Suggestions for a speculative punt?

kinger101 · 27 July 2020 at 6:06PM

AnotherJoe said:

kinger101 said:

AnotherJoe said:

kinger101 said:

Seems to be a lot of interest in EVs. I think some people have overlooked the fact that the people who manufacture most cars now are also developing EVs. Unlikely Toyota and VW will decide to call it a day just because they can't use an internal combustion engine.

Thatsa very old argument that maybe had some validity ten years ago. But time has shown to be untrue.
As can be seen right now, neither are capable of making EVs that match Tesla, and since they dont really believe yet (maybe VW are changing, time will tell) they dont have battery supplies lined up. This bottlenecks not just these companies but overall competition to tesla.
One significant problem VW and Toyota (sinec you mentioned them) is, if they make a really good EV, it will be better than their existing ICE cars.
So, then what happens? Its not a competition between EVs, its among all cars. And if (say) VW's new ID.3 is superior to the Golf on all metrics including price, why would anyone buy a Golf (or a Passat because the ID.3 has same interior space as next model up )? And then the bottom falls out of their balance sheet because they cant make anywhere near the volume of ID.3's to match both of those (or even just Golfs) an custmers wait. Very tricky swapping horses in mid race.
As it is teh ID.3 isnt competitive except at the very bottom trim level to Model Y
Only cars competitive to Tesla at the moment are smaller/cheaper models or hatchbacks from Kia/Hyundai (I have one) and they cant make enough (didnt get enough battery supply lined up)

The existing car manufactures will make good EVs because one day they won't be able to sell cars with ICEs. Just like Phillips don't sell tungsten filament lightbulbs and Canon don't sell film cameras.

Or they'll go bust. Remember Minolta? Mercedes are laying off 30k workers. BMW in trouble. VW cant write software. Their new car cant even connect a mobile phone to their display unit.

kinger101 said:

AnotherJoe said:

kinger101 said:

Seems to be a lot of interest in EVs. I think some people have overlooked the fact that the people who manufacture most cars now are also developing EVs. Unlikely Toyota and VW will decide to call it a day just because they can't use an internal combustion engine.

Thatsa very old argument that maybe had some validity ten years ago. But time has shown to be untrue.
As can be seen right now, neither are capable of making EVs that match Tesla, and since they dont really believe yet (maybe VW are changing, time will tell) they dont have battery supplies lined up. This bottlenecks not just these companies but overall competition to tesla.
One significant problem VW and Toyota (sinec you mentioned them) is, if they make a really good EV, it will be better than their existing ICE cars.
So, then what happens? Its not a competition between EVs, its among all cars. And if (say) VW's new ID.3 is superior to the Golf on all metrics including price, why would anyone buy a Golf (or a Passat because the ID.3 has same interior space as next model up )? And then the bottom falls out of their balance sheet because they cant make anywhere near the volume of ID.3's to match both of those (or even just Golfs) an custmers wait. Very tricky swapping horses in mid race.
As it is teh ID.3 isnt competitive except at the very bottom trim level to Model Y
Only cars competitive to Tesla at the moment are smaller/cheaper models or hatchbacks from Kia/Hyundai (I have one) and they cant make enough (didnt get enough battery supply lined up)

In the interim period for cars, the old manufacturers will make both ICEs and EVs. The early adopters will buy the EVs, and people who think they need 400-mile capacity to run down to Tescos will buy the ICE until the very last day it is legal to do so.

They probably wont. As the bottom falls out of the lease market due to falling s/h values and ICE and esp diesel becoming Persona Non Grata in cty centres, those PCP deals wont look so good any more.

kinger101 said:

AnotherJoe said:

kinger101 said:

Seems to be a lot of interest in EVs. I think some people have overlooked the fact that the people who manufacture most cars now are also developing EVs. Unlikely Toyota and VW will decide to call it a day just because they can't use an internal combustion engine.

