1.5 years ago, I made a posting on San Teh:
http://level13-analysis.blogspot.com/2008/05/appraising-san-teh.html
Now I feel its time to sit up and take notice of this sleepy stock again. For the last 6 months, it has been trading at $0.25 to $0.35 with low daily volume. San Teh is currently in a sweet spot to ride on China's construction and infrastructure boom. The catalysts for its share price appreciation are slowly appearing.
Catalyst 1:
Demand for cement remains strong due to the re-construction after the Sichuan earthquake and China's infrastructure stimulus spending. So far the cement prices around different regions in China have held up well.
http://www.chinadaily.com.cn/bizchina/2009-03/02/content_7527574.htm
Catalyst 2:
The government is continuing to eliminate backward production capacity. China is looking to eliminate 600 million tons of production capacity from old, outdated plants by 2012. Initially announced in 2007, the move will involve over 3000 local enterprises, China Cement reported.
Strict restrictions on new cement projects and cement production are being enforced by various levels of the Chinese government. Provinces with a per capita cement clinker capacity over 1,000 kg are reportedly unable to build a new production line. Furthermore, provinces with a new dry process cement percentage exceeding 70% are to limit production capacity to 10% of the respective province's cement output during the previous year.
China's cement production overcapacity is approximately 300 million tons; with over 3,000 small vertical kiln factories having a production capacity of 100,000 tons. The price ratio between iron and steel and cement products in China reportedly eclipses to 20:1 – a stark contrast to the 3:1 international ratio. According to China Cement, the backward capacity is due mainly to the profit margin achieved from low costs and low-level technology; aggravated by rapid expansion and outdated production capacity.
Catalyst 3:
The price of coal, which is a major cost of cement production, has remained at reasonably low levels since the crash in commodity price last year. A great amount of costs can be saved in the near future when the cement factory successfully switched to using residual heat for the power generation plant.
The 3 scenarios described above will bode well for San Teh's future developments. Now lets take a look at the numbers to check if they tell the same story. A comparison is done for 1H09 vs 1H08. If we look at the core operating profit excluding exceptional items, we can see that the earnings for 1H09 is $2.88 million vs -$2.5 million in 1H08. This shows a great turnaround in fortunes.
Debt and receiveables are at healthy levels. Cashflow from operation is at $15 million and moving forward, captial expenditure is expected to decrease. I will be looking forward to its earnings report very soon for 3Q2009. At $0.3, the downside is limited and P/BV ratio is 0.36. The forward P/E is estimated to be 18.7.
Lastly, the company has postponed its plan to list the cement subsidary in China in Y2008. With the change in macroeconomic conditions in China, we may not need to wait too long for the listing to take place.
Friday, November 13, 2009
Wednesday, September 23, 2009
Dummies guide to crisis 2007-09 (Part 4 of 4)
In this last posting, we will look at the current situation of real estate sales and prices in the USA. At the same time, its important for us to look beyond the numbers as what we see nowadays will not be what we get.
Recently, the media reported that existing home sales rising 7.2% in July. If only the picture were as positive when you look behind the headline numbers that create the excitement. But unfortunately that is not the case.
The inventory of unsold homes rose by 7.3% in July, as many more homes came on the market than were sold. That is not a sign that the housing crisis has bottomed.
There are also reasons to believe the sales increase of recent months is temporary, since to a significant degree they were artificially driven by the $8,000 bonus being paid to first-time home-buyers. The National Association of Realtors (NAR) reports that 30% of July home sales were to first-time home-buyers enticed by the bonus. Unfortunately, the bonus program expires November 31, and given the time it takes to close a deal the NAR says would-be buyers need to make offers by the end of September. So at the end of September, six weeks away, will that high percentage of home sales to first-time buyers, 30% of total sales, go away? One would think most of it will.
It is also not encouraging that 31% of July sales were of distressed properties, those in foreclosure, often bought at auction by speculators who intend to flip them back into the market later for a profit, and "short-sales" in which the bank accepts a low-ball offer rather than put the property through the foreclosure process.
That leaves a discouragingly low level of sales that would be considered normal, sales at relatively fair value, with sellers not in a financial crisis, and buyers not subsidized by the temporary first-time buyer bonus.
There was also the discouraging news from the Mortgage Bankers Association (MBA), that the mortgage-delinquency rate rose to 9.24% as of the end of the second quarter, a new record, and that the combined rate of mortgages either delinquent or already in foreclosure rose to a record 13.16% of all outstanding mortgages.
The MBA also noted another behind the headline statistic that is not encouraging, saying, "A year ago it was subprime adjustable-rate mortgages [which were being reset at higher rates] that were causing the problems. As a sign that mortgage performance is now being driven by economic problems like job losses, prime fixed-rate mortgages now account for one in three foreclosures.
If it weren't for the probable temporary aspect of the improvement; and if we could only see consumer spending picking up elsewhere, in case this improvement in home sales is a temporary aberration, and not a sign of the recession ending.
Recently, the media reported that existing home sales rising 7.2% in July. If only the picture were as positive when you look behind the headline numbers that create the excitement. But unfortunately that is not the case.
The inventory of unsold homes rose by 7.3% in July, as many more homes came on the market than were sold. That is not a sign that the housing crisis has bottomed.
There are also reasons to believe the sales increase of recent months is temporary, since to a significant degree they were artificially driven by the $8,000 bonus being paid to first-time home-buyers. The National Association of Realtors (NAR) reports that 30% of July home sales were to first-time home-buyers enticed by the bonus. Unfortunately, the bonus program expires November 31, and given the time it takes to close a deal the NAR says would-be buyers need to make offers by the end of September. So at the end of September, six weeks away, will that high percentage of home sales to first-time buyers, 30% of total sales, go away? One would think most of it will.
It is also not encouraging that 31% of July sales were of distressed properties, those in foreclosure, often bought at auction by speculators who intend to flip them back into the market later for a profit, and "short-sales" in which the bank accepts a low-ball offer rather than put the property through the foreclosure process.
That leaves a discouragingly low level of sales that would be considered normal, sales at relatively fair value, with sellers not in a financial crisis, and buyers not subsidized by the temporary first-time buyer bonus.
There was also the discouraging news from the Mortgage Bankers Association (MBA), that the mortgage-delinquency rate rose to 9.24% as of the end of the second quarter, a new record, and that the combined rate of mortgages either delinquent or already in foreclosure rose to a record 13.16% of all outstanding mortgages.
The MBA also noted another behind the headline statistic that is not encouraging, saying, "A year ago it was subprime adjustable-rate mortgages [which were being reset at higher rates] that were causing the problems. As a sign that mortgage performance is now being driven by economic problems like job losses, prime fixed-rate mortgages now account for one in three foreclosures.
If it weren't for the probable temporary aspect of the improvement; and if we could only see consumer spending picking up elsewhere, in case this improvement in home sales is a temporary aberration, and not a sign of the recession ending.
Sunday, September 13, 2009
Dummies guide to crisis 2007-09 (Part 3 of 4)
In this posting and the next, we will take a look at how real estate securitization contributed to the financial crisis. The thing that governments and bankers fear the most a a bank-run. When all depositors demand their deposits back, it wont be available because the money has been loaned for thirty years on a mortgage or three years on a car loan. It can be made available only if the bank can turn its long-term loans into cash. It can be prevented only if someone quickly loans the bank cash on its assets -- or buys the assets quickly.
