Welcome to our Weekly Podcast Program, Investing Ideas

We chat with Goh Tee Leng, fund manager at Heritage Global Capital Fund based out of Singapore. Tee Leng talked about one of his favourite investment ideas at the moment: OCBC Ltd (SGX:O39) and UOB Ltd (SGX:U11).

AUDIO Podcast:

Video Recording:

***To subscribe to our podcast, search “Investing Ideas” on Apple Podcast, Google Podcast or wherever you get your podcast. If you like the show, please rate and review us as well.

You can also find our recorded shows on our Facebook and YouTube Channel.

If you have an investment ideas you like to share and get on our show, please submit your ideas at:https://valueinvestasia.com/investingideas


To see the full transcript and download the presentation slide, please go to https://valueinvestasia.com/investingideas

Get More Value Invest Asia: 
• Like us on Facebook: http://www.facebook.com/valueinvestasia 
• Follow us on Instagram: http://www.instagram.com/valueinvestasia
• YouTube: http://www.youtube.com/valueinvestasia 
• Podcast: https://anchor.fm/investingideas 
• Newsletter: https://valueinvestasia.com/newsletter/ 
• Read more: https://valueinvestasia.com 


Value Invest Asia provides independent research on listed companies across Asia.
A full review on the interview and the idea would be available for our VIA Club Members, to find out more about VIA Club, click here: https://valueinvestasia.com/club/praise-for-via-club/ 

You can find out more about Tee Leng at his financial blog:

https:// investingnook.com

You can download his presentation slide here:


