Thoughts on Sesdaq and construction index

Just sharing some thoughts about sesdaq and construction index. Looks set to move :)





Decided to put in pac andes chart too:

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Lian Beng won contract? Not confirmed yet

STI went down 7 pts to close at 3552 with a volume of 2.3 billion. It's damn kelong, STI was up around 30 to 40 pts (1%) until the last few minutes before market close, it starts to tank down. Haha, profit taking at last minute? Strange action.

Construction stocks got a bit excited today, possibly by news that Koh brothers and lian beng had won a contract awarded by Sands IR. However, later announcement pointed out that both companies wished to clarify that they have submitted a tender together. The results of the tender is not known yet. Lian beng went up 10% today, I wonder what will speculators think of this tmr.

Just sharing swiber's chart:


Glad to see yn and csc going up :) I hope it reaches my tp soon, can't wait to dump it soon, haha! Dow futures +19 now. Bush is going to talk later about his plans to save all of us from the subprime crisis. Haha, see what he has to say :)

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TA charts for CSC, YN and SP

Some late night posting on some of my counters. After taking a break on TA, now getting back to it is so refreshing :)







Dow is burning hot now, up nearly 200 pts now. Suddenly doom and gloom becomes jolly and rally. Aah, the vicissitudes of the stock market.

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My investment compass found a direction!

STI was very strong today, rising up 32 points (0.91%) to close at 3560 with a high volume of 2.33 billion. The volume is the thing that shocks me, because it's been quite a long time since I last saw this kind of figures. Funds are buying into stocks, possibly to gear up their portfolio for the coming year, starting the traditional christmas rally.

A lot of midcaps and pennies moved up today. Construction did very well today, closing up a lot to prices seldom seen in the past few weeks. After the contract awarded to BBR, it seems like there is an increased sentiment towards these stocks.

Had a wonderful session chatting with HH today. This is my action plan to act on what had been discussed today:

1. Focus on fundamental analysis. Time to set up a system to eliminate lousy stocks before going into an in depth analysis of them. Try to select an industry to focus on instead of shotgunning every sector - there's simply too much things to read.

2. Select a few core stocks - these are stocks that will last through the good times and bad times. A large % of the capital will be into these stocks, while the rest are 'play' funds. 'Play' funds should not constitute a huge percentage, no matter how attractive it looks. Profits generated from the play fund will be channeled straight back into core stocks.

3. Aim high! I WANT to own some shares of Bershire hathaway! I WANT to live on the interest of my interest of my capital!

4. I want to learn all these by next year - big words I know - but I'll try. It's time to be focussed on what I need to know and find my direction. Now. Not later.

DJ on fire...100 over pts right now.

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Technical analysis - Triangle patterns

Since charlesming wanted to find out more about triangles, I'll talk a little about it. I'll admit honestly that I'm not very good in technical analysis, and I just know enough to get by. My kind of TA is functional for me only, haha :)

Basically what's a triangle? According to stockcharts.com, these are continuation patterns. Continuation pattern are formed after a trend is established, but instead of moving up all the way, the price goes up and down in a certain fashion, consolidating in lower volume. When a certain breakout price is breached, the stock moves in a direction based on the continuation pattern seen. There is also a price objective for these types of pattern, but the target price (tp) shouldn't be taken literally.

To be able to see triangle patterns, one must be able to draw support lines and resistance lines. I'm not talking about those horizontal ones, i'm talking about those trendlines which are oblique. A triangle pattern is just a pattern that you'll see if you extend these two lines until a point where they meet.

There are 3 types of triangle patterns:

1. Ascending triangle - this is where we have a horizontal resistance line above and a positive sloping support line below. The price goes up and down between these two lines until a point where a decision has to be made - usually the price will break the resistance line and have upside bias.

Below are some examples of ascending triangle. Pay attention to Swiber - a ascending triangle that failed.




2. Descending triangle - this is where we have a horizontal support line below and a negative sloping resistance line on top. Again the price goes in between the 2 trendlines until a point where a decision has to be made - usually the price will move down with a downside bias.



3. Symmetrical triangle - this is where there is a positive sloping support line and a negative sloping resistance line. Neither bullish nor bearish - it depends on other indicators as it could move up or down.



The following are keys points of the triangle formation:

1. The price need to be within the two trendlines. Small whipsaw is okay though, have to use judgment. Need to see at least 2 points touching the resistance line and at least 2 points touching the support line. If evenly spread out, is even better.

2. The other thing is that if the volume is trending down while the price is inside the triangle, it adds more weight that the pattern is really a triangle formation. Volume, if it surges after breaching the breakout price, will double confirm the triangle pattern.

3. Breakout price for all triangles follow these few guidelines:

a. Price moving above resistance line is bullish sign for all triangles, even for bearish descending triangle. Adds more weight if volume surges while breaking out

b. Price moving below supporting line is bearish, even for bullish ascending triangle. Same thing for volume.

It's important to take note that while a certain pattern can have bullish tendencies, it will only be true if it breaks above the resistance line. Otherwise, it's very bearish. Same thing for patterns with bearish tendencies.

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STI flattish, up 6.31 pts

Today, STI went up 6.31 pts (0.18%) to close at 3527, with a very low volume of only 1.38 billion. Dow closed down 55 pts so in the morning, I had expected STI to plunge, maybe to test the new-found resistance turned support. But the most it did was to touch 3500 and came bouncing back, especially after HSI opened at 10am.

There are some things to be happy about, and some things to worry about. First of all, Dow and STI is becoming less volatile. In the past few weeks before this, both are moving up and down violently, sometimes up to 2%. To see both closing at this small volatility is to see a storm calming down to a light drizzle, a welcomed change indeed. This is something to be happy about.

What I'm worried about is that while STI is climbing steadily, the volume keeps decreasing. This shouldn't be what is happening in a bull market. In such a market, rally is accompanied by surging volume while declines are accompanied by decreasing volume. We all need to be careful when volume is clearly diverging from the rising STI. This is a fool's rally.

An announcement to share:

1. BBR announced that it had won a contract awarded by URA to construct a common service tunnel with a contract sum of S$189,600,000 and lasting for 40 mths, ending on sept 2010. Hello, S$189 million contract is not a small sum, how come nobody 'knew' it before the news are announced? BBR closed flat at 0.080 today. Strange huh? haha, looks like the news didn't translate into action for BBR.

Dow's future is -74 pts now.

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Fundamental analysis on Popular

Introduction

Popular has this big vision of being the Edu-Channel of East Asia. With this vision in sight, they are making inroads into China, notably Beijing, Shenzhen and Guangzhou. This is besides their usual operating position in Singapore, Malaysia, Hong Kong, Macau, Taiwan and Canada.

Popular had been around for a long time, and they celebrated their 80th anniversary in 2004, having been listed in SGX since 1997. They have 3 branches of growth – retail and distribution, publishing/e-learning and their new business segment - property. Publishing is their key contributor to their bottom line. Very recently, they are also going into property, a whole new business segment through their new subsidiary, Popular Land Pte Ltd.

