Temasek Holdings: how Singapore's sovereign wealth fund built a S$300 billion portfolio

Note: Unless otherwise stated, the term 'Temasek' refers to Temasek Holdings (Private) Limited.

The Temasek story

'As we strive to deliver today for tomorrow, we must keep an eye on the longer term.'

Ho Ching

Chief Executive Officer, Temasek Holdings

When Singapore gained its independence after 144 years of British rule, there was significant apprehension about the country's future. The battle for freedom and sovereignty had been won, but Singapore's former colonial masters had left the country with a colossal budget deficit of some S$14m in its first year of self-government.

With an underdeveloped economy, and much of the country's infrastructure in disrepair and in need of investments, the prospect of having to reduce the massive deficit was daunting. Many predicted that Singapore would not survive as an independent state for more than a few years.

But the critics had underestimated the resolve of Singapore's early leaders. Unwilling to countenance the idea of the country submitting to fate, they decided that Singapore had to beat the odds to survive and began the monumental task of reforming the economy and cultivating nascent industries that would underpin the future growth of Singapore. Revenue sources were developed and spending was rationalized. By the end of Singapore’s first year of self-government, the country had managed to turn the deficit into a budget surplus of S$1m.

The subsequent years were a period of rapid growth for Singapore, fuelled by a series of forward-looking economic policies put in place by the country's leaders. By 1969, Singapore had grown its assets to S$3.3 billion, a remarkable turnaround in the country’s fortunes. By then, Singapore was growing at one of the fastest rates in South East Asia, attracting investments and creating jobs for its citizenry.

In 1974, in cognisance of the need to manage its assets professionally and to separate policymaking from asset ownership and commercial decision making, the Singapore government decided to carve out 35 strategically important businesses, to be managed professionally by a separate institution.

That institution was Temasek.

Temasek soon transformed itself into an active investment manager. In the 1980s, Temasek embarked on a series of divestitures and initial public offerings ('IPO') for its portfolio companies. One of the more notable examples was Singapore Airlines, which was listed on the Singapore Stock Exchange. Other companies were sold off.

In the 1990s, in a bid to foster a more competitive economy in line with free market principles, the government began to privatise a number of government monopolies. Probably the most prominent example was Singapore Telecommunications Limited ('Singtel'), which organised an IPO that sold 11% of the company to the public, with Temasek Holdings holding the remainder. It was a defining event that created a generation of equity investors overnight.

The new millennium saw Temasek stepping out of its borders to invest in the emerging Asia. Over the years, the group continued to develop its portfolio and acquired greater investment expertise, taking advantage of investment opportunities not just in Asia, but also further afield.

Today, Temasek is a global investment company. In 2018, the company had 11 offices in Asia, the Americas and Europe.

About Temasek

Temasek was incorporated on 25 June 1974 as an exempt private company under the Singapore Companies Act. While it operates as a private company according to commercial principles, Temasek is wholly owned by the Singapore Minister for Finance, a body corporate defined by the Singapore Minister for Finance (Incorporation) Act (Chapter 183).

Temasek is also a designated Fifth Schedule entity, a category that includes entities the likes of Government Investment Corporation of Singapore, Monetary Authority of Singapore, Central Provident Fund, Housing and Development Board and Jurong Town Corporation. As one of the designated Fifth Schedule entities, Temasek has a duty, under the Singapore Constitution, to safeguard the company's past reserves. What this means in practice is should a draw be required on the company’s past reserves, Temasek is required to seek the assent of the President of Singapore before it is able to do so.

It is important to appreciate that a draw on reserves is not the same as an investment loss. An investment loss, as long as it is transacted at fair value with the transaction undertaken on an arm’s length basis, is not in itself a draw on past reserves. Rather, a draw on past reserves only occurs when the company's total reserves fall below its past reserves (which is the level of reserves accumulated before the current term of government).

As a private exempt company, Temasek actually has no obligation to publish its financials publicly. Yet it has opted to do so through Temasek Review, which has been published annually without fail since 2004. This is indeed laudable, with Temasek serving as an exemplary model for the best in commitment to transparency.