Full Transcript

  
Stanley: 00:05Hi, this week we chat with Mr. Goh Tee Leng, the fund manager of Heritage Global Capital Fund. He’s also the founder of the financial blog investingnook.com. Tee Leng has been a great friend of mine for a long time, and I’ve been following his work for quite a while. So Tee Leng has a very unique investment style where he look at the macro environment and then finds opportunity according to what is happening in the macro world. And this week, he tried to explain to us why he thinks that the Singapore banks are of great value right now for investors. Without further ado, let’s get started.
S1: 00:44From valueinvestasia.com this is investing ideas, where we talk to investors from all walks of life, learn from them, and find out some of their favorite investment ideas.
Stanley: 00:59Hello, Tee Leng. How are you?
TEE LENG: 01:01Hey, good morning, Stanley.
Stanley: 01:02Hi. Right, Tee Leng, thank you for coming onto our show. I just want to maybe give you opportunity to maybe explain a little bit about yourself to the audience. Maybe you want to share with us how you got into investing. And how has it evolved over time for you?
TEE LENG: 01:24Sure. So a little bit background about myself, like what you actually mentioned, I’m the portfolio manager of Heritage Global Capital Fund, a low money value fund based off in Singapore. And I like to actually promote financial literacy events in Singapore. That’s why I actually started the financial blog called investingnook.com. And lastly, I actually graduated from University College of London, majoring in economics. So since a young age, because of my family’s influence, I’ve always been actually very interested in financial markets. I still remember back during 2008/2009, which was the global financial crisis. Almost every family dinner was actually revolving around which stocks are we buying? Yeah, we were always talking about stocks, back during the family dinners, back during that time. And it coincided with my junior college. I was studying economics back then, as well as all the subjects. And I thought that it was very relevant to what was actually happening in the world. Whatever I was actually studying in theory, I can actually see it happening in practice. Stuff like the government doing fiscal policy, monetary policy, and how our Singapore government does not actually use monetary policy because it doesn’t work in Singapore. We use the exchange rate policy. So I thought, economics was something very, very, relevant and very interesting. I mean, compared to studying chemistry, physics, you study in theory, but you don’t actually see it happen in real life. So that actually started my whole interest in finance and entering to finance world.
STANLEY: 02:57Okay, cool. And of course, you have been investing for many years now. How would you describe your investment style if I were to ask you?
TEE LENG: 03:07I find that my investment style is based on deep value investing. But I guess more in the recent years especially, we started slanting towards the capital cycle approach, which is the theory of the capital cycle. Theory of the capital cycle essentially states that capital is attracted to areas of high returns, and it repels areas of low returns. But end of the day, it always reverts back to its normalized values. And if you think about it, let’s say, for example, there’s an industry that’s actually making very, very, high returns. Entrants will be very, very, excited about this. You see a lot of new competitors coming to this industry, for the prospects of high returns. And that’s when you actually see a lot of investor optimism. And because of the rising competition, you start seeing the returns actually start falling below the cost of capital. And that’s when you actually see an underperformance in the share price. And because the business investments start declining industries that’s consolidating funds actually starting [sitting?] this industry, that’s when we actually see an underperformed investor pessimism that people are very, very negative. And because as firms are exiting this industry, you start seeing an improvement in the supply side. So returns actually start rising above the cost of capital gain. And that’s when you see an outperformance in share price again. But I guess in a nutshell, that essentially explains the whole internal of the capital cycle where capital is attracted to a risk, high returns and repels areas of the low returns.
STANLEY: 04:30Wow. Cool. This is a very– I guess this almost very deep analysis on how the– each industry and capital cycle really looks. In your own observation and research, it– has that always happened in almost every sector, or is there some sector that you haven’t been able to observe this capital cycle?
TEE LENG: 04:53More often than not, you can actually see the capital cycle working especially let’s say, for example the property markets. You actually see when– let’s say for example in Singapore, back during 2013, property prices just kept going up simply because there was not enough supply in the market yet demand was there. Come 2014, suddenly, the government implement the cooling measures such as TDSR, ABSD, LTV ratios and stuff. Demand vanished, but supply had to keep on coming online. And it’s just economics 101, demand and supply forces. If demand is no longer there, but supply just keeps coming on, I mean, onto the market, naturally, your prices will actually start declining. And that actually coincided with the 2014 to 2016 property decline in Singapore, and you can actually explain through all this supply forces. And the only reason why things that the– recovering in Singapore in late 2017, early 2018 was because supply started tapering off. So we don’t know where demand would be. We know supply is actually coming off and actually resulted in the property prices recovering once again.
STANLEY: 05:59Right. Interesting. Interesting. Wow. Okay. And I understand that today you’re going to share with us one idea which is also quite linked to the capital cycle as well. Why don’t you explain your thesis to audience?
TEE LENG: 06:15Sure. So actually it’s not one idea. I think everyone is getting a lot of value here. They’re actually getting two ideas instead of one idea [laughter].
STANLEY: 06:24Yeah. That’s great.
TEE LENG: 06:25But the investment idea actually have stock price points seen as in market turmoil now is in the banking industry in Singapore. So the Singapore banking industry is dominated by three main local players, UOB, DBS, and OCBC. In today’s presentation, I’m actually more interested in UOB and OCBC simply because that’s where the undervaluation actually lies. The valuations are actually more compelling as compared to DBS.
