Tuesday, April 28, 2009

Make me an offer I can't refuse!

When we’re talking about investing, what are we actually looking for? The concept is actually very simple. We’re basically looking for a company that fulfills the following:

A company that earns the most stable and highest earnings over the longest period of time, selling at a cheap price.

(You can replace ‘earnings’ by ‘dividends’ for those who are looking more towards income)

While the concept is easy, the execution is certainly not. For example, what is meant by cheap? Am I talking about the cheapness of the price with reference to the past prices, or am I talking about price with reference to intrinsic value? Talking about intrinsic value, how do I calculate it? Based on PE, discounted dividends, discounted cashflow? What about the discount rate and the period of discounting?

It opens up a can of worms just by analyzing the simple statement above. It’s the same when analyzing a company too – you thought it is a simple affair till you read more.

I think I need to do valuation of the stocks that I want to own, and the price that would make them attractive. It’s been a long time since I started doing so. So, everyday, I’ll just go the market and see if it throws up some real good bargains at me. Make me an offer I can’t refuse!

Wednesday, April 22, 2009

What I learnt from Mafia wars

After playing the facebook application - Mafia Wars - for some period of time, I've come to realise a few truths in life. You can really learn a lot of serious stuff in games, if you played it seriously enough. I'm so serious to even put in a spreadsheet the various yields one will get if one invests in different kinds of property.

Here are the truths in life that I realised by playing the game:

1. You need friends around you. Having many friends is better than having no friends. Having a few good quality friends is better than having many poor quality friends.

When playing the game initially, I only had less than 5 friends. As a result, I was bullied tremendously. It got to a stage that I was so irritated that I went to a massive recruitment drive to increase my friends. Currently, I had 150+ friends. Guess what? No more random attacks from others, nobody dared to rob my properties and it became so much easier to attack/rob others. I also realised that as my many friends grew in levels, it's even harder for others to attack me. A few high level friends helps more than plenty of low level friends.

2. When the going gets tough, the tough not only gets going, the tough hits back.

I used to just silently absorb all the abuse from others as they attacked and robbed my properties, thinking that I should be nice to others. But I soon realised that the best defense is to attack others, especially those that think they can bully me. I would gather a few strong friends, rob their properties dry, attack them until they are dead again and again for a few days until they give up. In life, you need to show others that you have the capability to hit back very hard when the need arises so that others will not take you for a sucker. I have to be aggressive to protect myself.

3. It's important not to overstretch your cashflow.

When you are rich, it's easy to forget that for every things you buy, there is a hidden liability side. As you accumulate your assets, you also begin to accumulate your liabilities. Make sure you always have free cashflow and do not accumulate too many assets that drains your cash out. My current cash flow in per hour is $22 million, cash out per hour is $402k, so my net cashflow is still $22 million per hour. I think I'm as conservative in game as in real life.

4. Be aware of the consequence of your actions, it might come back to haunt you later.

As I was attacking and robbing those who attacked and robbed me earlier, I was wondering. Is it possible that the other party is also retaliating because I had earlier on attacked/robbed them? So it becomes a case where the victim becomes the aggressor and subequently became the victim, and goes on and on in a vicious cycle. In life, it might not be possible to see who is at fault. So one should just think about whether all the fighting is worth it.

I called a truce with someone after fighting him for around a week. He accepted, and is now part of my team.

5. When money is not a problem, a lot of calculations becomes unnecessary.

When I started, money is not enough, so I had to calculate yields for the property purchase to make every cent that comes in count. When I am earning 22 mil per hour (i.e. in one day, I'll get 530 mil - alas if only this is real money) in the game, there is no point to this anymore. I just buy the property or any other items that I like since it forms only a tiny fraction of my cashflow.

The rich thinks very differently from the not so rich, and they are moved by concerns different from others.

There are so many truths in life that you can discover, if you only open your eyes to them. Most are just in front of you yet are invisible to you. Hidden in plain sight.

