Trade receiveables is important! (Suneast case)

Exactly one year ago, i pointed out some suspicious corporate actions in the SGX listed company called 'Suneast'. The link below will bring you to my earlier posting.
http://level13-analysis.blogspot.com/2007/12/saying-no-to-suneast.html

Now, one year later, my call to avoid this company has proved to be correct. Besides the questionable actions by the company i have stated earlier, I would like to draw your attention to the main reason that has caused the downfall of Suneast - Trade receiveables.

As at June 2007, the trade receiveables in Suneast was HK$168.4 million. One year later, it went up to HK$295.1 million, which represents an increase of HK$126.7 million (75.2%). Over the same period, sales revenue went up by merely HK$97.5 million (31.4%). To all the value investors out there, seeing the trade receiveables growing faster than sales revenue is a big red flag. Time to head for the exit immediately, regardless if you own the stock or not! What good is the company if it cannot convert all the profit into cold hard cash?

True enough, this problem is growing bigger and at the end of Aug 2008, Suneast has total trade receivables outstanding of HK$360 million. At this point in time, the problem is compounded because the banks are unwilling to lend it more money to finance the business operation. The events that followed were typical of a company desperate for cash.

On 30th Oct 2008, Suneast announced that it will issued more shares in three stages to raise capital. On 16th Dec 2008, Suneast has decided to sell its subsidiary which controls the much touted 51% of NuXD, which resulted in a loss of HK$56 million. Imagine, 56 million went up in smoke in just over 1.5 years!!!

The final blow was delivered today when the Executive Chairman, Mr Philip Chung, resigned with effect from 29 December 2008 due to health reasons. (Frankly, who will believe all this bullshit.) To put it crudely, it was a toxic stock from the beginning. The long suffering shareholders of Suneast ought to band together to seek a recourse from the management.


Wish all a very happy new year.

Desperate, Bold Step by DBS

DBS announced today that it will be issuing rights to raise net proceeds of approximately SGD4 billion. Pursuant to the Rights Issue, 760,480,229 Rights Shares will be offered at SGD5.42 per Rights Share on the basis of one Rights Share for every two Shares held. At this moment, there are 2 burning questions on the investors' minds. Why the need to raise capital? Why now?

After reading all the chest-beating statements in the announcement, i remain unconvinced. The signal i am getting from DBS is this: I NEED CASH BADLY. So they dont need the cash for M&A. But i believe they need the cash because their core business has slowed down tremendously and the cash flow is expected to be poor. NPL are on the rise and they know that they need to take huge write-offs in the near future. If not, why would anyone want to raise capital in this uncertain and turbulent time. Also, the rights are being placed at such a huge discount to attract investors to take them up, which indicates a red flag.

Current shareholders who choose not to take up this rights issue may potentially see their stake decrease by up to 33.3%. Before the announcement, DBS was trading at $9.85. So logically, upon the successful closing of this rights issue, the ex-rights price should also go down by 15% to $8.37 (assuming all rights are exercised). As such, in the near future, we may see DBS price moving rangebound around $8. However, we need to be aware that the future EPS, book value & dividend will be shared among a larger number of outstanding shares.

One last thing i would like to mention is the dividend. In the announcement, DBS stated that it intends to declare and pay a final dividend for the quarter ending 31 December 2008 the same absolute cash amount as it would have done had there been no Rights Issue. In light of the weak business conditions, I expected this year-end dividend amount to decrease as compared to the same period last year. I would really be afraid if DBS payout the same amount of dividend because it does not make sense to give out the same dividend amount using capital raised from the rights issue (Its a big no brainer red flag).

Have a merry christmas. Cheers!

Very much in the woods

Recession in the USA started in Dec2007 (Ok, owe up those who blindly believed what those authorities of influence said when they denied that USA was in a recession in the earlier part of the year). You don’t hear much good news nowadays. We are not out of this mess yet. In fact, I think we are only about 40% in progress. 60% more pain to experience before we can see the sunshine. Below are some of the pointers that I have consolidated from various print media and websites, which may help us identify the period of the much awaited turnaround in market sentiment and business conditions.

1) Home prices in USA stop falling.
2) Foreclosure rate return back to normal level.
3) Commercial banks start to lend again.
4) Inventory falls back to a reasonable level. Currently there are too much goods but too little demand.
5) Earnings growth visibility return for companies. At the moment, earnings are expected to contract for FY2009.
6) Government bond yield increase and corporate bond yield decrease. This is a sign that investors’ risk appetite has returned.
7) Companies stop writing-off assets and stop taking on impairment charges.
8) Inter-bank interest rate goes back to normal level.

Have a great weekend.

Updates on Bright World takeover

Recently, the share price of Bright World(BW) came under further pressure as a result of a letter sent to its directors from the Monetary Authority of Singapore (MAS), referring to a possible breach of section 203 of the Securities and Futures Act.

What is section 203 of the Securities and Futures Act?
Section 203 (Continuous disclosure) shall apply to —
(1)(a) an entity the securities of which are listed for quotation on a securities exchange;
(b) a trustee of a business trust, where the securities of the business trust are listed for quotation on a securities exchange; or
(c) a responsible person of a collective investment scheme, where the units of the collective investment scheme are listed for quotation on a securities exchange,
if the entity, trustee or responsible person is required by the securities exchange under the listing rules or any other requirement of the securities exchange to notify the securities exchange of information on specified events or matters as they occur or arise for the purpose of the securities exchange making that information available to a securities market operated by the securities exchange.
(2) The persons specified in subsection (1) (a), (b) or (c) shall not intentionally, recklessly or negligently fail to notify the securities exchange of such information as is required to be disclosed by the securities exchange under the listing rules or any other requirement of the securities exchange.
(3) Notwithstanding section 204, a contravention of subsection (2) shall not be an offence unless the failure to notify is intentional or reckless.

Comments:
Basically, what section 203 implies is that any price sensitive information must be announced through the SGX first before going through other media channels. There must not be any news leak prior to any announcement so that no parties can gain an advantage by making use of the price sensitive information.
Personally, i believe MAS is interested to know why there is a spike in trading volume 1 week before the takeover announcement by China Holdings Acquisition Corp. There is ground for MAS to suspect that the takeover news has been leaked out before it was announced. The directors have indicated that it is premature to assume that the takeover plan will be scrapped due to the infringement of section 203. The last SGX listed company to be convicted of infringing section 203 was more than 2 years ago in April 2006. The contravention by Trek, was in relation to the company's failure to promptly announce an earnings projection, in breach of its disclosure obligations under the SGX-ST listing rules.
On 19 January 2006, Trek disclosed in an interview with Reuters that it expected sales and earnings to grow by 20% to 25% over the next three to five years. As the information was material and had not been publicly disseminated before the interview, SGX-ST listing rules required that it be promptly announced to the market via SGXNET. Trek failed to do this. The company only made the announcement after being alerted by SGX-ST on the morning of 20 January 2006. By this time, there had been sharp increases in the price and trading volume of its shares. On 14 February 2006, SGX-ST publicly reprimanded Trek for breach of its disclosure obligations under the listing rules.
Trek has admitted to contravening section 203(2) of the SFA by negligently failing to notify SGX-ST of the earnings projection. The company has paid a civil penalty of S$75,000 to MAS without court action.
In the event that BW is guilty of not safe-guarding the price sensitive info, I believe the punishment will be at most a hefty fine.

