Hongguo - Financial health

Financial health of Hongguo

In the midst of analyzing the ROE, I’ve calculated the financial leverage ratio. Financial leverage ratio gives a good feel of the amount of leverage used. The figures are as shown:

Financial leverage---------Year
1.44--------------------------2003
1.43--------------------------2004
1.46--------------------------2005
1.38--------------------------2006
1.37--------------------------2007

Judging from the ratios, we can see that Hongguo isn’t overly extending itself. In fact, it should be less leveraged as the years go by. Let’s take a closer look to see if the financial status of Hongguo is as shown by the financial leverage ratio shown above.



Debt to Equity (total liabilities/share holder’s equity)

Debt to equity of Hongguo decreases steadily from 2002 to 2007, which is what is suggested by the financial leverage ratio. Looking at the balance sheet, there are only two years, 2003 and 2004, in which Hongguo had long term liabilities in the form of term loans. After that, there are no more long term liabilities.

On the other hand, Prime has a higher Debt/equity ratio (about twice as much) than Hongguo. This can also be seen by their higher financial leverage ratio shown in earlier post. Belle is harder to tell, since there is only one year since listing to compare.

On the whole, I’m very satisfied with the debt/equity that Hongguo has. It’s the second lowest among the three. A debt/equity averaging 0.43 since listing in 2003 is definitely not a sign to worry about.

Current and Quick ratio

Current ratio of Hongguo shows a slight downtrend. Considering that in FY07, its current assets are more than enough to pay off its current liabilities 2.77 times, I’m hardly worried. Even a more conservative quick ratio suggest that in the same year, the current assets without taking into account Hongguo’s inventories can pay off its current liabilities 1.46 times. Since Hongguo only has current liabilities, I think we can safely give Hongguo a clean bill of financial health.

Prime has a lower current ratio and quick ratio, with quick ratio less than 1 throughout the years. While I don’t think it is having any insolvency issues near term, I dare say that Hongguo has a stronger balance sheet than Prime. Belle has a rather strange current and quick ratio, but let’s not bother too much into it for now.

To add the cake to the icing, let’s take a look at the amount of cash that each company holds as a percentage to their total assets.

Cash/Total assets (%)--------02--------03--------04-------05-------06-------07
Hongguo-----------------------4.9------35.9------14.5------10.3-----12.2-----10.3
Belle-----------------------------------------------------------------------6.8-------38.5
Prime Success----------------16.8------18.0------11.8-----10.2------8.7-------7.7

I’ve a feeling that Hongguo management wanted to grow, but at a sustainable pace backed by a series of successful points of sales (POS) and funded by their own internal cash flow generated. They can borrow from banks to really aggressively open up new stores, but they didn’t. In fact, they are sitting on around 10% cash out of their total assets. While this might hinder their growth somewhat by not aggressively pursuing an all out approach to expand, I believe this prudence will bring about a longer and more sustainable growth in their business over time.

Here’s Hongguo’s financial health report – a strong balance sheet with around 60% equities and 40% debts on average, no long term liabilities or bank borrowings in recent years and with enough assets to pay off their liabilities at least 1.5 times over. I’m more than satisfied with them.

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Book reflections on Peter's Lynch "One Up On Wall Street"

What a prolific day today! I had one of the free-est saturday that I can recall from recent memories. I managed to finish Peter Lynch's One up on wall street today in the library.

One up on wall street is really a great reading! His style is more informal. Coupled with his wit and humor AND his enlightening advice, I think this is really a page turner for me. It mentioned on the front cover, "More than 1 million copies sold" - I think it is really that good to have sold a million copy.




There's so much information in this 300 page book that I do not know where to begin reflecting. I'm thinking of adding this book to my wish list of investment book that I would read again and again. Let's just start by reflecting on the points which lit up my proverbial light bulb.

1. I learnt the importance of placing the price of the chart against the earnings of the companies. This is not primarily to see how the market reacts to earnings, but to see how the earnings fluctuates. I 'practiced' this by Prime Success and Hongguo, but atlas, their earnings are too stable so it didn't show much. It'll be interesting to place a cyclical stock against the price.

2. Peter classifies stock into 6 general categories:

a. Slow growers

These are large and aging companies, with low earnings growth and usually large, regular dividends. I immediately think of yellow page. After thinking further, perhaps Singpost fall under here too.

b. Stalwarts

These are the 'blue-chip' quality stocks, with earnings around 10-12% growth. Risk is rather low for this type. Coca-cola, P&G from US side are quoted examples. I'm hard pressed to give an example in the local stock market. Help?

c. Fast growers

Smaller, aggressive companies growing 20-25% annually. Possibly a multi bagger, but with higher risk. Hongguo and China milk springs straight to mind.

d. Cyclicals

Companies whose sales and profits rise and fall in regular cycles. Construction plays come to mind. Tech stocks too.

e. Asset plays

Asset plays are companies that are sitting on a valuable asset but the rest of the crowd do not know. Hongfok (sitting on Concourse at Beach road), SPH (Paragon) are possible asset plays. Am I obsessed with singpost? Singpost might be possibly asset play too (sitting on Paya lebar site which they could dispose for a huge one-off gain).

f. Turnabouts

Those that have been depressed and battered, poised for a turnabout. Osim, creative comes to mind.


The book then goes on to list the pointers to look out when buying these 6 categories. There's even a section to tell you when to sell these 6 categories. All great stuff.

3. I think this is the most enlightening part. Peter's view on the growth of a stock and the PE struck me off as highly sensible. PE of any company that's fairly priced will equal to its earnings growth rate. That means that with a PE is 10x, then the earnings growth should be 10% growth. Some stocks are trading at breakneck 60x PE, so the question one needs to ask is that is the earnings growing at 60% too?

Peter suggests a more complicated formula to include dividends. Take the long term earnings growth rate, add the dividend yield, then divide by PE ratio.

If ratio < 1 ---- bad
If ratio around 1.5 ----okay
If ratio >= 2 ------- good

But if Company A grows at 10% with a PE of 10x is compared to Company B that grows at 30% with PE of 30x, even though both have a ratio of 1.0, Company B should be a better bet. Of course, this assumes all else being equal, which is ideal and never the case in practice.

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Hongguo and Prime Success Price/EPS chart

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Hongguo - Profitability part 2

EPS

Looking at the graph below, we can see that for the trio, earnings are pretty good and is consistently getting higher. I do find it strange that even though Hongguo’s portfolio is behind both Belle’s and Prime’s, its EPS is actually the highest among the three.


If this trend is sustainable, it doesn’t even matter to me if Hongguo is ranked 3rd or ranked 1st, since it’s the earnings that ultimately drive the company, not the market share of their brands, though both are usually correlated.

Hongguo’s EPS historical growth is around 25%. I did some calculations based on different periods of years to derive the CAGR and found that it’s pretty consistent, always hovering around 21 to 29% since inception. The CAGR shown below is actually for 5 year period since 2002 to 2007.


As for Prime’s, EPS historical growth rate is much higher and also less consistent compared to Hongguo. It grows at a 5-year CAGR of 62%, but the fluctuations of the CAGR for different periods vary from 22% to 41%. In other words, Prime’s EPS growth rate is high but less consistent than Hongguo.

Based on my previous post on Hongguo’s valuation, I projected the EPS in 2020 to be $2.04 and I know that the EPS for FY07 is $0.28. That gives us a projected CAGR of 16.5% over 13 years into the future. Comparing my projection with the historical EPS growth rate of 25%, I think it’s quite reasonable, considering that the historical EPS of Belle and Prime is well in excess of 60%. Even Prime’s more recent earnings growth rate of 33% (from 2006 to 2007) is way higher than my projected CAGR of 16.5% for Hongguo.

