## Friday, February 29, 2008

### Leap year

This day is a special day. For those whose age are multiples of 4 on this very day should know the significance of today. Today is the extra day that we added to February to correct the 365.25 days in a Earth year.

Thirty days have September,
April, June and November.
All the rest have thirty-one,
Except February the only one
Which Leap Years change
each fourth time
From twenty-eight to twenty-nine.
Century 100s don’t always leap,
each 400 years that leap we keep

The above poem actually describes which months of the year have 31 days and which have 30 days. February is the one that has either 28 or 29 days, depending on whether the year in question is a leap or common year. To determine if a year is a leap year or a common one, we carry out the following algorithm:

Let A = Year in question

EITHER A is divisible by 4
-------AND A is not divisible by 100 => leap year

OR A is divisible by 400 => leap year

ELSE, A => common year

To summarise, a leap year is a year which is divisible by 4 and not divisible by 100, or a year which is divisible by 400. A leap year would mean that the month of February will have 29 days instead of the usual 28.

## Thursday, February 28, 2008

### Yongnam

Had this company for a while, but this is the first time I did a closer look at their financial statements. From the press release, it seems that Yongnam had a good result. A closer look should be able to see if this is really true.

----------------------------------------------2006------------------2007--------
Cost of goods (% to revenue)------------85.0%-----------------82.3%-------
Gross margin------------------------------15.0%-----------------17.7%--------
Net margins (include one off gains)---------3.5%------------------14.2%--------
Net margins (exclude one off gains)---------3.5%------------------6.9%---------

EPS (cents, fully diluted)-------------------0.65--------------------2.03---------
ROE---------------------------------------72.3%-----------------22.8%---------

First thing I noticed is that the gross margin is rather low. I guess that’s the kind of margin one will get from a construction firm. I need to do a comparative study between players in the industry to get a clearer view of this. Yongnam had a write-back of impairment in respet of an investment property, resulting in a one-of gain of \$12,774,000. Discounting that, net margins improved from 3.5% in FY06 to 6.9% in FY07.

Second thing I noticed is that the ROE varies wildly from year to year. Some years is NA (as there are negative earnings), some years have 400% over. Inherently unstable business, due to the cyclical nature of the industry, I suppose.

Another surprise for me…I didn’t know that Yongnam is still having accumulated losses. Losses had been reduced from \$26.7 mil to \$1.89 mil in FY07. This reminds me of Aztech since they also had been reducing their accumulated losses over the years. Something bad must have happened in the past to make Yongnam like that. If I’ve known earlier, this would be a minus point for me.

From the balance sheet, I noticed that yongnam’s short term borrowings had dropped from 35 mil to 15.7 mil in FY07, while long term loans increased from 43.9 mil to 75 mil in FY07. According to the management, this is due to them securing a syndicated loan which was used to refinance existing borrowings, as well as to further working capital.

Yongnam listed a few points could grow their revenue and margins in the future:

1. A \$14 billion plan in Singapore to improve the country’s road infrastructure in the coming years, including the construction of the marina coastal expressway, Thomson MRT and the Eastern Region MRT line. These major infrastructure works will surely need steel structures. All the underground structures will need such steel struts that Yongnam provides, if I still remember my engineering foundation.

2. Looking for growth opportunities in Middle east, especially Dubai since Yongnam has established a strong foothold in there with the Dubai Metro Rail project. Looking for more growth opportunities in India too.

3. Yongnam’s order book as at 31 Dec 2007 amounted to \$162 million compared to \$147 million as at 31 Dec 2006. Without counting the writeback impairment of 12.8 million, Yongnam’s FY07 net profit is \$12.0 million. Assuming a net margin in FY08 of 6% (compared to 6.9% margins in FY07), this \$162 million order will translate into a net earnings of \$9.72 million. An excess of another 2.28 million (12 - 9.72 = 2.28), or an equivalent total contract size of \$38 million will make the net earings equal to FY07 (without the write back of 12.8 million)

If we are to include the write back, net earnings for FY07 is \$24.8 million. Again, based on a net margin of 6%, Yongnam need to cover up a shortfall of \$15.1 million in net earnings or an equivalent contract size of \$251 million in order to rival FY07 net earnings.

4. Their steel fabrication plant in M’sia is scheduled to commence operation by the first half of FY2008. By then, I should expect their margins to improve. A more comforting thought will be that their steel strutting business will grow even more, which is exactly what the management had planned. It’s good that Yongnam identified their strengths and work on leveraging it to exert a competitive advantage in this cutthroat business. Setting a steel fabrication plant should lower down the cost (I hope!).

There are still some contracts for the IR which is not awarded yet. What is the contract amount that is still up for grabs? If we know the amount, we can roughly see if Yongnam net earnings will be more or less than FY07 based on IR contracts alone. It’ll be excellent if Yongnam can derive more earnings from overseas then from Singapore. Let’s take a look at their segmented results:

For FY06
---------------------------------Singapore---------Dubai-----------M’sia-----------
Revenue (% to total)----------83.5%------------2.9%------------11.3%----------
Margin --------------------------9.5%-------------26.7%----------NA(neg earnings)-

For FY07
Revenue (% to total)-------------62.3%------------37.6%------------0%------------
Margin ----------------------------61.7%-----------18.6%------------0%-------------

As can be seen, there is a huge range of margins derived from the same place at different periods. Construction is really a hard business to place a value on, since their business variables are volatile and numerous. Thus order book really doesn’t mean anything as the margins can change drastically, depending on the conditions of the actual site to work on. There doesn’t seem to be a consistent pattern to base the revenue and the margins from, and hence I shall refrain from doing so too. If I ever do a valuation of construction firm, I must bear this in mind – the inherent instability of the industry will require a huge margin of safety and an equally conservative estimate of all the business variables.

Horror of horrors. I did a conservative estimate of Yongnam based on its net tangible assets (net assets – inventories – intangibles), and found that its NTA is only 8.09 cts. Okay, maybe steel materials can still sell for some value. Let’s give Yongnam a break and value the steel materials that it’s holding at book value, so its NAV will be 8.93 cts. If I assume that Yongam’s forward looking earnings in FY08 is the same as the FY07 (I take it as \$24.8 million, including the writeback), applying a net margin of 7% will give me a forward EPS of 0.143 cts.

Adding together gives me a value of 9.1 cts of \$0.090. Even if I double FY08 earnings, my value will be slightly north of \$0.092. How about 10 times earnings for FY08 from FY07? I get around \$0.104 – still a far cry from the present price of \$0.245. How the hell did Yongnam go up to 50 cts in the past? My goodness…and I bought at 34.5 cts and 43.5 cts pre-warrants issue. Atlas, the dangers of not knowing the value of what you’re buying.

## Wednesday, February 27, 2008

Yong said,

I spotted a few errors in your analysis and inaccurate statements. Allow me to correct them one by one.

1)"From hence on, there will be higher expenses from the rental of the building in which they sold and leased back. "

Ans: This is not true at all. Ossia is the master lessee of the building now. They pay a fixed sum of money for the rent of the building to MI REIT. Should they sub let out the units in the building to other parties and collect cash in excess of what they are require to pay, they would have a profit. And Ossia has confirmed that they are already doing that. They have also negotiated for a very competitive rent from MI REIT.

2) "Isn't Hong Kong part of Asia pacific? Why the disposal then? Money losing subsidiaries?"

Ans: Your analysis is inaccurate as you failed to consider the principle buisness activity of their HK subsidiary. Their HK subsidiary is involved in the selling of Millie's Lady shoes in China, Malaysia, SIngapore, HK, Taiwan and US. They only invested \$10million for the business and opened up numerous outlets in China. Most of the earnings were in RMB and NOT HKD.

Results wasnt really fantastic at first, but they have mentioned many times they wanted to fight head on with Belle International-their biggest competitor. However, Belle International decided to buy them out at a bombshell price. Since the profit is in excess of 80million, why not take the money and invest in somethingelse?

SHareholders certainly enjoyed the 15cents a share special dividend arising from the disposal of the buisness.

And profit was eroding due to higher expansion and distribution cost, not becos of an increaisng HKD. In fact, its the SGD that has risen against the HKD that resulted in a forex loss. This loss was not possible to be hedged as the management didnt know the exact date as to when the money was coming in.

By the way, included on their balance sheets are results from Pertama holdings which ossia has a 50% stake in it. Do remember to factor that in.

Going forward, Ossia will focus on the retail industry, with possible selective acquisitions of other retailing buisness.

Perhaps you would like to meet the management over a cup of tea? I assure you that the Goh Brothers are very kind people who will look after the interest of Minority shareholders. If you look at the past announcements, the Goh Brother have been buying back Ossia's share at 15cents-26cents, and they are doing it because its severely undervalued.

-----------------------------------------------------------------------------------------------

First of all, a very grateful thank you for having read through the piece that I wrote for Ossia. I admit I didn't read a full picture of the Ossia business (in fact, I read only the latest full year report and base my article from there...anything that isn't in there, I wouldn't have known). I really appreciate your insightful comments and I thank you for your time and effort to give a qualified commentary of my post :) I shall proceed to give a qualified reply too.

A. The issue of the "Put and Call option" agreement for the sale of Ossia building along Changi Road with Macarthur Cook property investment Pte Ltd (MCK).

