Hongguo 3Q results

Hongguo released its 3Q08 results last Fri. It wasn't doing exceptionally well, but given the current state of matter, I think it's quite alright. Let's just do a quick one here.


Here's my thoughts on the statements:

1. Looking at the 3Q to 3Q results, revenue increased which is followed by an increase in both gross profit and net profit in absolute terms. However, gross and net margins fell slightly.

The increase in revenues comes from the increase in more stores (150 in total) selling both the main C.Banner brand and E.Blan. However, JUC outlets decreased by 10 in the 3Q. The Naturalizer brand also starting contributing a little to the revenue. Cost increases as there are more outlets opened, bringing down the net profits. It's good to know that the management decided to limit the expansion of more outlets in the midst of this financial crisis. It's a more prudent way of doing business.

2. A little worried about their net margins, which is declining for a few quarters. I believe their 2nd and 4th quarter is their better quarters in terms of revenue and profit. Take a look at their quarter to quarter figures.


One thing for sure is that their net margins are sliding down. SDA/revenue is getting higher too, which the management always attribute to the expansion in new outlets. So far, their expansion do not require taking any long term debts, which is safe in this kind of credit crisis. At least I know they are less likely to blow up!

3. Here's their current ratio, total debt/equity, ROE and EPS figures.


Current ratio is still alright, but there is an increase in the total debt/equity ratio. The increase in debt is due solely to an increase in short term liabilities. Two figures stand out strongly from the current liabilities section of the balance sheet : Short term loan of 40.9 mil RMB and increase in trade payables from 64 mil RMB to 104 mil RMB. Seems like they are squeezing their creditors more tightly by paying them slower. There are not increase in trade receivables though.

4. As for cash flow, there is a few things to take note of. There was around 20 mil RMB that others need to repay Hongguo. This is partly offset by the 30 mil RMB that Hongguo owed others. Overall, cash generation from operations is +ve, but after taking into account tax, it went to -ve but is generally in a better state than 3Q07. There is an increase in short term loans of 40.9 mil RMB which is mentioned earlier in the balance sheet - but there are no mention of what the loan is used for. It made up 16.7% of the total debt (they have no long term debts), so it's not a major problem. Cash flow should improve more as they plan to limit the expansion of their core retail outlets (I take it that they mean C.Banner and E.blan brands) to 150 by end of FY08. The management mentioned that they would be the productivity and the profitability of their outlets - which I think is a good move. Fight, consolidate THEN advance, that's the way of the infantry.

5. Breakdown of revenue:

C.Banner --- 56.4%
E.Blan ---- 9.6%
Contract manufacturing --- 26.2%
JUC --- 6.1%
Naturalizer footwear --- 1.7%

There is more closure of JUC to the tune of 10 more outlets. I think they are slowly divesting out from that. Another point to take note is the huge increase in the contract manufacturing segment. Compare this to 2Q revenue breakdown:

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

Contract manufacturing is of lower margins than their in-house shoe brand, so I would expect the net margins to drop further. No more plans to expand their production capacity for their contract manufacturing. Management had stated that they wanted a revenue mix of OEM : Retail of 80:20, so that's what we should be looking at.




Value to price comparison:

Annualised EPS for FY08 is SGD $0.0606. On last count, the EPS I calculated was $0.06252. Last close is SGD $0.180 per share. This represents a PE ratio of 3x. To hell with historical PE, haha! The lowest PE was around 5x, but I think it broke all record now.

Applying Graham's strict (current assets - total liabilties)/shares outstanding, we get SGD $0.223 per share. Using NAV [(total assets - total liabilites)/shares], we get SGD 0.307 per share. Based on FY07 dividend, divided yield is around 7.8%.

Read More

Valuable Vicom

Long time ago, I mentioned about Vicom being a prime candidate for value at around $1.50, fully unaware that it will hit around $1.50 so soon this year. At the lowest, Vicom was trading at around $1.30 near end of Oct 2008. They just announced their 3Q results today.

Here are the main ratios for Vicom over the last 9 months:

--------------------------9M08------------9M07
Gross margins--------28.8%-----------29.3%
Net margins-----------23.0%-----------23.4%
ROE (annualized)-----25.6%-----------25.1%
Current ratio------------1.57-------------1.35
Total debt/equity-------34.5%----------30.4%

NAV for FY07 is $0.70, for 9M08 is $0.7532. This means that it’s trading at around 2x NAV at current price of $1.53 at last closing.

For the past 9 months in the FY08, Vicom earns a PATMI per share of 14.89 cts per share. In a non linear world, let’s just take a linear assumption that everything can be projected in a straight line to 4Q08 – that gives us a PATMI per share of 19.8 cts per share. Last closing price for Vicom is at $1.53 on 11th Nov, giving us a PE of 7.7x. Historical PE might not mean much in these extraordinary times, but I feel we have to put the 7.7x PE in perspective. Past PE of Vicom range from 6.8 times to 7.3 times from FY2004 to FY2007.

I did a valuation for Vicom before. It ranges from $2.2 to $2.8 over a period of 10 years. At 1.53, it gives us a paltry CAGR of 3.7% to 6.2%. But as I think the real attraction lies in the dividend. FY2007’s dividend is around 15.5 cts per share. Assuming no change in dividends over the next ten years, and without growth in dividends, we’ll get back $1.55 in ten years time, just based on dividends alone. This means a 0% growth in dividends over the next 10 years. Historical CAGR of dividends growth is 50%, with FY06 to FY07 increase in dividends per share (special dividends included) of 29 %.

You might want to check this out:

Per share data:

-----------Div without specials---------Div with specials
FY04----------4.6 cts-------------------------4.6 cts
FY05----------5.2 cts-------------------------6.8 cts
FY06-----------7.9 cts------------------------12.0 cts
FY07----------15.5 cts------------------------15.5 cts

15.5 cts per share at $1.53 means a dividend yield of 10.1% - a good rate anytime.

Business wise, their segmented breakdown of business as a % of revenue are as follows in 9M08:

Vehicle inspection business – 30.6%
Vehicle assessment business – 3.6%
Test / inspection services – 59.2%

This segmented breakdown of their business to their revenue is more or less the same as their FY07 results. Their main business is still the test / inspection service which makes up nearly 60% of their total revenue, which shows an increasing trend over the years. Vehicle assessment business will continue to drop as their monopoly status on this business is removed by regulation. Test/inspection services in SETSCO will thus continue to be their growth engine, followed by their vehicle inspection business.





Verdict:

Seems like quite a nice combination of factors that make Vicom attractive to me again. I like the high dividend yield of 10% - even if it cuts the dividend to FY06 level, it’ll be around 7-8%, which is pretty decent to me. What is more attractive to me is that this company got pretty good cash flow, decent margins, low debts and boring business – quite a cash cow in my opinion. If they only hold on to FY07’s dividend and continue paying at the same rate without any growth over the next ten years, I would have gotten the cost of the share for free – I thought that the downside is pretty much covered. And we haven’t talk about the likely capital gains. Or the likely growth in dividends given. If the wind is behind the sails of Vicom, we might be even getting back our cost of the shares much earlier than 10 years.

There might be some issues at buying or selling the shares. As the float is quite low, there is always a wide spread in the bid/sell queue. I think this is like singpost kind of company.

Is this the best use of my cash?

Read More

Bank Bubble Burst

This is a chart that shows the market cap before and after the sub prime crisis about a year ago. I think in a snapshot, we can see plainly who's the survivor and who's not.

Read More

Save enough and not much more

You might have noticed that these days I've been sharing more on my private life. Some recent events made me re-think the way I look at things, which is important for me to write it out so that I can think through it clearly.

