walt Disney Company Southeast Asia (Disney) announced a three-year collaboration, aimed at providing unique and fun experiences themed around Disney’s biggest brands and most popular stories and characters. As part of the collaboration, locals and visitors to Singapore will be entertained with a range of exciting experiential activities starting with Star Wars, followed by Marvel and Disney Animation/Disney Pixar themes in 2018 and 2019 respectively.

Also, MTI announced a Hotel industry transformation map to transform the hotel industry for sustainable growth. Four strategies were identified which are, building manpower-lean business models; developing new solutions through innovation; growing businesses through internationalisation; and building a strong pipeline of quality talent.

Lastly, Changi Airport is expanding with the new Terminal 4 opening this year and the new Terminal 5 which is still works in progress. A new Jewel at Changi will also be opening in early 2019. All these will attract more visitors into Singapore and boost the hotel industry greatly.

Stocks which are in the hospitality industry

Now, after understanding about the hospitality industry, let's look at some stocks which are in this business. These may be good investments when this sector recovers. I'm looking particularly at stocks which have more exposure to the hospitality industry in Singapore as it is the worst hit now and possibly will be the best when it recovers.

CDL Hospitality Trust

The first stock is CDL hospitality trust. Below is the 3 years chart of CDL hTrust where we see there was a sharp drop in 2015. The stock price seems to be recovering recently. Now, the dividend yield is about 6%+ with Price to book ratio at 0.96. Its NAV is at $1.55. At current price, it is not considered too cheap. I invested in this stock last year December when it was around PB of 0.80. Will not be planning to add more at current price unless it goes down again.

With 62% of its business in Singapore, CDL hTrust will definitely benefit if there was a strong recovery in the hospitality sector here. As at 31 December 2016, its gearing ratio is 36.8% with 61% of its loans on fixed rate. This is quite normal for a trust and aligned to other hospitality companies listed here.

RevPAR for the Singapore hotels has dropped 8.6% in 2016 as compared to 2015 with occupancy rate at 85.4%. Occupancy rate was higher at 87.7% in 2015.

Far East Hospitality Trust

Another stock which has its main business in Singapore is Far East Hospitality Trust. In fact, it has all its hotels in Singapore which is quite concentrated and may pose a risk if Singapore's hospitality industry does not do well.

Some of the hotels they own are Orchard Parade Hotel, Rendezvous Hotel, The Elizabeth Hotel, Village hotel in Changi, Bugis, Albert court and some others. They also have serviced residences called village residences located in Clarke Quay, Hougang, Robertson Quay and also the Regency house.

Rendezvous Hotel owned by Far East Hospitality TrustImage Credit:
For Far East hTrust, we see a similar drop in its stock price in 2015 and it has largely stayed low for the past 2 years plus. It now has a dividend yield of about 7.1% with PB ratio at 0.67. Its NAV is at $0.91. At current price of $0.61, it does still seem attractive to me.

For the hotels segment, RevPAR declined 5.3% in FY 2016 as compared to FY 2015 but however, its occupancy rate actually increased marginally by 1.6pp to 87%. For serviced residences, RevPAU was 5.8% lower and average occupancy decreased 2.0pp to 85%. Overall, it DPS decreased 5.9% in 2016 which still shows continued weakness in their business.

Its gearing ratio is at 32.1% which is not too high and aligned to other companies in the hospitality industry. 71% of its loans are on fixed rate. A large part of its loans has been refinanced to 4 year and 7 year loans which is a good thing.

It is currently doing asset enhancement to its Orchard Parade hotel and also constructing Village hotel in Sentosa which is expected to complete in 2019. I do not own stocks in Far East hTrust currently but will be looking to buy some soon.

Is this a good time to invest in the Hospitality industry in Singapore? 

With hotel supplies in Singapore beginning to taper off in 2018 and visitor arrivals still growing, I would expect occupancy rate to increase and possibly RevPAR to increase as well should it recover. Furthermore, with all the initiatives by the Singapore government, I think there would be a high chance to see some recovery in the hospitality sector next year.

Investing in this sector may take some patience to realise its value. As investors, we want to invest in the companies during bad times to anticipate better times ahead. In the worse case scenario, it may not recover and the wait could be even longer. Most importantly, we will invest when the stocks are undervalued with some margin of safety to manage risk better.

Let's see what happens to this industry in the future.