Popular to me is quite a recognized brand name at least in Singapore. I’m quite in tune with the education scene in Singapore so I’m in a good position to know. A lot of students have this popular card membership that entitles them to have discounts of 10%. It’s a paid subscription and offers discounts to other places like restaurants, optic shops etc. And boy do they shop – pens, correction tapes, exercise books and the most essential – assessment books and ten-year series (affectionately called TYS for short). The TYS are so popular that towards the end of the year around Sept/Oct, the shelves are snapped clean of them. Whether this can translate into profits in their coffers is another thing altogether, of course.

I’m going to break up my analysis on Popular into different segments – economic moat, growth, profitability, financial health, risks/bear case and their management. If I’m still up to it, I might want to do a DCF or DDM to arrive at some numerical valuation of the company.

Economic moat

It is important to think about whether Popular has a economic moat around it that prevents other competitors from snatching away its earnings and growth. It appears that Popular does have a certain moat around it, being one of the major publishers in its homeground – Singapore and Malaysia. It is fast gaining a foothold in the textbook market in Hong Kong and Taiwan, but more of that later. To look for evidence of economic moat, let’s take a look at how profitable Popular had been in the past by analyzing free cash flow, margins, ROE and ROA.


From 2003 to 2007, Popular managed to turn 12.7% (5 year average) of its turnover into free cash flow – that is cash flow that is not used for capital expenditures. This means that every $100 of goods sold, Popular managed to generate $12.70 of cash. I do not know what is the figure for its competitors, but I think this is pretty okay to me. Take note this free cash flow mean the cash can be used for anything - paying dividends, retained earnings - and all those capital expenditures needed for business had been accounted for already.

It’s quite something that Popular had never had a negative year, even though STI did had a rough patch around 1999 and 2003, but that’s not good enough for investors. Net margin shows a decreasing trend from 1999 till 2007; with a 9 year average of 4.3% - hmm, not a good sign of a strong economic moat. Net margins at 4.3% average means out of $100, Popular will get $4.30 as their net profit. Is that a little low? I need to find out about the margins in the publishing and retail sector to know if this is comfortable. ROE and ROA also shows a similar downtrend through the years. This is a little disturbing to me as it seems that market forces is gnawing at the profit margin of Popular.

(In case you're wondering why there's a spike in 2006 and 2004 - it's due to a one-off capital gain. That will make the graph more in line with the trend)

I wonder what is the competitive advantage of Popular over other publishers. I mean there are so many smaller publishers so why go to Popular? The answer could be the sheer size of the group, spanning over Singapore, Malaysia, Macau, Taiwan, Canada and China and their enormous distribution network. Popular have this interesting concept called the central book clearing house strategy – big name for something simple. It is a distribution network that aims to consolidate and move books in and out of all the Popular outlets in different regions. Popular aims to achieve this by acquiring and having joint ventures with local distribution giants in their respective countries. In 2004, Popular set up a joint venture with China National Publishing industry trading corporation (CNPITC) to move books in and out of China. It’s a huge step to enter China market, knowing that CNPITC is one of 3 fully licensed book importer/exporter in China. Beginning of wal-mart, anyone?

Is there evidence that this central book clearing concept works? The gross profit margins increased steadily over the years, so it could be this cost-effective way of distribution that contributed to this.


Another possible source of economic moat could lie in the strong brand name. From my humble field experience, I can tell you the first thing people want to purchase ANYTHING to do with school, the first name that comes in mind is popular. They sell packets of cheap stationery, files, TYS, assessments and all the basic necessity of school life. Scores of parents will throw to the admin staff their school book list for the new academic year. So go to any outlet during December and January, you’ll see what I mean.


While there’s no doubt that Popular has a certain level of protection that keeps competitors away, I hesitant to think that Popular has a strong economic moat, given the decreasing margins and returns. Are the profit margins sustainable? Maybe not… yet. If I want to get into this company, I’ll have a bigger margin of safety because of this perceived lack of a strong competitive edge.

Growth


Turnover is increasing year by year, with the % increase yoy falling, which is totally acceptable. I don’t expect the turnover to keep increasing at the same rate as that 10 years ago – pretty unreasonable. It worries me a little if over the next few years, I do not see any increase in turnover growth %- could be a sign of stale sales growth. Nevertheless, a 8-year average for revenue growth of 10% is still pretty good. However, looking at earnings growth, it’s a different story. EPS is a little more volatile, fluctuating between 2 to 3 cts, with 8-year average EPS growth of 3%.

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Something wrong with the chart. I realised on 7th sept, 2008, from Decarn that the 3-year average is actually my 2-year average. My apologies...
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A 3% earnings growth averaged over 8 years, isn’t that mediocre? I find it hard to fathom why the earnings is only growing at 3% while turnover is growing at 10%. This is exactly the same story when we look at net margins, ROA and ROE – it shows a decreasing trend, so despite the higher and higher turnover, it doesn’t translate into higher earnings.

Now that's something we have to worry about.



Breaking up the business into segments, we see a growth in the retail and distribution segment over the years while a decrease in the publishing/e-learning segment. Profit before tax clearly shows the trend in the two business segment. The drop in publishing/e-learning segment is most likely due to the high development cost and publication cost associated with new syllabus changes in Hong Kong. With the entry in new markets, development cost in course content would erode away publishing earnings. Really hope to see their publishing/e-learning sector up, as I believe this is the recession proof contributor. Even if times are bad, textbooks and educational materials still have to be used – that is my humble beliefs. As such, Popular entry into textbook market (esp pre-school and primary school) in other countries is a very wise decision. They had penetrated close to 70% of pre-school and 50% of primary textbook market in Hong Kong, very commendable. Not resting on their laurels, Popular also set up 15 tutorial centres in Taiwan where Popular’s own publications are adopted. They believed in 3 years time (by 2009), rewards would be reaped. I shall wait for them to prove it.

Popular growth story should be something like this: It managed to sell a lot of goods and services over the years, and this is a good thing. To make better use of the considerable development cost in developing good content for their publications, they are trying to introduce the books to other countries - and they did find out that it can be done. From my own point of view, Popular is trying to spread their pre-school materials over as many places as possible since the development charges are the same - this will spread out their cost and hopefully increase their earnings. It's wise not to do the same for secondary and above because there are different standards to adhere for secondary school materials and so the cost to develop so many contents over so many countries will be too prohibitive to even start it.

Pre-school syllabus are free and open-ended. Secondary school and above syllabus are regulated and subject to changes every few years (meaning development cost in content every few years). A smart management will enter pre-school market, capitalise on our strong primary school education materials (our primary school materials are the best in the world) and keep secondary and above materials in local context. That is exactly what they are doing. Nobody in the right mind will focus on higher levels of education, because there simply isn't a market - while everyone have to go pre-school and primary schoool, the education system will filter out people as we get higher and higher.

Possible growth story in pre-school textbook. Other than that, it's not my idea of a sustainable growth, unless their central house clearing concept makes it so cost-effective that it weeds out other publishers. Remains to be seen, of course.

Popular is going into property too. They purchased 2 residential properties, namely 1 Robin and 18 Shelford Road for development of up-market residential units. They are looking into commercial property and for future potential self-use. This is something totally new to diversify their business. Do what you do best, in my opinion.

