Saturday, May 31, 2008

Look what I've found

I was passing by one of the sportswear shops and saw these two socks selling at a discounted price. I was suitably impressed by the brands of it. My handphone camera quality isn't exactly fantastic, so I'm sorry if the second picture isn't at all clear.

There seems to be a certain fetish for brands having a certain 'tick' symbol. Perhaps by emulating certain branded logo, other brands can stand on the shoulders of giant and ride on the wave of mad consumerism. The socks under these 2 brands isn't exactly quality socks. I wouldn't rely on them to last a few rounds of hard machine washes. Perhaps that's why they are selling rather cheaply - 3 for $9.90. Other more branded socks are selling around 3 for $20-30 dollars, so you can do the maths here.

To show you what I mean by the fetish of the 'tick' symbol, let's take a look at the brand logo of a few sports companies.

Convinced now?

Care to guess which two companies these belong to? Hint - one is listed in singapore and the second picture shows the competitor of the first one, but listed in HK.

I'll write the answers in black ink, so that those who don't like the puzzle can safely look at the answers without depriving the fun from others :)

1st picture - China Hongxing
2nd picture - Anta

Friday, May 30, 2008

Full year results for china milk and pac andes

I was suitably impressed by the great showing of my companies that released their full year results today - china milk and pac andes.

I admit that I did not buy pac andes on fundamental grounds. In fact, I entered it solely due to dbs brokerage report back in 2006. Back then, I did no technical nor fundamental analysis. As such, my knowledge of this company is severely lacking. I'm trying my best to correct this, so haha, bear with me :)

Pac andes

Gross margins---------21.6%---------17.8%
Net PATMI margins---6.9%-----------7.3%
Currents ratio----------1.5x-----------1.9x

*note: ROE is PATMI divided by equity attributable to shareholders
*Debt/equity is Total liabilites divided by total equities

Dividends declared is 0.0207 SGD per ordinary share, which works out to be $20.70 per lot. I wish they have scrip dividend options too, seriously. You can read all the rave in their press statement and their full year annual results.

China milk

Operating margins-----90.6%---------91.3%
Net margins------------87.9%---------85.5%
Currents ratio----------14.9x-----------9.8x
EPS (RMB)-------------0.65-----------0.51

Should be expecting more revenue and earnings coming from their raw milk production. Their plant is ready for production. An interesting fact is that they keeping on saying their plant is ready to commence production for a 'major customer' soon. I wonder who that major customer is. I hope and hope it's Mengniu :) Win-win situation for all :)

Wednesday, May 28, 2008

How I read a financial report

I promised someone i'll do tat hong. In fact, I did it very briefly and posted it in the cbox, but I think that person didn't see it. Either way, May asked me to help out on reading tat hong's financial report, so here I am.

First of all, I confess my accounting knowledge is lacking. As such, there are certain things that I might not know or understand. I try my best. This is what I'll look for:

1. Income statement

a. Calculate gross margin, net margin
b. Check to see if there's any big changes in margins
c. Check to see if there's any big changes in the expenses
d. Check out the earnings per share

2. Balance sheet

a. With reference to income statement too, I'll calculate the ROE and note changes between years/quarters
b. Calculate debt/equity, current ratio, quick ratio
c. Check if there's an increase in current and long term liabilities
d. Check to see if there's a big changes in inventories, trade acct receivables and cash equivalents

3. Cash flow statement

a. Check cash generated from operations
b. check cash flows from financing activities, does it make up the main bulk of cash and cash equivalents at end of the year
c. check cash flows from investing activities, specifically any big changes in individual components

4. Read footnotes, esp the parts about management's remarks on revenues, profits, margins etc.

5. Check dividends if any. Calculate payout ratio.

6. If i'm really into the company, i'll check to see their business results by geography, segments etc

Okay, with that, let's jump into tat hong's results, I'll not do any analysis. I'll just be stating the obvious:

1. Income statement

Gross margins = gross profit/revenue
Net margins = profit for the year/revenue
Earnings per share = Net earnings / outstanding share

* cookieguy mentioned that net margins should use profit attributable to equity holders of the company divided by revenue. I'll stick to what I put earlier.