Eight years recap

For those who need a recap on what has happened in the investment world for the past 108 years, The Global Investment Returns Yearbook (GIRY), compiled by London Business School experts is definitely an eye opener. The core of the Yearbook is provided by a long-run study since 1900 in all the main asset categories in Australia, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States. These markets today make up some 85% of world equity market capitalisation. The first chapter of the book gave us an insight of the global markets from the first eight years of this decade.
The key findings for year 2007:

- Despite the turmoil in the credit markets, stock markets performed reasonably well in most countries. Emerging markets did best.
- Volatility accelerated from a low base at the start of 2007.
- Sector exposures had a larger impact than in recent years, with resource stocks doing particularly well, and financials suffering.
- The tide turned for small-caps, which suffered a reversal after four years of outperformance. Value stocks also disappointed, and they underperformed growth stocks.
- While the US (and world) bond indices did well, most government bond markets gave a negative real return.
- Commodities, notably oil, generally performed well.
- The second half of 2007 witnessed a real estate slowdown in many countries, and a sharp collapse in the US.
- Currency mattered. The US dollar was again weak, and nearly all currencies were performance enhancing. Most countries had satisfactory USD returns, but their Euro returns were markedly lower.
- By end-2007 stock markets had largely eliminated the losses from the savage, start-of-century bear market. This is remarkable since, at the trough in March 2003, US stocks had fallen 45%, UK equity prices had halved, and German stocks had fallen by two-thirds.
- Annualised real equity returns over 2000-07 remain negative in only three of the 17 Yearbook countries, the US (-0.4%), Japan (-0.7%) and The Netherlands (-1.3%). However, returns remain low in several other markets, including the UK (0.5%), Germany (1.4%), France (1.2%), Italy (0.9%) and Sweden (1.4%).
- The annualised USD real return on the GIRY world index over 2000–07 is just 1.3%. Over this period, bonds beat equities (and bills) in 10 out of 17 countries, including all the largest markets. Realised equity risk premium over this period remain low by historical standards.
- Despite 2007 being generally disappointing for small-caps, over 2000–07 they nevertheless beat large-caps in every Yearbook country except Norway (and, marginally, Taiwan). In most countries, those who invested in 2000 in small-caps are more than 50% richer than large-cap investors.
- The poor return in 2007 from value stocks did not eliminate the 2000-07 value premium. Over 2000-07, value stocks beat growth stocks in every Yearbook country except Hong Kong (and, marginally, Switzerland). In most markets, those who invested in 2000 in value stocks are more than 50% richer than growth-stock investors.
- Momentum trading has provided large potential profits in virtually every equity market. A strategy of buying stock market winners, while avoiding (or taking a short position in) stocks that have performed poorly, has provided a large premium since 2000-07.
- A major factor is the investor’s choice of reference currency. Over the eight years since 2000, the US dollar has fallen against all Yearbook currencies except two (the South African Rand and the Yen). Since 2002, the dollar has fallen against every Yearbook currency—by 39% in the case of the Euro.
- A huge gap has now opened up in sector performance since the tech-bubble burst in March 2000. An investment in the top performing UK sector—tobacco—would now be worth 212 times more than an equivalent amount invested in the worst performing sector—technology hardware.

Macau - Glitter no more

Statistics can lie. This cannot be too far away from the truth. In April this year, the Macau Statistics and Census Service reveals that the sleepy, underachieving Portuguese enclave until its return to Chinese rule in 1999 - has become the richest place in Asia. A closer examination of the figures supplied tells a totally different story.

Here is the good news - Macau's booming casino industry boosted per capita gross domestic product to US$36,357 last year, a rise of 26%. That surpasses perennial regional gross domestic product (GDP) superstars such as Japan, Singapore, Hong Kong and Brunei and means the territory now ranks 20th on the list of the world's top-performing economies, ahead of Italy and just behind Germany.

That is where the good news ends. This is neither an economic miracle nor a model that anyone in Asia - or elsewhere - should aspire to follow. All of Macau's new found wealth has been generated by casino revenue, which grew 47% last year, so GDP figures present a false economic picture of the city with a population of 538,000. Consider this: the rise in median monthly salaries has not come close to keeping up with Macau's soaring GDP, increasing only 7.5% from a year earlier and now standing at 7,930 patacas (US$990), well below the earning power of its prominent Asian neighbors.

A look at personal consumption expenditure also clearly puts Macau, which has a land mass of only 16 square kilometers, in a far humbler place than its garish GDP banner suggests. Personal consumption accounted for only 21% of Macau's GDP last year. In Hong Kong, 60 kilometers northeast, personal consumption accounted for 60% of GDP and personal consumption expenditure per capita was $17,800, compared with Macau's $7,500.

Where do you find the rest of Macau's whopping GDP? Most of it has gone into building a gambling mecca that has become the Las Vegas of Asia. Indeed, last year Macau overtook the Las Vegas Strip as the richest gambling market on the planet. Macau has long been known as a haven for gamblers, but that reputation was greatly enhanced in 2002 when the gaming market was liberalized to include foreign players. Before that, Hong Kong-born billionaire Stanley Ho Hung-sun, now 86, had monopolized the industry for four decades. Las Vegas gambling moguls seized the opportunity and poured money into the city, which now boasts 30 casinos. The Venetian Macau, which was built by the Las Vegas Sands Corp and opened last August, is the largest casino in the world.

While Macau's gambling dens have lured millions of visitors to the city - most of them from mainland China, where gambling is illegal - those tourist dollars are going mostly into the pockets of casino moguls, with ordinary citizens left to pick up the scraps that fall from the banquet table. Making matters worse for ordinary folk, inflation - as measured by the composite consumer price index - raced along last month at 9.47%, a 12-year high. Rents rose 15.6%, and the cost of a doctor's consultation shot up 24.2%. Add to that sharp hikes in food prices that have also hit Hong Kong and the mainland and the reported 7.5% jump in median monthly income starts to look like a negative.

Unemployment is a mere 2.9%, but that, again, is due to the casino boom. Alarmingly, Macau's younger generation is increasingly choosing to drop out of school in their teens to take casino jobs that pay as much as $2,200 a month. Gambling revenue has allowed the government to boost spending on education, but at the same time casinos are snatching would-be graduates away with the lure of easy money for work that, most likely, will be a dead-end.

China's agricultural industry

In October 2008, Communist Party of China (CPC) Central Committee issued a landmark policy to further rural reform and development. One of the biggest moves was to allow farmers to "lease their contracted farmland or transfer their land use right" to boost the scale of operation for farm production and provide funds for them to start new businesses.

Farming practices within China range from small scale family owned holdings to large commercial farming operations. The major buyers of market-ready products, such as fruit and vegetables, are large grocery retailers, whereas the major buyers of products requiring processing, such as cereal grain, are wholesale dealers and food processing companies. The costs of machinery and land required to work a large-scale farm are high and provide a significant barrier to entrance. Furthermore, farmers worldwide are facing increasing operational costs due to oil and fertilizers. Although large co-operative farms exits within the Chinese market, the Chinese agricultural market is highly fragmented compared to western markets.

The majority of commercial farmers operate relatively small scale holdings, producing a limited amount of produce for local consumption. However, rapidly increasing food demands are leading to an increase in the extent of large scale farming co-operatives. The customers of such large scale operations are typically food processing companies and supermarket chains. Such large buyers wield their large purchasing power to negotiate minimal prices through bulk purchasing.

The majority of the population of China is still relatively rural in nature and a high proportion of people are still involved in agriculture, either for self-sufficiency or commercial purposes. The majority of farming in China is undertaken within small scale family owned farms, which often act collectively within co-operatives. Given the small scale of most Chinese farming operations combined with the existence of cooperatives, players can enter on a small scale relatively unhindered. However, in order to start a competitive large scale farming operation, the significant cost of machinery and land may pose significant barriers to the entrance of new players. In recent years, some foreign players have started operations within China, attracted by the abundance of low cost highly fertile land and a burgeoning market for food in the country. Furthermore, the increasing demand for food within China is increasingly attracting foreign companies to enter the market through the importation of agricultural produce.

The agricultural products market encompasses a wide variety of products, for which the threat of substitution varies considerably. For example, many fruit and vegetables and cereal products, most notably rice, form staple dietary components for which the threat of substitution is low. Organically certified produce is increasingly being favored in recent years due to the supposed health benefits of avoiding the use of chemical fertilizers and the more environmentally friendly image of organic production. On the negative side, such produce is considerably more expensive for consumers. However, the cost of organic farming in comparison to intensive methods is declining as dramatic increases in fuel and fertilizer prices negatively impact upon non-organic methods.

Players within the Chinese agricultural products market range from individually owned farms to large consolidated farming corporations. It should be appreciated that the latter has a distinct advantage through their scale economies of mass production. With the exception of produce quality, there is typically a lack of differentiation between produce from different producers and producers are typically highly similar, which enhances rivalry.

Stock challenge game

Recently i entered into a stock challenge game organised by the following website:
http://www.nextinsight.com.sg/

The game has started on 3rd Nov 2008 and will run for the next 6 months. Below are some of the stocks i have bought or shorted with my virtual start-up capital of $100K with supporting reasons.

1) Bright World (Long)
How can i not put money where the mouth is after spending time researching on the company?
I am confident that all the pre-conditions of the takeover offer will be fulfilled in the coming months. Even though there is no guarantee, I feel the potential return outweighs the associated risks. Moreover, some sweeteners have been included in the post-acquisition period for current shareholders of China Holdings Acquisition Corp which bodes well for the success of this deal. Those who are not familiar can refer to my earlier postings on bright world.

2) Wilmar (Short)
Shorted Wilmar purely for trading purposes. I feel that the buy-in was overdone as it gained about 20% from Monday to Thursday last week. There was a rebound in CPO prices in the last 10 days or so. But I believe this upsurge in prices will be temporary.

