## Friday, August 29, 2008

### Scrips dividend

A fellow forum user asked me to explain the basics of scrip dividends. Here is my response. I thought that it's important to highlight this (even though the question is on MIIF) because one of the companies that I have partial ownership on - Pac Andes - is also going to do scrips dividends.

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There are two ways that companies can distribute cash - one is through cash (the normal route) and the other is through scrips dividends. I have the fortune of investing in two companies that offer scrips dividends, so I have a little bit of experience dealing with both.

Scrips dividends works like this basically:

1. Pays you the dividend in cash, but instead of you taking the cash, they buy more shares for you using the cash distributed to you from the dividends. The formula works like this:

New scrips obtained = (number of shares held at book closure date x amount of dividend distributed per share)/Issue price

2. To buy the shares using the dividends distributed, they have to use an issue price to buy. For the case of MIIF, the issue price is the arithmetic average of the daily volume weighted average price of a MIIF share during the pricing period of 5 market days from 29th Aug to 4th Sept inclusive. You do not have to do the calculation yourself, as they will issue another statement of the actual issue price on 5pm, 4th sept.

For some companies, in order to entice shareholders to subscribe to scrips dividends, they will offer a discount to this issue price. But for MIIF, there is no such discount.

To illustrate, let's say you are given a dividend per share of 0.20 cts per share. You held 10 lots at book closure and the issue price is \$1.15.

No.of scrips obtained = (10,000 x 0.20)/1.15 =1739.13

Since the scrips are usually rounded down, you'll get 1739 new shares, making your total share holdings at 11 lots 739 odd shares.

(for hsbc, the rounding is carried forward to the next interim. So, the 0.13 not 'used' will be added to the next round of scrips dividends. I doubt MIIF practise that as it's a major admin problem)

3. You can opt to take part cash dividend and part scrips dividends, by putting in the amount in the form that they will send you.

Possible impact

1. As they offer scrips dividend, they will have to dilute their shares outstanding slightly by issuing more shares. If you didn't subscribe, your ownership of the comany dilutes a little. If you subscribe to the scrips, then there is no change to your ownership.

2. Subscribing it will subject you to having odd lots. Might make it harder to divest your shares as the odd lots have to be sold in unit share market or through broker only. For long term investor on the company, it is not a problem.

3. Subscribing will compound your returns on the company better than if you reinvest the dividends yourself from open market purchase and there are no brokerage costs incurred. However, in open market purchase, you can decide the price and time (and amount) to invest, whereas for scrips, they will determine everything but you do not have to pay for brokerage.

For more reference, you can refer to musicwhiz's blog on pac andes, as they are also issuing new scrips soon. It's the post dated 9th July, 2008

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For Pac andes, the issue price is 0.44 per share, with no discounts to it. I'm supposed to return this form "Scrip Dividend scheme - notice of election' to them by 5pm, 4th Sept, 2008, if I opt to receive shares instead of cash. If I do not wish to obtain shares and opt for cash instead, then I do not have to do anything at all. There is also an extra option to choose shares for all future dividends in the form.

Since the market price of Pac Andes currently is 0.365, I doubt there is any advantage of subscribing to scripts dividends. I suppose most other investors would choose to do the same as well, as the price difference between the issue price of 0.44 and the market price of 0.365 is simply too huge to offset the benefits of not paying commissions.

As such, my decision is not to do anything, which means I'll be taking my 2.07 cts per share of dividends :)

## Wednesday, August 27, 2008

### Falling wedge formation

Doing this for a friend who asked me what is the meaning of falling wedge formation.

It's true...there is a falling wedge formation, awaiting confirmation. If it breaks green line (esp with heavy volume), then bullish confirmation is confirmed. This means there is more upside. I think this is quite likely. It's possible to reach up to 3010. If it breaks red line, then bullish signal becomes very very bearish sign. I think it's unlikely, but if it happens, then we might see 2400 level.

## Sunday, August 24, 2008

### FJ Benjamin FY08 results

FJ Benjamin released its full year results for FY08 recently. I’m not interested in this company though I’m interested in the business. I followed this company since a number of forum friends had or once had vested interest in this company, so I’m doing it for the intellectual challenge that it might pose.

The press release as usual gave a very clear summary of how FJ ben is doing. The headlines mentioned about the 33% increment in turnover year on year, while the net profit (excluding exceptional items) went down 17%. Dividend of 2 cts per share is also given. I’ve learnt not to rely so much on press release or any media statement but to do more detail and independent work on the financial statements itself.

Here are the key figures for FJben:

----------------------------------------FY08----------------FY07
ROE(%)------------------------------10.6------------------10.8
Net margins(extraord. gains)-------4.3--------------------8.3
Net margins(no extraord.gains)----4.3--------------------6.8
Total debts to equity (%)-----------91.4------------------52.9
Current ratio---------------------------1.7--------------------2.5
Quick ratio-----------------------------0.93------------------1.73
EPS (SGD)--------------------------0.0261---------------0.0507

My take:

1. Big drop in the net margins while gross margins (not shown) remained almost constant. Two items caught my eye as I try to decipher what made the net margins dropped so much – rental of premises and depreciation of property, furniture, fixtures and equipment. The former increased by 59% while the latter increased by 80%. Why is there a big increase in depreciation? Rental premises increment is understandable as they opened 33 new stores in FY08. It sucks to have higher turnover of 33% yet net profit dropped by 31%, in my opinion.

Again, the low net margins make me rethink about the kind of business that FJben is involved. Im always amazed that the net margins of around 4% is not that different from Popular. Even excluding extraordinary gains in FY07, the net margins dropped from 6.8% to 4.3% in FY08.