The problem of toxic assets is not that banks loaned too much money. In fact, the system for making loans made perfect sense. People were loaned money from depositors, but then the loans were packaged and sold to investors. The result was to return the cash to the bank that made the mortgage. Depositors were not at risk (beyond the usual risk due to fractional reserve banking).
The problem occurred at the other end. Banks thought these securitized mortgage packages were safer than the actual mortgages that they might have just held on to. Mortgages are usually excellent investments, paid without fail in about 99% of the cases and the underlying collateral -- housing -- regularly increases in price (mainly due to the steady inflation of currencies). Furthermore, risks were reduced by packaging mortgages from a variety of locations (protecting against a decline in any one city or region), organized by level of risk (riskier mortgages were packaged separately from less risky mortgages), and insured by a large international insurance company. What could be safer?
However, after 9/11, the US Federal Reserve lowered interest rates substantially to prevent the economy from freezing up or spiraling into a recession. The low interest rates caused housing prices to rise at an unusually high rate for several years. Then, perhaps in part because housing prices were rising so rapidly, suggesting inflation that was not being observed in the US Consumer Price Index, which does not include housing to any appreciable degree in its calculations, the Fed reversed course. This began a collapse in housing prices as the higher mortgage rates sharply reduced demand.
So these securities, presumably safe packages of insured loans, suddenly were hit from all sides. First, interest rates were rising, which made the old mortgages (and the related securities) decline in value since investors preferred the higher rates now available. Second, because housing prices were now declining, the value of the underlying collateral was declining as well, making the securities less secure. Third, because some buyers had bought property with adjustable rate mortgages, the rising rates and lower housing prices caught them in a trap; they could not refinance, and there was a steady increase in foreclosures. Fourth, a recession in the US was beginning, threatening loss of jobs and more foreclosures.
Now, what seemed an advantage -- securitization and insurance -- was reversed. Prior to securitization, the value of the mortgages on a bank's books was fairly clear. If it was being paid, it was valued at face value. If not, it was in foreclosure and had a reduced value based on the costs of foreclosure and resale. Typically this might mean the bank's mortgages were valued at 99.5% of their original value. In a crisis, with many foreclosures, this might drop to 97%, but that would be unlikely. In the case of a run on the bank, it could get cash for its fully valued mortgages.
However, with securitization, there was a market for the securities. Because there were a great many securities each with thousands of different loans, after the first sale was made to an investor, usually to an institution, not many actual resales occurred. Now, however, because it was unclear which securities included mortgages in the greatest danger and which did not, the very small number of sales saw prices that were extremely low -- less than 50% of the face value of the securities.
Now, the banks had a new problem. They had bought these securities themselves (not the smartest move, but it seemed safe), and the securities had to be valued, not on the grab-bag of underlying assets, but on the recent sales of such securities at fire-sale prices, an accounting rule called "marked to market".
Although foreclosures represented only a few percent of the mortgages, the practice of marking to market and the limited number of buyers for the securities dropped the value of these bank assets by 30-70%. The banks were suddenly insolvent -- as were all those who had insured them and other financial institutions against losses -- including all the investment banks.
So, in this situation, what should be done? If the banks failed, the depositors were secured by the FDIC, in theory. However the FDIC, despite its name (Federal Deposit Insurance Corporation) was a private corporation funded by a small insurance fee paid by banks. It's assets would be exhausted by the first few banks that failed. It could not pay more than a tiny fraction of depositors if there were a run on the banks.
Thus, to avoid a collapse of the banking system, the US Treasury and Federal Reserve began sticking fingers in the dike. It pressured the accounting body to eliminate mark-to-market, and at the same time, cut deals to give money to the insurance companies and banks.
The hasty effort to stop the panic may have prevented a collapse, but it did not slow the overall decline. People now became more afraid, worsening the housing price decline and the recession. Furthermore, since little or nothing has been done to preserve the value of the underlying mortgages (something that could have been done with a government guarantee of the principle and interest), the value of the assets continues to decline, requiring further bailouts.
The problem of toxic assets is not that banks loaned too much money. In fact, the system for making loans made perfect sense. People were loaned money from depositors, but then the loans were packaged and sold to investors. The result was to return the cash to the bank that made the mortgage. Depositors were not at risk (beyond the usual risk due to fractional reserve banking).
The problem occurred at the other end. Banks thought these securitized mortgage packages were safer than the actual mortgages that they might have just held on to. Mortgages are usually excellent investments, paid without fail in about 99% of the cases and the underlying collateral -- housing -- regularly increases in price (mainly due to the steady inflation of currencies). Furthermore, risks were reduced by packaging mortgages from a variety of locations (protecting against a decline in any one city or region), organized by level of risk (riskier mortgages were packaged separately from less risky mortgages), and insured by a large international insurance company. What could be safer?
However, after 9/11, the US Federal Reserve lowered interest rates substantially to prevent the economy from freezing up or spiraling into a recession. The low interest rates caused housing prices to rise at an unusually high rate for several years. Then, perhaps in part because housing prices were rising so rapidly, suggesting inflation that was not being observed in the US Consumer Price Index, which does not include housing to any appreciable degree in its calculations, the Fed reversed course. This began a collapse in housing prices as the higher mortgage rates sharply reduced demand.
So these securities, presumably safe packages of insured loans, suddenly were hit from all sides. First, interest rates were rising, which made the old mortgages (and the related securities) decline in value since investors preferred the higher rates now available. Second, because housing prices were now declining, the value of the underlying collateral was declining as well, making the securities less secure. Third, because some buyers had bought property with adjustable rate mortgages, the rising rates and lower housing prices caught them in a trap; they could not refinance, and there was a steady increase in foreclosures. Fourth, a recession in the US was beginning, threatening loss of jobs and more foreclosures.
Now, what seemed an advantage -- securitization and insurance -- was reversed. Prior to securitization, the value of the mortgages on a bank's books was fairly clear. If it was being paid, it was valued at face value. If not, it was in foreclosure and had a reduced value based on the costs of foreclosure and resale. Typically this might mean the bank's mortgages were valued at 99.5% of their original value. In a crisis, with many foreclosures, this might drop to 97%, but that would be unlikely. In the case of a run on the bank, it could get cash for its fully valued mortgages.
However, with securitization, there was a market for the securities. Because there were a great many securities each with thousands of different loans, after the first sale was made to an investor, usually to an institution, not many actual resales occurred. Now, however, because it was unclear which securities included mortgages in the greatest danger and which did not, the very small number of sales saw prices that were extremely low -- less than 50% of the face value of the securities.
Now, the banks had a new problem. They had bought these securities themselves (not the smartest move, but it seemed safe), and the securities had to be valued, not on the grab-bag of underlying assets, but on the recent sales of such securities at fire-sale prices, an accounting rule called "marked to market".
Although foreclosures represented only a few percent of the mortgages, the practice of marking to market and the limited number of buyers for the securities dropped the value of these bank assets by 30-70%. The banks were suddenly insolvent -- as were all those who had insured them and other financial institutions against losses -- including all the investment banks.
So, in this situation, what should be done? If the banks failed, the depositors were secured by the FDIC, in theory. However the FDIC, despite its name (Federal Deposit Insurance Corporation) was a private corporation funded by a small insurance fee paid by banks. It's assets would be exhausted by the first few banks that failed. It could not pay more than a tiny fraction of depositors if there were a run on the banks.