3) UOB (Short)
Shorted UOB as I expect its 3Q earnings report to be weak as compared to the last quarter. I see the UOB share price on a downward decline and took the opportunity to short it when there was a small rally on Thursday 30th Oct. I believe the demand for loans will continue to be soft and thus UOB’s margin will be affected. Further impairment charges will have to be taken as we progress and that will reduce the profits too.

I will post new updates if there is any change in my portfolio.

Cheers!

Sweeteners for Bright World takeover

A few days ago, CHAC and BW jointly announced the terms of the amended agreement in the takeover offer.

Things that have been changed:

1) Valuation and purchase price of BW.

The revised transaction results in a minimum valuation of Bright World at approximately USD255 million (assuming CHAC acquires all issued Bright World shares, the initial shares of CHAC issued to World Share are valued at USD9.29 per share, which is the estimated redemption value of the CHAC shares).

2) Triggers for the issuance of the additional shares

World Share's eligibility to receive additional CHAC shares has been modified by changing the triggers for the issuance of the additional shares from triggers based on the financial performance of the new company to those based on the market-based stock price performance of the new CHAC. World Share will now only receive additional shares if the stock price of CHAC reach USD12.50 per share.

3) Post acquisition cash dividend of USD0.50 per share for CHAC shareholders.

After the closing of the transaction, it is intended that CHAC shall declare and pay a cash dividend of USD0.50 per share to its shareholders of record and reduce the strike price for CHAC's currently outstanding warrants by USD0.50. World Share has waived its right to receive the cash dividend with respect to any CHAC shares it may hold.

Comments:

Personally, i view the admendments as a positive development in this takeover offer. It shows the determination of the buyers to push through this acquisition under such gloomy and uncertain economic outlook. Basically, with these changes, the buyers are clearly aligning the interest of the CHAC shareholders together with their own. I believe it is done to ensure that this deal can be approved during the voting which is to be carried out early next year. The earlier agreement announced on July 21, 2008 valued the the transaction at a minimum of about USD263 million based on the estimated redemption value of the CHAC shares of USD9.79 per share. Now the estimated redemption value of the CHAC shares is USD9.29 per share. The difference of USD0.50 will be paid as cash dividend to CHAC shareholders.

Crude oil price is all rubbish!

Around 4 months ago, crude oil price was at about USD140 per barrel. Fast forward to the last weekend, after a slew of bad news and poor earnings outlook hit the market, crude oil is only trading at about USD62 per barrel. After witnessing a drop of 55% in crude oil price, I have a few questions in my mind.

1) Did the oil consumption in the world reduce by half over the previous 4 months?
2) Did the world’s population replace half its energy needs by using alternative sources over the last 4 months?
3) Did the oil producing countries extract 2 times more output in the past 4 months?
4) Did someone or some country release its huge oil inventory in the market over the past 4 months?

The answer to the above 4 questions is a resounding ‘NO’. However, I will be glad if some kind soul can show me otherwise. The only logical and possible answer as to why oil prices has dropped dramatically is that most investors speculating in oil have exited the market. They include individuals, hedge funds and institutions. As such, this ties back to the title of my posting that the oil price in the market we have seen over the last few years is all rubbish. For the past few years, oil price is on a steady ascend because it is heavily influenced by speculators. Sadly during this period, there are even some highly respected persons who came out to defend the high oil price, saying that the prices are backed by real demand. When the commodities bubble burst, all of them tried to rush for the one and only exit, which results in the oil price collapsing in a relatively short period of time.

Everything is slippery and red

Besides the most obvious clue that the stock prices are dropping like stones, lets count the number of ways to spot the blood in stock markets:

1) Brokers and investors committing suicide after losing a fortune.
2) Friends seeking advice if they should pull out their money from unit trust.
3) You start to see the word “recession” appear regularly in the newspapers.
4) Hot money fleeing various countries and sectors that were the darlings of investors not so long ago.
5) Relatives and friends telling you to keep your cash and do nothing.
6) Shopkeepers no longer look at stock prices during their free time.
7) More and more property advertisement in the newspaper.
8) A decrease of workload for staff in banks doing the settlement of trades for clients.
9) A decrease in the number of people patronizing your favorite restaurant.
10) Banks starting to retrench staff across the board, especially the equities department.
11) The amount of assets managed by wealth mangers is stagnant or decreasing.
12) More and more news of companies closing down due to mounting losses and insufficient cash.

This list is by no means exhaustive, please feel free to add on.
Cheers! Have a nice weekend.

Saving mini investors

Currently the Hong Kong government is trying very hard to intervene and arrange for a compensation package to all minibond investors. There has been immense pressure by the Singapore minibond investors on the local authorities to step in and arrange a similar bailout. With all due respect, I personally do not think that it is a good idea for the authorities to step in.

MAS, which is the government authority in this case, has to make decisions and take actions that are consistent. If MAS has decided to intervene for the minibond investors, then why stop there? They should also round up all the retail investors who have placed their money in the internet technology unit trusts 8 years ago and fight to compensate their losses. How about those who invested in emerging market funds at the beginning of this year and are now looking at a loss of 30 – 40%? The list is never ending. Does anyone believe that there was no occurrence of “misinterpretation” by the banks 8 years ago? It takes 2 hands to clap and the whole fiasco happened due to the combination of greed on the investors’ part and “misinterpretation” on the banks part.

However, I do support the MAS stance that they will punish the banks if they are found to be guilty of understating the risks of the derivative products to the customers. It is important for MAS to send the right message that if any of the local banks compensate the investors for the losses in the minibonds, it should see it as a gesture of goodwill from the bank and not due to the pressure from MAS.

Lastly, I would like to bring up 2 golden rules for those thinking of purchasing investment products from those financial consultants.

Rule 1:
Ask for all the risks and the worst-case scenario for the product that you are interested in. Walk away if you do not understand what the financial consultant is saying.

Rule 2:
Never forget rule 1.

Target Vs Reality

We shall travel back in time and take a look at how atrocious are some of the target prices set by the analysts from the investment banks. I have taken China Shenhua (coal mining) listed in Hong Kong as an example.

Just slightly 6 months ago in March, UBS gave a target price of HK$70, saying the firm will benefit from strong coal demand, planned asset injections from its parent firm, mine reserve expansion and possible overseas acquisitions.

HK$70!!!!!!!!!
This is something that will probably make or break the analyst's career considering Shenhua had a short listing history (IPO in 2005). Setting such a target price does not reflect well on the thought process of the analyst as well as his/her manager who signed off the report. Retail investors will do well if they can think of all the various scenarios that can go wrong before buying shares of a certain company. Try to be aware of the downside risks and the upside will take care of itself if the investment has a huge margin of safety.

In the same month, Citigroup assigned a "sell" rating with a target price of HK$33. "We fail to see value in Shenhua and think potential for further de-rating remains. ... Creeping costs, higher spending and stationary power tariffs continue to threaten margins".

For a matter of fact, Shenhua is trading at a price of HK$17.50 today.

Smile

Lets shift our focus away from the stock market and have a laugh.

Here are 10 Aphorisms of Modern Life.
1. Any horizontal surface left long enough will grow a pile of paper.
2. Checks you write hide in the banking system until there is not enough money in your account to cover them.
3. If you drop some coins on the floor, the tiny worthless ones will stay at your feet, while the valuable ones will roll miles away and settle under a Coke machine.
4. At banks or immigration counters, the other queue moves faster.
5. When a broken appliance is demonstrated for the repairman, it will work perfectly.
6. After you dismantle and reassemble any item, there will be one extra bit left on the desk.
7. All deals which are too simple to need a formal contract will immediately turn into legal battles.
8. If you say the words "Well, it can't get any worse," fate has a nasty habit of taking it as a challenge.
9. The only thing worse than losing a highly competitive tender is winning one.
10. Any spoon placed in the sink will position itself to produce the biggest possible fountain when you turn the tap on.

My view on Bright World takeover (Part 2)

In order for the BW takeover to become a reality, there are altogether 8 conditions to be fulfilled. They can be found in the pre-offer announcement in the SGX website. Currently BW is trading at about $0.34, a whopping 50% discount to the takeover offer by CAHC. I believe the main reason why BW is trading at such a low price is because investors are skeptical that all the 8 conditions can be fulfilled under such gloomy economic outlook.

