Monday, March 31, 2008

Free books from wallstraits!

I chanced upon the wallstraits website today while searching for celestial for my blog post. Happened to see this little pop quiz in their main website, with the teaser that you'll get a free book if you answered the not-so-simple quiz.

Haha, they are not kidding, the quiz is so hard! (I suspect that some answers that are supposed to be correct are in fact wrong!) Nevertheless, I tried both of the quiz and managed to get 2 free books as they promised.

Step 1:

Step 2:

Step 3:

Hee hee, let's see if they really gives out the book in a weeks time :) If they really sent it, I would have won a cool $45.80 worth of books :P I quite like the Professor Sage's series of books as it catered to local context, so I do hope I'll get both of them for free :P

Go try it, no harm right?


Was browsing through sgx announcement during lunch time when I saw that Celestial annual report is out, so curiously I took a look at it. Celestial is a leading manufacturer of soy protein-based food and beverage products in Heilongjiang.

I wasn't going to look through the whole thing, just looking at the main figures which I thought was interesting.

1. COGS as a % of revenue for 2006 is 55.7%. That for 2007 is 61.0%. That's not a good sign. Possibly Celestial is being held hostage by the rising soy bean prices. They mentioned that soybean prices rose by 24.6%, but it seems some of their measures to control cost is good, otherwise, I believe the COG as a % to revenue will be even higher. The good thing is that their products are not essential food staples, hence are not affected by the policies imposed by PRC govt to curb inflation. They plan to increase their selling prices and that will really be a good test to see if they have pricing control - a sign of economic moat.

Gross profit went from 44.3% in 06 to 39.0% in 07. Net profit margin goes from 31.9% in 06 to 23.3% in 07.

------------------Financial leverage-----asset turnover-----net margins-----ROE

Financial leverage seems a bit too high. They stated on their annual reports that their gearing dropped from 87.5% in 06 to 75.1% in 07. That's scary and probably that's the factor that drove up their ROE to over 20%, which is quite good. I didn't check their past reports, but I would start to get interested if the business generates 15% to 20% ROE and above consistently over at least 5 years.

Their total borrowings in FY06 is a 1.22 billion RMB (total equity is 1.40 billion RMB, operating cash flow 0.28 billion RMB). Total borrowings for FY07 is 1.32 billion RMB (total equity is 1.75 billion RMB, operating cash flow 0.45 billion RMB). Are they over stretching themselves with too much debts? Funny thing is that they hold nearly 1.65 billion RMB in cash and equivalents, earning an effective interest rate pa of around 1.67%, while the effective interest rate of total bank borrowings is 7.99%.

It's almost like borrowing money from loan sharks then putting them in savings banks to earn interest. Well, they better have good use of the money, because that will be huge cost to them.

3. I think celestial is worth at least $1.50. At current price of $0.655 and EPS of $0.13 it is trading at a pretty undemanding 5 times FY07 earnings. With net asset value of $0.55, I'll feel even more comfortable buying at that level. There's a support around that level too.

Oh, almost forgot to mention, at current price, there's also a dividend yield of 3%. Could be one off, since they didn't state their dividend policy clearly. So if I were to buy, I wouldn't be attracted by their dividend only. This seems like a BATA stock - Buy And Throw Away (after the inflation storm and food scare eases off and the price escalates).

Haha, I'm such a cheapskate :)

Sunday, March 30, 2008

I lie to statistics!

Didn't know that my post on 'Statistics lie!' generated quite a healthy discussion on what is fair and what is not.

My aim of the post is to highlight the fact that statistics are used to show and highlight what the person intends to say - or to add weight to what had already been said. As such, there really is no fair way to represent statistic without the risk of misleading someone. Though I say that, there are plenty of ways to confuse and obfuscate the casual reader and it is these that we must really be careful.

A case example to note: There are people who say buy and hold is good. Warren Buffet buys and hold, and he is a good example of person who buys and holds stocks. To add weight to this statement, the person might quote him saying that he said his timeline for holding stocks is forever. But the fact is that Warren Buffet didn't buy and hold ALL his stocks forever. And those who recommend the buy and hold strategy sometimes forgot to mention buying GOOD COMPANIES at FAIR price with a MARGIN OF SAFETY. Also missing is that one must check and update if the reasons for buying it in the first place is still there.

So be very careful of what others say AND didn't say. I'll actually pay more attention to the latter than the former. People can similarly use statistics or graphs to show what they want. It's quite easily done actually.

Back to statistics... I calculated a ratio to see how the trends of fuel oil prices and electricity tariffs are like. The ratio is calculated like this:

Ratio = Electricity tariffs (cts/kWh) / Fuel oil price ($)

By using this ratio and watching how it varies with time, I hope to see a clearer picture. Using the ratio, one can see how electricity tariff changes as fuel oil price changes. Here's what I get when I plot it out:

Interesting huh? Seems like electricity tariffs per fuel oil price drops over the years. Does it mean that we get a better deal now then before? Haha, well, it's up to you to analyse it :) My point now should be clearer - is all that you see a lie? Be skeptical, not cynical :)

Thursday, March 27, 2008

Statistics lie!

I've always told my students - statistics lie.

I'm amazed at how subtle little massages to the data or even to the way the data is presented can create an illusion that conveys to the reader what is intended. While reading the newspaper today, I came across this little notice on the straits times that the electricity tariffs are going to go up again. Usual suspect for the rise in tariffs - high fuel price. It then proceed to put a table, after which a chart is drawn.

Guess which one of the 3 below is shown in the straits times?

I copied the data and put it on an excel spreadsheet. While the data values remain the same, the scale of the graph is different for all 3. Hence, for anyone who didn't take a closer look at the scale of the graph, they would have made some major error in their quick perusal of the charts.

1. In the first chart, it seems that the electricity tariffs are shooting up faster than the fuel oil price.

2. In the second chart, it seems that the electricity tariffs are climbing as fast as the fuel oil price, but resting slightly below it.

3. In the third and last chart, it seems that electricity tariffs are pretty constant while the fuel oil price fluctuates wildly.

No prizes for guessing which of the chart above is used for the straits times :)

Friday, March 21, 2008

A rose by any other nicks would smell as sweet

There are a lot of nicknames out there. It's just out of randomness that I decided to classify them according to noun, verb, adjective and adverb. My English isn't that good, so I only know there are these 4 categories of words. Heck, the definition below might not even be encompassing. Of course, there are other connective words like 'the', 'and' and so on, but let's not worry about them. Haha, I'm just doing this for fun :)

First of all, a brief description of each main category:

1. Noun - these are words that describe an object. Cat, dogs, paper clip, me, you, Peter are all examples of noun.

2. Adjectives - these are words that describe a noun and add depth to the noun. Black cat, lazy dog, rusty paper clip, silly me, funny you, dashing Peter are examples of adjectives.

