Understanding Islamic banking principles and its application to investing

islamic-finance

In the past few months, I’ve been sharing on-and-off with a Muslim colleague on generating passive income and my own journey to financial freedom. It was through these discussions that I was reminded of the existence of Islamic banking. As someone who has read next to nothing on this topic, I thought I’ll do some reading of my own and present my findings here.

(Disclaimer: I’m a free thinker and do not presume to know everything about Islam or its guiding banking principles. While I endeavour to make sure the information is accurate as far as possible, take it with that caveat in mind.)

Islamic Banking Guiding Principles

There are generally 3 major interlinking principles that guide what Muslims can or cannot invest in:

1) Prohibition of Interest (Riba)

Earning of interest is specifically prohibited in Islam. There are 2 reasons for this.

Firstly, the concept of interest implies guaranteed returns with no element of profit and risk sharing. This ties in with the 3rd principle.

Secondly, guaranteed returns encourages investors to turn a blind eye to how the funds are being used. It is thought that society suffers as a result if riba infects the entire economy. This also ties in with the 2nd principle.

2) Ethical and Moral use of funds

This principle means that you can only invest in ventures that are beneficial to society and not in vice industries. Well known haram (forbidden by Islamic law) areas include:

  • The sex industry
  • Alcohol
  • Pork
  • Gambling and speculation
  • Drugs

3) Risk and Profit sharing

This principle prescribes that profit is “good profit” only when the various parties participating in a venture take their proportionate share of risk and their proportionate resulting profit/loss. In relation to debt instruments, it is viewed that you are not taking any risk as you are guaranteed a return. Under Shariah law, you are essentially an economic leech and a sinner.

Implications of guiding principles

These guiding principles create certain areas that are strictly off limits, while also create various grey areas that are open to interpretation on what you can or cannot invest in. I’ll go through each asset class and discuss whether it is Halal according to the principles, while also highlighting any Shariah compliant alternatives that the banking industry has come up with similar characteristics.

1. Saving Deposits / Fixed deposits

Savings and fixed deposits in their traditional sense are prohibited due to interests paid. For Islamic savings deposits, hibah (gift/donation) is paid instead at the bank’s discretion.

As for Islamic fixed deposits, a popular model used is called murabahah (fixed cost plus model). For example, if you put $10k into the account, you effectively purchase $10k of commodities that the bank agrees to buy back at maturity at a fixed price including markup. The “interest” you earn is the fixed profit margin agreed at the start, thus mimicking the properties of fixed deposits.

As an interesting sidepoint, Maybank seems to deposit the profits the day after you make the deposit, unlike FDs that pay out at maturity.

2. Bonds / Debt instruments

Traditional bonds and debt instruments are a definite no as they pay interest. That said, there is a popular bond-like instrument called Sukuk, or “Islamic bonds”. Sukuk is usually tied to a specific venture / asset and investors are paid from the underlying profits and cash flows from the asset. It is a investment trust of sorts.

3. Equities / REITs

Equities generally comply with Shariah law provided the company’s activities do not contravene the 2nd principle. Muslim equity investors have to be extra careful to understand the company’s business activities and make sure they are not engaging in vice. This should already be practised anyway even if you are non-Muslim.

The grey area that I’ve come across is equities of companies with debt like property developers, construction companies or REITs. Some say it is a strict no-no, while others say it is OK as long as it is not a significant proportion of the balance sheet. The debate over what “a significant proportion” means is also a matter of interpretation. Throw in the fact that most of the world’s companies are funded by debt to some degree and you have a real practical application issue on your hands. Makes you wonder how the Kingdom Holding Company (Investment vehicle of Saudi Prince Alwaleed) reconciles these grey areas in his own equity investment strategy.

As a sidepoint, the world’s largest Shariah compliant REIT by asset value Sabana REIT is listed on the SGX.

5. Derivatives (Futures, options, etc)

This is another grey area due to the nature of derivatives trading. Derivatives trading are generally speculative in nature and thus haram. With that said, futures and options do serve a purpose in risk management if not traded speculatively.

6. Cryptocurrencies

There is little discussion on whether this is haram or not, but I would argue that it is haram based on its speculative and volatile nature, and lack of real world value. Crypto HODLers will argue with me till the cows come home, but for now, I think I am right.

Final Thoughts

Islamic banking and investing is a form of ethical and socially responsible investing that Muslims have to follow as far as possible in their quest for financial freedom. Navigating its guiding principles and grey areas can be complicated. My advice, as a practical free thinking outsider, is to find a middle ground you are comfortable with so that you can explain your actions when you meet your maker.