2. Current ratio dropped in FY08, mainly due to a drop in cash and cash equivalents. The wide difference between current and quick ratio means that the bulk of current assets are held in inventories. Fashion is fickle, so it might not be such a good idea to look at current ratio but to look at quick ratio instead. FJ ben increased both current and non-current liabilities in FY08. Combined with the reduction in equities, this raised the total debt to equity ratio from 52.9% to 91.4%. I’m a little more worried about their short term liquidity problem rather than their long term problems. I think that their increased inventories could be due to more stores opening or that they have problems selling. Since I’m a brand idiot, the less I talk about their sales, the more intelligent I’ll look. Let’s move on.

3. ROE is almost constant from year to year. But a closer examination using dupont analysis suggests the underlying fundamentals contributing to the ROE had changed.

-------------------------FY08-------------------FY07
Net margins(%)------4.32---------------------8.33
Asset turnover--------1.29---------------------0.85
Financial leverage----1.91---------------------1.53
ROE (%)--------------10.6---------------------10.8

Net margins drop from FY07 to FY08 is compensated by the higher asset turnover and higher financial leverage, causing the ROE to remain almost the same. This gives me an impression that FJ ben is having higher turnover but is not translating into higher profit due to costs. If you ask me, the ROE of FY07 is fundamentally stronger than in FY08, despite the ROE being almost the same.

4. EPS dropped from 5.07 cts in FY07 to 2.61 cts in FY08. This is inclusive of extraordinary gains of around SGD 3.8 million in FY07. Stripping that off, the EPS in FY07 is around 4.16 cts per share. Moving forward, with the world teetering on the threats of recession, it’s hard to foresee earnings figure improving in next year. There is always mention of IR and Ion orchard contributing to higher sales, but for me, let the performance of these catalysts speak for themselves. I’ll rather by pessimistic about their future results and be pleasantly surprised than be optimistic about it and get a rude shock.

Here are the EPS and ROE figures in past FY:

----------------------2003-------2004-------2005-------2006-------2007------2008
ROE (%)-------------2%----------3%---------6%----------11%--------11%------11%
EPS (cents)----------0.52--------0.70--------1.50--------3.53--------5.07-------2.61

Valuation and price

Based on EPS of 2.61 cts per share and last closing price of \$0.260, the PE is 10x. They gave a total of 2 cts per share dividend in FY08, thus giving a current dividend yield of 7.7%. This however, represents a payout of around 77% of EPS and the natural question of sustainability of the dividend arises. I'm not sure about their historical payout ratio though.

Looking at their historical PE, we can see a high historical PE of 34x and a low of around 5x. So, if we price FJben at a low PE of 5x, we'll get a price based on FY08's earnings of \$0.130.

If we apply old Ben's strict net current asset value (using current assets - total liabilites then divide by shares outstanding), we'll get \$0.140.

I calculated the NAV, it's 0.245 cts per share. But to be conservative, let's value the inventories at 50% of it's balance sheet value (why? I think 50% sales at Guess or Raoul would be very nice!), I'll get a bastardised NAV of \$0.165 there. At this price, the PE is around 6x. Dividend yield will rise up to 12%. Yum yum :)

## Friday, August 22, 2008

### Stupid

There is a fellow blogger called Stupid but if name is an aspiration to strive towards, this blogger is anything but the name suggests.

Stupid (henceforth called Stu) mentioned about the irrational exuberance exhibited by buyers backed in August 2007. You can see it on Decipher's blog, dated 17th August, 2007. But to understand the messages between the lines, one needs to understand the language used by Stu.

1. L&S

This one is the crowd favourite question. Once and for all, L&S is a slang used by Stu to describe financial institutions. Another more common term might be BB, which to me, means the same thing. Stu probably worked in L&S before, so had the privileged knowledge of how insidious and manipulative they are. Stu's philosophy is not to believe in the lies issued by L&S and their cronies (erm, like FED for one) but to think independently. Therefore being smart, which is to follow L&S manipulations isn't really that smart...might as well be stupid.

2. OILies and GOLDies

This should be easy to decipher. Oil and gold. Stu had a few pet topics - inflation, gold/oil, L&S and currencies. Oh, Stu also believed in investing in 'polynomials' (the meaning of which will be described later) with good cash holdings and minimum debts, giving good yields.

3. Polynomials

Singapore is a unique place to invest in because of the presence of polynomials. These are big companies with monopolistic, duopolistic, tripolistic (and hence polypolisitc) kind of structure. There are only a few players, sanctioned by government and competition is thus restricted. Examples will be like the transport companies, telco companies and banks. I'm under strict orders not to mention more, so for those that I didn't mention, think harder :)

Some of the blue chips in Singapore are still overpriced, according to Stu. Only when it comes down to these target price will Stu consider buying. As it stands now, the price of these companies are still very much overpriced. Here's a few that Stu mentioned in cbox.

1. Capitaland - \$2
2. SGX - \$2
3. Singtel - \$2.50
4. DBS and UOB between \$15-\$20. Perennial target for DBS is always \$10, though hard to reach as the cash rich management will buy back shares to stem the price slide
5. OCBC between \$6-\$8
6. Citibank - \$10. Actually Stu is aiming for between 0 to \$10, if I remembered correctly.

For more stupid philosophy, visit Stu's site here, though it's no longer updated as frequently.

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Correction: Stupid dropped by on 31-Aug and informed me on some errata. First, Stupid had never worked in L&S before. Secondly, the fair value of Citibank is from \$0 to \$15. Sorry stupid!