Temasek is also a leader in financial prudence and stewardship of resources, safeguarding the integrity of its balance sheet. One of its cornerstone principles is its operating practice of not guaranteeing the obligations of its portfolio companies. While Temasek is active in protecting its commercial interests (by adjusting its stakes according to commercial considerations), it also respects the operational independence of its portfolio companies. For instance, Temasek is generally not represented on the respective boards, and does not direct their business operations or commercial decisions.

A deep management bench

As an organisation, Temasek has a reputation for hiring and working with the very best and most talented individuals, who are committed to the highest standards of integrity and professional ethics. This commitment can be seen at every level, most evidently in the composition of its management team.

Temasek would probably not be where it is today without the defining contributions of its present Executive Director and Chief Executive Officer, Ho Ching. Since she took the helm of Temasek in 2004, the company has been transformed from a Singapore-focused company to an active global investor, with interests in virtually every corner of the planet. By virtue of Ho's visionary leadership, Temasek has become synonymous with the Singapore brand itself.

An alumnus of National Junior College, Ho received the President's Scholarship and went to Singapore University (now the National University of Singapore) where she graduated with First Class Honours. Later, she was admitted to Stanford University from which she graduated with a Master of Science in Electrical Engineering.

Ho started her career with the Ministry of Defence in 1976. Her unwavering commitment to excellence and unrivalled work ethic saw her rise quickly through the ranks. In 1983, she was appointed Director in the Defence Materiel Organisation, the defence procurement agency of the Ministry. She concurrently held the position of Deputy Director of Defence Science Organisation.

Later in 1987, Ho joined the Singapore Technologies Group and took on various leadership positions before becoming the company's President and CEO in 1997. During her tenure as CEO, she led the company to new heights, culminating in the formation and listing of Singapore Technologies Engineering as the largest listed defence engineering company in the region.

It was clear that Ho was destined for greater achievements. In 1997, Temasek's then-chairman S. Dhanabalan asked Ho to lead Temasek, describing her as the best person for the job. In 2004, Ho became Temasek’s CEO, a capacity in which she presently serves.

For her contributions to the nation, Ho has been awarded the Singapore Public Administration Medal and the Public Service Star. She has also been awarded the Asian Business Leaders Award, which recognises individuals who demonstrate moral leadership and service to society.

In relation to the execution of the company's vision and strategy, Ho is assisted by a team of professionals with impeccable credentials, endowed with years of operating experience gained within and outside Temasek. This year, Temasek announced the appointment of Dilhan Pillay Sandrasegara as chief executive of Temasek International, the wholly-owned management and investment arm of Temasek Holdings.

Pillay was previously deputy chief executive of Temasek International. He had served in various senior management capacities in the Temasek group since 2010, which included leading its investment and portfolio management groups, and supervising teams in the United States and Americas.

In the next section, we provide an overview of Temasek's recent investment performance.

Performance review and portfolio highlights

The net portfolio value of Temasek reached S$313 billion by end March 2019, setting a new record for the third year running. The company's performance was encouraging, with a rolling ten-year total shareholder return ('TSR') of 9%, on a compounded and annualised basis. This was an improvement over the previous financial year’s ten-year TSR of 5%, although we note that FY18’s ten-year TSR included the global financial crisis year of 2008.

Temasek also continued its proactive stance towards managing its portfolio, with S$24 billion invested over the year ended 31 Mar 19. S$28 billion of assets were divested in the period.

In terms of geographical distribution, two-thirds of Temasek's portfolio exposure are in Asia. As at 31 Mar 19, Singapore-based assets made up 26% of the company's portfolio. An identical proportion was held in China. Other territories in Asia accounted for 14% of Temasek's assets. Outside of Asia, North America and Europe were the main territories that housed a significant part of Temasek's assets, accounting for 15% and 14% of the company’s asset pool, respectively.

On a relative basis, Temasek has been reducing its exposure to Singapore over the years. In 2017, its exposure to Singapore (in terms of asset value) was 29%. A year later in 2018, the proportion was 27%. By 2019, the share of assets based in Singapore had declined further to 26%. This trend shows that Temasek remains committed to creating a diversified portfolio, one that is not heavily dependent on the fortunes of Singapore and its economy.