I am a self-professed champion fighter of expenses. I do have trouble spending my money and have the soldier discipline to put aside my income to save. But recently, I've been thinking very hard about why I would want to accumulate so much. I realised that I save up mainly because of a lack of security. Somehow my growing bank account and mmf account makes me feel safer, and as such, I've been deferring my spending so that I can invest/accumulate.

I used to have this idea of deferring enjoyment for as long as you can so that you can reap whatever opportunities in the meantime for greater enjoyment in the future. Well, I think for now on, I'll take some enjoyment along the way and stop treating myself so badly. It's hard to balance between being a saver and a spender, because on default I'm a saver. I'm trying my best not to have this accumulation mindset and to stop thinking that my growing bank account means security.




You know, sometimes, life is too short to defer enjoyment. You must really know what you are accumulating for. Enough is enough, no point keep earning and earning and deferring the enjoyment. You have only one life and you should make the best use of it.

Read More

Trust me

Recently I'm not in a good mood.

I was reflecting on the past mistakes that I had made in life. Not those little ones but the major ones - especially those that involve a considerable monetary loss. I realised that they all share some commonalities. I wanted to share this even though it's a little bordering on my private life, but I think the lessons are important enough so that those who read it will learn not to repeat it. I've been doing quite a bit of reflection as my work start to dwindle down and I am preparing to rest and strategise for the coming year 2009.

The two traits of my major mistakes are:

1. I had been too trusting on others. That is always my weak spot. I am a man of honesty, integrity and fairness (I wanted to add in exceptional in front of honesty - but I thought that I had done some dishonorable things in my life too) and the problem lies when I think that others are the same too. Therein lies the crux of the problem.

2. There are times I didn't do my due diligence and entrusting my responsibilities to others. I believe that it's linked to the first weakness of being too trusting. I mean if you trust someone, wouldn't you believe what that person is saying and that the person is acting in ways that are beneficial to you? I must have had a very romanticized view of the world.




There are countless examples where I had been duped by my own weaknesses. Here's a few scars that I received:

1. When I started investing back in 2006, I believed that brokerage reports are true and accurate. I kept thinking that these analysts are the pros, if they say this and that target price, who am I to dispute that? It is this trust in professionals that I ended up losing a chunk of my capital since I bought solely on brokerage report.

Lesson learnt: Professionals might not know any better than you. Differentiate between opinions and facts. Distill the facts but form the opinions yourself. The moment you find that you are actually transferring your responsibilities to others (i.e. govt, pros, experts, old-bird, experienced etc), stop and take over.


2. I was actually cheated during my uni days. This really scarred me for a very long time. It happened when 2 china folks told me they had lost their luggage and needed to call their families or something. I lent them my phone, after which they told me more sob stories. To cut the story short, I exchanged their phone with mine (because their hp battery is flat), and I even went to draw out some cash for them. To think that my savings account only have $500 and I gave them $150 out of it.

You know, I wouldn't be cheated out of greed. Usually I will be cheated out of sympathy by confidence tricksters (I use 'usually' because there's more than one incident). It takes a lot of courage to face this again as I blogged it out. For quite a long period of time, I was scarred by this.

Lesson learnt: Well, what can I say? Don't be so trusting. But it's hard to make a balance - too trusting you can cheated, too skeptical and you'll be a cynic. Still trying to sort out this.


3. My first insurance agent created a hell lot of job for me, because I was trying to undo some of the stuff that I was sold earlier. I won't push all the blame to him, because seriously, at that time if you asked me what's the interest rate on savings accounts, or what is the difference between term and whole life plans, I wouldn't know. On the contrary, because of my obvious lack of knowledge in this area, I had went to open a brokerage account with a friend in order to find out more. Well, everything falls into place and soon I started a blog and got very interested in personal finance too.

Lessons learnt: This is one of the hard lessons that I do not mind spending. Without the hard jolt of feeling something is wrong with my policies, I wouldn't be forced to do something about this aspects of my life and a lot of things you're reading now wouldn't come into place. I guess the most important lessons here is not to wallow in sorrow. ALWAYS do something positive and learn from your mistakes.

Fool me once, it's your shame. Fool me twice, it's my shame.

Read More

Post dinner thoughts

The dinner on Halloween's night at vivocity is such a success; I wondered why we didn't had it earlier! Since I'm such an introvert, it's quite difficult for me to put aside my shyness and meet so many strangers at one time. But seriously, I'm very thankful that I did and very happy to have met all who attended - Lumiere, KK, Cookieguy, Cheng, Pepper.

Special thanks to Dream and San for making things possible - and for the excellent wines and champagne!

I finished my work very early and reached there early at around 6 pm. I spent the next half an hour outside the vivocity shopping mall trying to thaw my freezing hands. The sun was setting and it cast a very beautiful warm glow to the scenery. I could not resist but to reach out to my handphone and snap this photo.




This is the only photo allowed for that evening. I was given strict instructions not to take any pictures while inside. Hoho, apparently it's not only a superfriends meeting, but a secret friends meeting too :) Nevertheless, photos can only dilute the real experience as the real deal are the company, the atmosphere and the great food there. Photos are only two dimensional; it serves to remind ourselves of the memories only.

I found that the group that I met is what I imagined them to be online. We had such a jolly good time that I think to those not in the know, they would have thought that we had been old friends :) Amazingly, we didn't talk much about investing at all. I gave them a good tip in the middle of the dinner when I was sabotaged by dream to give a impromptu speech - Buy low sell high! Hoho! On a serious note, I guess those present are not the type to have asked for quick picks too. We're more interested in each other's life experiences that the market.

Couldn't have spent a better dinner anywhere on a Friday night. Thks pple for the wonderful company!

Read More

Surviving through lean times - Part 2

Having talked about how to cope with possible recessionary fallout by trimming expenses and boosting income in order to boost savings, here I'm going to share about how to prepare myself psychologically for it. I believe the psychology part of preparing for the recession could be much more important than just the material aspects. This is because the mind will cause us to feel about the same thing differently at different times. You know what I mean, sometimes bad news feel like the end of the world, sometimes bad news feel like a mosquito bite.

I think it's important to feel upbeat about the whole thing. Easier said than done of course. I know some people who had invested in the stock market and are facing huge losses. This makes them worried and everything seems all gloom and doom. Having been through a bout of depression last year for losing 30k (most are realised, some paper losses) I think I can understand how it feels. You'll feel that Death is upon you because of all the suicidal thoughts that creep into your mind, especially at night when there are no routine work to occupy your mind anymore. I'll just look at the windows and think what it's like to fall down and end it all. Relationships got strained pretty badly too as it's apparent that I'm radiating negative energy and pessimism outwards. If you feel that way, please please do seek professional help. Depression is not a joke and it's not fun, neither is it incurable.

Time took care of a lot of things and I became better over a period of 1-2 months. I personally did not seek medical help because I'm confident I'll survive through it. I'm pro life and not someone to end my life prematurely. Again, do take note I'm just sharing my experiences. For those who are in depression, do seek the proper help.




I realised that life is more than just your investment, and it takes 1-2 months of depression to learn that! So what if you lose 30k? You can earn it back in 2 years. If not, 3 yrs or 4 years. I start to value the little things in life. What matters is that you do not overleverage yourself in the process. It's a different story altogether if I had borrowed 20k out of the 30k, lost all my 10k and still owe someone 20k! Or if I had lost 30k, and I had no buffer to pay for my tuition fee or housing loans and such. That will really sting! Thus the big idea here is: Do not overleverage yourself, because when the tide comes in, everything floats and rise, but when the tide goes out, you might be left with nothing but a mountain of debts.

Personally, I feel that keeping 3-5 months of expenses in savings account of banks is good enough for me. That's because of the nature of my job. I won't be suddenly called in and get retrenched, hence my buffer zone can be smaller. But I think this kind of buffer, you have to think about how long it'll take from the time you get retrenched to the time you eventually got a job - that's the amount of expenses in months you need to get in ultra safe places. These are the untouchables. I think by locking up this piece of my assets, I'll get piece of mind.

