US-China Trade War

What exactly is the real motive behind the trade war with China? Is this the start of a larger battle for dominance between the two rival powers?

https://www.channelnewsasia.com/news/video-on-demand/insight/us-china-trade-war-10736066

SINGAPORE BANKS SERIES (UOB, OCBC, DBS) – HOW DO THEY REALLY MAKE MONEY?

Layman way explanation this writer (Richard Tay-Junhao THE ASIA REPORT)👍
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Most people have an intuitive understanding of how banks money given their daily interactions with it. In this post, we are going to break it down for investors so that they can better analyze the financials.

THE BIGGEST MONEY MAKER – NET INTEREST INCOME
At their heart, banks are quite easy to understand and most people do have an understanding of how they work.

Let me use a simple analogy. Imagine you were a money lender – lending money out at let’s say 10%. In order to raise the money that you lend out, you borrow it from your family who trusts you at 5%.

The difference between your cost of borrowing from your family, and the money you lend out is 5% – which represents your spread between the two.

Banks function quite similarly.

Their “borrowing cost” is dictated by bank deposits and money they raised from the markets (bonds, preference shares), and the money they earn is derived from the interest they get from loaning this money out.

The difference between the interest they pay and the income they generate from interest on their loans is known as net interest income.

Net interest income = Interest income – interest expense

NET INTEREST MARGINS
We use net interest margin as a a measure of profitability relative to their loan book (i.e. total loans).

For example, if you were to make a net interest income of $1 on a  $100 loan, your net interest margin would be 1%.

If you were to make a higher net interest income of $2 on a $100 loan, your net interest margin would be 2%.

The higher the net interest margin – the more profitable a bank is.

Net interest margins (also known as NIMs) for banks work exactly the same way (except with more zeros at the back of course).

As interest rates start to revert back to normalized levels – net interest margins are also starting to trend up.

The market expectation is that this will continue into next year as the Federal Reserve continues to hike interest rates – something that bodes well for banks considering the importance of net interest margins to them.

EQUALLY IMPORTANT – NON INTEREST INCOME
Non interest income is exactly like what it sounds like – income generated from other activities such as credit card fees, unit trusts etc.

Although not as large in magnitude than interest income – these profit lines were extremely important to the banks when interest rates were compressed at artificial levels posts 2008 Great Financial Crisis.

Ending thoughts:
Understanding what drives the top line of banks is useful in understanding their financial performance.

In the next article, we will be talking about non-performing loans and provisioning. We will also highlight why this is one of the most important things that people miss out and that catches them off-guard during a market downturn.

WHAT IS ENTERPRISE VALUE AND HOW CAN IT HELP YOU AVOID LOSING MONEY?

Layman way to explain Enterprise Value by this writer (Richard Tay - Junhao from THE ASIA REPORT)...👍
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WHAT IS ENTERPRISE VALUE AND HOW CAN IT HELP YOU AVOID LOSING MONEY? [CASE STUDY: ASIAN PAY TV]

As a recap, the market capitalization or market cap is just:

Current Price of shares  x shares outstanding

Using a simple analogy, the price per share is the price of a slice of pizza if it is sold individually. The market capitalization is the price of the whole pizza (i.e. price of each pizza slice x total number of pizza slices).

WHAT IS ENTERPRISE VALUE?

Enterprise value or EV is a measure of a company’ total value.

It is a much more accurate measure than just using the share price or market capitalization.

Enterprise value provides an even more accurate measure because it includes in the price the debt, minority interest, preferred shares and subtracts out the total cash and cash equivalents. 

HONING IN ON THE DEBT

Minority interest and preferred shares tend to be less significant so we are going to ignore that for now and focus on the debt and cash element.

If you were to buy 100% of any company on the market, not only would you acquire its assets but also its liabilities. 

So imagine if you bought a company for $1,000 which had $500 in its bank account – naturally you would subtract that $500 from your purchase price.

Similarly, if the company had borrowed $500 from a bank, you would also add that “obligation” to the purchase price.

THE CASE OF ASIAN PAY TELEVISION

Ironically, businesses with more stable cash flows are normally able to leverage up their balance sheet more. They typically entice investors buy paying high dividends initially.

However, these dividends are rarely sustainable simply because of the company’s debt load. 

A change in business climate will force them to divert their cash flows to paying down their debt or higher interest charges – leaving less money for dividends which was exactly the case here.

KEY TAKEAWAY:

Companies that have extremely high enterprise values relative to their market caps are normally highly geared. This makes them particularly vulnerable to disruptions in their business.

Leverage magnifies outcomes. In good times, it can add a significant boost to your earnings. In bad times however, it can be devastating to the company.

Always assess the net debt position of a business – especially companies which are dividend plays to assess how sustainable the dividends are.