Tuesday, April 21, 2009

China milk quarterly tabulation

I've some time at hand to crunch some numbers for China milk. I've always wanted to do that but never really got around to doing it. Here's the figures:

I didn't read through the whole annual report nor its business in details, so let's do it another time then. Here's a few thoughts:

1) Despite the s-share saga, there are some s-shares like China milk whose business are still very sound and the debts are not stacked sky high. A cursory look at the revenue and net profits shows that China milk is very much in business despite the tainted milk saga in China too. The business is doing well without the much debts too. Debt/equity ratio is pretty good and is much lower than that in FY07.

2) The cash and cash equivalent is growing bigger and bigger since 1Q07. China milk did not announced dividends but there are official announcement of China milk proposing to buy back part of their convertible bonds - the only long term debts in China milk's balance sheet. The details are quite beyond me, not very sure what they are talking about. But it's important to note that by doing so, they would have reduced their long term liabilities in their balance sheet (by how much, I'm not sure) and book a non-taxable accounting gain of US$654,600 or around RMB 4.5 mil. That is around 3-4% of the 3Q08 net profits.

There are of course questions regarding what is the use of this cash if the management did not distribute back as dividends to shareholders. I think besides buying back their bonds, they intend to get more dairy livestocks.

3) Is there a problems with China milk running into liquidity problems? Very unlikely. Their current ratio are off the charts, being so well bathed in cash. With their repurchase and subsequent cancellation of their convertible bonds, their liabilities will reduce further. We're talking about a very debt-free s-share over here.

Monday, April 20, 2009

Hongguo FY08 results analysis

Hongguo released their FY08 results quite some time ago, and it’s only now that I’ve the time and resolve to really sit through and pore over it in detail. Overall, it was quite a disappointing 4Q result – not terribly bad nor excellent, just so-so. It didn’t help that Hongguo did not declare dividends for FY08 too, presumably to conserve cash and stay liquid in this hard and trying times. I’ve been waiting a year for their dividends in vain.

Here are the quarterly results for Hongguo for the whole of FY08:

1) We can see that the gross margins of Hongguo’s business fell sharply over the quarters. After a sharp rise in 2Q, the 2H08 is just anaemic. There are two reasons for this.

Firstly, the price of the products sold had been reduced due to the promotional discounts granted under the Hongguo’s stock clearing activity, as well as other sales campaigns organized by departmental stores. The departmental stores had to do this so as to encourage more consumers to spend, and such activities had increased in the 4Q, resulting in the rather poor gross margins of 34.6% in the 4Q (compared to average 39.4% for the whole FY08).

Secondly, there is an increase in the cost incurred by Hongguo to support the sales campaigns organized by the departmental stores. Whether there is an increased in the cost of producing the products sold, I’m not too sure on that.

These two reasons exert a downward pressure on the profit margins relating to C.Banner product line and those under JUC. It remains to be seen if this is a chronic problem or a temporary one. C.Banner, Hongguo’s top selling product line, is still ranked no.3 in China in terms of market share.

2)Net margins dropped throughout the whole of FY08, resulting in a whole year net margins of only 12%, compared to the 14.9% net margins in FY07. The rise in Selling, distribution and administration expense (SDA) rose for every quarter. This is due to Hongguo setting up more retail outlets (addition of 125 new outlets for their in-house brand, C.Banner and E.Blan, as well as another 60 more Naturaliser outlets), resulting in higher cost and administration expense because of higher staff payroll.

Just counting the in-house brand outlets opened in FY08, there is an increase of 16.4% in the number of outlets in FY08 compared to FY07 (762 in FY07 and 887 in FY08), whereas there is a corresponding increase of 27.1% of SDA (175 mil RMB in FY07 and 223 mil RMB in FY08). To have a clearer picture, let’s take a look at the SDA/revenue increment. It increases marginally from 23.8% in FY07 to 25.3% in FY08. This means that while opening more outlets will increase the SDA, the corresponding revenues brought in by the new outlets sort of compensated for the increase in SDA.