It's very important to find a support network too. I understand that like stocks, our moods go up and down in cycles too. If you have a group of your most loyal fans (start looking at your significant other, than to your friends and family), who will stay on with you through thick and thin, through prosperity and sickness, I think you'll never feel down. It's like when you're down, you'll cheer them up, and vice versa. Call it mutual backscratching, but it works!

If you can't find a network, about how my cbox? I'll cheer you up, but make sure when I'm feeling gloomy, cheer me up too :)

(Suggested background music for reading this post: Try Louis Armstrong's version of La Vie En Rose here)

Read More

Surviving through lean times - Part 1

Possibly facing my first recession since I started work 5-6 yrs ago, I think it's a good time to figure out how to tide over this rough period. Fail to plan, plan to fail, they say. I think I need to think about 2 aspects of coping with the possible recession - How to save more and how to cope with it psychologically. But for this post, I'll just focus more on the savings part. Maybe more on the psychology part at a more opportune time.


How I'm going to save more


The golden rule applies : Savings = Income - Expenses

To raise savings, I need to increase my income and decrease my expenses. As I've not been through a recession since I've started working, I do not yet know if my job is recession proof. Well, I do hope it is! What I intend to do is to market myself to the upper middle to upper class segment, for I deem them to be able to ride it out better than the average Singaporeans. In fact, I even plan to increase my rates. The good thing about my job is that I do not have to rely on any company, hence during recessionary times, I do not have to worry about being retrenched or suffer a pay cut. I believe that's a big relief factor for me, especially if I intend to take on more debts in the near term for housing and such. I guess it's a different mentality for me because for my job, security is never taken for granted. In fact, it's never secure. I have to fight my way to reach my previous pay every year. Haha, in a way, I'm having a recession every Nov to Jan period where I have to experience pay cut and no work :)

To prevent credit crisis in my job (where people are unable to pay), I think my usual diversification strategy works. I take in around 30 streams of income, so if one fails, it will not hit me too hard. I work on a credit basis - meaning that I provide service and give credit for around a month before I get paid. I might need to adjust the collection period to increase my own liquidity. Perhaps I'll shorten my credit term to two weeks for some. That will have to depend on situation, depending on how bad it gets.




Another integral part of the savings equation is to decrease expenses. I already have cost savings measures in place, regardless of recession or good times, so it's not as if I'm going to tighten my belt or anything because it's already tightened. I'm a valueskate, not a cheapskate.

Recently, I reviewed my insurance policies and found that it's not up to standard. I mean I could get much more for the same buck. That will have to go. As mentioned in my 'valueskate' post, I don't mind paying more if it's going to give me more bang for my bucks. After learning the that price is not equal to value, I think my perspectives opened up. Cheap need not necessary be better. Nor is expensive stuff necessarily good. I'll try to source out valuables at cheaper price, not necessary cheapest price :)

I seldom frequent restaurants, so nothing to cut from there. One trick I learnt is not to buy drinks when having meals. Drinks usually cost 80 cts to 150 cts, which is easily 50% of what I paid for my meals. I simply cannot imagine why. As such, I bring own bottle of plain water and probably saved myself $2 a day, which adds up to $700 a year. I don't buy a lot of clothes, so nothing to cut there. But I do love my Springfield brand, so I'll get it only when they have super discounts from 30% to 50% :) yummy!

After trimming what we spend and shoring up what we can earn, the remainder will be savings. I do hope to maintain at least 50% savings to income ratio even when times are bad. Currently, I'm doing all that I can to save around 70 to 80% of my income, so this will provide me with a truckload of ammunition to fire sparingly at critical levels of the market. I'm happily sitting on a near 80% loss in portfolio - truly an extraordinary time for me :)



Try being an arctic fox. Eat more during good times and ride out the winter during bad times. Rule of nature yes? Do that to your savings now :)

Read More

Pantene Chrysalis

San introduced me to this short movie:



It's really a short movie (4:03), and it's a million times better than most thai flicks i've seen, despite it's length. It's the blending of music and moving stills that creates such an emotive force within me that I get goose bumps every time I saw this. And I've watched it at least five times. There is really only one sound track in this short film, it's none other than Pachelbel's Canon in D. The movie blends in the touching parts of the film with the touching parts of the song, creating an emotive resonance that can only be amplified by the melancholic nature of the violin and piano. There is only around 4 lines of spoken dialogue, but like the classical piece without lyrics, the movie without dialogue makes one focus on the emotional aspects of the film. Climatic scenes are punctuated with short and sharp jabs of the violin. Violent scenes are accompanied by the jarbled and forceful piano song (i don't know which piece is that, can anyone trained in such music kindly enlighten?).

I really like the scene when the camera pans slowly to the broken violin, made to work one last time using scotch tape. The song slowly sinks into your emotions, which is then followed by the quick stabbing of the violin and ends abruptly. Amazing!

Do notice the butterfly towards the end. I think that's what san is showing me :)

The butterfly breaks out of the chrysalis, which is the cocoon like thing that a caterpillar wraps itself during the first stage of the metamorphosis. When it breaks out of this cocoon, the caterpillar changes structurally, to the extent that one cannot see any similarities between the former and present self. I suppose that that is why the short film puts a butterfly towards the end. It shows both the metamorphism undergone by the girl as she reaches new height in her music (she finally understand what it means by music being 'visible'), as well as the main purpose of the short film - to sell more bottles of pantene chrysalis.

Read More

Superfriends meeting on 31st Oct 2008

For those who are regulars in my cbox, you would probably have known that on Friday, 31st October 2008, the Superfriends of Bullythebear will be having a dinner and dance party at Wood restaurant bar, Vivocity. Erm, dance is optional of course, but maybe we can all ask dream the golden buddha to do a little jiggle for us after a few glasses of wine. It's going to be held in a private function room at Woods, timing will be advised when it's nearer the event next week.

I would like to confirm the attendees for the event. For those who had been invited, or wish to be invited, please confirm your attendance using the comments button right at the bottom of the post. Alternatively, you can choose to email me at duckula06 [at] yahoo [dot] com (it's zero six behind). If I did not reply your mail within 24 hours, u can safely assume that I didn't receive it...my yahoo mail is a bit crazy at times. Text me at nine-four-three-five--eight-nine-three-zero, DO NOT call me as I may be in the middle of work, thks! Do tell me who you are in your email/sms too.

The budget is around $40-50 per person, depending on the items you ordered. The menu is given here at this site, so do check it out. With bro dream going to negotiate a better deal for us, and yours truly guaranteeing that it will not go above $50, do consider attending this rare event to meet all of the superfriends in person. If not for the company, go for the food. If not for the food, go for the wine. If not for the wine, just go there for dinner!

Here are the list of attendees:

Confirmed going:

Me, LP
My gf
San
Dream the golden buddha
Cheng
KK

Special guests (for drinks only - not 100% confirmation)

Cookieguy
Lumiere
Pepper

Please RSVP, best before Tues 28th Oct. Dream will need to confirm the attendees so that the restaurant staff can prepare the table.

Read More

Keep your style, fade your fashion

It's simply not fashionable to invest in debt-ridden companies now.

Investment are like clothes. There are investments themes that come and go with the vicissitudes of fashion wear. From my short history of market experience, I already can see the different main fashion themes which are hot at different periods.




In the bull market, there are many many themes. Sector rotation, I think that's what they call it. I used to pay attention to companies belonging to a certain sector, like construction plays, oil plays, property plays etc, and look out for companies in those sector that had not run up. I had the misfortune to take part in the construction play leading right to the end of year 2006/2007 and consequently became the last fool holding the unwanted babies. Despite the many themes, the underlying premise of buying is based on PE.