Thatsa very old argument that maybe had some validity ten years ago. But time has shown to be untrue.
As can be seen right now, neither are capable of making EVs that match Tesla, and since they dont really believe yet (maybe VW are changing, time will tell) they dont have battery supplies lined up. This bottlenecks not just these companies but overall competition to tesla.
One significant problem VW and Toyota (sinec you mentioned them) is, if they make a really good EV, it will be better than their existing ICE cars.
So, then what happens? Its not a competition between EVs, its among all cars. And if (say) VW's new ID.3 is superior to the Golf on all metrics including price, why would anyone buy a Golf (or a Passat because the ID.3 has same interior space as next model up )? And then the bottom falls out of their balance sheet because they cant make anywhere near the volume of ID.3's to match both of those (or even just Golfs) an custmers wait. Very tricky swapping horses in mid race.
As it is teh ID.3 isnt competitive except at the very bottom trim level to Model Y
Only cars competitive to Tesla at the moment are smaller/cheaper models or hatchbacks from Kia/Hyundai (I have one) and they cant make enough (didnt get enough battery supply lined up)

The traditional car makers are making deals with battery manufacturers (e.g., Toyota and Panasonic), which will go some way in reducing shortages. But mineral shortages will impact all manufacturers until some materials scientists come up with a better battery.
The automotive industry in 20 years time won't look very different from today. If you want to invest in EVs, I'd probably buy LG Chem or SK Innovation. I wouldn't go for some Chinese company with pretty pictures of trucks that might not ever be made.

I did consider a battery vendor but ultimately they will be commodity companies with low margins. But fair enough maybe for the next 5 years. I tried it with BYD (they do both cars and batteries) and lost out there. BUt luckily switched that modney to Tesla.
If i wanted to invest in EVs I'd go for Tesla and Nio and at a push, VW. I have bought into the first two but Nio is my speculative punt, i wont be holding it.
I dont think many appreciate that every new EV on the market in the £40k and up range will act as an advert for Tesla because anyone who perhaps hasn't considered Tesla but goes into their favourite vendors showroom and gets sold on their EV, if they then decide to have a look at Tesla before buying, they will find it tough not to buy a Tesla. And also second time round, once familiar with say a eTron or iPace and the poor charging networks, again Tesla will be a serious contender.
I had trouble deciding and I was buying a £35k car, and if the Model Y was available i might well have bought it despite it being £10k more, especially since it will almost certainly hold its value better.

Minolta had embraced CCDs. Their problem probably was their offering was rather poor compared to Nikon and Canon. Likewise, BMWs woes are not caused by EVs given they account for only a small percentage of the market as present. All I'm saying is EVs won't cause that major a shake-up in terms of new entrants. I expect 80% of the market will still be in the traditional manufacturers.

I still think battery makers might be a good choice. They might be kingmakers amongst those companies that haven't invested enough into battery R&D.

Thrugelmir · 27 July 2020 at 6:15PM

kinger101 said:

Thrugelmir said:

DiggerUK said:

Thrugelmir said:

Durban said:

Carnival ?

Having secured their borrowing against their assets (cruise ships) doesn't instill confidence.

I imagine all plane and cruise companies would secure loans against assets in such a way; are you saying that Carnival is in a worse position than others..._

Airlines tend to lease rather than purchase outright. A different model to having an asset built to specification. Then subsequently using the asset to secure borrowings for other purposes, i.e. working capital.

It's actually a fairly standard practice for companies with large bespoke capital assets to use them as leverage . Debt has some advantages over equity. Interest repayments are tax deductible whereas the returns expected by investors are not. Debt on the books isn't a problem per se, but being thinly capitalized is.

Group debt is also a nice way of shifting profits to a low tax regime. You can guarantee for a company in a high tax regime its working capital will be provided by as much debt as legally possible from a holding company in a more favorably domiciled country.

Appreciate that. Leverage is a double edged sword. In that it has enabled aggressive growth i.e. building of yet more ships. Debt issues are going to account for a number of casualties as time passes.

mark13 · 27 July 2020 at 8:37PM

4D pharma and GGP , Vaccines & Gold are flavour of the month

coachman12 · 27 July 2020 at 11:08PM

bowlhead99 said
coachman12 said:
» show previous quotes
And your comments do not address the difference between leasing and owning whether they are what you would call "bespoke" ( a bit of a misuse of the word) or not.

If you are leasing your assets from other people you have a known outflow of money and need to make enough revenues to cover it, so you are 'operationally geared' - if you can improve your revenues without increasing what you are paying for the long term lease, the profits will increase faster than the revenues. If the revenues fall your profits will fall faster than the revenues util they are heavily negative unless you can terminate your lease contract earlier.