I did some background following your comments, so this is what I've dug up.

On 28th Feb, 2007, Ossia entered a put and call option agreement with MCK for the sale of Ossia building. Under the option agreement, and on the exercise of the option theron, Ossia will sell and MCK wil purchase the property for a consideration of S\$33.8 million. The lease agreement is for a term of 7 years, payable on a monthly basis for a total of S\$2.4 million per annum and subjected to rent review on lease year 3 and year 5. Subject to the rent review, the rent can be increased by 3.25% on lease year 3 and/or lease year 5 onwards.

I wanted to find out the present value of all the rent paid out for the 7 years of lease on the property, based on two scenarios and on an annual basis instead of monthly basis (which is the actual rental pay period)

Scenario 1: Increment of rent on year 3 and increment of rent again on year 5 (worst case)
Scenario 2: No increment of rent (best case)

I just set the discount rate as 0% to see what's the best price I can get for the two scenarios listed. The company's own evaluation of the net book value of the property is at S\$30.4 million. MCK and their valuators valued it at S\$33.8 million (which is the price that are paying). I really do not know how MCK valued the property, so perhaps you can shed some light on this.

For scenario one, I get a present value of S\$16.8 million. For scenario two, I get a present value of S\$17.4 million. Both are so way below the price that MCK paid out to Ossia. As you mentioned, Ossia really negotiated a very cheap rent from MCK. However, the question is what happens after the 7 years of lease is over. From my calculation, they can lease around 15 years if everything else remains the same, to 'break even' MCK's paid price of S\$33.8 million.

Where did you get the information that Ossia is the main lessee of the building? Are there other tenants in the building? Where did Ossia confirmed that they are leasing out to earn rental profit?

B. On the issue of HK subsidiaries and Millie's shoes.

I did some background again.

Ossia marketing (HK) Co Ltd is involved in the trading and retailing of leather products and fashion, with cost of investment as \$2,164,000. Osim International (HK) ltd is involved in wholesaling and retailing of footwear and apparel, with cost of investment is \$555,000. Based on this, the total cost of investment is actually \$2.719 million. How did you get the \$10 million for the investment? Am I missing some things out?

I noticed that Ossia also have separate subsidiaries for trading for Millie's shoes in PRC, namely Millie's Shoes (Foshan) Co. ltd (they held 64% of effective interest) and another Millie's shoes (Shenzhen) Co. Ltd (they held 100% effective interest), both are trading in the business of footwear in PRC. While it is stated that Ossia marketing and Ossia international are principally engaged in the distribution and retail sales of footwear products in PRC, HK and macau. They're also the registered and owner of trademarks including "Millie's".

Does your extra S\$7.281 million (10 - 2.719 = 7.281) come from the combination of the investment in these subsidiaries that are subsumed under Ossia international and Ossia marketing?

Having read more about Millie's shoes in their annual report for FY06, I realised that this brand and their products are quite well known in the region that they are selling. But what happened in FY 07...it's like HK segment isn't doing well. In just 1-2 years time, business turned around?

It's of utmost importance to be able to valuate this business as accurately as possible. By selling the two HK subsidiaries, am I right to say that they are in fact selling Millie's trademark to their competitor? I wonder if their sale of 80 odd million is worth the money, and how do you know it's a bombshell price? To me, it could be like buying a cow for \$10 and selling it for \$80, but forgoing the big business of milking the cow constantly for cash.

But thanks, really, for telling me about the real cause of the foreign exchange loss. I admit my mistake of not checking which currency is depreciating (never really good at currency stuff).

I'm also not vested in Ossia, so can't talk to the management. However, I do like to dispute that buying back shares need not mean that the shares are undervalued. I mean there are many reasons for that. Perhaps they are really cash rich and are obliged to increase shareholders's value (and ultimately their coffers as they own 60% of the shares).

I also do not read more about the Pertama holdings investment. Am i right to say that they own 50% of harvey norman? I do hope that my reply give justice to the effort you put in to comment on my post :)

## Tuesday, February 26, 2008

### Old Chang Kee

I saw a few interesting reports today, but I chose old chang kee :) Oh, before that, Swiber won some projects worth US\$20 million in M'sia and Indonesia. Keep it coming, swiber!

Okay, let's get down to Old chang kee. It's just out of sheer curiosity that I'm interested in their full year financial results. I liked their curry puffs in the past and I always see long queues of people buying their stuff, so naturally I'm interested to see if popular products equates to good business. Old Chang Kee (OCK) recently IPO.

Revenue increased 20% from FY06 to FY07
COGS increased correspondingly by 21.6%
Gross profit rises 19%

The rising prices of flour and other raw materials which OCK used to produce their products must be the culprit here. Does this remind one eerily of Synear, the company that sells dumpling that recently got whacked real hard? Synear also have to cope with rising pork and flour prices that affects that COGS and consequently their margins. Revenue, as the management said, rose due to an addition of 13 more outlets in Singapore. Does it mean that if OCK opens more outlets, their revenue will go up? That's interesting...as it means their products is so popular (which I agree to a certain extent. Just go to OCK outlets and watch the queue during the evening rush hour).

An interesting thing here is the rise of 111.4% of 'other operating income'. They stated that they started to sell their used oil which contributes to S\$170,000 in FY2007, which is 0.4% of their total revenues. I think OCK should explore more about this incidental stream of revenue as used oil if thrown away is seriously a waste of money, considering how much oil they use each day for their total outlets.

Net profits dropped 2.5% though, despite having one-off gain from selling their wholly owned subsidiary named 1901 Singapore pte ltd, which operates five 1901 Hot dogs outlet (never heard before). Revenue from 1901 hot dogs contributed to 2.6% of total revenue in FY07, so it wasn't exactly a bad decision. I think OCK is trying to streamline their business, and doing what they do best - which is curry puffs. Again, my wish list for OCK - to provide a revenue data segmented according to products. I think that will be too much to ask for...it's not a wish list for nothing :)

-----------------------------2006-------------2007----------
COGS (% to sales)----------40.9%------------41.4%---------
Gross profit margin---------59.1%------------58.6%---------
Net margins-----------------9.0%-------------7.3%----------
ROE (i used total equity)----39.8%------------30.2%--------

Doesn't look good huh? Even with all the disposal of subsidiaries and hence one-off gains, net margins went down. This is not due to direct cost of goods, but rather something that happened between the gross profit and the net earnings. I'm not really interested to find out what at the moment. ROE isn't exactly encouraging, doesn't look stable.

What i'm really interested in are the red flags detected when I browsed through their financial statements:

1. Under pg 3 of 14, in the balance sheet, there is under 'current liabilities' this very interesting item, "Club membership - current", amounting to \$15,000. There also a club membership payable - long term, under non-current liabilities, amounting to another \$5000. Are you thinking of what I'm thinking. There's no mention of this in the report, so perhaps if one is interested, one can look for the IPO prospectus for more juicy details.

2. OCK is making quite a lot of short term and long term loans. Increment of 79% of short term loans (both secured and unsecured) and an increment of 222% of long term loans, as at 31st Dec, 2007. Any reasons for this big rise in loan amount? Expansion in PRC? Expansion in Singapore/M'sia?

Net gearing went up from 12.7% in 2006 to 19.2% in 2007.

**net gearing defined as (total liabilities - cash & equivalents) / (total assets - intangibles) x 100

3. Amount due to a related party makes up \$2000 found in the balance sheet. In cash flow statements on page 5, there are bad debts written off from "loan from related party" amounting to \$77,000 in FY06 and another "loan to an associated company" amounting to \$13,000 in FY07. Did you hear my alarm bells ringing? There's more...."provision for doubtful debts - amount due from associated company" amounting to \$116,000 in FY07. There's quite a number of these dubious items. Who are these 'associated companies' and 'related party'?

I saw in page 11 that there is a bad debt written off relating to a loan from a related party (an employee of the other shareholder) and investment written off in FY06 of \$219,000. More light to shine on this issue please?

Funny isn't it, with all the club membership and related parties and associated companies. Didn't know that we can lend money to an employee just like that. Hmm, I thought curry puffs are simple business, but I think I'm so far from the truth. There's a lot of things hidden between the financial statements, and I wonder who will buy the business. At the current price of \$0.200, I consider it very expensive. Why?

With poor earnings visibility, doubtful items in financial statements, overly optimistic outlook (management mentioned the food and beverage industry remains positive due to events and projects like Formula one and the successful bid for Youth olympics and the IR project.....I have to struggle not to scoff at such statements. They did mention rising cost, rental, oil prices and other raw materials to make the industry competitive), I think the valuation is short and sweet.

I'll just take net assets - inventories - intangible = \$8,998,000
then find out the number of shares outstanding = 68,400,000
then do a division = \$0.1316 per share

Revenue in 2007 is \$40,548,000
CAGR revenue from 2006 to 2007 is 20%

Projected 2008 earnings (based on CAGR) = 1.20 x 40,548,000 = \$48,657,000
Projected 2008 EPS = 4,8657,000/68,400,000 = \$0.7114
Assuming net margins in 2008 to be 7.3% (same as 2007),
net EPS = 7.3/100 x 0.7114 = \$0.052

Based on my newbish model of valuation = 0.1316 + 0.052 = \$0.183 (this is totally unorthodox, so don't follow me)

Given the circumstances, the margin of safety is set at a high level of 50%.
50% x 0.183 = \$0.090

Good for one more puff, if it ever reaches that price by FY08. The valuation is mainly for fun, don't treat it like it's a buy call at that price please :)

### FJ benjamin

Since I did Ossia, I might as well do a little analysis on FJbenjamin too. This have a similar business to that of Ossia of retail. FJben sells watches, apparels and have a 30% stake in St.James power house too. Flipping their annual report for FY07, this is what I see:

Turnover increases at a CAGR of 25.0% from 2003 to 2007
Net earnings increases at a CAGR of 94.8% for the same period.