Let me explain. When the market conditions are bullish and prices of stocks are breaking their 52 week high, it's simply not fashionable to invest in P/B kind of stocks. PE values are all time high, so to entice investors to put their monies, low PE stocks are trumpeted as the next growth stock to run up. I've not personally seen another metric used in bullish times locally, which is Price to revenue P/R ratio, though I read that in the telecom/dot.com era in 1990s, there are plenty of such analysts keen on this metric. It's not unexpected isn't it? When prices are so high, and earnings haven't begun to catch up on the prices, the best way to show value is to use some metrics that are independent of the earnings and/or profitability of the companies in question, but instead based on the rapid growth of the companies (never mind profitability, it'll catch up).

However, when the tide turns in a bearish market, fashion police of the investing realm dictate that P/B becomes the new yardstick of measurement. Book value defined as total assets - total liabilities, becomes the fashionable thing to valuate companies. We hear of analysts saying about the P/B of banks or properties counters or reits or whatever being at all time low, compared with SARS, Asian financial crisis, dot.com era or other similarly bearish times. I reasoned that this is the case because the market price of the company are supported by the assets owned after all the liabilities are paid to creditors. As such, P/B ratio becomes the valuation metric of choice when market conditions are bad.

The current aversion towards debt-ridden companies resulted in the relentless selling across the board of such companies regardless of business economics. Shipping stocks seem to be whacked hard for being in the wrong kind of business in the wrong time. S-shares, which are singapore listed china companies, are whacked down hard after the scare by Ferrochina and China painting & dyeing company. That means if you're a s-share and a shipping company, you're doubly screwed. YZJ and Cosco are two examples that spring to my mind.

I also noticed that dividends, ignored during bull market, are back in vogue when times are bearish. Analyst are always touting the high dividend yield of certain companies as being defensive. Reits, most showing double digits yield, are sold to investors as offering higher yields than the miserably low interest rates offered by savings account. The reason we don't talk about dividend yields during bullish times is two-fold - first being that the prices are marked up so high that the yields are nothing to boast about. Second, the capital gains from sheer price appreciation is much more tempting and lucrative than the steady and slower dividend gains.

Here's a summary of some of the metric mentioned and the times they are in vogue:

1. Price earnings ratio P/E = bull
2. Price revenue ratio P/R = bull
3. CAGR growth or CAGR revenue % = bull
4. Price to book P/B = bear
5. Cash per share = bear
6. Dividend yield % = bear
7. Liquidity ratios like current, quick, gearing = bear

One can take advantage of this whimsical swings in the investing realm in two ways. The first is to trade (long/short) the fashion trends by identifying possible candidates. For example, after ferrochina announced its death note, a few days in a row, s-shares was shorted furiously down to crisis levels, especially those debt ridden companies. Another way to take advantage of this is to always prepare one's portfolio for the bear. Chasing the price of companies so as to ride on its growth story is not exactly preparing for bearish times.

Fashion fade, but style is forever - Yves Saint Laurent

Have your own style, don't keep chasing after fashions. By the time the fashion magazines announced what is the hottest for this season, that season is over. Don't be caught wearing last season's wear.

Read More

Be a valueskate, not cheapskate

With recession looming like dark clouds over our heads, I think it's a good idea to start a label for my opinions on personal finance. Is it surprising that I'll start on this topic? It shouldn't be, because investing is basically a philosophy that can best be summarized like this: Forgo immediate wants for future gains. I think this philosophy can be extended to the broader aspects of life, rather than just the myopic realm of investing only.

I've a happy problem. I've got difficulties spending money on myself. I find it strange because I can commit 10k into the stock market without batting an eyelid but I've got problems spending $10 on socks. I've been eyeing this brand of socks by Byford, which are rather cheap, for almost a year. I've been wearing those black socks issued by SAF, but the quality is quite questionable as after a few washings, the socks will become quite distorted and gets 'hardened'. Those who wore it before will know what I meant by 'hardened' socks, haha!

How much are the socks, u ask? It's selling for around $10 for 3 pairs, which is about as cheap as it can get. I wonder why I took so long to decide on buying it :) At the rate that I'm walking, I 'holed' socks very frequently, so it's important for me to get good quality at cheap prices. I'm going to dump my SAF issued black socks for the new ones.

Recently I also bought a pair of shoes. I've been using a cheap $23 shoe for more than 10 months, which I think is very good value for money. I used to think that the more I pay, the more quality I get. My previous pairs are from caterpillar, selling around $80 to $100 per pair. But guess what? It didn't last me 6 months. I changed my philosophy on buying shoes now: Buy it cheap, if it last longer than expected, it's a bonus - if it didn't last long, at least I didn't spend too much on it. Buy a pair of shoes for $23 is better than buying one for $90, because while the latter can last me for 6 mths, I can buy 3-4 pairs of the former :) There! My downside (price) is taken care of, the upside (how long it lasts) will get care of itself.

The new crocodile shoes I bought in a sale cost me $29. It is much much better than my previous pair because there are ample support at the heels. From here, I also learnt another lesson: Cheap does not equal to value. My previous pairs makes my angle painful because when my heel strike the floor, the shock goes up instead of being absorbed by sponges or other cushioned support. Be a value hunter, not a cheapskate.

My blade shaver is getting blunt too (and a little rusty), so I thought of getting another one. At guardian pharmacy, I saw that there are two brands of shaver - one from the famous Gillette and the other is the less well known Schick. 3 pieces of Gillette's blade cost $22, while the same quantity of Schick's blade will cost me $12. I decided to try out Schick, even though I've been using Gillette since I started shaving. The mechanical parts of Schick seems to be more inferior than Gillette (it feels a little rickety) but nevertheless do the job it's supposed to do well. I maintain my blades very well, so the $12 is money well spent. The recommendation is to change the blades monthly but I think I've used my blade for 1.5-2 yrs already.




I'm sharing all these because I think that at all times, it's good to control one's expenses. It's only when in recessionary times that we hear people talking about cutting costs, whereas I think one should always trim excesses and adopt a lifestyle that is simple but not cheapskate. For those familiar with Greek philosopher Diogenes, I think I bear a resemblance to him.

Read More

Opinion piece by Warren Buffett

With the STI coming down to 1880 and DJ showing no signs of breaking down from its fast and rapid decline southwards, there is plenty of fear in the market. Once, I had heard of people talking about stocks and shares..but now, the library is full of books on investing that nobody is interested to borrow and everyone is not looking at the share prices now. Is it the first sign of market bottoming?

My support level for STI is still 1800, which I think is a pretty safe level to do something with your excess cash. Do not be like ferrochina who over leveraged itself; use those savings that you do not need for the next 5-10 yrs, for who knows how long this episode will last. Popular sayings are that the crisis will last 7 months, based on historical bear markets...so perhaps in mid 2009, we'll be seeing some semblance of stability again?

Below is the encouraging post by Warren Buffett for all who has an interest in the stock market. His adage, while getting close to being cliches, are still simple and easy to understand. Just don't do it blindly :)

Here's his opinion piece:

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

This is the text of an opinion piece written by Warren Buffett and published in the New York Times on Friday, October 17, 2008:

Buy American. I am.

By Warren E. Buffett

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Read More

Erratum in Business Times report

This is slightly interesting.

Lynette Khoo, BT, made a mistake in her report regarding corporate scandals rocking the s-shares locally. For those uninitiated, s-shares refers to China companies but listed in SGX. China milk announced in SGX about the error without explaining much or reassuring. I guess it's self explanatory. Here's the report:


I've highlighted the parts that need to be corrected. The erratum is here:


Not that it matters. In this kind of market, prices will get slashed anyway. But s-shares seem to have taken the bulk of it, perhaps due to the perception that their management or corporate governance is not good, or simply that the business quality is just not that good. The best are in China or in HK, I must say.