Profitability

Take a look at these two table. The first one on top shows the ROA, ROE and net margins over the years. The second one below shows each item on the income statement as a % of revenue.



As I said before, it's good that popular did not have a year where it does not have positive earnings, despite being around for so long in good and bad times. Asset turnover increases very slightly, nothing to worry about over there.

One thing that shocks me is the high COGS of the Popular. Isn't it a bit high at 80% over? If they can find some way to reduce this cost, their margins will be improved tremendously. From this, I can say that either the industry have very high cost of goods sold, or Popular need to control the costs of their production. Could it be that Popular have no pricing power over their goods and services rendered?


Though COGS is high relative to turnover, it had been steadily decreasing over the years. I think there is one main reason for this - their central book clearing strategy. It serves two purposes - firstly is to distribute books that they had spend development cost on to other countries, to 'recycle' their materials sold, and secondly, to make it more cost effective to distribute their goods to different countries.

Gross margin seems to be increasing from 2003 to 2007 as a result of this cost cutting. I do not have data for the gross margins before 2003. But net margins since 1999 is dropping. Conflicting information. But to me, the bottom line wins - if net margins isn't good (4.3% averaged over 9 yrs) and shows trend of decreasing, that is all that matters. The profitability record of Popular, while in the black and shows no real signs of concern of being in the red anytime, isn't bad but it stops short of being fantastic.

Financial health

Below shows Popular's financial bill of health.


The figures for Debt to equities is slightly different from the official figures because I used shareholder's equities as opposed to total equities in my calculation. Debt to equity is pretty low and is dropping over the years, so it's a good sign. EBIT is more than sufficient to cover interest payments an average of 30 times (5 yr average), so it's very okay. Current ratio and quick ratio is also very steady over the years, absolutely no cause of concern at all. Financial leverage of roughly 2 times is considered reasonable, meaning that for every $1 worth of assets, another $1 is borrowed - not excessively leveraged.

Cash to total assets (my own ratio, haha) is quite strong at around 20 plus %, indicating that Popular is far from insolvency. Their free cash flow to turnover % is high also, so it isn't a cause for concern yet again. We can see that Popular is past the growth phase, considering that it has such a high percentage of assets as cash. This is cash sitting around, so I guess the management do not have a better use of it right now. Dividend is pretty consistent, around 40% of net profit given off as dividend, amounting to around 1.2 cts per share for most years.

A clean bill of health for Popular.

Risks/bear case

With appreciating SGD to HKD, their revenues earned in HKD might not contribute as much as they would have like. However, Popular does not deal with derivative foreign exchange contracts to hedge its foreign currency risk, so no big fx losses like those of Sembmarine happening. Popular is exposed to fx risk from HKD, M'sia Ringgit, Chinese renminbi, New taiwanese dollar and canadian dollars.

There is also project risk involved in their developing of course content for the textbook markets. The risk is that they might not recoup their development cost in time if the changes in the syllabus takes place faster than anticipated. But as long as they stay close to the pre-school market, should be pretty okay (so far no or not much regulation).

Their venture into property market - hmm, I don't know why they are doing this. Do they have the expertise to do that? They bought in when the market is high, so it remains to be seen if their investment into property development turns out to be a wise choice or not. Maybe they are sourcing out another way to increase their growth.

Management

I admit honestly that I'm lacking in analyzing the management. But let's give it a try.

Firstly, I'm not sure if this is common - the CEO and the chairman of the board of directors is the same person - the son of the founder of Popular - Mr Chou Cheng Ngok. They stated on their code of corporate governance that this is to "ensure that the decision-making process of the Group would not be unnecessarily hindered". Hindered by what, may I ask? Their board is made up of 2 executive directors and 3 non-executive directors, 2 of whom are independent. The other non-executive director is the son of the CEO/chairman, Mr Wayne Chou, who also sits on the renumeration committee. It's important in this kind of situation to sit in the AGM to have a feel of the power sharing between the directors in the board, as there might exists a possible conflict of interest. The independent directors must be vocal and steadfast enough to voice out their views as the usual checking mechanism of the board of directors on the CEO is missing here.

The directors' fee is not stated explicitly (nothing wrong with that), but the CEO/chairman has 2% of his pay as director's fees, 25% as salary, 57% as bonus/profit share and 16% benefits-in-kind. I thought it's quite good to have most of the pay as bonus/profit sharing, instead of salary. This would push the CEO harder to work towards the benefit of the company. However, since Popular's chairman of the board and CEO is the same person, nothing much to say on this already. I wonder what's the benefits-in-kind that of the the directors have. It's not stated anywhere. I want to find out how much the CEO and other directors are getting in terms of bonus and profit share.

It is stated that the Group does not have any share scheme in place. I take it that Popular do not give share options to employees.

Valuation

This really kills me. Trying to juggle around and find fault in my excel spreadsheet because I was getting ridiculous values like $560 per share (I made a mistake in turnover - per $million instead of $thousands). I even have to look at fishman's blog for some clues as to the process of valuation. I gave up trying to use free cash flow because the value I get is too crazy ($200 per share if you want to know). This is totally a GIGO effort - garbage in garbage out.

Since this is essentially a GIGO effort, I made some creative solutions to the model. Instead of using a one off % to determine the growth in operating income, I used a couple of ratios to help me. This is what I did:

1. I noticed that the turnover per year is growing pretty consistently, so I did a linear regression and I end up with a correlation coefficient of 0.9966 (the closer it is to 1, the more linear the data is), which confirms my observation. So, I found the equation of the turnover to years and spread it out over 10 years.

2. From previous crunching, the free cashflow (FCF) to turnover had an average of 12.7%, so I changed turnover to FCF by multiplying 0.127 by turnover.

3. Next I found out that the operating income over the years is about 35% of free cash flow, so I converted FCF to operating income by multiplying it 0.35 by FCF.

4. After that, it's the same old stuff for discounted model and I end up with a per share value of Popular as 0.830. Since this model is GIBO, I used a high margin of 40% and arrive at an safety value of 0.330.


At today's close of 0.305, it is undervalued according to my GIGO model by around 8%.

Technical Analysis



Long term chart (2000 till 2007) of Popular doesn't good at all. There is a very important and strong dynamic resistance line (red line) that always prevent upside movement of Popular. This resistance line, together with 2 support lines at 0.385 and 0.300 forms a descending triangle - a pattern with bearish tendency. The first descending triangle, developed from 2004 to end 2006 had already been validated after breaking support at 0.385. There is a downside target of 0.270 for this.

Another medium term triangle, formed from the start of this year, is materializing now. Support is around 0.295, so once broken, a downside target of 0.215 is there. Short term, popular seems to have rebound but will definitely test 0.300/0.295 support level again. By extrapolating the resistance line, the two lines of the triangle will converge - pointing to a time period somewhere in the middle of next year 2008. By then, we will see if Popular will pierce through the support level or not.