---------------------2003-------2004-------2005-------2006---------2007---
Operating margins---1%----------2%---------2%----------7%-----------8%----
ROE (%)-------------2%----------3%---------6%----------11%---------11%---
EPS (cents)----------0.52--------0.70--------1.50--------3.53----------5.07--

COGS as % to revenue-------------------------------------59.0%-------59.2%--
Gross margins---------------------------------------------41.0%-------40.8%-
Net margins (with exceptional items)----------------------5.4%----------8.3%--
Net margins (without excep. items)------------------------4.8%----------6.8%-

Wow, that's impressive isn't it? How did fjben manage to earn so much more profit from a proportionately lower increment in turnover? Earnings per share went up by 81.9% CAGR from 2003 to 2007 too. How did they do that when the turnover only grows at 25%? Very interesting!

Second thing I noticed but Fjben is that they have no non-current bank borrowings. Nil. Zero. They do have current borrowings (meaning have to repay within a year from June 07) but no long term borrowings. Is that too prudent? Why are they not leveraging on other people's money to boost their returns?

(Just saw that their shares had increased by 67.1%. Perhaps their plan is to use shareholder's money instead of bank's money to fund their growth. Not sure about the warrant stuff, though I know the warrants will expiry in 16 July 2007, with an exercise price of \$0.45. Total amount is around \$236 million, not at all a small sum. This deserves a closer look.)

They are sitting with a lot of cash in their piggy banks. Way too much in fixed deposits with an interest rate of 1.5 to 3% per annum. Maybe that's why they are giving a fat dividend last time round.

(Realised from their presentation slides that the fat dividend is due to capital reduction exercise, to return \$74 million to shareholders)

A few things to worry about:

1. I noticed the advertising amount spent had dropped slightly, from 3.9% to revenue in 2006 to 3.6% in 2007. Branded goods have to keep on appearing in people's mind in order to create a perceived difference in the quality of the goods. Okay, I admit, I'm rather blind to advertisement and I don't watch TV. Not exactly in a position to comment on advertisment and its effectiveness :)

2. Rental of premises is increasing from 8.1% to revenues in 2006 to 9.3%.

3. Staff costs dropped from 14.5% in 2006 to 14.1% in 2007. Are they mistreating their employees as I heard from someone in it? Sales staff, if poorly motivated by rewards, will have poor services. I personally haven't tried the service of their brands, and I wonder if their services are okay?

Now I realised that branded goods isn't such a wonderful business. Yes, it's a cash cow business but the margins aren't that fantastic. To bring about brand awarenss, the shops have to be in high end places, not neighbourhood shopping malls (even though I see some brands carried by Fjben in Tampines mall). Such places are naturally going to be more expensive in rental. But I think FJben is doing well to keep costs rather constant, at least for FY06 and FY07.

How then to grow earnings?

1. Charge a higher price
2. Sell more
3. Sell another product or have a new revenue stream
4. Acquisition

I think fjben have the options of 1 to 3. It's not that 4 isn't an option, it's a rather funny option. (I saw in the presentations that their strong cash position allows them to do potential acquisitions. On who? Ossia? haha1) If they can do (1), it'll mean that they have a certain competitive advantage in the sense that they can control pricing. Retail at this branded goods level depends much on the brand, I guess. How about (3)? I think they're doing that currently by bringing in new brands (banana republic, is that right?)

I really wish they can show us the turnover figures for the respective brands they carry. As well as the margins. But i think that's too much to ask for as it's a sensitive information that can be used by their competitors against them. I'm especially interested in their house brand Raoul. Are there certain brands that aren't doing too well but is covered up by one or two brands that's doing very well. I guess we'll never know unless you're from the inside. Oh well, let's take a look at the segmented information:

---------------------2006-------2007-------
Turnover by region---------------------------
SEAsia--------------78.3%------83.8%------
North Asia----------19.8%------14.6%------
Others--------------0.11%------1.6%--------
----------------------------------------------
Turnover by segments-----------------------
Fashion--------------54%--------60%-------
Timepieces-----------42%--------36%------
Licensing-------------4%---------4%--------
----------------------------------------------

They mentioned in their presentations that their store growth had grown double digits. With fashion up 55%, timepieces up 15% and licensing up 44%. What much they make from each segment is not mentioned. If they give that, it'll be interesting.

The management seems very positive about the FY08. They citied a retail renaissance in SE asia with buoyant consumer spending. In singapore alone, there are 5 major orchard road malls being build or refurbished in 2008 and 2009, along with 2 IR (2010, 2011), resulting in more retail spaces and hopefully more revenues for the products. This in in addition to F1 Grand prix in 2008 and the much touted Tourism board to double tourist arrival by 2015 to 17 million from the current 10 million. M'sia have new landmark malls to open - Pavillion and Gardens (date to open is not mentioned). Indonsia there are 2 too - Grand indonesia and pacific place.

They expressed confidence in their 3 new brands - GAP, Banana Republic and Celine and they hope to strengthen their market share in those 3 brands. Guess brand must be their cash cow, as they plan to increase their no of stores in 2008 by 71 for guess alone. For GAP - increase by 19 stores. Banana republic by 7 stores, La Senza by 35 stores, Raoul by 30 stores and Celine by 9 stores. Just looking at their number of stores, I suppose we can guess which are the ones who're doing well (or at least expected to do well enough to justify the expense to open up new stores)

In order of highest stores opening in FY08:

1. Guess (71)
2. La Senza (35)
3. Raoul (30)
4. Gap (19)
5. Celine (9)

As a retail swaku who buys clothes maybe once every 9 months or so, I'm only interested in Guess products. La Senza is of course not my cup of tea ;)

Due to my incompetence in this retail industry, I'll gladly stay out of it. I'm not interested in branded goods, nor am I very confident of their earnings especially in bad times. My only brush with branded goods are those that went for sale (like the recent store wide sales at Springfield - yummy! my fav brand!). Not interested in Fjben :)

### Ossia International Ltd

Today there's quite a number of companies posting results. A few are interesting, but let me just look a bit more in detail for Ossia international limited. They had just released their full year results for FY07, so there's more things to look at in comparison with FY06.

Gross profit went from 50.9% in FY06 to 52.1% in FY07
Sales went up by 9.8%
COGS went up by 7.2%

As sales went up, COGS went up by a proportionately lower amount, bringing gross profit up a little.

I saw a 38.3% jump in operating income, which looks interesting. I tried searching in the report, but not much clues from there. Maybe I didn't really search hard enough (though they should make a note beside the item too to make it easier for investors). There is also a one off gain on the disposal of investment property to the tune of S\$3.4 million from the sale and leaseback of Ossia building near changi area. From hence on, there will be higher expenses from the rental of the building in which they sold and leased back. Distribution costs went up 23.2% which the management attributed to the expansion of distribution channels in China.

Ossia disposed off its entire equity interests in 2 subsidiaries from Hong Kong (I wonder why?), resulting in a gain of \$85.23 million. Interesting...i wonder what's their game plan? Selling off HK subsidiaries, increased distribution channels in China, opened more than 20 stores in Singapore and M'sia. Is there a clear plan stated by the management? This is what I'll be looking for.

(Found that they had stated in point 10 that "the Group will continue to focus and expand its core business to be the regional distributor and retailer in lifestyle products apparel, bags, footwear, sports and golf in Asia Pacific". Isn't Hong Kong part of Asia pacific? Why the disposal then? Money losing subsidiaries? )

Net profit rose 26.1%.
Net margins for FY07 is 59.9% while FY06 is 2.9%.

Without the disposal of subsidiaries interest (85.23 million) and the one off gain from the disposal of investment property (3.4 million), net profit will be be such a stellar figure, improving from 2.9% to nearly 60% in FY07. So don't take the stated figures so literally. I remember the net margins for fjben is around 4 to 5%, so I'm wondering why Ossia isn't having a similar margins. Could it be the brand names that Ossia is selling compared to that of fjben? Highly possible.

I won't be calculating the inventories turnover for Ossia as I suspected that the disposal of subsidiaries will distort the figure a lot, so no point. It's satisfying to see that later on in the report, the management said as much that the decrease in inventories is due to the disposal of subsidiaries in HK. Inventories turnover remains an important metric to look at such companies though.

Cashflow for Ossia is mightily strong, waiting to receive a huge chunk of cash from their disposal of the subsidiaries. Gearing ratio went from 0.52 times in Dec 06 to 0.09 times in Dec 07, due to the repayment of the borrowings. Looks like Ossia have a strong balance sheet.