These are the list of s-shares scandals that I know of:

1. CAO - china aviation oil debacle, where the CEO Chen Jiulin ran up losses of up to $550 m on trading losses back in 2005.

2. Ferrochina - unable to pay off debts, and banks unwilling to revolve their short term debts.

3. China printing and dye holdings - CEO and deputy CEO went missing. Rumors are that their parent company is unable to repay creditors money.

4. Tianjin Zhong Xin Pharma and New Lakeside filed adjustments to previous financial statements. Don't it all remind us of Worldcom and enron?

I've said that I'm getting sick of all these kind of quality of companies listed in Singapore. I shall stay clear of them and have my reservations against them. Don't get me wrong, I'm still pretty bullish on China, it's just most of the china companies listed here are not that great. With Cosco dragged down from $6 to today's close of $0.815, I think it's safe to say that ALL s-shares are now below $1.

Read More

News from milk industry

Some news from the milk industry in china.

News 1:

BEIJING -- Hangzhou Wahaha Group Co. is considering an acquisition of the dairy company at the center of China's milk scandal, company officials said Monday.

A spokesman for Wahaha, China's largest domestic beverage producer and a joint-venture partner of Groupe Danone SA, confirmed that chairman Zong Qinghou has said the company is interested in acquiring Shijiazhuang Sanlu Group Co.

The scandal over tainted milk, which has sickened tens of thousands of children, is expected to force a consolidation of China's fragmented dairy industry. Scores of dairy producers with complicated supply chains around the country made the industry difficult to monitor ...


My take:

After every major crisis, there are also opportunities abound. Those who survive this saga will emerge much stronger, for there are fewer competitors around. With Wahaha considering an acquisition of troubled Sanlu group, I expect to see perhaps more consolidation of the China's milk industry


News 2:

Three Chinese dairy companies have publicly apologized for their involvement in a toxic milk scandal that has killed at least four children and led to Chinese-made products pulled from shelves around the world. All three brands have lost there status as ‘China National Brands’. This won’t bring back the prestigious label but is seen as a first step to regain consumer trust….

Inner Mongolia Yili Industrial Group, Mengniu Dairy and Bright Dairy Group were found earlier to have produced milk contaminated with melamine, a compound used to cheat nutrition tests.




The scandal has savaged the companies’ share prices and prompted Seattle-based coffee chain Starbucks Corp to pull Mengniu milk from its 300-plus stores last month.

“I feel I have let everybody down. I have done so much, yet still done wrong,” Beijing News quoted Mengniu’s marketing chief, Zhao Yuanhua, as saying on state television.

Zhao and executives from Mengniu and Bright Dairy also promised consumers that their products prices would not rise despite higher costs of quality controls.



Chinese health officials last week said that nearly 10,700 infants and children were still in hospital after drinking toxic milk and formula. More than 36,000 children had left hospital after being treated.

The scandal has rocked faith in the safety of Chinese-made products, already under a cloud from a series of quality scandals involving food, drugs and toys last year, and prompted authorities to issue tighter rules governing milk production.


China’s quality watchdog said a fourth round of tests on baby milk formula and other milk powder from dozens of local brands across 18 provinces had shown no new cases of melamine contamination, Xinhua news agency said in a separate report.

But the Ministry of Agriculture had decided to continue sending quality teams across the country to monitor the clean-up of milk stations and animal feed producers, it said in a notice on its website.

“Supervise and urge local authorities to investigate and punish the illegal use of melamine and other toxins, and other unlawful adulteration,” the ministry said.


My take:

With the three giants in the milk industry stripped off their China National Brands name, I wonder what's in store for these three. How long does it take for them to regain the trust of consumers? Or are consumers forgetful? They did mention that they will keep the prices steady even as their costs increases from the higher quality control. If raw milk prices rises, these companies are going to suffer two fold - first is the lack of demand for their products, second is the squeeze they will feel when the cost rises yet unable to pass the cost to consumers. It'll be interesting to see how they cope with their business henceforth.

Who ask them to do funny things to their products?

Read More

OCBC's valuation range

I learnt a little more about the person who wanted a stake in Ocbc. She wanted to pass it on to her future generations, so the time horizon can be stretched further than the 3-5 yrs that she had told me initially. As such, preference shares might not be the best option anymore. I'm looking more into OCBC because that's what she wanted.

This is based on the data I posted on my earlier post.



Based on historical data, the dividends per share (excluding extraordinary and special dividends) had been increasing steadily for the past 5 years. Since I still do not know how to valuate banks well, I might as well treat OCBC as a dividend yielding company. I'm not looking for extraordinary growth here, just hope to see enough income to beat inflation (~3-5% pa returns in the form of dividends) is good enough.

Assuming that we have a pretty bad year in 2008, and OCBC has a EPS of 50 cts (do note that 1H08, OCBC's diluted EPS is already 53.3 cts). Assuming a dividend payout ratio of 35% (management mentioned payout of at least 45% of core net profit though), we can expect the DPS to be 18 cts. In order to have a dividend yield of 3% to 5%, we ought to buy OCBC at a price range of $3.6 to $6, with the lower price limit corresponding to a dividend yield of 5%. At this starting dividend, even if the EPS (and the corresponding dividend per share) do not increase, it's still very good.

If we look at the price to NAV (without valuation surplus), it ranges between a low P/NAV of 1.15 to 1.57. Based on 1H08, the NAV (without valuation surplus) is $4.60, so multiplying by these multiples, we get a price range of between $5.29 to 7.22.

Lastly, on a technical perspective, here's the chart for OCBC since 2003.



Support levels can be found at 5.70 (Jul 2005 low). This seems to me to be a pretty strong level. The next lower level will be at $5, back to early 2003 level.

Summary:

1. $3.6 - $6 for a dividend yield of 3% to 5% (look at the assumptions made)
2. $5.3 - $7.2, based on P/NAV (without valuation surplus)
3. $5.70, if not $5, based on 5 yr chart

Read More

China PANTING & DYING holdings ltd

It's actually quite sickening to see the kind of s-shares listed in sgx. It's very inferior in quality, and by quality, I mean in terms of both exposure in PRC, business and corporate governance.

The latest s-share that need to be shot got to be China Printing & Dyeing Holding Ltd. Their shares got halted yesterday, together with Ferrochina, so naturally there are talks about the solvency of the firm itself. It's not insolvent (maybe not yet), but their CEO and deputy CEO had been un-contactable since 7th Oct 2008 despite repeated attempts by the independent directors to contact them.

There are unconfirmed rumors and media speculation in China, that the parent company Zhejiang based Jianglong Holdings, China's largest printing and dyeing company, was reported to have gone broke. Jianglong owes more than 300 small suppliers a total of US$29.34 million (RMB200 million). An inside source revealed the company also owes US$234.70 million (RMB1.6 billion) to private creditors, but this has not been confirmed. Is the CEO and deputy CEO, who are husband and wife, missing due to this?

The company is suspended from trading till further notice.

These recent episodes of s-shares made me re-think about investing in them. The quality of s-shares listed here is really bad. For all the hardwork, what will I get? Shouldn't I look at better fields over at HK? How about bigger and higher quality big caps too? Many questions to ask myself in this trying bear market.

Read More

Ferro Trouble

Ferrochina announced very grimly news. Due to the current economic crisis, they are unable to repay part of its working capital loans amounting to about RMB 706 mil, which had become due and payable. As a result, further loan facilities and notes of about RMB 2,030 mil may potentially become due and payable. Another sum of working capital loans of RMB 2,493 mil may also become due and payable.