PE of Prime Success vs Hongguo

Prime’s historical PE ratio is shown below. It goes from a low PE of 1.1 times to a high PE of 42 times. But let’s just look at the more recent PE, it’ll be around 16.2 to 42 times. Last close of Prime Success is HKD 4.55, which gives it a PE (based on FY07 earnings) of 19.2 times. Prime’s FY06 to FY07 earnings is 32%.


On the other hand, Hongguo current PE is 10 times, with FY06 to FY07 earnings growing at 22%. According to Peter Lynch, PE of a fairly valued stock should be the same as the earnings growth rate. Dividing earnings growth rate by PE, a stock having 1.5 is considered good but having above 2 is a possible bargain. Following his line of thought, Hongguo will be quite undervalued at the current price, having a PE of 10x but an earnings growth rate of 22%. It should be more fairly valued around PE of 22 times. (22/10 = 2.2)

Similarly we can do the same for Prime. It is trading at PE of 19 times, but with earnings growth rate of 32%. (32/19 = 1.7).

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Singtel chart

NO dream, I'm not going to back to the dark side! :)

I've quite a free day today, so was talking to stub about some of the companies that is interesting. Singtel crop up in our conversation and I thought it's interesting too. At least it passed my screening, though need to look more into it and compare with the other 2 main competitors before deciding anything.



Charting is fun for me, though not always so lucrative for me, hoho! Anyway, I know that I usually do patterns for my chartings. An important point that I come away from reading Phil Fisher's Common stocks and uncommon profits is that when you have a hammer, the whole world looks like a nail, hence it's important to have a few mental models of things so that we can see a problem with different perspectives.

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Hongguo - Profitability part 1

Profitability

Let’s take a closer look on the profitability of Hongguo. To really see how good/bad Hongguo is, it’s inevitably that I’ll have to look through its main competitors – Belle and Prime Success again. Below is my calculated data, after spending days poring hunting down annual reports and compiling them.


Prime Success is the longest listed company out of the trio, while Belle is the youngest, having been listed only in May 2007 (though it had been in business for a far longer time). As such, do take Belle’s data with more skepticism than your normal dosage.

Here, I’ll just focus on ROE, ROA and the margins.

ROE

We can see that for the trio, all ROE is relatively high as it should be, given their market position in PRC. Hongguo has a more consistent and steadily increasing ROE, while Prime success’s ROE peaks at 2004 and is steadily declining ever since. In ascending average ROE, Belle is ranked first, followed by Hongguo then Prime. Since Prime success is touted as Hongguo’s main competitor (see previous posting), we ought to do a closer comparison between the two.

As mentioned earlier, Prime has a spottier ROE compared to Hongguo. On average over the same period of time, Prime has a lower ROE of 24.50% compared to Hongguo’s 25.77%. It seems like Hongguo is better at investing retained earnings than Prime does. It’s not surprising given that Hongguo has the smallest market share among the trio, and the bigger competitors will always find it harder to invest in themselves than when they are much smaller.

I am quite pleased with the stability of Hongguo’s ROE though, it definitely makes valuation much more predictable.

ROA

Actually, whatever had been mentioned for ROE can be copied directly to this part. In ascending average ROA, again we have Belle ranked as the top, followed by Hongguo and finally Prime.

Hongguo showed steadily improving ROA, while Prime shows a spottier ROA record, like what we’ve seen earlier on its ROE. Again, I’ll attribute this partly to the smaller size of Hongguo. The management must also play a certain part in creating these figures, since not all can be explained by just the size of the company. In this aspect, Hongguo is once again ranked highly by being consistent.

Gross and net margins

Net margin for Hongguo is showing a decline, though its gross margins increases. Since gross margins didn’t decline along with net margins, I believe that it is the increasing expenses of maintaining a greater sales force and expansion plans that causes the decline in net margins. I would start to worry if after the expansion plans slows down, the net margins still didn’t improve, or if the gross margins start to drop. If this scenario actually plays out, I’ll have reasons to believe that somehow, the brand of Hongguo is no longer as attractive as it is now, so they can’t pass the rising costs down to consumers. As it is now, it’s more reasonable to adopt a wait-and-see attitude to see if the net margins can improve in the future.

Prime is also expanding rapidly, yet their net margins didn’t drop. In fact, for Prime, gross margins increases while net margins remain more or less constant. Strange isn’t it? I’ll keep a lookout on this point for Hongguo.

Thoughts

Earnings come from two parts – volume of sales and price of sales. A company with low net margins, selling huge volume can rival that of another company with high margins but with lesser volume.

Prime seems to be the low net margins, high turnover kind, judging from its asset turnover of 1.69 (highest among the three) and net margins of 8.06% (lowest among the three). Prime gives me a mental image of them selling lower priced items to mass consumer. The higher volume because of the lower price compensates for the lower net margins, giving Prime their earnings.

Hongguo, on the other hand, has a higher net margins but with lower asset turnover. Is is interesting to take note that while net margins drop over the years, the asset turnover increases more. This gives me a mental image of Hongguo selling higher priced items but with lower volume. The Average selling price of Hongguo shoes compared to Prime seems more or less to confirm this observation. If that indeed is the case, then Hongguo’s management is right; they do not have to worry much about Prime’s Daphne brand as it caters to a different crowd and have lower selling price.

Belle’s net margin is the highest, based on 2007, yet their asset turnover is also the lowest in the same year. It is stated that Hongguo will follow this model of going for the higher end consumer where there is more emphasis on brands than the more cutthroat mass market. If that is the case, we only have to see the margins of Belle to have a rough guide on where the net margins of Hongguo will go in the near future – around 16% and above. Since Belle and Prime (except Hongguo) indicated interest in growing their sportswear brands, it will be crucial to see what the margins for sportswear and the ladies fashion shoes are. That should shed more light on what the margins for Hongguo will be like.

Points of sales (POS) analysis

I thought this could be a good way to analyse retail business – by analyzing the revenue, expense and earnings stream of each company with reference to their POS. I came out with this table.


A few trends I noticed:

1. Belle is getting the most bang for its buck. Revenue per POS of 1.90 RMB million beats Prime and Hongguo hands down. Revenue per POS for Prime is coming down steadily while Hongguo is climbing up. It’s important that revenue per POS is at least constant or improving because it shows us how each dollar of revenue is generated from each point of sales being set up, even as the company expands. We certainly do not want to see more stores but less revenue generated – could be a sign of expanding too fast or too aggressively into regions outside their target market.

2. Belle again wins hands down for the net profit generated per POS. Here, we see an increasing trend of net profit per POS for Hongguo and a decreasing trend for Prime. Can you imagine it – in 2007, an average POS for Hongguo earns the same net profit as an average POS for Prime?

3. Selling & Distribution (S&D) expense per POS for Belle is the highest, so here we see that the higher net margins comes at a higher cost. The high selling and distribution cost per POS for Belle seems to confirm the earlier image of Belle as the high end seller. To create a perceived difference in their shoes, Belle must necessary spend more on advertising, which chalks up their S&D expenses. Surprisingly, Hongguo has the lowest cost per POS. Why surprising? Because given their decreasing net margins, I would expect the cost to run up faster than the earnings they get from opening new POS. Hmm, this is indeed an interesting point to investigate further – why did net margins of Hongguo drop over the years?

I do hope that Hongguo can increase their advertising further, yet this will cause the S&D to increase higher too. The only way around this is that the advertising will eventually generate enough consumer goodwill which will make the consumers pay more for the branding, thus improving margins in the long run.