STANLEY: 06:52Okay. Okay. Before I ask why is that the case, maybe you can explain a little bit why do you think that the bank is in a capital cycle that is attractive to investor right now?
TEE LENG: 07:05Sure. So I mean, apart from the whole trade war, which everyone probably knows about is causing a lot of uncertainty in the markets, how people actually do business. Business sentiment is actually not that positive, becoming a bit more negative, a bit more pessimistic. People are a bit more cautious when they’re actually doing business investments and that probably results in businesses not taking so much loans, and the reasons why the banks valuations have become a bit more compelling. But aside from that, it could also be because that the Feds have been talking about rate cuts, and that naturally, actually results in people being very, very worried about your net interest margins actually coming off because your net interest margins it’s– has a direct correlation with your Fed rates.
STANLEY: 07:51Right. Okay. Okay. So if I can summarize this basically because people is worried, more uncertainty and also rates cuts so they are worried that banks profitability is going to be declining, or under stress, over the next short term, right?
TEE LENG: 08:06Yes.
STANLEY: 08:09I see. Okay. But why do you have a different view from that? Because from what you describe it seems all pretty negative. So why do you have a different view on that?
TEE LENG: 08:20So I find that when you are actually investing through Singapore banks not only must you actually understand the banks, you have to actually understand the central bank of the country as well. And that’s actually a very important point. Because the central bank is able to actually restore faith in the banking industry when everyone is actually very negative. So for example, let’s say for Singapore, talking about a central bank that is essentially the monitoring authority of Singapore, the MAS. And what actually happened in 2007 2008, during the global financial crisis, was that everyone was pulling money out of the banks. People very, very worried. We don’t actually know which bank is going collapse the next day. And that was actually what we were seeing in the US. So everyone was very negative of banks. Not really wanting to put their money with banks. And what the Singapore government essentially did was that the Singapore government said, “Now is the time we have to use all surpluses we actually saved over the years, use our reserves, and to actually back all the deposits in Singapore. So what they essentially did was that they actually went to the person and they actually sought for the approval of $150 billion to actually guarantee all bank deposits in Singapore. And they essentially restored the faith in the Singapore bank industry. And one thing you actually note is that regionally, amongst all the banks, if you actually look at customer deposits. Regionally the banks, in terms of 2007 2008 2009, naturally you actually see a dip in terms of the customer deposits. But if you actually look at the Singapore banks during this period of time not only did the customer deposits not decline the customer deposits actually increased as well. And that’s why I find that understanding the central bank and how the central bank’s able to actually step in during times of need is very, very important. If you compare to that to the Irish government in Ireland when, during the same period of time, the government in Ireland also stepped up and said, “You know what, we’ll actually back all the deposits in Ireland.” But the problem was because the result is not strong enough, people didn’t have the faith in the government. They actually pulled their money and that essentially crippled the whole government. So understanding the central bank is very important. That, of course, that is one part in the government. I’m talking about why I have this conviction in Singapore banks. But if you actually look at all banks in terms of all the quantitative side of things, all the investment metrics essentially. The loan to deposit, the cost of income, the non-performing loans, the capital ratios. Our bank, in terms of all these numbers, are also very, very strong. In terms of all the investment metrics, they’re actually regarded quite highly. And that’s the reason why I find that, given this whole turmoil, our Singapore banks are quite strong today, built to actually to ride it out essentially.
STANLEY: 11:12Right. Okay. So here you mentioned about the capital ratio for Singapore banks tend to be pretty strong compared to, I guess, the peers in Southeast Asia. But why is that the case, besides that the government sort of has a backing that they will bail out all these banks if anything happened. But are Singapore banks generally just more conservative in managing their capital? And what leads to all this better ratios and better management?
TEE LENG: 11:46I guess one thing is… Of course, the management is a good capable management. Where they’re actually more prudent, they don’t actually lend out too much money. For example, let’s say the loan to deposit ratio, our banks are actually pretty conservative. They the loan to deposit ratio is roughly about 85 to 90% for our three local banks. And that essentially means that for every $1 in terms of deposits we only lend out about $0.85 to $0.90 in loans. And that’s essentially a very, very conservative way of actually making money. As compared to in UK, I love UK banks having loan-to-deposit ratios of more than 100%. Means they’re actually lending out more money than they have in terms of deposits. And how they actually make up for that shortfall is actually by tapping into the money markets, issuing perpetual bonds, perpetual securities, they actually make up for the difference. Which is actually quite dangerous in that sense.
TEE LENG: 12:39That’s why, of course, our bank’s management is very, very good. They are very prudent. They’re not too aggressive to try to actually chase for every single dollar. But at the same time, our Singapore government actually regulates the Singapore bank industry very, very strictly in that sense. Let’s say, for example, the capital ratios. Our Singapore banks have to actually fulfill the Basel III standards. The Singapore government said that, if you actually want to be operating in Singapore not only must you actually fulfill the Basel III standards, you must actually fulfill the Basel III standards plus another 2.5 percentage points above that. And that’s the reason why you can actually see our local banks, the capital ratios in terms of the Tier 1, is all about 14, 15%. And that’s actually, around the world, is one of the strongest capital ratios you actually see. It’s quite comparable to Wells Fargo as well.