Point 13, Ossia had a segmented revenue and business results. The following is a summary:

--------------------2006-------------2007-------------
Sales---------------------------------------------------
S'pore/M'sia-------33.8%--------------36.2%----------
HongKong----------34.8%--------------27.7%---------
Australia/Taiwan---31.4%--------------36.0%---------
--------------------------------------------------------
Operating profit----------------------------------------
S'pore/M'sia-------38.1%-----------------NA----------
HongKong----------4.8%-----------------NA---------
Australia/Taiwan---57.1%-----------------NA---------

For the sales, the percentages are with reference to the continued operations sales. For operating profit, the percentages are with reference to continued operations operating profits. It's not possible to find the percentages of segmented operating profit in 2007 because the HK region is making a loss. Below is the actual figures for FY07:

In FY07
S'pore/M'sia ----\$409,000
HK--------------(-\$1,222,000)
Austrialia/TW---\$3,043,000

I think this small exercise shows why Ossia decided to dispose of their interests in their HK subsidiaries. They completed the disposal exercise in January 2008, so the subsidiaries are still operating as of FY07.

It appears that while sales figure for HK is nearly 1/3 of total sales, the operating profit is only a paltry 4.8% of the total operating profit in FY06. FY07 is even worse. I wonder why? Perhaps a more careful and detailed look in the previous few years of data will shed some light on this abnormal situation. Could it be the same situation that plagued Popular - that of rising HKD that erodes their profits? It's a possible reason, given that in point 10, they mentioned that had a foreign exchange loss (HKD to SGD) when they dispose of the two HK subsidiaries.

Did some sleuthing and found these are the brands that Ossia is marketing:

Elle Paris, Elle Sports, Elle Active, Elle Petite, Bodymaster, And 1, Prince, Mizuno sports, Spank, Keds, Sperry Top Sider, Bridgestone Golf, Kasco Golf, Bally Golf, PRGR Golf, Sword Golf, Hedgren, Tumi, Columbia, Acegene, Progres, Playboy, Diesel, Levi's, Kangol, Hush Puppies, Scholl, BCBG, Nina, Vago and Millie's

(There could be more...I didn't really search their website, if there is one)

Okay, maybe I swaku, because I only heard of Elle, Bodymaster, Bridgestone golf, Columbia, Playboy, Diesel, Levi's, Hush puppies, Scholl and Vago.

Based on Wallstreet's general piece on Ossia, ROE of Ossia isn't exactly fantastic. Going from 17.3% (FY04), 14.6% (FY05) then to 5.7% (FY06). I'm not sure how they count it, but I'm not going to calculate the ROE of Ossia in FY07 due to the disposal (if I just subtracted those one off, I'll get negative net earnings!).

I'm pretty convinced of its instable ROE though. Family owned business by the Goh family (60 % over), but not exactly my cup of tea :)

## Friday, February 22, 2008

### The strange mayfly episode

Today, I saw a cat sitting right in the middle of the pavilion near my home. It looked so carefree and serene, full of content. I thought how come a cat, with so little possessions, can have a life so carefree and possibly happy, at least at that particular moment in time. I wonder how come, humans having so much, can actually have so little.

I knew my blog post tonight will be about this topic, so I suddenly thought of the Mayfly - an insect that lives for 1-2 days with absolutely no mouth to feed. Its sole purpose in life is to mate and then die off. Is such a life worth living - to live in order that the species will propagate and carry on? I wonder what do the Mayfly think of its life...is it full of purpose or is it meaningless as I thought it is? What could it be thinking of as it lies in the last few minutes of its life?

It's eerily coincidental that there is this insect that had been resting motionlessly in my bathroom. I thought it was dead because I really never see it moving for 1-2 days already. I told myself that it must have attained nirvana and must have died a happy death - possibly a painless one. C'mon, at least it's not eaten and smashed alive by humans. I left it alone.

It's eerie because when I did some research on Mayfly (to type this blog), I found that a mayfly looks like this:

It's characterised by 2 long hind legs, with an 'arched' body. So guess what? When I went back to the bathroom and looked closely at it, it's exactly the same! I went to nudge it a little and am surprised to see it inch a little away from my fingers. I guess it's still alive...though weak enough not to fly away.

Things around us work in strange and mysterious way. Perhaps it's time for me to look inward and ponder upon the meaning of life. Do we need so much to be happy?

## Thursday, February 21, 2008

### Singpost valuation exercise

Preliminary studies on the dividend that singpost gives and the current dividend yield looks good, hovering around 5% to 6% (based on average prices) since 2003. Take a good look at the ROE and EPS, classic signs of deep (earn a lot) and wide (hard to penetrate) economic moat, most likely due to its monopolistic status of its postal license, which ends in 2007. Looking at their annual report for 2003, I'm glad to see that Singpost had already prepared for this eventuality. I'm probably going to take a good look at their plans for 2003 to prepare the company for deregulation of the postal services, and then see if what had been said had been done now.

More metrics:

Average yield (based on average yield) for the past 5 years (2003 to 2007) = 5.37%
Averaged dividend growth for the past 4 years (2003 to 2007) = 10.67%
CAGR for dividend growth = 10.45%

Average EPS over past 5 years = 6.15 cts per share
Average EPS growth rate for past 4 years = 6.50%
CAGR for EPS growth = 6.29%

Net margin approximately 30% since 2003
Average payout ratio = 0.81

To really understand the finer points of the model, I suppose you have to read the book. After messing around with the variables, I settled on three main things: first is that the EPS is 0.615, which is the average EPS over the past 5 years, second is the core growth rate which I tried between 5% to 7% (I based it roughly on the earnings growth rate), and thirdly a ROE of 50% to 80%. Here's the matrix of possible projected total return by fixing EPS at 0.615 and changing ROE and core growth.

Payout ratio of 0.81 or 81% is about right. Singpost's dividend policy is 5 cts per share or 80-90% of net profits, whichever is higher. Messing around with the variables give me a projected total returns (meaning capital + income) of around 10% to 12%, which is pretty close to the rougher "current dividend + future dividend growth" model of 15.82% (5.37% + 10.45%). Difference probably lies in the fact that I'm using historical average EPS of 0.615, whereas I should be using a forecasted future EPS. Doing so will add in less than 1% to my projected total returns, bringing it to a range of 11% to 13%.

Is it safe?

Looking at the current dividend yield of 5.63%, it forms nearly half of the total projected returns, which makes this dividend play rather safe (because the other half of the potential returns are not guaranteed, whereas this 5.63% is guaranteed as long as they give out the dividend). So far, this is one of the few companies that I see that had a strict dividend policy stated explicitly in its investor relations page. I've got more reason to believe that such a dividend can be maintained. I didn't want to go in depth to talk about the economic moat and the ROE...another time another day.

Singpost is a very stable business. Net margins is almost constant at 30% since 2003, though they are doing things better and better with ROE increasing from 23% to 84% in 2007. With EPS growing steadily, I think based on history, this should be a safe counter.

Will it grow?

So far, the company did not give any indications that their dividend policy is going to change. There could be a possibility that after selling their flagship HQ in paya lebar, they are going to give out one big fat dividend, and thereafter change their dividend policy due to higher cost (from rental of the sold premises) . But that is just pure speculation. Since the company had already planned for the eventual deregulation of the postal services, they had been going full gear into expansionary plans. Btw, Singpost is appointed as the Public postal licensee (whatever that means). A good thing to analyse here will be how their other revenue streams are growing.

Amid a possible global slowdown, even if the growth rate drops to 4%, it will still give a lowest potential total return of 9.1%. Pretty pessimistic viewpoint, but still reasonable returns. To me, anything more than 8% is pretty solid. More than 10% is great.

What's the return?

To summarise, a pretty pessimistic viewpoint will give a total return of 9%. But I think a more possible outcome is between 11% to 13%. Messing around with various combination, I found that:

1. \$0.95 is an extremely good bargain for singpost, based on 5 cts per share dividend, 2006 earnings, ROE 50% and a core growth rate of 4% (which is lower than singapore's economic forecast) - this combination gives a total potential returns of 10% which I'm satisfied with.

2. I did a quick Free cash flow discounted model, based on a perpetuity rate of 4% (btw, that's pathetic and ultra conservative, meaning that singpost is growing slightly faster than inflation only) and a discounted rate of 6% (which I based it on EPS growth rate...feeling is that it's around there).

Intrinsic value turns out to be 1.284.

Given the steady and consistent showing by Singpost, I reckon a 20% margin is sufficient...\$1.03.
If you're feeling pessimistic, try 30% margin...\$0.900.

So there we have it: \$0.90 to \$0.95 is a very good buy based on both dividend and discounted FCF. While it is all very sketchy, upon reflection, I feel that I've understood the numbers more clearly. Going by feelings alone, I feel \$1.00 itself presents a very good buying oppportunity because if it's really based on on 90 to 95 cts buy, it's a very pessimistic outlook. The point is this, the lower the price, the safer it is and the greater the potential returns.

Price in which you enter is everything!

## Wednesday, February 20, 2008

### Book review on "The Ultimate Dividend Playbook" by Josh Peters

Here are my thoughts for the book that I finished reading, titled "The Ultimate Dividend Playbook - Income, Insight and Independence for Today's investor" by Josh Peters. This is another excellent series from Morningstar group. I really really love their clarity and ample use of examples to illustrate the point. This is one of those books that I would love to keep. Probably will buy it, together with another of Morningstar's series, "The five rules for successful stock investing" by Pat Dorsey.