Thoughts

I think Prime Success is in some sort of a trouble. Something isn’t just quite right when we look at its numbers – the story seems a bit bleak for Prime. As for Hongguo, I think they do have the potential to maintain or even improve its market position. It’s good that while Hongguo seeks to expand over as many POS as possible, they did it from their own cash flows and didn’t borrow excessively to achieve this. When times are bad, this kind of cautionary and prudent expansion plans will bode well for the company’s long term future.

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Analysis on my reading pace

Grey remarked that I am a very fast reader. Let's see if I really am (I thought I'm pretty normal, since compared to my gf, my speed is like a toddler learning how to read).

From this financial year starting 1st Jan 2008, I managed to read:

A total of 21 books,excluding 4 books that I'm currently reading (semi concurrently). This also includes 2 books that have little relation to investing but have profound effect on my philosophy. This leaves a total of 19 financial books which I've read so far. I exclude the tonnes of annual reports and announcements, and any other thing that is found online.

Since 19 weeks have passed as of today (we're going through the 19th week now), and I've already read 19 financial books, that means I'm reading at a rate of 1 book per week on average. The average book thickness range from 1.5 to 2cm thick, with an estimated pages of say 200 (conservative).

This means that on average,

1. I read around 2.1 to 2.9 mm thickness of books per day

2. That means around 30 pages per day

Where to find the time to read?

1. Before I sleep, I always allocate 30 mins to 60 mins to read

2. I always carry the book that I'm reading at the moment wherever I go and will read it while waiting

3. Nowadays, I squeeze in some time while transiting on MRT standing and reading. I used to read only when I get a seats, but since the probability of getting a seat on MRT is pretty low, I can feel time sliding past my palm if I just stand there and watch the crowd pass by.

Conclusion: I think I must be a reading machine. It didn't dawn on me that I read at a pretty fast pace until I started to analyse it. Even so, I found that I'm still lagging behind in my reading, so that I have to selectively read books which are of priority first. Books which are interesting but not of greatest priority will be reserved later.

Oh my god, I'm such a bookworm, hoho!

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CSC chart

CSC chart. Been trying to sell off this as I found that the characteristics of the business no longer suits my portfolio.

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Book reflections on Common stocks and uncommon profits

Some books hit on you straight away, leaving you with a proverbial light bulb glimmering brightly over your head. For others, you need to slowly grow with it.



Phil Fisher's Common stocks and Uncommon Profits and other writings belong to the second type. The book didn't particularly strike me as "AH-HA", yet the more I read, the better it gets. I guess when I read it the 2nd and 3rd time in the future (I intend to get this book), I'll be able to derive more information out of it.

That said, it's not totally a waste of time. Far from it, it's actually quite an interesting read. Now, interesting is different from enlightening. Buffettology is enlightening, Morningstar investment books are enlightening...but somehow Phil Fisher's book is just interesting to me. Of particularly interest to me is the preface by his son, Kenneth Fisher, which describes how this brilliant man struggles with his internal insecurity and why his famous 'scuttlebutt' technique works very well for his temperament. It also mentioned his later years which is plagued by Alzheimer's disease.

The book is sectioned into 3 main parts - Common stocks and uncommon profit is one, followed by Conservative investors sleep well and lastly developing an investment philosophy. I find the last two sections much more interesting and enlightening than the first part, which Phil Fisher is more famous for. His second part, conservative investors sleep well, really talks a lot about what makes a great growth stock, which I had to read many times in the future to fully distill the essence out of it. As for his 3rd part, he highlights the importance of having a philosophy in investing so that it acts as a set of principles in which to guide oneself through good times and bad in the market.

If one only have 10 minutes to spare, the Appendix section summarises the whole book in point form - short and sweet. Do yourself a favour, if you do not intend to read the entire book, at least go to bookstores to read last section Appendix. You can browse through some pages of it from this google link here.

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Thoughts about STI

While trying to find out more about the compounded returns of investing in STI ETF today, I managed to crunch some numbers for the adjusted close of STI since inception on 28th Dec, 1987 till now. The data that I used comes from Yahoo! finance. Below is the chart (linear y-axis) of STI from inception till last close, on 2nd May 2008.


We can see from the STI chart that there are notable periods of time that it dropped sharply. In 1990, 1998, 2003 and 2007, we can see a visual drop in STI. But I think a more appropriate chart to use is a logarithmic y-axis, so that we can better appreciate the change in % of STI.

It's interesting to take note that while the 1990s and 1998 crashes are very severe, the 2007 subprime crisis which is acting out now is a mere blip on the chart. In fact, the subprime crisis is nothing compared to 1998 where the market crashed below inception level. That must be the dot com crisis that plagued US and possibly spilled over to Singapore shores. (I made a mistake, it's not the dot-com, it's the asian financial crisis of 1997-1998)

It's actually very encouraging to see such charts because it gives hopes to investors that while all seems lost, time itself will right the wrong and correct the excesses, hence there is no need to worry about the current crisis if one's holding power is there. But some may argue that STI ultimately is a collection of a number of big caps ranked in market capitalization, so while STI may rise, retail investors investing in smaller pennies might suffer much more than suggested otherwise. There is also the added complication of survivorship bias where those who didn't survive are taken out of STI, hence STI isn't such a good beacon of hope. Well, that's true.

I further compiled a table that shows the compounded annual growth rate for STI taken at different periods of time : 1 yr, 3 yr, 5, 7, 10 to 20 yrs, just to see what sort of returns one might get from holding STI.


One will surely notice that the further one holds, the lesser the chances of having negative returns. The break even year is actually 14-yrs holding period - which means to say a person holding STI for 14 yrs will not have a single year of losses. But of course this comes at a price; holding longer period will ensure less returns but it's safer than say, holding over 1 year period.

Holding STI over a period of 20 years will reward the patient investor with a very safe and compounded returns of around 7%, beating long term SG bonds hands down (SG bonds give only around 4% long term). With the CPF rate pegged to long term SG bond rate, I wonder why investors would not consider a passive and low cost fund like ETF, it's certainly not exciting but it beats most investment out there without the holder needing anything but patience.

Not exactly my kind of returns though :P

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Hongguo - Valuation

Valuation

I did up several analysis to determine a ballpark range of which the price of Hongguo can be expected to appreciate in the coming years. The first one which I did was the constant ROE analysis, with projected EPS shown below.


As the name suggests, I assumed that the ROE for Hongguo is constant at 22.19%, which is the 5 year average value from 2003 to 2007. I also assumed that the payout ratio (dividends per earnings) is 25%. Sparing you the details, I get an EPS of SGD $1.50 in year 2018, ten years from now. The table above shall be the guide in which the yearly results of Hongguo will be checked against. I’ll be looking out for the EPS for subsequent reports, to ensure that Hongguo is performing within my expectations.

I also checked the projected EPS against the actual EPS, shown below


It’s not amazing that the projected and actual are around the same, since my model is based on historical results (2003 to 2007). It’s more important to look forward to 2008 quarterly results to see if the projection yearly EPS can be hit.

I tabulated the historical PE for Hongguo since their IPO in June 2003 below. Based on the closing price and earnings for that particular year in question, the lowest PE ratio for Hongguo is 5.5 and the highest is 26.3.



This is what I did:

Assumptions

1. Projected EPS for 2018 is RMB $1.50
2. Currency exchange of 1 RMB to 0.2 SGD
3. Highest PE of 26.3
4. Lowest PE of 5.5
5. Dividend payout ratio of 25% to earnings

Projected price for Hongguo in 2018 range from $1.65 to $7.89

Based on a price of $0.540, we can expect a return of 11.8% to 30.8% pa compounded for 10 years. Since dividends are paid out, we can also get a total dividend per share of $0.67 in ten years time, more than the original purchase price of $0.540.