3. Verbs - these are words that describe action. Running, walking, swimming, waving are examples of verbs.

4. Adverb - these are words that describe more about the action and add depth to the verb. Running quickly, walking briskly, swimming haphazardly, waving frantically are examples of adverb.

Here it goes:

Noun - I found out that there are plenty of nicknames which belong to this category. Steadybull, la Papillion, guest, bug, HH, KK, musicwhiz, cookieguy, noob, stupidbear, charlesming.

These people presumably wanted to portray a certain kind of idea or object that they are aiming towards, or they use the nicknames to describe themselves as they already are. For me, la papillion (french for butterfly) signifies a metamorphosis from a a newbie to a pro, or from TA to FA. I want to portray myself as changing drastically, something like from a caterpillar to a butterfly. A complete transformation yet an integral part of the whole cycle of life.

Adjectives - There are less people using adjectives but it's still possible to find. Grey is one. Stupid can be an adjective or a noun.

You are such a stupid person (adjective).
Hey stupid, come over here (noun).

I'll treat stupid as an adjective.

7777777 is an adjective too (though it can be a noun as in an idea. Seven 7s could be lucky to him, hence the seven 7s could be a idea, a symbol to him, hence acting as a noun). Like 500 eggs, or 20 burgers, the numbers are used to quantify or describe the noun (eggs/burgers). I saw a g01den from cna forum too, but it's definitely rare compared to nouns.

People who use adjective must be more concerned with concepts or details. Perhaps they have an idea of who they are, but somehow the quality of that idea is more important that the idea itself. As the saying goes, the devil lies in the details. Hence by choosing an adjective yet omitting the noun, these people are more concerned with the details regarding the object rather than the object itself. Seeking to differentiate themselves by focusing on details?

Verb - Very rare. I've only got one -Decipher. To decipher is to read or to interpret. Interpret what? Most likely market trends, market outlook etc.

Probably someone active would use verbs as their nicknames. I don't see a nicknames that goes like swim, read, jump or cry, have you? Not enough data to analyse :)

Adverb - I haven't seen anyone with the nicknames quickly, faster, steadily, crazily etc, have you? This is worth studying...why don't people give themselves adverbs as nicknames? Perhaps you need a verb in order to quantify it with an adverb. Without the verb, an adverb by itself is useless. For example, quickly. Quickly what? Hmm, very interesting, since I don't see another with such nicknames. Whoever had adverb as a nickname must be truly special and unique in his/her thinking.

Interesting isn't it?

Wednesday, March 19, 2008

Synear - profit guidance

Synear released a profit guidance for its upcoming 1QFY08 results. It's good that they update investors of any news that crop up, so that expectations can be managed. Here are the key points:

1. Sales is for 1Q08 is expected to be 10% lower than 1Q07, though higher than sales in 4Q07. This is due to the snowstorm in Jan 08 which had affected the transportation and sales of the Group's products to southern China.

4Q07 revenue is 595,609,000 RMB
1Q07 revenue is 719,923,000 RMB

Management is expecting 1Q08 sales to be between 595,609,000 RMB to 647,930,700 RMB.

2. Cost of sales continued upward trend in 1Q08. The group intends to focus on their premium brand products with higher prices to mitigate the drop in margins. Looks like synear is being squeezed on top and bottom.

3. Expenses due to advertising will be increased to create brand awareness. Short term, this will depress net margins further. But I think management did a good move - with proper branding, they will create a moat that will ensure long term success. It'll be truly disappointing to see them cut expenses due to the difficult circumstances they are in just to see a good quarterly report card.

4. New plants at chendu is back on track with a utilization rate of 30% in 2008. Trial operations begins by end of march 2008. With higher utilization of their assets, we could potentially see a higher ROE since they would have higher asset turnover. But dropping net margins might neutralize this partially or fully.

Lastly, management concluded by saying fundamentals remain intact. Demands for their products are still strong. Well, that remains to be seen. Let's see how the 1Q08 results work out.

Tuesday, March 18, 2008

Macro economics is interesting!

As you've probably noticed, I've started to post less and less in the blog. Why? I've simply got less and less time. Actually, there's nothing much to talk about from the daily fluctuations of the market anyway. I've been reading intensely (as always, since the start of this year) and I've learnt a lot of things. I'm just wondering why I didn't start this intensive reading program of mine earlier, so I can compound the knowledge sooner

I started reading this excellent book, titled the 'Concise guide to Macro Economics' by David A. Moss. The slick black colour attracts me to at first, and after browsing through a couple of pages, I thought this is a must read for everyone who don't have a background in economics.

It's pretty short, hence the title concise. It skipped all the maths/equation parts about economics and zoomed in right to the principle and general understanding of it. It really opened up my eyes. I wondered how I lived my life so far without knowing what's the different between nominal, real GDP, the components of GDP, how depreciating USD to SGD doesn't always mean USD goods are cheaper etc.

Frankly, I've not read through the whole book but the knowledge I got from it already widened my worldview. For example, just now when I was cashing out my ERS, I noticed the dividend rate is given as 3% plus real GDP. Haha, my eyes opened up when I saw 'real GDP'. Books always gave me this feeling that my mental eye can roam further and see deeper.

Of the most important things I've read so far, I realised that the FED isn't the only one who can increase money supply. Banks can do that too. Assume that the bank's reserve ratio is 10%. If I deposited $100 into the bank, based on the reserve ratio, the bank can lend out $90 and have to keep $10 in the bank. Well, if I still have my $100 and someone had $90, then money supply had increased from $100 to $190, an increase of $90. Well, of course, it doesn't just end there. If that someone used it to buy some goods and the person sold the goods for $90 also deposit it into the bank, then the bank can lend out another $81 out, increasing the money supply further.

Okay, this bit is from my knowledge of geometric progression (GP). The amount of money forms a GP with first term as 100 and ratio as 0.90:

100...90...81...72.9...65.61...59.049... and so on ad infinitum

If we assume that everyone downstream puts the money into the same bank and the bank reserve ratio do not change, then taking the sum to infinity of the GP will lead us to $1000. I found that this is exactly the same as the formula quoted:

Money multiplier = 1/(proportion of leakage)

If the reserve ratio is 10%, then leakage is 10%.

Since initially I deposited $100 and the money multiplier is 10, the money supply increased to $1000 (100 x 10), exactly the same as what is calculated by my sum to infinity of a GP. Hence, we can see that banks can also 'print' money by taking deposits and lending out. What is amazing is that this supposedly highly leveraged position is the core business of banks, since they charge interest for the money loaned out. Can you imagine how much interest my $100 can generate for the bank?