Conclusion

With a healthy cash flow, good debts to equity ratio, Popular has a clean bill of financial health. It is not excessively geared too, so it should be able to withstand bad economic seasons. The growth isn't exciting, neither is it stagnant, and this can be seen as Popular finds new ways to expand its old business and go into newer ones. However, while turnover is increasing steadily, the earnings, ROE and net margins isn't. This is the thing that I worry most - what's wrong? I would say that Popular is a slow and steady stock to invest in, but don't expect too much out of it. If it pays a good dividend, it might even be a rather defensive stock. There's no coverage for this company by analyst - probably Popular isn't that popular anymore.

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This is a pivotal moment in my education in being a value investor. A whole new way of looking at business is now opened to me. I spend a tough one week digesting the annual reports and thinking about the business of popular, instead of the price. This is my thesis on Popular - my hardwork and learning all condensed into one.

Feel free to criticise it, I'll try my best to answer :)

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HSBC dividend

Just received a letter from POEMS telling me about the procedure and fees to receive cash or script dividend for my HK stock - HSBC.

Book close date: 23 Nov 2007
Cash dividend per share: Approximately HKD 1.326
Reinvestment price: Not yet confirmed
Max entitlement to new share dividend: Book close quantity x appr HKD 1326/Reinvestment price

Should I take up the script dividend option, I will be charged:

1. HK collection fee of 0.5% of total dividend amount
2. HKD 2.5 per lot
3. PSPL handling fee of $10 plus 7% GST - a total of SGD 10.70

I have to state my written decision clearly (there is a form to check the option you want) and return the form to POEMS by 13th December 2007. If they did not receive confirmation by me, then the default option is to receive all dividend in cash. I understand this once sent, this option will be the standing instructions for the optional dividend of HSBC until I opt out from it by either emailing at custody@phillip.com.sg or write in to the company address.

Not sure if the reinvestment price is the average closing price of the last five days prior to XD or the average close of the first 5 days on and after CD. Let's assume it's the last 5 days before XD - it's 131.64.

Since I have 1 lot = 400 shares, if I accept the cash dividend, I'll get HKD 530.40 = SGD 99.48 (based on exchange rate of 0.18755). If I want the script dividend, I'll get 4 new shares (530.40/131.64, assuming reinvestment price of 131.64, then rounded down). Further more, I need to pay HKD 2.652 collection fee (0.5/100 x 530.4) and HKD 2.50 (based on 2.50 per lot - dunno pay for what) plus another PSPL handling fee of SGD 10.70.

That works out to be a total of HKD 5.152 = SGD 0.966 + another SGD 10.70, a grand total of SGD 11.67! Wah, like that eat up almost 12% of my dividend already. I think I should get more HSBC shares to average down by cost, otherwise really not worth it.

If I own 1 lot, my cost of script dividend is 12% of dividend
If I own 2 lots, my cost is 6.4%
3 lots, cost is 4.6%
4 lots, cost is 3.7%
5 lots, cost is 3.1%

I think optimally, 2 lots to 3 lots is reasonable, bringing down the cost of having script dividend at 4.6 to 6.4%. I would prefer to lower it down to near 3% with a total of 5 lots, but as it is, this will have to wait, haha :)

I think i'll go for the script dividend. Never mind the cost, I'll try to lower that down by buying more lots. I prefer to compound it with them then taking the dividend out. Okay, that should do it.

Singpost chart is shown below:

Price fell to 38.2% fibo retracement zone, a very good level to expect a rebound. Probably going to get more singpost at 1.08/1.09 level, see if I can get it tmr. The price is around 1.12 before pre-close matching brought it down to 1.09. Let's see how tmr. Getting interesting :)

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STI up another 1.24%

Dow was still up last night and the party goes on. STI went up another 43 pts (1.24%) to close at 3521 with a volume of almost 2 billion. All the biggies moved up - SGX, DBS, Cosco...could it be that funds are buying up now to window dress their portfolio for the next year? Possibility is there.

A lot of funny stuff happened towards market close. Sudden whack up and whack down to change the closing price - almost as if the BBs are trying to making the candlestick nice, haha! I saw that happening to singpost, cosco, swiber at least. Very interesting :)

Some news to share:

1. Pac andes secretaries resigned. I don't think that's very important to shareholders - it's not as if the CFO resigned. A matter of formality I suppose.

2. Popular is going to release 2H FY08 on 10th Dec. Going to be interesting as I'm doing an FA on it right now. I'm around 50% done so I'll probably post early part of next week, so stay tuned!

3. Lian beng is going to do a share placement of 35 million shares at 0.68. These days, construction companies did a lot of shares placement, possibly to fund their projects these few years. Tsk tsk, don't like it. Lian beng is going to face some selling pressure at 0.68.

Dow is strong, up 147 pts (1.11%) now. Haha, don't be so happy, take this rally as a chance to off load. Don't buy impulsively!

Portfolio loss: -$860

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Singpost at $1.090 is so so tempting!!

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STI up 3.22%

STI did a superb move upwards today, after a very good showing by Dow last night. Dow was up 331 pts (2.55%), and today STI followed it to close up 108.5 pts (3.22%) at 3478 with a volume of 1.78 billion. I've not seen STI rallied up so fiercely for some time already - but it's true that STI is getting more and more volatile nowadays, almost mirroring the crazy HSI volatility.

All it takes is the 2nd in command from FED to say a sentence - that FED should be more nimble and not let the economy suffer in order to punish the speculators. That's enough to push Dow up so much and consequently the rest of the bourses.

Technically, I don't like the many gaps that form as we move up and down. Gaps just show how impulsive buyers are, can't wait to enter and ride the momentum. With today's rally, STI broke ema200 days resistance at around 3420. What I hope to see is that this resistance becomes the new found support level for STI while waiting to clear the next resistance at ema 20 days - 3480 thereabout. The testing of support is important - we could be in turning up already from the fresh selling last few weeks.

On weekly charts, STI tested ema 50w, a very important support level for STI, considering that it always rebound up from it. This important support level had been tested 3 times since 2005 - once in Oct 05, another in June 06 and lastly in August 07. We're now at this level - can it serve as a support again? I'll say highly likely. Ah, but the question is how high will we go this time?

Yongnam rose up 11% today, the rights was up 43%. Construction was suddenly up. This was followed by Lian Beng's trading halt. Construction contracts coming? Let's see if they will announce more details tmr.

My internet is too shaky for me to blog more. Better post it up first.

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Volatility of STI

I was haunted by the image of a picture in market uncle's blog. Not it wasn't particularly scary, but the image sort of got stuck in my mind's eye and I seriously need to exorcise it out. Research shows that if one is feeling down or happy, one just have to work on some maths or logical problems - it'll bring the level of serotonin to neutral level so that one does not feel happier nor sad. I've tried it before, it works very well. Try Sudoko next time you're feeling unhappy.

For me, I need to work out some maths as I couldn't quite resist lure of the data tempting me to find out more about them. Market uncle did a pretty good collection of the data which enabled me to compute a little bit more stuff about them. The data collect are the percentage daily closing of STI from April 1985 to October 2007 - pretty nasty bit.