In terms of sector exposure, holdings related to financial services made up a quarter of Temasek's portfolio (as of 31 Mar 19). A fifth of the company's assets were invested in companies in the telecommunications, media and technology sector. Approximately 17% of Temasek's portfolio was invested in the consumer and real estate industry. These three sectors, as a whole, made up 62% of Temasek's portfolio.

Temasek's portfolio can be qualified as being highly liquid. As of 31 Mar 19, 36% of its portfolio was invested in liquid and sub-20% listed assets, the latter referring to stakes of less than 20% held in listed companies. In fact, Temasek has been increasing its exposure to this category of investments; in 2017, liquid and sub-20% listed assets constituted 33% of the company’s portfolio.

Incidentally, Temasek also maintains significant exposure to unlisted, private companies. These stakes accounted for 42% of its portfolio as of 31 Mar 19. Temasek has been increasing its allocation to unlisted assets over the years, which rose from 40% in March 2017 to 42% in March 2019.

In a statement issued in July this year, Temasek International CEO Dilhan Pillay noted, 'We continue to build our portfolio for the future by increasing our exposure in unlisted companies. Investments in this space have generally performed well and provided us with better returns than listed ones since 2002.'

A commonly held misconception is that exposure to unlisted assets must necessarily affect the overall liquidity of the portfolio. Temasek's track record on divestments leads us to believe that this may not necessarily be the case.

In its financial year 2019, Temasek managed to increase its rate of divestment, with a net divestment rate (investments minus divestments) of S$4 billion (FY18: net investment of S$13 billion), while maintaining its share of liquid and sub-20% listed assets at 36% (2018: 36%) and also increasing its share of unlisted assets from 39% in 2018 to 42% in 2019. The fact that Temasek managed to increase its pace of divestments without any relative decline to its portfolio proportion of liquid and sub-20% listed assets indicates that the divestments were made without compromising its core liquidity position. We think this augurs well and amply demonstrates the resilience of Temasek's liquidity profile.

Temasek’s access to liquidity is also enhanced through its unique network of associated, but independently governed and managed, companies. One of the more prominent examples is Azalea, a wholly-owned subsidiary of Temasek Holdings with an independent board and management team. Azalea is in the business of making private equity investments and has so far issued private equity bonds to both institutional and retail participants across five collateralised fund obligations. The issuance of these private equity bonds plays a key role in enhancing Temasek's access to liquidity, particularly in relation to its unlisted private equity assets.

Temasek's active divestment strategy manifests itself in various transactions. Probably one of the largest and more important deals in 2019 was the sale of Ascendas Pte Ltd and Singbridge Pte Ltd (from Temasek's 51%-owned subsidiary Ascendas-Singbridge Pte Ltd) to Capitaland, in a deal valued at some S$11 billion. In the next section, we will take a look at the structure of the deal and explain what it means exactly for Temasek.

The Ascendas-Singbridge Deal

On 14 Jan 19, CapitaLand Limited announced that it would be entering into a transaction with Temasek Holdings to acquire the share capital of two wholly-owned subsidiaries of Ascendas-Singbridge Pte Ltd ('ASB'), of which Temasek Holdings owns 51%. The transaction was approved by CapitaLand’s shareholders at an extraordinary general meeting held on 12 Apr 19, with over 99% of shareholders present voting in favour of the deal.

Pursuant to the terms of the deal, ASB received consideration of approximately S$6 billion, comprising a S$3 billion cash component and the remainder made up of new CapitaLand shares at a price of S$3.50 per share. The issue price of S$3.50 represented a 7% premium over CapitaLand's trading price on the day before the acquisition was made public. It also represented an 11.3% premium over CapitaLand's 1-month volume-weighted average price of $$3.1447.