## Thursday, August 21, 2008

### Money No Enough 2 Part deux

Part deux: Money No Enough 2

Though I dislike the movie by Jack Neo, I seriously like the very down to earth songs in the movie, sung mostly in Hokkien - the language of the melancholy (and crude). Why do I say that? Listen to those Hokkien songs, it's almost invariably about tragedies - personal or otherwise! Hokkien songs evoke the melancholic liquor of out everyone that other songs find it hard to do. If you don't believe, listen to Chen Lei's songs :P

The subject of the review, part deux, is more on the songs in the movie.

Here's the song that I like. This song sends goosebumps up my spine - a sign of a touchy mushy song :) It's about wife and the husband relationship, how the wife and husband will still be together, regardless of what happens.

The next song is closer to heart, it's also the main theme song of the movie. What if I have 1 million? What will I do? :) I really really like the chorus part of the song. The solo part is also quite nice. Not shredding, no wah nor any funny effects..but I just it fits the song pretty aptly :)

## Tuesday, August 19, 2008

### Batman: Gotham knight review

I just watched the greatest batman movie ever!

It's not really a movie, but rather it's a 6 part anime-movie, titled Gotham Knight. I dare say it's even better than the recent movie depicting the Joker, because this one is closer thematically and philosophically to the batman that I know and want to see. Each part consists of a series of thematically related but not necessary chronologically ordered short story. But before you dismiss it, do note that each series has a lot more depth than the movie can ever do. The following themes are explored in the 6 parter:

1. The impressions of Gotham citizens on batman
2. Batman's inner pain
3. Batman's refusal to use firearms

The series ends with the final 6 part and leaves me craving for more. Besides the great voicing and good music, the sounds are also top notched. Each part depicts batman in different art forms, so for true batman fans, you can ogle and drool at the various ways that batman is drawn. Each style is so unique! (I like the first episode's way of drawing batman - because it draws the impression of batman, seen through the eyes of witnesses, rather than the usual way. Hard to describe, have to see it to experience it)

Do pay close attention to the dialogue, because it is really full of wit. Which of these parters do I like best? It's number 5, titled 'working through pain'. The execution is simply superb! The next best is part 4, titled "In darkness dwells". I mentioned in my batman review that the movie should show the other intellectual side of batman, not just the brawns but the brains as well. Part 4 shows how good Batman's 'superpowers' is - his cold logic and good detective skills.

So where to see it? You can see it here. But you need to change it to part 01, as the link is for part 2. You can change which part you want to watch on the top of the link.

A trailer of this anime-movie can be found here:

### Thoughts about STI part 2

Was nudged by millionairemind to do a little investigation into the total returns of STI should year 2008 fall by 20%. Since I have not been checking STI absolute value (I did check the daily relative % drop/rise though), I was quite surprised that since the start of the year, we've dropped a cool 20%.

I did post a table with the values of all the CAGR for different years from investing in STI, in this post. I think this time, I better list down my assumptions for calculating the values:

1. Most importantly, the data is taken from Yahoo! finance website. The price is adjusted closing price.

2. The CAGR (compound annual growth rate) is calculated like this:

To find the CAGR from period A to period B:

CAGR = (price at 31-dec of period B / price at 1st-jan of period A)^(1/(B-A)) - 1

If market is not opened on 31st Dec or 1st Jan, the price of the market days closest to the dates will be taken instead.

3. The AVERAGE CAGR is calculated by taking a simple average of all the CAGR of the same period i.e. sum of all CAGR of the same period divided by the number of CAGR taken.

Below is the table calculated for the returns on STI for different periods, assuming that 2008 closed on 31st Dec at 2769, a 20% drop from 1st Jan 2008:

For comparison, here is my earlier table posted, without taking into account 2008:

Here's what can be observed:

1. Average CAGR dropped across most periods. 'Most' is the keyword. Average CAGR for 5-yr, 7-yr, 10-yr actually increased. I don't ascribe any significance to this fact, because of the way I computed the CAGR. I took 1st Jan and 31st Dec as the price for each period of calculation, so I'm very sure that if I changed the starting and ending period to take the price (say, using 1st June to 1st-June next year), the whole data will change.

2. Adding data for 2008 still doesn't change the fact that after investing for 14-yrs, there is not a single year of negative CAGR. This means that based on historical data, if one invests in any year in the past, for 14 years starting from 1st Jan and selling on 31st Dec of the 14th year, you will not make any losses. But the returns are a pathetic 3.1% per annum (on average) for a period of 14 yrs.

Again, this would most definitely change should I change the dates where I calculate my CAGR for different periods.

3. This much I can conclude: Investment period and Average CAGR seem to follow a U-shaped curve. There is a period of declining average CAGR from 1-st year till around the 10-14th year, beyond which, the average CAGR increases with period of years invested. However, the shorter the period of investments, the more volatile the the returns are. Conversely, the longer the period of investments, the less volatile the returns will be.

4. Here's a very interesting observation when I break down the percentage of getting positive CAGR for different investment periods.

------Years----total number of samples----number of +CAGR-----% of +CAGR
-------1 yr-----------------21---------------------12---------------------57%
-------3 yr-----------------19---------------------14---------------------74%
-------5 yr-----------------17----------------------12---------------------71%
-------7 yr-----------------15----------------------10---------------------67%
------10 yr----------------12-----------------------9----------------------75%
------12 yr----------------10-----------------------9----------------------90%
------13 yr-----------------9-----------------------8-----------------------89%
---14 yrs onwards---------------------------------------------------------100%

It's quite obvious that the longer the period of investments, the lesser the number of years in which one gets negative returns, no matter which year they started the investment. As mentioned, on the 14th year onwards, all the sample data gave positive CAGR.