Gross margin----39.0%-----------30.9%
Net margin------15.9%------------17.4%

- 2007 have this 44 million under operating income. I'll check it out to see what it is, as it inflated the net profit for the year 2007, that's why we see a drop in net margins for 2008 compared to 2007.
- big jump in operating expense in 2008 caught my eye
- if i use net margins as the net profit attributable to shareholders divided by revenue, i'll get a 2008 figure of 14.0% and a 2007 figure of 16.4%.

I got a little interested at this point to find out more about tat hong's results:

Gross margin----39.0%-----------30.9%--------28.9%-------26.8%
EPS (cents)------17.73-------------17.10---------9.66---------4.57

Looks interesting indeed.

2. Balance sheet

ROE = net profit for the year/total equity
Debt to equity = Total liabilities/ total equity
Current ratio = current assets/current liabilities
Quick ratio = (current assets - inventories) / current liabilities

*cookieguy mentioned that ROE should be profit attributable to equity holders/equity attributable to equity holders. But again, I'll just stick to my formula.

Current ratio----1.39---------------1.27

In my opinion, quick ratio isn't relevant here.

- ROE dropped from 07 to 08. Could be the other income in 2007 playing a part
- Debt to equity dropped from 07 to 08 - a good sign
- Current ratio also increased from the same period - good sign.
- Using the formula cookieguy mentioned, i'll end up with 2008's ROE of 24.1% and 2007's ROE of 31.0%.

Other ratios can be calculated, but I leave it to you to find out. In fact, you might want to come out with some yourself, made specifically to find out for a particular industry/sector.

I think that's about as far as I would like to go. Hope it helps :)

Thursday, May 22, 2008

Paradoxical commandments

It's an inspiring book, "Anyway - The paradoxical Commandments" by Kent M. Keith. This book is about finding meaning not in other people's applause, but finding it in the very act of doing things that you think is right. Here's the 10 paradoxical commandments:

1. People are illogical, unreasonable, and self-centered. Love them anyway.

2. If you do good, people will accuse you of selfish ulterior motives. Do good anyway.

3. If you are successful, you will win false friends and true enemies. Succeed anyway.

4. The good you do today will be forgotten tomorrow. Do good anyway.

5. Honesty and frankness make you vulnerable. Be honest and frank anyway.

6. The biggest men and women with the biggest ideas can be shot down by the smallest men and women with the smallest minds. Think big anyway.

7. People favor underdogs but follow only top dogs. Fight for a few underdogs anyway.

8. What you spend years building may be destroyed overnight. Build anyway.

9. People really need help but may attack you if you do help them. Help people anyway.

10. Give the world the best you have and you'll get kicked in the teeth. Give the world the best you have anyway.

Tuesday, May 20, 2008

CSC review

Today I trimmed off CSC from my portfolio, cutting out all my stake in it. It was a love-hate relationship.

I bought it entirely on technicals, held it with speculative hope, thought I'm holding it for investment but sold it on a rational and businesslike manner. I believe CSC will have a splendid FY08, but I couldn't care less anymore. This is simply a business that holds no place in my revamped portfolio.

I went in 5 lots at 0.305 on 16th April, 2007. Went in another 20 lots at 0.385 on 22nd May, 2007 after csc announced that it won a contract worth 200 million (something like that, can't remember the exact details). I made 2 mistakes:

1. Bad entry point on 16th April. I don't know what I'm thinking about.

2. Even worser entry on 22nd May. I bought on news that they won a contract, whereas I should have sold. This gap up is soon covered and the stock price went up after that. But by buying 20 lots at a high of 0.385, I basically sealed my returns for csc, no matter how great it looks. This lesson is already well learnt by me. It's my first exposure to being a contrarian instead of following the herd instinct.

At a price of 0.305, I bought it at a PE of 35 times (FY07 earnings). At a price of 0.385, I bought it as a price of 44 times. Considering the low margins (though it's better than most construction firms, I must admit), erratic earnings subjected to economic cycles and low ROE, is it a good buy? Furthermore, at a PE of 35 times, do I really expect the earnings of CSC to grow at 35% or 44% pa?

Subsequent mistakes come from not knowing when to sell off a cyclical stock. At the peak of the bull run, csc was trading at 0.495, PE of 57 times. I didn't sell it. My rationale then was that since the price kept creeping up, it will continue to creep up too. Even when the price first broke past ema20d, then ema50d, then ema100d I was still holding it. I thought it is just a correction and things will improve.