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Monday, April 10, 2017

The Shocking Case of An Insurance Policy

Just last week, there was a shocking case of an insurance policy which went viral. Apparently, this person's dad bought an endowment policy from prudential in 1994 where the maturity payout of the policy is suppose to be $42,000. He got a shock when his dad got a cheque of only $20,000+ just recently when it matured.
My dad bought this prudential savings plan twenty years back and he was supposed to get 40k+ this year during March. However, they've only sent my dad a cheque for 20k+ (the initial investment is 30k+). 
My family went up to the prudential office to lodge a complain and to enquire as to why the company isn't giving the full sum as promised on the contract. The company dismissed my dad with a convenient bullshit excuse " our company isn't earning much so that's the sum you'll have ". 
Is this ethically right? What's the point for anyone to save with prudential if you're going to make a loss in the end after 20 years? That money could've been many times more if my dad invested in other financial instruments and inflation. 
Is there any case if we were to sue them? My parents are just Hawkers, I don't understand why you've to make the old generation suffer so much
I have reposted the original post on Facebook above. Insurance is always a complicated topic. Buying insurance is definitely a long term commitment as we will have to continue paying the premiums for at least 20 years and more. If we surrender early, we will lose a lot of money.

What happened to the shocking case?

Throughout the past few years, I've reviewed my own insurance policies, both which I bought when I was still a student and those which my parents bought. I've took actions to eliminate the unnecessary premiums which I've been paying and make sure I have enough insurance coverage also. For the case above, it was an unfortunate case where the maturity payout was less than what was expected. For us to know what happened, we must first understand how an endowment policy works.

Insurance, as the name implies, should cover us for some sort of misfortune such as death, critical illness and disability. All insurance policies will cover us for some of those mentioned but most of us would have bought policies with savings and investment elements also. Whole life plans, endowment and investment link policies all have the savings and investment elements in it.

Breakdown of the insurance policy

1. Guaranteed and Non-Guaranteed 

If we take a closer look at our insurance policies, we will always see a guaranteed and non guaranteed portion in the policy illustration which is prepared for us by the insurance agent. The policy illustration is only applicable for plans which have insurance and savings/investment elements in it. For plans which are only for insurance coverage, such as term plans and personal accident, there is no such illustration needed as the premiums paid are only for insurance coverage.

The guaranteed portion is the amount which we will definitely be able to get at the time of the illustration. If you look at this portion in your benefit illustration, it is very low. The amount you get back just on the guaranteed portion alone will 100% be lesser than the premiums you paid.

Then, there is the non guaranteed portion which seems like a lot of money. This non guaranteed, as its name implies, is not guaranteed to you. The amount is based on the projected investment return which your insurance agent put in when he/she did the benefit illustration. This is the tricky part. Some agents put in projected investment return so high that is it really quite impossible to achieve. Many people who bought insurance policies many years ago back in the 1980s and 1990s, have very high non guarantee amounts because the projected investment return was put in much higher in the past. It is understandable as interest rates were so high back then and we can easily get 5% just putting money in the bank. This doesn't apply to now at all.

Therefore, if we really want to know the value of our policy, we can actually get a revised policy illustration or check the actual value of the policy with the insurance agent of the company directly. This will ensure we do not get a shock when the time comes for us to cash out.

2. Not all Premiums are put into the policy value

The premiums we pay on the whole life, endowment and investment link policies are not all part of the policy value.

Let's breakdown the premiums into a few portions:

  • Insurance coverage
  • Critical illness rider
  • Disability rider
  • Life fund
As we can see above, the premiums we pay can go into different portions. Take note that the premiums we pay for the insurance coverage, the critical illness and disability riders are not part of the savings. These amount will never be given back to us. 

The rest of the premiums are put into a life fund to generate some investment returns. The amount we can receive back depends entirely on the fund performance. 

Managing our expenses on Insurance

Depending on your insurance policies for retirement may not be a good choice as the amount you will get back at maturity is really not in your control. It can be much lower than what you expected. For myself, I try to limit the money I spend on insurance to 10% of my income. In this way, I can save up more and plan for my own retirement which I have more control over. 

It is important to review the policies we have and see what we can do to get enough coverage while limit the premiums we pay. To get the most coverage, we can consider term insurance which is really simply just insurance in itself without any savings or investment elements in it. 

Now, we can even purchase insurance direct from insurance companies without going through an agent. You can check out MoneySense website on the direct purchase insurance here. Do note there are limitations on the coverage you can get which is at $400,000 currently. Any coverage above that, you'll still have to go through an agent. 

For the case on Facebook, it was unfortunate that the policy holder got back lesser than what was expected. For those of us who are still holding on to endowment or whole life policies, it is timely to review again if it serves our needs. 

