News: Obama's budget

More details on Obama's new budget:
Plan to cut

• Deficit from $1.75T in fiscal 2009 to $533B in 2013 (mainly from pay back on bail out $$ from financial institutions);
• Let Bush's 2001 tax cut fro the 2% of richest Americans (earn > $250k) expire as scheduled at the end of 2010;
• Corporations will no longer be able to exclude foreign-source income from tax;
• A cap-and-trade programme for carbon emissions that is yet to be designed;
• Remove most of American troops from Iraq before the end of 2010;
• Reduce payments to privately managed Medicare plans and farmers

Plan to rise / focus

• Permanent the worker tax credit;
• Expand public subsidies to reduce the number of those without health insurance;
• More $$ for parents, students, the disabled and the unemployed;
• Investment in alternative energy;
• Extra deployments to Afghanistan;
• On top of $700B bail out plan, addition $250B is being set aside just in case

Econ data: 09 week 9

Economic DataThe economic data continue to look worse:

• US 4Q GDP down 6.2% (worse than expect down 5.4%), prior down 3.8%;
• US Feb consumer confidence down to 25 (worse, 35), prior 37.4;
• US 2008 house price index down 18.55% (worse, down 18.25%), prior mth -18.2%
• US Jan existing home sales down to 4.49M (worse, 4.79M), prior 4.74M
• US initial jobless up to 667k (worse, 625k), prior 631k
• US Jan durable goods orders down 5.2%, (worse, 2.5%), prior down 4.6%
• US Feb Chicago PMI up to 34.2, (better, 33.0), prior 33.3
• US Feb Mich Sentiment flat at 56.3, (same, 56.0), prior 56.2

GDP fall 6.2%, in a way it is good, lots of it due to corporation's goodwill impairment which do not take into account when the analyst forecast their expectation of 5.5% fall.

More news:

• US government's shares on CitiGroup will rise to 36%, kind of expected;
• Berkshire Hathaway's 2008 results and letter from CEO will be published tomorrow morning at 8:00pm, BRK's equity portfolio is estimated to fall $28B or 39% since 9/30/08. It is interesting to see how much BRK's book value will fall.

Obama's plan:
Obama has published the federal budget. $1.75T deficit, plan to cut it to 50% by 2013.
If the economy and the financial sector did not collapse, I think it is achieveable.
However, his GDP esitmation may sounds too optimatic. 2008 -1.3%, 2009 +3.2% and 2010 +4.0%. I don't think it is an easy task.

He also plan to rise tax on high income group, cut expenses on amry force and certain government admin fees. I think the plan is good. But in general, rise tax & cut government expenses will give pressure to the economy instead of give stimulus.

TD Bank 1q09 results

TD Bank is the 2nd largest bank in Canada based on total asset, with close to 66,000 employees and 17 million customers worldwide.1q09

Results:
1. Total reveune up 15% vs 1q08

• Good: Gross interest income up 9.7% while net interest income up 53%
• Bad: Other income down 22% mainly due to security gain of $152M turn into loss $205M

2. Reported EPS down 38% vs 1q08 / Adjusted EPS down 7.6%

• Bad: Loan provision up 110% or 86% vs 4q08;
• Good: wholesale banking return to profit from $228M in 4Q08 to $265M in 1q09, due to huge increase both in net interest income & other income

3. Ratio

• Good: Tier 1 Capital up from 9.8% 4q08 to 10.1%
• Good: Net interest margin up from 2.01% to 2.42%
• Fair: Loan impairment to net loans up from 0.5% to 0.76%, still lower than peers & US banks
• Good: Adjusted return on common equity down from 8.6 4q08 % to 13.2%
• Bad: Efficiency ratio up from 65% 4q08 to 72.8%

4. Balance Sheet

• Good: BVPS up from $36.78 4q08 to $41.57
• Good: Total assets up 3.9% to $585B
• Good: Total deposit up 6.9% to $402B, #1 in Canada with 21.2% market shares
• Good: Total notes & debentures down 7.8% to $130B, continue the deleverage process;
• Good: AOCI turn from loss $1.6B to gain $2.2B
• Good: Cash flow from operation up $2.7B vs down $2.4B in 4q08
• Fair: in 1Q09, TD issued add'l common & preferred shares of $1.4B & $0.9B

Risk:

• Uncertain on how worse the Canada's economy will be in 2009 since it is highly driven by USA and oil price;
• GDP is down, unemployment rate is up, house price start falling....all these may trigger the rise of loan impairment;

Comments:

BUY, Fair Value CA$65.60However, given the current market situation, most investors has taken a risk aversion approach. A value investor can take 45% margin of safety and buy it around or below $CA36.08.