But all these mean nothing if the percentage of losses in sample data is greater than percentage of gains in sample data. What I mean is that even though, based on past data, there are greater chances of getting +ve returns no matter what investment periods I choose, I can still lose money if the % of losses in losing years are greater than the % of gains in winning years.

Let's see this table:

------Years----Average gains of +ve years^----Average losses of -ve years#
-------1 yr-----------------28.1%---------------------16.2%
-------3 yr-----------------12.3%---------------------10.3%
-------5 yr-----------------9.8%-----------------------5.2%
-------7 yr-----------------7.6%-----------------------3.8%
------10 yr-----------------4.4%-----------------------1.7%
------12 yr-----------------3.2%-----------------------0.3%
------13 yr-----------------3.3%-----------------------0.8%
------14 yr-----------------3.1%
------15 yr-----------------3.6%
------16 yr-----------------4.6%
------17 yr-----------------5.0%
------18 yr-----------------5.5%
------19 yr-----------------5.6%
------20 yr-----------------6.3%

^ average gains of +ve years means the simple average of all the gains made for that particular years of investment
# average gains of -ve years means the simple average of all the losses made for that particular years of investment
* There are no average losses data for 14th year of investment periods and beyond, because there are no -ve years.

I am quite surprised by the results. Not only are there higher probability of getting positive years, the average gains for every data for different investment years yield the same results - the average gains of positive years is much more than losses incurred in negative years. But of course, average doesn't mean anything. On average, each family in country X has 2.2 children doesn't really mean they really have 2.2 children. The same logic applies here.

## Sunday, August 17, 2008

### Money No Enough 2

I watched Jack Neo's Money No Enough 2 today.

To summarise, I do not like it at all. The summation of the cheap feel of the CGI, predictable plot lines and the usual ranting of pet topics makes it not worth the premium ticket price to watch this movie on a weekend. Fortunately, I watched it at a discount movie theater, which showed the movie at only \$7, so it's not too bad to whilst one's time away for 2 hours.

It's rather ironic to see the cinema pretty crowded. The cinema, because of the rather uncomfortable seats, acoustically challenged sound system and the occasional hiccups (damn, I encountered the hiccups today when I watched the show; for a cool 5 mins, there are not sound at all) means that there are usually not many people in the theatre. To see so many people watching a movie titled 'Money No Enough 2' shows that people do have money to watch such cheap thrills.

The movie did not disappoint. Characteristic of Jack Neo's movie, it is a sequence of little skits not dissimilar to his past Comedy nights, aired on Monday Channel 8, shown every Monday. Despite the crowd's laughter, I do not find the show funny at all. In fact, it's quite a sad movie for me.

The movie showed all the familiar situations where Singaporeans are trying to earn money. I was a little taken aback when I watched that spending a night in ICU at private hospitals will set one back by 8k a night. I wonder how I can afford such expensive 'hotels' with or without insurance (specifically, H&S). Ouch...spending 3 nights will erode one's net worth by \$24,000...scary thought.

I think I've said enough for this film. If you can, try not to watch it. Another irritating thing about the movie - when is Jack Neo's movie not a happy ending?

## Friday, August 15, 2008

### China milk 1Q09

China milk's 1Q results are out.

Only have time to browse through press release and power point slides. I'll do a more detailed analysis when I've the time.

To summarise:

1. EPS increased from 0.11 RMB in 1Q08 to 0.14 1Q09, a 27.3% growth

2. Revenue grown from 124.2 mil RMB to 158.4 mil RMB, 27.6% growth

3. NAV rose from 2.46 to current 2.61 in 1Q09

4. announced JV with a govt owned bureau and a third party (unnamed) to acquire like 200 pedigree bull sires. That's 140 mil RMB investment with 40% stake - all self funded

5. raw milk processing, OEM basis, will be out in 2Q towards end of year

6. Interim dividend declared, around SGD \$5.60 per lot

Quick thoughts:

Not sure if they are going to give interim dividends for the next 3 quarters. If they do, that will give an annualised dividend yield of around 3% at last closing price. Great growth from EPS - what's good is that they are not as badly hit by rising material cost as other companies. In fact, they played the inflation game pretty well. Read that they had to buy more fertillisers as they do not have enough generated internally - will this be a long term running cost for the company? Have to read more.

The raw milk processing, having being delayed for some time, had been finalised to be 2Q towards end of this year. Let's hope no more delays now. The announced JV with Heilongjiang govt, with china milk taking a 40% stake, will see them acquire 200 pedigree bull sires. This will strengthen their monopolistic status on their sperm business...a very good sign to me.

Quick valuation

EPS at 1Q is 0.14 RMB. Annualising it gives us SGD 0.112. At last closing price of 0.695, that's a forward PE of 6.21x. Not sure if this is high or low, cos this must be the first time I'm analysing their results. Price is around 1.3x NAV value too. Considering their high current ratio and low gearing, this company will have no solvency issues in the near future.

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Thks to littlecupid, who pointed out that my PE calculation for china milk is wrong. It read as 16x initially but I've changed it to the correct 6.21x now.

## Thursday, August 14, 2008

### Swiber 2Q08 results

Swiber released their 2Q results today. From the looks of it, it seems like they did very well, with net profit (mind you, not revenue) shooting up 258.1%. 2Q revenue is 82% of total revenue achieved in the whole of FY07 and 2Q’s earnings had already overshot the whole of FY07’s earnings. But I’ve learnt never to take press release so literally, so it’s best to pore over the results and ignore all the hype in the press release.