Perhaps it's because I don't have much background in accountings and finance, hence the simplicity of the books drives the points straight home :)

This author is a believer of Graham's teaching, so ample use of margin of safety can be seen in a number of chapters. Like other morningstar series, they place equal emphasis on intrinsic factors like management and economic moat to determine the valuations of dividend counters.

These are the succinct points which I think the author is trying to drive at:

1. Buy and hold for dividend counters. The compounding will work wonders for the patient investor. The author believes firmly in income rather than capital gains because dividend paid out is yours to keep and isn't subjected to the vicissitudes of the market.

2. Prospective returns of a dividend yielding stock = Current dividend yield + Future Dividend growth

For example, if a company has a current dividend yield of 3% and the dividend had been growing in the past for 10%, and we can estimate that in the future the dividend growth is say 7%, then the total returns (prospective returns) = 3% + 7% = 10% for the long term

If one truly understands this, then having a low current yield need not be bad, especially if the dividend growth is higher to give a high total returns. If the current yield is high, perhaps the dividend growth is low, so it brings down the total returns. If the stock price falls, current yield will be pushed up, bring the total prospective returns to be high. It's good to buy when the price is depressed, to put in simply.

Current yield is a function of profits and dividend payout ratio.
Future dividend growth is a function of reinvestment of retained earnings into existing business opportunities, acquisitions and share buybacks.

This, I think, is the gist of the whole book. Truly opened my eyes.

3. Payout ratio = Dividend per share/Earnings per share

High payout ratios leaves little margin for errors since a slight drop in profits might leave the firm with insufficient earnings to cover the dividend. Too low a payout ratio might make the current yield too low to be attractive.

While payout ratio is the amount out of earnings that is paid to shareholders as dividend, what happens to those earnings that aren't paid out (after subtracting costs and such, of course)? It will be plunged back to the firm as growth.

In other words, earnings is either given out to shareholders (rise in current yield) or if not, it'll be plunged back to the firm to grow it (rise in future dividend growth).

4. Sustainable growth rate = (1 - payout rate) x ROE

Sustainable growth rate suggests how much earnings growth can be expected to grow, given constant ROE and payout ratio. Since how much the earnings can grow for a company will in turn affect future dividend growth, sustainable growth rate probable shows us the upper limit of how much dividends can grow. ROE and payout ratio will affect this potential earnings growth.

Given that all else is equal, a firm with high ROE is going to do a better job of increasing its dividend rate than one with lower ROE. And in the long term, ROE is a function of the firm's economic moat.

5. A good check on a firms dividend records can shed a lot of light. These are the points to look out for:

a. Are there dividend cuts? Plenty of cuts means that dividend is not sacred in the company, they shows less commitment by the company to carry on giving the same or more dividends in the future.

b. Is there meaningful payment? Talking about dividend rate here. Check for at least 5 year, 10 years or more if possible.

c. Is there meaningful increment? There must be consistency in increasing dividends. Look for those companies are proud of their dividend increment records - they are less likely to sacrifice these record on a whim. Look for average growth rate too, at least growing faster than the rate of inflation.

a. Is the dividend safe?

b. Will this dividend grow?

c. What is the return?

Each is a separate and wordy chapter on its own, so there is no way for me to summarize it all.

The book ends after teaching the reader how to evaluate the few great dividend plays - banks, utilities, REITS and energy partnership (don't think this is present in Singapore). As I said, an excellent book to start on one's journey into dividend play.

## Tuesday, February 19, 2008

### Bad experience from Nokia phones

I'm doing my part to educate everyone that they have a chance against the mighty Goliath company. I'm not against Nokia phones, though I used them twice only in my whole handphone career. To me, it was pretty stable (back then, without colours and funny stuff, every other phone is stable) and had pretty long battery life (again, without funny applications, every phone had to have a long battery life). I heard from a lot of users that Nokia phones are getting from bad to worse (out of maybe 50 students, only less than 10% uses Nokia). Guess which is their favourite? Sony Ericsson :)

I can say that Motorola services is okay, not exceptionally good nor exceptionally bad. I wouldn't want to test their service centre too.

This is a classic example of bad services and bullying. It's a shame that a strong company like Nokia is rotting to such a level. It's no wonder that they market share have been eroded by other companies.

-----------------------------------------------
From lousyexperience,

I finally won the battle against Nokia Pte Ltd.

I bought a Nokia phone in Aug 2007 through Starhub with 24months contract at \$388.

The phone was not functioned properly in the very first week. I tried to ask for a one to one exchange and was replied, "Nokia has no such policy". I got no choice but to send to Nokia Care Centre for repair.

Between Aug 2007 and Nov 2007, countless of visitation and many phone call were made to Nokia. So much time was wasted but the phone was getting from bad to worst.

I gave warning to Nokia that I was considering to file a claim against them through Small Claim Tribunal. I finally took action as there was no proper follow up from Nokia after one month.

Nokia authorized a young girl to come for the first consultation and then in default of attending before the Tribunal for the rest.

I finally won the case and was awarded \$778 by Small Claim Tribunal in 18 Dec 2007.

Nokia was given 15 days to make the settlement, but they did not respond to me.

I called to check about it on 22 Jan 2008, and Nokia said that they did not receive such notice.

I went to their HQ the next day, after presenting the Order of Tribunal to the Manager, he finally agree to pay. However, Nokia would pay me if only I agreed to sign a conditional letter. They wanted to keep my mouth shut and I was not allowed to disclose this claim to any third party. I refused as they had no right to impose any condition because this was not an out of court settlement.

I then applied for WSS (Writ of Seizure and Sale) the next day. An appointment date was scheduled on 11 Feb 2008.

I accompany the bailiff officer to Nokia HQ. Nokia was then given two options by the bailiff officer. One was to make settlement and the other one was let the bailiff officer to sticker their movable assets.

They finally woke up and agree to make payment. By then, they got to pay \$1,018.43 instead of \$778.

By sharing this experience, I hope that many have a better idea of what to do if encounter similar situation in the future.

Many of us wouldn’t want to take the trouble to make such claim. Some may have no time, and some may think that Nokia is such a big company and no point goes against them.

The Relations Manager of Nokia, Ms Serene Teo, told me that I won’t be able to win the case and the most I could only get back \$388. This was what she believed, but she was wrong.

## Monday, February 18, 2008

### Dupont analysis of ROE

One metric that I really find it helpful to analysis in detail is actually the ROE - returns on equities. The definition of ROE:

ROE = Net earnings/total equities

Problem with metrics such as these is that the definition can be tweaked accordingly to one's needs. Net earnings can be trailing (past 12 months) or forward looking. As such, it's important to make sure that the components that make up ROE is defined clearly, otherwise we might not be comparing apples to apples.

One system which helps me to understand the interaction of ratios is actually the Dupont system. Dupont system of analysing ROE splits it up into 3 parts, all multiplied together to derive the ROE.

ROE = Financial leverage x Assets turnover x Net margin

Financial leverage = Assets / equity
- financial leverage measures the total assets that a company have (like bond issues, bank loans, accounts payable etc) to the equities. Basically the higher this ratio is, the more debts that the company has.

Assets turnover = Revenues/Assets
- Asset turnover measures how much revenue is generated for each dollar of assets. Some business need a certain amount of assets before revenue can be generated (e.g. utilities) while others need less amount of assets input (e.g. software). Basically, the higher this ratio, the more productive the firm will be in terms of generating revenue from their assets. You can see this ratio as how fast the assets are churning out revenue too.

Net margin = Profits after tax/Revenues
- Revenue is the dollar amount received from selling goods or services. But not all will go into the coffers, some of them will need to pay for the expenditures. Hence, this ratio will tell us how many dollars is made upon a dollar of revenue earned. The higher this ratio is, the more profitable the revenue stream is.

The more interesting part of Dupont analysis is that, if you do a little algebra, the components of adjacent ratios will cancel each other out, giving us the ROE exactly.

ROE = (Assets /equity) x (Revenues/Assets) x (Profits/Revenues)

Thus by breaking up ROE into 3 components, we can see what really drives the ROE of a company. Is it the high leverage of the company that creates higher ROE, or high margins, or high asset turnover?

Most of the information is courtesy Shares Investment and from DBS vickers online Clarity service. I didn't double check the information, so if you're wondering why dairy farm have a ROE of over 1000%, well, me too! Please double check the information, I'm not responsible for any wrong information provided :)

It's interesting to look at Swiber and china milk, very similar ROE. We can see that both Swiber and Chinamilk have similar financial leverage. Asset turnover for Swiber is the thing that causes the ROE to be high, which shows that Swiber did pretty good use of its assets in generating revenue. China milk, on the other hand, banks on its high net margins to drive ROE. This means that China milk is sitting on a very profitable business, with 86 cts of net profit coming from every \$1 in revenue.

Dupont analysis thus allows us to analyse what drives the ROE. Is it financial leverage, high turnover or high margins that push ROE high? For more details, of course, there is no escaping poring through the financial statements. But I think this forms a pretty good start.