However, more revenues do not necessary imply that more is added to the bottom line. With the management stating explicitly that they are going to add another 120 new outlets (100 for in-house brands, 20 for Naturalizer brand), I’m a little worried. I can expect the SDA to increase more in the next FY. As long as the additional outlets are opened without leveraging themselves too much (they did not borrow money to open new outlets at all) and keep inventory management, costs and cash flow tightly managed, I think all should go well.

3) Their liquidity ratios are all very well above the normal s-share companies, so I’m not worried at all. With current ratio well in excess of 3 times, and quick ratio above 1.5, I think Hongguo have a clean bill of balance sheet health. They are not highly leveraged at all, so that must have helped a lot especially now where credit lines are tight. Receivables dropped, even when revenues have increased, so no problems of Hongguo having a lot of theoretical earnings in income statement but no real money in cashflow statement. I did notice in the footnotes that the percentage of the receivables dragging over more than 1 yr had increased from around 8.7% in FY07 to around 12% in FY08. But the total amount we’re talking about is less than 1% of the total trade receivables, so I think it’s immaterial. Around 94% of the trade receivables in FY08 are not past due and not impaired, so it should translate into cash in due time.

In terms of cash flow, there are not problems as far as I can see. They are probably going to have better cash flow in the next FY because firstly, they skipped the dividends and secondly, they mentioned they are not going to expand their manufacturing facilities to boost their annual capacity since they still have excess capacity to handle it.

4) Looking forward, the management reiterated that their main focus is actually on the ladies footwear retail business in their business strategy. Currently, they are getting a higher percentage of their revenues from their contract manufacturing business. Hongguo intends to be less aggressive in their outlet expansion plan (though they are still going on with their plans to open another 100 in-house brand outlets and 20 Naturalizer outlets), which I think is prudent in case their liquidity dries up.

For the existing scale of operation, Hongguo stated that their current 6 production lines are sufficient, hence they do not need to expand further in their production facilities in the coming FY. They would instead focus on securing high margin orders to increase their profit margins. Big words, yes, but so far, the management had a track record of fulfilling what they had mentioned. I've full faith in them continuing to do so again. They have every incentive to do so, since in FY08, all the 3 founders had a total stake of direct/indirect interest amounting to 47%, compared to 46% in FY07.

5) I should be attending my first AGM on 30th April by Hongguo. They are trying to pass off some resolutions, notably the more interesting one would be the share purchase mandate. I don't mind them purchasing their own shares off the market, though at this time, I would rather they distribute it to shareholders in the form of dividends. I've no wish to invest more in ass-shares at the moment, so I would rather direct the cash from the dividends to other worthy pursuits.

6) Valuation valuation valuation…

Price at last close: $0.155
EPS: $0.061
PE ratio: 2.5x

NAV: $0.32
Current assets – total liabilities: $0.25

I’m not even going to suggest that Hongguo is a good buy now. But if you’re dying to get some ass-shares in SGX, why not consider the better ones? You’ll save yourself countless sleepless nights. Just ask those who invested in Ferrochina, beauty china, china print & dye etc.

Even considering graham’s strict current assets – total liabilities, the current price is at around 40% off it. If Hongguo survived this and does not go belly up, how wrong can you go with 2.5x PE and price way below any form of valuation? Time will tell if this is a good investment.

Thursday, April 16, 2009

Bulls climb a wall of worry

Have you got this feeling that you've missed out on the stock market? If you've been watching the markets, it seems that no bad news can derail STI from marching upwards these days. Forget about the general economy and the languishing GDP forecast by our government - the stock market has a mind of its own and will move up regardless of the fundamental economic situation.