Ferro china is thus currently in active negotiations with its financial lenders to explore various options (including refinancing) to address its repayment obligations. If unsuccessful, they will not have sufficient cash to satisfy its financial obligations. In view of the liquidity issues which Ferro is facing, the Company has temporarily ceased its manufacturing operations in its factories located in Changshu City, Jiangsu, PRC and Changshu Riverside Industrial Park, Jiangsu, PRC.

Shares are suspended till further notice.

I wanted to see if I can spot anything before this news came out. I browsed through their 2HFY08 results:


------------------------------------2H08-------------2H07
Current ratio---------------------1.02--------------0.95
Quick ratio-----------------------0.64--------------0.62
Total debt/equity----------------130%------------106%


'000,000 RMB
Cash flow from operation----------385--------------(-137)
Cash flow from investing----------(949)-------------(478)
Cash flow from finance-------------710--------------676
Cash at end of period---------------125-------------0.757


Gross margins---------------------9.1%-------------9.5%
Net margins-----------------------6.4%-------------6.9%
Diluted EPS (RMB cts)-----------50.52------------35.12

ROE (half yr)----------------------6.3%-------------2.3%
Asset turnover--------------------0.43--------------0.16
Financial leverage------------------2.3---------------2.1
Net margins(%)--------------------6.4%-------------6.9%


With the benefit of hindsight, I can see that the total debt/equity is increasing drastically from one year ago. This is due to their higher borrowings. Quick ratio is not very good, being less than 1. Thought there is an improvement, the absolute value are not good. Do not always look at the trend, the figures itself matters as much. Neither is current ratio, which is hovering around 1. I admit in the past, I would never had paid much attention to these ratios. BUT it is exactly these ratios that made ferrochina unable to tide over their working capital needs! How am I to know from these ratios that ferro is has solvency issues?

We can also see from the cash flow that most of the net cash at the end of the accounting period is coming from the financing side. Cash flow from operations isn't contributing much. They seem to be expanding too fast, resulting in a huge outflow of cash from investing activities. This made them borrow more, which is a big problem as there are problems borrowing money from the current credit crisis. BUT how am I to know in advance it's going to have troubles without the benefit of hindsight? I'm as likely to gloss over it as the rest of the companies I own!

Ferro did issued two tranches of medium term notes, amounting to US$130 mil with 65 mil warrants attached. A lot of companies are doing that these days, or to issue scrips to conserve cash. Are they going to face the same situation as ferro too?

It is both very sickening and frightening...that whatever confidence one might have over the analysis of the statements might be just illusory. At worst, it's self deception. What happened to CIMB's outperform and target price of $2.44? To be fair, JP Morgan already mentioned Ferro. Look at my post on these troubled s-shares, esp the chart attached.

Be more vigilant, but how? Be careful, but how? Just buy big caps? Never buy s-shares again? Buy companies with long history? But big caps can fall too (look at AIG, LEH, Osim, Creative Tech...).

It shall soon pass.

Read More

The changing landscape of financial markets

I thought this is a very good article about the changes that is happening to the financial markets around the world, post sub-prime and post credit crisis. If you've been living in a cave for the past 1 year, it all began with sub prime borrowers in US unable to pay off their housing loans. Then because of the way the lenders 'diversified' and spread their risks to other companies and other countries by selling instruments linked to such debts, all of these holders started to fall like dominoes. Banks also fear lending to each other, leading to the current credit crisis, where there are lots of fear lingering around.

Read this:
----------------------------------------------------------------------
By Rita Raagas De Ramos, | 9 October 2008


Fidelity International’s global head of institutional investment, Michael Gordon, says the events of the past few weeks are changing the financial landscape in ways that few thought possible.

The impact of the current financial markets turmoil must not be underestimated, says Michael Gordon, London-based global head of institutional investment at Fidelity International. He shares his views on what he believes are the seven ways by which the global financial landscape will change forever as a result of recent market events.

First, expect the financial world to become more local. Investors will favour local, home-country stocks over international investments as emotion overrides reason. Home is where the heart is and we should expect investors to feel safer in their own backyards for a while. They will feel most confident holding domestic stocks where their governments will protect both them and their institutions. And these institutions and those who trade for them are also likely to prefer local counterparties where they are available.

Second, financial industries have become political. The public is looking to governments to act and politicians have shown they will not let the electorate down. We should remember that governments are local, not international. While information and intelligence are shared internationally, decisions are made at the country level.

Third, complexity is out and simplicity is back in. Investors, firms and regulators will have a newfound desire to understand fully what they are buying and will favour those investments they can adequately control, understand and monitor. For many financial instruments, underlying exposures and leverage have moved beyond the understanding of those who
bought them and also those who had the responsibility of governing the institutions who traded and marketed them. Firms will now become more focused on what they can do well and what they can adequately control and monitor.

Fourth, models are out and people are back in. Investors will shift away from models – quantitative or otherwise – and swing back to human beings, where their level of understanding is greater. Many such models rely on past relationships between securities, markets and asset classes. Theory and practice can be strange bedfellows as many investors are now finding
out. Market participants have learned now how leverage has overridden historical correlations so that everything now seems one-directional.

Fifth, innovation is out and experience is back in. Funds will flow to those with experience in the traditional practices of traditional markets and investors will be wary of anything new. This was already a trend emerging this year but last week’s events have cast it in stone – at least for the foreseeable future. Smart will be replaced by sensible, while trust and experience will be at a premium.

Sixth, transparency trumps opacity. Investors will demand transparency from the firms managing their money and in the products that they market.

Seventh, oversight will be as valuable as insight. Compliance will become even more critical in firms and those companies that have relegated this function will need to redress the balance. Oversight will become as important as insight in the new world of investing.

Read More

Origins of the Crash

I've finished the very readable book by Roger Lowenstein, titled "Origins of the Crash". There are many books that talked about crashes, but this book focuses more on the dot.com bubble, collapse of Enron, accounting scandal at Andersen and the telecommunications bubble, with the author linking the excesses of past markets to the downfall of future bubble.



There are a few key take aways that I got from this book. Bubbles are caused by a series of factors:


1. Lack of corporate governance.

There are stories of dot.com companies where the CEO and chairman of the board of directors are the same person. Boards full of the CEO's 'independent' friends, some of whom are blatantly related in familial ties, some are the CEO's lawyers, accountants and so on. Audit committee do a perfunctory job of looking through results, and had absolute trust in the CEO.

Special purpose vehicles (SPV) are set up to transfer assets to these, so as to lighten the balance sheet to make it more attractive, less debt-ridden and thus able to borrow more.


2. Massive conflicts of interest

CEO is paid to direct the company. Board of directors are supposed to monitor the performance of the CEO. Audit committee in the board are supposed to monitor the results of the company, while external accounting firms are supposed to make sure the results released satisfied accounting standards.

All these broke down in the dot.com era when the CEO is the chairman of the board of directors. Audit committee and the renumeration committee are but cronies of the CEO, who are not only not independent but also had a massive stake in the company and/or subsidiaries. Some of them sitting in the board are also directors in the subsidiaries owned by the company. Accounting firms also act as consultants for the firm besides their accounting jobs, with some even switching over to become the CFO of the firm they used to work for.


3. Greed and emphasis on share price

Not only of the CEO with their massive pay scale and millions of options given to them, lifetime pensions and usage of company jet, serviced apartment, car with chauffeur etc, but investors are also at fault. Investors are so sure of being able to buy high and sell higher that all aspects of the business are thrown out. Only prices matter, even if the companies do not have earnings. In fact, earnings and fixed assets are seen as negative aspects anchoring the price because without them, the hopes and promises of the company becomes intangible - a value hanging in the air - and all who buy into it can hang onto their false hopes long enough to sell it to the next smitten investor.