China Mobile 2008 results analysis

Overview:
China Mobile provides a full range of wireless telecom and value added services in China. It has 70% market share and about 457 million subsribers, which makes it the largest wireless operator in the world.

Mega-trend
Telecom industry in China is growing, because:

• Population: 1.3B in China vs 0.3B in USA
• Forecast GDP growth in the future 20 years: 8% vs 2.5%;
• Total # of wireless subsribers over popution:50% vs 95%;
• Trend from rural (low income) to urbanization (high income);
• Increase population of middle class, which demand not just basic wireless service but value added service

Industry:

Telecom industry have the following special:

• Require huge initial capital investment;
• Require continue capital spending on technology improvement;
• After the initial set up, service delivery cost will go down over time;
• Trend of decline in ARPU (Average revenue per user) in China;
• Growth is require to have continue improve in efficiency;
• China's ARPU is among the lowest compare to developed countries;

Financial Data Actual 2008:

• Total # of subscribers up 23.8% or 457M (12/08) vs 369M (12/07)
• ARPU down 6.7% or RMB$83 (9M08) vs $89 (9M07)
• EBITDA margin down 2.0% or 52.8% vs 53.9%
• Revenue up16.6% or RMB$301.4B vs $258.4B
• EPS up 37.7% or RMB$4.13 vs $3.00

Financial Forecast 2008, 2009, 2010:

• # of new subscribers: 88M in 08 (actual), 80M in 09 and 74M in 10
• ARPU: RMB$83, $80 and $78
• EBITDA margin: 52.5% for all years
• Reveune growth: +25%, +20.7%, +15.6%
• EPS: RMB$5.89, $7.11, $8.22

Risk:

• Face increase competition in 3G;
• Unsymmetry act against CHL's molopoly position in wireless industry;
• CHL's 3G wireless standard TD-SCDMA is not as mature as China Telecom's CDMA & China Unicom's WCDMA;
• Rise on Capital expenditure on 3G;
• ARPU may further reduce since most of the new subscriber are lower income users from rural market
• Slow down in general economic growth

I've increased my discount rate from 11.5% to 12.5% to reflect the additional uncertainty about the future.

Comments:

BUY, Fair Value HK$147.48 (reduced from HK$168.48 previously @ Oct 08)

Manulife 2008 results

Q:Why did Manulife fall after the result published?

A:
1. Market fall, especially the entire North America financial sector due to the fear about banks will be nationalized;

• If nationalized does happen, it will dilute the value of the existing shareholders;
• CitiGroup might have the highest possibility to go nationalize, but it is kind of expected;

2. Market fall will trigger a loss in Manulife's book;

• Since Manulife has a huge segurated fund portfolio and those seg funf products provide dealth guarantee and maturity guarantee benefit;
• If equity market fall, Manulife needs to top up the reserve to meet the future possible payment to the unit holders;
• Increase reserve will have a negative impact to income

3. Manulife's 2008 results did not meet analysts' expectation, it gives the market an excuse to give pressure on its stock price; But some fact you need to know about:

• Bilibala's estimation is better and more accurate than all the analysts this time;
• As I always say, no one cannot look value an insurance company simply by looking and estimate the net income;
• Such disappointment on net income was being interpreted as bad news and trigger a wrong signal to sell;

4. Given the market fall about 13% since Dec 31, 08, Manulife may have $1B loss if management team still did not create a hedge program to reduce its equity exposure.

• In my previous blog "Mkt view 09w08", I've estimated 1Q09 results should be around $500M net loss.
• Because I expect management will have a hedge program in place
  I also expect a market rebound by the end of March;
• If so, the result should not be that bad.

I will keep Manulife's fair value price at CA$31, until I review Manulife annual report (not publish yet).

China Life Jan 09

Jan 09 premium up 19% compare to Jan 08, better than expect and better than Bilibala's 16% 2009 target growth. No change with my fair value calculation.

