Each day, we come across numerous fund/unit trust advertisements in the various print medium. It can get quite intimidating. What to look out for? Fortunately, there are a few pointers serious investors should take note of when searching for the next high performing fund.
1) Look for funds in operation for more than 5 years.
A fund should have been around long enough to invest in both good and bad markets. The longer the track record the better.
2) A long management tenure.
The manager should have a long track record at the same fund so that we are able to gauge his performance over time.
3) Low management fees (<1.5%).
Avoid funds with front- or back-end loads -- additional fees charged every time you buy or sell a share. Also we do not want to pay more for mediocre returns.
4) Relatively low fund turnover.
We want the manager to be investing, not trading. But remember, small-cap funds typically have higher turnover than large-cap funds.
5) Is the fund following its investment objective?
Check out the fund's top holdings. Are they consistent with its stated objective?
6) Check the fund's ability to beat the benchmark.
Again, that's the main reason why we put money in funds. Isnt it?
So as to achieve a better than average return.
7) Ideally the manager should also have a stake in the fund.
You would like them to eat their own cooking too, dont you?
Thursday, June 28, 2007
Monday, June 11, 2007
Bond yield & bull run
Equity investors will do well to take note of the movement & returns of other financial instruments. One good example is the bond market. It is one of the favourite destination for investors due to the following reasons:
1) consistent, stable long term returns
2) much less volatility (good for risk-averse investors)
The yield on the 4.5 percent security due May 2017 now trades at 5.18 percent. Last Thursday and Friday were the first time since August 2006 it had breached the key 5 percent threshold. This is one major indicator to start worrying about the present bull run.
How Bonds Affect Stocks
Why do bonds matter so much? Rising bond yields put pressure on the economy, by making all kinds of debt more expensive, including home mortgages and corporate loans. At the same time, higher yields make bonds more attractive to investors and thus make stocks relatively less attractive.
Just as important, if the debt markets run into difficulties, that could bring to a halt the rash of mergers that have been running at record levels and have been a key underpinning to the stock market. Higher rates drive up the costs of the heavy borrowing that leveraged-buyout specialists rely on to finance takeovers.
One factor in the bond-market woes: concern about inflation, or rising prices. Inflation eats away at the value of bonds, as interest payments that are a fixed number of dollars can buy fewer and fewer goods and services. Now, more economists are suggesting that inflation could be a growing problem, as global workers, even in China and India, begin pushing for higher wages. Foreign central banks also are pushing rates higher, amid strong economic growth around the globe.
In some ways, yields on U.S. bonds are simply keeping up with global bonds -- yields on European and Japanese bonds all have moved up in the last month. In the past, the fact that U.S. inflation is still running at a tame rate of about 2% might not have forced up U.S. bond yields. But the U.S. imports more than it exports and it has to borrow funds from abroad to pay for the difference. So yields on U.S. bonds must stay competitive with those abroad to keep attracting foreign investors.
The ECB also just recently raised rates thus putting a whole round of higher rates expectations which should start to work its way into global equities. Rates ARE headed higher in the UK, euro zone and Japan. The US will have to follow or see a major selldown in the dollar. Risk-reward ratio for equity investments is not that attractive now. Investors should stay away from expensive shares and companies with plenty of hot air (nice story but no substance).
1) consistent, stable long term returns
2) much less volatility (good for risk-averse investors)
The yield on the 4.5 percent security due May 2017 now trades at 5.18 percent. Last Thursday and Friday were the first time since August 2006 it had breached the key 5 percent threshold. This is one major indicator to start worrying about the present bull run.
How Bonds Affect Stocks
Why do bonds matter so much? Rising bond yields put pressure on the economy, by making all kinds of debt more expensive, including home mortgages and corporate loans. At the same time, higher yields make bonds more attractive to investors and thus make stocks relatively less attractive.
Just as important, if the debt markets run into difficulties, that could bring to a halt the rash of mergers that have been running at record levels and have been a key underpinning to the stock market. Higher rates drive up the costs of the heavy borrowing that leveraged-buyout specialists rely on to finance takeovers.
