This time is different! I think… (China and Hong Kong Market)

So… in early 2024, I was lucky to have some spare cash as the big expense I was expecting didn’t come to fruition.

As I was wondering and researching what to invest in, I was convinced that I should investigate a market that is so gloomy that everyone is cursing and swearing about it.

Hong Kong (HK) Market.

Before the rally in late September 2024, the Hang Seng Index (HSI) was trading roughly at the same level as the Lehman Brother’s crash.

I did have some concerns regarding the HK market.

•   HK market may need more time to recover
•   HK’s economy is at the mercy of the Chinese government’s policy
•   The credibility of the HK market’s financial reporting (Annual reports and financial statements)

The gloominess and pessimism of HK market are totally noticeable. When I asked on Reddit (https://www.reddit.com/r/HongKong/comments/1b4ubc7/hk_stocks_recommendation/) about HK market and their choice of company to buy. You really can feel the pessimism about HK market then.

I didn’t stop there. I also asked my usual Whatsapp stock market interest group, and they, too, gave their pessimistic views on it.

The Time To Buy Is When There's Blood In The Streets - Nathan Rothschild

There was blood in the streets in HK when they protested from 2019 to 2020 regarding an amendment to one of the law bills.

But this isn’t and shouldn't be the only reason why I should buy anything in HK market too.

To be frank, their pessimism is warranted, regardless of how they convey their feelings to me.

Yet… I am undeterred. I strongly believe that HK market deserves a good hard look because:

1.       There are still economic activities in HK and China. There are still people buying food, taking transportation, paying bills, and wearing clothes.

2.       Hongkongers are hyper-competitive and hyper-materialistic. They survived under a foreign overlord (United Kingdom), and they will survive under China. I sincerely believe none, no Hongkonger, willing to stay poor and not work hard for a good living. Not without a good damn fight.

Although I believe that their economy will not become zero, I must be prepared that whatever HK-listed company I buy will tank or go down in price even more.

Hence, here is my rough game plan:

·         I try to search for at least 3 companies that I believe will do well even when the economy will do well even when the economy is bad. A moat is so strong that despite a bad economy will still survive and be profitable.

·         I will be more stringent with my criteria. Especially the debt part of the company. Reducing the odds that the company goes bankrupt.

·         I will allocate a small position and prepare for 100% loss.

I managed to find 3 of those companies that satisfy my requirements:

·     Hong Kong Exchange (https://drive.google.com/file/d/1ABlppSPq8mP-EH8tH8CLkdKpNsGefs3t/view?usp=drive_link)

·     MTR (https://drive.google.com/file/d/13IeOCu4Eflmf8Y6IGlA2PJb7_Fi0FB3f/view?usp=drive_link)

·     Yum! China (https://drive.google.com/file/d/1yp8TLJ8PSjhW0-NMHHVCAjn43J_o2EQI/view?usp=drive_link)

I will not explain in detail about these companies. At the time of writing, I am vested in MTR and Yum! China (HK)

Annnnnnd then I carry on with my life.

Fast forward to late September, the People’s Bank of China (PBOC) Governor made an announcement and then China and HK’s markets soared.

Well… I, too, couldn’t believe my eyes when I saw my investment become profitable by a good margin.

But this is where everything becomes… funny…

This time is different! Really!

Memes start flowing on what the Chinese and Hong Kongers are doing. Rushing into open accounts. Many want to capture the bull market and maximize their gains.

This has gone so crazy… When I saw this image, I knew the sentiment in China and HK suddenly became too greedy…

A monk! Open a brokerage account! I am Speechless!

Financial advisers, analysts, Finfluencers, not just Singaporean finfluencers… basically I think everyone (since I am blogging about this, so I am one of them) starts to say something about this China Bull run.

Those who are very mindful, very demure (I don’t know who started this trend, but hey, let me use it), explained what the PBOC Governor means by those actions and what that help.

Some proudly boost how high China/HK share will go and what is his/her target price. (How do they know sia?) and there was one that declare he will eat shit.

Basically, a lot of people, both from the media and the retail investors think that this time is different.

小赌怡情大赌伤身 (Gambling with little stakes may be fun, but gambling with big stakes may bring harm)

Then after the golden holiday week, I expect the market will soar higher, since a lot of people, including a monk, open a brokerage account.

Oh boy… I never thought I would be so wrong.

The Chinese retail investors did manage to join in the stock market… before the market goes down about 30%.