So what's my total losses?

Total capital input: $9,282.92
Total losses without dividends: $2,290.02
Total losses including dividends: $2,232.21

% losses inclusive of dividends : 24.0%

HSBC chart using chartnexus!

Below is the chart for HSBC. I looked at the chart after I updated a newer version of chartnexus today. Now they even include HK stocks :) Amazing..and it's free too :) To all the guys/gals at chartnexus, thks for all the great work!

As mentioned in previous charting of hsbc, there is a rising wedge. But as I looked at it today, I realised that it didn't really breakdown as the pattern indicated. Instead, the price seems supported by ema20d and is also resisted at around 137.

Break below 137, I think we can expect more downside, at least for the shorter term. Break above 137, esp with high volume, we can see a uptrend.

Monday, May 19, 2008

How to detect and kill mozzies

Today I killed another 5 more mosquitoes. I affectionately call them mozzies. I still keep a running tab of how many I manage to kill, just for the record. You can check it out here.

I must confess that I take no pleasure in killing these irritating insects. If it wasn't for the fact that they can create life threatening diseases to humans living around my area, I wouldn't be bothered. Ants and spider live a happy existence in my home.

Having killed so many mozzies, I think I can write a little more about how to go about detecting them and subsequently killing them.


I follow the my own set of rules for detecting the presence of mozzies:

1. A buzzing sound is heard

2. I've been attacked by mozzies and there is a mark - those typical swelling followed by an insatiable itch on the affected area - to show it

3. Detection by sight

No 1 and no 3 have to occur together before I will go into 'hunting' mode. If no. 2 occurred, 'hunting' mode is justified without the occurrence of no. 1 or no. 3 or both.

Once hunting mode is on, a can of insecticide will be in my hands. I do not practice random spraying of insecticides all over in the hope of hitting one by luck. I will wait for the mozzies to rest on a surface before spraying. Usually they will fly over a few minutes before resting on a vertical or inclined surface. I've no idea why horiontal surfaces are not conducive for mozzies. Either that, or I'll be the human bait and I'll stand motionless for a few minutes to bait the mozzies to attack me. Once they settle on my skin for about 5 seconds, I'll spray.

The time interval of 5 seconds is to get the mozzies into feeding mode first so that my hit rate is higher. Key areas to focus on is the feet area or the head area, which are places that mozzies like to feed on.

Once sprayed, the procedure is repeated until:

1. The mozzies body is found and accounted for (killed and accounted for)

2. There is no activities for a prolonged period (missing in action)

Once 1 or 2 occurred, hunting mode is deactivated. Normal activities resumes :)

Saturday, May 17, 2008

Peter lynch's checklist

Here's a checklist from Peter Lynch's book, One up on wall street:

Stocks in general:
  1. P/e ratio – is it low or high for this particular company and for similar companies in the same industry
  2. The percentage of institutional ownership
  3. Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs
  4. The record of earnings growth to date and whether the earnings are sporadic or consistent (the only category where earnings may not be important are asset plays)
  5. Whether the company has a strong balance sheet or a weak one (debt-to-equity ratio) and how it’s rated for financial strength)
  6. The cash position. With $16 in net cash, I know Ford is unlikely to drop below $16 per share – floor of the stock

  1. These are big companies that aren’t likely to go out of business. They key issue is price, and the p/e ratio will tell you whether you are paying too much
  2. Check for possible diworseifications that may reduce earnings in future
  3. Check the company’s long term growth rate, and whether it has kept up the same momentum in recent years
  4. If planning to hold the stock forever, check to see h
  5. How the company fares during previous recessions and market drops

Slow growers
  1. Since you buy these for the dividends, check to see if the dividends have always been paid, and whether they are routinely paid
  2. When possible, find out the percentage of the earnings being paid out as dividends. If it’s a low %, then the company has a cushion during hard times. If it’s higher %, then it’s riskier than the company can continue paying the dividends.

  1. Keep a close watch on inventories, and the supply-demand relationship. Watch for new entrants into the market, which is usually a dangerous development
  2. Anticipate a shrinking P/E multiple over time as business recovers and investors look ahead to the end of the cycle, when peak earnings are achieved
  3. If you know your cyclicals, you have an advantage in figuring out the cycles. The worse the slump in the cycle, the better the recovery will be. Vice versa.

