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.