Social media is filled with people venting their frustrations on how much losses they make and how terrible their situation is.

Some claim they mortgage their properties, take up loans, and pour all their life savings into the stock market, thinking that this time is different, and they are going to change their life around.

I am wrong, though profitable still (not sure for how long).
They are wrong and suffer a huge loss.

Why is it different?

Why am I profitable while others are suffering a huge loss?

The simple answer is I bought my investment when the market was extremely pessimistic. When everyone brushed my questions aside and looked down on this idea. It was as if the idea of investing HK shares offended them.

A classic bear market attitude.

But this time is different… because usually, the market had demonstrated it has become profitable. Companies become profitable, dividends become larger, and assets consistently break previous all-time highs, then usually people will start to take more risk and invest in overpriced assets.

Not this time.

Retail investors start to invest and take extreme risks before the market proves itself.

The psychology of the retail investors leaps much more forward before the government and the companies execute anything to prove the efficiency of the policy.

My Learning

I am lucky. That’s for sure. I have a template to research a stock, I read books that enforce my bravery to invest in a market (Thanks Howard Mark!) that has extreme pessimism, and last but not least I don’t invest in a way that will ruin me.

But I think the takeaway I have in these 2 weeks is:

·         Market is irrational.

·         What never happened before, doesn’t mean it wouldn’t happen.

·         There are people out there doesn’t care about the safety of their wealth in hopes to earn more wealth.

I must be inexperienced to find this behavior mind-blowing…

 

Yours Humility

Manferd

The Wind, the Current and the Sailor of the business.

If you ask any Singaporean elderly their opinion about working for the Government, they will use the word: Iron Rice Bowl. It means that your salary is good and steady, free from disruption. As other materials like porcelain or ceramic can be dropped and smashed.

Hence, they will be proud if their children are the Government’s employees.

But…

Sign-on in the Navy is not a guarantee of a rank promotion.

Once I finished my Basic Military Training and my Navy training in RSS Panglima (aka Changi Naval Training Base), served on board a ship for a few years. They sent me for a Petty Officer Course (POC) for training, to qualify for the next phase of my career and First Sergent rank onwards.

And Navy’s POC had an interesting challenge for my batch boys and me back then.

My Master Sergent, who was my trainer, challenged us to row our boats from Changi Navy Base to a distant location up north, within a day, camped overnight, and then row our boat back.

Our boats will have no propeller engine or sails. 

(the closest I can find the boat we used)

The challenge was not easy. We will be rowing against nature’s elements and the only thing we can rely on will be our own brute strength. If we row in the daytime, we will face the hot sun. If we row in the night, we cannot easily see where we are going, not to mention we will be sleepy. We are also concern about the weather turning foul (rain and heavy wind). If our boat capsized, we would be seriously in trouble. The boat is made of solid wood, flipping it back upright and gathering our equipment will finish us off.

As our team discussed how to manage this without mechanical assistance, our Master Sergent hinted to us, “Try to make your life easy, what will help you to row easier?”

XXXX

On the date we selected, the morning sun was yet to touch our faces. We made our final preparation to sail off.

My friends who are well versed in navigation data had checked the weather forecast, the tide data, the current, and the wind data.

I am clueless in this area, so I leave my trip in their good hands. They too, must row the boat. So, I am sure it was in their best interest to plan it well.

The rest of us will do our part in ensuring the logistics are well taken care of.

When the sun’s rays shined over the horizon, we pushed our boats into the sea, dipped our oars into the sea, and took off.

The rowing was not that tough. Our boats were going in the direction of the current, which was the same direction as our designation. The wind, we cannot tell for sure, but we do not have a sail up so even if it was against us, it was not that bad. The sun was unforgiving still, we poured iced water on our head in an effort to prevent heat-stroke. How effective was we cannot be sure. But at least we tried.

XXX

You might be wondering, what does this have to do with value investing?

Like my boat back then, a business can ‘sail’ with economical winds and currents in their favor.

Doing a business is never easy, it will always be competitive, full of pitfalls, regulations, and unforeseen challenges.

Sometimes, an experienced manager can guide the existing management on how to navigate the economic winds and how to ‘sail the boat.’ How to position the business to capture the economic winds in favor of the business (tailwind), or even know how to guide the business despite the winds are against it (headwind).

However, as a value investor, having such an experienced management is highly helpful. Knowing which direction, the economic winds are blowing helps a lot too. It should make the business ‘sail’ easier. It does not eliminate all problems, but it does help.