As the data are classed, I need to find the class mark to be able to estimate the sample mean and sample variance. For the daily % change of the extreme ends, "above 20%" and "below -20%", I take the class mark conservatively as 20 and -20 respectively. I do not know the extreme upper and lower limit of the daily % change but I figured that it is immaterial as the frequency of those 2 classes are very small, so it shouldn't skew the mean too much. Here's my table:

I computed the summation of x, summation of x² and total frequency of data collected. Since the sample size is huge (5719, mind you), it's very safe to assume that central limit theorem holds. As such, I would take it that the daily % change of STI follows a normal distribution. Let's find the sample mean and variance, and ultimately the standard deviation for this distribution.


Getting interesting huh? The daily % change of STI follows a normal distribution with mean of 0.039% and with a standard deviation of 1.379%. What does that mean? It means that statistically, STI have a mean volatility of about 0.04%, with an 'spread' of about ± 1.38%. To be more precise, we can find out the confidence interval of finding the mean, given a probability of locating the mean.

I'll give a few confidence interval to illustrate:

1. There is a 99% probability of the mean daily % change of STI lying between -0.01% and 0.09%
2. There is a 90% probability of the mean daily % change of STI lying between 0.01% and 0.07%
3. There is a 80% probability of the mean daily % change of STI lying between 0.02% and 0.06%

This is all well and good until one realise that the spread of ± 1.4% basically means that knowing the mean doesn't mean a thing (haha!) because the standard deviation (measures the spread or uncertainty) is so high.

Perhaps it will be even more interesting to find out if periods of high volatility, as predicted by daily % change, will cluster together. According to autoregressive conditional heteroskedasticity (ARCH for short) model by Engle (1982), the volatility is a function of previous volatility and the mean volatility.

Future volatility = f (past volatility, mean volatility)

This models predicts that volatility tends to occur in clusters and they tend to mean revert. Mean reversion means that the property will go back to the mean value. This coincides with my own market experience. I remember that last year, the volatility of STI is very quite low, if we see a rise or drop of 20 pts it's a big hoo-ha already. This low volatility period lasts for quite a while until this year, where I see big swings of ±1 to 2%. HSI is even more volatile, swinging wildly ± 1000 pts. And boy do these periods of high volatility cluster together.

If you know bollinger band, one of the technical indicators, it basically set up a trading rule based on the transitional moment between clusters of high and low volatility. 'Bollinger squeeze' is where the two bands tighten (volatility drops) around the price range. At the critical point, the price breaks out of the band, resulting in a huge change in price (up or down, we have to look at other indicators for the direction) and subsequently huge increase in volatility. We can also make use of the idea that volatility tends to mean-revert to trade based on bollinger band. If it hits the top band, price tend to mean revert and correct, thus moving down. If it hits the lower band, price will mean-revert and move up - creating an overbought/oversold kind of signal.

Haha, enough crap for now :) I explored a few concepts today :)

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STI was pretty flat; it closed down 3 pts at 3369 with a volume of 1.5 billion. Pretty quiet day, nothing much happened.

Just a news to share:

1. Tiong woon was awarded service contract for shell houdini project to provide project cargoes trucking, heavy haulage, storage and marine transportation services. They didn't state the contract value. This stock is heavily beaten down, so will this provide the catalyst for it to move?

Dow futures up +70.

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STI down after Dow 237 pt drop

STI was down 46 pts to close at 3372 with a volume of 1.75 billion. If you take a look at the intraday chart of STI, we see that throughout the morning, STI was down by around 2%. A sudden spike around 11 am causes a huge buying spree (intraday high of 3400) before it retraced and consolidate around 3370 region. What causes the spike up? Probably the news that citibank managed to sell its capital to Abu Dhabi group for 7.5 billion USD.

Dow futures is now at +45.

Sold off GK goh today at a loss. Wanted to trim my portfolio for some time already, so today somehow reached a point where I put my decision to action. I felt relieved immediately, sort of, haha :)

As discussed with fishman, we will be doing a fundamental analysis on Popular. I have a biased opinion on this already - heard two person saying this is a bad buy - but nevertheless I will try to find out for myself why this is such a bad deal. Dateline for homework is set at next week, 4th December. Anyone who wished to join us just leave a comment. I'll try to figure out how to discuss the finer points of our analysis :) hee hee, the best way to learn is to have an opinion and debate about it!

STI to test resistance at 3400 again? :) Let's just hope it won't fall to below 3300.

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Yongnam rights issue

I got my OIS for yongnam rights issue recently, so spent some time reading through the thick 100 page report about the rights issue.

A few key dates for my own reference:

Last day of trading of nil-paid rights : 30 Nov (this fri)
Last date and time for acceptance and payment of warrants: 6th Dec (next thurs) 9:30 pm for ATM
Expected date of issuance for warrants: 17th December
Expected date of trading for warrants: 21st December

So far, the rights issue is well received. It hovers around 0.035/0.040 range while yongnam mother share hovers around 0.270 to 0.280 most of the time. Since I have 10 lots of yongnam before XR, I'm provisionally allocated 3 lots of warrants which I have to subscribe to. Am I going to subscribe for excess rights? Probably not. I'll just pay my due of $90 (0.03 x 3000) and be done with it.

I believe that construction still has a little more to go. The price shouldn't drop too far from the present, having dropped from their peak in Aug (or even the Oct peak) to now. However, I do not want to hold construction companies for the long term because they are so cyclical in nature, so who is to say that they will be around in another 5 years? I'll try to reduce or remove my entire stake of construction companies to free my capital, hopefully by this year end, pending a year end rally :)

For my own records, here's the address of the warrant agent in case I want to exercise my warrants to change it to shares:

Tricor Barbinder Share Registration Services
8 Cross Street
#11-00 PWC Building
Singapore 048424

I haven't read the part about exercising warrants. I'll read it though, even though I have no intention to keep it to realise the value. It's more for knowledge about how this whole exercise works. Having been through one rights exercise for Pac andes, I dare say I'm in a much clearer picture of what is happening and I'm not so blur. Haha, just take a look at those in the cna forum, I guess I'm like them for my Pac andes rights exercise.

Just sold off my GK Goh at 1.100 today. I figured out that even if the market rebounds, this stock will not reached my buy price at 1.22 anytime soon. Might as well put it in my MMF and get a 2% returns or put it in other stocks. I'll realise a loss of 10.8%, equivalent of $660 absolute loss. Enough is enough :)

Waiting patiently for HSBC to hit HKD 120 :)

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Good to juggle my portfolio?

What a roaring start to a bluesy Monday :) STI was up 93 pts (2.8%) to close at 3418 with a volume of 1.68 billion. By powering up so much, it now faces the ema200 days resistance at around 3430. Should it break through the resistance, we could be seeing another road block at ema20 days at 3500. It's important to remember that the lowest we got to in this selldown is around 3300. It's highly significant if STI fell lower than 3300. A very good scenario is if we break free of ema200 days resistance then retrace before powering up to 3500. Too much to hope for? haha :)

Today we see renewed interest in Singpost, with intraday high of 1.17. Flocking to defensive stock? There's a few strategy I might employ to make my portfolio better:

1. This is the most important - Get rid of GK Goh, CSC and Yongnam when the opportunity arise. I'm more worried about GK Goh than the other two. This would free up quite a bit of my capital.