Thus, to avoid a collapse of the banking system, the US Treasury and Federal Reserve began sticking fingers in the dike. It pressured the accounting body to eliminate mark-to-market, and at the same time, cut deals to give money to the insurance companies and banks.
The hasty effort to stop the panic may have prevented a collapse, but it did not slow the overall decline. People now became more afraid, worsening the housing price decline and the recession. Furthermore, since little or nothing has been done to preserve the value of the underlying mortgages (something that could have been done with a government guarantee of the principle and interest), the value of the assets continues to decline, requiring further bailouts.
Tuesday, September 8, 2009
Showing at a cinema near you! (In the near future)
New characters from the Disney-Marvel merger........ :-)
IRON MOUSE!
SPIDER MOUSE!
IRON MOUSE!
DONALD HULK!
SPIDER MOUSE!
Friday, September 4, 2009
Heads you win. Tails I lose!!!
I have to interupt the dummies posting with this latest development from one of the S-chip companies. The majority owner of China Precision has decided to take the company private by offering S$0.28 to buy back all existing shares it does not not own. I am not a stakeholder in China Precision. Nevertheless, ALL MINORITY SHAREHOLDERS SHOULD REJECT THIS OFFER!
Why do I say that? Below are some reasons which i believe will support my view.
1) The company's IPO took place in May 2006 at a price of S$0.30. The exit offer is at a discount of 6.7%. This means that shareholders who held on to the shares since IPO will make a loss (lets exclude the dividends for the time being).
2) As of the latest financial report ending 30th June 2009, the net asset value (NAV) of the company is S$0.32 per share. Based on this, the exit offer is at a discount of 12.5%.
3) Currently, China Precision does not have any bank borrowings. Thus, the assets mainly consist of cash, property and plant equipment. It has RMB 143 million of cash which translate to a cash backing of S$0.08 per share. In short, the majority owner is only paying S$0.20 for the whole business.
4) For HY2009, the company made earnings of RMB 9 cents for each share. Using the exchange rate of S$1:4.5 RMB, the EPS is S$0.02. Assuming the EPS does not change, we will have S$0.04 for the whole year. Setting the exit offer at S$0.20 (minus the cash backing) means that the business is only valued at a forward P/E of 5X (Isn't that cheap?).
I will be looking forward to the response from the independent directors and the appointed financial adviser on this exit offer. Its time for shareholders to sit up and vote wisely.
Why do I say that? Below are some reasons which i believe will support my view.
1) The company's IPO took place in May 2006 at a price of S$0.30. The exit offer is at a discount of 6.7%. This means that shareholders who held on to the shares since IPO will make a loss (lets exclude the dividends for the time being).
2) As of the latest financial report ending 30th June 2009, the net asset value (NAV) of the company is S$0.32 per share. Based on this, the exit offer is at a discount of 12.5%.
3) Currently, China Precision does not have any bank borrowings. Thus, the assets mainly consist of cash, property and plant equipment. It has RMB 143 million of cash which translate to a cash backing of S$0.08 per share. In short, the majority owner is only paying S$0.20 for the whole business.
4) For HY2009, the company made earnings of RMB 9 cents for each share. Using the exchange rate of S$1:4.5 RMB, the EPS is S$0.02. Assuming the EPS does not change, we will have S$0.04 for the whole year. Setting the exit offer at S$0.20 (minus the cash backing) means that the business is only valued at a forward P/E of 5X (Isn't that cheap?).
I will be looking forward to the response from the independent directors and the appointed financial adviser on this exit offer. Its time for shareholders to sit up and vote wisely.
Saturday, August 29, 2009
Dummies guide to crisis 2007-09 (Part 2 of 4)
The deposit creation process is at the heart of the banking system servicing the public and stimulating economic growth. The modern banking instruments of securitisation, hedging, leveraging, derivatives and so on turned this process on its head. They enabled banks to lend more out than they took in deposits. According to Morgan Stanley Research, in 2007 UK banks loan-deposit ratio was 137%. In other words the banks were lending out on average £137.00 for every £100 paid in as a deposit. Another conservative estimate shows that this indicator for major UK banks was at least 174%. For others like Northern Rock it was a massive 322% (little wonder why Northern Rock was among the first few to collapse). Banks were “borrowing on the international markets” and lending money they did not have but assuming to have in the future.
On closer examination there is a remarkable difference. With every cycle of the 86.5% loan-deposit ratio every £1 deposited is reduced becoming less than £0.50 after 5 cycles and less than 1 penny after 32. With a loan-deposit ratio of 137% — lending £137 for every £100 — not to mention 174% or indeed 322%, the story is drastically the opposite. Imagine a banker gets the first £1 deposit in the first week of a new year and lends it out. Imagine that twice every week in that year the amount lent out comes back to him as a deposit and he sustains such deposit creation process with a ratio of 137% twice every week for the year. This is a perfectly plausible scenario on the current electronic financial markets. The total amount lent out in a year by a banker is over £447 trillion. Significantly with a loan-deposit ratio 100% or above no reserve is created.
It is an acknowledged monetary principle that the lending interest rate cannot be below 0%. This would allow borrowers to borrow money and banks would keep paying them for doing so. Indeed, there would be no incentive to lend and borrowing would have become a source of income for a borrower. Ultimately, lending would have stopped completely. It is a very similar principle that the loan-deposit ratio cannot be 100% or above, as in such circumstances, an amount of money coming from economic activities into deposit creation cycle would be multiplied very rapidly to infinity. Economic growth and inflation would not be able to catch up with it, which happens if loan-deposit ratio is below 100%.
The loan-deposit ratio below 100% that traditionally served as a very strict self-regulating mechanism of money supply stimulating the economy becomes a killer above 100%. The banking system becomes a classic example of a massive pyramid scheme. But as with every pyramid scheme, as long as people and institutions are happy not to demand cash withdrawals from the banks it is sustainable. Any bank can always print an impressive account statement or issue a new deposit certificate. The problem is whether the cash is there.
This is only the beginning of the story. According to some estimates there are around $2 quadrillion worth of financial instruments (like securities) that cannot be redeemed due to the lack of cash in the system — so-called toxic waste. These instruments are in the financial system and there are prospective beneficiaries of these instruments when they are redeemed, however. Furthermore they appreciate in value and attract interest so their notional value continues increasing over time. Governments around the world injected cash into the global banking system to a tune of around $10 trillion, or 200 times less than $2 quadrillion. The government will not stand a chance to sustain it, unless this massive pyramid scheme is brought to a halt and liquidated. But there is no sign of governments contemplating doing that yet.
The current “quantitative easing” (printing cash) is an attempt to convert more toxic instruments, like securities, into cash, albeit at some inflationary costs, and make them state-guaranteed, as cash is guaranteed by the state. It is just another trick of the financial pyramid purveyors to extract even more cash from taxpayers through the governments on the back of the scheme.Unless and until the governments identify, isolate and write off toxic instruments held by financial institutions every pound put into “rescue” is very likely to end up being good money thrown after bad.