(There's a very good side story of Jack Welch - famed CEO of GE, who got many perks after his retirement from GE. His lifetime perks included the use of a $15 million Manhattan apartment with complimentary wine, food, laundry services, newspapers and toiletries. He also have access to a corporate jet, floor level tickets to New York Knicks, courtside seats at the U.S Open, a box at Metropolitan Opera, a car and a driver. This is besides a $350,000 monthly pension, and a combined past earnings of more than $400 million while working at GE.)

Only when the share prices start to fall that the investors' dream become their nightmare.


4. Nobody guarding the guards

Gatekeepers are supposed to keep the gates, but who makes sure that the gatekeepers do their job? Apparently none.

Auditing firms became conflicted after the removal of rules that prevented them from doing underwriting business with their audit clients. Analysts in investment banks hyped companies that their firms did business with even if they felt that those companies did not deserve such praise. Directors turned a blind eye to many things management was doing. The government, with many ties to big business, failed in its regulatory role because times were good. There are also many stories of the whole lineup of politicians in the US being involved in the whole debacle.
Even the SEC chief was a lawyer who once fought against excessive clamping down on accountants.

Are we seeing more crashes in the future? I'll bet we will. But did you notice that many of the things that happened is happening now again? As the saying goes, there is no new thing in the market, history repeats itself again - in different forms.

(This site is a very good review of the book)

Read More

The floor's slippery - it's covered with thick, red liquid

Chicken Little starts screaming "It's the end of the world!"



With STI falling 5.61% to reach 2,168 and DJ now hovering below 9800, dropping 5.12%, it's hard not to see otherwise. I didn't expect DJ to drop below 10k, which is an important psychological level for investors. Here's my views on STI:


Support level 2100, 1800 then 1600?

Read More

Preference shares Part 1

After chatting with a few guys over at the cbox, I realized that a better instrument for the person who wanted to buy OCBC (see my post on “Brief overview of Local banks") will be the preference shares that is also offered by the three banks.

Preference shares goes by the funny stock name with many letters in it. Here’s the list of all the listed preference shares by the three local banks.


1. UOB 5.05% NCPS 100
2. DBS Bk 6% NCPS 10
3. OCBC Bk 4.2% NCPS 100
4. OCBC Bk 4.5% NCPS 100
5. OCBC Bk 5.1% NCPS 100
6. OCBC Cap 5.1% NCPS 100
7. OCBC Cap 3.93% Pref 10


In the process of finding out what those letters mean, I did some research and I emerged a little more knowledgeable on these preference shares.


1. NCPS – refers to non-convertible and/or non-cumulative preference shares.

There are quite a lot of things to illuminate here. First of all, what is a preference share? Preference share is not the same as ordinary shares, the latter being the ordinary shares that are traded on SGX. Preference shares do not carry voting rights, unlike ordinary shares. However, preference shares are ranked higher than ordinary shares. With that, I mean that in the event of liquidation of the parent company, preferred shareholders will be paid out assets before the common shareholders (those who hold ordinary shares) but after debt holders (those who hold bonds issued by the company).

Beside this, preference shares might have an option to convert them to ordinary shares at a prescribed price. This is called the ‘convertible’ option. However, for the preference shares issued by the banks, they are non-convertible and non-cumulative, hence the moniker NC.

So what’s non-cumulative?

Before explaining that, it’s important for you to know that the dividends paid out are not guaranteed. By this, I mean that the dividends payments, which are given out semi-annually, might be skipped. However, if the dividends on the preference shares are not paid up, they are not allowed to declare dividends on the ordinary shares too. Non-cumulative means that any dividends payments missed are not accumulated and paid at a future date. For contrast, cumulative preference shares mean that if the dividend is not paid, it will accumulate to be paid for future payment. Since the banks are shoring up their Tier 1 capital by issuing preference shares, they will have to be non-cumulative so as to be included in it.


2. Difference between preference shares and bonds

You might have realized that preference shares are quite similar to bonds. Some key differences exist though:


a. Bonds have a fixed maturity date, while NCPS do not have. On maturity date, the issue company of the bond will buy back the bonds at par value, which is the price that the bond is first sold off. This means that if one buys direct from the issuer and holds till maturity, there is neither capital appreciation nor losses. The dividends, or in this case called the coupon, are received by the bond holder until maturity.

For NCPS, the maturity is till perpetuity. Well, on theory anyway. Different NCPS have different terms where the issuers have the right but not the obligation to redeem the preference shares at a certain date/dates according to the terms stated out in the prospectus. For example, OCBC 5.1% NCPS 100 have the right but not the obligation to redeem the preference shares, in whole and not in part, on 20th Sept 2018 and on each dividend date after 20th Sept 2018 at a par value of SGD 100.


b. The other major difference is that bond holders will receive guaranteed coupons, whereas the dividends coming from non-cumulative preference shares are not guaranteed. As mentioned previously, as long as the ordinary shareholders are paid a dividend, the preference shares will also have to pay it. Based on track records, it’s quite a safe bet that the banks will carry on paying dividends, since they’ve been paying for the past 10 years at least.


In summary, I’ve discussed about a little about the letters that made up the stock quote for the preference shares. For example, for DBS Bk 6% NCPS 10, it means that the shares are issued by DBS bank, with a dividend yield of 6% at par value (usually $100). It is non-cumulative, non-convertible and has a lot size of 10 shares. You should be able to tell, at least from this post, what is meant by a non-cumulative and non-convertible share and the difference between a bond and a preference share.

I’ll work on the differences in yields and terms for the different preference shares in my next posting.

Read More

Death of equities?

This is the shock I got when I opened up yahoo! finance this morning, like all morning.



I've not seen such a precipitous drop in DJ or SP500 before! STI's fall yesterday seems like child's play when compared to the big brothers over at US. I think STI might fall 6% too, so it will be around 2200. Too bad I've got work, otherwise watch the historic moment unfold.

When I came back home, I was rather shocked to learn that STI did not break 2200. In fact, it's slightly neutral at -0.1%.


What a world of difference a few hours make! Market is hard to predict indeed. STI is surprisingly strong. After going down to 2240, STI rebounded and never looked back. HSI also went from -1k to +135 intraday. Invisible hands at work here?

A little market trivia: The title of this article, "Death of equities", was published by Business Week. Then, DJ was around 800. But by the early 90s, DJ had risen over to over 3k. The rise was started around 3 months after the article was published :)

Read More

Brief overview of local banks

Is it time to buy local banks now? Someone wanted to invest a substantial amount of money into OCBC, so I thought I would do a little research to see whether it makes sense. I do not really know how to valuate banks and will not attempt to do so here. Rather, I'll just dig into the past number and let the reader do the rest of the legwork, if they are interested.

My source for these information comes from Shares Investment book (340 issue) and the respective banks' website.

Here is the brief overview of their segmented business data. It shows the revenue incurred from various segments as a percentage of the FY07's revenue.


We can see that OCBC derived a substantial portion of their revenue from dividend and rental. I suppose that rental means they have, under their holdings, certain properties. DBS has more percentage in terms of interest income and fees/commission. UOB is quite similar to DBS in that aspect, though I'm curious to know what constitutes the 'others'.

Below shows the ratios that I've done for the three local banks from FY03 to FY07. Do pay attention to the * portion below each table, as I noted the assumptions I made when calculating the figures.


Based on annualised 1H08 earnings for the three banks, at current closing of OCBC @ 7.160, DBS @ 16.920 and UOB @ 16.800, the forward PE for FY08 (estimated) and Price/Book are:

Banks-----------PE------------P/B
OCBC ----------10.7-----------1.6
DBS ------------10.2-----------1.3
UOB ----------- 11.2-----------1.6

I've browsed through the Singapore Country Book prepared by Deutsche Bank around May 2008. They mentioned that OCBC and DBS are well positioned to benefit from double digit loan growth and a rising net interest margin environment. The report seems quite bullish about the loan growth, saying that it is expected to be the second strongest year after Asian crisis. I've nothing much to comment about this, since I'm not in the know. They did cite factors such as strongth growth in business lending (particularly building and construction, property area) and in housing loans (particularly the mass to mid-market private residential, and HDB) as catalyst to push up the loans growth in the local banks.

