A _ and a _ walk into a bar...

蘿蔔青菜各有所愛
To each his own (lit. some people like turnips, some people like veggies)


Spending a lot of time with Norwegians lately and picked this one up:


A Swede and a Norwegian are icefishing the same waters in the winter. The Norwegian excitedly gives a shout for as he pulling in fish after fish while the Swede gets nothing. Finally the Swede goes over there and says--"Oh my god, you cut a hole in the ice?"


Key learning? Every culture has its own "Portagee" joke (Hawaii humor popularized by this guy)


Last weekend in Singapore! Then the plan puts me back in Taipei to finish my Chinese classes until Chinese New Years.

Furlough Fridays

望子成龍

To hope that one's children will have a bright future

Caught an article from Sarah. Apparently the latest in local news is "Furlough Fridays"--a surefire, statistically proven method to help Hawaii's students fall further behind.

And the situation was already pretty dire--check out Hawaii's average SAT scores, especially on reading and writing. A brief glance at this table shows that we're already nearly last place in the country, squeaking ahead of tiny Maine and DC, both which sport higher SAT participation rates than we do. All of this is in a state where half the island is Asian (nationally correlates with higher SAT scores). Yikes.

Indonesian telcos

I feel nervous about this one.

Investing in a heavily-regulated industry is dangerous, but particularly so when it operates in a developing (and reputedly corrupt) country that I do not pretend to understand well.

The company is PT Telekomunikasi Indonesia, aka Telkom.

Summary:

Telkom is the largest telecom in Indonesia. Telkom provides fixed line, cellular, and internet services. It's the largest operator in Indonesia with a 43% market share, providing network coverage to over 90% of Indonesia’s population. Revenue breakdown:  41% wireless, 27% data, 17% fixed line.

Given its size and nature of a stable heavily-regulated business, it makes sense to think of this as a macroeconomic play on Indonesia. Better do some reading on the country I'd be buying into.

Quick read on Indonesia's economy:
-GDP slightly larger than Taiwan, but spread over a population base of ~250M (almost the size of the US)
-Rapid urban migration, likely sparked by high youth cohorts and unemployment (national rate at ~9%, heavily borne by younger workers)
-Natural resource rich and a member of OPEC (though oil production peaked in '77 and has been on the decline)
-Primary exports are crude oil and LNG (20% of EX), textiles (10%), then wood (3%), and are bound for Japan (20%), Singapore (15%), US (15%), and SK (10%).

Analysis

Surprisingly, I would infer that Indonesia is not a major component or resource supplier to China, so that perhaps investing in TLK might be more of a domestic consumption play.

Things that are immediately attractive about this investment range from the macroeconomic (resource-rich economy provides some stability against high inflation, economy appears to not be as reliant upon the weak US consumer), industry structure (leader in classic oligopoly with 3 big telcos), and company-specific (diversified across the communications & data industry in Indonesia).

It seems that Indonesia, with its rapid urbanization, will be a classic case of technological leapfrog, wherein it makes sense to skip full build-out of a traditional fixed-line grid in favor of installing wireless. Given the capex heavy nature of telecom, this is a significant threat to an industry incumbent that has already heavily invested in fixed-line. I can see a few possible outcomes:

1) TLK doesn't get "fair compensation" and is saddled with the cost of maintaining an increasingly unmarketable infrastructure while its competitors thrive on a low-capex wireless-focused revenue model

2) TLK does get "fair compensation" to cover its capex cost by charging a gov't mandated "fair" rate each time a competitor uses its lines

2) TLK gets "premium compensation" and charges the other 2 dominant telcos a premium for the privilege of routing calls through its fixed-line infrastructure

My experience with other utilities suggests that it's probably #2, but I can certainly see how #1 would be plausible, especially if Indonesia is trying to strengthen the overall competitiveness of its telco sector at the expense of its leader (I learned about this phenomenon the hard way by investing in South Korea Telecom amidst its battle with KT Freetel).