If there is no credibility in the bank, people will start to withdraw their money all at once, causing bank runs. This is where other banks or the central banks have to lend money to this particular bank, in order for them to pay the extra $900 generated from my initial $100. If nobody wants to lend to this bank, the bank goes bankrupt.

Besides being amazed by the potential lucrative business in running a bank, I start to see the whole picture of Fed's action. This is no doubt helped by Stupid's excellent insight into L&S behaviour. By printing and injecting more money into the money supply, by making open market purchase into private financial institutions, by lowering the discount rate that FED lends to banks...they are employing all the tools of monetary policy. What's their aim? Definitely not to control inflation. This huge inflow of money will lower short term interest rate, possibly increase long term rates and in turn increase short term rates when inflation sets in. As Stupid mentioned, this inflationary environment is planned so as the assets being writedown will not go down so fast, creating an illusion that the situation is under control. This can happen since the assets are marked down to market value, and thus nominal and not real.

All this from reading just a concise guide to macro economics. Can you imagine how much insight I'll gleam from reading a not so concise guide? As they say, knowledge is power.

Friday, March 14, 2008

Self analysis of tuition business

I thought it'll be interesting to analyse the business that I am now in - tuition. Specifically, I wanted to do a little more thought on the risks and economic moats relating to a private tutor in Singapore.

Here's the business risks about private tuition:

1. Low entry - there is no regulation nor certification needed to be a private tutor. Some of the stories I heard even involved people faking degrees and certs to have a better chance for assignments. Basically, tuition is one of the main thing that students/working adults do part time to boost their income.

2. Depending on the target segment, the tuition service is deemed to have little value added and is based primarily on price. This means that whoever provided the cheaper tuition rates will get the assignment, though I stress that this is only for certain target segment. Seems like little pricing power by individual tutor, since there are so many tutors around.

3. Hard to stand out - Advertising isn't too effective, unless it is consistent. Might have to rely on network of tuition agency, who will suck 50% of the first month pay of the assignment they passed over to you. Though there are free networks with no fees paid, there will be many people signing up for this network, hence net effect is still the same - hard to stand out.

Economic moat - pretty much non-existent. But really?

There is this powerful economic moat that can be established for this business, which is the networking effect. This effect is the reason why e-bay or microsoft OS is so hard to break through. How does this work?

Let's imagine a tutor is very good in what he is doing. Due to the low entry of tutors, there will be a lot of bad tutors around who are more interested in making a quick buck. As such, the percentage of better tutors are quite low. Once this good tutor manage to convince the parents and student of his capabilities, this family becomes a living advertising node of this tutor. Let's suppose that this family just introduce one new student to the tutor, very soon over a period of time, there will be a lot of advertising nodes for this tutor, all acting to introduce to their relatives/friends about this good tutor. Hence the networking effect works in two ways:

1. The number of students recommended will increase exponentially to the point that there will be too many students and too little time.

2. The student come with the mindset that this tutor is already good in teaching, hence there is less effort needed to impress and win over their hearts. It is positively biased towards the tutor.

When demand exceeds supply, the tutor will naturally gain pricing power over the rates charged. Not only that, a lot of families will also go out of the way just to have this tutor, hence again the effect of positive discrimination towards the tutor. By this same networking effect, there is no need for find agencies to recommend students and be subjected to a commission of 50% first month pay.

Another way to counter the price competition is this: look for another target segment that are not so price sensitive. Tuition service should not be a commodity and if one is providing this as if it's one, then of course pricing will have to be competitive. There are a certain group of people who do not mind paying a premium for quality educational help and this is exactly the type of people to target when choosing students. Tuition pricing is interesting - the cheaper it is, the less value you will add to the students since they feel it's cheap and hence will not value the service accordingly. Perception and personal branding is important here, as in all types of service industry.

Let's take a look at the factors that will determine the earnings growth.

Earnings growth factors:

1. Have more students (increase volume)
2. Charge a higher price (but not high enough to reduce the student intake significantly)
3. Teach more subjects, develop content (diversify revenue streams and cash flow period)
4. Teach in a group (charge cheaper but have more students to make up AND save on time)
5. Acquisition (buy over other people's time in exchange for passive income - save time)

The ultimate is to boost earnings through no.5. By doing that, one can achieve financial freedom and not use one's time to exchange for money.


1. There could be more regulatory control on tuition. Perhaps a license to operate as a independent tutor will be needed in the near future, something like that of a broker or insurance agent/property agent.

Impact: It's even better to regulate this industry. Less competition on all fronts and more serious tutors around. Better for both tutors and students alike.

2. Less children born could mean that parents will be more willing to spend a greater part of their income on education for their children. With more parents having 1 children, the propensity to spend on them is higher than for a family of 2/3 children.

3. More education reforms will be expected. It's hard to anticipate the kind of changes that will be forced down the road, so it's always good to diversify the revenue streams. I always remember the time when MOE basically rendered chinese tuition services out of business by reducing the importance of chinese in major exams. With ample diversification in different levels, a tutor can have a long term survivability in the ever changing landscape. It's also important to constantly update oneself on the changes in syllabus. This said, the long term prospects of education is not going to diminish as far as one can see.

Moral of the story? Be very good in what you are doing, if not, don't do it at all. Life is too short for a half hearted effort in the things you do.

Thursday, March 13, 2008

Oh....this and that

I had a few thoughts in my mind today.

It had been raining profusely these couple of days. The rain comes with high intensity and long duration - the type of rain that carrying an umbrella will still get you 30-40% drenched. Since I had to travel on foot often, I thank god for my wonderful high cut boots (had a low cut shoe but haven't dry when I had to 'wade' through the rain on Tues). It is while having dinner in this wet weather that suddenly I thought of straits asia.

I had this company once but had sold it long before it reaches the price that it is trading at now. Today, I was thinking about its business and wondering if it had strong sustainable earnings. Not too long ago, Straits asia was badly hit due to a force majeure on their coal mines in Indonesia, resulting from the extremely heavy rain. Looking at the local weather these few days, it's hard for me not to think of their coal mines back in Indonesia.

I didn't do my due diligence, but I suspected that straits asia are held by forces beyond their control. And they can't do much about it. These are the 2 forces:

1. Bad weather condition affecting coal mining condition. If la nina strikes, the effect of a prolonged wet condition can last 3-5 years, then el nino will strike. Since they mine coal and sell them, their revenue had to be dependent on weather condition, resulting in a cyclical business wholly dependent upon weather conditions. Since no one can predict the weather ever since man start doing it, one can extrapolate this result and say that Straits asia revenue is also unpredictable.

2. Commodity prices will control the price that they can sell their coal. They should fix their selling price in advance, so at least in this aspect, they can control the price of their commodity for a short period of time. However, company's A coal is the same as company's B coal (let's not worry about the different types of coal and which type is more suitable for which purpose), as such straits asia cannot have pricing power over their coal. If they choose to charge a more expensive price, then customers can buy it from others who can do it cheaper.