Happy Hunting,
KK

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5 things Singaporean investors should be thankful for this National Day

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National Day has always been a time of patriotic celebration. For me, it tends to be patriotic reflection. This has been made more pronounced with my work travels over the past 1 and half years. Sitting here alone chilling in my Beijing hotel room having worked through yet another National Day overseas, I thought I’ll share my top 5 things I feel Singaporean investors should be thankful for this National Day.

1) Income tax regime

The best part of being a Singaporean investor is the relatively low income taxes as well as no taxes on dividends and capital gains. Taxes on employment and investment income directly affect your ability to accumulate wealth as it acts as an additional cost. Having experienced the benefits of Singapore’s income tax system, I can’t imagine living in a system that taxes you over 40% of income and having to pay taxes whenever I receive dividends or sell my investments.

What’s more, I’ve seen tax systems in China and India that are so complex and with high tax rates. Only with a tax system so simple and intuitive like Singapore’s will you be able to e-file your taxes on your own.

2) CPF

CPF can be a contentious issue among Singaporeans. To me, having a family member who YOLOs all his life, I see the need for the forced savings of CPF. What’s more, it’s not like they are paying you peanuts for holding your cash, with guaranteed 2.5-5% interest across your various accounts. Yes, CPF has its flaws, but its current incarnation to me provides the necessary basic layer of retirement safety for most Singaporeans, without encouraging the crutch mentality of pension systems. I’ve yet to find a better designed retirement system to date.

3) Wealth of investment options available

This may seem pretty obvious, but the countries I’ve visited sometimes struggle to have the same level of investment options available to their citizens. Ask the Chinese what a REIT is, and they’ll tell you it is a scam to swindle investors’ money on the premise of pooling funds to invest in real estate. Add to that the controls over capital outflows and you essentially can only buy stocks from the Chinese casino stock market, unless you are super rich.

Also, let’s not talk about countries with hyper inflationary economies like Venezuela and Zimbabwe or poor countries where investment options don’t really exist.

4) High level of security and low risk of disaster

This factor to me is often overlooked and taken for granted. Imagine owning a REIT with Singapore properties and every other year Singapore is hit by a tsunami or earthquake. Or owning a Singapore-based factory with constant civil unrest and strikes. The relative political and financial stability gives rise to the possibility of stable assets to invest in, and for Singaporeans to prosper.

5) SDIC’s Deposit Insurance Scheme

Another often overlooked factor. This deposit insurance is essentially the Singapore government insuring up to $50k of your bank deposits in each Singapore based bank. With ironclad AAA-rated reserves, this insurance is almost guaranteed to pay out in bank disaster scenarios. Given Singaporeans love of fixed deposits and high interest savings accounts as a form of investment, this is most welcome.

Conclusion

Singapore is one of the most investor friendly countries in the world, and the world has noticed. With many famous names and investors choosing to come to invest and start wealth management firms and funds here, we as Singaporeans should utilise our birthright to its fullest extent.

To all my Singaporean readers, Happy National Day! #WeAreSingapore

Happy Hunting,
KK

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If Professor Oak introduced Investing

Professor Oak

Introduction

Hello there! Welcome to the world of Pokemon Investing! My name is Oak! People call me the Investment Prof! This world has many instruments for investing! For some people, they invest to build passive cash flow. Others invest for capital gain. Myself… I study investments as a profession, and I’m here to provide you with a beginner’s guide to investing!

How investments accumulate wealth

There are generally 2 ways you can profit from investments – Capital gain and Dividends.

Capital gain refers to the “Buy Low, Sell High” concept. Dividends refers to cash distributions to shareholders as and when announced. Here’s Meowth to illustrate this.

Meowth explains investing

Let’s say you recently caught a Meowth. As you train Meowth, it grows in levels and becomes of higher level. Also, from time to time, Meowth successfully casts its signature move Pay Day and generates cash for you. Now replace Meowth with the investment you just bought, leveling up represents growth in investment value and capital gain, while Pay Day proceeds represents cash flows and dividends.

These 2 factors combine to increase your wealth.

Choosing a suitable investment vehicle

So you are ready to catch your first investment, but which investment type should you buy? To answer this, there are 2 questions you have to ask yourself:

1) What is your risk appetite?