The astute observer would observe that even though Temasek agreed to the premium on the newly issued CapitaLand shares, the agreed price of S$3.50 actually represented a discount of approximately 23% from CapitaLand's book value per share of S$4.55 (as of 31 Dec 18). The structure of the deal embodied Temasek's commitment to fair dealing and creating win-win solutions : the final price of S$3.50 per share was substantially higher than what investors could have obtained via the open market, yet allowed Temasek to capture significant value. CapitaLand’s shareholders appear to have benefited from the deal in a big way as well; the company’s shares are currently trading at S$3.63 apiece.

Temasek recognised a significant gain following the completion of the Ascendas-Singbridge transaction. Before the deal was signed, ASB had total shareholder’s equity of just S$1.78 billion (as of 31 Mar 2018). Since ASB received approximately S$6 billion in cash and shares as part of the sale, we can surmise that the Ascendas-Singbridge deal has been a fruitful transaction. Not forgetting the fact that with the S$3 billion cash influx, the deal further fortifies Temasek’s already very resilient balance sheet.

A minor point that might be of interest to the reader: Temasek's ownership in CapitaLand has increased to 51% post transaction. This means that Temasek will need to include CapitaLand’s financials in its consolidated accounts, which would likely result in an increase in reported group borrowings.

An overview of Temasek's credit profile

Few individuals would disagree with the observation that Temasek's credit profile is impeccable. Temasek has been given a triple-A rating by both S&P and Moody's, a grade reserved for the most creditworthy debt issuers.

For the year ended 31 Mar 19, Temasek reported a net interest expense of almost zero, with S$0.4 billion in interest income and S$0.4 billion in interest expense. The year before, the company reported net interest expense of S$0.2 billion (interest expense of S$0.4 billion and interest income of S$0.2 billion). Its recurring income-to-interest expense ratio was an astounding 96x in FY19 (FY18: 68x). Recurring income, as defined by Temasek, is the sum of divestments, dividend income, income from investments and interest income.

Temasek also continued to present an excellent leverage profile, with little debt on its balance sheet. Its total debt load of S$15.1 billion as of 31 Mar 19 was dwarfed by its net portfolio value of S$313 billion, giving a net portfolio value-to-total debt ratio of 21x.

As a group, Temasek's liquidity is also healthy, with its consolidated current ratio (current assets/current liabilities) of 1.58x in March, up from 1.51x a year ago.

Analysing Temasek's Bonds

Temasek currently has a number of SGD-denominated debt issues. In Figure 1, we present a curated list of bonds issued by the company.

Figure 1: List of selected Temasek SGD bonds

The chart in Figure 2 indicates the Z-spreads of the selected Temasek SGD bonds across various maturities.

Figure 2: Temasek bonds – Z-spreads over years to maturity

From a relative valuation perspective, it would appear that the TEMASE 4.000% 07Dec2029 Qsov (SGD), TEMASE 4.0475% 05Mar2035 Qsov (SGD)) and TEMASE 4.200% 07Dec2039 Qsov (SGD) are more attractive compared to other Temasek issues.

Having shortlisted the abovementioned bonds, we undertook a roll-down analysis to understand what the likely investment returns would be if an investor bought the bonds and sold the respective securities after a hypothetical holding of one year. The reader will find the results of our analysis in Figure 3:

Figure 3: Roll-down analysis of selected Temasek bonds

We would recommend the TEMASE 4.000% 07Dec2029 Qsov (SGD) . At first glance, this might appear surprising since the other two issues provide marginally higher rolldown yields. However, these issues have significantly longer durations and are thus more vulnerable to interest rate movements. Given the uncertain interest rate environment, the TEMASE 4.000% 07Dec2029 Qsov (SGD) allows us to mitigate duration risk, whilst still capturing significant roll-down upside.

(Related article: 'Rolling Down the Bonds: The Best Kept Secret in Bond Investing')

Conclusion

To many, the story of Temasek is the story of Singapore, and the Singapore spirit. An embodiment of the Singapore DNA of thrift, courage and integrity, Temasek has built a franchise that is not just a role model for companies in Singapore, but also the envy of the world. Under the visionary leadership of Ho Ching and her management team, Singapore and its people are assured of an enduring legacy, one that has withstood the test of time.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a NIL position in the above mentioned securities . The analyst who produces this report own none of the above mentioned securities.