Then the next important question will be “How do I know whether there is a tailwind or headwind for the business?”

XXX

After one night in the campsite, we packed and restocked our water and placed it into our boats, we waited for the high tide.

And this time, the officers were joining us.

We rowed again, back to Changi Naval Base. The current did its job again, making our journey smooth. The officers sat at the back, and seemed to be enjoying the sea breeze while we rotated rowing among ourselves.

While we sailed out late in the morning, we reached the Changi Naval Base in the late afternoon.

After we moored our boats and offloaded our gears, we managed to get lunch in the cookhouse.

The officers did not make any comments or remarks and let us mind our business.

XXX

Googling for economic winds is still my method of researching.

Let us take Banking as an example.

I will google ‘Banking trends’ or ‘Banking outlook’ to find out more.

However, like my sailing journey, there were bound to face some challenges, and I like to know more about it.

So I will google ‘Banking challenges’ to find out more too.

I can put the year, for e.g.: ‘Banking trends 2024’ in hopes of finding better results. The same goes for challenges.

If I am interested in the trends and challenges of a particular country, I can google “USA banking trends 2024” or “Singapore banking trends 2024”

As much as I can, I try to read the research publications or any credible source I can find.
Hence, the keywords I used matter a lot.

For your convenience, you can copy and paste this with your investment notes, just replace the ‘industry’ with something you want to research:

·      ‘industry’ challenges
·         ‘industry’ threats
·         ‘industry’ trends

You may come across some economy research reports that will cost quite a decent amount of money to buy. I didn’t pay for any of these reports, though I may be interested in them, but they are really pricey.

Hence, you can try to search using these keywords:

·         filetype:PDF ‘industry’ challenges

·         filetype:PDF ‘industry’ threats

·         filetype:PDF ‘industry’ trends

And sometimes, you may find quality PDF research reports that will explain in detail… for free…

Credits go to Fifth Person for teaching me this.

Finally, AI chatbots may help.

https://gemini.google.com/app is one of those Chatbots that is useful for me.

You can type in your question, and it gives you a concise answer with links to support.

XXX

In my experience of military life, if we can have extra time for ourselves is considered a privilege. Unlike businesses where rewards are given in terms of pay raises or higher bonuses, employees are willing to sacrifice time to earn more money.

We value not going back to work more, as we do not get overtime pay and extra bonuses are akin to lottery. Only a very few handfuls know how to get bigger bonuses in the Navy, and this is closely guarded information among us.

The officers know that and give us a day off from our training after our expedition.

Now I think back, I feel that they appreciated how we planned and executed our sailing. There was no accident, no loss of equipment, we did not get to row like slaves, and most important of all…

Our officers can go home on time. They too, are not paid overtime to sail with us in the event we must sail late into the night.

They have, skin in the game too, but in this case, they did not put in any effort and the challenge was a success, and… on time.

XXX

My reward from my mission was a day off from training.

Investing is a different story; good and proper research does not necessarily yield a good return.

But it does provide some insights into the business challenges and what helps them prosper.

Gives us a good chance to avoid those which having a headwind while riding those who are having a tailwind.

I wished I had known this before I bought Prime US REIT back in 2023…

*in Uncle Roger’s voice* Haiya…

I have an Uncle story

 I had an uncle.

He was the first millionaire in our family.

How did he get to become a millionaire?

Private 4D.

 

He strikes it once. And he didn’t take that winnings.

He betted all in those winnings again.

And he strikes it twice in a row.

 

The bookie didn’t run away. He called my uncle and told him that the money was ready and asked where to deliver his winnings.

Damn… now I know which side of the gambling table to bet on.

 

So, I am sure you have read many stories online and in newspapers. Sudden windfall drove their winners irrational and did stupid things with their winnings and making them square one, or even worse. My uncle was no exception.

 

What he did was he went to the hang flower thai pub.

Pay to hang flower (WTF? What does that do? What is that for?), sleeping with the ladies there, and drinking. He was already an alcoholic. I guess he just destroy the dam and let the alcohol flood his liver. He just doesn’t care.

 

And yea, the thai ladies and the pub owners there really know what to do.

 

With no control, with no self-discipline, the winnings were gone.

 

I am not even sure if he lent anyone some money, usually in this kind of scenario it is bound to have some people ask him to do business, investment, be a sleeping partner, and borrow money.