STANLEY: 13:35Oh okay. Wow, that’s fascinating. But in terms of that, okay… To me, it seems that you’re talking about the whole banking sector is maybe too… people are overlooking it and too focused on the negative side of the whole Singapore banking sector. But you could you also talk a little bit about the three major banks, of course, DBS Group, OCBC, and UOB. When investors are choosing between these three what is really the difference between them? Because, to an outside investor, a bank is a bank is a bank is a bank. So what are we really exposed to differently when we are choosing between the three?
TEE LENG: 14:14Sure. I mean, all three banks, of course in terms of the loan exposer, they are very different. For example, OCBC and DBS, they have exposure to Hong Kong. Whereas UOB is not so big in Hong Kong. They don’t actually have a Hong Kong unit. But, I mean, aside from that in terms of all the other numbers our three local banks are actually pretty similar.
TEE LENG: 14:37The only difference I will say, there are two main differences, the first difference is that DBS is actually very, very well known in terms of the cost of funding. The cost of funding for DBS is actually much cheaper as compared to the other two banks. And that reason why DBS cost of funding is much cheaper is because they actually acquired POSB in Singapore. And if you think about it, a lot of Singaporeans would definitely have a POSB bank account. And naturally, you have a few thousand just lying in there, or maybe even more, just not doing anything. And that’s the reason why DBS cost of funding is very, very much cheaper. Whereas for OCBC and UOB, to actually attract people to put money into their deposits they actually have to pay people to actually put money into them. And that’s the reason why their cost of funding is actually more expensive compared to DBS. So naturally, you actually realize that for DBS their net interest margins is actually much higher than UOB and OCBC.
TEE LENG: 15:34The second point is that… So one interesting thing is if you actually look at the global financial crisis and the book value per share in terms of all three banks. If you actually look at 2007, 2008, 2009 one interesting thing you will actually see is that for OCBC and UOB from 2007 to 2008 naturally their book value actually took a hit, but come 2009 it actually recovered and they recover way higher than where they were actually were in 2007. So the recovery was actually much faster for UOB and OCBC as compared to DBS, which actually took much, much longer about even after five years they have not actually reached back to where they were actually in 2007 and I guess the [inaudible] actually, we have about this is that for OCBC and UOB, we think that it’s a family-owned bank and if you actually own a bank, naturally you are a bit more cautious when it comes to you on loans. You won’t be as aggressive. You’ll make sure that people coming to you are really, really credit-worthy, whereas, compared to DBS, DBS is, end of the day, a people’s bank. They have to actually support the local economy, so naturally, the loans they actually give out relative to the other two banks is a bit more risky because if DBS is not lending out money, then what’s going to spur the economy growth in Singapore? So I find that these are two main different shading points comparing the three local banks.
STANLEY: 17:04Ah, okay. You also talk about the exposure to Hong Kong with DBS and OCBC, both after acquiring a Hong Kong division. Do you see that as a risk now, especially with what’s happening in Hong Kong and people are talking about the financial status of Hong Kong in the longer run? In that sense, do you see that the two banks, DBS and OCBC would be slightly a riskier bank compared to UOB?
TEE LENG: 17:34So I know that’s a lot of speculations there because of the protest, the turmoil you actually see in Hong Kong, it’s actually benefitting Singapore banks because there might be a flight of capital so Singapore and even talking to a lot of private bankers, I actually have heard similar stuff. However, I find that at the end of the day, there might be some shift of money to Singapore but it’s, at best, marginal. Generally, I find there’s such huge shifts of money does not actually occur unless there’s actually a very, very massive change, but a change regimen, and that’s not something we actually see in Hong Kong now. I find at end of the day, Hong Kong is actually still a very credible and viable financial center, but of course, I do understand if the protest does continue on for longer it will actually dampen consumer and business confidence in Hong Kong and it will naturally, actually affect the banks, especially OCBC and DBS for their Hong Kong exposure, but end of the day, I guess you can only choose one of two things. You can either choose a good outlook or again, a good price. You cannot have best of both worlds. If you want to be buying at a good price, then naturally, the outlook is probably a bit more bleak, but our three local banks have weathered so many different storms from incorporation up until today. I guess we have to give them some credit to the management to be able to actually weather this storm out again and immerge even much stronger.
STANLEY: 18:55All right. Cool. So yeah, definitely, I think that you are right on point that things might not turn out to be as bad as we might seem so far in Hong Kong, but going back to right at the beginning where you say that your idea is more on UOB and OCBC, I just want to ask you why is that the case? Why do you prefer these two bank compared to DBS at this moment of time?
TEE LENG: 19:23Sure. So in terms of DBS, if you actually look at the valuation chart, I mean, usually I look at the past 10-year price to book historical chart and one thing you actually realized with DBS, if I’m not wrong, currently, DBS trades at about 1.3 times slightly more, 1.3 times PB. So you actually look– it’s actually traded closer to it’s upper bound valuation, so usually, we plot out the historical 10-year chart and we calculate what’s the average price, the book-value that the company actually trades at and the plus-minus ones, then the deviations to give us the lower and upper bound and we actually realized that for DBS, it’s actually traded quite close to this upper bound, and as a competitor, you’ll be an OCBC. You’re basically trading about 1.2 times book value as of today. And that’s actually closer to its lower bound, and for OCBC, it’s trading at about 1.1 times book value, and that’s actually traded below its lower bound. So that’s why I find that for OCBC and UOB, the valuation is actually more compelling than its competitor, DBS.
