Notes from DBS AGM on 25 April 2019 - Achieved Broad-Based Growth in 2018

2018 Annual report of DBS & the electronic voting device

Growth Drivers:

• The wealth management business grew 5 times and the cash management business expanded 8 times over the last decade. Both formed around one-third of the bank's total income. Their growth rate is encouraging/important because they are considered 'high-returns' businesses, which are less capital-intensive.

• Achieved significant income growth from the Hong Kong & China markets. This shows that the acquisition of Dao Heng Bank years ago, has paid off. Prosperity of HK is closely tied to the fortunes of China. The CEPA between China & HK would benefit DBS in the long run 
• The ASEAN-HK FTA signed in 2017 has started to take effect on the real economy as the trade infrastructure & business networks ramp up progressively. It should continue to drive economic growth in the region. This is advantageous to DBS as the bank has significant presence in SEA countries like Vietnam & Indonesia.

• The consumer/wealth management segment achieved 21% income growth. Attributed largely to the acquisition of ANZ's wealth management & retail banking businesses in 2017. DBS was able to extract value out of this acquisition with a focus on maximising profits while keeping costs under control. This is reflected in the bank's cost-income ratio since 2015. The cost-income ratio has come down and remained steady. 
• Launched a wholly-owned subsidiary in India, which already started in March 2019. Looking to open more branches in India.

• DBS is not only acquiring more digital customers but also better-quality customers. The ROE from digital customer base is better than traditional customers.
• DBS has formed plenty of partnerships with a wide range of digital platforms such as GoJek. The number of digitally-acquired individuals and SMEs have been rising steadily. This shows that the bank is making good progress in transitioning to digital acquisition of customers. This is important for future growth because this is a low-cost, manpower-light method.

Risk-Management & Challenges Ahead:

• One shareholder is concerned about the sustainability of the current generous dividend payout in the event of an economic slowdown. The CEO replied that the bank focuses on stable, sustainable dividends in terms of the 'absolute amount' paid out. Current payout ratio is considered 'comfortable'. Confident of maintaining the current $1.20 per share annual dividends. The payout ratio might fluctuate a little from year to year, but the bank is confident that its current operations is able to support the 'absolute amount of dividends'.

• One shareholder is worried that NPLs from China's clients might spike up if the US-China trade war drags on this year. The CEO replied that DBS has always focused on working with big, stronger companies in China. Their domestic financing needs can be met by the major Chinese banks. But when they want to expand into overseas markets, they require the services of a reputable foreign bank like DBS to help them with international trade finance. DBS is very selective when doing business with mainland China clients. The bank performs lots of stress-testing before committing to loans. Even if the clients are forced to shift their production & supply chains out of China, they are going to countries like Thailand & Vietnam where DBS also operates in. So, it is possible that DBS can still participate in their growth. The bank has a specific committee that looks closely and assess credit risks on their loan portfolio. They are very conservative/careful in this aspect.
• One shareholder voiced his concerns about potential disruption from Fintech. The CEO replied that re-positioning DBS into a digital bank is how it guards against disruption. He believes that banks which can disrupt themselves and adapt quickly enough, will survive.
• One shareholder was worried that a dovish US Fed & a flat yield curve would affect DBS's NIM profits this year. The CEO replied that global GDP growth has indeed slowed down. This is likely the start of a synchronized slowdown. Even though there is some co-relation between the rates in Asia and the US Fed rates, the effect is not immediate. There is a lag and the co-relation is not exactly 1:1. Due to this 'delay' effect, he still expects to see healthy NIM this year despite the Fed rate hike pause.
• A shareholder voiced his concerns about DBS's role in the Hyflux perpetual bond default. He is wondering if DBS's analysts lack the 'foresight' on Hyflux's financial problems. The CEO assured the shareholders that DBS has done all the required due diligence and followed all the rules & regulations set by MAS. Although what happened to Hyflux is unfortunate, the analysts could only make their best educated 'judgement call' based on the data provided by Hyflux at that specific period of time. Nobody expects things to deteriorate so badly at Hyflux.