### More on Aztech

Hi Stupidbear,

This is in response to your posting on Aztech. I've previously did some research on Aztec before for fun. So I added 2007's result into my spreadsheet to analyse a little more closely. These are the few points I noticed:

1. Turnover increases steadily, yes, but the net margins is rather low actually.

2003--2.4%
2004--4.2%
2005--5.7%
2006--8.4%
2007--6.8%

2006 is an exceptional year for aztech, so discounting the fact, the margin did grow at an admirable rate. But to me, the net margin this low suggests to me that the industry is quite competitive. Can you think of why customers would want to buy aztec's product? There are so many similar ones out there. What's so good about their product? Hard to have product differentiation, and their industry quite easy to penetrate in too.

Take note that their turnover is mainly coming from North/south america. It wasn't like that all the time. In 2004 and 2005, their main revenue comes from europe (40% turnover). In 2006, main revenue comes from Asia pacific (46%). But in 2007, 40% comes from north/south america. Considering the slowdown of demand from america, I wonder what kind of results aztech will get in 2008. Such a big shift yearly... does that mean their contract duration is rather short? How come one year is europe, the other from asia pac, the other from america?

2. Cost of goods sold (COGS) increases by a lot in 2007 because of higher labor costs over in China, and of rising yuan in their plant at Dong guan. This causes their 2007's gross profit and corresponding net profit to drop. Management also cited new labour law in china that might adversely affect their COGS. This is one thing I would look out in the coming reports.

3. Did you know aztech had negative accumulated earnings? It had been steadily decreasing though, meaning that it is turning round. It's still negative though. Does it matter to you that they have accumulated losses and never had a year of positive accumulated profit since 2003? I didn't check their annual report backdated from 1999. The gap is closing in though, so they might actually break even in this respect in the coming financial year.

in '000
2003--(58,173)
2004--(52,332)
2005--(42,611)
2006--(26,621)
2007--(15,699)

4. Cash generated from operations is quite strong in aztech. Didn't calculate its free cash flow though. Ever wondered why aztech is giving dividends out? Could it be that they couldn't find better returns for their business? They paid increasing dividends through out the years though

2004--0.0025 per share
2005--0.0050
2006--0.0150
2007--0.0175

I think based on current price 0.265, their yield for 2007 is 6.60%. Quite good, but I'm worried about future dividend growth prospects though. Can they afford to keep on paying increasingly more dividend? Dividend CAGR of nearly 90%!!

5. I'm not comfortable with them going into construction materials business. This is afterall something out of their core business. I doubted their expertise in this area, and they surprised me with a contract award of a substantial amount. Their first award of 23 million is 8.6% of their 2007's total turnover. It remains to be seen what kind of margins they can earn from this new revenue stream. We can see it in 6 mths time actually, and whether aztech will continue to get their 2nd and 3rd contract continuation.

6. Based on net profits of \$18, 177,000 and shares outstanding of 419,118,000 shares, current share price of \$0.265,

EPS = 0.0434
P/E = 6.1 (range from 5.2 to 10 thereabouts)
ROE = 20.3% (from 2003's 5.8%, 11.7%, 15.7% to 2006's 24.8%)

Attractive enuff for you?

7. Current ratio from 2003 to 2007 range from 1.4 minimum to 1.8 maximum. Presently 1.7. Acid test range from 0.9 to 1.2, currently 1.2. I think they have no problems with inventory turnover, in fact it's getting better over the years in this respect. They are also getting less inventory as a ratio to their current assets. From 2003 figure of 43% to present of 30%. This is reflected much in their cash flow too...less money in inventory, more in other places (in aztech's case - in cash).

I really have no vested interest in Aztech, just wanted to share with you my findings. I'm neither for or against Aztech. Give me your comments too :)

## Saturday, February 16, 2008

### The origin of duckula06

Wanted to do some analysis on Comfortdelgro...but nah...i'll take a break. Too tired.

Had a great conversation with stupidbear this morning about pac andes. He forced me to think through some of my sloppy thinking. Well, at least now I got the theory just a little bit more accurate. The point is that if Pac andes ever reach 40 cts, it's a big bargain. I suppose that's what investors like mw and hh are trying to tell me - focus on valuation so as to know if the price you're paying is a bargain or not.

Despite people telling me that I've become a guru or expert in FA, I courteously decline that honour. I know myself better than to call myself a beginner. In truth, I'm a newbie who's just learning to crawl. If I haven't learn how to crawl, I better not learn how to run, lest I hurt myself in the process. I better not teach another how to crawl too.

I find that investors are generally a quiet lot. A tad mystical, a little too secretive. It's hard to find someone who will tell you what to do if you want to be a long term investor. Everywhere it's just hush hush. Perhaps the secrecy is important, for those who are truly interested and curious can discovery for themselves what it's truly like to be able to valuate companies. For the curious newbies whom like me, it's just discovering this less travelled path, well, there's always me to discuss in this blog. Impatient ones please find another pasture to graze.

I seriously started analysing business in around Nov/Dec 2007, so that puts it around 3 months. In terms of tangible rewards, there is none. If you liken it to planting a seed, well, you can't just stare at the soil for action. You stare at it for 1 day, 1 week, 1 month...then 'suddenly' something pushes the soil out and you get a seedling. For someone who didn't watch the gardener plant and water the soil everyday, they will believe that the gardener is lucky. Cause and effect, if they are separated by time, often get separated in relation too, so that the effect can no longer be attributed to any one cause. This inherently makes learning to invest for the long term difficult to practice. If I learn to ride a bike, I fall I learn...instantaneous learning through trial and error because the cause and effect is separated by a very short interval of time. If I invest in a company and I can only see the results in a long time, how can I learn from trial and error? I can't...because human life span is limited.

I can learn from other's mistakes though. I can read more books to learn from the wisdom of those that came before me. I can do more thinking that will propel me to mentally stimulated environments. That's how one should learn...to transcend beyond one's immediate physical environment by thoughts.

Ever seen a vampire who is poor? It's impossible if they just do the most basic of stuff - put their money in banks. Even a paltry interest rate of just 0.25% per year, if put over 288 years, it'll double your money. If we're talking about a more aggressive investor vampire who earns 8% interest per year, an equivalent 288 years will make \$1 become \$4,227,090,834 - inflation unadjusted returns. Even though our investor vampire won't probably be affected much by inflation of say 3.5%, let's see how his real returns are after 288 yrs...it dropped down to \$320,252.

** The above is a vegetarian vampire who drinks only tomato juice as a substitute for blood; it's from Count duckula that my email is derived from. Don't ask me why 06, it's classified **

Well, this thought experiment shows 2 things:

1. First, being a vampire (or other seemingly long life span creature) is good, because compound interest will really work its magic. Here, having time in the market is important. If you haven't started investing, ask yourself why not?

2. Inflation the silent money killer will work its magic over time too. Compounded inflation is scary, because it's the default option - you can't opt out. A silly vampire putting his money under his pillow (or in his coffin) will be the first poor vampire in history, assuming that those fiat money are not antique highly collectibles currency by then.

A Friday night's rambling...

## Thursday, February 14, 2008

### Swiber LOI; Pac andes 3Q results

Quite a few news to announce:

1. Swiber was awarded LOI for US\$35 million project in offshore Indonesia. This latest LOI represents an extension of a contract awarded to Swiber in Nov 07 for a major international oil conglomerate based in Indonesia. Altogether, the 2 contracts is worth abot US\$66 million in all.
If I didn't remember wrongly, this is the first contract awarded since the start of year 2008. More to come pls! Price rebounded up to close at 2.120.

2. Pac andes and china fishery posted results. Pac andes 3Q results is quite excellent.

Revenue for 3Q: up 52%
Gross profit for 3Q: up 104.1%
Net profit after tax: up 119.3%
PATMI: up 153.4%

What is even better is comparing the for a 9 month period in 07 and 08:

Revenue: -----9MFY08 --- 4,838 mil ------ 9MFY07 --- 2,984 mil
Gross profit : -9MFY08 --- 1,003 mil ------ 9MFY07--- 510.8 mil
PATMI: -------9MFY08 ---- 260.8 mil ------ 9MFY07--- 161.6 mil

Looking at the figures above, it's quite hard for Pac ands not to exceed last financial year's results.

Revenue segmentation by operation:

3QFY08 ----- 55% fishing division --------45% SCM
3Q FY07 ----- 37.4% fishing division -----62.6% SCM

I think most of the fishing revenue must have come from their increased stake in China fishery from 28.8% to 64.1%. But don't get wrong, SCM is growing very fine by its own accord.

Looking forward, the management had a few things to expect a great year ahead:

1. Continued rise in global demand for ocean-caught fish and fish products such as fishmeal and fishoil, esp in PRC market. Since PRC makes up 77.5% of sales in the 3Q reported, this should have direct relevance towards their bottomline. Basically it means that china fish will do well, which will contribute to Pac andes earnings too.

2. Frozen fish SCM business will see more growth too, esp since Pac andes is one of PRC's largest importers of ocean-caught fish. They plan to enlarge their self-owned transportation fleet to combat the global shortage of reefer vessel and rising freight costs. The group had doubled its transporation fleet from 2 to 4 vessels during the reporting period.

3. Expects to deliver a higher volume of fish catch in current fishing ground. With a new revenue stream in South Pacific Ocean in FY09, this will add more fishes since they now have more fishing grounds. 3 upgraded supertrawlers will be deployed for this new south pacific fishing ground.