China Mobile Jan 09

Jan 09 # of new subscribers down 5.3% compare to Jan 08.Which means earning growth may slow down (not dropping), price already reflect such impact.No change with my fair value calculation.

Berkshire Hathaway 4q08 results

Over 4q08, BRK used its cash to sign off about $17B special deal, to buy either bonds or preferred shares @ 10-15% interest.

Those deals will generate $2B income and significant improve its net income by 23% (based on 2007).

I am not sure when it will publish its 08 results, usually it is around the end of Feb or early Mar.

No change with my fair value calculation.

Econ data: 09 week 8

Next week, Canada bank will start publishing their 1Q09 results.Canada banks fall to what I mentioned b4 "20% below", so they are very attractive to buy now.I don't think the 1Q09 results will be as bad as 4Q.I will expect a down compare to 1Q08, but should have income instead of loss(for most of them).

Economic Data

• USA Jan 09 house start down to 466k (worse than expect, 529k) prior 560k
• USA Jan 09 building permit down to 521k (same, 525k) prior 547k
• USA Jan 09 leading indicator up 0.4% (better, 0.1%) prior 0.2%
• USA Jan 09 industrial production up to -1.8% (worse, -1.5%) prior -2.4%
• USA Jan 09 CPI up 0.3% (same, 0.3%), prior -0.8%
• USA Jan 09 PPI up 0.8% (better, 0.3%), prior -1.9%
• Initial jobless claims @ 02/14 flat at 627k (same, 620k), prior 627k

Next week we will have existing home sales, new home sales and consumer confidence index, if those figures look good (I mean don't look too bad), we should see a relief to the equity market.

Manulife 2008 results

The top 5 largest life insurance company in the world, with business diversify among North America, Europe & Asia.

• Fair, 4q08 premium & deposit up 6% vs 4q07,
• Good, 4q08 EPS down from $0.76 to -$1.24, worse than analysts' expectations' -$0.95 and worse than CEO's -$0.98. but better than Billy's expectation -$1.30.
• Good, Once again (or once awhile:P) Billy's estimation is more accurate than Mac's CEO as well as all the big firms financial analysts.
• Fair, 2008 premium & deposit up 1% vs 08,
• Good, 2008 EPS down 88%, again worse than analysts' expectation, but slightly better than Billy's.
• Good, MFC keeps its quarterly dividend at $0.26 per share.

However, as I always said, "an insurance company's net income or EPS is meaningless to determine ones investment value."

Here are some other guidelines:

• Good, 2008 invested assets up 16% vs 2007 (thx to US$ up 24% in 4Q while the equity market down by 20%-23.5%, kind of offsetting each other)
• Good, 2008 Total equity up 13% (11.5% due to net income plus other comprehensive income, 9% due to new shares issues and -7.5% due to dividend paid out);
• Good, MFC rise its reserve margin from 10.4% to 14.8%, up 42% to become more conservative.
• Good, Book value up 6% to $16.62
• Good, Embedded value up 31% to $28.68. Again, mainly due to FX gain and capital injection.
• Good, Cash flow from operation remain strong, up 5.6%

There are 3 major drivers to estimate MFC's 2009 net income. 1) equity market performance 2) FX between USD & CAD 3) T-bill yield curve

• Bad, equity market performance 10% lower than 12/31/08 so far;
• Good, flat, FX basically no change, if Canada will cut interest rate further by 50 - 75 bop while oil price remain below US$40/bbl, CAD dollar won't rise/may fall in the near future.
• Fair, Canadian T-Bill rate may fall further while US T-Bill rate may rise a little bit, it will affect the actuarial liability calculation.

Given the 3 points listed above, I will say MFC will continue to suffer a loss around $500M in 1q09 (compare to $1870M loss in 4q08) and may get back to income in 2q09.
However, it is still too soon for me to estimate 2009 net income, but it should be an income instead of a loss.

I will keep my recommendation as BUY with a fair value of CA$31. (Assume the 2nd round of financial crisis won't happen out of control.)

Corp info: Pepsi Co 2008 results

2nd largest beverage company in the world, and the largest snack company in North America, with popular brand name such as: Pepsi, Tropicana, Quaker and Frito-Lay etc.