Out of the 8 conditions, investors are mainly concerned on the following 3 requirements:
1) shareholders of the Offeror holding 33.33% or more of the IPO shares do not vote against the Offer Transactions and exercise their redemption rights in relation to their IPO shares;

Comments:
At this moment, i would rate the possibility of the rejection of the offer transaction and cash redemption by the current shareholders as low. Why do i say that?
Many other blank check companies have a redemption threshold of 20%, which makes it more difficult for such companies to consummate their initial business combination. Thus, because CAHC permit a larger number of stockholders to exercise their Redemption Rights, it will be easier for them to consummate an initial business combination with a target business which stockholders may believe is not suitable. CAHC has increased the redemption percentage to 33.33% from the more typical 20% in order to reduce the likelihood that a small group of investors holding a block of our stock will be able to stop them from completing a business combination that is otherwise approved by a majority of our public stockholders and to be similar to other offerings by blank check companies currently in the market.

2) the Group Companies’ profit after tax (PAT) for the six-month period ended on 30 June 2008, nine-month period ending 30 September 2008 and full year period ending 31 December 2008 should not decrease by 10 per cent or more as compared to the same period in fiscal year 2007.

Comments:
Unless you are an insider working in BW, it is impossible to forecast accurately the revenue for the next 2 quarters. However, i am aware that rising raw material cost and a slowdown in their customers' manufacturing activity can severely impact the bottomline. Baring a sharp drop in revenue, i dont see any problem with BW fulfilling the 10% condition. Using HY08 results, we are able to have a clear idea on how much more profit is need for the rest of the year.

PAT in RMB 000 (thousands)
6 mth:
Y2007 52586
Y2008 79003
9 mth:
Y2007 95350
Y2008 At least 85815 (HY08 achieved 82.8%)
12 mth:
Y2007 144865
Y2008 At least 130378 (HY08 achieved 60.59%)

3) The Chinese authorities may not approve this takeover.

Comments:
Investors who are aware of the recent failed bid by the Carlyle Group to acquire a 45% stake in Xugong Construction Machinery Co Ltd may be skeptical that this acquisition by CAHC, which is a foreign entity, will materialize. The failure of the deal has once again drawn attention to the political challenges facing foreign investors in China, especially in so-called "strategic" sectors. China is concentrating on its key strategic sectors and machinery is now a part of that. Probably a few years ago if a foreign company wanted to buy into such assets it wouldn't have created much trouble, but lately China has been trying to control them more. The key point is that they want these key industrial sectors to remain in Chinese hands, whether through funds or other channels. In my opinion, I believe the Chinese authorities will give the green light for this BW takeover because, ultimately, when the whole acquisition is completed, Mr. Wang, who is a Chinese national, will gain control of CAHC which BW is a wholly owned subsidiary.

Some investors may think, if it is such a good opportunity to double your money over the course of a few months, why are the insiders not buying?
I have extracted the answer from the pre-offer announcement by CAHC:
CHAC and the Sellers have agreed to refrain from taking any action that would be prejudicial to the successful outcome of the Offer. In addition, until the termination of the Offer or the consummation of the Transactions, CHAC and the Sellers have agreed not to solicit or enter in negotiations regarding an alternative transaction. Furthermore, World Sharehold has agreed to procure that Bright World and each of its subsidiaries (collectively, the “Group”) (A) refrainfrom taking certain actions without the obtaining the prior written consent of CHAC and (B) operate their business in the ordinary and usual course.

Does CHAC have the financial muscle to carry out this takeover?
As at 30 June 2008, there are USD125 million in CHAC trust account. After this whole acquisition is completed, they would have used up USD50 million as World Share's 77.42% equity ownership position in Bright World is paid for using CAHC’s shares. This leaves them with the cash holding of USD75 million to acquire any of the four companies controlled by Mr. Wang Wei Yao.

Since the announcement of this takeover news, there have been some positive developments in China’s machinery industry:
China's machinery industry reports a 17.4 percent increase in the added value in July, and a 20.9 percent rise in export delivery value, according to China's National Development and Reform Commission. Experts held that the reform of the value added tax (VAT) has helped boost the development of the industry.
It will drive enterprises to invest on fixed assets, such as machinery equipment, said Zhu Qing, director of the financial department with the Renmin University of China. He predicted that this policy would be carried out nationwide in 2009 on the ground of industrial restructuring and the declined economy increase rate.

The country's eight million companies will be allowed from next year to use fixed-asset investments to offset valued-added tax payable to the government, according to sources. Analysts said reforming the tax system was a prelude to a new round of economic sweeteners from Beijing as policymakers struggled to cushion the impact of weakening global and domestic economies. The adjustment in value-added tax will mainly ease the burden on manufacturers that have large investments in fixed assets such as factories and machinery. Analysts estimate that the change will reduce funds flowing into government coffers by between 100 billion yuan and 150 billion yuan a year. Analysts said the top beneficiaries of the policy change would be machinery and equipment makers, which have large fixed-asset costs that can now be offset.

Readers can draw their own conclusions if this represents an excellent opportunity, as the potential gains outweigh the associated risks.

My view on Bright World takeover (Part 1)

This write-up on Bright World (BW) is divided into 2 parts. It contains my deductions based on publicly available info on the takeover of BW. Before I begin, please take note that i am vested in BW and my views may be biased. What is mentioned in this posting cannot and should not be taken as professional investment advice.

Lets recap what has happened so far:
On 21 July, China Holdings Acquisition Corp (CHAC) announced today that it will make an offer to acquire all the shares of Bright World Precision Machinery Limited. CHAC has entered into a definitive agreement with World Sharehold Limited (World Share), the majority shareholder of Bright World, pursuant to which World Share will tender all the shares it holds in Bright World in the offer to be made by CHAC. Bright World, together with its subsidiaries, is an established Chinese manufacturer of conventional and high-performance metal stamping machines that serves industrial companies in rapidly growing manufacturing sectors -- automotive, home electrical appliances and computer and telecommunications. The transaction, which has been unanimously approved by the board of directors of CHAC and is expected to be completed in the fourth quarter 2008 (barring any unforeseen circumstances), values Bright World at a minimum of approximately US$263 million (assuming CHAC acquires all issued Bright World shares, the initial shares of CHAC issued to World Share are valued based on the estimated redemption value of the CHAC shares and CHAC assumes Bright World's existing debt).

Under the terms of the definitive agreement, CHAC will issue to World Share, which is controlled by Mr. Wang Wei Yao, the nonexecutive Chairman of Bright World, a promissory note automatically convertible into a minimum of 19.9 million initial shares of CHAC in exchange for World Share's 77.42% equity ownership position in Bright World. For the remaining 22.58% of Bright World's shares held by other shareholders, CHAC will offer SG$0.70, or approximately US$0.51, per share in cash. If 90% or more of Bright World's shares are purchased, CHAC will increase its offer priceto SG$0.75, or approximately US$0.55, per share in cash. Also under the terms of the definitive agreement, World Share is eligible to receive additional CHAC shares, up to a maximum award of 3,765,000 shares, based on Bright World's realized profit for Fiscal Year 2008, provided such maximum award will be reduced, share-for-share, by the number of initial shares in excess of 19.9 million. World Share also will be eligible to receive an additional 1,000 CHAC shares for each 0.001% increase in Bright World's Fiscal Year 2008 net earnings (in Renminbi or RMB) above 20% compared with a base net earnings of RMB 144,863,000, up to a maximum award of 12,000,000 additional CHAC shares if Bright World's Fiscal Year 2008 net earnings exceed a base net earnings of RMB 144,863,000 by 32%.

The total number of initial CHAC shares plus additional CHAC shares that will be awarded to World Share shall not exceed a combined maximum total of 35,665,000 CHAC shares. If Bright World achieves the specified 2008 financial performance benchmarks, CHAC acquires all issued Bright World shares, the CHAC shares issued to World Share are valued based on the estimated redemption value of the CHACshares and CHAC assumes Bright World's existing debt, the transaction will value Bright World at approximately US$404 million. Under this scenario, the pro forma, fully diluted ownership of World Share in CHAC would be approximately 64% under the treasury stock method, assumingUS$10.00 per share. World Share also may receive a contingent payment as compensation for the foreign exchange impact on the funds in CHAC's trust account if the US dollar weakens against the RMB between signing and closing of the transaction.

Upon completion of the transaction, CHAC will seek to list its shares on the New York Stock Exchange. Messrs. Wang Wei Yao and Shao Jian Jun, non-executive Chairman and Chief Executive Officer, respectively, of Bright World, will continue in those roles with the combined company. With a gross plant production area of over 230,000 square meters, Bright World's product line includes over 100 models of metal stamping machines, with an emphasis on high performance metal stamping machines. Its product line also includes board cutting machines, bending machines, Computer Numeric Control (CNC) metal stamping machines and other complementary heavy machine tools. The company's vertically integrated structure allows it the flexibility to fulfill custom design stamping machine requests at competitive rates.Since 2005, Bright World has successfully refocused its product portfolio toward high-performance metal stamping machines that yield higher prices, enhanced margins and superior growth prospects.