Of course this is a simplistic situation. Straits asia can acquire a lot of mines so as to monopolise the coal supply at least in their immediate region, forcing customers to buy from them (since logistical support to transport the coal plays a part too) - thus creating an economic moat around them. This moat is obviously short lived since a mine can be productive for a limited number of years - beyond which, it'll be too costly to mine 1 tonne of coal than before. How long can a mine last? I didn't research on that.

To improve their margins, they have to control their costs. I believe mining is a high capital intensive operation with high operational costs too. I wonder how much cost they can cut on these grounds.

Based on my thought experiment, I find that straits asia isn't the kind of business that I would like to own. Care to know my valuation of it? In an idea world, it should be someway around the vicinity of 0.745, not the current 2.930 that it closed today. Based on FY07 earnings, straits asia is now trading at PE multiple of 81 times. This is considered not too bad, cos just a few weeks ago, it is trading at 120 PE. Crazy world huh?

Another thought I had today occurred when I was reading a book in the library. Now, it wasn't the first time I heard of Mr.Market and his maniac depressive mood swings. But when I was reading it again, suddenly the proverbial light bulb in my mind lit up. I started to think about a world where business are valued at their proper prices in the market. Then I started to think about what might happen in such a situation

1. If business are valued properly, it will be an efficient market. In an efficient market, there is no chance to achieve above market returns. In such a situation, one just have to invests in as many stocks available as there is possible, so as to reduce the risks of having any 'dud' stocks that can go busts. The more diversification one has, the less risk. ETF is a good low cost option.

2. The stock quotes will only move significantly every time the company releases results. If the price move before the release of results, there can only be two outcomes. If it moves up, it's good news. Down - it's bad news. No ifs, no buts.

The above is ridiculous isn't it? So much about efficient market hypothesis and the idea of diversification so widely advised by financial planners. The market isn't efficient - at most I'll settle for fairly efficient. To acknowledge that fact is to agree that present economic principles are theories and ideal, and hence are at most a model to appreciate the forces at work here. To treat it seriously as a certainty is a folly.

I've always asked my students this: Newton's 1st law states that a body at rest will remain at rest, and a body moving at constant speed in a straight line will always move in that motion, unless acted upon by a resultant force. How does one know it's true? A body will never be at rest and a body is always acted upon by a resultant force. Just imagine a book resting on a table, it's not moving. Then earth is rotating, so the table found on earth is also rotating, which means the books rotates too. Earth rotates around the sun, the solar system rotates around the centre of the galaxy and so on. Nothing in this universe is truly 'at rest' and they are always acted upon by a resultant force.

Relativity overrides Newton's law. Why call it a law?

My overly active neurons are firing up so much these days :)

Tuesday, March 11, 2008

Yongnam clinched S$70 million contract in Delphi

Yongnam announced a contract stating that they won a S$70 million structural steel contract in Delphi. The contract is to build Delphi international airport terminal building and is expected to have favourable material impact on FY2008 earnings.

This contract is significant not only because of its size, but more because of the significance of breaking into a new market - India.

I mentioned in my last post on Yongnam that its 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, an equivalent total contract size of $38 million will make the net earnings equal to FY07. It's a rough figure, because I realised that not all the earnings from the contract will be realized in FY08. But having won S$70 million, I can look forward to a better FY08 results at this early start to Yongnam's FY08.

This brings the total order book for Yongnam on 11th March to be S$232 million.

With another S$181 million contracts, Yongnam can possibly beat FY07 earnings even with the write-back included. Let's see how it all works out.

Monday, March 10, 2008

Chicken curry noodle

When I go the the hawker centre to eat, I never fail to notice that when a 'hot' stall is there, there are similar stalls selling the same thing near it. One particular stall is selling this chicken curry noodle.

There are 2 stalls selling this item, each of them claiming they are the original one. Both have the food shows 'mark of approval' upon them, signifying that perhaps under a certain programme shown on TV, the host had rated their stall among the better food stalls. One of them even have photographs of famous celebrities pasted on the wall.

This is how a healthy capitalistic system will work. Good money will chase good business. Let's say that Stall A which is selling chicken curry noodle is have a roaring business. Initially their customers will queue up and want to buy their food. Their returns will be very high since they are the only ones selling this particular item that everyone seems to want to eat at the same time. Their customers growth rate will also increase over time. And food is subjected to fashionable whims in Singapore (think bubble tea, donut, chicken floss bread). People won't mind queuing longer and paying a bit more to get it since Stall A is about the only store to sell it.

Here's where things get interesting. Competitors seeing that Stall A selling chicken curry noodle is doing such a good business, want to jump into the business too to cash in on the current craze. Stores starting copying this original store, all the way down to the most minute detail (I'm talking about where the cook stands, how the chicken are arranged, the font of the store, name of the store etc). Customers who didn't follow the chicken curry noodle story and wanted to try it out will get confused. All the stores sound similar, sell almost the same thing (until you eat them - but some people can't tell the difference either) and what's more...their price can be cheaper too. Now, why would anyone who wants to eat this want to queue a longer line at the original stall A? It's even hard to tell who is the original stall at this point in time.

Stall A start losing business to its competitors. Why?

1. Zero or narrow economic moat. To me, all the chicken curry noodle looks the same. If I come up with a duck curry noodle, I'm sure others will copy my innovation and I'll lose the edge over others in due time. Fickle customers have no brand loyalty in this business.

2. If all looks the same, customers will choose the one with the best perceived value. Perhaps Stall A presentation of the food is better, perhaps stall B has a shorter queue, perhaps stall C give more meat. I'm sure all the prices will be the same in equilibrium, since competition will force them to cut price if a particular stall sells at a dearer price.

3. There is no value added besides the food. There is little/no service involved, since this is a hawker setting. The taste of the food and the price is what counts. In a full fledged restaurant with waiting staff, perhaps other factors like ambience, decoration, accesibility etc counts. But not here. If you lose out in taste, the price better be cheap. If the taste is good, the price can be higher, but not much higher since there are so many substitute products within the same vicinity. Customers can always choose to eat others. I can eat laksa too if there are too many queuing for curry chicken noodle, or if the price is too steep.

So what can stall A do to maintain a certain moat to prevent competitors from eroding its profit? I came up with a few crazy ideas :)

1. Be such a good cost cutter that stall A can sell the chicken curry noodle at super cheap prices; prices that other competitors are unable to match. Source out the cheapest raw materials supplier, buy in bulk, open multiple stalls to have economies of scale. Try to cut cost so that the price charged can be cheaper. Though profit margin is reduced, revenue can still be high due to high volume turnover.

Feasibility: Next to impossible in a hawker stall setting.