As a rough guide, PE for Belle is currently around 31 times, Prime success around 23 times and Hongguo is around 10 times.

Let’s calculate our total returns (including dividends),

Total expected earnings (including dividends) in 2018 = 1.65 + 0.67 = $2.32
Based on a price of $0.540 gives us a return of 15.7% compounded annually over a period of 10 years, pretty good for me.

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Hongguo - Growth prospects

Growth prospects

In the annual report for FY2007, Hongguo mentioned that their future plans are:

1. To build a multi-brand portfolio in order to cater for diversifying market niches, by forming 6 to 8 brand package in next 2- 3 years OR through in-house brand development or collaborations with renowned foreign partners

2. Sales network will be enlarged to support 260 more stores, comprising 200 for in-house brands and 60 for cooperative brands with Brown shoe

3. Production capacity will be expanded to 12 production lines, of which 6 will be for the production of in –house brands and the remaining 6 for supporting contract manufacturing business.

Their plans are based on their core beliefs that China’s economy will continue to grow and they will be more affluent consumers waiting to get their products. As a result of these core beliefs, they are increasing their production lines to make more shoes in anticipation of this rising demands. At the same time, they are collaborating with international partners to build up their brand portfolio, presumably to increase their market share.

Are these core beliefs valid? If it is valid, is it possible to gauge how much the increased demand will be like? Let’s have a go.

China GDP grew at a CAGR of 11.9% per annum from 1995 to 2006, which can lead to an emergence of a middle class which is both quality conscious and have the purchasing power to drive PRC consumer market. China’s footwear sales volume reached 2.1 billion in 2006 and is forecasted to increase to 3.5 billion by 2009. The sales volume per capita for china is forecasted to increase from 1.6 pairs to 2.2 by end of 2009, while leather shoes sales are forecasted to grow at 15% per year from 2006 onwards (from annual report FY07).

The national bureau of statistics revealed that China’s middle-income group (with annual income between RMB 60k to 500k) is likely to increase from 65.5 million (5% of total population) to 45% in 2020, with annual incomes per household of RMB 60k to 500k. With average salaries of RMB 2100-2300 for employees in major cities, there is a high proportion of workers belonging to the middle income group and this figure is still increasing.



The following shows the shoes sold per capita in different countries (from China International Capital Corp):

China – 2.3 pairs per year
South Korea – 3.9 pairs per year
US – 7.3 pairs per year

As disposable income rises, it’s very likely that China will increase its shoes sold per capita. Perhaps not as much as U.S but at least it’s likely to see that approaching more mature markets like South Korea.

What’s more interesting is that China’s luxury market is predominantly male-driven. In fact, it is the only market in the world where men consume more luxury than women (Feb 2008, Issue 12, Industry Series). They are also much younger than their western counterparts, with males aged 25 to 40, compared to 40 to 70 in western markets. These are young professionals, entrepreneurs and businessmen. Female consumerism is set to rise and there’s plenty of scope for growth in the ladies shoes market. So confident that Belle’s CEO mentioned during their IPO that shoes are a necessity hence they are not subjected to the whims of macro-economic trends.

Let’s summarise the main findings

1. Female consumerism is set to rise. Current luxury goods consumers are males.

2. Emergence of a middle-income class – forecasted to reach 45% of total population in 2020. Population of China at 2020 is forecasted to be 1.4 billion (UN world population 2004 revision)

3. Rising disposable income, especially from urban households. From 1990 to 2006, disposable income of urban household increases at a CAGR of 11.8%. This is against a backdrop of strong GDP growth of China with CAGR of 11.9% per annum from 1995 to 2006. GDP of China in 2007 revised to 11.9% (Shanghai Daily, 11th April)

4. Per capita sales of shoes set to increase from current 2.2 pairs to reach closer to South Korea 3.9 or U.S 7.3 pair per annum

Let’s do some rough estimation:

Assumptions (conservative, I must add):

Estimated population size of China in 2020 = 1.4 billion
Middle class proportion in 2020 = 45%
Market share of Hongguo in 2020 = 5%
Shoe sales per capita = 2.3 pairs per year
Average Selling Price of shoes = 300 RMB

Estimated revenue for Hongguo in 2020 = 1.4 x .45 x .05 x 2.3 x 300 = RMB 22 billion
Given 2007 revenue for Hongguo is RMB 7.39 billion,
Forward CAGR of revenue from 2007 to 2020 = 29.8%

Historical CAGR of revenue from 2003 to 2007 = 35.3%
Estimated revenue in 2020 based on CAGR of 35.3% = RMB 32.9 billion

Belle’s and Daphne market share is around 7-8%, with the top 10 brands making up 50% of total market share. I assume Hongguo having a market share of 5% despite being the top 2nd or 3rd brand in China for so many years. I also assumed that the shoe sales per capita remained at 2007 level, possible though unlikely.

I think this estimate is helpful because we know that if assumptions are met, we can conservatively expect Hongguo to continue growing their revenue at around 30% from year to year until 2020. If assumptions are more than catered for, we can expect an even greater revenue growth for Hongguo (in fact for the whole industry as well), perhaps around its historical CAGR of 35%. Any more optimistic than that is just pure speculation.

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Hongguo - signs of monopoly

Signs of monopoly

Hongguo does show signs of having a good business. Earnings is consistently increasing since they were listed in 2003, with a compounded annual growth rate (CAGR) of 20.3% since 2003 to 2007. The key word here is consistent; Hongguo has never dropped its earnings since IPO in 2003, and in fact it has been steadily increasing.

ROE is also pretty consistent (in fact showing a slight uptrend), around 20 to 22% since listing, giving a very respectable 5 year average ROE of 22.2%. By breaking down ROE into 3 components, we can see exactly what drives ROE over the years. Hongguo did not do it through debts as the financial leverage ratio went down from 1.61 in 2003 to 1.37 in 2007. Hongguo did not do it through net margins (more about that later) as net margins shows a decline from 19.3% to 14.9% in 2007. Instead, Hongguo increased asset turnover from 0.71 in 2003 to 1.09 in 2007 – a sign that they are pretty efficient at generating revenue from their assets.


A look at the ROA shows the same picture. The drop in net margins is compensated by the increment in asset turnover, causing ROA to rise up since 2003 to 2007 with a 5 year average of 15.1%.

So why do consumers buy Hongguo’s shoes? By finding out the answer to this, we can understand if Hongguo has a consumer monopoly. If it does, is the economic moat that prevents other competitors from eroding its profit deep and wide?

Hongguo has 2 core businesses:

1. Design, production and retail of their two in-house brands, C.Banner and E.Blan for the domestic market in PRC

2. Original equipment manufacturer (OEM) for global footwear brands for the international market

For their in-house brand C.Banner, it is a ladies’ fashion footwear label aimed not at the general mass market but more at the quality upmarket side. C.Banner is ranked 2nd in 2005, 3rd from 2002-2004 in terms of market share from CIIIC (national statistics board of PRC). C.Banner replaces Qianbaidu in 2002 as the equivalent of brand name. Qianbaidu was previously ranked 6th in terms of market share in 1999, but is aimed at the medium price range, unlike the new C.Banner.

Most notably, C.Banner is also recognized as National Famous Brand in 2005. According to the State Bureau of Quality and Technical Supervision which governs the assessment of national-level brand name products, a national brand name must satisfy the following basic criteria:

1. The product must be a national quality award-winning item whose quality is among the best of its kind in the country and has reached advanced international standards.

2. The product must meet market needs and have won widespread recognition. The manufacturer must have the necessary technical know-how and have achieved economy of scale in its production capacity. Its annual sales and economic benefits must be among the top in the industry for over five consecutive years.