• Good, 4q08 revenue up 3%, net income down 43%, exclude special adjustment, net income up 11%
• Good, 2008 revenue up 10%, net income down 9%, exclude special adjustment, net income up 9%
• Fair, 2008 sales volume, North America flat in snack, fall 3% in beverage and International up 8% in snack and 13% in beverage.

I think Pepsi will continue to perform well even under today's weak economy.
Pepsi's share price currently is 30% lower than peak, for a conservative investor, it is good buy.

Shoppers' Drug Mart 2008 results

The largest retail drug store in Canada, Ontario & Quebec.

• Fair, 4q08 revenue up 15%, EPS up 14.3%
• Good, 2008 revenue up 11%, EPS up 14.5%
• Fair, retail store network up 12%
• Bad, During the year, SC rise debt by $400M

In weak economy, SC's result is awesome, but since the stock price remain quite high compare to others.
Shopper need to rise debt in order to keep its store network growth in 10-11% in future, also, I still want to wait till I see how bad the Canada economy will be before I make a decision to invest in SC.
For now, I will give SC a HOLD.

Econ data: 09 week 7

Obama's new stimulus economy plan finally passed the senator with 61 votes to 38 votes.
The Senate and the House has finalized the plan on Wednesday.
However, the market fall like crazy after this settlement. To me, it is just bad reaction on good news.
Even though the plan is not perfect (it will never be perfect), but I think it is a lot better than nothing.

This week's economic data is very light.

• US Jan 09 retail sales up 1.0% (lot better than expect, -0.8%), prior -3.0%. need to see further trend in Feb in order to confirm whether this is a true rebound or not;
• US initial jobless claim @ 02/07 down to 623k (worse, 610k), prior 631k
• US Dec 08 total credit down by $6.6B follow by a $11B decline in Nov. We are still in the process of deleverage (both consumers & bankers), such situation will only get better when unemployment rate reach the peak and house price touch the bottom.

Corp info: Disneyland 2008 results

1Q09 revenue down 8% and net income down 39%. Huge profit reduction mainly on studio entertainment sector (mainly due to unbeatable success of the High School Musical 2 in 2007). If we take away this impact, and non-recurring items like $40M fuel hedge cost and $60M bad debt write off. The adjusted result was not looking too bad.

As Warren Buffet said, "when you think about 20th FOX, or Universal Network, nothing will come to u mind, but with Disney, everyone will think of something good."
If any company or any product which will give u a memory about happy, joy, satisfy whenever u think about it. Then you may think about whether you should invest in such company.
In short run, the revenue may go down due to weak economy and weak advertisement sales.
In long run, it also face the challenge such as tradition broadcasting vs online, buying DVD vs watch on youtube/download issues.
Future success will rely on whether Disney can turn her business into the digital world instead of keep fighting on copy right or illegal issues.

Corp info: Kraft Food 2008 results

4q08 net revenue up 6.2%, EPS down 71.1%, exclude cost restructure, EPS up 6.8%
2008 net revenue up 16.8%, EPS up 18.5%, exclude cost restructure, EPS up 31.9%
In 2009, sales will continue to get pressure from strong US$. But weak economy will encourage more household to cook at home which should benefit Kraft's sales.

Econ data: 09 week 6

This week, the most important data are 1) the unemployment rate 2) Obama's new stimulus economy plan, whether it will pass or fail today
• Jan USA unemployment rate up to 7.6% (worse than expect, 7.5%) prior 7.5%
• Jan USA non-farm payrolls positions cut 598k (worse, 540k), prior cut 577k
• Jan USA hourly earnings up 0.3% (better, 0.2%), prior 0.4%
• 01/31 Initial jobless claims up 626k (worse, 580k), prior 591k
• Dec USA pending home sales up 6.3% (better, 0%), prior -3.7%
• Jan USA ISM services index up to 42.9 (better, 39.0), prior 40.1
• Dec USA factory orders down 3.9% (worse, -3.1%), prior -6.5%
• Jan Canada unemployment rate up to 7.2% (worse, 7.0%) prior 6.6%
• Jan Canada non-farm payrolls positions cut 128k (worse, 40k), prior 20k
Now everyone's eyes will turn to the bail out plan, regardless of pass or fail, it takes 2-3 months (at least) in order to have impact to economy and it will take another 2-3 months to reflect them on the economic data, and another 2-3 months for analysts to confirm and determine the trends.