2. Come up with innovative customer retaining schemes e.g. a card with 10 blanks for customers to fill up when they order a bowl of noodles, upon filling to 5 and 10, they can get an extra bowl free of charge. How about making the taste so addictive that customers are unable to find another substitute even among competitors? Secret recipes for their curry gravy perhaps? Special techniques to make the chicken more tender and juicier?

Feasibility: Highly likely, esp the part about making it so delicious that customers 'have' to come back for more to satisfy their craving.

3. Advertise aggressively to create perceived value in their products. A good example is Tian Tian steamboat. Having seen the advertisement countless times every few minutes in tv mobile in the past, the steamboat eatery had acquired the brand consciousness. But advertising must be consistent and repetitive, and can represent a certain cost to a single stall owner selling chicken curry noodle.

Feasibility: Possible but unlikely for Stall A.

4. Hire hot babes to serve. Ever been to hooters? Well, I've never but I've heard about it and seen them in action. Beer promoters work on this principle too. Pretty daughters might work too (yes, I've seen it before).

Feasibility: Interestingly possible. But have to see if this added cost will bring about any real improvements in business. It certainly won't affect me.

I'm sure there are more. I'll love to hear more from people who have something creative to contribute :)

Morale of the story: Next time you buy into a business, think about the competitive advantage that the business have over others. Discover the economic moat of the business, if there are any. This will uncover the long term survivability of the business.

Friday, March 07, 2008

Rebirth of the Phoenix

It's becoming more and more apparent that we are entering a bear market. Volume starts to thin out, less buyers in the market, fall in prices more than rise in prices. I believe STI made a new low today...possibly going to find some reprieve around 2600 to 2700, as some had pointed out.

I think this is going to be a test on me. I am not confident of my investing, because my results do not show it. I'm still making quite a loss, due to my previous trading on longcheer and warrants. All these effort to reduce the magnitude of my's not a feeling easy to swallow. It doesn't help that almost all my counters went down below their purchase price, underscoring my lack of knowledge on the intrinsic value of business. Yes, I admit that I didn't know valuation then and I'm paying literally for the mistakes now.

Such is the price I have to pay for such a grave mistake committed in the past.

But one should not live in the past, nor worry too far into the future. The moment is now; what can I do so that I won't repeat the mistakes again? As a proverbial phoenix, the older me had passed on and turned into ashes. A new phoenix shall then reborn from these very ashes and so a new life shall begin for me.

Wednesday, March 05, 2008


Time to read more about Ecowise. Was quite disappointed with their investor relations since their website only provided 2 years worth of financial statements (which is the same for sgx announcement website) and one of the statements is actually truncated off. Looks like I have to rely on bits and pieces of information.

Let’s take a look at a few figures first. FY04 and FY05 have net losses. We’ll just see the latest three years to take note of the trend in the metrics.

COGS (% to revenue)-------65.7%----------46.7%----------43.9%
Gross margin------------------34.3%----------53.3%----------56.1%
Net margin-------------------(-11.2%)---------18.9%----------22.5%
Financial leverage-------------1.7----------------1.6-------------1.7
Asset turnover-----------------0.7----------------1.0-------------1.0

I saw a brief summary of their results in FY04 and FY05, both are losing money. Without any annual report, I’ve no idea why they are losing money. But let’s focus on the FY06 and FY07 where I have more information.

Here’s what I think:

1. Cost to goods sold has dropped tremendously from 65.7% to 43.9%. The management sited lower disposal cost contributed to this lower cost, thereby increasing their gross margins from 34.3% in FY05 to 56.1% in FY07. I wasn’t really satisfied with this kind of gloss over statement, but there’s not much I can do to find out more, given the sparse information from their website. Still, gross margin this high is pretty admirable. I wonder if there’s anything to compare with.

2. I realized that they had lots of ‘corporate activities’ like cash dividends, right shares and warrant issues. Really messed up the total number of shares outstanding, to the extent that I had problem deciding how many shares they had in a financial year. Looks like they needed lots of capital for something…I don’t know what. My guess is for their investment in a new crusher or their cogeneration plant…but I really don’t know since I can no longer find documents from sgx announcements website.

One interesting thing is that Ecowise had an acquisition on a company named Watertech Pte Ltd, which the founder later bought back (after citing disagreement for common ground and performance indicators). Ecowise made a net gain of $80,000. How come the discussion isn’t made properly before acquisition? So eager to get the company that there is not time to discuss? It’s fortunately that the founder of Watertech wishes to buy back at a higher price. Funny.

3. ROE increase seems to be driven by net margins improvements. At 22.5% in FY07, I think it’s a pretty good business. History is too short for me to comment much too.

4. Based on their financial leverage metric, it seems that Ecowise’s debt is rather stable. I calculated their Debts to Free cash flow for FY06 and FY07, it turns out to be 1.68 and 1.71 respectively. I hope their cashflow is enough to pay for their debts. Actually, the bulk of their FY07’s current liabilities is due to their trade and other payables (75.2% of total current liabilities), while the bulk of their long term liabilities comes from finance lease (78.2%). I don’t think there’s a problem paying off their liabilities at all, looking at their balance sheet.

5. Their revenue can be segmented into different business area, namely collection, processing, solutions and corporate. Let’s take a look:

** margin is based on profit before income tax as a ratio to revenues **

Margins (FY06)-------13.4%-----------14.6%----------13.6%-----------198%
Margins (FY07)------10.8%------------16.9%----------974%------------71.5%

** Due to eliminations, I can’t find the % of each business segment’s contribution to the total revenue **

If I’m not wrong, there are 3 new streams of revenue. I’m not sure if these are to be subsumed under the above 4 business areas. There is absolutely no mention of any plans by ecowise in their financial statements nor their website. I had to piece the information below myself, so I might be wrong.

a) Carbon credit sale – their wholly owned subsidiary signs ERPA with Kansai Electric Power Co Inc in Japan, for the sale of up to 95,000 certified emission reduction certificates, equivalent to 95,000 tonnes of carbon dioxide emitted into the atmosphere which would have been emitted otherwise. The ERPA will be for carbon credits generated from early 2008 until end of 2012.