One factor in the bond-market woes: concern about inflation, or rising prices. Inflation eats away at the value of bonds, as interest payments that are a fixed number of dollars can buy fewer and fewer goods and services. Now, more economists are suggesting that inflation could be a growing problem, as global workers, even in China and India, begin pushing for higher wages. Foreign central banks also are pushing rates higher, amid strong economic growth around the globe.
In some ways, yields on U.S. bonds are simply keeping up with global bonds -- yields on European and Japanese bonds all have moved up in the last month. In the past, the fact that U.S. inflation is still running at a tame rate of about 2% might not have forced up U.S. bond yields. But the U.S. imports more than it exports and it has to borrow funds from abroad to pay for the difference. So yields on U.S. bonds must stay competitive with those abroad to keep attracting foreign investors.
The ECB also just recently raised rates thus putting a whole round of higher rates expectations which should start to work its way into global equities. Rates ARE headed higher in the UK, euro zone and Japan. The US will have to follow or see a major selldown in the dollar. Risk-reward ratio for equity investments is not that attractive now. Investors should stay away from expensive shares and companies with plenty of hot air (nice story but no substance).
Friday, June 8, 2007
Property dreamland in China? Think thrice!!!
Nowdays, more reports are surfacing that real estate prices will continue to go up for the next 10 years. I cannot help but admire these writers for their power of extrapolation. This optimism is built on the demographic structure of the Chinese population for the next 10 years.
Building castles in the air
Here are reasons why we should ignore all this bullish talk and why the prices are not sustainable.
First, the current price of newly built houses and apartments in most cities is beyond the reach of the vast majority of citizens. Building costs are much lower than selling prices no matter how one calculates - that's not normal. Some economists estimate that the greatest part of the huge profits are swallowed by land authorities and developers.
Second, the real estate market in many regions is prone to bubbles because of intense speculation in the last few years. An economist from the National Development and Reform Commission, said this week the number of houses constructed over the past few years has actually surpassed demand. A large number of houses in many cities are left in the hands of developers or controlled by some speculative investors. One of the tricks developers play to bid-up housing prices is the so-called fictitious transaction - falsely reporting sales that never take place. Tomson Riviera, a luxury apartment block in Shanghai, which made a sensation in 2005 with its astonishing average price - 110,000 yuan (US$14,387) per square meter - will be investigated by the city government, along with other two projects, the Xinhua news agency reported on Wednesday.
Since the beginning of its "sales" in 2005, only three contracts were signed but all of them were canceled. There seem to have been no real transactions. A smokescreen to justify the price? The abnormally high price level of real estate in many cities in recent years cannot be explained by the great number of young people or the tension between supply and demand.
Why has it existed? One notable reason may be the notion that buying real estate is a good investment. Developers, media and some scholars tell people housing prices will soar. If people didn't believe this, there would be panic, the bubble would burst. In order to postpone that day, some people may deliberately be trying to mislead the public by talking about the age structure and the supply gap.
Building castles in the air
Here are reasons why we should ignore all this bullish talk and why the prices are not sustainable.
First, the current price of newly built houses and apartments in most cities is beyond the reach of the vast majority of citizens. Building costs are much lower than selling prices no matter how one calculates - that's not normal. Some economists estimate that the greatest part of the huge profits are swallowed by land authorities and developers.
Second, the real estate market in many regions is prone to bubbles because of intense speculation in the last few years. An economist from the National Development and Reform Commission, said this week the number of houses constructed over the past few years has actually surpassed demand. A large number of houses in many cities are left in the hands of developers or controlled by some speculative investors. One of the tricks developers play to bid-up housing prices is the so-called fictitious transaction - falsely reporting sales that never take place. Tomson Riviera, a luxury apartment block in Shanghai, which made a sensation in 2005 with its astonishing average price - 110,000 yuan (US$14,387) per square meter - will be investigated by the city government, along with other two projects, the Xinhua news agency reported on Wednesday.
Since the beginning of its "sales" in 2005, only three contracts were signed but all of them were canceled. There seem to have been no real transactions. A smokescreen to justify the price? The abnormally high price level of real estate in many cities in recent years cannot be explained by the great number of young people or the tension between supply and demand.