From 2004 through 2007, in US dollar terms, Bright World achieved a revenue compounded annual growth rate (CAGR) of 33.5%, a net profit CAGR of 28.3% and an EBITDA (earnings before interest, taxes, depreciation and amortization) CAGR of 31.1%. For the first quarter of 2008, Bright World's revenues grew by 46.8% and its net profits increased by 57.9% inUS dollar terms versus the comparable period in 2007. The definitive agreement between CHAC, on the one hand, and World Share, Mr. Wang Wei Yao and Mr. Shao Jian Jun, on the other hand, also provides the newly combined company with a right of first refusal to acquire four other companies controlled by Mr. Wang Wei Yao that manufacture agricultural machinery, auto parts and components, lawn equipment and construction equipment. The new company plans to be able to grow through the use of cash flow from operations and cash available from CHAC's trust fund.

Value in textile industry? No way!

Below is a recent recommendation by one of the brokerage companies on the SGX comapnies involved in the textile industry:

Risk-reward ratio getting attractive. In fact, these textile companies are generally financially sound. They are in net cash position and are still garnering lucrative net margin of 26%-30%, rewarding investors with adecent ROE of >20%. As high-end textile manufacturers are relatively asset-heavy given their high capex investment, current low historic P/NTA of 1x also indicates opportunities to pick up shares in these companies at bargain prices.


But from the info i gathered, it seems like the picture is not so rosy.

A 2% increase in a value-added tax rebate for garment and textile exports – from 11% to 13% – was good news for exporters, but a sign of hard times for the export sector. Rebates had been cut or removed for many industries last year in an attempt to deflate China’s ballooning trade surplus, but struggling exporters prompted Beijing to reverse its earlier moves. The slowdown was most evident in relatively low tech sectors like textiles and apparel. In the first seven months of 2008, growth of garment and textile exports rose 7.67%, down from 24.4% growth over the same period last year. The General Administration of Customs said an appreciating renminbi, weak US demand, trade barriers and the earlier rebate reductions all contributed to the slowdown. While lower-end exports were more visibly affected, broader numbers were hit as well. In the January-July period, growth in overall exports was down 5.7 percentage points to 21.9% year-on-year, and the trade surplus fell 9.6%.

In the first quarter of 2008 alone, US apparel imports from China declined by nearly 10% compared with the corresponding period of 2007, reaching US$4.43bn. In terms of China's currency, the renminbi, the fall was an even greater 17%. China's drop in competitiveness stems from mounting costs on several fronts. Apart from higher costs of energy and raw materials - which manufacturers face all over the world - Chinese textile mills face greater costs in having to comply with growing environmental legislation. At the same time, Chinese apparel factories are having to cope with new regulations on working conditions. Furthermore, firms wishing to invest are finding it harder to obtain finance as the Chinese authorities have tightened credit in a bid to limit inflation. On top, Chinese exporters have been hit by lower export tax rebates. Labour costs have become a particularly serious issue for Chinese firms. At least seven major exporting countries in Asia can now offer lower labour costs than China. During the first quarter of 2008, US consumer expenditures on clothing and footwear (on an annualised basis) were 0.2% lower than in the first quarter of 2007 - after growing by 3.7% in 2007, 4.5% in 2006 and 5.1% in 2005.

Statistics of WebTextiles.Com showed that China's large enterprises produced 9.72 billion pieces of garments in the first half of this year, up 7.64% year-on-year, 6.7 percentage points lower than the growth of last year. The commodity retail price index was 107.5 in the first half of this year, up 7.5%, while the index of clothing declined by 1.62%; the CPI stood at 107.9, up 7.9% year-on-year, while the index of clothing fell 1.48%. On the contrary, the PPI rose 2.40% in June 2008, the same as that in previous month, but the PPI of clothing was at the record high level since 2006. Sales of clothing have entered slack season since July and the price will go downward. It is predicted that the market supply of clothing will be in great surplus, which will dampen the operation and development of textile industry.


Calling investors to pick up shares of companies in the textile industry is, in my point of view, premature. Generally, there are excess capacity and the prices are going down. Export markets are soft and manufacturing costs are rising. Textile, being a commodity, has got no power in terms of pricing.

Drawing inspiration

The 2008 Olympics has officially ended. As we look back at the events which have taken place in the last 16 days, we can draw inspiration from many athletes who have overcome all odds to win a medal for themselves and their own country. Among this special group of athletes, we have one that is handicapped and some who have battled with cancer prior to the Olympics.

However, there is one athlete worth mentioning in this posting. He is not a handicap and is not battling with any illness. Rather, it is his life story so far that has captivated me. I believe it is the events in his life that shaped him into the Olympic champion he is today. His achievements are absolutely impressive considering he is the youngest American to win an Olympic wrestling gold medal.

The guy’s name is none other than Henry Cejudo, the 21-year-old prodigy who had won the gold medal in Olympic freestyle 55-kilogram wrestling. His parents were undocumented Mexicans who met in Los Angeles. His mother had six kids, four with his father, Jorge, who was in and out of prison until dying of heart problems at age 44 last year. Henry never saw him after age 4.

When you've had as tough a life as Cejudo, a grueling day is routine. When he was young, the family was miserably poor, sometimes moving from apartment to apartment under the cover of night because they lacked rent money. His mom worked several jobs at a time, stealing home for a few hours to make sure her family wasn't in trouble. So far in Cejudo’s life, he has shifted house approximately 50 times. And all this time, Cejudo didn't get his own bed until he was 17, when he moved into the U.S. Olympic Committee (USOC) training center in Colorado Springs. Sometimes they stayed with friends, sometimes with relatives, sleeping six or seven to a room in bad neighborhoods, drug deals going on down the street. He spent his first four years in South Central Los Angeles. The family spent a couple of years there before moving to the Phoenix area.

Henry and older brother Angel emulated the pro wrestlers they saw on TV and the Mexican boxers they revered, and they entered a youth wrestling program in Phoenix. Angel was the first ace, winning four high school state titles, and Henry did the same. American wrestlers are supposed to go to college, then enter the Olympic program when they're experienced and ready; Cejudo did so at age 17 and is the only wrestler to win a national senior championship before leaving high school.

Neither liked studying, so when Angel was invited to the Olympic training center, Henry tagged along and won his last two state titles while living there. Within a year, younger brother was the rising star. As they say, what took place in the Beijing Olympics is now history.

To persevere and never give up is something we can all learn from Cejudo. Especially in the current tough economic outlook, investors need some patience and self belief. Bad times will pass. They always do if you look back at history. The night is darkest before dawn. Look forward to each new day with enthusiasm and vigor so as to continue the fight.

The value of house work

Generally, economists have applied the replacement cost (RC) method in valuing the work done by housewives. The replacement cost approach to the problem asks: “how much would it cost to replace the services of the housewife?” The idea being one could go into the market place, find the wage for nannies, cooks, maids, etc., then use these wages as the value of the housewife services.

As i last checked, some agencies are charging $8.5 per hour for housework.
Assuming this amount is the same for hiring a cook and for child care, and that a housewife will carry out these activities for 10 hours, we are looking at a cost of $85 per day.
Over the period of a year, the services contributed by a housewife adds up to a pricey sum of $31025 (85x365). In actual fact, the amount should be higher taking into consideration higher charges for weekends.
Ok, owe up those who thought that housework costs nothing!
So guys, time to show some appreciation to your wife or mum.... :-)

However, the fundamental problem with RC method is that it is based on market oriented economic theory, and as a result they ignore the institutional aspect of marriage. Marriage, as an institution, is designed to produce a set of goods that the market does not produce. Certainly some market goods get jointly produced in the marriage, but these are secondary to the main purpose of marriage. Marriage restricts the behavior of both the husband and wife such that they have an incentive over their life-cycle to cooperate in procreation and the successful rearing of the next generation. To confuse the value of a housewife with the services of domestic service misses the point entirely. The market based procedures are only crude, unreliable, and biased under-estimates of the true value of a housewife.

Marriage is a sharing arrangement. A husband does not hire his wife, nor does the wife hire her husband. When the marriage is doing well both benefit, and in hard times both suffer: “for better or for worse.” Some shares are better than others. A spouse who gets a small share of the pie has little incentive to work within the marriage. The gains from an increased share to this person will more than offset the disincentives caused by reducing the share to the other spouse. Economists have shown that for a given man and woman there is an “optimal share” which creates the best incentives for the husband and wife to contribute to the marriage.