Since ecowise is the first registered company to do such sale, I think it shows their expertise in this area. I admit, half the time, I’m not sure what they are talking about. I only know that Ecowise plans to leverage their expertise as a Clean development mechanism (CDM) project developer, whatever that means.

b) Their new cogeneration plant that can generate electricity and heat from renewable biomass like wood and horticulture waste. This new plant, if I’m not wrong, can be a new revenue stream as their can sell either the technology or the electricity generated. Okay, I’m not really sure, and I can’t find any information on it. But one thing for sure is that ecowise is using their own generated steam (for heating) and electricity for its production and process, hence reducing the use of diesel and grid electricity, hence their cost should go down even more.

c) Ecowise forms a JV with Holcim, one of the world’s leading cement and aggregates suppliers, to purpose of which is to maintain and operate an industrial materials recycling and processing plant to recycle and process used copper slag in Singapore. Joint research and development facility set up will also seek new alternative sources of fuels and raw materials towards sustainable developments in construction and building materials. I got to admit, this is their most exciting venture as the prospects could potentially be good. It is stated explicitly by the management that this is JV will be the cornerstone of their continued growth in the coming years. They are working together to create an eco-concrete for construction companies, amidst the high construction activity in Singapore. Processed copper slag can be mixed into ready-mix concrete as an alternative to sand. Sounds exciting.

Though I can’t find the exact contribution to the total revenue based on the 4 business segments, I can approximate it. It’s takes up a huge chunk of the total revenue for sure, with solutions and corporate forming a very small percentage. I’m wondering why in page 9 of their FY07 report that the eliminations is so high. Contract got cancelled? What happened? Even in FY06 too. No mentions ofthe high eliminations in both FY06 and FY07 by management. This is a red flag to me.

A few important questions:

1) Ecowise’s core business of collection of used copper slags and general waste for shipyards and fabrication yards in Singapore. It is stated that the collection fees are charged based on per trip basis or tonnage. Where do those ships come from? Will the ships be affected by a highly possible decline in demands over at US?

2) For their processing business, it is the recycling of used copper slag used for surface treatment by shipyards and fabrication yards. So again, will the possible decline in demands from US affect the shipyards/fabrication plant business, and in turn affect Ecowise’s revenue?

3) Is Singapore ready for the green evolution? Could this be a concept stock that won’t take off because others are not ready?

Just found out a bit more in addition to the above when I did a google search on Ecowise. Managed to dig out a summary of the IPO prospectus (from wall straits - wonderful site!) for Ecowise when it got listed in 2002. Here are the extra stuff I managed to dig out:

1. Directors have a profit sharing programe based on the profit before tax (PBT) per year.

PBT over $2.5m up to $3.5m:

* Sunny Ong Keng Hua: 5%
* Lee Thiam Seng: 3%
* Oh Kian Chye: 2%

PBT over $3.5m:

* Sunny Ong Keng Hua: 7.5%
* Lee Thiam Seng: 4.5%
* Oh Kian Chye: 3%

If it reaches $4m in a given year, total compensation for the three directors will be about $600,000. I think this will really motivate the directors to think in line with the shareholders as they have a direct stake in the company. I'm just wondering why their investor relations in their website is so bad as it reflects badly on the company for not wanting to disclose more to prospective investors like me.

2. Stated in their IPO prospectus is their business Model :

Future Plans Include:

* Expand its processing and recycling facilities (okay, done)
* Intensify its marketing efforts to promote the recycled products generated from waste management solutions (since their processed copper slag is doing well, i suppose they did that)
* Feasibility study to produce charcoal on a large scale (not that I know of)
* Licensing of waste management solutions (yes, it's part of their business, a small part)

Business Strategies:

* To provide waste management solutions
* To keep abreast of current recycling technologies and environmental practices
* To expand customer base
* To attract, train and retain experienced professionals
* To achieve growth through acquisitions, joint ventures, or strategic alliances

3. The following are the major competitors they cited:

* JPL Industries Pte Ltd (collection & recycling of used copper slag)
* Meng Guan Landscape & Construction Pte Ltd (recycling horticultural waste)
* Kiat Lee Landscape and Building Pte Ltd (recycling horticultural waste)
* Gold Green Corp Pte Ltd (recycling horticultural waste)

I doubt they are listed, though it means nothing except that it's harder for investors to gauge how strong their competitors are without access to their statements. I wonder what's ecowise competitive advantage over their competitors besides visibility due to their listed status.

4. Risk Factors :

* Operate in a competitive environment and if it is unable to compete favorably, results of operations will suffer
* Subject to regulatory conditions and license renewal
* Dependent on certain major customers
* Dependent on the local ship repair and marine industry
* Decline in the price and demand for recycled copper slag may erode revenue
* Increase in disposal fees charged by NEA
* Dependence on network of service providers
* Loss of key personnel will have an adverse impact on business
* May require additional funding for future growth
* No assurance that future plans will be commercially successful
* Exposed to credit risk and defaults in payment
* Dependence on the Singapore economy
* May not always have adequate insurance coverage
* Contractual obligations to provide clearance and disposal services at fixed rates under the term contracts could result in operating losses
* Failure to comply with the conditions in term contracts
* May be subject to fluctuations in foreign exchange rate which could lead to forex losses
* Subject to intellectual property risks
* Risks relating to the new shares

I think it's good to know the risk factors involved in the business to construct a convincing bear case. As I pointed out, there is a real dependence on the local shipping/marine industry for their core business of processing copper slag. A lot of external factors will determine the outlook for ecowise. Basically it's a concept company and hence risky business.

5. The following are their major customers, at least for the FY2002:

Keppel Group: 12.1% of FY2002 revenue
SembCorp Group: 44.0%
ST Marine Ltd: 12.0%
Toh Kim Bock CE Contractor Pte Ltd: 7.4%

Closely linked to the local shipping/marine industry, as they pointed out in their risk section. It might have changed a lot presently, but back in FY002, the local shipping/marine customers makes up like 75% of their revenue. That's quite unacceptable to me, knowing that shipping is cyclical. I do hope that presently in FY07/08, their revenue income is more diversified.


A severely lacking Investor relations in Ecowise’s website AND the sparse information given by the management in the statements PLUS the lack of a clear plan makes this little company a hard nut to crack.

Based on funny empirical formula again, I found out that the value of Ecowise is at 0.225. There is no way to valuate this company properly given the lack of information. I can be sure that the price will definitely go above the current closing price of 0.180 though. How undervalued this is, I’m not too sure. Given that my estimation of 0.225 is correct, 0.180 represents a 20% margin of safety, certainly not good enough for me. Call me greedy, I’ll like it more if I see 0.115 (representing a margin of 50%).

Tuesday, March 04, 2008

Reading this won't make you great

How many traits of a great investor do you have? A great article to see if you have the guts and mettle to be a good investor. I guess investing is equally relevant to life too. See how many you strike :)

Reading this won't make you great

Mark Sellers, founder of a Chicago-based hedge fund, argues that the best investors are born with particular psychological traits that others can never learn


WHAT makes someone a great investor? It's something you have to be born with, said Mark Sellers, founder and managing member of Sellers Capital LLC, a long/short equity hedge fund based in Chicago.

Apparently, it's not about your IQ, the education you've had, the books you've read, or the experience you've accumulated. 'If it's experience, then all the great money managers would have their best years in their 60s and 70s and 80s, and we know that's not true,' he said in a speech to a class of Harvard MBA students.