Let’s ignore the 2Q results and talk about the half year results straight. Why? This must be the first time I’m studying Swiber’s results though I’ve been holding this since 2007. Tsk tsk, so many things to do, so little time…

In USD’000,
-----------------------------------1H08------------------1H07
Revenue----------------------195,402-----------------44,676
Gross profit------------------50,638------------------12,767
PATMI------------------------31,119-------------------9,943

Gross margin-----------------25.9%------------------28.6%
Net margins-------------------15.9%------------------22.3%

Current assets----------------310,267----------------235,610
Total assets-------------------639,375----------------370,040
Current liabilities-------------218,711---------------109,730
Total liabilities----------------424,443---------------192,561
Equity (after MI)-------------212,857---------------176,872

Current ratio-------------------1.42---------------------2.15
Total debts to equity---------1.99----------------------1.09
ROE----------------------------14.6%-------------------5.62%
EPS (US cents)----------------7.33---------------------2.69
NAV (US cents)--------------50.16--------------------41.68

Net cash from operations---18,482-----------------2,938
Net cash in investing--------117,106---------------13,043
Net cash from financing-----52,591---------------13,682

My take:

A few things stand out from a simple comparison of 1H08 and 1H07 results. These are:

1. Revenue in 1H08 is over 4 times that of 1H07

From their foot notes, they mentioned their increase in revenue is the results of revenue derived from offshore construction projects. In 2Q08, Swiber executed 6 projects simultaneously over Brunei, M’sia, and Indonesia, compared to just 2 offshore construction projects in M’sia and Brunei in 2Q08. Two things to take from here – one is that Swiber’s capability and outreach is wider than a year ago with more operations in a wider area. The second is that the scope of their operations also widened over a span of a year.

2. Gross profit dropped a little while net margins dropped substantially

The gross and net margins dropped in 2Q, pulling down both in 1H too. I’ve no ready answer, since this is my first analysis of Swiber. Need to dig out more.

3. There is a big jump in liabilities, with total debts to equity ratio almost jumping by 2 times. Current ratio is weaker compared to a year ago. Their cash flow from operations seems to be better. A good part of their cash flow is used on purchase of new PPE. Bonds and new loans raised forms a big chunk of their cash flow.

I read that this is due to Swiber issuing MTN bonds and an increase in bank borrowings. This is to finance fleet expansion and working capital purpose. Indeed, their PPE had increased significantly. There are also 2 vessels under construction.

Outlook

As of 30th June, there is an order book of about USD 664 million compared to less than USD 220 million last year. Contract size is one thing, what are the margins and net profits for these contracts – that’s more important. I’ll be monitoring their margins issues in future results. As usual, no dividends are declared. With a annualized ROE of around 28%, I’d rather they keep the money and re-invest in their business.

Baring unforeseeable circumstances, Swiber is almost certain to have a bountiful year in FY08. I’m actually more interested in knowing what the margins and profit for their deep water drilling operations are, which should be ready by 2010? That will be more exciting and something to watch out for.

Value to price comparison

Based on 1H08 earnings of SGD 10.26 cts, we can annualize it to have a forecasted EPS of 20.5 cts. For a little perspective, the EPS for FY07 is SGD 17.6 only, so let’s put it at SGD 20 cts (that’s a 14% rise in earnings). Last close for Swiber is 1.510 per share, which gives a PE ratio of 7.6 times.

Historical PE

Year-------Price(low)----Price(high)----EPS(SGD)^-----PE(low)-------PE(high)
2006----------0.50-------------1.04------------0.0462---------10.8----------22.5
2007----------0.83-------------3.80-------------0.164----------5.1-----------23.2
2008----------1.51-------------3.60-------------0.200*---------7.5-----------18.0

* forecasted based on 1H08 earnings
^ EPS(SGD) based on Shares investment book, with 1 USD to 1.4 SGD exchange rate

Around \$1 per share, Swiber would have a PE of around 5x, which is near to the historical low. That would be such a good margin of safety for a cheapskate like me.

NAV is around SGD 0.70 per share, so at current price, it’s trading at around 2.2x NAV. At \$1 per share, that’s 1.5x NAV too.

## Sunday, August 10, 2008

### Hongguo 2Q results

2Q results

Income statement

1. There is a jump in revenue from 166 mil RMB in 2Q07 to 188 mil RMB in 2Q08, representing a jump of 13.3%. Net profit increased from 26.8 mil RMB to 27.9 mil RMB.

2. Gross profit margin increased from 41.6% to 45.2%. Net profit margins decreased from 16.1% to 14.8% quarter to quarter. I'm currently monitoring net profit margin situation.

3. Selling and distribution/admin expenses(SDA) to revenue (%) increased from 24.5% to 28.0%.

4. Net profit margin drops mostly due to share of losses of JV (580k RMB), finance cost (395k RMB) and a drop in 'other operating income'.

Here's a summary of quarterly ratios:

-------------------------1Q08-------------1Q07--------2Q08----------2Q07
Gross margin--------41.6%-------------39.4%---------45.2%----------41.6%
Net margin----------15.3%-------------16.8%---------14.8%----------16.1%
SDA to revenue------23.1%-------------19.7%---------28.0%----------24.5%

Half year results

No need to talk so much, a table of ratios will do the trick.

-------------------------1H08-------------1H07
Gross margin--------43.3%-------------40.5%
Net margin----------15.1%-------------16.5%
SDA to revenue------25.3%-------------22.0%

As mentioned, I'm a little worried over their net margins. It's to be expected while their new shops are opening and hence net margins continue to fall. As long as it stabilise around 15%, I'll be happy.

1H08 revenue is 412 mil RMB, while 1H07 revenue is 342 mil RMB. For a little perspective, the full FY07 revenue is 739 mil RMB, so the 1H08 revenue is already 56% of last FY's revenue. My full year FY08 revenue of around 890 to 1000 mil RMB is on track. Net earnings of 62 mil RMB for 1H08 also compares well with full year FY07's earnings of 110 mil RMB. Baring unforeseen circumstances, I'm sure Hongguo FY08 results will be better than last financial year.

