Monday, December 15, 2008

Talk about TLK!

The largest telecommunication company in Indonesia, PT Telekomunikasi Indonesia (NYSE:TLK), with $6B+ in revenue and over $1.2B in profit per year. Growth is measured at 20% YOY right now but will likely reduce with the on coming global recession. The balance sheet is strong with $1B+ cash and less than $900m in total long term debt. No need to go to the debt markets for handouts here. The current market cap is $9.82B with $1.2B in free cash flow. Thus the stock is selling at less than 9x cash flow with over 50% market share of the Indonesian cell phone market. Growth prospects are tremendous for this firm, considering that market penetration stands at only 40% of the Indonesian cell phone market.

What could go wrong? Excluding the major Asian meltdown of 1990s, the Rupiah has traded at most at a 30% discount todays value. Also assume a major slowdown in growth due to global pressures, reducing the growth to nil YOY. Even then, the stock would be trading at approximately 11.7x last years cashflow (9.82B / .84B = 11.7). I'll take it! At least I will buy a piece, and hope that something unfortunate and unrelated does not happen so that I can buy A LOT MORE at a lower price. :)

Transparency: The author purchased TLK at $20.12/share on November 20th and will buy again when it reaches that price point in the future.

Tuesday, December 9, 2008

Playing the Spread: Income Investing in a Treacherous Market

Nowadays I am enamored with income investing. It may be a case of the the Stockholm syndrome due to my FRE preferred positions. But who says market investing is not a case of constant flogging anyway, up or down.

Soooooo here is what we have learned over the year...

BSC preferreds were a great bet...
WM preferreds got wiped out...
C preferreds are hanging on and continue to pay...
WB preferreds, after much stomach flipping turmoil, were also a good bet...

My rational attraction to preferreds and income trusts stems from the low yields available in the market. It appears to me that there are some very stable companies being treated like they have serious default risk. Thus the spread between risk free income and corporate investment grade yields is very wide. Moreover, in the case that the economy is deflating at 3% this year, then the DUK debt will a real 12% yield. Not to mention the comparison between the income and general market performance.

10 year Treasury - 2.5%
Duke BBB Junior Debt (JBI) - 8.5%
BMY Debt Notes (XFR) - 8%
BAC Preferred Floating (BAC-PE) - 11%

Transparency: The author has established a position in JBI (Duke Energy Debt Trust) at 21 (8.5% real yield) and a position in BAC-PE at $8.1 (10% real yield).

Tuesday, December 2, 2008

8 Good Reasons to Short HSBC

1) Primary real estate exposure is Hong Kong residential mortgages

With the slowdown in China, demand for Hong Kong real estate should fall steeply.

2) Large US subprime exposure

Yes, it is still there. HSBC Finance, formerly the Household Finance Inc subprime lender, holds many loans with the expectation of holding until maturity. In fact it was one of the largest US subprime lenders until late 2007. Reading the annual report and related news articles, there are multiple mentions of securitized mortgages that were sold to HSBC affiliates or other subsidiaries. This allows HSBC to move the securities off balance sheet and avoid marking the securities to market. As a result, there is a significant chance that within months HSBC will need to raise capital in this increasingly unattractive capital raising environment.

3) Very large US consumer revolving credit exposure

The HSBC USA subsidiary is one of the largest credit card lenders in the US market.
[I will add facts to support this later.]

4) Global slowdown in key HSBC markets

US is already in a recession. UK is very close to admitting it is in a recession. China is slowing seriously and cannot see the bottom of the downturn. Thus HSBC will be pushed to recapitalize in at least two of the three major markets.

5) Madoff Discount

Thanks to Mr. Madoff's astute business model, you can erase $1B in market valuation in HSBC just due investments in Madoff managed funds alone. HSBC is now facing lawsuits due to alleged negligence advising it's clients.

6) Large Chinese manufacturing exposure

All consumer loans, industrial loans, and real estate loans made in China by multinational companies are at risk because of the huge slowdown export related manufacturing in the Greater China region. HSBC is heavily exposed to China in this manner.

7) $1T Credit Default Swap exposure

Credit default swaps, even if no default events occur, drain precious capital because of the counterparty collateral requirements. With a few potential major credit events on the horizon, CDS are a toxic security to hold.

8) Large Middle East Commercial Loan exposure

HSBC is pervasive in all areas of the former British Empire, the Middle East is no exception. But with the drop in the price of oil and the deflationary effects of the credit crisis, many of their commercial outlays in this region will be at risk or at least deserve to be marked down.

Transparency: The author is long HSBC JUN 09 $40 put options at $6.3 and
long HSBC JAN 10 puts at $3.1