Fast growers
  1. Investigate whether the product that’s supposed to enrich the company is a major part of the company’s business
  2. What the growth rates in earnings has been in recent years. Favourites ones are in the 20 to 25% range. Wary of companies growing faster than 25%. Those 50% usually are found in hot industries, a nono
  3. That the company has duplicated its successes in more than one city or town, to prove that the expansion will work.
  4. That the company still has room to grow.
  5. Is the stock selling at P/E ratio at or near the growth rate? In fair valuation, the P/E should be the same as the earnings growth rate.
  6. Whether the expansion is speeding up or slowing down. For companies selling products which customers buy only once, a slowdown can be devastating. Not so much for companies selling product which customers have to keep buying
  7. That few institutions own the stock and only a handful of analysis ever heard of it. With fast growers on the rise this is a big plus.

  1. Most important, can the company survive a raid by its creditors? How much cash does the company have? How much debt? What is the debt structure? And how long can it operate in the red while working out its problems without going bankrupt? If the company have to issue shares to turnabout, the company may turnabout, but the stock might not
  2. If it’s bankrupt already, then what’s left for shareholders?
  3. How is the company going to turn around? Has it rid itself of unprofitable divisions?
  4. Is the business coming back?
  5. Are costs being cut? If so, what will the effect be?

Asset plays
  1. what’s the value of the assets? Are there hidden assets?
  2. How much debt is there to detract from these assets? Creditors will get the share first
  3. Is the company taking on new debt, making the assets less valuable?
  4. Is there a raider in the wings to help shareholders reap the benefits of the assets?

When to sell?

Slow growers
  1. Company lost market share for 2 consecutive years and is hiring another advertising agency
  2. No new products are being developed, spending on research and development is curtailed. Appears to be resting on its laurels
  3. Two recent acquisitions of unrelated business look like diworseifications and the company announces it is looking for further acquisitions “at the leading edge of technology”
  4. The company has paid so much for its acquisitions that the balance sheet deteriorated from no debt and millions in cash to no cash and millions in debt. No surplus funds to buy back shares
  5. Even at lower price, the dividend yield is not high enough to attract buyers

  1. New products introduced in the last 2 years have mixed results, others still in testing stage and are a year away from marketplace
  2. The stock has a p/e ratio of 15, while similar quality companies in the industry have p/e ratio of 11-12
  3. No officers or directors have bought shares in last year
  4. A major division that contributes 25% earnings is vulnerable to an economic slump that’s taking place
  5. The company’s growth rate has slowed down, though maintaining profits by cutting costs, future cost cutting opportunities are limited

  1. Sell towards end of cycle. Look for inventories building up/falling commodity prices/new competition.
  2. demand for product is slowing down
  3. Compnay doubled its capital spending budget to build a fancy new plant, as opposed to modernizing the old plants at low cost
  4. Company tried to cut cost but can’t compete with foreign producers

Fast growers
  1. Watch out for the end of second growth phase of company
  2. When a lot of analyst are looking into it, giving highest recommendations, 60% held by institutions and coming out in magazines
  3. P/E gets bigger and reaches illogical levels. When p/e reaches 50, can the company still grow at 50% earnings?
  4. Same store sales are down 3% in the last quarter
  5. new store results are disappointing
  6. Top executives join rival firm
  7. Company returned from a show for intuitional investors
  8. Stock is selling at p/e of 30, while most optimistic projections of earnings growth are 15-20% for next 2 years

  1. Sell when it’s turned around
  2. Debt, which has declined for 5 straight quarters, just rose by 25 million in latest quarterly results
  3. Inventories are rising at twice the rate of sales growth
  4. P/e is inflated relative to earnings prospects
  5. Company’s strongest division sells 50% of output to one leading customers, and that customer is suffering from slowdown in own sales

Asset plays
  1. Wait for raider to come
  2. Although the shares sell at a discount to real market value, management announced it will issue 10% more shares to help finance a diversification program division expected to be sold for $20 million only brings $12 million in actual sale
  3. Institutional ownership risen from 25% to 60%.

Friday, May 16, 2008

China Hongxing intiation report

Was alerted to China hongxing when I saw a thread in cna forum regarding its excellent results. I did browse through its quarterly results and found it pretty impressive, hence my initiation report on China hongxing.