Balance sheet

-----------------------------1H08------------1H07
Current ratio----------------3.6-------------2.8
Total debt to equity(%)------27.4------------37.1
ROE(%)-----------------------11.7------------11.4%

There's no long term liability. The notes payable to trade creditors are interest-free and secured on fixed deposits, amounting to 16.3 mil RMB in 1H08, compared to 37.8 mil RMB in 1H07. No big changes in balance sheet items for Hongguo. As usual.

Cash flow

Net cash from operating activities for 2Q08 dipped to -12.2 mil RMB, from 14.5 mil RMB 2Q07. Main culprit is the huge amount of notes payable. I think there's nothing alarming about one quarter of negative cash generated from operations, esp when it's used for paying down their notes payable. As mentioned in the balance sheet, the notes payable from their current liabilities dropped by more than 50%. Hongguo is using its cash flow generated from its operations to pay it off.

As for investing activities, there is no disposal of subsidiary for this 2Q, so there is a dip in the net cash from this part of cash flow. Again, nothing important worth mentioning here.

Others

EPS for Hongguo in 1H is \$0.1563 RMB. My target for FY08 EPS is \$0.32 RMB.

Here's the contribution to revenue and by its different brands

C.Banner --- 62.2%
E.Blan ---- 9.2%
Contract manufacturing --- 17.0%
JUC --- 6.9%
Naturalizer footwear --- 1.7%

Of note is that while all other business, there is an increase in new outlets for 2Q, there is actually a close of 6 retail outlets for Jiangsu Unity Corporation (JUC). This will be something to look out for in their annual report for FY08. Naturalizer footwear also started contributing to their revenue since 1Q08.

Production capacity dedicated to contract manufacturing segment was increased to 6 production lines. The management that they believed this current level of production is adequate in satisfying demand, hence there are no immediate plans to further expand production capacity in short term. This means there are no foreseeable big capex in the near term. Cash flow should further improve.

Value to price comparison

Annualised EPS for FY08 is SGD \$0.06252. Last close is SGD \$0.33 per share. This represents a PE ratio of 5.3x. This is around historical low PE of Hongguo, which is 5.5x (occurred in 2005 and 2006).

Dividend paid out in FY07 is SGD 1.418 cts per share. At last close of SGD \$0.33 per share, it's around 4.3% dividend yield (based on FY07's dividend). Actual amount will vary as it's subjected to the exchange rates of USD because the dividends are actually paid in USD and posted in cheque, instead of the usual direct transfer to bank account. Not that it matters, actually.

Applying Graham's strict (current assets - total liabilties)/shares outstanding, we get SGD \$0.192 per share. Using NAV [(total assets - total liabilites)/shares], we get SGD 0.267 per share.

------------------------
Hongguo's 1Q08 result analysis is here.

## Tuesday, August 05, 2008

### China Hongxing's 2Q report

China Hongxing gave a strong 2QFY08 report. Here's the highlights of the reports:

1. Revenue increased 53.1% for the quarter ending 30 June 08. For the 1HFY08, revenue increased by 48.4% compared to 1HFY07. Gross margin dropped from 42% in 1H07 to 40% in 1H08. For the same period, net margins also dropped from 18.8% to 17.4%.

My take:

The revenue growth of Hongxing is always admirable. They are on the fast track to increase their points of sales (POS) rapidly, and this contributes to their top line exponentially. Just for the first half of FY08, they increased their POS by 397 to 3,648 in China. In the whole of FY07, the revenue is RMB 2,046 million. Just for 1H08, the revenue is already RMB 1,333 million. If we annualised the 1HFY08 revenue figure, we're going to see a 30% increase in revenue from FY07 to FY08. Probably more than this, since 4Q is their strongest in sales for the entire year.

There is strong revenue growth in all segments of their business, something to cheer for. Footwear makes up 68.5% of their revenue, while apparel makes up 26.8% in 1H08, compared to 59.4% of revenue in footwear and 33.2% in apparel for 1H07.

For the margins, there is an appreciably drop in both gross margins and net margins quarter to quarter. In FY07, gross margin and net margin are 41.4% and 20.4% respectively, compared to 1H07's 42% and 17.4%. I think this is normal, as the new POS are just starting up and needed some time to bring in the crowd and add in to the top and bottom line. I think one needs to be more mindful of the expenses chalked up in the meantime - Selling and distribution in 1H08 is now at 257 mil RMB, compared to 312 mil RMB for the whole of FY08. If management carries on the pace of their expansion of new POS, their gross and net margins will definitely be squeezed by higher expenses.

I think I would exercise caution in building the brand empire. Too much too soon will breed redundancy, which will cost them dearly if economic situation isn't as rosy as they forecasted.

I found something ironic in the footnotes of the results. It mentioned on pg 9 of 13 that the strong growth in revenue is mainly attributed to:

"(iii) our ability to raise our selling prices; and"

But a few lines down, under the heading of "Cost of goods sold and gross profit margin", it mentioned that the gross profit margin went down because

"This was mainly due to product discounts of approximately RMB 78.0 million provided to our distributors and retailers".

While this is probably nothing worth alarming over, the ironic of the situation struck me. If they are able to raise their selling prices, why offer discounts to sell to distributors and retailers? Their business strategy?

2. Current ratio for 1H08 is 15.6. Quick ratio is 14.8. For the same period, total liabilities to equity is 13.6%. Cash flow from operation went down to - 248 million RMB in 1H08, compared to 90.8 mil RMB in 1H07.