Why has it existed? One notable reason may be the notion that buying real estate is a good investment. Developers, media and some scholars tell people housing prices will soar. If people didn't believe this, there would be panic, the bubble would burst. In order to postpone that day, some people may deliberately be trying to mislead the public by talking about the age structure and the supply gap.
Thursday, June 7, 2007
AUSSINO GROUP
I would like to dedicate the following write-up to my friend who is moving to Australia soon with his wife. We have been friends for more than 10 years. Gosh.... think i will miss his laughter, jokes and passion for sports. Nevertheless, I sincerely wish the couple all the best in their future endeavors. Do keep in contact, for I will be seriously considering a trip to Down Under in the not too distant future.
Without futher delay, lets take a look at the following company.
BASIC INFORMATION
Company Name: Aussino Group Ltd
Stock Price: 0.355 (as at 7th June 07)
Currency: Singapore Dollar
Stock Exchange: SGX
Industry: Home Furnishing & fashion products
OVERVIEW
Aussino Group is a knowledge-based group involved in the design, product development, distribution and retailing of soft home fashion furnishings and fashion products. Their business strategy is to focus on the value-added front end (design & development) of the product life cycle and its distribution aspect. In this way, the need for constant capital expenditure on the manufacturing machinery is removed. Aussino's merchandise is available through more than 8,000 retail outlets worldwide. It has a wide range of in-house branded soft home furnishing products including "Royal Symphony", "Inspire", "Sino" and "Aussino" brands, which are targeted at the middle and middle-upper market. Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". All new AUSSINO and SINO collections are coordinated and manufactured in our network of 38 factories, coupled with products imported from Europe and U.S.A.
INVESTMENT MERITS
(i) Nature of business
As a designer and supplier of home furnishing products, the fortune of Aussino is closely tied to the growth in home sales around the world. For the past few years, we can see that property prices are on the uptrend in many parts of the world.
Home furnishings retailers benefit in several ways from the sale of new and existing homes. When existing homes change hands, remodeling and customization often follows, which can drive the sales of construction-related supplies to professionals, as well as to do-it-yourself homeowners. Additionally, as consumers furnish their residences, they often purchase new supplies.
(ii) Excellent long term earnings and profitability
For the last 5 years, Aussino’s revenue has grown by a CAGR of 22.7% and net profit before tax has also grown at a rate of 10.1%. The net profit growth (excluding other income) in FY2006 increases by 12.5% over FY2005. Similarly, its net profit margin grew from 7.9% in FY2005 to 8.6% in FY2006. The context in which the foregoing is achieved is commendable as the home furnishing industry is highly competitive.
(iii) Superb balance sheet and copious cash flows
The balance sheet is fundamentally strong. It has low debt and a net cash position (cash – total debt) of about $9million (3.7cents per share). In addition, Aussino has been able to manage its capital expenditure with internally generated cash flow. In fact, its cash flows have remained healthy despite the need to spend $3-4 million yearly for expansion purposes. For the record, the free cash flow generated in FY2006 was $12 million (FY2005: $5.8 million).
(iv) Consistent dividend policy
Its management has also been willing to fork out any excess cash to reward shareholders. Over the past 5 financial years, shareholders have been consistently rewarded with increasing dividend payments. The total amount of dividend paid-out so far was $15 million.
(v) Competent Management & Large Insider Ownership
Mr Anthony Lim has more than 15 years of experience in the retail, wholesale, export and import business. He founded the Group in 1991 and has identified business opportunities for the Group. Mr Anthony Lim expanded the Group's businesses to markets in U.S.A., Australia, Canada, China, Singapore and Malaysia. He continues to provide strategic direction and expertise to bring the Group forward to its next phase of expansion growth.
Currently, the insiders are holding more than 50% of the shares. As such, we can safely say that the interest of the top management and the minority shareholders are aligned.
So far over the years, there was no issuance of new shares and share options. This means that there is no dilution of shareholders’ stake. I take this to be a good sign that the company is able to move forward using its own resources and there is no excess compensation in the form of share options.