What impressed me most is the high net margins generated from china hongxing business. They specialised solely on selling sports shoes, apparel and distribution business. The gross margins hovers around 30-40%, which is what I'll expect. But the net margins is around 15-20% for sports shoes. I would have expected a net margins of around 10%, having browsed through a couple of sports shoes company listed here and in HK.

I had such a hard time finding their number of shares because of a few issues:

1. They have convertible shares offering, which makes the number of shares outstanding very messy as they convert at different times

2. They split their shares 5 to 1 (every 1 ordinary shares is split into 5) to increase the liquidity, creating more confusion for me.

This is my compiled data. Note that the EPS is based on basic, non-diluted. The diluted one is too messy for me to keep track. All entries are in RMB ('ooo).

As I mentioned, the net margins is considered high for their business. I read that their sports shoe brand Erke is one of the top sports brand in PRC, so perhaps that accounts for their higher margins. Low debts and having a pretty strong balance sheet, at first glance. The founders own a huge percentage of the shareholdings too.

A few things I don't like about Hongxing:

1. I don't like it when companies split up their shares for more liquidity. Same pie but cut into more pieces only. The management mentioned splitting up the shares for more liquidity. Seems like the management is overly concerned about share price, though this could be a one-off incident and my judgment could be too harsh.

2. ROE is high but not consistent. I have no idea where the next ball park figures for ROE is next year and it keeps me from having a good valuation of Hongxing into the future. But from their latest quarterly results, ROE is around 12% annualised. Earnings are too erratic too.

3. They are listed only in 2005, so the history is a bit too short.

As such, no more investigation into this until perhaps after they stabilized their ROE and earnings per share. I wonder how they will fare once the Beijing Olympics fever fade away. They are trading at around 20x FY07 earnings at a current price of 0.675. Perhaps when the price reaches 0.40 again (around 10x FY07 earnings) then it'll be more realistic.

TA looks poised for another cycle of upsurge though.

Wednesday, May 14, 2008

To read or not to read

I just finished reading the Warren Buffett Way by Robert G. Hagstrom. Not particularly a good read for me, so I'll rather not review it. Sometimes I do wonder if the sequence of the readings will affect the satisfaction of reading a book. I think so, to a huge extent. When I didn't know better, I suppose I'll have thought that the Warren Buffett way will be a good reading. But for me now, it seems a little diluted and leaves me craving for more.

In addition to that book, I also borrowed another tome by Ken Fisher, son of Phil Fisher. The book is titled "100 Minds that made the market". I mean it when I said that it's a tome. Specifically, it's a 390 over pages thick tome about 100 individuals who made contributions (either good or bad) to the investment sphere that we know today.

The reason why I borrowed it is because (in order of importance)

1. It's a brand new book - I'm such a sucker for new books because I loved the smell of it. Nothing excites me more than reading a brand new book for the first time :)

2. I love reading the past. There are 100 individuals listing in the book, detailing in 2-3 pages their autobiography and their impact. I think I'll be wonderful to trace the history of all these people.

However, given my time constraints, I'm afraid I'll have to forego reading that book. It's unfortunate but necessary. I still have a list of readings that are more urgent than the history. These are:

1. The Intelligent Investor - I've not finished reading it despite having it for some time. It wasn't a good read for me the last time I tried reading, since I'm more inclined towards trading. Hopefully my dozens of investment related books will prep me for this blockbuster of a book. Problem about this book is that it's too heavy to carry it around everywhere I go, which makes it hard for me to pursue reading. I read during nonsense waiting time like in the trains.

2. Security analysis - Same as above.

3. Berkshire's annual report - this is the worst of it. I HATE reading from the internet and that is my main inhibition. I'll see if there are print versions of it in the library...that will really really make it more conducive for me.

I'm excited yet fearful of what my holdings will be like in the future. To quote biblical text, let me work out my own salvation with fear and trembling.


Chairman for bullythebear is going to write a half year report statement coming end of may. Watch out for it!