My take:

Hongxing always had very good gearing and low borrowings. In FY07, current, quick and total liabilities to equity are 14.7, 14.2 and 14.4% respectively. I don't think they have much problems of insolvency in the short term, nor in the long run.

For their cash coming from operation, the huge shortfall should be due to the increase in prepayments, deposits and the receivables - to the tune of 592 mil RMB. There is also a corresponding big increase in the inventories held (which they mentioned is for the commencement of their new manufacturing facilities). I believe this is normal for a company that is on the fast track to increase their POS, so they needed to increase their supplies to facilitate the setting up of these new POS. Indeed, they mentioned this on pg 11 of 13.

3. EPS (diluted) increased from 7.57 cts RMB to 8.61 cts RMB in 1H08. For non diluted basic EPS, it increased from 8.44 cts RMB to 9.14 cts RMB for the same period.

My take:

For FY07, EPS (basic) is 16.4 cts RMB. If we annualised 1H08 EPS, we can roughly get around 18 cts RMB, representing around 10% growth in EPS. At current price of 0.485, this represents a FY07 PE of 14.7x. Forward FY08 PE will be around 14x. While it did come down from a PE of 20x just 3 months ago, I think at least at 14-15x PE, it's a more reasonable price to enter. Reasonable but not necessarily giving a wide margin of safety.

Assuming a pessimistic scenario, I think a growth of 10% EPS is what I can accept. So perhaps a PE of 10x, with a price of around 0.34-0.35 seems to offer more margin for a deeper and better sleep at night.

## Monday, August 04, 2008

### C&G Industrial holdings

C&G Industrial holdings had a ninja 2QFY08 announcement on 3rd August, yesterday. It is rare to see a company giving its result announcement on Sunday. Caught me off guard, so to speak :) I noticed it when I saw a big drop in % change - around 27% drop - when I checked my watchlist.

Not going to do any detailed analysis. I thought this is a good candidate for pure Graham's play. The big drop is likely due to the bad 2Q08 results. Revenue dropped 7.2% compared to the 2Q07, gross profit dropped 17.4% and net profit dropped 66.5%. What caught my eye is actually the huge administrative expenses chalked up - to the tune of 23.9 million RMB, an increase of 362.4% from 2Q07.

A few factors caused the 2Q08 results to stink:

1. Revenue dropped because sales are affected by snow story in early 2008. But I think the more important fundamental change in their revenue stream is due to the fact that their yarn products are now confined to functional yarn, combed yarn and compact combed yarn. These are products with higher margins and those normal yarn products with lower margins are not longer manufactured or outsourced since Feb 2008. I think this creates a short term drop in revenue, but can potentially bring about greater good in the future.

Selling price were also reduced during 2Q08. This is worth looking closer because if a company had true competitive edge over others, I wouldn't expect selling prices to be cut. Is there a problem with tough competition eroding their selling prices and hence profits?

2. Net margins dropped due to the drop in revenue but no corresponding drop in the cost of sales. From around 19% net margins in 1H07, it dropped to 15% net margins in 1H08 (extraordinary gains are inclusive). 28.8 % gross margin dropped to 27.8% during the same period too.

To me, it's a short term problem. If their plans to manufacture and sell higher margin products succeed, this short term drop in net margins and gross margins will correct itself.

3. Other income - this is due to the exchange rate gains made in 2Q07 to the tune of 4.3 million RMB while there is a exchange rate loss made in 2Q08 around 1 million RMB. Did they do some form of hedging?

4. Administrative expense increases a lot because of an increase in consultancy fee for research and development (14.7 mil RMB). I suppose this is one off and will not recur every quarter. If this 14.7 mil RMB is added to their 1H 08 results, the drop in net profits is only around 8%, and not the 26.6% report in the results.

In other words, this could just be another temporary problem, just like their net margins and possibly revenue drop.

Graham's play?

What is so interesting about C&G is that they are sitting on a huge pile of cash and cash equivalents - 560.873 million RMB. Taking 468,000,000 as the number of shares outstanding, this gives us a cash/cash equivalent per share of 0.234 SGD.

I'm not sure where the cash comes from, but I think it's likely coming from the net proceeds from issue of shares of 218,514 million RMB made in FY07. This amount is just carried over to the current FY.

Let's be really conservative and calculate the total liabilities per share. Total liabilities stand at 228,661 mil RMB, giving us total liabilities per share of 0.098 SGD. Thus, after paying off all liabilities using only their cash/cash equivalents, there is still a cash per share of 0.142 SGD.

Graham recommended using current assets to minus off all liabilities (my calculation is even more conservative since I only used cash/cash equivalents to minus off all liabilities, which is part of current assets). Doing that we have a value of 0.192 SGD per share. Using a margin of safety of 30%, we get around 0.134 SGD per share.

Anyone game to play Graham on this company? :)

--------------------
edited: Mike informed me that I had miscalculated some figures because I used the wrong shares outstanding (I used the 07 figures instead of 08). Re-did my calculations :)

## Friday, August 01, 2008

### Circular to shareholders

CIRCULAR TO SHAREHOLDERS (“CIRCULAR”)

in relation to

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

DEFINITIONS

For the purpose of this Circular, the following definitions apply throughout unless the context otherwise requires or unless otherwise stated.

“BullyTheBear” : The once exclusively technically inclined, but now almost exclusively fundamentally inclined financial website in Singapore

“cbox” : The tiny little community space above the blog posts of BullyTheBear and below the header, where shareholders can type in messages and discuss the mundane and important issues of the day

“Chairman” : Chairman of BullyTheBear website, known popularly as La Papillion, or LP

“Exchange rate” : Exchange rate of 1 USD to 1.40 SGD, taken conservatively.