3. The manufacturer must possess advanced and reliable production facilities and have the ability to conduct research and development.

4. The product must have good market rating and after-sales service.

5. The product must have met all the quality requirements in spot checks by all the relevant government departments over the past three years, and none of the product for export has have ever been rejected or involved in quality-related claim for damages.

As can be seen, the criteria stated are not easy to meet and is in fact quite strict. The fact that C.Banner is a national brand name must testify to the fact that the branding is not just widely known, it actually brought in tangible economic benefits to Hongguo.

From what I read, there are only 8 major players whose ranking rotates throughout the years. As such, I consider them possible competitors to Hongguo, even though their product mix and target audience might be different. These are the competitors (not arranged in any order):

1. Daphne –Prime Success or Yong’en

2. Belle – Belle International Holdings

3. Senda – Jiangsu Senda Footwear

4. Fuguiniao – Shishi Fuguiniao shoes development

5. Harson – Jiangsui Kunshan Zhen Zing Footwear

6. Teenmix – Belle International Holdings

7. Basto – Shanghai Basto Footwear

Of course, the 8th is C.Banner (or Qianbaidu, their older name).

On 13th Nov, Belle international acquired 5 companies from Jiangsu Senda Group, which includes Jiangsu Senda group sanxia footwear and shanghai basto footwear. In other, words, Belle basically acquired nearly all the competition (Belle, Senda, Teenmix and Basto are all under Belle international now), giving rise to 3 major players (not arranged in any order):

1. Prime success (1880.HK)
2. Belle International Holdings (0210.HK)
3. Hongguo International (H14.SI)

In terms of market cap (22nd April, 2008):

1. Belle International – SGD 10.8 billion
2. Prime Success – SGD 739 million
3. Hongguo – SGD 204 million

In terms of Points of sales (POS) as of 31st Dec, 2007:

1. Belle International – 6,090 from PRC alone, 6,143 in total
2. Prime success – 2,374 from Daphne, 2859 in total in PRC
3. Hongguo – 540 for C.Banner, 840 in total in PRC

In terms of EPS (RMB) as of 31st Dec, 2007:

1. Hongguo – 27.76 cents
2. Belle International – 25.03 cents
3. Prime success – 21.08 cents

In terms of net margins based on FY2007:

1. Belle International – 17.0%
2. Hongguo – 14.9%
3. Prime success – 10.1%

Without doubt, Belle International is the major competitor for Hongguo in PRC market. It is also stated in an interview dated 16th Sept, 2003 that Belle international is their main competitor. Prime Success (Daphne) is not a direct competitor as they are in a different shoe segment and their shoes are selling at half or two-thirds the price of Hongguo’s shoes, hence Daphne is in a different market segment from Hongguo. I did some sleuthing and found that the average selling price (ASP) of Daphne shoes range from RMB 200-250 (SGD 40 – 50) per pair in 2007, which is exactly what Hongguo had mentioned. Daphne is the No.1 brand in Chinese ladies footwear market for the past 10 consecutive years.

Are they concerned about foreign brands competing with them? They mentioned no, because the pricing tends to be very high (above 1,500 RMB or SGD 300 per pair), hence they are targeted at very high-end customers. On the contrary, Hongguo shoes ranged around 300 to 400 RMB (SGD 60 – 80 per pair).

It seems that tiny Hongguo is able to fight off the competitors pretty well, despite its limited market cap. They possibly have something that consumers like about their brand. Or rather, I propose that Hongguo is able to carve a little niche out of selling shoes to a group of people who are left behind by Daphne’s middle class range and foreign players’ high-end range.

But as I read more, I realized that both Prime Success and Belle International had substantial exposure to sportswear. For FY07, Belle’s business is split into 2 main divisions – footwear and sportswear. The footwear division is responsible for 53.1% of FY07 revenue stream while sportswear consists of 46.9% of revenue. The sportswear growth rate for Belle from 2006 to 2007 is a staggering 244.9% while the growth rate for footwear is only 34.8%.

Prime Success FY07 revenue consists of 75% Daphne and Shoebox brand (both are ladies’ fashion footwear brand) and 8% Adidas. Shoebox brand has ASP of RMB 75 – 100 per pair, so it is catered to the low-price market segment. Prime Success also mentioned repeatedly that Adidas is a renowned brand and are planning to grow that segment. Hence, we can see that the two major players are concentrating their firepower on growing their sportswear segment.

In other words, we see the following situation:

Belle – covering all the market segment, concentrating on growing their sportswear business. Belle and Staccato (brand under Belle International) ASP is about RMB 600-700 per pair.

Prime Success – covering low-price end (Shoebox) and middle-price range (Daphne), as well as sportswear (Adidas). They obtained distribution rights for Nike products in China too and mentioned they are going to focus on growing Daphne and sportswear brands. Daphne ASP is around RMB 200-250 per pair.

Hongguo – focusing only on designing, production and retailing of in-house and international brands of shoes, mainly aimed at middle to high end ladies fashion footwear. They do retailing for fashion apparel too. Think Byford, Hugo Boss, MaxMara, Bodyline, Ermenegildo Zegna, Guess, Colorado and Nine West. C.Banner ASP is around RMB 300-400 per pair.

I think with this, I have found Hongguo’s situational monopoly in the cutthroat consumer market in PRC. They have found their niche on a group of people not covered extensively by the major competitors. Belle can be a worthy competitor, but they are focusing their fight on the sportswear segment. Prime Success’s Daphne continues to be a major contender for market share with Hongguo’s C.Banner, but Prime success also seems to be more interested in growing their sportswear brands. Besides, Daphne ASP of RMB 200-250 per pair puts it at a different league with the ASP of C.Banner, which is around RMB 300-400 per pair.

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Hongguo - initiating coverage

I'm interested in this Singapore listed China company named Hongguo. Hongguo is a manufacturer and retailer of fashion ladies shoes and clothing, best known for their 'C.banner' and 'E.Blan' lines of ladies shoes. Though I never heard of these 2 brands before, do take note that Hongguo is one of the 2 largest ladies shoe brands in China, with their own manufacturing facilities in Nanjing and Dongguan.

Besides their own well recognised brand in China, they also do contract manufacturing over other brands of shoes. 'Nine west' is one of them. I read that they could be bringing in other brands to expand their portfolio, including international ones like Tommy Hilfiger.

Outlook: Women drive the economy. Looking at how my significant other buys her shoes every month and hearing how other 'more normal' women buy new shoes every week, we could be looking at a fast expanding market. As china get more affluent, we could be looking at a shift in the earning power of women there. Hence in their own market in which they are ranked the top 2, there could be tremendous growth.

Risk: Shoes can be commoditized. Branding plays a good part in holding the pricing and selling power of Hongguo. If that fails, they can only resort to reducing the price of their shoes, will be ultimately erode their margins and earnings.

Ratios: Margins is around 17 to 19% from 2003 to 2007. ROE is around 20-22 for the same period. PE is slightly less than 10 (based on FY07 earnings). Possible bargain in this company.

Need to analyse more in depth, considering this is a china company. Management needs to be scrutinized more carefully than usual.

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Amazing annual report

I've never been more impressed by an annual report than this.

The chairman and the management believes that a good annual report is one that teaches the owners of the company how to interpret the results. And boy, they did enlighten me! They mentioned that for a good analytical review of a business, the balance sheet classifications and other non-profit number indicators should not be an 'art and science' to understand - it must be easily interpreted. He did exactly that.


This forms a very very interesting reading as he goes on and tell the owners (yes, he calls the shareholders that) how to interpret their results and why they do certain things. He even explains the terms of the balance sheet for the owners, so that they know how to interpret it themselves. The managing director's statement goes on like that for 8 pages, which he explains with crystal clarity how to interpret the numbers and what it means for the business. I'm thoroughly washed with his sincerity and desire to educate owners.