If you decide to instead borrow money and buy the hard asset for yourself, with the assets on your balance sheet supported by borrowings, you are 'financially geared' - if the company makes profits they will accrue to the shareholder with only a fixed return for the lender - extra profits made will line the shareholder's pocket though losses will not prevent you from giving the lender his fixed return, so your overall returns are geared to the actual profits that can be made. In this scenario, you have bought yourself a productive asset, which will depreciate over time, and the cost of the interest on the borrowing together with the reduction in value of the asset may be similar overall to the cost of having someone buy it and you lease it off them, though less cash outflow from day to day because it's 'your' asset (although you still owe the purchase cost on it, until you pay that off). It's akin to having a mortgage secured on a property you let out.

As an alternative to getting the money to support your balance sheet from a secured loan, you could get it by having your investors inject extra capital into the business and use that to buy the asset instead. Then there is no ongoing obligation to service a loan or pay a lease. However, it does require the equity investors to put up more money at risk. And they will demand a return for that, whether by annual dividend or just by the ongoing profits of the company being enhanced as a result of it having more capital available.

The problem with funding everything through equity is that paying a dividend or creating value for the investors to extract through sale or capital redemption is that it is not very tax efficient:
- If a company whose £50m ship can provide £5 million of profits a year wants to give £2 million a year to its financiers to thank them for supplying the finance to buy the ship, and it does it by paying £2m interest every year, the profits before tax get reduced from £5m to £3m and the (e.g.) 20% corporation tax bill ends up being only £0.6m instead of £1m. So profit after tax (which is what is available to the shareholders of the company to retain in the business or pay out to themselves) will be £2.4 m (5 less 2m interest less 0.6m tax).

- If however the company raised the £50m through equity, and needed to pay an extra £2m annual dividend to the people who subscribed for the new shares, the previous owners of the business would see their £5m annual profits before tax dwindle to only £2m retained in the business or available for payout, because the company is still paying £1m of tax cost to HMRC and £2m of dividends to its new shareholders. There was no 'tax shield', as paying more dividends doesn't get you out of paying tax to HMRC, whereas if you had incurred a £2m interest bill you would have saved £0.4m on the tax bill causing the net cost of borrowing to be only £1.6m.

'bespoke' refers to the assets being heavily customised or tailored for purpose rather than being an off-the-shelf commodity. Like our suits from off-Saville Row. For example the bespoke fitting out of a ship with cabins and engines and freight space etc. If you want a highly bespoke and massive asset, you may find it difficult to lease one exactly like it on a temporary basis, and if you have bought it you may find there isn't anyone else you could easily sell it on to in a pinch at the amount of future profits you hope that you could generate from it within your own business model.

However, it could be relatively easy to raise finance against it - as long as you are not trying to get a lender to lend you as much as the whole thing is worth to you, only what they consider a reasonable LTV against the value it could be sold for after un-customising it.

As you have explained, planes are often less 'bespoke' and more 'off the peg', and a 300 passenger aircraft is more of a commodity than a 3000 passenger floating hotel. So leasing may be more prevalent in aircraft, while buying and customising more likely for cruise liners, which means that cruise liners (needing to finance such assets) may be seen to do a lot of borrowing against such assets.

Not the sort of scenario any sensible person would want to see in a company in which they have interests.

I'm not sure whether here you mean that a sensible person with interests in a company would be unwilling to see leverage in a company in preference to leases or equity raises. If you don't like the idea of companies using debt to partially finance a business, you would perhaps not have have added Fisher and Sons last week, a business with a market cap of just under £600m which at its April AGM noted its committed debt facilities of £280m at end of March together with £64m of uncommitted facilities.

Or was your scenario that a sensible person wouldn't want, kinger's suggested group operating model of a company in a high tax jurisdiction saving tax by making interest payments to a fellow group company in a lower tax jurisdiction, to shift profits around the business to the extent the tax law accommodates it? That doesn't seem unusual (although countries are generally attempting to clamp down more on such practices, these days).
__________________________________________________
coachman reply :
Thank you, bowlhead. As always your post, like so many of your posts on the Forums, graces this thread; and I thank you for the time, effort, thoroughness and understanding which you have put into your definitive post.
Obviously, I cannot address every point you raise in a very long post but I will , if it is OK, just restrict myself to the 2 main issues which I had raised and on which you were kind enough to opine.
First, you seem to agree with the point I was making that "planes are often less 'bespoke' and more 'off the peg' "------and that is all I was saying in relation to that issue, nothing more and nothing less. I'm afraid the poster continued to insist that "bespoke" was the correct word when we were not talking about a floating 3000 floating passenger hotel but aircraft which are not "bespoke"----they are what I called in common parlance : "off-the-peg". He feels he now has to stick stubbornly with the word "bespoke" even though he used it incorrectly.
Second, on the point about an interested party not wanting to see a company being in the scenario as described, I can confirm that I am not averse to seeing leverage in a company ( and of course you quite rightly refer to Fisher &Sons)-----though I know my advisers do keep a closer eye on developments affecting such companies.
Instead I was disagreeing with the second option you mentioned ie tax jurisdiction. I know that it is not unusual , as I think you say, but I personally do not like it as a model---if indeed you are able to do it ( eg if you are not in a Group). As you say , many countries are trying to prevent such tax actions and for years before criticisms became prevalent ,I have always been uncomfortable with such practices. And that is what I meant when I said it was not a scenario that I ( as the anonymous "sensible person" ) would be happy to see.
Once again, I thank you for your deeply considered and very fair post, and I hope I have made my position a bit clearer than my earlier post. I hope I have also dealt with the factual mistakes and wrong generalised "bespoke" assumptions posted earlier by another poster. My sincere thanks again.