Couples do not marry in a vacuum. Individuals compete with one another for mates. This competition for spouses, along with the optimal sharing rule above, forces people to marry individuals they expect will make an equal contribution to the marriage. A person will always do better marrying someone of equal quality and sharing equally, rather than marry someone with of a lower quality, even though their share is higher in the latter case. The result is that in equilibrium husbands match with wives who are expected to contribute equally over the life of the marriage.

Recognizing the incentives of sharing explains why full time working wives still tend to do more than half of the housework in a marriage. Women still earn 70% of men, on average. Since total contributions must be equal in successful marriages, women who contribute less market value to the marriage must contribute more household services.

If we accept the argument that individuals marry others of equal expected value, then we have a simple, but better, method of measuring the value of household services for marriages that remain intact. If a marriage is on-going, the partners must feel that on average they are getting out of the marriage what they are putting in, and that this marriage provides a higher value than marriages to other people. The condition for this is that the partners are making approximately equal contributions and are sharing 50-50. Thus, to determine the value of household services we need only look at the market earnings of the husband and adjust for the market earnings of the wife, and the household services of the husband. Or:

Value of housewife = Husband’s income – Wife’s income + value of husband’s household services

Suppose the wife does not work outside the home, and the husband never does any work around the house. Then the value of the wife’s household service is simply equal to the husband’s income. This methodology is not only easier than the standard ones, it is better in that it is a true measure of value, rather than just cost. It is better because it does not have any of the ad hoc aspects of the market measures since it relies on the revealed behavior of the individuals to assess their own value.

Countdown to recession

We are currently witnessing the beginning of economic downturn in many countries.
Remember that a recession is defined by 2 consecutive quarters of negative economic growth. Based on the above definition, there is already one country in the recession list. It is Denmark, with New Zealand and Germany not far behind. Denmark’s economy has now contracted for two consecutive quarters, by 0.2 percent in the last quarter of 2007 and by 0.6 percent in the first quarter of 2008. With reports appearing last month that inflation had reached 18-year highs, the situation is not improving. The New Zealand economy shrank 0.3 per cent over the three months to March. Official growth figures for the second quarter are due in September.
For the second quarter, the German economy, one of the biggest in the euro zone, contracted for the first time in nearly four years, shrinking 0.5 per cent. Meanwhile, the French economy contracted by 0.3 per cent over the quarter, as did Italy’s, while Spanish gross domestic product was up by 0.1 per cent.
As for the Asia side, Japan said its own economy had contracted in the second quarter, as falling exports and weak consumer spending sent Asia’s largest economy hurtling toward its first recession in six years.
This time round, the downtrend will be slower and more gradual as compared to the financial crisis more than 10 years ago. The main reason being that various governments are willing to pump in the cash and bailout banks who are on the verge of collapsing. They wanted to prevent mass withdrawal by the public. Those who are unsucessful may take to the streets so protests and riots may occur. Unfortunately, this is done at the expense of taxpayers’ money and the effects will be felt for many years to come.

Price Movement

This posting is not to encourage readers to trade. For most people, it has been proven that constant trading is detrimental to their investment return. However, as a retail investor, we should have a general knowledge of the signals that the price movement is indicating to us.

The price movement of a stock is dependent on the demand and supply of the stock, which in turn is influenced by the buyers’ buying interest and the sellers’ selling interest. Every buyer or seller has different purposes when entering into a trade. The followings are general “rules”, which provide us with some hints on whether the stock price will probably go up or down. One should not view these “rules” as a foolproof method that will hold true all the time. There are certain occasions that market manipulators might be using these “rules” to mislead the general public.

Rule 1: Buyers are showing small orders and sellers are showing big orders. However, the stock prices are holding quite well – buy signal.
A lot of selling orders with only a few buying orders on the stock may imply that the stock price would come down. However, if the stock prices are holding quite well, it could mean there are some net buyers accumulating the stock. The reason for this is buyers may refuse to show their buying orders to attract sellers to sell at the buyers’ buying price. Showing high buying orders may delay selling interest, as sellers will wait for the buyers to buy at their selling price. Hence, it is a “buy” signal if we notice the above rule on any stock.

Rule 2: The overall market is weak but your stock price is moving against the overall market trend – buy signal.
In a down market, if a stock that you own is inching up steadily despite the overall weak stock market sentiment, this may imply that there are some net buyers on this stock. This is viewed as a “buy” signal where buyers are eagerly accumulating the stock in spite of the weak market. In most instances, the stock price will move higher the moment the overall market sentiment recovers.

Rule 3: Stocks carry a lot of bad news and are trading at high volume but stock price remains stable – buy signal.
Sometimes a certain stock is facing huge bad news but the stock price is holding on quite well. Normally, it may imply that buyers are not worried about the market concerns on this stock. The current stock price may have discounted all the bad news.

Temasek reduces Merrill Lynch stake - True or False

A total of 87m shares have been sold off at a loss, according to US recorded filings.
Temasek Holdings has sold off half its ill-timed investment in Merrill Lynch - or about 87m shares, according to a mutual funds report on institutional trades on US stocks.
The online report, MFFAIRS (Mutual Fund Facts About Individual Stocks), reported it sold off 86,949,594 shares (50%), leaving a current holdings of 86,949,594 shares (50%), according to the filings made public.
The report gave no exact date or price of the sale.
Neither has there been any confirmation from Temasek, which had paid US$48 a share last year. Last week Merrill Lynch was traded at $31.
At that price Temasek would have suffered a loss of $17 a share - or a total loss of about US$1.48b for the 87mil shares.
The company's equity capital position is weak relative to competitors, said Brad Hintz, a New York-based analyst at Sanford C Bernstein, reports Ambereen Choudhury.
"With $19.9b in CDOs still frozen on the balance sheet and with counterparty risk rising on the hedges underlying these troubled positions, the potential for additional material write-downs remains a concern,” Hintz said.
The third-biggest US securities firm probably will report a loss of $6.57 a share this year, compared with an earlier forecast of $1.07, Hintz said.
The revised estimate assumes the company generates no earnings in the second half.
Merrill may have to take an additional $10 billion of pre-tax write-downs related to its holdings of mortgage securities, Moody's estimates.
Huge paper lossesThe disposal leaves Temasek Holdings and the Government Investment Corporation (GIC) still holding substantial parts of big troubled Western banks.
Its remaining investments in UBS (Switzerland), Citigroup, Barclays and Merrill Lynch - at an original cost of US$21.88b - have declined on by some 47 percent in value.
Some experts believe that Temasek has made an error of judgment.
Investment guru Jim Rogers said in July he believed that US bank stocks could fall further and predicted that Singapore's state investors would lose money on Citigroup and Merrill Lynch.

Comments:
Before you come to the conclusion that Temasek has made a lousy investment decision which has resulted in losses, it seems like nobody can verify on the accuracy of this news. According to the Mutual Fund Facts website, they have sold off 50% of their stake. That means at the start, Temasek should own about 174 million shares. However, I am inclined to think that this piece of news is untrue. The numbers simply do not add up. I did a simple search online and found the following:

On 3rd Jan 2008, in a 13G filing on Merrill Lynch, Temasek Holdings disclosed that they hold a 9.4% stake, or 91,666,666 shares, in the investment bank. In December, Merrill, hit with massive write-downs due to the submprime debacle, said they would raise up to $6.2 billion in a deal with Temasek Holdings and Davis Selected Advisors. Under the plan, Temasek Holdings was to invest $4.4 billion in Merrill Lynch common stock, with an option to purchase an additional $600 million of Merrill Lynch common stock by March 28, 2008. Under the deal, Temasek's ownership position will at all times be less than 10% of Merrill Lynch's outstanding shares. Temasek made the initial investment of $4.4 billion at $48 per share (91,666,666 shares). Temasek has an option to buy an additional 12,500,000 shares, also at $48.


Currently, Merrill Lynch's share price is hovering at around US$34. So assuming Temasek exercises the option to increase its stake, the extra $600 million will net another 19 million shares. Taking into consideration that Temasek has bought an additional 12.5 million shares at US$48, the total amount of shares it is holding should be in the region of 123.5 million (92+19+12.5).

How did Mutual Fund Facts website get 174 million???????
Never take news report at face value. Always double check.

RTO = Ready to offload

In the Business Times on Thursday:
Backdoor listing is the flavour of the season as companies are taking the reverse takeover (RTO) route to the stock exchange instead of initial public offerings (IPOs).
In the first half of this year, the value of announced reverse takeovers (RTOs) on the Singapore Exchange surged to US$969 million - an all-time high that even exceeded the amount raised through IPOs, year-to-date.
Some US$797 million worth of RTOs were announced for the whole of last year - a record by itself - data from Dealogic shows. The first six months of the year have already surpassed this amount. The RTO trail saves time. In contrast, the IPO process involves roadshows, and lodging a prospectus which is then made publicly available on the Monetary Authority of Singapore website Opera for investors to pore over.