Loan-deposit ratio above 100% is like (untreated) AIDS. As it progresses it weakens the immune system of economy that safeguards against adverse events. The current crisis was triggered by the collapse of subprime mortgage market (effectively overvaluation of assets). This time the system, for years having had been weakened by loan-deposit ratio above 100%, also collapsed altogether. It was a giant pyramid and it was bound to crumble anyway (for whatever direct cause). It was like a human suffering from AIDS whose death was not caused by AIDS directly, but by pneumonia, flu, infection, etc.
Until recently the world enjoyed a sustained period of high growth and low inflation and the fact that it came to such an abrupt end does not come as a surprise. It was in the very nature of the pyramid scheme mechanism. The deposit creation process with a ratio above 100% guaranteed impressive-looking economic growth figures. At the same time there were no extra cash hitting Main Street, as there was no extra cash printed. In this context, the high growth of property prices is no surprise. In their huge majority and extent, these are, in practice, cashless interbank transactions. The world stayed oblivious in this economic miracle like customers of a pyramid scheme being happy with the figures on their statements until they wanted to withdraw money. But like with any pyramid scheme, the financial system ran out of cash, with the outcome of a lack of liquidity, not high inflation.
*info in this posting published by the British Parliament and accepted as evidence by the House of Commons, Treasury.
http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/144/144w254.htm
On closer examination there is a remarkable difference. With every cycle of the 86.5% loan-deposit ratio every £1 deposited is reduced becoming less than £0.50 after 5 cycles and less than 1 penny after 32. With a loan-deposit ratio of 137% — lending £137 for every £100 — not to mention 174% or indeed 322%, the story is drastically the opposite. Imagine a banker gets the first £1 deposit in the first week of a new year and lends it out. Imagine that twice every week in that year the amount lent out comes back to him as a deposit and he sustains such deposit creation process with a ratio of 137% twice every week for the year. This is a perfectly plausible scenario on the current electronic financial markets. The total amount lent out in a year by a banker is over £447 trillion. Significantly with a loan-deposit ratio 100% or above no reserve is created.
It is an acknowledged monetary principle that the lending interest rate cannot be below 0%. This would allow borrowers to borrow money and banks would keep paying them for doing so. Indeed, there would be no incentive to lend and borrowing would have become a source of income for a borrower. Ultimately, lending would have stopped completely. It is a very similar principle that the loan-deposit ratio cannot be 100% or above, as in such circumstances, an amount of money coming from economic activities into deposit creation cycle would be multiplied very rapidly to infinity. Economic growth and inflation would not be able to catch up with it, which happens if loan-deposit ratio is below 100%.
The loan-deposit ratio below 100% that traditionally served as a very strict self-regulating mechanism of money supply stimulating the economy becomes a killer above 100%. The banking system becomes a classic example of a massive pyramid scheme. But as with every pyramid scheme, as long as people and institutions are happy not to demand cash withdrawals from the banks it is sustainable. Any bank can always print an impressive account statement or issue a new deposit certificate. The problem is whether the cash is there.
This is only the beginning of the story. According to some estimates there are around $2 quadrillion worth of financial instruments (like securities) that cannot be redeemed due to the lack of cash in the system — so-called toxic waste. These instruments are in the financial system and there are prospective beneficiaries of these instruments when they are redeemed, however. Furthermore they appreciate in value and attract interest so their notional value continues increasing over time. Governments around the world injected cash into the global banking system to a tune of around $10 trillion, or 200 times less than $2 quadrillion. The government will not stand a chance to sustain it, unless this massive pyramid scheme is brought to a halt and liquidated. But there is no sign of governments contemplating doing that yet.
The current “quantitative easing” (printing cash) is an attempt to convert more toxic instruments, like securities, into cash, albeit at some inflationary costs, and make them state-guaranteed, as cash is guaranteed by the state. It is just another trick of the financial pyramid purveyors to extract even more cash from taxpayers through the governments on the back of the scheme.Unless and until the governments identify, isolate and write off toxic instruments held by financial institutions every pound put into “rescue” is very likely to end up being good money thrown after bad.
Loan-deposit ratio above 100% is like (untreated) AIDS. As it progresses it weakens the immune system of economy that safeguards against adverse events. The current crisis was triggered by the collapse of subprime mortgage market (effectively overvaluation of assets). This time the system, for years having had been weakened by loan-deposit ratio above 100%, also collapsed altogether. It was a giant pyramid and it was bound to crumble anyway (for whatever direct cause). It was like a human suffering from AIDS whose death was not caused by AIDS directly, but by pneumonia, flu, infection, etc.
Until recently the world enjoyed a sustained period of high growth and low inflation and the fact that it came to such an abrupt end does not come as a surprise. It was in the very nature of the pyramid scheme mechanism. The deposit creation process with a ratio above 100% guaranteed impressive-looking economic growth figures. At the same time there were no extra cash hitting Main Street, as there was no extra cash printed. In this context, the high growth of property prices is no surprise. In their huge majority and extent, these are, in practice, cashless interbank transactions. The world stayed oblivious in this economic miracle like customers of a pyramid scheme being happy with the figures on their statements until they wanted to withdraw money. But like with any pyramid scheme, the financial system ran out of cash, with the outcome of a lack of liquidity, not high inflation.
*info in this posting published by the British Parliament and accepted as evidence by the House of Commons, Treasury.
http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/144/144w254.htm
Tuesday, August 25, 2009
Dummies guide to crisis 2007-09 (Part 1 of 4)
When the financial crisis erupted full force in the second half of last year, there was panic all round. This and the next posting will focus on the banks' contributing role in the crisis. Before going into details, one has to understand the basic principles on which the banking system operates.
Students at the A-level are taught about "multiple deposit creation," It is the most rudimentary money creation mechanism for banks, which if administered properly serves the economy and public at-large very well. In the deposit creation process a bank accepts deposits and lends them out. But almost every lending returns soon to the bank as a deposit and is lent again. In essence, when people borrow money they do not keep it at home as cash, but spend it, so this money finds its way back to a bank quite quickly. It is not necessarily the same bank, but as the number of banks is limited (indeed very small) and there is—or was—a very active interbank lending. In terms of deposit creation the system works like one large bank.
Therefore, the same money is re-lent over and over again. If all depositors of all banks turned up at the same time there would not be enough cash to pay them out. However, such a situation is highly unlikely. Every borrower repays his loan and pays interest on it. In principle, the difference between a loan and a deposit interest rate is a source of the banks' profit. Naturally, banks have to account for some creditors that will default and reflect it in the lending interest rate, or all the creditors who repay cover the costs of defaults. On top of it, the banks possess their own capital to provide security.
Fundamental to this deposit creation principle is the percentage of deposits that a bank lends out. The description above used a 100% loan-deposit ratio, meaning that all deposits are lent out. In traditional banking this ratio was always below 100%. For example, a conservative bank, lets called it Safe Bank, intended to lend out 86.5% of every deposit. For every $100 deposited, the bank lent out $86.5, while the remaining $13.50 was retained in the banks reserve with a small portion of it kept in the Central Bank.
Therefore, the same money is re-lent over and over again. If all depositors of all banks turned up at the same time there would not be enough cash to pay them out. However, such a situation is highly unlikely. Every borrower repays his loan and pays interest on it. In principle, the difference between a loan and a deposit interest rate is a source of the banks' profit. Naturally, banks have to account for some creditors that will default and reflect it in the lending interest rate, or all the creditors who repay cover the costs of defaults. On top of it, the banks possess their own capital to provide security.