Post-AGM refreshments provided. Received a $20 voucher :)

Notes from Keppel DC REIT AGM on 16 April - Steady Hands On The Wheel

Future Growth Catalysts:

• The development of the new Intellicentre 3 East data centre (IC3 East DC) in Sydney, Australia is expected to be DPU-accretive. Upon completion by 2020, Macquarie Telecom will sign a new 20-year triple-net master lease with Keppel DC REIT (KDC) for both Intellicentre 2 and Intellicentre 3 East. The lease includes built-in annual rental escalations with renewal options. This expansion aims to meet the needs of hyper-scale cloud providers, enterprise and government customers. After witnessing the successful execution of the mainCubes DC in Germany, I am confident that IC3 East would be similarly rewarding for unitholders in 2020.

IC3 DC East Sydney is a Tier III data centre built on the vacant land next to the existing IC2 DC

• Growth strategy remains the same. KDC has enough debt headroom to pursue inorganic growth through acquisitions. The focus will be on Asia-Pacific region. The management had looked at the US DC market, but the cap rates are lower and the taxes are higher. So, the US market is not as attractive.
• Besides Australia and Europe, Singapore remains a key market for KDC. The rapid growth of cloud services and digital enterprises are driving demand for hyper-scale DC capacity. Singapore is a strategic DC hub in the region due to its list of considerable advantages compared to other neighbouring cities:

1. Economic & political stability
2. Stable energy supply from the power grid.
3. Sufficient internet bandwidth
4. No natural disasters
5. Rich connectivity to Asia, the US and Europe
6. Ease of setting up business

Risk Management:

• KDC performs natural hedging of foreign currencies to ensure stable distribution to unitholders. They hedge the distributable income 2 years in advance.More than 80% of debts is on fixed rates, which will offer some protection against future Fed rate hikes.
• One unitholder asked if KDC would consider building its own DC instead of acquiring them. The CEO replied that although it is cheaper to build instead of acquire , it would alter the fundamental risk profile of KDC from a REIT to a developer. There would be higher operational & development risks involved, especially at the initial stage. There are lots of testing to be done and other technical regulations to be met before a new DC can run smoothly. There is no need to take on these risks as a REIT because KDC already has a sponsor in Keppel T&T who is a reputable DC developer. It would be safer to wait for Keppel T&T or Alpha DC Fund to develop the DC and stabilise it before injecting the asset into KDC.

Competition:

• Hyper-scale cloud providers form the largest tenant base of KDC's portfolio, they house their 'mission-critical' operations in the DC. Their top concern is the physical on-site security. Their risk appetite in this aspect is zero. So, the property manager's track record in providing top-quality security/safeguards is critical when it comes to attracting and retaining big-name tenants.Due to the solid operational track record of KDC's sponsor, Keppel T&T, the tenant retention rate is in the high 90%. The CEO also mentioned that some new DC players struggle to lease out their new DC even after a year due to a lack of track record.
• Setting up the infrastructure of a DC is extremely costly and time-consuming. It takes a lot of capex and time to ramp up the operations. Similarly, it is a huge hassle to 'power down' operations in one DC and make a complete shift to another DC. Too much hassle and wastage. Unlike your home desktop PC, the DC cannot be 'turned off' with a flick of a switch. Besides, these hyper-scale cloud providers require their services to run 24/7. They cannot tolerate any downtime. As a result, the DC business is 'highly sticky'. As long as the on-site physical security is up to standards, tenants would not consider moving out, ever.
• One unitholder asked a pretty common question. Since DC is such a good business, why don't these hyper-scale cloud firms save on rental costs by building their own DC? The CEO replied that contrary to popular belief, rental costs actually take up only a small portion of operating a DC. More importantly, these cloud service firms (your Amazons, Microsofts, Googles, Facebooks and such) want to grow really fast. Some of them aim to deploy up to 15 DC in a month around the world! Nobody can build so fast. Therefore, they still need to lease from DC landlords like KDC.

In conclusion, the CEO and the chairman gave me the impression that they have a good grasp of the DC business. I am happy to stay vested. Looking forward to the completion of IC3 DC East in Sydney! :)