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Wednesday, April 5, 2017

Changing Your Financial Situation With The Early Retirement Concept

It is soon coming to the 4th year of this blog's existence. Through writing about financial topics, I learnt a lot in the process too. I also read from other blogs and learn from people who have manage to changed their financial situation totally.

These 3 years plus has been a wonderful journey, meeting new friends and bloggers who make this journey a better one. We celebrate each other life journey from marriage to having kids, its really a whole community of friends from online to offline.

Worrying about life?

Through blogging, I also receive several emails from readers who are in tough situations. Many want to seek out solutions to change their financial situation. Most do not know what to do and just want to see light at the end of the tunnel. Finally, there are people who are afraid of their future and worried that they would not have enough money. 

I too was once lost, worried and afraid for my future until I got inspired by a concept that changed my financial situation. It started off with the concept of passive income, then multiple streams of income then early retirement and finally financial freedom. All these concept kept me focused on where I want to head in my life. It was not all perfect and I had to trial and error, fine tune and adjust accordingly. Life is about experience after all isn't it?

The concept of Early Retirement

The concept of early retirement which I chanced upon a few years back set the precedence for my life. Early retirement is often misunderstood as being lazy, doing nothing and not working. This is not true at all. To me, it is more about providing financial security and assurance for ourselves as well as our loved ones. When we are able to take out the money aspect off our minds, we can then truly live our lives purposefully.

So how does this work? How do we do it?

This is the table that summarises how much we need to save in order to retire in how many years:

Savings Rate (%)Working Years Until Retirement
5%66 years
10%51 years
15%43 years
20%37 years
25%32 years
30%28 years
35%25 years
40%22 years
45%19 years
50%17 years
55%14.5 years
60%12.5 years
65%10.5 years
70%8.5 years
75%7 years
80%5.5 years
85%4 years
90%3 years
95%2 years

If we just look at the table above, the traditional advise of saving just 10% of our income will ensure we can never retire at all. This is already base on a 5% annual investment rate of return on our savings. If we don't invest at all, it will be even worse.

Up to this point, maybe some of you are still confused on how the numbers come about in the above table. Let's take an example of saving 50% of our income which means retiring in 17 years. This also means having financial independence after 17 years just by saving 50% of our income.

Here's how it works:

Let's assume a person starts working at the age of 24 with an annual income of $30,000. This person saves half of his salary which is $15,000 and invest it at 5% investment return. At the end of 17 years, his $15,000 saved annually will become $387,605.50. If now he just put these savings and invest in some stocks which can give him a 4% dividend yield, he would have enough dividends to cover his expenses fully. This is the point of financial independence.

Of course, there are many situations which may change in the 17 years such as expenses increases and income should also increase as well. We would have to adjust accordingly to make this work. 5% investment return isn't that difficult to achieve. Most people can invest and get more than 5% return which would speed up the growth of their money.

This concept is an inspiration to help me focus on my long term financial planning. I believe most people know that it is important to invest their money but lack the motivation and the patience to see through the investment process. Knowing this early retirement concept has helped me to invest better and most importantly give me a reason as to why I am investing in the first place. Without a goal and a purpose, investment can get tiring, boring which lead to us eventually giving up.

Where To Start To Change Your Financial Situation?

After knowing the concept of early retirement, we can then identify how many years we want to achieve financial independence. If we are looking at about 10 years, then we need to save 65% of our income. The next question to ask is whether its possible to save 65% of our income?

We can start by eliminating unnecessary expenses. If its not possible to eliminate expenses anymore, we will have to increase our income. If after reducing expenses and increasing income, we still can't reach the desired savings rate, then we have to look at longer years to financial independence. Perhaps saving 50% of income is more manageable than saving 65%. This will take 17 years instead of 10 years but its more achievable for some of us.

Savings is just the first part of the early retirement concept. The next step is to invest the money with at least 5% investment return. Identify the types of investment which you are comfortable and familiar with then keep investing the extra savings and reinvest the profits. Our money will gradually compound over the years to reach our desired amount for financial independence.

There will come a point when we realise the money we get from investing is more than our expenses. The safe rate is at 4% which means if we invest all the savings we have at 4%, will we have enough investment return to cover all our expenses? If yes, then congratulations, you have reached financial independence.

I hope this concept will motivate and inspire you to persevere through your financial journey, just like how I was inspired. There will certainly be some adjustments along the way so do enjoy the process fully. The key is to keep focused and don't give up.

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