Fundamental to this deposit creation principle is the percentage of deposits that a bank lends out. The description above used a 100% loan-deposit ratio, meaning that all deposits are lent out. In traditional banking this ratio was always below 100%. For example, a conservative bank, lets called it Safe Bank, intended to lend out 86.5% of every deposit. For every $100 deposited, the bank lent out $86.5, while the remaining $13.50 was retained in the banks reserve with a small portion of it kept in the Central Bank.
In practice, this ratio was the bank's control tool on deposit creation process, ensuring that the amount of money supplied to the market was limited. According to this principle, for every $1 deposited, a bank lends out $0.865. After only five cycles the amount is reduced to below $0.50 and after 32 cycles it is below 1 cent. If this process continued forever the total amount of money lent out of a dollar would be less than $6.41. With every cycle of deposit creation, a bank built up its reserves, ultimately collecting almost entire $1 for every $1 initial deposit. Added to capital repayments, interest payments on loans and the bank's own capital base this system ensured that that there was always enough money in the bank for every depositor.
For years banks worked as a confidence trick—the notional value of deposits and liabilities to be paid by the bank exceeded the value of money on the market. Since only a very small number of depositors demand cash withdrawals at the same time and almost all these paid-out deposits are deposited in a bank again quickly the banks ensured that every depositor got his money while circulating money in the economy and stimulating growth. The loan-deposit ratio was a self-regulating tool. As with every cycle it multiplies, the reduction of amounts created decreases exponentially and quickly. The faster the deposit creation cycles occur the faster the reduction progresses, thus accelerating with every cycle. The total "created" from the original $1 deposited in a bank is a finite, not more than $6.41 at the 86.5% loan-deposit ratio, backed by nearly $1 reserve. It is an inverted pyramid scheme starting from a fixed initial deposit base and quickly reducing through deposit creation cycle to zero.
Wednesday, July 22, 2009
Greed and 'good' GDP
Once again, greed has reared its ugly head after a hiatus of 18 months. Investors are tripping over themselves for a piece of the action in the world's second best performing stock market. Recently, about half a million new trading accounts are opened in China and the index went up to 3296, a level not seen since June 2008.
Many are optimistic that the country can attain the government-set goal of 8% gross domestic product (GDP) growth for the whole year. Due to the emphasis of the government on the GDP growth, officials are ignoring other aspects of development and environment protection. Funds and efforts have been mainly devoted to sectors that could have an immediate impact in boosting GDP growth.
Since China began to suffer a serious economic slowdown last year, there are lingering fears that massive unemployment will result in widespread social unrest. As such, Beijing gave up its five-year-old macro-economic control policy and set out on its political task of ensuring a 8% GDP growth for this year.
The quick recovery of GDP growth has aroused concern among some Chinese officials and economists that "GDP worship" is making a comeback. Retail investors should take statistics released by the China government with a huge pinch of salt. Some of the GDP figures are very 'good looking'. But they do not mean the growth of social wealth. On the contrary, they are instead achieved with a waste of social wealth. For example, a big bridge can be built and some GDP can be recorded. The bridge can be dismantled and rebuilt again. In this way, the GDP is multiplied twice but it is a huge waste of resources.
It can be expected that, once China successfully rides out the current crisis and resumes high-speed growth, the government may again have to impose macro-economic controls to correct the problems of imbalanced development and pollution. It seems that, unless China can discover a better mode of development, it will find itself difficult to break out of this vicious circle.
Many are optimistic that the country can attain the government-set goal of 8% gross domestic product (GDP) growth for the whole year. Due to the emphasis of the government on the GDP growth, officials are ignoring other aspects of development and environment protection. Funds and efforts have been mainly devoted to sectors that could have an immediate impact in boosting GDP growth.
Since China began to suffer a serious economic slowdown last year, there are lingering fears that massive unemployment will result in widespread social unrest. As such, Beijing gave up its five-year-old macro-economic control policy and set out on its political task of ensuring a 8% GDP growth for this year.
The quick recovery of GDP growth has aroused concern among some Chinese officials and economists that "GDP worship" is making a comeback. Retail investors should take statistics released by the China government with a huge pinch of salt. Some of the GDP figures are very 'good looking'. But they do not mean the growth of social wealth. On the contrary, they are instead achieved with a waste of social wealth. For example, a big bridge can be built and some GDP can be recorded. The bridge can be dismantled and rebuilt again. In this way, the GDP is multiplied twice but it is a huge waste of resources.
It can be expected that, once China successfully rides out the current crisis and resumes high-speed growth, the government may again have to impose macro-economic controls to correct the problems of imbalanced development and pollution. It seems that, unless China can discover a better mode of development, it will find itself difficult to break out of this vicious circle.
Tuesday, June 30, 2009
The surge in China's stock market & real estate prices
Investors are rightfully worried about the formation of asset bubble after the revelation that Chinese banks lent out US$670.9 billion, a full 91.6% of the country’s lending target for the year in the first quarter. Most are wondering if it was being directed into areas conducive to a long-term recovery. With such a huge sum of money flowing around, coupled with lax regulation and tracking by the banks, it is not difficult to guess which are the likely places the money will end up in. For answers, look no further than the China stock market and prices of real estate.
Not long ago, Beijing, worried that hot money flowing into unwanted sectors could cause bubbles rather than sustain economic growth, has warned mainland banks against using wealth management funds to directly invest in secondary markets of A shares, managed funds and pre-IPO companies. The warning come ahead of the revival of mainland initial public offerings and after an estimated 50 percent of bank lending has been poured into surging stock and real estate markets.
As such, the recent run-up in China stock market cannot be attributed to any improvement in economy or the companies’ fundamentals. Guilin Sanjin Pharmaceutical, the mainland's first IPO since September 2008, was oversubscribed 165 times and raised about 910.8 million yuan.
The sharp reduction in lending in April – to US$87 billion from US$278 billion in March – could be seen as a return to a degree of normalcy. Not as far as the People’s Bank of China is concerned. The central bank advocates a continued loose monetary policy on the grounds that a real economic recovery has yet to take hold. Increased liquidity may help in the short term, but it presents serious long-term risks. Many have highlighted a possible non-performing loan crisis down the road.
Not long ago, Beijing, worried that hot money flowing into unwanted sectors could cause bubbles rather than sustain economic growth, has warned mainland banks against using wealth management funds to directly invest in secondary markets of A shares, managed funds and pre-IPO companies. The warning come ahead of the revival of mainland initial public offerings and after an estimated 50 percent of bank lending has been poured into surging stock and real estate markets.
As such, the recent run-up in China stock market cannot be attributed to any improvement in economy or the companies’ fundamentals. Guilin Sanjin Pharmaceutical, the mainland's first IPO since September 2008, was oversubscribed 165 times and raised about 910.8 million yuan.
The sharp reduction in lending in April – to US$87 billion from US$278 billion in March – could be seen as a return to a degree of normalcy. Not as far as the People’s Bank of China is concerned. The central bank advocates a continued loose monetary policy on the grounds that a real economic recovery has yet to take hold. Increased liquidity may help in the short term, but it presents serious long-term risks. Many have highlighted a possible non-performing loan crisis down the road.
Sunday, June 21, 2009
No better way to lose - Jackpot machines
Last November, a 49-year-old man won the largest UK jackpot ever - playing an online slot machine. His take was £2,086,585. This, despite what we know to be a universal truth: slot machines (jackpot machines) are the worst bet of them all. They take much more than they give. The maths, the science and the psychology are all against you.