STANLEY: 20:28Right. So I guess that the only difference is that in terms of valuation, those two seems more attractive at the moment. But why do you think that’s the case? Because given that the two banks are almost at all-time low, but why is DBS not declining as much?
TEE LENG: 20:48Well, I guess that’s really more the qualitative side of things, whereby DBS is definitely a better bank as a consumer. Even my family prefers DBS for private banking. As a competitor, OCBC, which is the Bank of Singapore, private bank. So naturally, there is a reason why people actually like DBS compared to OCBC and UOB, but end of the day, it’s like what I always say. As a consumer, I like using Grab. I think WeWork is a great product. But as an investor, I don’t actually want to invest in the brand and these kind of companies, which is burning cash. And I guess this is the same thing. As a consumer, I love using DBS, but if I’m an investor, end of the day I want to be buying good companies that are compelling cheap valuations. And that’s the reason why I actually prefer UOB and OCBC. DBS, I guess one of the reasons is that– I mean, end of the day DBS is definitely a much better bank. In terms of net interest margins, like I said, it’s also much higher. Given their resources, they probably can actually expand much faster as well as compared to OCBC and UOB. So it’s hard to explain why there’s this huge divergence, but end of the day, I guess I’m just basing it off the valuations that’s shaping up for OCBC and UOB. But of course, if you tell me that for DBS, the valuations come off even faster, then actually I’d rather start switching over DBS, because there’s a better quality asset.
STANLEY: 22:24All right. Okay, okay. That’s fascinating. And so an investor should not completely disregard DBS even though at this point it might be slightly pricier. But before we end this session, I would just want to maybe speak a little bit about what do you think are the possible risks? We talk about, yes, now the outlook is not doing great. That’s why the valuation has come down and for an investor it might be a good time to do bottom fishing. But what could go wrong for this investment thesis?
TEE LENG: 22:59To be honest, I find that there’s not much risk involved. The biggest risk I guess most investors are currently talking about is really the net interest margins coming off because of the Fed rates. One thing that I actually want to share is that, yes, the net interest income is determined based on your net interest margins, but it is not the only way you can actually post up your net interest income. Your net interest income can also increase because at the end of the day you must remember as a bank not only do you actually charge the differential between your loan interest and your cost of deposits, you also make money by gathering more deposits, gathering more assets. So one thing you actually notice is therefore, let’s say for OCBC, from 2009 to 2018, net interest margins have been actually trending downwards, but if you actually look at the net interest income, they have actually been trending upwards constantly. Only in 2016, they had a slight dip, but come 2017 it actually grew even stronger. So I guess that’s the biggest risk a lot of investors are actually seeing, because if the FEDs actually cuts the rates, it nationally actually means that your net interest margins would come off as well. But I find that there are two sides to the coin. At the same time, everyone is actually still employed. You are still collecting a paycheck. Naturally, you’d actually be depositing your money in the banks. And you actually realize that the bank’s customer deposit is just constantly growing and if your banks actually retain the long-term deposit ratio of roughly 85 to 90%, naturally your customer loans is also increasing as well. And that’s how they’re actually making more money as well. So I’m not too worried about the risk that most investors are actually thinking of. Any other external risk, I guess, is really just– let’s say for Hong Kong, the whole trade war thing’s actually prolonged even longer than expected, then naturally you’ll actually create a hit in terms of business sentiments, people actually wanting to take loans from the banks, but it’s all really just a short term problem. In the long term, I actually don’t really consider this as risk.
STANLEY: 25:18Cool. Wow. That’s a very convincing thesis from you there both on starting out from the macro point of view of capital cycle and also the strength of Singapore Bank and Singapore itself as a financial hub. I just want to thank you so much, Tee Leng, for your time and your research. Once again, this is Goh Tee Leng, fund manager of Heritage Global Capital Fund, and do check out his financial blog at InvestingNook.com. That’s investing N-O-O-K dot com. And he’s kind enough to provide us with slides on what he presented as well. You’ll be able to download it from our show notes below. So once again, thank you so much. I’d love to have a chat with you very soon.
TEE LENG: 26:02Happy talking to you, Stanley.
STANLEY: 26:03Yeah, thank you.
 [music]
S1: 26:04Thank you for listening. You can subscribe to our show on Apple Podcast, Google Podcast, Spotify, or wherever you get your podcasts. If you are feeling generous, please give us a rating and review as well. This would greatly help other investors find out about our podcast. To access our show notes, please go to ValueInvestAsia.com/InvestingIdeas and be sure to sign up for our email newsletter for more outstanding content and reports about investing. The show is for entertainment purposes only and should not be taken as investment advice. Please seek professional advice or do your own research when making any investment decision.

****Disclaimer: The show is for entertainment purposes only, and should not be taken as investment advice. Please seek professional advice or do your own research when making any investment decision. 
Disclosure: Tee Leng owns OCBC Ltd and UOB Ltd at the point of recording.

LEAVE A REPLY

Please enter your comment!
Please enter your name here