Risk appetite refers to your willingness and ability to accept volatility in your investment value. It is like choosing a Pokemon. A risk adverse trainer might choose a lovable, nurturing Chansey as your Pokemon, slowly and steadying training it to higher levels with no expectation of explosive growth. A risk taking trainer might choose a volatile Charmander as your Pokemon, which might experience explosive growth when it evolves into a Charizard, but you might get burnt from time to time.

Pokemon Risk Appetite

Similarly, a risk adverse investor will be happy with steady but comparatively lower returns, while a risk taking investor will have to accept more volatile but potentially higher returns.

2) How active do you want to manage your investment portfolio?

This essentially means how much time you wish to spend managing your portfolio. Are you like a Snorlax and would rather Rest than manage your portfolio? Or are you a hard working Magikarp that tirelessly Splashes your way to Gyarados financial freedom?

active-vs-passive.jpg

Based on your answers to those questions, you can choose the investments suitable to your personality.

Investment Options.JPG

Conclusion

As a beginner investor, picking the right investment class to start with is very much like choosing a starting Pokemon. Aligning your risk appetite and involvement with the suitable investment allows you to be comfortable with your investments through thick and thin. Till next time!

Happy Hunting,
KK Professor Oak

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“Save 100k by 30” goal review

Whenever you reach a milestone in life, you tend to reflect on what has been and sometimes, what could have been. As I celebrate the 5th anniversary of joining the workforce yesterday and my 30th birthday today, I am reminded of a goal I once had but have not tracked for a long time.

Back in July 2013, as a young fresh graduate about to embark on my career as a legal sweatshop worker auditor at a mid sized audit firm, I read an article in the Sunday Times entitled “Is it possible to have $100k by 30?“. Author Jonathan Kwok surmised that as a 25 year old male fresh graduate, if you earned the median salary of $3,050 per month, had 3 months bonus (AWS + 2 months variable bonus), had a 4.5% annual pay rise, saved 50% of your salary, you would have managed to accumulate $123,000 of pure savings (excluding CPF contributions). If you choose to invest 60% of the savings and obtain a 6% return per annum, the average 10 year year return of the STI then, that amount will be $134,000.

Back then, upon reading this, I thought to myself…

Challenge Accepted

5 years on, if you simply look at my portfolio value, you would see that I’ve already achieved that goal with some time to spare. The exact time I achieved the $100k goal was approximately slightly before my 29th birthday, 1 year ahead of schedule. In fact, my current tally is quite close to Jonathan’s estimates.

Reliving my 5 year mission

Let’s examine how I did it with a trip down memory lane.

Tough start

When you study among so many brilliant individuals throughout your education years, there comes a certain basic expectation that there is a set path that you must follow to career success. However, when you can’t even get on that path to begin with, you sometimes feel like a failure, especially when you see your peers start to outpace you in terms of opportunities and salary growth.

I’ve made peace with myself on this, but to date I still face a uphill battle as a result as my salary was by some measures much lousier than Jonathan’s assumptions:

Starting point

*My bonuses were never more than 1 month, some years were less than that.

I was starting off a giant back foot, with my only redeeming factor being auditors’ comparatively large annual increments. To this day I’m still lagging behind Jonathan’s salary assumptions. With that said, I can’t complain too much as I know there are people out there who start from even further behind, with student loans and large parental support contributions monthly.

Leading a simple and frugal lifestyle

I have relatively simple tastes, I am a bit like what some would call a 宅男 (Nerd / Otaku), the most important things I possess is my computer, mobile phone and Nintendo Switch. Netflix / Youtube / Video Games with the odd movie at the cinema being my entertainment, analysing business news stories and financial reports my interests. The only time I go to restaurants are with close friends whom I catch up with every few months or colleagues, my family innately prefer hawker centres. No girlfriend either so no expenses there as well.

As a auditor in a firm previously, leave was mainly used for professional exams, there was little time for overseas trips. In fact, since starting work, I’ve never taken leave to go on a leisure trip overseas.

Zero in 5 yearsPogchamp

I can imagine the horror that is going through your minds now. While I love the idea of travelling for leisure, I hate spending tons of money on it. Also, I feel that if I were to go on trips, I feel it is more meaningful if it were with friends or family. As a single introvert, my attached friends don’t really ask me to join them on their trips. This was partly why I took my current job in the hospitality industry, as it afforded me a chance to travel and have a first hand look at how business is done overseas.

Saving and investing half my take home pay

This low cost lifestyle enabled me to consistently save half my take home pay. I’ve also been rather aggressive with my savings, investing at least 80-90% into the US market at first, with my portfolio now more weighted towards the SG market. How I rationalise this approach is through the fact that I’m young and can afford to take the risk. I also have low expenses and in the event I’m screwed over by Mr. Market and/or retrenched by my employer, I take comfort in the fact that my parents will take care of me.