2. I might want to sell off Singpost around 1.20 (to cover commission). Why the sudden U-turn? I want to free up capital to move it towards HSBC. When ncy told me that Goldman Sachs is downgrading HSBC to HKD119 (from the present HKD133.50, I was quite overjoyed actually. Hmm, strange feeling because I remembered clearly in the past that I'll be pissed off as this kind of downgrading of target price might trigger a selloff.

Haha, different mentality this time. If HSBC hits HKD 120, I'll be queuing for sure. HH told me that last time, JP morgan is always downgrading HSBC and it will really trigger a selloff. She'll always collect when that happens, haha :) With HSBC, I can opt for script dividend so the money will be reinvested into the stock instead of taking out and removing the magic of compounding. That's the most impt reason for me to switch from Singpost to HSBC. Another reason is that since it's a foreign stock, it's harder for me to check the live prices from my watchlist daily - this is IMPORTANT as it prevents me from doing stupid things like trading it. Haha :)

I think with these 2 major changes to my portfolio, I'll be reduced to my core holdings with no speculative stocks anymore. I'll be more confident to hold it through the testing period of my portfolio - bear market. A little scared because I've never experienced one before. I've gone through 2006 where any stocks you buy will just jump so much within contra period. I've gone through the craze in IPO stocks where everyone will just jump in and sell off, making a handsome profit.

Let's see how the bear looks like. Coming to your nearest theater in summer 2008 :)

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STI went up 13 pts - 3325

STI went up 13 pts to close at 3325 with a volume of 1.42 billion. Quite low, so the significance of the rebound isn't high. Dow wasn't opened for business last night so I guess it eased a lot of selling pressure off Asian bourses. In fact, Asian bourses had a little rally after HK's Warren buffet - Lee Ka Shing used 2 billion to buy shares and announced loudly to the whole world.

Nothing much to say, perhaps can share an announcement:

1. Swissco signs S$3.9 million worth of charter contracts. Not very interesting I suppose, haha :)

Dow futures now at +82, and US opens for half day, should stop around 2pm? Anyway, could see a slight rebound and might affect STI's opening next monday. Hope to see a stronger technical rebound - around the range of 3400-3500 to wrap up the year with a good note. That would be an excellent time for me to trim my portfolio. I still need to cut 3 counters - GK Goh, CSC and Yongnam and I'll be set for the bear to come.

Oh well, as it is, my portfolio is -2.8k. I don't include my HK shares - that's for long term, might as well don't see the returns weekly or even monthly. Just hold for a good 5 years and see what turns out :)

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FA of dating a rich man

Copied and paste from cna forum. Haha, damn funny!

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Title: What should I do to marry a rich guy?

I’m going to be honest of what I’m going to say here. I’m 25 this year. I’m very pretty, have style and good taste. I wish to marry a guy with $500k annual salary or above. You might say that I’m greedy, but an annual salary of $1M is considered only as middle class in New York. My requirement is not high. Is there anyone in this forum who has an income of $500k annual salary? Are you all married? I wanted to ask: what should I do to marry rich persons like you? Among those I’ve dated, the richest is $250k annual income, and it seems that this is my upper limit. If someone is going to move into high cost residential area on the west of New York City Garden (?), $250k annual income is not enough.
;
I’m here humbly to ask a few questions:
1) Where do most rich bachelors hang out? (Please list down the names and addresses of bars, restaurant, gym)
2) Which age group should I target?
3) Why most wives of the riches is only average-looking? I’ve met a few girls who doesn’t have looks and are not interesting, but they are able to marry rich guys
4) How do you decide who can be your wife, and who can only be your girlfriend? (my target now is to get married)

Ms. Pretty



Here’s a reply from a Wall Street Financial guy:

Dear Ms. Pretty,

I have read your post with great interest. Guess there are lots of girls out there who have similar questions like yours. Please allow me to analyze your situation as a professional investor. My annual income is more than $500k, which meets your requirement, so I hope everyone believes that I’m not wasting time here.

From the standpoint of a business person, it is a bad decision to marry you. The answer is very simple, so let m e explain. Put the details aside, what you’re trying to do is an exchange of “beauty” and “money”: Person A provides beauty, and Person B pays for it, fair and square. However, there’s a deadly problem here, your beauty will fade, but my money will not be gone without any good reason. The fact is, my income might increase from year to year, but you can’t be prettier year after year. Hence from the viewpoint of economics, I am an appreciation asset, and you are a depreciation asset. It’s not just normal depreciation, but exponential depreciation. If that is your only asset, your value will be much worried 10 years later

By the terms we use in Wall Street, every trading has a position, dating with you is also a “trading position”. I f the trade value dropped we will sell it and it is not a good idea to keep it for long term – same goes with the marriage that you wanted. It might be cruel to say this, but in order to make a wiser decision any assets with great depreciation value will be sold or “leased”. Anyone with over $500k annual income is not a fool; we would only date you, but will not marry you. I would advice that you forget looking for any clues to marry a rich guy. And by the way, you could make yourself to become a rich person with $500k annual income. This has better chance than finding a rich fool.

Hope this reply helps. If you are interested in “leasing” services, do contact me
signed, J.P. Morgan

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Another down day for STI, 1% drop

STI dropped another 1% more to close at 3312, with volume of 1.8 billion transacted. I think another 100 points like that to go before we hit rock bottom. Cannot be falling one straight line without rebound right? Possible support at 3300, then 3250, I think at most will fall to 3150.

Most stocks are already trading at/below Jan price - meaning that the whole year worth of gains is wiped off. Serious huh? Well, nobody said that stock market is easy to earn money from.

Here's some announcements from yongnam:

1. They successfully raised $100 million in the warrants issue. This capital raised will be partly used to purchase steel struts to meet the rising demand from the construction boom. Nil-paid rights will cease trading on 30th Nov, so I need to pay up 0.03 for each warrant by then.


I was just fiddling around with HSBC charts, trying to figure how when the selling will stop. I used the max charts available from yahoo! that shows the chart from 2000 to now. HSBC hit slightly above 120 in 2001 before crashing down throughout the whole year in 2001 to 2002. The price consolidates inside an symmetrical triangle for almost 2 years before breaking out in mid 2003, rising throughout 2003 until early 2004. Price is consolidating in the form of a channel trend, going slightly upwards though at a gentler pace (unlike end of 2003 where the price jumps up so much).

As of today, the price broke below the lower trendline down to 130. A possible support level (and good entry point is 120 - high of 2001).

Can u see the pattern? Go down, consolidate in pattern, breakout in uptrend - exponential increase in price, consolidate in pattern, breakout in downtrend - exponential decrease, consolidate and repeat again. Whole cycle takes 5-6 years thereabouts.

Very interesting :)

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My first foray into fundamental analysis: Aztech

Aztech

Introduction - It's NOT FUN in FUNDAMENTAL ANALYSIS!

Aztech systems ltd is a manufacturing firm that provides OEM/ODM design and manufacturing services, contract manufacturing and retail distribution. Their products include data communication devices (like modems, routers, wireless products), voice communication products (IP telephony, skype products), homeplugs, TV receivers and even RC helicopters for hobbyist.