Intelligence and learning are obviously necessary too, and are sources of competitive advantage for an investor, but there are structural assets some possess that cannot be copied or learnt by others. 'They have to do with psychology and psychology is hard wired into your brain. It's part of you. You can't do much to change it even if you read a lot of books on the subject,' said Mr Sellers.

He said that there are seven traits great investors share that are true sources of advantage because they cannot be learned. You are either born with them or you aren't.

The seven traits are:

One, the ability to buy stocks while others are panicking, and the ability to sell at a time when other investors are euphoric. 'Everyone thinks they can do this, but then when October 19, 1987, comes around and the market is crashing all around you, almost no one has the stomach to buy,' Mr Sellers said.

'When the year 1999 comes around and the market is going up almost every day, you can't bring yourself to sell, because if you do, you may fall behind your peers.

'The vast majority of the people who manage money have MBAs and high IQs and have read a lot of books. By late 1999, all these people knew with great certainty that stocks were overvalued, and yet they couldn't bring themselves to take money off the table because of the 'institutional imperative', as Buffett calls it.'

Two, the great investor has to be obsessive about playing the game and wanting to win. 'These people don't just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they're still half asleep, is a stock they have been researching, or one of the stocks they are thinking about selling, or what the greatest risk to their portfolio is and how they're going to neutralise that risk.

'They often have a hard time with personal relationships because, though they may truly enjoy other people, they don't always give them much time. Their head is always in the clouds, dreaming about stocks. Unfortunately, you can't learn to be obsessive about something. You either are, or you aren't. And if you aren't, you can't be the next Bruce Berkowitz.'

(Berkowitz was a managing director of Smith Barney and set up his fund Fairholme Capital Management in 1999. Since inception, Fairholme Fund has returned 18.7 per cent annually on average.)

The third trait of a great investor is the willingness to learn from past mistakes. 'The thing that is so hard for people and what sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them. Most people would much rather just move on and ignore the dumb things they've done in the past.

'I believe the term for this is 'repression'. But if you ignore mistakes without fully analysing them, you will undoubtedly make a similar mistake later in your career. And in fact, even if you do analyse them it's tough to avoid repeating the same mistakes.'

A fourth trait is an inherent sense of risk based on common sense. 'Most people know the story of Long Term Capital Management, where a team of 60 or 70 PhDs with sophisticated risk models failed to realise what, in retrospect, seemed obvious: they were dramatically overleveraged. They never stepped back and said to themselves, 'Hey, even though the computer says this is OK, does it really make sense in real life?'

'The ability to do this is not as prevalent among human beings as you might think. I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should. They ignore common sense, a mistake I see repeated over and over in the investment world.'

Five, great investors have confidence in their own convictions and stick with them, even when facing criticism. 'Buffett never get into the dotcom mania, though he was being criticised publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship and Barron's was publishing a picture of him on the cover with the headline 'What's Wrong, Warren?'. Of course, it worked out brilliantly for him and made Barron's look like a perfect contrary indicator.'

Mr Sellers said that he is amazed at how little conviction most investors have in the stocks they buy. 'Instead of putting 20 per cent of their portfolio into a stock, as the Kelly Formula might say to do, they'll put 2 per cent into it. Mathematically, using the Kelly Formula, it can be shown that a 2 per cent position is the equivalent of betting on a stock which has only a 51 per cent chance of going up, and a 49 per cent chance of going down. Why would you waste your time even making that bet?'

The Kelly Formula arose from the work of John Kelly at AT&T's Bell Labs in 1956. His original formulas dealt with the signal noise of long-distance telephone transmission. It was then adapted to calculate the optimal amount to bet on something in order to maximise the growth of one's money over the long term.

Six, it is important to have both sides of your brain working, not just the left side - the side that's good at maths and organisation. 'In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn't write worth a damn and had a hard time coming up with inventive ways to look at a problem,' said Mr Sellers.

'I was a little shocked at this. I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses.

'On the other hand, if the right side of your brain is dominant, you probably loathe math and therefore you don't often find these people in the world of finance to begin with.'

So finance people tend to be very left-brain oriented - and Mr Sellers said that that is a problem. A great investor needs to have both sides turned on, he said. 'As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off.

'You need to be able to step back and take a big picture view of certain situations rather than analysing them to death. You need to have a sense of humour and humility and common sense. And most important, I believe you need to be a good writer.'

He cited Warren Buffett as one of the best writers ever in the business world. 'It's not a coincidence that he's also one of the best investors of all time. If you can't write clearly, it is my opinion that you don't think very clearly,' Mr Sellers said.

And finally the most important, and rarest, trait of all: the ability to live through volatility without changing your investment thought process.

This, said Mr Sellers, is almost impossible for most people to do; when the chips are down they have a terrible time not selling their stocks at a loss. They have a really hard time getting themselves to average down or to put any money into stocks at all when the market is going down.

'People don't like short-term pain even if it would result in better long-term results, he said. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk.

'This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss.

'But most people just can't see it that way; their brains won't let them. Their panic instinct steps in and shuts down the normal brain function.'

Monday, March 03, 2008


Since quite a lot of people are interested in Synear, especially the recent fall from heaven, and wondering if it’s a good bargain now, I thought I’ll be interesting to find out a little more about Synear. Synear doesn’t have a lot of history since it only IPO in SGX on August, 2006. I’m thankful for its investor friendly statements too – means that I don’t have to spend a lot of time reading fine print and such.

COGS (% to revenue)------68.6%-------------66.4%--------------67.8%------
Gross margin----------------31.4%------------33.6%--------------32.2%------
Net margin------------------16.3%-------------21.8%--------------21.5%------
Financial leverage-----------3.53---------------1.35-----------------1.16--------
Asset turnover---------------2.28---------------1.12-----------------0.70--------

There are a few things I noticed about Synear just by coming up with this table of comparison between the financial years:

1. Synear managed to control their costs, keeping it near 66 to 68% of revenue. As can be seen from their gross margin, it’s also a stable figure around the vicinity of 32%. It’s only depressing when one looks at the 4th quarter results.

COGS (% to revenue)----------64.6%-------------------------72.4%-------------
Gross margin ------------------35.4%-------------------------27.6%-------------
Net margin----------------------21.8%-------------------------10.7%-------------

While 4QFY06’s COGS is more or less in line with the full year FY06, it’s a different story for FY07. We can see that there is a huge difference between 4QFY07 gross margin of 27.6% and full year FY07 gross margin of 32.2%.

As mentioned by the management, the price of the Group’s main raw materials (pork, flour and packaging materials) have increased by an average of approximately 13% in 2007 as compared to that of last year. If we increase 4QFY06’s 64.6% COGS to revenue by 13%, we’ll get 73.0% (64.6 x 1.13 = 73.0), which is quite the figure for 4QFY07. Management isn’t joking when they say it’s 13% increment in raw materials!