Take a look at the chairman's message below.

Amazing right? It's also interesting to note that the founder and now non-executive chairman is a senior craft teacher, so perhaps he finds great satisfaction in educating owners for a win-win relationship. Why win-win? It's because while teaching others, you will also learn from your students if you keep an open mind. I think he managed to pass this philosophy to his son, the present Managing director.

Have you ever seen a consolidated balance sheet which is as easy to read as this?


I think a close fight will be from china milk. China milk's annual report is such a classic, with its own mascot talking and explaining to shareholders, that everyone should at least browse through it, regardless of whether one finds it of investing interest or not.

Of importance is that this kind of style is not only for the FY07, it goes all the way back! Their clarity and desire to educate owners are amazing. I browsed through the FY06 and was suitably impressed by it too. Here, they are trying to educate owners what higher EPS, higher ROE and NAV means to everyone. I must read all their annual reports - I do find their insights refreshing. It's akin to Berkshire's style of explaining their annual report to shareholders.


I have more to say, but I think I'll stop here, lest I'm accused of promoting this company. I have no investing interest in it (not yet anyway, though my interest and curiosity is piqued) and have no vested interest in it. I did bought long long time ago and sold for a mere $180 back in 2006 as it is one of the few stocks I bought when I started this investing business.

When I have a listed company in which I have to write the statements, you can be sure that I'll follow their style. Such is the effect of their enlightening report on me.

So here's the riddle - which company is this?

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HSBC 1 yr chart

HSBC chart



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Added a new company to my portfolio today, can you spot it?

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Of bonds, yields, stocks and PE

I was inspired by Mike's posting on the stock vs bond deal to do a little more research on my own. From what I can gather, the chart below seems to be the latest updated yields for treasury bill/bonds by SG govt (I'm not sure!)


Quite pathetic right? I'm not sure if I can find any bond yield longer than 20 years old, because the website where I got the data didn't have such an option for me to choose. It seems like the 20 year bond gives us a yield of 3.40% - not exactly impressive, though it's the safest form of investment. The highest the bond yield ever went up to was 5.19%, back in 1990, for 5 year bond rate.

3.4% means a PE of 29
5.2% means a PE of 19

Since current 20 yr bond yield gives us a PE of 29, does it mean that once PE of STI reaches around 29, that pretty much forms the ceiling of the upsurge, since the inflow of money should rationally go over to bonds?

Not sure :)

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Time waits for no man

Another week passed...

Seems like the older you get, the faster time passes. Anybody who experienced this phenomenon? I was walking home from work today and I felt a sense of urgency to do what needs to be done before time slips through my palm like sand.

Time and tide waits for no man, so hurry up and do what you need to do. Prioritize your most important tasks first so that they will be done first :)

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CSC and YN contract wins

No wonder CSC and YN suddenly revived from inactivity.

There are two announcements related to these two companies:

1. Yongnam and KTC secured a S$81.4 million contract for Marina Bay Sands IR to design, supply, install and remove temporary decking, steeling waling, strutting and excavation works. This is a 70% (YN) - 30% KTC joint venture for the South podium at the IR. They stated that this contract needs to work 24/7 basis to deliver the objectives within a tight timeline.

2. CSC won a contract in the energy related industry worth S$47 million. This contract is to do foundation works for Norway's Renewable Energy corporation ASA (REC) to build the largest fully integrated solar manufacturing complex here. Contract is for a period of 9 mths.

I managed to sell off 60% of my stake on CSC today too. Going to pare of my holdings for YN and CSC, join me? :)

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Charts for CSC and YN

Charts for CSC and Yongnam - for my own reference.





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Singpost will be posting their fourth quarter results for the financial year ending 31st March 2008 on 30th April, 2008, after the close of trading.

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Are you a fighter, a mage or a fighter-mage?

I was talking to dream and musicwhiz last night when the idea of using Dungeons&Dragons (D&D) as an analogy to the two streams of thought for investing/trading was discussed. I did some research on found that, well, not only does D&D analogy applies to investing/trading, it also applies to web development. I got most of my information from the site, which I think all in IT should at least read it - it's damn interesting!

Fighters


Description:

Not the flashiest or most prestigious role, Fighters have the lowest barrier to entry. They accumulate experience quickly, and don’t have a lot of class bonuses. But their simplicity belies a focus and strength that is crucial. The fighter is the guy in the party that protects the more “thinky” types from anything that might get in their way. There can be honor and satisfaction in bashing orcs one at a time.

Analogy:

I do agree with the author that fighters are not the most flashiest of the lot, but they certainly have the lowest barrier to entry. Almost any races can join to become a fighter. Fighters act as a tank to protect the weaker wizards from monsters, especially during the earlier stages of their 'career'.

Personally, I think fighters represents technicians. This is based on 2 reasons:

1. Chart reading is the more accessible than reading annual reports and financial statements
2. You can accumulate experience fairly quickly (don't flame me on this!) because you need less knowledge before you can start reading charts


Mages


Description:

The mage is the general purpose wizard. They are resourceful and possess a broad understanding of all types of magic. While not specialized in their studies, they are deeply theoretical, research oriented, and possess incredible focus and discipline. Their power comes from being able to summon a wide variety of spells, but they tend to be weak and vulnerable in the chaos of melee, since they must prepare spells ahead of time.

Analogy:

There are more specialized classes of magic users - like wizards, so don't be too harsh when they wrote 'while they are not specialized in their studies'. I think FA will fit into this role because:

1. Mages will fit into the researching type that fundamentalist seems to exude.
2. Mages are weaker at first (short term might not do well) and as they level progresses (as time goes on), they are gain more and more powerful spells. I think this fits into the long term perspective of fundamentalist.

Haha, but it depends on your reasonings.

I think dream gave a very good counter analogy. He said that since mages are more nimble and agile, dodging monsters and casting spells, mages will be most like TA :) Perfectly reasonable! So what do you think?

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Important realisation

Buffettology is really a good book. I think I'm going to get this book for sure, as I think I'll re-read 12 times. I made an important realisation when I'm a quarter into the book. This realisation is handy to quickly get a rough value of a business entity that sounds promising. First of all, I need to assume 2 things:

1. When I buy shares of a company, I am a partial owner of the business entity, hence I'm entitled to get a part of the earnings generated by the entity. Hence, EPS (earnings per share) of the company is also my earnings, though the earnings can either be put back into the business to generate more future earnings, or it can be distributed to shareholders like me as dividends.

2. The market will someday price the company at the right value.

We can calculate the earnings yield of a business, which is also the inverse of the P/E ratio. Supposing that the PE of a company is 12, then the earnings yield will be 8.33% (1 / 12 = 8.33%). This will be like a bond where you pay the price of the stock and expect to get an earnings of 8.33% with 2 major exceptions. First is that you might not get the principal back at the end of the period - which is both a good or bad thing because you might get more or less than the principal you put in. Second, the returns of 8.33% per year can vary - it can go up or down.

Of course, when we're investing, we will want the earnings per year to go up. Based on assumption 2, this means that the price will also go up. Conversely, if earnings go down, the market will also price the stock accordingly.

Let's say I want to get a returns of 15% per annum. Let's say the EPS (forward) is $0.23, it will mean that I will have to buy at $1.53 (0.23/0.15 = 1.53). If I pay:

$2.00, my earnings yield becomes 11.5%
$1.00, my earnings yield becomes 23.0%

In other words, the lower the price, the better the yield becomes. For me, I'll be happy with a earnings yield of 15%, which means a PE of 6.7 (1/0.15 = 6.7). If I buy a company with PE greater than 6 or 7, that will mean my earnings yield becomes lesser than 15%! That's an important realisation!