Shiro Corporation is a subsidiary of Aztech. It’s a brand that sells mp3/mp4 players, skype phones, wireless modems. Basically, I think it’s just a product arm of Aztech (not sure about that). Incidentally, I used to own a cordless Shino phone. ‘Dieded’ after a few months and since then, have a bad impression of Shino phone products.

Aztech has its own manufacturing plant at Dong Guan, China, with close proximity to airports (HK, Shenzhen, Macau and Guangzhou) and sea ports (Yantian and HK).

I’m not really a techie, but from the awards Aztech won in 2007 for its wireless router, it seems they are at least coming out with the right products that people wants. Whether that translates into profits, we shall examine it in detail.

This year, Aztech won the SIAS investor choice award for being the most transparent company and silver award for best investor relations. While it’s hard to forget that Sembcorp marine also won some award from SIAS before its downfall in fx losses, I do agree that Aztech investor PR is a notch above the other companies I’ve seen. Their website is well updated, information is presented clearly. I never had such an easy time digging out information from any company. Their accounts is so transparent and written so clearly that it really spoils me! This wine smells good before I even tasted it.

While analyzing, I notice that I do not have a framework to scrutinize a company. I need to find out from books how to dissect a company in bits to analyse. I’ll work on it. In the meantime, I’ll do an analysis of the company itself for the past 5 years. A good analysis should also include comparing Aztech across its peers but this would be another day, another fight.

While compiling the information from the past 5 years of annual reports from their website, I noticed that I have to grapple with different numbers even though the items are the same. An example is that the administrative expenses in the 2005 annual report is different from the same item in the 2004 annual report. Quite often I have to cross reference 2 sets of annual reports and do some detective work before I can discover what is the new thing that they included inside the same item. There’s a lot more such examples. When in doubt and the figures do not match up despite my sleuthing, I always take the latest figure.

I can’t emphasize it enough. In the course of just compiling data from the past 5 years of annual report, I learnt a lot of things. I wanted to find out the R&D expenditure of the company and the problem is that they do not state it explicitly. Even much sleuthing, I managed to deduce that the R&D expenditure can be found from the cash flow statements, under deferred expenditure (from 2003 to 2005) and intangible assets (from 2006 onwards). A sense of satisfaction envelops me :)

If it was hardwork compiling the data, it was harder digesting the data and the various ratios that are supposed to help to feel the company. Here's my compilation and some ratios:

The data above is compiled using the annual reports available from its website. I doubt the above is of any use to anyone, cos it's too messy. I'll do a better job next time. Here are a few pointers worth mentioning:

Margins

It’s a remarkable feat to see the net profit growing steadily from 2003 to 2006. Net profit margin is increasing from 2.4% in 2003 to 8.4% in 2006. 2007 might have some problem maintaining the growth momentum (I annualized the net profit, turns out to be $16.8 million, a far cry from $20 million in 2006). Their 4Q is traditionally stronger so it should be able to push the net profit up to at least match 2006 net profit. There's quite a couple of factors that would push up 4Q earnings too, which I'll touch on later.

Their newly opened manufacturing plant in Dong Guan, supposed to multiply their capabilities and steamline their cost, does seems to work. We see an immediate jump in operating profit margin from 5.7% in 2005 to 9.5% in 2006. I think it’s important to see how this figure goes as when we look at the full year results in 2007. So far, the rising wages and appreciating renminbi is causing them some trouble in 3QFY07.

What I do suspect is that 2006 is a very strong year for them; hence the results might be hard to beat this year.

With increasing wage and rising reminbi, I think it’s a good choice that the management is transforming their manufacturing plant towards automation with less dependence on manual work. Moving forward, China will no longer be a cheap place to situate their manufacturing plant. Aztech will have to find ways to grapple with rising labor and overheads in China, together with rising renminbi. In 3Q 07, they are already reporting higher turnover but lower net profits. Can see this happening in their administrative expenses and the cost of goods solds, both reporting a rise of 12.1% and 24% respectively.

It’s important to keep a lookout for their operating margins as a result of this, looks like it’s going to drop from 9.5% to around 7-8% this FY07, a cause of worry.

R&D expenditure

R&D expenditure is increasing in dollars, but R&D spending per revenue seems to have reached a peak in 2003. But the management promised to spend more on R&D in 2005, which I think is paying off in the form of new products that is well received by the market, judging from the good vibes generated in industry magazines. I think for their products, there are so many brands all with similar specifications, so it’s important to know what makes it sellable. What truly differentiates their product could be positive reviews in magazines. I’m speaking from my own point of view – I won’t buy tech gadgets without first browsing through reviews.

Their R&D% increased steadily since 2004, but question: is the expenditure too low? I have no idea without comparing this figure to its peers. With 4 R&D centres found in Singapore, HK, Shenzhen and Dong Guan (china), the expenditure on R&D is only less than 2% of net sales? Hmm… In order to maintain the innovation and strong R&D presence in Aztech that they keep saying they are, I think coming up with new innovative products is a must for it to maintain a good lead among its competitors. I would love to see greater increase in R&D expenditure in 2007 (so far for 3Q, it’s spending with respect to net sales is quite good at 1.9%).

While their strength is traditionally in data and voice communication, in 2005, they ventured into multimedia like MP3 players, multimedia speakers and power conversion products. This is after they identified in 2005 that the multimedia sector has the potential for growth (I agree – even handphones with mp3 are the norm nowadays).

I wonder what’s the margin like for selling each individual product. No way they are going to put it in their report for fear of competitors… but I would very much like to find out from people in the business.

Segment growth

They did very well in M’sia and Singapore, which happens to be the place where they get the most awards and accolades. Aztech did very well in M’sia in the wireless networking and products area. Can see that they are trying to increase their market share in Europe and other parts of Asia pacific by taking part in trade fairs to showcase their products.

I tried to manually calculate their turnover by business segment but the figure I got was a little off. It didn’t help that in 2004 to 2005, they reclassified their business segment to form the present 3 segments – retail distribution, contract manufacturing and ODM/OEM sales AND further reclassified some of the 2005 turnover for ODM/OEM sales to retail distribution. I’m left puzzled and confused. My rule still holds – use the latest figures when in doubt (it is more conservative in the analysis too). Due to these changes, I’m unable to come out with similar turnover by business segments for FY2003 and FY2004.


There’s a slowdown in contract manufacturing because of slowdown in orders for a complex high end product from key customer in Asia Pacific. I wonder if it’s serious.

I did it for turnover by geographical segments for all the years though. Interesting trends can be observed. Aztec is increasing its turnover in other regions (I think they are referring to Egypt, South Africa and Australia specifically), while turnover in Europe is dropping. Did the trade fair they attended in United states contribute to the great increase in turnover in America for 2007 (judging by 3Q turnover)? I saw their 2H07 report saying that they are venturing into new markets in South America and eastern Europe. Do hope to see more contracts wins in those two areas – hopefully a rise in turnover in America and Europe.

EPS

Okay, I admit, I’m not good at analyzing this but I’ll work on it. Aztech EPS increases year on year, that’s all I can comment now.