This is for future reference:

OCBC


DBS


UOB


So which provides the most value? Price is often illusory, because the cheapest in price need not be the cheapest in value. Need to do more research.

Read More

China milk - tainted milk scandal

I read an interesting company update by DMG and partners regarding China milk. While I can't reproduce the entire report by cutting and pasting, I'll summarise the pertinent points here.

What happened


The whole story begins when recently, it was detected that the milk made in China have traces of melamine. A lot of babies in China, after taking in contaminated milk, had fallen ill and some had even died because of the toxicity. While most cases are contained in China itself, there are reports of one baby who suffered in HK. Despite this, a lot of countries had decided to ban china products outright for fear of further contamination. In Singapore, several products had been taken off the shelves too.


What is melamine


Melamine is a compound that is used in making plastics or fertilizers. It is a non-protein nitrogen containing compound, with about 66% nitrogen by mass and is known by it chemical name as 1,3,5-Triazine-2,4,6-triamine. Due to its high nitrogen content and its cheap cost, it is added to milk by farmer and/or companies to boost the nitrogen content of the raw milk so as to pass the protein test, which is used as an indicator that the raw milk supplied is of high quality.

Melamine can cause bladder and reproductive damages, specifically in the formation of kidney stones. The lethal dose of melamine is more than 3 g per kg of body mass. As such, most if not all the affected victims are babies, as their body mass are much lower than adults and hence the ingested amount, over a prolonged period of time, causes the above mentioned effects.


Possible causes of the addition of melamine to milk


China milk's management mentioned that the main reason why Chinese dairy farmers and companies add melamine is because of the poorer quality of raw milk. As the rising cost of animal feed and fertilizers increases (also linked to the rising price of crude oil) in 2008, the cattles are not fed as well as they should. The consequence of this malnutrition is that the milk produced by these cattles are also of poor quality - that is, of lower nitrogen content. In order for farmers and dairy companies to attain higher profit and margins, they need to send the raw milk supplied for protein test to indicate that it is of superior quality. Hence, the addition of melamine will serve this purpose.


How China milk can benefit from this


Management mentioned that earnings will be expected to remain stable because the core business of the company is not in selling milk but in selling bull semen, despite the name of the company. They mentioned the price of each straw of semen (specifically the pedigree Canadian bull semen in which they have a monopoly on) - RMB 70 per straw - and typically two straws are needed to impregnate a cow.

Since Canadian bull semen will produce cows which yield the best quality and volume of raw milk, the management believes that this will be an effective step in rebuilding China's reputation in the milk industry worldwide. China milk will stand to benefit from this process of rebuilding China's reputation. It will take 3 years from conception before a calf can be milked, so the healing process will not be short.

Furthermore, China milk grows 75% of their own feed and produces their own fertilizers, so they have the ability to control quality at each step of their value chain. Since feeds takes about 50%++ of their operating cost, they will stand to gain from their independence off the rising feed/fertilizer price.


Risks


While china milk mentioned in a separate announcement that they are not involved in the scandal, and none of their customers are listed in the affected companies mentioned in mass media, the industry wide scandal affects each and every player in it. It will take years before confidence will be regained.

It is important to note how the demand for china milk will be affected. If less domestic milk is consumed, then farmers will be less inclined to have more cows to produce milk, and the subsequent drop in demands for cow embryos and sperms will also be reduced.

JP Morgan listed china milk under high cash high debts - meaning a possibility of management's poor financial discipline.


How to benefit from this


PE of China milk is around 3x. I think one needs to do a projection of the earnings at much lower percentage than one based upon historical rates. Even if using a earnings growth of 5%, we have a PEG of 0.6. My views is that not much can go wrong, though I said it with a biased views of an investor with vested interest in it.


Addition announcement dated 26th Sept 2008


China milk posted another announcement on SGX. Here's a summary of the new announcement:

a. Management believes that the sales of raw milk are not expected to be materially affected as there is still demand from milk processor and milk product manufacturer

b. As the Group believes in the quality of its raw milk (which contain no additives) and because the shortage of good quality dairy cows in China still persists, the Group is cautiously optimistic that it will be able to continue securing orders to supply raw milk to its current customers (none of which are manufacturers of the affected milk powder brands in China).

c. In addition, the Group believes that there will not be any material adverse effect (financial or otherwise) on its other business relating to the sales of bull semen and cow embryos. Although the Group expects that there may eventually be some consolidation and/or adjustments in the milk production industry in China, the Group believes that there is still sufficient underlying consumer demand for dairy products in China. On the other hand, demand for its bull semen and cow embryos (both for breeding of dairy cattle as well as for fertilisation of dairy cows for the purposes of raw milk production) is expected to remain relatively consistent given the shortage of good quality dairy cows in China as a whole and the fact that dairy cows need to be fertilised every year in order to produce milk.

(I've seriously not thought about that before. I've always thought that the main economic moat of China milk is that it holds a substantial herd of Canadian Holstein, known for its high quality and high volume milk production, before China banned the import due to outbreak of mad cow disease. Now that they said it, it does make sense that the continued demand for sperm is due to the fact that diary farmers need to fertilize their cows every year to produce milk!)

d. The Group further believes that the demand for its bull semen and cow embryos will remain good as the Group only produces bull semen and cow embryos of Canadian pedigree.

e. Purely as a precautionary measure, the Group has sent samples of its raw milk to an independent laboratory for the relevant testing and will follow up with an announcement on the results of the tests after receipt of the same.

(I should wait for their report of the lab test. I like China milk's way of handling the crisis. How a company manages a crisis and offer words of confidence is as important as how they capitalise on the opportunity posed by the crisis.)

Read More

The sleeping dragon (and China map)

Below is the map of China. As my portfolio had quite a bit of exposure to China, I think I should put in a map of the different provinces of China for future references.




These days, there are many reports by brokerage firms on S-shares. S-shares are Singapore listed China companies. As always, they have plenty of things to say about s-shares. With s-shares having superbly low PE below 10 (3 even!), there are reports saying some are value buys and some are never buys. When the bull is charging, reports of QDII funds coming delights these analyst, so target prices keeps shifting northwards. When the bear is charging, reports of possible frauds, unsustainable growth, poor governance (among other stuff) are cited to keep pushing the target prices downwards.



The table above shows some of the s-shares with warning signs. It's taken from a report from JP morgan. Surprisingly, out of so many s-shares, none of them mentioned my beloved Hongguo. Hongguo must be a pretty uninteresting company to these analyst, since not one of these big names mentioned them. I was a little perturbed when China milk had the privilege of being listed as the company with high cash, high debt. This 'indicates poor financial discipline', according to the report. 'Balance sheet management around book closure date, or in the worst case scenario, a possibility of fraud or embezzlement of cash' might be the possible reasons.

Well, it seems like chinamilk had the dubious honour of having total debt/market cap>30% and total cash/market cap>30%, hence it was identifed as having high cash, high debt. I wish to defend it, but was flabbergasted and not sure what to say. Why was I unable to defend? My confessions:

1. I did not read up much on china milk before buying.

2. I did not know the business as much as I would love to.

Forgive me, I bought one tranche in Dec 2007 and another batch in March 2008. Well, to atone myself from the sins of value investing, I promise to write a detailed report on the valuation and business of china milk, with as much detail as my Hongguo writeup. This will not only give me the confidence to hold on, but the confidence to add on when the opportunity so arises.

Read More