My comments in RED.
I have never been a fan of the RTO process and the new business that comes along with it. In my opinion, the greatest beneficiary of such arrangements are the vendors and owners of the new business. Perhaps for the long suffering shareholders, the only good thing is that they are now able to sell their shares in the open market as a result of an increase in trading volume caused by the buzz surrounding the impending RTO deal. I will dissect the numbers in the RTO recently announced by Showy International to illustrate why it is a lousy deal.

On 7 july:
Showy International Limited is pleased to announce that the Company has entered into a conditional sale and purchase agreement (the “S&P Agreement”) dated 7 July 2008 with Newest Luck Holdings Limited (“Newest Luck”), Leap Forward Holdings Limited(“LFH”), Tan Hoo Lang and Tan Fuh Gih (together with Tan Hoo Lang, referred to as the “TanBrothers”) (collectively referred to as the “Vendors” in this Announcement), for the proposed acquisition by the Company of the entire issued and paid-up capital of Fortune Court, and the allotment and issue of shares in the Company as consideration for such acquisition, resulting in the reverse take-over of the Company.

Fortune Court is engaged in the property development industry in Chongqing. Fortune Court’s subsidiary, Chongqing Yingli Real Estate Development Co., Ltd (“ChongqingYingli”), is a premier property developer in Chongqing with a unique track record of old city reconstruction. It has since developed several major commercial buildings, such as Future International and New York New York. As at 30 June 2008, the total gross floor area (“GFA”) of completed properties held for investment by Chongqing Yingli is approximately 140,621 sq m, comprising commercial area of 78,985 sq m, office area of 22,668 sq m, residential area of 485 sq m and car park space of 38,483 sq m. In addition, the total estimated GFA of Chongqing Yingli’s land bank as at 30 June 2008 is 512,329 sq m. Chongqing Yingli engages third parties to assist in the project management of its properties and to provide project consultancy services.

Showy International shall acquire the entire issued and paid-up capital of Fortune Court for an aggregate consideration of S$545.39 million. The Consideration shall be satisfied by the allotment and issuance of a total of 1.65 billion new ordinary shares in the capital of the Company at the issue price of S$0.33 each. In the end, the total number of shares outstanding will be 1.779 billion.

So the million-dollar question is, is the acquisition amount for Fortune Court cheap or expensive?
Lets take a look at the 2007 financial figures of Fortune Court.
Revenue: S$49.2 million
Profit from operation: S$12.54 million
The fair value gain on investment properties is paper profit and non-recurring in nature. Thus it is not taken into consideration for the calculations.
Book value: S$206 million

Earnings went up by 30% between Y2006 & Y2007. Assuming Fortune Court can eke out the same amount of growth this year (very unconservative assumption considering the China real estate market was red-hot in the past few years), the earnings should reach S$16.3 million in Y2008.
In actual fact, Fortune Court is being valued at a PE of 33.4 (545/16.3). The return on investment is 2.99%! Wait, some may say that the value of Fortune Court lies in the properties and land they are holding. So lets see how much over valuation did Showy agree to pay.
The premium paid by Showy is a whopping S$339 million! (545-206). After this whole acquisition is complete, the forecasted EPS will be S$0.0092 (16.3/1773). If the above figures do not put you off, nothing will. The acquisition price of S$545.39 definitely do not look cheap.
But again, RTO deals are not meant to be cheap. Refer to my title for this posting again. Caveat emptor!!

Who's the real culprit?

Below are some of the versions we read about recently on the reasons behind the relentless price increase of commodities.

VERSION 1: Speculators
In the current global economic slowdown, it would be fundamentally reasonable to assume that consumption has gone down and prices have weakened. This indeed is the case for lead, zinc and nickel. Copper on the other hand has remained stubbornly resilient and is in striking distance of its previous all-time high despite the increasingly bearish fundamentals. The International Copper Study Group (ICSG) reported a production shortfall for 2007 of about 55,000 tonnes, which is the basis of the widely published conclusion that copper remains "tight". However, the ICSG also states that those numbers make the assumption that all copper imported into China was consumed (Chinese consumption would have had to have been up 37%).

To find out what was actually happening statistically in China, one would look at the National Statistical Bureau (NSB) numbers to see what was produced plus what was imported, and subtract what was consumed. Consumption (3,990,000 tonnes) Production 3,441,000 tonnes Net Imports 1,350,000 tonnes Surplus Balance 801,000 tonnes In 2007 world refined copper production substantially exceeded consumption, by at least 750,000 tonnes. The inventory overhang in China has caused its prices to be at a substantial discount to the rest of the world. In the first quarter of this year, the ICSG has reported that global consumption is down by nearly 1%. First-quarter average mine capacity utilisation was slashed to 82% from 89% in the corresponding period of 2007. This is a fundamental picture of slowing consumption, unreported copper inventories and producers reducing production in face of worsening consumption. In short, it is unrealistic for copper price to be trading at such a high level. Actions of the speculators maybe one of the main contributing factors.


VERSION 2: Demand increase
Unlike in the past, when rallies in commodity prices have tended to be confined to a select few commodities, over 2003‐2007 prices have risen for all raw materials across the board. Links between various commodities through the supply chain (including, for example, transport costs) typically result in positive co‐movements but correlation is at a historical high, pointing to the role of a common demand shock across the raw‐materials sector.

The remarkable rise in oil and metals prices has its origin chiefly in the strength of emerging markets demand this decade. The rally in metals prices has also been driven by the concurrence of strong demand growth from the developing world and weak production capacity. China, which consumed about half of all the increase in copper, steel and aluminium output, and nearly all the increase in lead, zinc and tin during 2002‐2005, has single‐handedly altered the demand side of the equation.

The demand for base metals began to rise at a juncture when supply was ill-positioned to respond, since investment had sunk to a 12‐year low in 2002, due to a steep decline in prices in the 1990s, and a wave of consolidation at the end of that decade caused exploration budgets to shrink.


Comments:
Depending on what you read and who you listen to, the above are 2 of the most popular reasons given for this surge in prices of commodities. In my opinion, both are valid factors behind the price increase. It is clear that as China and India progress, their need for commodities will go up. At the same time, the number of speculators and hedge funds having open interest in various commodities also went up in recent years. However, in the near term, it is unlikely that commodity prices will remain immune to the global economic slowdown that is underway.
A weakening US economy, coupled with the forecast slowdown in Chinese growth, which Fitch estimates will be the slowest in six years, is likely to take a further toll on metals demand.
On the other hand, US House of Representatives recently passed a bill that directs the Commodity Futures Trading Commission to use all its authority to curb speculation in energy futures markets. It seems like the stage is set for a period of stable prices.

Competitive advantage period (CAP) --- Part 3

The CAP for the U.S. stock market, as a whole, is estimated to be between 10 and15 years. However, within that aggregate, individual company CAPs can vary from 0-2 years to over 20 years. As a general rule, companies with low multiples tend to have shorter CAPs. Alternatively, companies with high multiples typically have long CAPs.

For example, companies like Microsoft and Coca-Cola have CAPs well in excess of 20 years, demonstrating their perceived market dominance, the sustainability of high returns, and the market’s willingness to take the long view. If a substantial percentage of the value of acompany can be attributed to cash flows beyond a few years, it is difficult to argue persuasively that the market is short-term-oriented. In turn, it follows that the forecast periods used in most valuation models are not long enough.

It may be more important for the investor to try to quantify CAP than to pass judgment on its correctness. As noted earlier, the components of value are all expectational, and therefore must be considered relative to one another and against the expectations for the business overall. There are a number of ways of estimating CAP, but one of the most useful methods was developed by Al Rappaport. The technique is known as market-implied CAP (MICAP). Determination of the MICAP has a few steps.

First,the analyst needs a proxy for unbiased market expectations as the key input into a discounted cash flow model. Since, by definition, there is no value creation assumed after CAP, the model uses a perpetuity assumption (NOPATCAP/WACC) for the terminal value. Next, the length of the forecast horizon is stretched as many years as necessary to achieve the current stock price. This period is the company’s MICAP. Scrutiny of the MICAP determination process would correctly identify it as a circular exercise. That is, if a stock price increases without changes in cash flow expectations and/or risk, the MICAP will necessarily expand. This in no way weakens CAP’s value as an analytical tool. In fact, this tight link with valuation highlights the power of including CAP as a key tool in the analytic toolbag. For instance, a calculated MICAP can be compared to previous MICAPs for the same company, an average MICAP for the industry (if possible and appropriate), and the company’s historical cash-on-cash return on invested capital.