I know its considered a bit reckless by finance advisors, but I really frown on holding too much cash. Also, I would argue that if you know what you’re doing, focus on buying quality stocks and take a long term view, the risk of being wiped out by the market is relatively low. You might suffer massive draw downs in your investing journey, but quality companies always have the ability to bounce back.

Being lucky with my investments

I try as far as possible to be right with my stock picks based on fundamentals, but ultimately the market has a large say in whether you are right or wrong. I’m lucky to say I’ve managed to achieve an XIRR of 16.57% p.a. (according to Stocks.Cafe) to date since 2013 or 15.22% between 2013 – 2017, well outperforming the 6% assumption Jonathan had. This helped me make up for the salary gap I have and am still facing.

Financial goals on track, life goals still lacking?

Some of you might be looking at all of this in “disgust”, saying that I do not have a life. “Why don’t you live it up a little?”. In a way, I would somewhat agree with you. While I like the finer things in life, I am content with my nerdy and simple lifestyle. The only true failing I have is that I’ve yet to find a partner in crime in my journey to financial freedom, probably due to my 宅男ness. I’m reminded of it from time to time by my mom, as all mothers do. I’m open to being single forever if that is path given to me, but that sometimes sounds too lonely.

Will I be anointed a 铁公鸡” (stingy person) like AK in 10-20 years? Haha I certainly hope not.

What next?

I hope my story will be an inspiration (nightmare?) to the fresh graduates of 2018 as their embark of their careers, as a Sunday Times article once did for me. Financial freedom can be planned and achieved if we take pro-active, positive steps towards achieving those goals.

As for me, let’s set a new 5 year goal:

Save 350k by 35

Watch this space.

Happy Birthday to me,
KK

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Portfolio @ July 2018

July

July is almost in the books, so it’s once again time for a portfolio review.

PortfolioPortfolio Value

Performance Indicators / Dividends

  • YTD Time weighted return: 3.24%
  • Dividends collected: $1,497.64
  • Upcoming Dividend Receipts:
    • Frasers Logistics & Industrial Trust: SGD 151.50
    • SingTel: SGD 652.70
    • Keppel Corp: SGD 195
    • Capitaland Mall Trust: SGD 106.78
    • AIMSAMP Capital REIT: SGD 150
    • Starhill Global REIT: SGD 163.50

Commentary

All dogs have their day

July has been kind to me, with portfolio value rising to an all time high of $129k. If you take into account dividends that has XD but are yet to be paid, that’s $130k there. This month’s performance was driven by pretty epic recoveries in my dogs SingTel and Starhill Global REIT and further augmented by gains in Capitaland Mall Trust, Alphabet, Visa and Bank of America. My investments in SingTel and Starhill still slightly remain underwater, but this recovery helped ease the mental torture. This episode has and continues to remind me that panic selling never made anyone money.

Recent Moves

I only made 2 moves this month, re-entering Frasers Property Ltd the day after the Government’s ruthless ABSD and TSDR adjustments and Facebook yesterday after “disastrous” quarterly reporting results. As mentioned previously, I tried for the Koufu IPO, but wasn’t allocated any.

With regards to Frasers Property, I felt the market did not fully understand their business model and geographic reach. Frasers Property has moved away from their property development roots into the recurring income property segments, with more than 80% of assets in these categories (Source: FY2017 Annual Report). What this means is greater earnings stability and less development activities, especially in the residential market – the area hardest hit by the Government’s property cooling measures. Add the fact that Singapore only accounts 33% of 2017 revenues (of which about half relates to residential developments), a juicy 5% dividend and 30% discount to book value, it seemed like a no-brainer. The market seems to agree with the subsequent steady recovery.

As for Facebook, its more of a vote of confidence in Mark Zuckerberg than anything else. Yes, Facebook platform growth is stagnating, but based on past experience, FB management always finds a way. With a giant economic moat and many monetization levers yet to be pulled, the decline seems overly done. Time will tell if my faith was misplaced.

Earnings review

Most of my portfolio stocks/REITs have reported quarterly earnings, so here’s some quick thoughts on them:

  1. AIMSAMP Capital REIT – Steady quarter, environment continues to be challenging,
  2. Capitaland Mall Trust – Pretty good quarter, 2.2% y-o-y DPU increase, 0.8% positive rental reversions, AEI at Westgate, Gearing drop to 31.5% – potential acquisitions incoming (hopefully), good stuff.
  3. Keppel Corp – Honestly a pretty meh quarter, special dividend is nice. In separate news, noted Keppel Urban Solutions and Keppel Capital signing some partnerships/MOUs with ST Engineering and MindChamps for smart cities and early childhood property assets respectively, which I found interesting.
  4. Starhill Global REIT – Stabilised DPU decline at 1.09 cents, Good to see office occupancy increasing to 95% from 90% in Q1, Uniqlo renovations at Plaza Arcade completing soon with opening expected in Q3, plenty to look forward to.
  5. Visa, Alphabet, Bank of America, Facebook – Simply put, decent to stellar quarters.

Here’s to an awesome August. 🙂

Happy Hunting,
KK

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IPO Analysis: Koufu Group Ltd

Koufu Logo.png

Singapore food court operator Koufu Group Ltd has filed for a IPO on the SGX Main board. Summary of listing details as follows:

Offer price: $0.63
Total shares offered: 97,008,000
Placement shares: 90,675,000
Public shares: 6,333,000
Closing date for application: 16 July 2018 12pm
Commencement of trading: 18 July 2018

Full prospectus can be found here.

Here’s my thoughts on the salient points of this listing.

1. Company Profile and Business Model

Koufu operates 2 key divisions, Outlet and mall management, and F&B retail largely in Singapore, with 1 food court in Macau.

Business Breakdown

Koufu Brands

Outlet and mall management

The outlet and mall management business relates to management of the operational aspects of the food courts and coffee shops – ensuring the premises are clean, finding stall operators, account management and billing, etc. They also operate a hawker centre in Jurong West (on a social enterprise model) and Punggol Plaza.

Interestingly, the prospectus also shines some light their sales cycle. Stall operators are generally charged the higher of a fixed monthly fee or a variable monthly fee pegged to stall sales. All sales are processed through the company provided POS system and cash are collected and retained daily by Koufu. Statements of account are issued twice monthly and sales proceeds net of monthly fees and other charges are paid to stall operators within 7 days.

This means that they have a low likelihood of bad debts as revenue is collected upfront. In fact, the time lag between collection of revenue and payout of sales to stall operators increases the interest income of the company, similar to insurance companies or payroll processors.

F&B Retail

F&B Retail consists of 4 concepts: F&B stalls, F&B kiosks, Quick Service Restaurants and Full Service Restaurants. F&B stalls make up the bulk of F&B retail revenue. These stalls are mostly drink stalls in their food courts, with some other stalls like Chicken Rice and Western food stalls.

2. Financials

Revenue and Profit

Revenue and profit figures have been growing over the past 3 years, but at a declining rate, which is concerning.

EPS.JPG

At adjusted EPS of 4.83 cents and 63 cents offering price, it represents a 13x trailing PE, which I think is fair but not necessarily exciting. Assuming a 50% dividend payout ratio guided by management, it represents a 2.415 cent dividend or 3.83% trailing yield.

3. Use of Proceeds

Use of proceeds

Total proceeds comes up to approximately 70.5 million, of which the bulk of the 45.5 million proceeds will be used for the integrated facility to serve as its HQ and expanded central kitchen to support its expansion plans in Singapore and achieve greater productivity gains. The remainder will go straight into the founders’ pockets as they are offering their own shares as part of the IPO.

4. Shareholders

The shareholding structure immediately post the IPO, assuming no over allotment, is as follows:

  • Jun Yuan Holdings – 78.7% (Founders’ investment company)
  • Cornerstone Shareholders – 3.8%
    • Cornerstone Shareholders are 2 Singapore family investment vehicles, One Hill Investments and Qilin Asset Management, and Maxi-Harvest Group. Maxi-Harvest Group is owned by Lee Sai Sing, a non-independent director of Koufu’s founder’s brother’s Catalist listed company GS Holdings Ltd. In summary, nothing much to shout about and at 3.8% holdings, hard to say they are really cornerstone.
  • Public Shareholders – 17.5%

Cornerstone shareholders are not subject to lock-ups, the founders are subject to a standard 6 month lock-up. Post IPO the founders still retain significant control over the company.

5. Peer Valuation

The closest listed peer to Koufu is Kimly Limited, a listed chain of coffee shops which IPO-ed in 2016. Kimly Limited currently trades at approximately 18.65 times P/E and 5.19 P/B. Between the 2, Koufu is priced more attractively at 13 times P/E and 4.9 P/B.