bowlhead99 · 28 July 2020 at 8:49AM

coachman12 said
First, you seem to agree with the point I was making that "planes are often less 'bespoke' and more 'off the peg' "------and that is all I was saying in relation to that issue, nothing more and nothing less. I'm afraid the poster continued to insist that "bespoke" was the correct word when we were not talking about a floating 3000 floating passenger hotel but aircraft which are not "bespoke"----they are what I called in common parlance : "off-the-peg". He feels he now has to stick stubbornly with the word "bespoke" even though he used it incorrectly.

Kinger used bespoke correctly. He is talking about floating hotels owned and operated by Carnival (which are built for their use and tailored to spec), and not about aircraft, which are off the peg (take it as it comes) or in some case made to measure (work with the supplier to change the seating configuration to something they haven't done before) but not full bespoke. You think he is talking about aircraft, because you made a mistake. We can see in the nest of quotes in the thread above:

- Durban suggested Carnival the cruise operator as a speculative punt.
- Thrugelmir said that the use of borrowing against their cruise ship assets didn't instil confidence
- Digger thought that airlines and cruise operators would generally borrow against their assets, so Carnival wouldn't be any worse than others in those sectors
- However, Thrug explained that with airlines (in other words, not cruise liners) they would tend to lease. And that was a contrasted model from what the cruise company suggested by Durban was doing, having assets built to specification and then borrowing against those fixed assets to fund working capital.
- Kinger noted that actually, the practice Carnival is engaging in (with its 'assets built to specification' noted by Thrugelmir) is a fairly standard practice - for companies with large 'bespoke' capital assets to use them as leverage, because having some debt on the balance sheet is efficient. You buy the asset outright because it's bespoke and not just off the peg, and then you finance part of it with debt because using debt is sensible from a tax perspective.

So, we can see that Kinger is describing the borrowing activities at Carnival (the company suggested by Durban at the top of the nested tree of quotes) as being normal for a business of that type, where one is going to buy rather than lease a floating hotel, and will need to find an efficient way to finance it. Thrugelmir referred to Carnival's assets as 'built to specification'. Kinger referred to the same sort of assets as 'bespoke'. I can rent something off the peg, but if I want something that fits my body shape perfectly I would buy it and get it tailored. We can all understand the analogy he is making and everybody knows we are talking about the assets of Carnival.

However, you have misread the text you are quoting, so you think it's a misuse of the term 'bespoke', for some reason that you don't explain at the time.

So Kinger gives you the dictionary definition of bespoke to prove that he has used it correctly in the context of Carnival's 'made to the customer's order' assets,; then to your demand for him to address leasing vs owning he explains that he wasn't attempting to address that because, "the discussion was on Carnival's use of ships for as security for debt. Nobody was disputing the fact airlines usually lease their assets". Carnival is the company suggested for the speculative punt, Carnival has bespoke assets which it will hold on its balance sheet, Carnival has borrowed against them to fund its operation and working capital because borrowing is tax efficient.

You criticise him for using bespoke 'in the sense used, for leasing planes' which is not at all something that he did. So he has to explain in response that we are not discussing leasing planes; the discussion was about Carnival [a company with bespoke assets] using assets as leverage for debt.

We can all follow the series of nested quotes in the thread above to see that his comments are on point; we are indeed talking about Carnival (suggestion for a speculative punt) and whether its borrowings secured on its boats are something to be feared or embraced.