“Mike” : Chairman of Straits Times Index. Despite everyone calling him Mike, Mike is not his real name. Mikedurst is what he is known in cna forum

“Upgrade” : The changing of the free and basic plan of cbox to the paid and feature-ful premium cbox

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

To: The shareholders of BullyTheBear

1. INTRODUCTION

The Chairman of BullyTheBear would like the shareholders to consider this proposal of upgrading the basic cbox to premium cbox. The cbox had been an integral and important part of the culture of BullyTheBear. Despite several major facelifting and structural changes that had occurred and will occur in the future, the cbox is one feature that will be set in stone. In fact, BullyTheBear will not be where it is today if not for the bond building and sharing that took place among shareholders, many of whom are regular users of the cbox.

As such, on 1st August 2008, the Chairman decided to act on the suggestion by Mike on the Upgrade.

1.2 Purpose of this Circular

The purpose of this Circular is to provide shareholders with relevant information relating to the Upgrade, and to seek shareholder’s approval and feedback for this exercise. Shareholders are requested to give honest feedback, but it is to be noted that the decision of the Upgrade lies solely on the Chairman. That being said, the voices of the shareholders will taken into consideration on the final deliberation of the Upgrade’s decision.

(a) Higher capacity – the premium cbox can store up to 600 messages (as opposed to only 100 messages for basic cbox) with up to 1000 characters long each. Each and every post are also archived.

(b) Users can delete their own last messages in the event of typos. The administrator can also delete messages and ban users with a single click.

(d) Dynamic auto-refresh – yes, the feature everyone is waiting for. The rate of autorefresh is dynamically adjusted to the rate at which new messages are being posted

(e) Sound notification in the event of new messages. This complements the auto-refresh.

(f) A ‘who’s online’ display lists who is viewing and who is chatting

(h) Custom word filter

(i) Allows users to password protect their names to prevent impersonation

Cost of the Upgrade depends on the period of time for which the premium cbox is purchased. Generally, the longer the period, the cheaper the cost is. Here are the costs for different periods:

Period(months)----------Cost(USD)------------Cost per month (USD)
------3------------------------\$6.00-----------------------\$2.00
------6------------------------\$11.00----------------------\$1.83
------12----------------------\$20.00----------------------\$1.67
------24----------------------\$35.00-----------------------\$1.46

In evaluating the Upgrade, the management of BullyTheBear had taken into account the pertinent factors set out below which will be considered as they are deemed to have significant bearing on the assessment.

(b) Financial effects of the Upgrade

(c) Possible effects of the Upgrade

As a responsible company, BullyTheBear believes in involving shareholders in its major decisions. While sole responsibility and decision eventually rests on the management, the Chairman still believes in seeking honest and prompt feedback. Below are the key reasons for the Upgrade:

(a) As mentioned in the Circular, BullyTheBear is a shareholder friendly company. There are currently some small amounts of cash and cash equivalents held in the advertising revenue of BullyTheBear account as mentioned the 1HFY08 results announcement dated 4th June, 2008. While small, it is not insignificant. The Chairman wishes to reward shareholders for their continued loyalty to the BullyTheBear. Consider this the dividend for supporting (and continuing to support) BullyTheBear’s only source of revenue.

(b) It is the wish of the Chairman to give back to society what it had been given to him. Through the tiny space occupied by the current cbox, a lot of important discussions had been debated and ideas thrown around shareholders. By the Upgrade, it is hoped that such active discussion will continue to be an active feature of BullyTheBear. The Chairman would like to take this opportunity to once again thank all the regulars and not-so-regulars who frequent the cbox daily like the neighborhood’s kopitiam.

(c) Though this is not a serious and prevalent problems yet, the Upgrade will prevent impersonation of regular users of cbox as the premium version allows the user to password protect their nickname. This protects both the integrity and credibility of users – two of the important tenet that is held closely by BullyTheBear’s management.

3.2 Financial effects of the Upgrade

The cost of the Upgrade will be borne solely by BullyTheBear internal cash/cash equivalents, funded entirely by the advertisement revenue generated while serving the shareholders. There are no plans to issue rights shares or rights warrants to fund this Upgrade. Depending on the period of the Upgrade, this exercise will set BullyTheBear’s account by anything from USD 6 to USD 35 or an equivalent of SGD 8.40 to SGD 49.00 based on the Exchange rate.

Donations are welcomed, of course. For those donors who are afraid of conflict of interest between serving the good of BullyTheBear and the self-serving good of fattening the Chairman’s bank account, there is an option of buying the Upgrade as a gift. More details can be found here.

3.3 Possible effects of the Upgrade

Since the premium cbox will have auto-refresh, the Chairman fears that this might slow down the speed of downloading BullyTheBear’s site contents. Since there is a 30-days money back guarantee, if there is ever a noticeable slowdown in the access speed, the Upgrade will be downgraded as soon as possible.

Other than this, other possible effects could be an increased usage by shareholders and possibly new shareholders. Disruptive personnel with wild rantings of “Go and Die” and spamming of websites can also be controlled more effectively, ensuring a more conducive environment for the benefit of shareholders.

4 Conclusions

The Chairman would like shareholders to give honest and prompt feedback on the Upgrade. Shareholders can do so by clicking the comments button at the end of this Circular and they can be sure that the Chairman will address their concerns and feedback within 1 working day. The Chairman would like to recommend:

(a) Upgrade period of 12 months, with an expense of USD 20.00 or SGD 28.00 based on the Exchange rate

(b) request active shareholders to visit the cbox website for more information, though most of the key information had been listed in this Circular.