4. Active negotiation to restructure the terms of the group's 4th VOA from a daily rental hire to a prepaid charter hire basis. This is to reduce the amount of charter hire payable on an annual basis.

More numbers:

EPS for 9 MFY08: HKD 0.2382
EPS for FY08 annualised (based on 9M): HKD 0.3176
EPS for FY08 (exchange rate of 0.182) : SGD 0.0578
Price per share (based on today's close) : SGD 0.495
P/E : 8.56

Saw that the debt to total assets ratio went from 49.6% to 44.0%. Hmm, almost half their assets are from debts, quite highly leveraged.

## Wednesday, February 13, 2008

### Singpost...what's happening to you?

A few things that I noticed today:

1. Singpost had a hefty volume of 26 million shares transacted, way above its normal average volume. Price-wise, it went up to an intraday high of 1.14 before closing at 1.120, up 0.050 (4.7%). The catalyst for the price to move up is the fact that they could be selling the HQ at paya lebar. This report from DBS vickers should shed some light on the possible effects of such a move.

2. SPC is having wild swings in its price. Very wild indeed. Just for today, the intraday range from 6.190 to 6.560. The question here to ask is that does the fundamental business change so much to validate the wild price flunctuations daily? If not, then what is causing people to buy and sell SPC like its some sort of commodity? It's scary that the price swings mirror that of warrants, esp those HSI warrants that I'm so used to trading in the past.

3. JADE got suspended. Wow...what happened?

The book above had been beside me for like 2 weeks everyday, never leaving me. I think this book is a very insightful read. I really like the morningstar series - the ideas are written clearly and in a very concise and easy to understand manner, with plenty and plenty of real life examples to illustrate the point. Anyone interested in dividend plays (which includes common stocks and REITS) should at least pick up a copy of it. I borrowed mine from the national library, but I did check out from Bershire business books that it's selling at \$37.55. I might want to get a copy :)

I think library is the single most important thing that we ever devised. Excellent source of information :)

## Tuesday, February 12, 2008

### Aztech really got a contract worth 250 million

Haha, don't play a fool with Aztech.

They just announced that they had secured a contract for the procurement and supply of construction material. The contract is to be executed in 3 steps worth a total of about S\$250 million over a period of 3 years. Haha, no joke man, Aztech is serious about this new stream of revenue and they already had a plan in mind. The first stage is worth S\$23 million, to be executed in 6 mths time, with the next two stages valued at 92 and 138 million respectively upon confirmation that the buyer is satisfied with the first stage.

NOL had a set of good 4Q results, with net profit rising 292% (that's like 3 times), due to higher liner freight rates and container volumes, but warned that 2008 might be challenging due to a slowing US economy. Revenue rose 22% to US\$2.42 billion from US\$1.99 billion a year earlier, with quarterly results way above analyst expectations of around US\$147 million. For full year 2007, NOL''s net profit rose 44% on year to US\$523 million. Revenue was US\$8.16 billion, up from US\$7.26 billion the previous year.

Haha, no wonder it shot up rather high today before the results are out.

## Monday, February 11, 2008

### My journey so far

The more I read about fundamental analysis, the more I realised that there is more I need to cover. I wonder how long it takes to truly master it. Perhaps when I reached that level, I will realise that the essence of FA is very simple. But the journey to reach that simplicity and mastery is anything but.

I'm still eager to take in more, if only I have more time.

I suppose I'm at the literature research phase, where I'm supposed to read a wide variety of content relevant to the topic at hand, to understand what had been done and not done so as to come out with a system of my own. Till then, I will have to read more to cover my inadequacies in the long journey.

Given so much to cover with so short a time, there is simply no time to worry about daily fluctuations in the market. As such, I haven't read a chart for ages, nor stand obsessively over my watchlist like in the past. I haven't do anything since my yzj episode in Jan. This period must be the busiest yet the most quiet of my investing career.

Amazing journey...and one hell of a journey.

## Friday, February 08, 2008

### One hundred years from now

One hundred years from now

One hundred years from now Ben, David, Charlie and Warren will finally share,
a chapter in financial textbooks that care, about stocks as part ownership of a business.
One hundred years from now, Mr. Market will still call plays, up and down,
and many enthused speculators will still smile, yell, cry, or frown.

The three most important words in investing will remain true.
The "Margin of Safety" you see, is the key, that makes this magic free.
Then with this safety, we can grow wealthy.

Above all else, America will stand strong if we fix what is wrong,
and if information is exchanged ethically and freely.
Strong, if the rewards earned are those based upon merits.
We know these are two important lifelong tenets.

It helps to have wide experiences with analyzing and managing,
numerous different businesses; even in difficult downturns and busty surges.

Rational and thorough business analysis takes keen emotional intellects,
and the disciplined tracking of understandable businesses.
For in business there are often tempting smooches, and impressive pooches.
The wonderful ones, will continue to be the most fun.
Those with Trustworthy First-Class Managements and proven track records,
will yield the most generous and rewarding runs.

Disciplined Reserving of Capital from Insurance Operations is a must.
Adherence to such may prevent an embarrassing bust!
Analysis of Strategic and Sustainable Competitive Advantages
of Industries and Businesses should continue,
for your wealth to compound and accrue.

Be passionate with Learning from Practice, Mistakes, and Experiences,
for sometimes they come in snowflakes, backaches and bunches.
Within your circle of competence will you begin to grow,
for there is a threshold of examination and knowledge to overcome, you must know.

After many years of buying and supervising a great variety of businesses,
Charlie and Warren did not learn how to solve difficult business problems known as tumults and bitches.
What they did learn was to avoid them, and those unhealthy problimatic batches.

After giving thanks to the teachers with whom we have grown,
give them proper credit for what they have known.
Time is the friend of the wonderful business, and the enemy of the mediocre.
Charlie learned it early, his friend Warren mastered it later.
Have a good pal, whether it be a great guy or a great gal.
In tandem you two may begin to think like Pascal.

Learn then that the goal should always be, to maximize the average annual rate of gain,
in intrinsic business value on a per-share "Berkshire-like" basis.
Only then could your mind have a peaceful bear-free oasis.

With Love, more things are possible.

Composed by Bud Labitan

Edited by Mrs. Helen Rueth

## Wednesday, February 06, 2008

### Career and EQ survey

Did 2 surveys that show your career personality and your EQ. Here's the site of those interested: http://quiz.ivillage.co.uk/uk_work/tests/career.htm

I'll say it's a pretty accurate description of me.

------------------------------
You would be very happy in a career that utilised your level-headedness, and allowed you to work mainly on your own. You want a career that allows you to stimulate your senses and your mind, without having to be involved with lots of people. Some careers that would be perfect for you are:

* Novelist
* Photographer
* Vet
* Medical Technician
* Paralegal
* Geologist
* Marine Biologist
* Graphic Designer
* Online Content Developer
* Webmaster
* Computer Security
* Producer
* Computer Programmer
* Technical Writer
* Systems Analyst
* Meteorologist
* Artist

You like working and being alone. You like to avoid attention at all costs. You tend to keep to yourself, and not interact much with the people around you. You enjoy spending time with a few a close friends. You like to listen to others, but don't like sharing much about yourself. You are very quiet and private.

You are very practical, and only act after thinking things through. You don't like being forced to answer quickly. You have to evaluate the situation completely. You make decisions based on what you can verify with your senses.

You like to be involved deeply in one or two special projects. You like to be behind the scenes. You are very logical and fair. You feel you should be honest with others at all costs.

You trust what is certain. You only like new ideas if they can be practically applied to the situation. You value what is real. You use your common sense. You like to utilise the skills you have instead of learning new ones. You are very specific and detailed when writing or talking to others. You follow directions well. You like things to be laid out for you to do instead of working them out for yourself. You like decisions to be made. You don't like things to be left in limbo. You like to know what you are getting into before you commit to something.

You like to focus on the here and now. You enjoy completing projects. It is important for you to achieve and succeed. Therefore, you believe in working hard and playing later. You like to set goals and work towards them.

-----------------

You scored 60% correct!

Your score indicates that you have an average EQ.

People who typically score in this range are usually able to recognise and understand their feelings and to express them in an appropriate manner. They are fairly comfortable with who they are. In most circumstances they are not afraid to show love, empathy and compassion for other people. In general, they are comfortable with intimacy, and giving of themselves to other people.

They are pretty good communicators. They are fairly in tune with themselves and those around them. They generally know how to say the right thing at the right moment. They are good friends and partners. They are normally able to show anger in appropriate ways. More often than not, they are able to stand up for themselves when necessary, but also are not afraid to cry if they are hurt. They are able to admit when they are wrong and take steps to correct their mistakes. They are rarely unable to say they are sorry.

They are generally happy, well-rounded people. They accept challenges. They can stay motivated and focused in the face of setbacks. They are able to set goals for themselves and often achieve them. They are positive and optimistic about themselves, others around them, and their future.

However, just because people with an average EQ have a pretty good grasp on their emotions they still have plenty of room for emotional growth. They can continue to be introspective. They can continue to communicate with the people around them and continue to work on their goals. They can utilise what they have and continue to identify areas within themselves that need work.

Remember that a person's emotional intelligence never stops growing. Because we are always evolving as people, EQ is something that must be nurtured. If it isn�t cultivated, emotional intelligence will disappear.