As you had not gone back to check the thread, and stubbornly held in your mind an idea that he thinks that leased airplanes are bespoke and must be a fool for doing so, you disregard his responses where he helpfully reminds you what we are talking about:

I'm afraid the poster continued to insist that "bespoke" was the correct word when we were not talking about a floating 3000 floating passenger hotel but aircraft which are not "bespoke"----they are what I called in common parlance : "off-the-peg". He feels he now has to stick stubbornly with the word "bespoke" even though he used it incorrectly.

But he didn't use it incorrectly. We were indeed talking about a 3000 passenger floating hotel, and how the company that owns such floating hotels (and might be a speculative punt) chooses to finance either the acquisition of those assets or its working capital and general operational cashflows through debt secured on the ship.

I hope I have also dealt with the factual mistakes and wrong generalised "bespoke" assumptions posted earlier by another poster.

You have dealt with the situation quite poorly - you have misread something, made your own mistake, and complained that someone else was being stubborn when they tried to explain what you had misunderstood.

Apologies if this derailed the conversation further but perhaps it is useful from time to time to ensure that people are not unjustly accused of being stubborn idiots who don't understand what they are talking about. Despite taking a lot of page-space above, on average over my last two posts I have hopefully contributed something of use, as the previous post addressed your demand for some exploration of leasing vs buying and choice of finance methods.

At the end of the day, leasing some or all of your main operating assets (as is done by airlines) results in operational gearing and can be precarious when passenger numbers go through the floor, if you can't exit the leases and are paying the asset's owner in cash each month for the use of the assets and at a price which reflects assumed depreciation of them, even though they are idle. The big airlines groups are terminating a number of leases as soon as practicable to manage capacity while cancelling or deferring delivery of a pipeline of orders for additions to their fleet. A punt on airlines from current levels is speculative, despite government intervention and refinancings galore; some have fallen by the wayside. Alternatively buying your main operating assets and funding them with debt (as is done by cruise companies) creates financial gearing which can again be precarious when passenger numbers go through the floor and you still have interest cost to service, but at least you are not paying for depreciation in cash each month - and if the debt is somewhat covenant-lite, you may get through to the other side. Again, a punt on cruise companies from current levels is speculative.

Ultimately we don't know the relative before and after demand levels of cruise companies or airlines, but it is clear that in both cases their profitability or shareholder returns are highly geared to future revenues and many trips or flights are only efficient to run at all with a threshold level of passengers.

coachman12 · 28 July 2020 at 3:37PM

Once again, bowlhead, I thank you for your thoroughness and detailed explanatory post.
I was talking about aircraft when I disputed then word "bespoke", as it had been raised by Thrugelmir earlier; when used in the case of aircraft, "bespoke" is incorrect and I thought I had made clear in my post that I was talking of aircraft and that the post I was responding to had also moved on to the newly introduced issue of aircraft, but apparently not in your view, which I respect.
I wish you had commented on the second point you had made in your original definitive post ie. tax jurisdiction etc and my answer about that aspect of the whole issue.
As for "bespoke" : another misunderstanding can be added to the long list of such posts which end up at cross-purposes, often IMHO due to a need by some posters to show a self-gratifying form of intellect or change of direction which just confuses the whole thread. Once again, I send my thanks to you-----not just for your invaluable contribution to this thread but for all the posts you make on these forums.

Sailtheworld · 28 July 2020 at 3:55PM

Who needs self awareness anyway?

adindas · 28 July 2020 at 5:45PM

Just bought "Intel (INTL)" manage to catcht the dip today @US$49.55. 90 minutes later manage to gain 10c per share lol.

I am expecting to sell it in about six monhts time when the sentiment against them has gone and they manage to catch up their competitors.

At least good news for investors as Fed extends its lending programs to December 31

barnstar2077 · 28 July 2020 at 6:40PM

adindas said:

Just bought "Intel (INTL)" manage to catcht the dip today @US$49.55. 90 minutes later manage to gain 10c per share lol.
I am expecting to sell it in about six monhts time when the sentiment against them has gone and they manage to catch up their competitors.
At least good news for investors as Fed extends its lending programs to December 31

Please don't tell me how much you make, I am trying very hard to stick to my investment plan! : )

EdGasketTheSecond · 28 July 2020 at 10:13PM

coachman12 said:

"bespoke"----they are a choice from "off the peg" merchandise( to use another quaint phrase)

I thought they are the thin metal bits that go from the hub to the rim

Suggestions for a speculative punt?

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