Of course, this is a simplistic case. What happens if the earnings keep on increasing? That will mean that my yield will increase and increase, even though the price of the stock remains the same! I finally understand why price is irrelevant, except when you're going to buy or sell, because earnings is what matters at the heart of this. But if we can assume assumption 2 to be true, then eventually the price of the stock will also increase as long as the earnings do too.

Okay, what happens when company gives out dividend? If profits earned are either put back into the business to let it grow or are given out to shareholders are dividend, it will only mean that when dividends are given out, future earnings will not grow to its greatest potential. Responsible companies that have no confidence of being able to maintain or generate higher earnings will give out dividends to shareholders. For those companies that can generate higher returns, why ask for dividends? Can shareholders generate returns higher than the ROE of the company themselves?

I'd rather let the company compound the earnings for me.

A few things must be put in place here.

1. Companies must be capable and responsible to handle the earnings efficiently. Otherwise, mismanagement of earnings into less worthy avenues will erode the value. Hence, an efficient, capable and candid management is crucial.

2. Inherent economics of the business must be sound. Some business/industry are just better than others.

3. Companies must have an economic moat so that their earnings will not be eroded by future and present competitors. This will ensure that earnings are high, consistent and growing.

This is going to be an exciting journey :)

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Books came over!!

I'm extremely delighted today :)

First of all, I've been hunting for Philip A.Fisher "Common stocks and Uncommon profits" for some time already. I've chanced upon it a few weeks ago, only to go back home in disappointment because the book cannot be borrowed due to some technical problems. But this time, I found it nestling between the shelves. It's a bit old, but I'm too happy to find it to care much :)

The second thing is that the 2 books that I've been waiting was mailed over to me today! I've been waiting for the free copies of the books after completing the pop quiz by Wallstraits. Been 2 long weeks! I'm even beginning to suspect that it was somehow lost in the mail till it came over today.

The books are in excellent condition - hard covered and smells of 'new'-ness, enticing me to read it. What's more impressive is the fact that both the books are signed by the author, Curtis J. Montgomery, with a short encouraging phrase addressed to my name. I was both touched and impressed by this act of generosity and sincerity that I promised to myself that when I have such a day that I publish my own books, I'll do the same to pay it forward.

Thank you Wallstraits! You not only delivered my free books to my doorstep, you've also received a promise by La papillion to pay this kind act forward.

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Monopoly rules - Milind Lee

Monopoly Rules by Milind Lee was a book that I completed reading last week. I didn't have time to publish what I thought about this book last week, so this is a bit long overdue.

In a nutshell, I think this book is very interesting. The author talks about the wrong focus on SCA (sustainable competitive advantage) whereas they should first focus on whether their business have a monopoly. Let me explain. Monopoly, according to the book, isn't exactly the definition that text books gave. To state it simply,

Monopoly is an ownable space for a useful period of time.

There are 2 aspects of monopoly, space and time. Space is talking about the product uniqueness, service uniqueness and price difference. You find that those 3 that are mentioned are actually something tangible space - that can be seen. There are other intangible space, namely custom/tradition and emotional involvement. Perhaps I need to explain a little more on custom/tradition and emotional involvement by giving some examples.

Some companies, by virtue of them having been around, will have what I call brand presence. The book quoted Standard and Poor, having been around for so long, will be the first place a newbie will look for to find out about a company or a unit trust. Emotional involvement will be those that Warren Buffett owns...coke, see's candy and so on.

Time will be the other aspect of a monopoly. There only 2 things to talk about it - either we know the length of time of the monopoly (trademark, regulation, patent, copyrights etc) and unknown (how long will ebay monopolise the online auction trade).

These are the different types of monopoly.

1. Asset monopolies

This is based on tangible assets or brand (yea, i know brand is intangible, but that' how the book classifies it under. A brand is something that can be seen, hence it's classified under asset by the author)

Limited natural resources, unique products/services, breakthrough in technology, license/patents/technologies/copyrights are all examples of this type of monopolies. The author sees this type of monopolies as old-schooled and will be less and less relevant in today's fast changing economy. These are easy to see and hence they are easier to erode by competitors.

2. Situational monopoly

This is one that exists because there is a need that no other companies met or even discovered. Even in generally bad industry (like airlines), certain companies can still find a little need that is totally unmet by others can carve a situational monopoly for itself.

Monopolies need to be protected by 3 havens:

1. Regulation haven - controlled by legal rights such as patents and government controlled.

2. Technological havens - such as the difficulty to do, copy, reverse engineer or it simply costs too much

3. Customer islands - these are network effects such as high switching cost and loyal customers. Think ebay.

I think this part of the book is most interesting. It talks about how to identify monopoly in companies so that one will know when he/she sees one. These are the 5 questions he/she ought to ask when searching for one:

1. Do your customers see only you if they are looking for this product or service?

2. Are you invisible to your competitors?

Some companies are in denial and/or are complacent and arrogant, thinking that this and that companies poses no threat to their business until it's too late. It happened to AT&T and Bells, long time ago in US.

3. Are the true competitors outside the dotted line?

By dotted line, the author means that these competitors are classified outside the definition of your industry. For example, when thinking about the competitors of airlines, sometimes the competitors are not other airlines, but are other modes of transportation. By looking outside the scope of your immediate industry, perhaps more can be said about the strength of the monopoly.

4. Can you price like a monopolist?

5. Do you earn unusually high profits?

Quite a good reading as I learnt more about this aspect of analysing my own business and other companies :) Next time you evaluate any company, think along this line:

1. Where is the monopoly?
2. How does it came to be?
3. How long does it last?

I think it'll be quite a good guide to analyse any companies qualitatively :)

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New new new

Here's the screenshot of the old bullythebear website:


Here's how the screenshot of the newer bullythebear website looks like:


Personally while the older one will be missed sorely by me (and some others too!), this new one should be the new phoenix that the ashes of the old one had turned into. The background is a brownish-black colour. What I liked about the new one is the colour scheme. The red/orange combination signifies confidence and power.

I totally revamped the Newbie's FAQ section to make it easier to update and to have the option to include questions as well. Here's how it looks like:

Where can it be found? You can find it below the header and above the chatbox, by clicking the button "NEWBIE'S FAQ". Please help me spread the word around for this newbie's faq. It's supposed to help those who are new and had questions to ask, so help me do them a favour? :)

Those who want to link up or use the faq, just drop me a mail or use the chatbox, thks!

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Note: I decided to control the comments as a measure to counter those idiots who are flooding my comments page with virus or spyware laden websites, and as a precaution to those who might innocently clicked on it. Please do not click on any of those!

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A new look!

I've outgrown the older template.

It's time for a new template. This must be the 3rd time that I changed a new template and it could only get better and better. I still remembered that my very first one was from the standard classic template from blogger itself. Not very inspiring at all.

After some time, I switched to a new (and now old) one, with 2 columns. Not too long ago, I configured it to work with 3 columns. In the process, I learnt lots of html codes myself. No doubt, it's rudimentary, but I think I can still do the standard editing and managing of my website. With the new and latest template, I've graduated one more level with html coding.

There's much more features in this latest template. I think I should list them down:

1. Tabs near the header just above the chatbox. These are quite handy to me and possibly to others as well. Though we have several links, we only click a few of them. And those should be placed in the most accessible places so that time wouldn't be spent trying to locate those links. The tabs can be fully extended to include more quick links as and when I want it.

2. The colour matching is done on a more conscious level. Nobody would want to visit an unpleasant website, even myself. It's important to have a certain level of aesthetics in order to fire the little neurons in my mind for productive work in the blog.