But I assume, he was a full hardcore Slaanesh worshipper. He did not care and did any of those ventures. (Warhammer 40k reference, there is a fictional god called Slaanesh that in that science fiction universe that represents pleasure, excess, and decadence)

 

My dad did try to talk some sense out of him. My uncle told him, “At least I used to be a millionaire.”

I guess that was his way of saying “I achieve what you can never achieve in your lifetime.”

 

As you guys can figure out… I am using past tense. Because he isn’t with us anymore.

He may indulge in his pleasure, excess, and decadence. The thai ladies and pub owners are making money, and doing business, they are not doctors or his mother. Eventually, his health problem becomes too serious he admits to a hospital.

And he doesn’t have any savings, not to mention his winnings. So, he was transferred to a hospice hospital. And pass away there. Alone.

My aunt did visit him, and make a video. He did apologise for the trouble he made.

 

He is succeeded by his son and his wife.

What did I learn from all these?

 

Be on the correct side of the gambling table

The bookie part does impress me. I didn’t expect that private gambling willing to honor the winnings, especially since the size of the winnings is almost $1 million. I guess for them, they aren’t worried that their customers win against them, but worried more about “what if there is no customer to gamble?”

However, it does tell me that there are certain industries, like brokerage firms, banking, and insurance companies. They do have some form of gambling and they call it probability.

Hence, I just need to know which side to ‘bet’/invest on to win in the long term.

 

“My partner Charlie says there are only three ways a smart person can go broke: Liquor, ladies and leverage.”  - Warren Buffett

Alcohol and women are a powerful money-spending combination. I learn to respect their power.
I believe that the atmosphere in the hang flower thai pub, clubbing filled with beautiful women, sometimes people give free drinks, etc. While the ladies will seduce men to spend more money on them or get more drinks. This will entice people to go into that route of ruin.

I don’t blame the pubs that most likely encouraged my uncle to keep buying liquors and hanging flowers on ladies.

They really trying to make money here. Usually, ladies don’t resort to this line unless they don’t have other good options, resulting in sacrificing their sleep and health just to make more money.

You can view this for more context on hang flower joints, aka siam diu here: https://youtu.be/up0YD5KVGGU?si=57UrTYa4CHT0QiFB

Yet…

I believe we should have fun and have an open mind when we progress in our lives.

Moderation should be the key. Set up some ‘limitations’ to prevent overspending, like just bringing cash. Just be aware that going to such places is ‘dangerous’ for wallet and credit cards.

 

Come to think of it, I could go down this route… if not for my gout. When I drink alcohol, my gout can flare up easily. You can say that my gout is my wake-up call and reason to avoid drinking.

 

Darkest Dungeon Intro

As my uncle passed away, there was no funeral, my dad and aunts decided to cremate my uncle’s body as soon as possible. I want to join them with the cremation, at least pay my last respects.

My dad strongly advises me not to go. His reason because my uncle’s wife is not mentally stable.

 

I guess my uncle’s addiction to whoring and booze not only ruin his wealth, his health, and his family.

Economic Moat of Exchanges… or is it?

 Exchanges is a place where buyers and sellers come together to trade these things like stocks, currencies, and even commodities like oil, in a safe, organized way.

When I was researching for Hong Kong investment opportunities, I stumbled upon Hong Kong Exchange (ticker: 0388). I had a flashback on those HK dramas that related to stock market, like Divine Retribution (世紀之戰) and The Greed of Man (大時代).

Putting aside my nostalgia, I did learn a few things about exchanges and their economic moat.

So, let’s start with…

Toll-like Revenue

If you want to trade financial products, chances are you must buy them through an exchange, directly or indirectly. There is no way around this. Hence, they earn their revenue through all transaction fees.

Yet… this “toll-like” revenue is established through a few factors.

Barriers to entry

While in some countries, like Singapore’s SGX and Hong Kong’s HK Exchange, there is only 1 exchange, which gives them an almost monopoly-like business in their country.

Most countries have high capital requirements and uphold certain standards to ensure the exchange function as it should be.

Apart from functioning as intended, should another company wish to set up another exchange, that company need to show a business plan to the country government to explain the need of another exchange.

Hence, it isn’t as simple as having the capital to obtain the license. 