2. Gross margin is kept nearly constant for the full year results, but again looking at quarterly results, the higher cost of goods sold reduced the gross margin from 35.4% in 4QFY06 to 27.6% in 4QFY07. Management did say that they raised their average selling price for their products by about 8% in April 2007 (2Q FY07).

Let’s review what companies can do to raise their revenue:

a) Raise the price of the products (which they did, by 8%)
b) Sell more products
c) Sell a new range of products
d) Growth by acquisition

a) They did raise the price of their products by 8%. However, this is still less than the price increment for their raw materials. Unless they can fill the gap by selling more, it’s hard to raise prices anymore since the products they are selling isn’t staple. I mean consumers can totally do without it if the price is too much for them to pay. That’s the bad thing about this food business – there is no discernible economic moat and too many similar products and substitutes. I don’t think price increment will go down well with consumers, unless their products are really different from their competitors (then they can charge a higher price for it).

b) They did sell more products.

From FY06 to FY07,

Savoury dumplings products---- sales revenue increase by 21.3%
Glutinous sweet dumpling products ----- sales revenue increase by 16%
Other quick freeze products ---- sales revenue increase by 18.9%

(% to the total sales)
Savoury dumplings------44.8%--------------45.0%---------------45.9%----------
Glutinous dumplings----38.5%--------------35.8%---------------34.9%---------
Other quick freeze-------16.6%--------------19.1%---------------19.1%---------

Take note that part of the sales increase is due to the increase in price and not the volume of sales. This increase must at least be partially attributed to the increase in the number of distributor from 515 to 604 in FY07.

We can see from the table above what is the trend that consumers like for their product mix. Their savoury dumpling products is getting more sales year on year, while their glutinous dumpling products isn’t that popular. In fact, their quick freeze products seem to be taking in more share while their glutinous dumpling products dropped. This is totally what I expected since I like savoury rather than sweet products, haha 

c) Management said that having a premium range of products increased their sales (page 12 from 4QFY07 result). I believe they are talking about their new pan-fried dumpling series and their premium “Shoudatianxia” series of savoury and sweet dumpling, which commanded higher gross profit margins. This shows that Synear do sell new range of products so that customers will always find something fresh in their product range. The good thing is that these new product range draws a higher margin, but whether people buy it is another thing (which I can’t tell).

Their FY06 annual report stated that Synear had acquired land to build a new product development centre in Zhengzhou, Henan Province. This new product development centre will work on improving existing products, improve production efficiency and product safety, as well as launch new and innovative products.

d) No plans for acquisition mentioned by Synear.

3) ROE drop is interesting. I’m waiting for the ROE to stabilize itself, maybe to around 10 to 15% into the future. We can see that the ROE drops because the financial leverage of Synear actually decline a lot in the past 3 years. They have less short term debts and reduced their long term debts to zero, which may or may not be a good thing.

Another factor that contributed to the drop in ROE is due to their decreasing asset turnover. There is tremendous spending in property, plant and equipment (PPE) and a big chunk of their total assets is in cash and cash equivalents. The increase in PPE (and land rights) is due to Synear’s plan for new plants in Chengdu city, Huzhou city and Guangzhou city, amounting to a total of RMB 383.4 million, offset by amortization and depreciation charge of about RMB 20.2 million.

I think ROE will definitely drop more as they had plans to relocate their production facilities out of the city area to suburban areas in Zhengzhou city. It’ll take about 4 years to construct, with the first phase of construction comprising cold storage warehouses to be completed within a year from Feb 08. The new facilities, termed “Synear Industrial District” will amount to about RMB 1,200 million. Basically, as long as the facilities can really boost up their revenues, I don’t see a problem with the drop in ROE due to low asset turnover. It’ll take some years (at least 4) to realize the potential of all these new plants.

Let’s take a tally for the $$ needed for future expansion

(a) Synear Industrial District – RMB 1,200 million
(b) Acquring land and building cold storage warehouse – RMB 310 million
(c) New production facilities in Shenyang city – RMB 180 million

Total amount = RMB 1,690 million
Net proceeds from placement of new shares in April 07 = RMB 1,140 million
Short fall = RMB 550 million

In RMB (million)
Net cash from operation-----397------------------290-----------------514-------------
Cash balance--------------------86-------------------822----------------1,153------------
% op cash to sales------------26.7%---------------15.6%-------------23.2%------------

It does look like Synear have enough cash from its operations to fund the short fall of RMB 550 million, perhaps with a little more long term borrowings from banks. Since they have no long term debts, perhaps borrowing is a better way to finance the expansion plants. I could be wrong, as I’m no expert in financing. As Synear mentioned, they will use the earnings generated from the Group’s operations and/or external borrowings.


Actually I’m pretty satisfied with Synear statements. I’m a little worried about their escalating cost (as shown in their latest 4Q results) and how they plan to overcome this cost. I’m also a little skeptical about how they can keep growing their revenue. Maybe their brand is more than what I think is worth, but it remains to be seen since their history is so short. Very satisfied with their debts and cash flow too.

Using my very quick method of getting an approximate value for Synear, I get around 1.14. (pls dun ask me how I get this value, as I said it’s very approximate and not tested fully, just empirically). I'll do a more detailed one maybe tonight.

I tried to work out some value for synear but realised that I can't. The reasons mainly due to the fact that the free cash flow for synear is not consistent as they are spending a lot on capex. Being unfamiliar with the industry and the business, the estimate I have is going to be very wide. Another thing is that they are in this expansion and growth phase, making the valuation hard too as their metrics are not stable (and I have only 3 years of data).

I'll stick to my rough estimate of 1.14 then. Applying 50% error margin, I think a good chance to buy is around 0.570. PE (earnings based on FY07, price as $0.665) is 9.4. PE based on my buy price of 0.57 is 8.0. PE based on my estimate of 1.14 is 16.0. Should be a real bargain if that price is reached. Do your due diligence as ultimately it's not my money!

9 to 5? I don't think so

Today, I saw a very wonderful website that inspires me. For a change, this isn't about investment or the stock market, but rather, it's a website that talks about freelancers - people like me!

Naturally I'm interested to see if other freelancers are facing the same problems as me :) I came upon this website as I was looking for a new wallpaper for my desktop. It's been quite a while since I last changed it, so I thought I'll go around looking for one. That's when I came across this website with its beautiful (and motivational) wallpaper. It's from this website called the Freelance Switch.

That little picture attached on this blog post is the wallpaper on my desktop. Motivational huh? :)

I'll carry on my 'sneak preview' on Synear tmr. I'm away for the whole weekend, hence I'm unable to work on it. Been real busy lately.