I still can't stop browsing the 100 minds that made the market. As Ken Fisher said, he wrote the book for fun, which I think it's true. I read about a few luminaries of the investment sphere, Rothschild, Morgan, John Law, Benjamin Graham, Rowe Price, Charles Ponzi, William Hamilton, John Maynard Keynes, Jesse L. Livermore and Hetty Green. Hetty green is by far the most interesting of them all, also known as the "Witch of Wall street". Perhaps one day I'll just blog about her :)

Tuesday, May 13, 2008

Earthquake in China

Seems like it's one disaster after another. Myanmar had barely finished with its cyclone and China is struck with a 7.8 magnitude earthquake.

A couple of china companies listed here came forth to offer help and aid to survivors - something which I found touching. There's a lot of announcements today regarding whether any of them got hit by earthquakes.

1. China Sports - not affected. Only 4% of assets are held around the region but no points of sale in affected region.

2. Synear - production plant is in Chengdu. Plant did not suffer material damage, neither are the staff hurt, but for safety precaution, plant is shut down on 13th May. Unable to touch base with about 8 distributors in the worst-hit areas. Synear will contribute 1 million RMB to Red cross for victims.

3. Hi-P - has a small operation near Chengdu. Has to be shut down due to no power supply until power supply resume. Expected to be minimum impact.

4. CentraLand - had two current development projects located in Zhengzhou, Henan province, located 1050 km from epicentre. Group's operation not affected.

5. China xlx - Plants is located at Henan, 1000 km from Sichuan. Expected to have no impact on operations.

6. Ferrochina - not affected.

7. Sino-env - not affected. Sends condolences to victims and is currently looking for ways to aid survivors of the disaster.

Seems like most are not affected. Synear is the most affected of them it seems. Money isn't everything, you only have 1 small fragile life.

Monday, May 12, 2008

Hongguo - Management


Three of the founders of Hongguo, Chen Yixi, Li Wei and Miao Bingwen are serving in the board as directors. Chen Yixi is the executive chairman, Li Wei is the Managing director and Miao Bingwen served as the executive director until 1st March 2007, where he became a non-executive director.

There is no employee stock options plan, hence no issues of the shareholder’s stake in Hongguo diluted. Furthermore, there is no stock buyback by Hongguo. There are no employees who are immediate family members of a director and whose renumeration exceeded S$150,000 since FY03.

Here is the breakdown of the founder’s salary indirect plus direct interest held:

We can see that the founders hold a substantial stake of their personal wealth being a stakeholder of the very own company which that set up. The executive chairman, Chen Yixi, alone holds 25.8% (direct and deemed interest combined) of the shares outstanding of Hongguo. Based on a market capitalization of SGD 204 million, that’s a cool SGD 53 million just by Chen Yixi alone. As a whole, the founders hold a 46% stake in their own company – a sure sign of confidence in their own baby.

There is ample planning and disclosure of the management’s plan for Hongguo, all stated clearly in their annual reports. It’s important to check this against what had been done over the years. Below shows the plans laid out and the check if the plans are carried out in the future:

I think the management did a very good job informing shareholders what they intend to do, so that they are no surprises. Their plans for expansion of their POS are very close to the actual POS set up in the future. Furthermore, all their design output targets and annual production targets that are set way in advance had been met uncannily.

A final look at the ROE and ROA will wrap up my analysis of the management of Hongguo. ROE is consistenly around 21-22% range, averaging 22.2% over 5 years since listing in 2003. ROA is improving from 13.66% in FY03 to 16.26% in FY07. Both of these figures show a certain level of competence in their business and management skills.

I find it very interesting that Prime Success and Belle are eagerly pursuing the sportswear segment and cited that the coming Olympics are going to ignite this sports fever in China. However, Hongguo did not once mention about going into the sportswear segment despite the show of confidence by their competitors. Doing business within their own circle of competence or too slow to respond to changing competitive landscape? Time shall tell.

What needs to be done is to attend their AGM.


It took me some effort to get the IPO prospectus of Hongguo, since the prospectus was dated 23 May 2003. I like to look at the IPO prospectus because with the benefit of hindsight, we can see if the ‘future plans’ listed by the management in the prospectus are fulfilled. Tracking management’s plan is one thing, checking to see if there is a major shift in their plans is another, so these are the 2 areas in which I’ll be looking for.