For HK and Singapore here are some links to read if you are interested in the requirements need to open and maintaining the exchange:

HK SFC requirement: https://www.elegislation.gov.hk/hk/cap571?xpid=ID_1438403465394_001

MAS requirement: https://www.mas.gov.sg/-/media/mas-media-library/regulation/notices/mpi/notice-sfa-02-n04-notice-on-capital-requirements-for-recognised-market-operators-that-are-formed-or-incorporated-in-singapore.pdf

Intangibles – Data

There will be an ocean size trove of data available for interested parties to analyses, to make sense out of it, etc.

Traders will want fast accurate data depending on their trading style, as some of them believe the speed of data matters to their prosperity. Investors probably wish to know other information like the companies’ management transaction and announcement. They want this information to be timely and wholesome. Brokers need this data to implement into their platforms and let their clients use them.

And who has this firsthand data to give them? Spoiler alert: Exchanges. 

Data like Real-time quotes, corporate data, order book data, market news etc.

Exchanges recognized that brokers and financial institutions want this data and are willing to pay them.

Hence, granting them another subscription-like income.

Intangibles – the country matters

While the exchanges have no part to play in this matter, the country’s reputation where they reside matters too.

Imagine the country’s bureaucracy is slow and inefficient, police do not do any enforcement at all, and law is just a book.

Investors may not trust the listed companies’ financial reports. Companies may not wish to list in that exchange. Even if the company does, it takes a long while to get it.

Should there be any white-collar crime, will there be anyone enforce it?

In the opposite scenario, a country that has efficient bureaucracy, transparent and clear laws with good enforcement. Companies and investors have a high trust in the country and may consider listing or trading/investing in that exchange’s listed companies or financial products.

This may increase the volume of transactions, foreign capital flow into the exchange.

Some exchanges may cater to a specific type of investment product and entrepreneurs may choose that exchange to list in instead.

For example, Singapore Tech Company, SEA LTD listed in NYSE instead of SGX and Oversea REITS choose to list in SGX due to the high preference of dividend stocks.

This leads to another topic…

Their challenges

The high barrier to entry created by regulations and their valuable intangible assets makes them virtually unchallenged in their home country. Exchanges business isn’t almighty.

Because they may face…

Prefer to list in another foreign country exchange

Like my pervious example, SEA Ltd chooses to list in NYSE instead of SGX. This shows that companies do have an option to list which exchange they prefer to.

Hence, it isn’t a guarantee that a company will be listed in their home country exchange.

Certain exchanges may have more diverse and deeper investor pools, providing access to a wider range of potential investors than the domestic market. This can lead to increased demand for the company's shares and potentially higher valuations.

While other exchanges may attract concentrated pools of investors interested in the company's sector or industry, leading to better understanding and valuation.

Depending on the country’s tax law, foreign companies may get certain tax advantages.

Companies considering listing may take these factors into consideration.

Government Policies may affect exchanges

Sometimes the government may impose policies for certain intentions well in mind. It doesn’t mean the exchange may get the benefit.

Strict regulations, complicated reporting requirements and unclear policies may protect investors from several issues. But they may also deter companies from getting listed, which reduces the exchanges potential.

For example, US exchanges allow investors to buy a single share of the company, allowing retail investors to invest in the company of their choice with little capital. While SGX can only transact in terms of 100 shares (1 lot).

Almost a monopoly moat

Despite facing challenges like cybersecurity threats and regulatory hurdles, traditional exchanges offer several advantages, including asset-light operations, healthy profit margins, and limited competition in certain markets. Technological advancements in areas like trading platforms and data analytics present opportunities to further streamline operations and attract new investors or traders.

The rise of cryptocurrencies has introduced new dynamics to the financial landscape. While crypto exchanges strive to gain a foothold, the recent SEC approval of crypto ETFs presents an indirect benefit for traditional exchanges. With their established security infrastructure and extensive operational experience, traditional exchanges can offer a safe and regulated platform for investors interested in accessing crypto assets. This can potentially lead to increased trading volume, broadened investor, and trader bases, and increase its revenue.

 

December is the month of reflection 2023

The year 2023 sure is full of events. Let’s start with…

Trust

How do those banks lose the public’s trust, I am not very clear on the actual details. I believe it is related to crypto and FTX. Regardless, the bank run happened so fast that three US banks bit the dust over five days.

Interestingly enough, other banks benefitted especially the big four US banks. People trust them, open accounts, and deposit money with them.

Those banks that collapsed aren’t the only one who has trust issues.