It's why the machines are the darlings of the casinos: they generate between 60 and 80% of all casino profit. According to figures collected by Las Vegas-based gaming expert Michael Bluejay, the return percentage makes the cost of playing fruit machines outrageously high in comparison to other forms of gaming. Games such as blackjack or baccarat give the casino a 1% edge over the player. A slot machine set at a relatively high 90% offers the casino a whopping 10% edge. According to Bluejay, a player on a one-dollar slot machine will on average lose $800 in a ten-hour session. This is money ground away by the machine as winnings are fed back into the machine. The same player over the same time period will lose only an average of a tenth of that ($79) playing a low-intensity game such as roulette. You still lose money at roulette, blackjack and baccarat, but you lose it more slowly; so you enjoy a longer night out.
People talk about strategies, like watching as punters pump in money then hovering like a vulture to move in if it doesn't pay out for him. But random number generators have no memory for the past or plan for the future. They do not make decisions. The machine's outcomes are determined by random numbers and every time you play a machine the odds are exactly the same. It's a myth that the slot machine will tighten up after it has hit the jackpot, or that it will be loose if it hasn't been paying. This is not true. It's like spinning a roulette wheel. Every time you play the odds are the same.
By controlling how often certain symbols that pay out money appear, manufacturers can mathematically control how much money the machine will pay out over its lifetime. Most manufacturers and players agree that machines set to pay out below 75% are far too stingy to maintain player interest, though they certainly exist.
Most people misunderstand the percentages, according to US expert and author Frank Legato. 'People think that because it's a 98% machine that it should pay back 98 cents in every dollar they gamble. No, several hundred people over a couple of months will have got back 98% of everything that was put in that machine.' He claims that even a 98% return machine will make $200 to $300 a day for a casino.
'It's about impression management. The high-frequency gambling, plus near misses, plus the lights and colours and sounds and noises... all contribute to a person staying on the machine. 'Why is there a metal payout tray? So that when coins fall into the tray, you hear the "kerchunk, kerchunk, kerchunk" and it emphasises the win. You go into a casino and there might be 1,000 machines but you'll hear the 20 that are paying out and the coins hitting a pan. What you don't hear are the 980 machines that are losing at the same time.'
It's why the machines are the darlings of the casinos: they generate between 60 and 80% of all casino profit. According to figures collected by Las Vegas-based gaming expert Michael Bluejay, the return percentage makes the cost of playing fruit machines outrageously high in comparison to other forms of gaming. Games such as blackjack or baccarat give the casino a 1% edge over the player. A slot machine set at a relatively high 90% offers the casino a whopping 10% edge. According to Bluejay, a player on a one-dollar slot machine will on average lose $800 in a ten-hour session. This is money ground away by the machine as winnings are fed back into the machine. The same player over the same time period will lose only an average of a tenth of that ($79) playing a low-intensity game such as roulette. You still lose money at roulette, blackjack and baccarat, but you lose it more slowly; so you enjoy a longer night out.
People talk about strategies, like watching as punters pump in money then hovering like a vulture to move in if it doesn't pay out for him. But random number generators have no memory for the past or plan for the future. They do not make decisions. The machine's outcomes are determined by random numbers and every time you play a machine the odds are exactly the same. It's a myth that the slot machine will tighten up after it has hit the jackpot, or that it will be loose if it hasn't been paying. This is not true. It's like spinning a roulette wheel. Every time you play the odds are the same.
By controlling how often certain symbols that pay out money appear, manufacturers can mathematically control how much money the machine will pay out over its lifetime. Most manufacturers and players agree that machines set to pay out below 75% are far too stingy to maintain player interest, though they certainly exist.
Most people misunderstand the percentages, according to US expert and author Frank Legato. 'People think that because it's a 98% machine that it should pay back 98 cents in every dollar they gamble. No, several hundred people over a couple of months will have got back 98% of everything that was put in that machine.' He claims that even a 98% return machine will make $200 to $300 a day for a casino.
'It's about impression management. The high-frequency gambling, plus near misses, plus the lights and colours and sounds and noises... all contribute to a person staying on the machine. 'Why is there a metal payout tray? So that when coins fall into the tray, you hear the "kerchunk, kerchunk, kerchunk" and it emphasises the win. You go into a casino and there might be 1,000 machines but you'll hear the 20 that are paying out and the coins hitting a pan. What you don't hear are the 980 machines that are losing at the same time.'
Saturday, June 6, 2009
Pay 83% premium for hope?
The Singapore stock market has gone spectacularly over the past few months. It would be foolhardy to say otherwise. Apparently, the sense of optimism is now so strong that some speculators are willing to pay a premium of 83% for hope.
Enporis Greenz Limited was formally known as Seksun Corporation Limited, which was principally involved in the manufacture of high-precision metal components and contract manufacturing for the electronics industry, with operations in Singapore, Malaysia, Indonesia, China and the USA. In October 2007, the Company announced the sale of substantially the whole of its assets and business undertakings to Supernova Holdings (Singapore) Pte. Ltd. Following the completion of the sale in February 2008, the Company remained listed on the SGX Mainboard and was renamed as Enporis Greenz Limited. Currently, it is a shell company with no operating business to speak of. The Company continues to explore and assess various investment options to seek viable opportunities in other areas of business.
According to the Listing Manual, the Singapore Exchange Securities Trading Limited (SGX-ST) may remove the Company from the Official List if it is unable to acquire a new business satisfying the requirements for a new listing within 12 months from the time it becomes a cash company. On 30th Jan 2009, the Company managed to obtain an extension of time of 6 months from 31 January 2009 to continue their search of a new business. In the event the Company does not obtain ETL or proceed with the RTO, the SGX-ST will not grant further extension and will proceed to delist the Company.
The time to the deadline of 31st July 2009 is less than 2 months away. It is highly unlikely that Enporis Greenz will be able to consummate a new business, considering the amount of paperwork and logistics to be done. The writing is clearly on the wall as one of the management staff, who is also a substantial shareholder, has steadily pared down his stake from 24.42% to 20.46% in the past few weeks.
In the event that the company is delisted, any cash remaining will be distributed to the shareholders. As of the last financial report, the maximum amount of cash backing per share is approximately $0.03. Enporis Greenz last traded at $0.055 on Friday 5th June, which represents a premium of 83%. In short, speculators are paying 2.5 cents more to punt that the company will successfully find a new business before end July.
Unfortunately, the margin facilities of financial institutions do not allow the shorting of Enporis Greenz's shares. A potential return of 45% in less than 2 months is eye-popping no matter which view one takes.
Enporis Greenz Limited was formally known as Seksun Corporation Limited, which was principally involved in the manufacture of high-precision metal components and contract manufacturing for the electronics industry, with operations in Singapore, Malaysia, Indonesia, China and the USA. In October 2007, the Company announced the sale of substantially the whole of its assets and business undertakings to Supernova Holdings (Singapore) Pte. Ltd. Following the completion of the sale in February 2008, the Company remained listed on the SGX Mainboard and was renamed as Enporis Greenz Limited. Currently, it is a shell company with no operating business to speak of. The Company continues to explore and assess various investment options to seek viable opportunities in other areas of business.