Banking analysts suggest that Indosat is a better buy, with greater % exposure to broadband and a lower valuation. Analysts are amid downgrades of Telkom and I lack the knowledge and conviction to disagree with their reasoning. This exercise is showing me how little I know about both Indonesia and its telecom industry though, and I'm hesitant to invest a lot more time in this pick. Maybe later

Dumpster diving for stocks...literally

一錢不值
To not be worth a cent

Taking advantage of the slower work schedule to do some thinking on the portfolio. Thought it might be fun for me to continue to publish what I'm thinking about--fun for me because I'd like to re-read this later. Fun from the reader perspective will come in the form of schadenfreude at my poor picks :)

So given my time constraint, I searched my typical resources to synthesize the best bear and bull arguments that I could find, and trusted the bankers' calculations (scary!). So today, I looked into Waste Management (Ticker: WM)

Overview:
Founded in 1894, WM is the largest trash company in the US, owning 277 landfills that receive 115 million tons of waste annually, with ~25% market share. The company envisions itself as an "environmental services company" and is moving into higher-growth "greener" businesses such as recycling and waste-to-energy. However garbage collection and landfill fees will continue to generate the bulk of its revenues. Of its collection revenues (56% of total), approximately 40% is commercial use, with an even 30%-30% split for residential and industrial.

Core investment thesis:
-Stable cash cow in a semi-countercyclical industry: The trash we throw out has to go somewhere, right? WM will generate ~$1.3bn in FCF on ~$12bn revenues, not bad, considering that this will probably be their worst year for a decade. They are directly exposed to construction industry (<20% revenues) which is why it's only semi-countercyclical. Still, they're easily maintaining their 4.1% div yield (current price of $28.39)
-Market leader in fractured industry: With 25% US market share they are the clear leader (15% for recently merged Republic + Allied, 3% for Veolia, 2% for Coventa). They've steadily been able to raise their prices (and pass on surcharges for fuel & recycling) over the last few years, which customers have accepted and competitors have followed.
-High barriers to entry: While collection itself is an extremely low-entry barrier business (the winning business model to date? Guy + truck), the landfills are actually tremendously high-barrier thanks to regulations (3-7 years to get permits, tremendous NIMBY factor). And controlling the landfills (277 nationwide = 40% national capacity), the scarce and non-expanding resource, means that operating margins are ~5% above industry average. ~70% of their collections go to their own landfills, so the rest of their landfill use comes from high fees they charge to the average guy + truck.

Key risks:
-No hedge against broader US economic downturn: Trash is still generated by people buying "stuff". And if one believes that the US will be in a prolonged recession due to its poor financial state, then WM's overall profits will definitely suffer.
-Exposure to US mfg sector: Waste volumes (revenues by a lesser degree) dropped 10% yoy this year, driven by a decline industrial waste. So if one believes in a secular decline in US manufacturing, one can also expect a secular decline in industrial collections revenue.
-Exposure to US bldg construction: In '07, private construction expenditure was 3x public expenditure (and thus ~3x the waste)...so government infrastructure projects won't be enough to move the needle. One has to believe that private sector construction will resume for a recovery.
-Exposure to US municipal govts: I don't know the facts, but I've heard that municipalities are often the worst fiscally managed governments in the States. And in a crunch, I'll bet that they would consider switching from a price-raising WM to a cheaper local alternative.
-Union dispute: They employ Teamsters. Nuff said.

Non-factors:
-Commodity exposure: They are exposed through their recycling business, but they are adding a recycling surcharge to their customers to shift more commodity pricing exposure to them.
-High D/E: At 130%, it's naturally something to check out. 70% of their debt doesn't come due until after 2013, and op income covers interest payments by 4.5x, so it's not a concern.
-Stronger competitors: Recent combination of the #2 and #3 to create the new Republic Services (RSG) could threaten their pricing. For several reasons I don't think this is significant--the trash business is inherently local and I wonder how many markets are shared by the two. Also consolidation in a market is often good for pricing, since the bigger you are the more you have to lose by an across-the-board price decline.