The crypto poster boy, Sam Bankman-Fried (SBF) gained a lot of trust at first and lost it when FTX struggled to meet the demands of customers’ withdrawal of funds. I wouldn’t go through their operational mistakes. But the informant tipped off, rumors spread, and then things spiral down on its own.

Trust is important, yet no way to quantify it.

The funny thing is… when I research companies, especially overseas companies. It is very hard to assess the public trust in the companies. Till a crisis like this happens. Trust is so fragile yet tip the scale to the one that has it or otherwise.

Yet, there is little or no way to tell.

This expands beyond banks. How do we trust our smartphones that safeguard our data? How do we trust the companies who produce food are safe for consumption?

Yet, if we question everything, we will be losing a lot of time. If we don’t, we are vulnerable.

Therefore, to ensure the economy runs smoothly, the government has to step up. Most likely, US banking will face tougher requirements in the future.

Dune warned about charismatic leaders

Adam Neumann and SBF managed to attract people to invest in their business.

I did watch some of their interviews. Both of their styles are different.

Despite their difference, I do note that people liked them a lot, at least before their respective companies went bankrupt.

These cult-like leaders most likely come with several problems. In my opinion, the biggest problem is that they lack accountability and corporate controls.

Can the government step in to stop this? I don’t think so. I am afraid the company’s stakeholders have to step up. However, this isn’t easy to achieve.

I don’t have an easy solution to these. So far, my only way to handle this is a careful portfolio management.

For glory's sake...
For vengeance's sake...
War! (Xerxes, 300: Rise of the Empire)

As if the Ukraine war isn’t enough, Israel and Hamas started their quarrel with each other this October. I never understand their enmity and I don’t think I will ever find the truth about what happened.

Nevertheless, war it is…

The warring nations supply commodity resources to the global economy, most notably, oil and gas.

Naturally, exporting their nations' goods will be affected, and Ukraine may not have its infrastructure at full capacity to transport its goods. Russia may able to deliver its goods to its allied countries, but have to sell at steep discounts.

Meanwhile companies in countries that in peacetime, they suffered raw materials shortages or inflation. To add on, the Fed has to increase the interest rates to deal with inflation.

Naturally, this rolled the wheel of fortune, oil and gas companies, banks that survived the bank run, and to my surprise, luxury watches benefitted from these quarrels. They enjoyed the Peace Dividend.

Speaking of Dividend…

Dividend War

If you are into the Singapore Finance blogosphere, or social media or joined some Singapore Telegram Finance groups, you should be aware that there is another quarrel, luckily with just words, about dividends.

One side claims that dividend investing is dangerous, another side champions that dividend investing is wonderful.

Even among the supporters of dividend investing, there is a heated debate on which method of dividend investing is better too.

While I enjoyed reading the messages and comments of those exchanges like a Korean drama. I noticed a certain behavior in these discussions. While each side believes their method is effective, they prefer to ask questions about the other side’s methodology and try to poke holes into them.

While I am entertained, I am aware of both ends’ pros and cons… I think…

Each methodology will have its pros and cons. There isn’t a perfect strategy.
Everyone’s life is different.
Everyone is going through a different phase in life.

Last but not least, whatever the strategy is, there is no guarantee.

Intangibles

There are things in this world that money can’t buy.

Trust takes years to build up. Rumors can ruin it.
Foresight to build up the business in a way that it has recession resilient, and back up the supply chain to ensure the company still can be operational.
Enmity between neighbors can’t be diminished just by spending cash…

While financial statements are important to analyzing a company. I must not forget that businesses, countries, and also market are driven by people. Not everyone uses financial statements to determine their investment decision.

There might be other intangibles that may make and break a business.

But how can I identify and access them?

 

Economic Moat of Airport Operators

Before we discuss airport operators, let's talk about airports themselves. Building an airport is a complex and costly undertaking, and there are many factors to consider, such as:

•          Location, where it must accessible to the public with a possibility to expand.
•          Runways, which must be a certain length and width and there must be enough of them to handle the anticipated traffic.
•          Terminals to handle the passengers and cargo. It must have enough space for check-in, security, baggage handling, and boarding. It also must have enough space for taxis, car parks, and other transportation.
•          Support facilities, like fuel storage, maintenance hangers, and air traffic control towers.
•          Environment impact, the airport must have a minimal environmental impact. This includes minimizing noise pollution and protecting wildlife.

Building an airport is a complex and expensive undertaking.

However, it can also be a major economic driver, attracting businesses, boosting tourism, and generating foreign income.