Inventory

Aztech had a history of holding inventory for long – 70 plus days. I need to see comparative figures for other company in the same business before I can comment. 2 months plus of inventory in their warehouses, is that risky? They are dealing with tech products so my impression is that tech products have very short lifespan and becomes obsolete fast. Good sign is that the inventory to current assets is actually decreasing over the years, so maybe it isn’t a worrying trend.

In 3QFY07, their inventory rose up a lot. Possibly a result of delay in the key customers. It is confirmed when they breakdown the inventory and it showed more than half of the inventory comes from the contract manufacturing projects. They mentioned this increase in inventory level was due to the purchase of major components for the confirmed order of 1.5 million units of ADSL 2/2+ broadband modem from a key customer in North America. Hmm, I thought their 3Q07 presentation said the delay in orders is from Asia pacific region? Another customer? Interesting.

Anyway, the keyword here is confirmed order. So, it shouldn’t be a problem. I took notice of an inventory provision of $1.03 million made for obsolete items – so it’s true that the inventory do gets outdated.

Gearing

Gearing goes from 24.6% in 2003 to a peak of 67.4% in 2005. Wow, isn’t that pretty high? I guess it’s their manufacturing plant built in 2005 that requires them to borrow. However, they did a sale and leaseback agreement on Aztech building in Ubi for $23 million with a lease of 7 years in 2006. This move improved their cash flow in 2006 and improved their gearing to 24.8%, a more acceptable figure.

The good part is that they should have enough cash flow to repay their interest. Cash flow is steadily increasing yoy. Their cash conversion cycle ties down closely to their inventory turnover, which is near 2 months plus. This means that they have little trouble collecting debts from customers. This company pays steady and increasing dividend, so that should show something about its strong cash position. Not too worried about Aztech, since it had survived from 1994 till now, going though the tough times and good times.

Conclusion

A hasty conclusion, yes. There’s so much more things to find out, so much more things to sleuth that I could go on writing on and on. Any longer I feared I’ll be doing a thesis on Aztech already – so pardon my hasty stop. I found out that I would have to specialize in certain fields or sectors to be good in these as there is absolutely no way to plow through the fields of information that floods me daily. And I haven’t even done the comps (comparative studies of peers). No wonder analyst no need to sleep, everyday run model run until die man…

Aztech looks good on its balance sheet. It shows a healthy growth in its net profit margins and have the cash flow and steadily increasing dividends to boast. On accounts of its financial statements, I’m pretty satisfied in the way they run their business. A few pointers:

1. Is their inventory levels too high? How is their inventory supply compared to industry average? An investor needs to know this as tech products become obsolete very fast, maybe once every 3 months? An inventory supply of 70 odd days is worrying to me from my amateurish views.

2. What is the competitive advantage of Aztech? I know they won multiple awards for their wireless technology in M’sia prestigious magazines. Is it their strong R&D research? Are they spending enough on research compared to their peers? To me it seems a little strange to know that they have 4 R&D centres but their relative expenditure on it compared to net sales is only 1-2%. In the cutthroat world of tech products, one needs to be on the move both in design and function in order to beat the many competitors that will come to take one’s market share. I have problems seeing what is so good about their products – what’s their economic moat that prevents future competitors from stealing their profits? Can they raise their prices when they want to increase their margins – I doubt so because the competition in their product range is fierce.

3. Their manufacturing plant in Dong guan, China, is facing higher costs and appreciating renminbi that is threatening to lower down their margins. I don’t think renminbi would be going down anytime soon, and I read that they are mitigating this risk by hedging a fixed amount of US dollar against SGD and China Yuan. Is that safe? They already suffered from an exchange loss of SGD 0.44 million due to depreciation of US dollar against SGD. I’ll love to see their transformation to automation that relys less on manual labor.

4. On a closer note, it’s exciting to see if their 4Q can push up their lackluster 3Q performance. From research reports I’ve read, it seems that the delay in their contract manufacturing will be resumed in 4Q, so all seems to be well. Their long awaited product will also be launched in 4Q, possibly coinciding with the traditionally stronger 4Q for tech sales. This might be factors that could at least be on par with FY06 earnings. They stated the order book as of 24th October secured to date hits SGD 270 million, compared to a total of SGD 239 million in FY06. A good sign and reward for their continued expansion into new regions.

Based on FY06, their EPS is 4.9 cts. At the current price of 30.5 cts, Aztech is just trading at 6x FY06 earnings. I'll work on the dividend discount model one day...my gosh, so many things to do.

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adjusted the PER after protonoid advised me - see comments
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5. To me their gearing is a bit on the high side – but I could be wrong since this is the first time I’m doing this. I’m comfortable with their ability to pay off their debts from their strong cash flow, just a little worried in bad times. Their products isn’t exactly necessity products, so earnings might drop when times are lean. Can they repay their interest when recession hits?

Their quick ratio is always near 1 (lower side of 1), which is a good figure I believe. As long as earnings generate cash, not a problem.

That’s all I can say. I know it raises more question than it answers, but hey, I just started ok? Haha :)

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PLS PLS post comments about anything on this hardwork I've done! I spent 2 days plus one looonnggg night doing...so sleep now

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Commission for HK shares through POEMS

This is more for charlesming and HH, whom I promised to share about the transaction costs of purchasing HK shares through POEMS. A lot of things are hidden, apparently my broker cannot tell me for sure what the details are as he had not encountered before. Nevertheless, from my calculations, here goes:


Don't ask me why my commission rate is 0.478120%. That's what I worked out from the total brokerage they passed to me and calculated backwards. Can help me work out yours using the same rate and see if you get the same total cost paid? Probably not, haha :)

Oh well...doesn't matter much if one doesn't trade often, I guess.

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Key dates and events of Yongnam rights exercise

STI was down on accounts of Dow dropping 218 pts yesterday night. It went down to -100 over points before closing up 26 pts at 3438 with a volume of 2.26 billion. The remarkable recovery is due to an announcement after lunchtime that FED is holding an emergency meeting tonight at 2pm to discuss the possibility of a rate cut this month. A rally ensured in Nikkei and when HSI opened, it also pulled STI up from -ve ground to +ve grounds.

That was the excitement that lifted the gloominess enveloping the market today. It was quite boring, so I spent most of my time away from the market.

Yongnam removed the XR remark today. They announced the following:

1. Issue price of warrants is 0.03, with each warrant carrying the right to subscribe for 1 mother share at an exercise price of 0.25 each.

2. OIS will be despatched on 22 Nov

3. Commencement of trading nil-paid rights is 22 Nov on market open

4. Last day of trading nil-paid rights is 30 Nov on market close

5. Last date and time for acceptance and payment is 6 Dec at 4:45pm for post, 9:30pm for ATM

Dow futures stand at +70. Tonight investors would be scrutinizing the minutes released in the FED meeting for clues of possible rate cut. What else could they say? Presidential election coming, inflation poses risk, economic recession also poses a risk - at best a wishy washy have don't have kind of statement. Quite stupid huh, deciphering the tea leaves of the Gods, haha :)

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