Other #s:
-Historical 3 year dividend growth rate of 10%, cash payout ratio of only ~50%
-FCF/share = $2.65, Price/share = $28.39, Effective "yield": FCF/price = 9.3%
-Trailing P/E: ~13
-'09 forecast ROE: 15.5%
-DCF of $35.5, which would imply ~25% upside

I can't understand why the stock is trading so cheaply, given that nearly all of the analysts I read were bullish on the stock. So I feel like I'm missing something. Also I'm worried about buying into a company with 100% US revenues, given how I feel about the risks inherent to relying on the overleveraged US consumer and the rate that we're printing cash (not as high as I originally thought). But I love the business itself and think the valuation is pretty reasonable, given traditional assumptions about an economic recovery. I think I'll incorporate this as a defensive investment in a more globally-oriented portfolio.

Solar in the bay

换湯不换藥

To change the appearance but not the essence (lit. to change the soup but not the medicine)

In typical consulting style, I was staffed on a solar project on a Thursday and hopped on a plane that Saturday. The catch? The project was in San Francisco. So I've been in the US for the last 3 weeks, having an amazing time split between the epic cities of LA, CHI, and SF.

So by this narrow miracle, I was able to make it for the Chimes reunion in Chicago. An amazing 90+ out of 223 members were able to make it from this group spanning 6 decades. I came furthest afield, but not by much--Phil and Maurice came in from Belgium and Switzerland. A weekend full of my favorite barbershop (Who Told You & Ten Feet by Boston Common) and by now my favorite duet song, O Holy Night. Really fills in that persistent harmonic void that KTV never quite fulfills.

Then comes work in San Francisco itself, which has been amazing. I can't imagine a more interesting project, focused on executing a strategy in downstream markets. Like all good things though, this one came to an (unexpected) short end when the client pulled the plug on the project on Thursday night. So I'm still here in the Bay, roaming about and getting a handle on how I went to spend my last 3 months of delicious, leave-of-absence granted freedom.

A friend of mine has started up a finance blog, check it out: themarketmind.blogspot.com

Juggling

不言而喻
It goes without saying

I'm searching for inspiration in my old files from school. Came across this quote that fits folks for whom future fortunes fork:

“Imagine life as a game in which you are juggling five balls in the air. You name them - work, family, health, friends, and spirit - and you're keeping all of these in the air. You will soon understand that work is a rubber ball. If you drop it, it will bounce back. But the other four balls - family, health, friends, and spirit are made of glass. If you drop one of these, they will be irrevocably scuffed, marked, nicked, damaged, or even shattered. They will never be the same. You must understand that and strive for balance in your life.”

雜事

上行下效
Those below follow the example set by those above

Caught an interview that Obama gave to BW [so be mindful of the audience bias] on what he views to be the major lessons from his first 6 months on the job:

You know, I think that the thing that I maybe understood theoretically but did not, I think, fully comprehend until I'd taken office is the degree to which so many of the issues you're dealing with involve legacy structures that are not easily changed. They're pathways that have already been set up, health care being the most classic example of a whole set of institutions and very complex relationships. So even if you could imagine in the abstract a much better way of doing things than we're doing right now, getting from here to there is extremely difficult.

The second thing I have learned since taking office is the degree to which you're working with probabilities. A lot of the decisions you're making, whether it has to do with Afghanistan or the banking system, involve seeing a set of options, the outcomes of which are never guaranteed, and then making the best possible decision—knowing that there's incomplete information but being willing to make those decisions, even if there's a risk involved.

The second one piques my interest because it sounds familiar--I remember that Rubin also stressed this ability to think "probabilistically" in his autobiography as a key competitive factor back from his Goldman days. Given the prevalence of cognitive biases out there (eg # of folks scared of a plane crash vs scared of getting in an auto accident), it shouldn't be a surprise that a rational decisionmaker that can base decisions on 1) probability and 2) impact of outcomes is at an advantage.

Two other links that I've been looking at recently, a wishlist of problems-to-solve from a renowned entpreneurial incubator and the blog of the Skoll Center, Oxford University's center for social entrepreneurship.

And an amazing video from Colbert, speaking at President Bush's media roast: