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Economic Moats of SGX Listed Companies

Here are some locally-listed companies that possess economic moats.

Singpost

Singpost possesses a great economic moat – namely it’s the virtually the only provider of mail services in Singapore. No other close competitor exists to rival it due to regulatory constraints. In other words, as long as regulations do not change, Singpost has pretty much been given a license to print money.

 

singpost

Do note however that Singpost has also branched into other businesses whereby it possesses little or no economic moat whatsoever.

SPH

SPH is the dominant provider of printed newspaper and magazines in Singapore. It has done extremely well over the years. However, its economic moat has weakened somewhat in recent years with the rising popularity of the Internet.


sph

As you can see, companies with economic moats tend to do extremely well over the years. Some of the hallmarks of economic moats (by no means exhaustive) are good ROE (>12%) and with moderate leverage. Do note that economic moats are not always impenetrable and can be eroded over time.

SMRT

SMRT is pretty much the dominant MRT operator in Singapore. It also runs certain bus routes in Singapore.

smrt

The nature of the service – being a necessity more than a luxury good guarantees this. Capital expenditures are much higher in SMRT than in other companies mainly due to the nature of the industry.

Economic Moats – Consumers Worst Enemy, Investors Best Friend?

“In business, I look for economic castles protected by unbreachable ‘moats’.” – Warren Buffett

The best kinds of businesses that I love are the ones with strong economic moats. They are often characterized by supernormal profits and high returns on capital. In this post, I characterize the different economic moats that exist.

Companies with profitable margins are often eroded over time. The bubble tea craze a few year back is a textbook case. Initial start-ups were immensely profitable and its novelty soon became a craze. Competitors soon entered the market and before long, the once profitable industry became over-saturated and profits plummeted.The bubble tea industry is one in which firms possess virtually no economic moat at all. Coupled with the fact that entering the industry was relatively low, pioneers of bubble tea were soon unable to maintain past profit margins.

Industry Without an Economic Moat

You will often find firms with economic moats to be extremely profitable in the long run – provided that their competitive advantage is maintained.

Type of Moat Examples
Intangible Assets Tiffanys & Company, Nike, Coke
Customer Switching Costs Adobe. Microsoft
Network Effect Microsoft, Visa, eBay
Cost Advantages Dell

Intangible Assets – Brands, patent and regulatory licences. Patents of drugs drives profits from pharmaceutical companies – one reason why they are so highly guarded. Strong brand names such as Nike or Tiffanys & Co. allow companies to charge much higher premiums as compared to their competitors. If consumers are willing to pay a premium for a brand name – you have evidence of a moat.

Customer Switching Costs – Adobe has come to become the gold standard for image editing software.  Most designing firms run using its propriety software not because it’ cheap but because were trained using Adobe Photoshop. Switching to cheaper software doesn’t make sense as any savings made will most likely be offset by the loss of productivity (not to mention the risk involved).

Network Effect- Credit card companies are a prime example of this economic moat. You’ll find that shops readily accept cards like AMEX or VISA. Competitors who try to enter the market will be hard pressed to competing against well established networks.

Cost Advantages – Dell, famous for their optimizing and reducing cost in the process flow has done exceedingly well compared to its competitors. By cutting out the middle-man and selling directly to consumers, they have a comparative advantage against well established players like HP.

This list is by no means exhaustive but merely acts as a good reference point.

I recommend reading “The Five Rules for Successful Stock Investing” as a great primer for learning more about economic moats in different industries.  I also recommend “The Little Book That Builds Wealth” as a secondary reading.

I will be covering economic moats of locally listed companies in my next post. Look out for it!

Special Post: Investor’s Handbook

One of the best things I did in University was to co-found the first student-led fund in University College London (UCL): Bloomsbury Capital.

To my knowledge, we were the first fund in London with a dedicated focus to value investing, and that was seeded with real money from our sponsors.

One of the great things about it was that I got to meet people from all around the world. There’s nothing like getting a on the ground perspective from local investors, and this played a big part in me entering the South Korea market for the first time.

I like to bring everyone’s attention to an Investor’s Handbook produced by the current committee of Bloomsbury Capital: Tee Leng (who runs Value-Edge) and Direk (who will be starting a blog soon too).

They are from Singapore and Thailand respectively and avid value investors themselves.

The reading list I think is a great place to start if you’re new, and the handbook is full of investing wisdom distilled from some of the most successful investors of our time.

It’s a great read, so do check it out here:

Investor’s Handbook: Beginner’s Guide to Value Investing

The Asia Report Episode #5: Dividends & Income

Untitled

Thanks for the warm feedback and responses to the previous episodes. I’ve decided to add a video presentation, along with the audio recordings. This episode complements the previous post, and I run through how I think about dividends when I look at listed companies.

Which 254 SGX Companies Have Paid Dividends Consecutively For The Last 5 Years?

The Asia Report Episode #5 – Dividends & Income from Jun hao on Vimeo.

We cover:

  • Why Focus on Dividends?
  • Weeding out Bad Businesses
  • Source of Income & Investment Funds
  • 254 SGX Companies Spreadsheet
  • And more!

Enjoy!