One foreign fund manager, Arisaig Partners (BVI) Limited has found this company to be attractive enough to take up a significant stake (14.27%) in it.
(vi) Diversification
In order to diversify its exposure beyond the home furnishing business, Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". For the last financial year, this business contributed 8.8% of the group’s revenue.
Aussino is also the exclusive distributor in China of a range of luxury ladies' and men's bags and accessories under the Calvin Klein, Gianfranco Ferre and Krizia international fashion labels.
VALUATION
Aussino is now trading at less than 8x historical earnings and it is even cheaper when the stock price and earnings are adjusted for cash (about 10.27% of its market capitalization is cash.). Over the last five FYs, Aussino’s EPS have grown by a CAGR of 12.3%.
Given its management excellent trade record in execution and in enhancing shareholder’s equity (FY06: ROE, ex cash is 34%, rising from 32.5%), Aussino is likely to continue on its growth path. A key contributor for its growth going forward would be its business in emerging markets like China, Middle East and Vietnam.
To supplement the above, a discounted cash flow analysis was performed. A conservative growth rate of 5% over the next ten years was modeled. The analysis also incorporated an estimated capital expenditure of $3.5 million every year. The discount rate used was 8% per year and the terminal value after 10 years is assumed to be zero. This yielded an intrinsic value of $0.45 per share; a margin of safety of 25% from current prices.
From the above calculations, we can conclude that Aussino is likely to be a growth stock trading at value prices, bearing in mind that its IPO price was $0.88.
RISKS
(i) Possible price competition
(ii) Increase in raw material prices
(ii) High risk when expanding to new markets
DRIVERS
• Attractive valuation and rock solid balance sheet
• Consistent top line and bottom line growth since listing
• Mutual fund managers are starting to take notice of the company
• Favorable future trends:
- The aging of the population, as well as recent concerns over geopolitical instability, has led consumers to curb travel to a certain extent and concentrate on their homes. As a result, consumers are spending more on outfitting their homes with new furniture, fixtures, and appliances. They are also remodeling entire rooms and adding amenities. This effect is known as the “nesting” trend that sociologists have seen over the last several years.
- The focus of both retailers and consumers is away from formal furnishings such as china and crystal, and toward more casual, soft lifestyle-oriented furnishings.
Without futher delay, lets take a look at the following company.
BASIC INFORMATION
Company Name: Aussino Group Ltd
Stock Price: 0.355 (as at 7th June 07)
Currency: Singapore Dollar
Stock Exchange: SGX
Industry: Home Furnishing & fashion products
OVERVIEW
Aussino Group is a knowledge-based group involved in the design, product development, distribution and retailing of soft home fashion furnishings and fashion products. Their business strategy is to focus on the value-added front end (design & development) of the product life cycle and its distribution aspect. In this way, the need for constant capital expenditure on the manufacturing machinery is removed. Aussino's merchandise is available through more than 8,000 retail outlets worldwide. It has a wide range of in-house branded soft home furnishing products including "Royal Symphony", "Inspire", "Sino" and "Aussino" brands, which are targeted at the middle and middle-upper market. Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". All new AUSSINO and SINO collections are coordinated and manufactured in our network of 38 factories, coupled with products imported from Europe and U.S.A.
INVESTMENT MERITS
(i) Nature of business
As a designer and supplier of home furnishing products, the fortune of Aussino is closely tied to the growth in home sales around the world. For the past few years, we can see that property prices are on the uptrend in many parts of the world.
Home furnishings retailers benefit in several ways from the sale of new and existing homes. When existing homes change hands, remodeling and customization often follows, which can drive the sales of construction-related supplies to professionals, as well as to do-it-yourself homeowners. Additionally, as consumers furnish their residences, they often purchase new supplies.
(ii) Excellent long term earnings and profitability
For the last 5 years, Aussino’s revenue has grown by a CAGR of 22.7% and net profit before tax has also grown at a rate of 10.1%. The net profit growth (excluding other income) in FY2006 increases by 12.5% over FY2005. Similarly, its net profit margin grew from 7.9% in FY2005 to 8.6% in FY2006. The context in which the foregoing is achieved is commendable as the home furnishing industry is highly competitive.