As such, governments need to ensure that airports are operated safely, efficiently, and sustainably. Therefore, when selecting airport operators, governments will scrutinize their candidates for experience, management expertise, and commitment to safety.

Once the Airport Operator got the contract… it can be very ‘Sticky’

Once an airport operator has been in place for a while, they will have built up a "sticky" moat. This is because their employees will have learned how to make full use of the airport's layout, machinery, and other resources. They will have established a good workflow, and they will have refined it over time. This takes time and effort, and it is very difficult for a new operator to replicate.

As a result, once an airport operator has proven itself to be competent, it will be very difficult to replace them. The government will have to consider several factors before making a change, such as:

•          Can the new operator handle a crisis?
•          Can the new operator ensure smooth operations?
•          Will the handover be a smooth process?

Unless the new operator can offer something significantly better than the incumbent, the government is likely to stick with the current airport operator.

Unless you are considering other modes of transportation...

Depending on the traveler's needs, flying is often the fastest way to reach a city or country. With a few exceptions, most cities only have one or two airports. This means that airports have a natural monopoly, and can charge high prices for their services. This is similar to a toll road, which is the only way to get to a certain destination.

Combo Economic Moat

Therefore an Airport Operator has a few things going in its favor that can create a wide economic moat. These include:

•          A Natural Monopoly, there isn’t much choice available for travelers…
•          A Toll-like business, as all travelers using the airport will have to pay certain fees…
•          High Regulation Requirement, which creates a high barrier of entry for others
•          High Switching Cost, as the government worries if a new operator can perform just as smoothly as the current operator.

Thus, with all these combinations, airport operators tend to gain a wide economic moat. 

With Economic Moat, does it mean it's a good business?

Despite the wide moat airport operators can have, it does not mean that they are on the road to prosperity. We still have to do our due diligence.

Therefore, I am just taking a glance at three airport operators. At the time of writing, the three with the largest market caps are:

1.       Airports of Thailand (AOT)

2.       Aena (AENA)

3.       Shanghai Airport (SHA)

I will be briefly looking at their Revenue trend, Net Income trend, and then Gross Margin.

These details will show roughly how profitable these companies are. 

AOT’s Revenue, Net Income Trend, and Gross Margin

AENA’s Revenue, Net Income Trend, and Gross Margin

SHA’s Revenue, Net Income Trend, and Gross Margin

These companies had been growing their revenue and net income for years, with gross margins consistently above 50%. However, the COVID-19 pandemic struck, and their businesses were severely disrupted.

Conclusion

I was inspired by Beansprout’s article “Airports of Thailand - Beneficiary of Thailand's tourism recovery”, https://growbeansprout.com/aot-airports-of-thailand-thai-tourism-recovery, which discusses what factors benefit AOT and what are the risks AOT may faces.

However, I still want to learn more about AOT and airport operator business in general. Thus, this motivates me to write this blog post.

I am not disappointed by this type of business. But I still have some concerns, which I have to look into it later on.

Why I Avoid IPO

 An initial public offering (IPO) is when a company sells its shares to the public for the first time. This allows the company to raise capital and become a publicly traded company.

Usually, the purpose is to raise capital for the business.

However, IPO is something I tend to avoid.

I don’t have any advantage

As a value investor, I need to assess a company's long-term investment potential. I typically look at 10 years of financial statements to make this assessment. However, IPO companies typically only provide the latest 3 years of financial statements. While these 3 years are recent, they do not provide enough information to assess how the company has performed over time or during a crisis. This is an important factor for me to consider when making an investment decision.

Sellers have the advantage

Sellers in an IPO, such as business owners, venture capitalists, and other stakeholders, have a number of advantages. They can:

·         Set the price of the shares.

·         Determine the percentage of the company that is sold.

·         Choose the date of the IPO.

These advantages give sellers a significant amount of control over the IPO process.

As a result, it is likely that IPO shares will be sold at a premium.

There is a lot of hype generated

Brokers, capital market banks, and company stakeholders have a vested interest in generating interest, hype, and desire among the public so that they will buy shares.

The company, brokers, and investors all have a financial interest in the success of the IPO. This can create a psychological disadvantage for buyers, who may feel pressured to buy shares.

In conclusion

It is not easy to find an advantage in buying an IPO as a long-term investment. The media hype surrounding IPOs often makes it difficult to assess the true value of a company. As a result, I typically ignore the media and focus on other investment opportunities.