3. It's a 3 column template, so there's a better use of the web space available. This blog is not used mainly for advertising (though who would mind if there is). In fact, it is my own philosophy that interests comes before money. I removed those things that are jarring to my philosophy and only include one advertising source - nuffnangs.

Sorry for all the disturbances and inconveniences while doing the changes. Do bear with me in this period of transition :)

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Successful Value Investing in Asia - Tony Measor

I've not done a book review for some time, but this book that I read beckons me to review it, so that I can share with more people and also that I can remember the lessons taught.

This book that I'm talking about is: Successful Value Investing in Asia - 10 timeless principles by Tony Measor. To be frank, I saw this book from major bookstores before but I rubbished it away. Perhaps in the past I saw this book with a different light than what I saw now. When I finished reading it yesterday, I was wowed by the sensible insights of the author who wrote it.

In a nutshell, here's the 10 principles by the author:

1. Invest, cash is not king
2. Be your own fund manager
3. Learn the basics
4. Looking for dividend income
5. Focus on growth
6. Buy and keep
7. Beware of the quick profits of IPO
8. Gamble to win
9. Enjoy the ride with the market
10. Buy property for living, not for investing

I really learn a lot from chapter 3: learn the basic. Here, I found out that there are 2 ways to value a company. One is through its earnings and the other is through its assets. There is of course a compromise between the two. That statement alone makes me think about a lot of things already.

Without any doubt, the author is bullish on the banking sector as the ultimate growth stock. His favorite, which appears time and time again in the book, is actually HSBC which is listed in HK. He cited a very interesting insight - that HSBC forms a major component of HSI (from the charts, I agree with him). HSI might go up or down but overall, the direction is still up if you give it enough time to mature. It's the same for HSBC.

He mentioned that while valuating shares with earnings, one must also back the valuation with asset values. Asset values will form a safety net in case earnings fail to meet expectations. I would classify the author as a dividend value investor, someone who values dividend more than capital gain.

In the book, he mentioned several companies several times, and thus I think these are worth investigating further:

1. HSBC
2. Manulife
3. China mobile
4. China light & Power holdings
5. Hang Seng Bank
6. AIG
7. Huaneng Power
8. Cheung Kong

It's really a good interesting read for me, I might consider getting this book :)

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Mozzies attack!

What's the difference between a fly and a mosquito? A mosquito can fly but a fly cannot mosquito! A pretty lame joke from my student. But it didn't mask the fact that it's not durian season, it's dengue season now!

I can always tell because somehow, these irritating blood suckers will fall in on the mirror of my bathroom every morning. When in season, they will also fall in after every few hours and I would have to clear them every now and then!

Don't tell me to call NEA or ENV or what nought. They came they went, and they educate and they checked. Nothing. Will report it. What else can they do? They did told me that it's aedes mosquito alright (great). Luckily, my area (Bedok/Tanah Merah) is not a dengue hot zone, otherwise with the sheer amount of mosquitoes gathering at my bathroom everyday, it's amazing that I'm still here blogging!

I did some research on Aedes mosquito, as any curious person would do. I found out these:

1. Aedes mosquito usually bites in the daytime (spot on, as they usually leave me alone at night). Malaria mosquitoes, those commando that live in Tekong, usually bites in the evening and nights.

2. Mosquitoes in generally drink nectar from flowers for food. Only female mosquitoes need blood for the proteins and iron needed to develop the eggs. Female blood suckers!

3. Mosquito usually don't venture far from where they are born. Since I live in the highest floor, and I'm sure that my home is not a breeding ground, it must have come from possibly the roof? Or neighbors? I highly suspect the roof.

Hence, as a community message from Bullythebear.com, I decided to track the number of mozzies I kill per day and add up the total. Perhaps I can keep the dead carcasses instead of washing down the drain, keep it in a bottle and start mailing to ENV or NEA for some serious action by them.

PS: Despite my hatred of these irritating blood suckers, I pity them too. I once, out of curiosity, fed one of them to a spider which I saw lying in ambush at the corner of my room. Guilt still washes over me... I won't do it again.

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Civil engineering vs value investing

Oh my, how time flies...Friday already and another week gone by. As KK would have said, only left XXXX weeks more to go :)

I realised I didn't blog much this week, so since I have both the energy and the time to do it now, I shall try to post some thoughts that are in my mind. It's about margin of safety.

I did civil engineering before, so the concept of margin of safety isn't new to me, except that it wasn't known in the engineering jargon as margin of safety - it's called factor of safety. Different words, same meaning. Thus, you can imagine that my eyes lit up when I first read Benjamin's Graham classic book - The Intelligent Investor. The concept of having a safety margin is EXACTLY the same as designing something bigger - a bridge or a building or what other things that civil engineers do.

I'll illustrate with examples..

For stocks,

1. We analyse the business and see if it's worth taking a closer look. Hence there is a screening procedure, otherwise all the stocks in the world will require 10 lifetimes or more to scrutinize closely - not possible.

2. Having ensuring a business is worth re-looking, we analyse the 3 financial statements to check that it's worth taking a shot. Step 1 and step 2 are closely related, since the screening procedure also involves numbers and ratios taken from the financial statements.

3. Calculate the intrinsic value or fair value of the business. Many methods to calculate - P/B, P/E, DCF, DFCF, DDM and other 3 letter words

4. Apply a margin of safety. This is not a fix margin for all the stocks, but rather it depends on how sure you are of the value you used for estimating the fair value. In essence, the more unsure of the input (hence the business), the higher should be the margin of safety.

5. Go buy it

That's investing with a margin of safety for you. I find that this approach parallels the design procedure in civil engineering works. Alright, granted that I lost 99% of my civil engineering knowledge. In fact, I only remember 1% of all that is taught, which is the concept of the factor of safety. Interestingly, I asked myself immediately after I graduate what I learnt from the extremely value packed (read: packed to the brim with courses and lab work spreading over 6 workdays per week) 4 year course.

What I learnt is this: Always apply a factor of safety. But if you apply too much, you'll pay too much for construction built to stand an extremely harsh condition that has a very low probability of happening. Apply too low, you'll pay less for the construction of a structure which cannot take unexpected conditions.

So how does a civil engineer design their works?

1. Do a survey of the land based on the map. Do a site visit to find out unanticipated conditions before designing. Do soil testing with a few drill holes. A 'few' meaning enough to find out reasonably what the soil conditions are yet not be overburdened with cost. Most of the time, civil engineers do not have the luxury to choose the site and deem that a particular site is not worthy of construction. Engineers will have to make it work, given any site.

2. Look at the survey results and the soil testing results. Get the working parameters of the site to facilitate design. Forecast the load that the structure is going to take given reasonable conditions. For example, to build a bridge, the average weight of a normal car is taken. A forecast of the traffic condition is made for both directions and then we'll get the load. Have to look up a engineering code book to multiply the first factor of safety to get the design load. This is because what is forecasted might not be correct, so we have to multiply the forecasted load with a safety factor to get a higher design load, in case the calculation is wrong.

3. Design the structure based on the design load. When designing the load that each beam and column have to take, we apply another factor of safety to account for a myriad of conditions like earthquakes, wind, soil settlement. In other words, the structure can take unexpected load conditions which is not forecasted, but up to a certain degree only.

4. The key is that if the factor of safety is too high, the cost of construction will be too much because we are over designing the structure for a load which is probabilistically low. Yet if the factor of safety is too low, we are stressing the structure too much and it won't be able to take in unexpected load conditions. Very dangerous as it can lead to catastrophic failure and lead to loss of lives.

You go figure what's so similar about this two disciplines :)

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