(iii) Superb balance sheet and copious cash flows
The balance sheet is fundamentally strong. It has low debt and a net cash position (cash – total debt) of about $9million (3.7cents per share). In addition, Aussino has been able to manage its capital expenditure with internally generated cash flow. In fact, its cash flows have remained healthy despite the need to spend $3-4 million yearly for expansion purposes. For the record, the free cash flow generated in FY2006 was $12 million (FY2005: $5.8 million).
(iv) Consistent dividend policy
Its management has also been willing to fork out any excess cash to reward shareholders. Over the past 5 financial years, shareholders have been consistently rewarded with increasing dividend payments. The total amount of dividend paid-out so far was $15 million.
(v) Competent Management & Large Insider Ownership
Mr Anthony Lim has more than 15 years of experience in the retail, wholesale, export and import business. He founded the Group in 1991 and has identified business opportunities for the Group. Mr Anthony Lim expanded the Group's businesses to markets in U.S.A., Australia, Canada, China, Singapore and Malaysia. He continues to provide strategic direction and expertise to bring the Group forward to its next phase of expansion growth.
Currently, the insiders are holding more than 50% of the shares. As such, we can safely say that the interest of the top management and the minority shareholders are aligned.
So far over the years, there was no issuance of new shares and share options. This means that there is no dilution of shareholders’ stake. I take this to be a good sign that the company is able to move forward using its own resources and there is no excess compensation in the form of share options.
One foreign fund manager, Arisaig Partners (BVI) Limited has found this company to be attractive enough to take up a significant stake (14.27%) in it.
(vi) Diversification
In order to diversify its exposure beyond the home furnishing business, Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". For the last financial year, this business contributed 8.8% of the group’s revenue.
Aussino is also the exclusive distributor in China of a range of luxury ladies' and men's bags and accessories under the Calvin Klein, Gianfranco Ferre and Krizia international fashion labels.
VALUATION
Aussino is now trading at less than 8x historical earnings and it is even cheaper when the stock price and earnings are adjusted for cash (about 10.27% of its market capitalization is cash.). Over the last five FYs, Aussino’s EPS have grown by a CAGR of 12.3%.
Given its management excellent trade record in execution and in enhancing shareholder’s equity (FY06: ROE, ex cash is 34%, rising from 32.5%), Aussino is likely to continue on its growth path. A key contributor for its growth going forward would be its business in emerging markets like China, Middle East and Vietnam.
To supplement the above, a discounted cash flow analysis was performed. A conservative growth rate of 5% over the next ten years was modeled. The analysis also incorporated an estimated capital expenditure of $3.5 million every year. The discount rate used was 8% per year and the terminal value after 10 years is assumed to be zero. This yielded an intrinsic value of $0.45 per share; a margin of safety of 25% from current prices.
From the above calculations, we can conclude that Aussino is likely to be a growth stock trading at value prices, bearing in mind that its IPO price was $0.88.
RISKS
(i) Possible price competition
(ii) Increase in raw material prices
(ii) High risk when expanding to new markets
DRIVERS
• Attractive valuation and rock solid balance sheet
• Consistent top line and bottom line growth since listing
• Mutual fund managers are starting to take notice of the company
• Favorable future trends:
- The aging of the population, as well as recent concerns over geopolitical instability, has led consumers to curb travel to a certain extent and concentrate on their homes. As a result, consumers are spending more on outfitting their homes with new furniture, fixtures, and appliances. They are also remodeling entire rooms and adding amenities. This effect is known as the “nesting” trend that sociologists have seen over the last several years.
- The focus of both retailers and consumers is away from formal furnishings such as china and crystal, and toward more casual, soft lifestyle-oriented furnishings.
Opening speech
My previous blog is gone. What the f%&$! Seems like they ran out of time trying to make it a viable business. Its ok. One door closes and another one opens. I welcome you to my new blog (value on level13) and a new beginning. In this blog, I will share some of my stock analysis. Please feel free to do the same in terms of feedback and comments. Ideas are to be shared..... :-)
CHEERS!
CHEERS!
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