According to the Listing Manual, the Singapore Exchange Securities Trading Limited (SGX-ST) may remove the Company from the Official List if it is unable to acquire a new business satisfying the requirements for a new listing within 12 months from the time it becomes a cash company. On 30th Jan 2009, the Company managed to obtain an extension of time of 6 months from 31 January 2009 to continue their search of a new business. In the event the Company does not obtain ETL or proceed with the RTO, the SGX-ST will not grant further extension and will proceed to delist the Company.
The time to the deadline of 31st July 2009 is less than 2 months away. It is highly unlikely that Enporis Greenz will be able to consummate a new business, considering the amount of paperwork and logistics to be done. The writing is clearly on the wall as one of the management staff, who is also a substantial shareholder, has steadily pared down his stake from 24.42% to 20.46% in the past few weeks.
In the event that the company is delisted, any cash remaining will be distributed to the shareholders. As of the last financial report, the maximum amount of cash backing per share is approximately $0.03. Enporis Greenz last traded at $0.055 on Friday 5th June, which represents a premium of 83%. In short, speculators are paying 2.5 cents more to punt that the company will successfully find a new business before end July.
Unfortunately, the margin facilities of financial institutions do not allow the shorting of Enporis Greenz's shares. A potential return of 45% in less than 2 months is eye-popping no matter which view one takes.
Sunday, May 24, 2009
Current outlook of S-REITs
Real Estate Investment Trusts (REITs) in Singapore are struggling for the first time since CapitaMall Trust, the first S-REIT, was listed in July 2002. Before the US sub-prime crisis took its toll on the economy and property market in Singapore.
Like their Asian peers, S-REITs have taken a beating since mid 2008. S-REIT prices have fallen by an average of 61% between end 2007 and 2008. Their total market capitalisation has plunged by 42%. With a total debt of over S$4.9 billion maturing in 2009 and more than $3.2 billion in 2010, refinancing has become the most imminent challenge, exacerbated by increasing cost of financing under the tighter credit conditions. Deleveraging is also among the top priorities of S-REITs, leading to CapitaMall Trust (CMT)’s major rights issue in March 2009. On top of these problems, S-REITs are threatened by falling rental income in all sectors and asset devaluation in their portfolios.
The retail S-REITs are expected to be the least impacted by falling rents among other S-REITs in this downturn. During previous downturns, the retail sector was the most resilient with rents declining the least. S-REITs with more suburban malls in their portfolios would face the least drop in rental income as their resident catchment would still need to eat and drink and purchase basic goods and services. Average rents in suburban areas dropped only marginally by 1.6% in the first quarter of 2009 from the peak in the third quarter of 2008 while average rents fell more by 6.9% in Orchard/Scotts Road and 3.8% in Other City Areas during the same period. Suburban malls also have an advantage over malls in the central areas in terms of competition level as among the 2.9 million sq ft of new supply in 2009, only 9% will be in the suburban areas. With the opening of Tampines 1 Mall in early April 2009, there will be no other major new mall in the suburban areas for the rest of the year.
S-REITs in the office sector would face the most impact on rental income as office demand is more correlated to GDP performance than other property sectors. During the Asian financial crisis, rents of prime office space in Raffles Place dived 41.4% from the peak in the fourth quarter of 1996 while prime first-storey retail rents in Orchard/Scotts Road and first-storey industrial rents fell less by 28.6% and 34.5% respectively. Following the Internet bubble burst in 2001, prime office rents in Raffles Place plunged 45.6%, higher than the fall of 38.9% for first-storey industrial rents while rents of prime retail space in Orchard/Scotts Road remained stable. In this current downturn, prime office rents in Raffles Place had fallen by an average of 36.8% from the peak in the third quarter of 2008 by the first quarter of 2009.
With a higher percentage of supply in the pipeline compared with other sectors, the office sector is expected to take a longer time to bottom than the other sectors. Office occupier demand is expected to be negative in 2009 with excess space caused by consolidation of operations and job layoffs. At the same time, there will be a substantial amount of new space in the next five years, the bulk of which will be in 2009 and 2010. The annual average supply of 2.2 million sq ft during 2009 to 2013 is 47% higher than the past ten year’s average.
Like their Asian peers, S-REITs have taken a beating since mid 2008. S-REIT prices have fallen by an average of 61% between end 2007 and 2008. Their total market capitalisation has plunged by 42%. With a total debt of over S$4.9 billion maturing in 2009 and more than $3.2 billion in 2010, refinancing has become the most imminent challenge, exacerbated by increasing cost of financing under the tighter credit conditions. Deleveraging is also among the top priorities of S-REITs, leading to CapitaMall Trust (CMT)’s major rights issue in March 2009. On top of these problems, S-REITs are threatened by falling rental income in all sectors and asset devaluation in their portfolios.
The retail S-REITs are expected to be the least impacted by falling rents among other S-REITs in this downturn. During previous downturns, the retail sector was the most resilient with rents declining the least. S-REITs with more suburban malls in their portfolios would face the least drop in rental income as their resident catchment would still need to eat and drink and purchase basic goods and services. Average rents in suburban areas dropped only marginally by 1.6% in the first quarter of 2009 from the peak in the third quarter of 2008 while average rents fell more by 6.9% in Orchard/Scotts Road and 3.8% in Other City Areas during the same period. Suburban malls also have an advantage over malls in the central areas in terms of competition level as among the 2.9 million sq ft of new supply in 2009, only 9% will be in the suburban areas. With the opening of Tampines 1 Mall in early April 2009, there will be no other major new mall in the suburban areas for the rest of the year.
S-REITs in the office sector would face the most impact on rental income as office demand is more correlated to GDP performance than other property sectors. During the Asian financial crisis, rents of prime office space in Raffles Place dived 41.4% from the peak in the fourth quarter of 1996 while prime first-storey retail rents in Orchard/Scotts Road and first-storey industrial rents fell less by 28.6% and 34.5% respectively. Following the Internet bubble burst in 2001, prime office rents in Raffles Place plunged 45.6%, higher than the fall of 38.9% for first-storey industrial rents while rents of prime retail space in Orchard/Scotts Road remained stable. In this current downturn, prime office rents in Raffles Place had fallen by an average of 36.8% from the peak in the third quarter of 2008 by the first quarter of 2009.
With a higher percentage of supply in the pipeline compared with other sectors, the office sector is expected to take a longer time to bottom than the other sectors. Office occupier demand is expected to be negative in 2009 with excess space caused by consolidation of operations and job layoffs. At the same time, there will be a substantial amount of new space in the next five years, the bulk of which will be in 2009 and 2010. The annual average supply of 2.2 million sq ft during 2009 to 2013 is 47% higher than the past ten year’s average.
Sunday, May 10, 2009
Gauging the market through equity risk premium
Following the stock market rally since mid-March, STI has now breached the 200day MA level on the back of rising volume. I would say that the majority of stocks regardless of size, have rebounded off their lows. All technical signs are pointing towards a bullish uptrend.
In this posting, lets take a look at what the equity risk premium (ERP) is indicating for the Singapore market. To calculate the ERP, the average P/E of the index stocks are needed. Curently there are 30 component stocks which make up the STI. Based on their Y2008 earnings and the closing price on 8th May, the average P/E is found to be 10.9. Take note that 2 companies have got no P/E as they are loss-making.