Looking back at the way Kimly performed since IPO, it priced at about 12 times P/E, enjoyed a ridiculous first day pop of over 100%, before spending the next 2 years dropping to its current valuation. Given the intense interest on day 1 for Kimly, it may be an indication for Singaporeans’ interest in a food court business like Koufu.

My Thoughts

Positives

  • Defensive and largely recession proof business
  • Highly positive operational cash flow
  • Experienced management and founders
  • Fair valuation
  • Dividend paying
  • Proceeds used to improve productivity of the business
  • Potential strong demand as seen in Kimly IPO

Negatives

  • Highly competitive business in a highly fragmented market
  • Management has no proven overseas expansion track record
  • Founders are cashing out
  • Weak cornerstone shareholders
  • IPO-ing in a weak environment given the trade war fears among other factors

In spite of the negatives, I have applied for a small position for speculation purposes. If I am allotted some shares, my initial thoughts is to sell any insane 1st week pop. If no pop happens, hunker down for sometime and observe the company’s performance. Of course, if I get nothing, I also don’t mind.

My first time applying for IPO shares so we’ll see how things go. Applications close tomorrow at 12pm.

Happy Hunting,
KK

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Dual class shares and their implications

Me You

SGX recently announced that they will be allowing companies with dual class share structures to list on the SGX with immediate effect. This prompted a friend to ask me what this meant, so I thought I’ll write an article about it this week.

What are dual class shares?

Singaporean investors should be familiar with the traditional company share structure – the concept where owning 1 share entitles you to 1 vote. This essentially means there’s only 1 class of shares. On the other hand, dual class shares means there are 2 or more classes of shares in the company, with the main difference being in the voting entitlement per share.

The concept of dual class shares is not new, it has been a structure that has been allowed in the US for the longest time. Traditionally, it had been the share structure of choice for family owned businesses who seek to float their shares on the stock market. Examples of this include the New York Times and the Ford Motor Company. In more recent times, this structure was popularised by Silicon Valley unicorns like Google (now Alphabet) and Facebook who have strong founder-led cultures.

To illustrate the concept of dual class share structures, let’s take a look at Alphabet’s share structure.

Alphabet Example

Equity share is computed assuming each share was issued at $1 per share

Class A and C are publicly traded, while Class B is held in the hands of Google founders Larry Page and Sergey Brin. As you can see, despite only putting up 7% of the company’s equity, the founders have 61% control of the company. Even if you exclude Class C shares from equity calculations (since Class C shares were issued free in a 1 for 1 stock dividend exercise back in 2014), they have only put up 14% of the company’s equity.

Implications

1) Inequality amongst shareholders

As you can see from the Alphabet illustration, dual class share structures are unfair to the “lesser shareholders”. Despite putting up most of the equity, they do not receive the proportionate amount of voting power at AGMs.

2) Founders can sit pretty on their throne

This can be a boon or a bane. If you have founders with foresight and morality, giving them absolute control of the company through such shares can eliminate a worry of theirs and allow them to focus on running the business. On the flip side, if you have founders who are terrible or are just out to cheat investors’ funds, “lesser shareholders” are not able to vote them out of the company due to a lack of voting power. Of course, you can vote for or against by buying or selling the company’s shares, but you would probably incur losses doing so.

3) Price differential between the different share classes

The difference in number of votes per share creates price differences between each class of shares. Naturally, share classes with more votes should trade at a premium compared to their less counterparts. This is evident once again in Alphabet’s example:

This price differential is something to be aware of and can potentially create minor arbitrage opportunities.

If its so bad, why is SGX allowing it?

One word – Competition. SGX’s main competitor, the Hong Kong Stock Exchange allowed dual class shares structures in April this year. If they were to remain firm and continue to disallow it, prospective tech companies might simply choose to list in Hong Kong instead. Interestingly, Xiaomi announced their intention to list in Hong Kong soon after the rule relaxation.

The pain of missing out on the Manchester United IPO in 2012 and the continued lack of Tech IPOs in Singapore is also another push factor.

What does this mean for investors?

For now, nothing. There are currently no companies listed in Singapore under the dual class structure. You should only to be aware of this when such companies start listing or if you wish to buy the Tech stocks in the US or for now Xiaomi in Hong Kong. Just know that investing in companies with dual class share structures are like putting your money with a fund manager. You are effectively surrendering control of your funds to the founders, with the only decision you can make is whether to stay invested or not.

Happy Hunting,
KK

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