### Review on "Free cash flow and shareholder yield" by William Priest and Lindsay Mcclelland

I devoured "Free cash flow and shareholder yield" by William Priest and Lindsay Mcclelland in 2 days.

To be honest, I'm very surprised at how much I 'eat' books these days. It's almost an addiction to learning new things. This book is very interesting, not because of the free cash flow and shareholder yield part, but because of the prediction it had made for US. It talks about the housing bubble, liquidity bubble and hedge fund...three problems that will cripple US economy in the near future. In other words, the two authors had predicted the subprime issue way before the situated became what it is today. I came to understand why the subprime issue is going to be the greatest bubble that US had to face since the dot.com era. It's interesting to see how it all turns out to be exactly the way it is described. Great foresight!

Free cash flow means that cash flow after adding in depreciation, after accounting for changes in working capital and after subtracting off capital expenditure (capex). In other words, these cash flow are free in the sense that the company can use it to do anything to enhance shareholder's value. Specifically, the company can opt to do the following:

1. Pay cash dividends
2. Repurchase outstanding shares (i.e. share buyback)
3. Reduce outstanding debts
4. Engage in merger and acquisition (M&A)

The first 3 options are known as shareholder yield or shareholder's growth, simply because they increase the value of shareholder. Option 4 and 5 are collectively known as firm growth. It makes sense to think that if the two firm growth options is not equal or greater than the current average cost of capital, then capital should be returned to shareholders instead.

These are the following requirements to build a portfolio based centrally about shareholder yield.

1. An exceptional, robust current cash dividend yield (about 4.5%). Yield should compare favorably with long term bond and greater than that of global equity indices

2. Must be consistent dividend growth - a trailing 3 year compound annual dividend growth rate of 3%

3. Should display enough diversification across countries, across sectors

4. Portfolio is balanced in such a way to reduce risk and to provide a minimum of variance around a portfolio's mean expected return i.e. the much debated beta concept.

I don't really subscribe to the modern portfolio theory, even though point 1 and 2 is a good guide for me.

To screen stocks to fulfill the above requirements, this is what had been suggested:

1. Screen stocks that display 4% or above current dividend yield. 4% is a figure they give, though they emphasize on comparing with alternatives

2. Stocks must have positive operating cash flow growth over the past 5 years

3. Find companies that have increased dividends in more than 50 percent of they years in their available data. It's important that the most recently dividend history possess three or more years of increasing dividends.

4. Cash from operations should exceed dividends over a trailing 3 year period. This is to ensure good dividend coverage (meaning operating cash flow is enough to cover the dividend given out)

5. Find companies whose dividend is 'sacred'. This means that the companies have not cancelled their dividends at any point within their available financial history (20 year max)

Interesting book indeed. There's a lot more that I didn't review though, but those interested can always find this book in the national library.

## Tuesday, February 05, 2008

### Comments on Informatics and Aztech

Quite a number of companies are giving their reports today. I'll comment on a few which I found interesting:

1. Aztech

Turnover 2007: S\$268.31 million (up 12%)
Gross profit margin: down 7.5%
Net profit 2007: \$18.18 million (down 9.3%)
Net margins: down 1.6%

From this 3 figures alone, we can see that Aztech faces rising COGS even though the turnover is increasing. They mentioned it's the twin effect of rising labour costs over at China and the appreciating RMB that causes the cost to spiral upwards. This eroded their gross margin from 50.11% to 46.33% and their net margins from 8.4% to 6.8%.

Looking at the turnover by region, north and south america takes up 38% of their turnover, which makes their situation slightly precarious. Given the situation at US now, consumer demand might not be sustainable in the near term, hence I would expect their turnover to slow down after rising for 4 years with a CAGR of 20.8% since 2004 to 2007.

I saw their capital expenditure rose up 166.1% from FY06, so I did some checking. Realised that they had spend 8.9 million on a Shenzhen office, 3.8 million on cost of new SMT lines. These two costs chalk up most of the increment in capex in FY07. To improve their margins, they can do a lot to trim down on COGS. The latest high speed SMT lines are more automated, hence less reliance will be on workers (with their rising RMB wages). They are also hedging some fixed amount of US dollar against SGD and RMB. I don't know what is meant by that though.

I still remember that Aztech is venturing into construction materials. At that point in time, I was thinking that perhaps the margins are eroding (due to the nature of the industry)...and so it is. I suppose that is how they plan to maintain or improve their net margins.

2. Informatics

Informatics achieved break even in 3Q FY08 with a net profit of \$0.03 million for the first time in the last seventeen quarters (5.25 years). The 3 financial statement are depressing.

- operating revenue drop by 5% comparing 9 mths
- staff costs reduced by 11% comparing 9 mths

Seems like informatics is reducing cost to improve its margins. There is only so much we can do to reduce the cost, eventually the margins have to come from improving revenue. They mentioned that their revenue is affected because of ongoing consolidation of M'sia operations. UK operations is showing growth, and they are opening new recruitment centres in M'sia, Vietnam and China. It remains to be seen if their strategy is able to pull more students in to increase their revenues. Until then, let's watch.

Haha, wanted to do some comments on Tiong Woon, who achieved a half year net profit which is 49% up from previous year. However, reading financial statements is soo tiring. After just browsing informatics and Aztech, I think I have enough for today. I do hope my hardwork will be rewarded one day. I still remember the pain when I first started on TA, reading countless articles and books before starting to see some light. Well, I'm going to repeat that for FA.

Wish me luck :)

### CAGR

Today I learnt much about CAGR.

No, it's not a new brand of cigar. CAGR stands for compound annual growth rate. It's a nifty mathematical formula to calculate the rate at which an investment grows linearly in a given period.
It all springs from the basic future value/present value equation:

Future value = Present value x (1 + i)^(t)

where i - interest rate compounded per per year
where t - time in years

Appropriate adjustment can be made if the compounding period is less than a year. Just change the appropriate figure for the time.

I saw CAGR all the time in brokerage report, yet I do not understand what it is until I was forced to come to terms with it while analysing some presentation materials for china milk. It helps that prior to that, I was reading intensively on a lot of books that give calculates the growth rate for their investment using this method (though they might not call it by the same name).

A good example should be able to illustrate the finer points of the formula:

Let's say that in 1st Jan 2005, I started my investment portfolio with \$10,000
In 1st Jan 2006, I made a loss, so my portfolio drops to \$8000
In 1st Jan 2007, I recouped my loss somewhat and my portfolio stands at \$9500
In 1st Jan 2008, my portfolio ends at \$12,000

To calculate my CAGR, I just plug it into the formula:

Present value = 10,000
Future value = 12,000
time period = 3 years

i or CAGR = 6.27% compounded annually

When CAGR is used, one must be careful of the assumptions behind the formula:

1. The maths of the formula assumes that the value of the investment is increasing steadily from an initial value of \$10,000, compounded annually for 3 years to reach \$12,000

Based on CAGR of 6.27%, my linear returns are as follows:

1st Jan 2005 - \$10,000
1st Jan 2006 - \$10,627
1st Jan 2007 - \$11,293
1st Jan 2008 - \$12,001

As you can see, this is vastly different from the actual portfolio returns I have at the start of each period. Therein lies the problem...CAGR does not take into account the stability of the portfolio value. CAGR cares more about the destination rather than the journey to reach it. In other words, a CAGR of 10% can be more volatile than a CAGR of 10% in another investment. One still have to look at the year to year figures to see it one can stomach the ups and downs of the value, given the same CAGR.

2. For calculations of CAGR, the time period have to be the same. Otherwise, there is really no basis for computation. For example, if I want to find the value at 5th May, 2008, it's hard. We can make a linear extrapolation to generate the results, but seriously it's pointless because CAGR assumes a linear trend, which doesn't really happen in real life. Manipulations can be done to compare quarter to quarter, half year to half year or annually period to get different CAGR to amplify one's point.

3. The formula also does not take into account of what happens when I inject another sum of capital on top of the initial amount invested.

Let's say that in 1st Jan 2005, I started my investment portfolio with \$10,000
In 1st Jan 2006, I made a loss, so my portfolio drops to \$8000
In 1st May 2006, I injected another \$5000, into my portfolio and it ends at \$14,000
In 1st Jan 2007, I recouped my loss somewhat and my portfolio stands at \$13,800
In 1st Jan 2008, my portfolio ends at \$15,500

How to account for that? I do not know yet. Perhaps CAGR no longer applies, and I have to calculate my rate of returns instead.

One can also extend this argument to a company. If I want to calculate the CAGR of revenues coming in for a period of 5 years, and in the period the company bought more assets which can be used to generate more revenues...CAGR no longer makes sense anymore. What to make of this? I do not know.

---------------------------------------------------
** Here, I would like to appeal for help to enlighten me on this issue. Any comments will be answered and thanked for!

Steadybull mentioned a very interesting insight...that of using EPS to calculate and compare one's return, where earnings refer to capital gains (loss) plus dividend received. By doing that, the EPS will be automatically reflecting any changes in my working capital (i.e. if there is an injection or withdrawal of funds). Perhaps one can do an EPS annually, then do a CAGR on each of the EPS for the period to be calculated.

But I foresee 2 problems - one is that the problem of different period won't be solved if I use EPS. Second problem...what if there are 'negative' earnings? Meaning that there are capital losses?

There should be a more elegant way to dealing with this.