Thursday, July 10, 2008

Into the pits of Mt.Doom, I threw Yongnam

I sold off Yongnam shares yesterday, taking advantage of the 152 pt rise in DJ the night before to dump out all my holdings. I'm still holding Yongnam warrants still though. Those are really low cost and can be converted to yongnam should the situation becomes more favourable in the future. I'll take my time on those.


Irrational story

I woke up in the morning, feeling that I seriously need to trim the weeds of my investment garden. I've always been toying around the idea that I have to throw off yongnam since I bought at such a high price. Nothing moves it anymore and I realise construction isn't what I would like to have in the long run. Price had been moving downwards, but within range of 0.165 to 0.150.

I ran through the annual report 2007, worked out a few ratios and convinced myself that I am going to sell it at 0.160. I keyed in my orders to sell at buy price, as I do not want to wait anymore, lest I have seller's remorse and withdrew my order. Besides, the volume of the sell queue is quite huge and the volume of buy queue is low. I can't afford to wait as I'm afraid there will be a sudden sell down to push the price down 1 bid. Might as well sell it straight at buy price.

Once I sold it, I felt relieved. Finally threw my 'one ring' into the pits of Mount Doom, into the fires of Mordor!




Rational story

I bought Yongnam in two tranches - one is at 0.345 and another at 0.435, giving me an average buy in price of 0.390. It was April 2007 then, and I do not know what is the use of looking at earnings. Had I looked at it then, I would have realised that the PE at the time of purchase is 54x - I'm too optimistic about the future of yongnam!

PE (based on my average price of 0.390 and 2007's earnings) = 18x
PE (based on my average price of 0.390 and 2006's earnings) = 54x

Yongnam does not have a good consistent track record of earnings. While turnover keeps increasing since 2003, earnings after tax goes up and down. I suppose 2007 is one of their best years to date since 2003.

--------------------------2007---------------2006
Net margins-------------14.1%----------------3.5%
Gross margins-----------17.6%----------------15.0%
EPS (diluted)------------$0.0203-----------$0.0072
Current ratio-------------2.3------------------0.90
Total debt/equity--------1.46-----------------19.2
Trade debtors/revenue--11.5%-----------------5.6%

Their current ratio improved tremendously because suddenly they have a healthy cash balance. A closer look at the cash flow statement reveals where the bulk of the cash comes from. Net cash from operations is -46 million, net cash from investing is -18 million and net cash from financing is +100 million. Thus, because of their big borrowings (90 million borrowings, 10 million from warrants issuance, 63 million from ordinary shares issuance), they manage to get a huge cash balance which boosted their current assets. Trade debtors seem to be worser off than 2006. Judging from their cash from operations, they did seem to have some trouble collecting their debts (85% had passed the due date by 90 days in 2007, compared to 10% in 2006 )

The issuance of shares and warrants increase their share capital base greatly, so their total debt/equity seems lower. In absolute amount, 2006's long term borrowings is 43 mil and 2007's long term borrowings is 75 million. I am very afraid. It's a capital intensive business, cyclical in nature, full of rotten debts and is peaking or had peaked. Worse of all, I bought at 54x PE back in 2007. Can the earnings grow 54%?

I don't know and I'm not willing to bet on it.

As such, I cut it and suffered a loss of 60.24% - one of the heaviest hit, percentage wise.

9 comments :

Sgbluechip said...

Good to trim your under performing stocks once in awhile. Pain for the short run, gain for the long run!

I can see a lot of growth in terms of understanding and depth on your analysis of financial ratios. Well done!

Any other counters you are looking at current bear market?

Collin Yeo said...

Hi LP

The closing price on Dec 31 06 was a mere 10 cents, believe you was referring to 07 instead?

Anyway, as long as you are supported by rational decision and you sleep well after making the move, its always a good move :)

Brendan Lee said...

During my last reservist towards the end of 2007, my friend advised me to buy Yongnam. He is in the construction industry, he said Yongnam supplies almost all the steel in the IR project.

So I studied the company, seeing the high valuation simply turned me off. I'm glad I did not buy this stock.

During this period of time in 2008, I have been earning money from my currecies and commodities trading rather than stock investment.

I did not sell my stocks but I did not buy more either. Its true that stock valuation are very attractive now, but I do not know where is the bottom and how will the crisis result in.

If you are interested in currencies and commodities trading, take a look at my website: http://binarytrading.blogspot.com/

la papillion said...

Hi sgbluechip,

Haha, thks for your kind comments, I'm still learning as much as I can :)

I had a few...HSBC, Singtel, Vicom, Citibank. Waiting for the price to reach my level before I go in. I seem to find more interesting companies in HK than here, haha :)

la papillion said...

Hi collin,

Good observation. I made a mistake and changed it already. It now reads April 2007 instead of 2006.

Thks for pointing out!

(Do email me if you need the spreadsheet)

la papillion said...

Hi Brendan,

He is right. In fact, Yongnam should win most of the contracts for the steel project. Yongnam is one of the largest steel construction companies in the business. (Even my steel professor back in Uni is the independent director, goodness..)

I do look at your few blogs once every while. Thks for introducing it :) If I'm ever into currencies/commodities, you'll be the first I'll ask for info :P

Collin Yeo said...

Hi LP

No idea where to get your email and eventually I sent to your MSN mail (duckula06@yahoo.com )instead lol.

Anyway, can you email me at collinyeo@gmail.com?

Thanks.

PanzerGrenadier said...

Hi La Papillon

Realised losses are part and parcel of the investment game as sometimes we have to let go to move on and redeploy capital.

The latter part of 2007 after sub-prime also caught me as some of my equity picks turned into lemons. I sold a couple of them in 2008 to cut loss and ate x,xxx in realised losses.

Sometimes, that is the tuition fee we pay to Mr. Market.

Be well and prosper.

la papillion said...

Hi PG,

Yea, I realised that too. Well, I'm getting better at cutting losses :)

It's good to lighten my balance sheet and sit on cash, ready to deploy them when necessary, instead of holding onto hope :)