BP world energy review

This posting is contributed with compliments from Julian.... :-)

From the 57th annual BP statistical review of World Energy, here are some summaries:

1. High oil prices are not because of speculation. Speculation might make the price swings more volatile but the push in price is due to economic fundamentals. Global energy growth has been above average for 5 consecutive years but at the same time energy supplies have not been able to catch up. Britain's North Sea oil field recorded world's largest decline in production, ever! Declining by 10% in 2007. Production in Russia is declining. Nationalism is on the rise and this will negatively impact production as some countries like Venezuela are not exactly that good in increasing production output.
2. The world is not running out of hydrocarbon. We currently have 40 yrs of proven oil reserve, 60 yrs of natural gas and 130 yrs of coal. So we still have enough reserve, the problem is more political.
3. Alternative energy comprises of around 2% of total energy consumption. So switching to alternative energy is not as easy as it seems.
4. Conclusion: let the market adjust itself. At these prices, oil consumption would definitely decline as individuals/nations are taking steps in reducing oil consumption. At the same time, at these high prices, nations will try as much as they can to sell more oil to reap the immediate reward. This will help put pressure on demand.

For more, go to BP.com

Competitive advantage period (CAP) --- Part 2

Competitive advantage period (CAP) is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital. Economic theory suggests that competitive forces will drive returns down to the cost of capital over time. If a company earns above market required returns, it will attract competitors that will accept lower returns, eventually driving industry returns lower. The notion of CAP has been around for some time; nonetheless, not much attention has been paid to it in the valuation literature. The equation can be summarized as follows:

Value = (NOPAT/WACC) + [I(R-WACC)CAP]/(WACC)(1+WACC)

where NOPAT = net operating profit after tax
WACC = weighted average cost of capital
I = annualized new investment in working and fixed capital
R = rate of return on invested capital
CAP = competitive advantage period

Rearranged, the formula reads:
CAP = {(Value*WACC-NOPAT)(1+WACC)}/I(R-WACC)

These formulas have some shortcomings that make them limiting in practice, but they demonstrate, with clarity, how CAP can be conceptualized in the valuation process. A company’s CAP is determined by a multitude of factors, both internal and external. On a company-specific basis, considerations such as industry structure, the company’s competitive position within that industry, and management strategies define the length of CAP. The structured competitive analysis framework set out by Michael Porter can be particularly useful in this assessment. Important external factors include government regulations and antitrust policies. CAP can also reflect investor psychology through implied optimism/pessimism regarding a firm’s prospects.

It is believed that the key determinants of CAP can be largely captured by a handful of drivers. The first is a company’s current return on invested capital. Generally speaking, higher ROIC businesses within an industry are the best positioned competitively (reflecting scale economies, entry barriers and management execution). As a result, it is often costlier and more time consuming for competitors to wrest competitive advantage away from high-return companies. Second is the rate of industry change. High returns in a rapidly changing sector (technology) are unlikely to be valued as generously as high returns in a more prosaic industry (beverages). The final driver is barriers to entry. High barriers to entry— or in some businesses, “lock-in” and increasing returns— are central to appreciating the sustainability of high returns on invested capital.

Competitive advantage period (CAP) --- Part 1

In 1991, Barrie Wigmore, a Goldman Sachs limited partner, released a study that attempted to determine what factors drove the stock market’s above-average returns in the decade of the 1980s. After carefully accounting for earnings growth, interest rate declines, M&A activity and analysts’ rosy forecasts, it appeared a full 38% of the shareholder value created in the 1980s remained unexplained. Dubbed the “X” factor, this mysterious driver of value left Wigmore and the Wall Street Journal, which published a feature article on the study, at a loss. Given overwhelming evidence of well-functioning capital markets, it appears completely unsatisfactory to attribute such a large component of share price performance to some unidentifiable and seemingly inexplicable force.

Fortunately, there is an answer to this problem. However, to understand the solution there must be a recognition that share prices are not set by capitalizing accounting-based earnings, which are at best flawed and at worst substantially misleading. The focus must be on the economic drivers of a business, which can be defined as cash flow (cash-in versus cash-out), risk (and appropriate demanded return) and what is dubbed “competitive advantage period”— CAP— or how long returns above the cost of capital will be earned. CAP is also known as “value growth duration”.

In this context, Mr Wigmore’s “X” factor can be explained by the market’s extension of expectations for above-cost-of-capital returns. As Mr Wigmore’s analysis suggests, the length and relative change of CAP can have a substantial impact on the value of a business and the market overall. For example, the revision in expectations of Corporate America’s ability to generate returns above its cost of capital is a powerful indicator that investors believed that America was more competitive at the end of the 1980s than it was entering the decade. This conclusion was later supported by economic analysis. It should be noted that in a well-functioning capital market all assets, including bonds and real estate, are valued using similar economic parameters. In the case of bonds, for example, the coupon rate (or cash flow) is contractually set, as is the maturity. The bond price is set so that the expected return of the security is commensurate with its perceived risk. Likewise for most commercial real estate transactions. At the end of the day, the process of investing returns to the analysis of cash flow, risk and time horizon. Since these drivers are not contractually set for equity securities, they are by definition expectational and, in most cases, dynamic.

Remarkably, in spite of CAP’s importance in the analytical process it remains one of the most neglected components of valuation. This lack of focus appears attributable to two main factors. First, the vast majority of market participants attempt to understand valuation and subsequent stock price changes using an accounting-based formula, which generally defines value as a price/earnings multiple times earnings. Thus CAP is rarely explicitly addressed, even though most empirical evidence suggests that the stock market deems cash flow to be more important than earnings, holds true to the risk/reward relationship over time, and recognizes cash flows many years into the future.

Second, most companies use a forecast period for strategic planning purposes (usually three to five years) that is substantially different from their CAP. As a result, investor communication is geared more toward internal company-based expectations rather than external market-based expectations. If the determination of stock prices is approached with an economically sound model, the concept of CAP becomes immediately relevant.

Appraising San Teh

San Teh’s cement business continues to be its main revenue driver. Riding on to its excellent FY06 results, FY07 has also proven to be a successful year. Since FY04, the cement business has returned to the black after many years of losses. Turnover of the Group rose 26% to $162.7 million and profit after taxation improved 14% to $11.9 million. Sales in cement operation went up by 31% to $128.3 million and the operating profit increased 39% to $21.0 million. The average cement selling price was higher at RMB256 per ton as compared to RMB240 per ton in FY06. In FY08, the average cement selling prices are expected to hover at around RMB250 to 260 per ton on the back of strong fixed-asset investment and GDP growth in China. Profits have continued to be depressed in the plastic division due to the rising PVC resin prices. The low occupancy rate in the newly opened hotel in Suzhou has resulted in a loss for the hotel division in FY07.

Since 2006, the government of China, through The National Development and Reform Commission (NDRC) has started closing down the smaller size cement companies with outdated capacity. Such a drastic step from the government is a very important factor for the China cement industry in the next few years. Although new capacity supply should stay at high levels, the volume of outdated capacity being shuttered should keep net capacity increases low compared with the increase in new demand. Oversupply should gradually ease in the next few years due to the above reason. The main objective for closure of outdated capacity is to reduce discharge and save energy as the remaining players have a more efficient manufacturing process and at the same time weed out all rouge companies operating without permit from the government.

Due to the fact that the existing plant in Fujian Longyan is running at full capacity, the management has decided to build a new cement plant in Dali with an output per year of 1 million tones. It is expected to contribute positively to the bottom line starting from the second half of FY08 onwards and also around 33% of the cement revenue from FY09.

San Teh is in the process of preparing their cement operation for a listing on the Shanghai Stock Exchange by end of this year. Recently, one of the three largest cement groups in China, the Southern Cement Group, together with the other three institutional investors, have invested RMB72.0 million for a 6.67% interest in San Teh’s cement operation. Based on this, the whole cement operation is estimated to be worth a whopping RMB1079 million (S$210 million). Assuming the plastic and hotel business is worthless as they are making losses, San Teh's share price should be at the S$0.72 level.

The current share price is significantly below San Teh’s NTA of S$0.93 as at 31st December 2007. Given the potential events described above taking place in the near future, this huge price discrepancy is unjustifiable. The group’s financial position is healthy and the expansion strategy is right on track to become a mid sized cement manufacturer. This discount gap should narrow considerably once the cement operation has been listed successfully.