This is their plans stated in the prospectus:

1. Expansion of retail network and consumer base
a. Expand distribution network of department store outlets in major PRC cities to capture consumers with higher purchasing power

b. Launch customer loyalty privilege card program to develop customer database and to inform customers of new designs and promotions

2. Introduction of new brands and product lines
a. Expand stable of brands

b. Acquire established brands, and possibly production facilities and distribution network that come with acquired brands

c. Develop other brands

d. Introduce new product lines such as men’s fashion shoes to target different market segments

3. Expansion of manufacturing facilities
a. Acquire new equipment to increase production capacity

b. Carry out planned expansion where there is sufficient market demand

4. Contract manufacturing
a. Increase contract manufacturing operations

5. Trading and manufacturing operations in Jordan
a. Set up production facilities in Jordan to manufacture shoes for customers in USA when conditions are favourable

Comments on:

1. Basically their game plan for growth is still the same. They did expand their retail network from 280 POS in 2002 to 840 in 2007 and they also acquired Jiangsu Unity corporation (JUC), a chain of 63 boutiques carrying mainly foreign brands. As for launching of customer loyalty privilege card, it was not mentioned in previous annual reports. However, it was stated here that repeat customers are rewarded with gold and silver privilege cards to receive a 10-20% discounts on future purchases. Not sure if it’s still valid though, as it’s dated back in July 2003.

2. They did expand their holdings of brand, especially after acquiring JUC. The brand holdings under JUC include Byford, Hugo Boss, MaxMara, Bodyline, Ermenegildo Zegna and Tommy Hilfeger. The more recent brand in which Hongguo hold exclusive distribution rights include Naughty Monkey. Naturalizer and Via Spiga rights are accorded to them via a joint venture with US-based Brown Shoe Company in 2nd half of 2007. Besides acquiring established brands under JUC, they developed another house brand called E.Blan. As for men’s shoes, Hongguo distributes Lumberjack brand of casual shoes for men and women which Hongguo had an exclusive distribution rights in China. Besides that, they plan to have urban business/casual men’s shoes brand, as stated in their FY06 slides.

3. Manufacturing facilities expanded to 4.1 million shoes per annum. Expansion of design facilities in Guangzhou enabled them to design 6000 shoes per season in 2007, compared to only 600 designs per season back in 2003.

4. Revenue coming from contract manufacturing segment increases from 10% in 2003 to around 20% in 2007, representing an increasing proportion of Hongguo’s business. Management wanted a retail to OEM ratio of 80:20 mix, which is what we see in 2007. Besides Nine west, their contract manufacturing business include other notable brands like Kenneth Cole, Guess and Colorado.

5. I do not know much about their Jordan business as not much is mentioned.

I think the management did a fine job stating in advance what they had in store of Hongguo and they had the track record to prove it. Moving forward, the managements stated in FY06 slides that their plans forward is as follows:

1. Going to propel Hongguo as a fashion goods and branding company driven mainly by footwear distribution

2. Retail vs OEM maintained at 80% : 20% mix

3. Develop a comprehensive industrial chain to build up a leading status in the market to enjoy long term competitive advantage against other players

4. Construct a brand portfolio and product portfolio
a. E.Blan – transformation from a shoes brand to a multi-brand footwear store chain brand

b. To include a series of ladies’ fashion brands covering medium to high end market, including shoes, handbags and accessories

c. Urban business/casual men’s shoes brand

5. Maintain 8% to 10% annual same store sales growth
a. Open 100-150 new stores annually from 2008 to 2010

6. Enhance logistics and information system
a. Enhance sales system and update POS system

b. Streamline logistic process

7. Form alliance with outstanding companies internationally

If all goes according to plan, we can see a greater net margins and slightly slower POS increment in the years to come. I see that the management has no plans to venture into the sportswear segment and is cutting their niche into exclusively ladies fashion wear. No institutional imperative, it seems.

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

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
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.

Saturday, May 10, 2008

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.

Hongguo and Prime Success Price/EPS chart

Hongguo - Profitability part 2


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).

Friday, May 09, 2008

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.

Hongguo - Profitability part 1


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.


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.


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.


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.


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.

Thursday, May 08, 2008

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!

Wednesday, May 07, 2008

CSC chart

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

Tuesday, May 06, 2008

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.

Monday, May 05, 2008

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

Sunday, May 04, 2008

Hongguo - 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:

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.

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.

Friday, May 02, 2008

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.