A few signs are worrying:

1. I've noticed that the top volume of SGX are occupied by the likes of small caps, specifically the ultra pennies as I call them. Once again, ultra cheap counters like the 0.005 digiland reaches the top position in volume transaction. Hey, did I have a deja vu that such things had happened before? I remembered fondly the good old days of the 2006/2007 period where such small caps are punted.

2. Some of the counters are climbing up with lesser volume, perhaps reflecting the same way that STI index is climbing up too. Look at ocbc's chart:

Did you see the rise in price without the corresponding rise in volume? Volume divergence is the name of the game.

The signs are even clearer when you look at UOB's chart. Several volume indicators are diverging from the upward trend in price.

So, if you think you've missed the boat, think again. If you're a keen reader of history, you'll learn that humans never learn from their past mistakes. What had happened in the past will happen again, perhaps in another form. Don't feel missed out...look out for opportunities again and know what to do when it happens again.

If all else fails, you can always feel 'motivated' by this:

Thursday, April 09, 2009

Fashion whims in insurance

Did you realise that financial/insurance products suffer from fashion whims too?

During the good old bull times, we have products offered by companies touting good returns projected way into the future (I heard from a friend, the returns projected are at 10% or more). It's no surprise then that the returns are much less than projected - it's just not sustainable. So what's fashionable now?

If you ever had people cold-calling you regarding their newest product, or if you've ever been waylaid by people on your way to a shopping mall, you'll have realised that the latest fashion whim in financial products are endowment polices. These are called a variety of names but all of them fulfill the same function - save a certain amount of money per month for a period of years mixed in with a bit of insurance coverage, essentially a sort of savings plan.

Hey, don't get me wrong. I'm not saying that endowment plans are rubbish - they are not. I'm just saying that they are not suitable for everyone, especially those who have no proper life plans, CI (critical illness) and H&S (hospitalisation plans). You know, when you have only one product to sell, everyone seems to need the product you are selling. Just like when you have a hammer in your hands, every problem seems like a nail to you.

I noticed that banks are getting a bit more aggressive towards selling insurance policies to its customers. They are touting H&S plans and other insurance plans too. For those who are unsuspecting and who bought it, may I ask a few questions to you:

1. Who is going to service you when you have claims?

2. If you have queries, who are you going to call for help?

3. Who's going to do a yearly review with you since you last bought it as your circumstances must have changed?

Not sure about you, but I prefer to have some face whom I can talk to and hold accountable for. Of course, that person might run road too, but there'll always be another one to take over your case.

Another fashionable whims in insurance I detected recently is this early payout upon diagnosis of CI. Suddenly the brochures are highlighting this clause, and there are new products introduced with the selling point as this. Hey, you know what, the whole industry is filled with incompetent people inculcating the incomprehensible into the indifferent...it's going to be an immeasurable effort.

If you ask this layperson who knows nuts about insurance, I'll say go for the big picture. If you're my age, single but not available and with no child, you'll want to ensure that you have at least a proper life coverage for CI and death, together with the all important H&S plans. Cover these basic needs first, then we talk about other add on like personal accident plan, hospital benefit and disability income. Settle that insurance part, then we proceed on to talk about investments. Exactly in that order.

Tuesday, April 07, 2009

STI - self reference

Self reference only.

There's still no signals to get into STI. Have to wait for a good point of entry.

I see support level at 177X level, sitting right at the ema100d level. After that will be 170X level. I read this website often, it gives a good analysis of the STI weekly movement. Good reference material: http://www.him.com.sg/

I want to catch the big movement, not the small little ones, hence like a fisherman, I have to learn to be patient. It makes it easier because I'm in no hurry to lose more money.

These days I've not had the energy and time to do some quality posts. Why? Usually I blog in the morning. But these days, I'm preoccupied with driving lessons..GRRR! Hopefully it'll all be over soon then I can go back to my usual routine. Life is a series of projects after projects...it gets a little tiring after sometime, don't you think so?