The second input we need is the average 1-year fixed deposit rate of the 3 local banks. A quick search on the internet will provide the rates and the average i get is 0.55%. Using the average P/E and average FD rates, the ERP is found to be 8.63%.
One thing i would like to point out is that the ERP value is never static. It changes everyday due to the fluctuation of stock prices. Generally, a high ERP value (>2) indicates that the investor expects a higher return for putting his money into equities especially during periods of uncertainty. In order to make investing in equities worthwhile, the investor must be adquately compensated through earning higher returns. On the contary, it goes down when investors are bullish about the future prospects of equities.
The current ERP of the STI is relatively high as compared to one, two years ago. As such, the Singapore market is not considered to be expensive. However, bear in mind that trailing P/E is being used. A 20% drop in earnings this year for market is not far-fetched. As investors, we should never rely on a single metric to determine our buy or sell decisions. Even though the Singapore market is not expensive, whether it can still continue to go up is anyone's guess.
Sunday, April 26, 2009
Thinking from the business perspective
Collin Yeo said...
"uptrending share price tells you nothing on the business and industry outlook"So what does? Consistent CAGR, strong cashflow, earnings and dividends? What if these doesn't translate into uptrending share price? Would you still buy into the company?
Collin, the 4 points you mentioned above form only part of the metrics that an investor should take note of. The list is not exhaustive but it includes ROE, ROIC, WACC, trade receivables level and so on. These ratios and figures can be obtained easily from the annual reports. But wait, getting your hands on them is only half the work done. The other half of the effort should be focused on the business prospects and the management staff. Most investors neglect this portion as such things are not easily quantifiable and it can be very time consuming to dig for info.
What should investors look out for in terms of business prospects and outlook?
Basically reading up on the work of Michael E. Porter will give you a much better idea.
For example, lets take a look at the group of companies under electronic contract manufacturers.
There are quite a few of such companies listed in SGX. The laptops, computers and other electronic equipment companies are usually the customers of the electronic contract manufacturers. They exist to provide a value added service (example: assembly of components, modules and circuit boards) to their customers. Through these processes, they earn a small margin (5-10%) in return. Compare this to their customers' margin. After taking back the assembled parts, the customers will then put their own brand name (example: HP, Acer) on the product. For niche electronic products, the selling price can be a few times higher than the cost price. For low end products, the margin is around 20-30%.
On the whole, there isnt much differentiation among the electronic contract manufacturers. Each of them can adequately serve the needs of HP and Acer. All are providing a commodity service. Normally, at the end of the day, the contract manufacturer with the lowest cost will win. If one have to choose between investing in the prospects of brand owners and contract manufacturers, then the choice is quite clear.
Now back to your earlier question, "Would you still buy into the company if consistent CAGR, strong cashflow, earnings and dividends doesn't translate into uptrending share price?"
There is no definite answer as one has to look into the circumstances how the strong earnings and cashflow are achieved. There will be more reason to do some research if such positive news does not translate into a higher share price. What does the public know that you dont? But if I can find a company with great business prospects (competitive advantage), consistent CAGR, strong cashflow and earnings with anemic share price, i would be happy to snap it up.
Cheers!
"uptrending share price tells you nothing on the business and industry outlook"So what does? Consistent CAGR, strong cashflow, earnings and dividends? What if these doesn't translate into uptrending share price? Would you still buy into the company?
Collin, the 4 points you mentioned above form only part of the metrics that an investor should take note of. The list is not exhaustive but it includes ROE, ROIC, WACC, trade receivables level and so on. These ratios and figures can be obtained easily from the annual reports. But wait, getting your hands on them is only half the work done. The other half of the effort should be focused on the business prospects and the management staff. Most investors neglect this portion as such things are not easily quantifiable and it can be very time consuming to dig for info.
What should investors look out for in terms of business prospects and outlook?
Basically reading up on the work of Michael E. Porter will give you a much better idea.
For example, lets take a look at the group of companies under electronic contract manufacturers.
There are quite a few of such companies listed in SGX. The laptops, computers and other electronic equipment companies are usually the customers of the electronic contract manufacturers. They exist to provide a value added service (example: assembly of components, modules and circuit boards) to their customers. Through these processes, they earn a small margin (5-10%) in return. Compare this to their customers' margin. After taking back the assembled parts, the customers will then put their own brand name (example: HP, Acer) on the product. For niche electronic products, the selling price can be a few times higher than the cost price. For low end products, the margin is around 20-30%.
On the whole, there isnt much differentiation among the electronic contract manufacturers. Each of them can adequately serve the needs of HP and Acer. All are providing a commodity service. Normally, at the end of the day, the contract manufacturer with the lowest cost will win. If one have to choose between investing in the prospects of brand owners and contract manufacturers, then the choice is quite clear.
Now back to your earlier question, "Would you still buy into the company if consistent CAGR, strong cashflow, earnings and dividends doesn't translate into uptrending share price?"
There is no definite answer as one has to look into the circumstances how the strong earnings and cashflow are achieved. There will be more reason to do some research if such positive news does not translate into a higher share price. What does the public know that you dont? But if I can find a company with great business prospects (competitive advantage), consistent CAGR, strong cashflow and earnings with anemic share price, i would be happy to snap it up.
Cheers!
Thursday, April 16, 2009
Beware of interested party transaction
C&G used to be a stock market darling from 2006 to 2007. But this should no longer be the case going forward with their latest announcement.
http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_C00AF58E46FDF7164825759A0030BE44/$file/CG_Memo_of_Understanding_for_the_Proposed_Acquisition.pdf?openelement
Basically, C&G is signalling to its investors that there is not much light at the end of the tunnel for the textile industry. To me, textile is a commodity and there is no pricing power for companies in this industry. Of course, this does not mean that C&G will report a loss in the next few quarters but growing profits will become increasingly difficult as we move on. This is the main reason why i did not buy into C&G after looking through its report in 2006. Yes i missed out on the wonderful gains as the share price went up throughout 2007. But again, a uptrending share price tells you nothing on the business and industry outlook, which one ultimately has to take into consideration when buying shares.
The next thing investors should take note of is the interested party transaction involved for this latest acquisition. Mr. Lam Chik Tsan who is the Executive Chairman and Director of C&G, owns 60% of the issued and paid up share capital of Vendor. Accordingly, the Vendor would be deemed as an “associate” of Mr. Lam Chik Tsan and an “interested person” in the context of the Proposed Acquisition. It should also be noted that Mr. Cai Junyi who is the Company’s Executive Director and Chief Executive Officer, owns approximately 17.5% of the issued and paid-up share capital of the Vendor. The 2 of them in total owns 77.5% of the vendor.
Waste to energy may be the next big thing that the China government is trying hard to promote and rollout. From the environmental viewpoint, this is a positive move forward. But being constantly in the news does not gurantee profits, which is the main driver of share price. Also, one should question how did the independent valuers arrive at the RMB359 million figure. Till now there is only 1 operating waste incineration power plant in Jinjiang. The Target Group has also commenced preparations to construct waste incineration power plants in Huangshi and Hui’an and construction of these plants are expected to be completed by September 2010 and March 2010 respectively. In addition, memorandums of understanding have been signed with the relevant administrative authorities of the Anxi County in the Fujian province of PRC and Chonburi, Thailand. Sounds good. However, one should be aware that memorandums of understanding can be cancelled on short notice.
All this talk of a new promising waste to energy business venture caused me to recall a similar company listed in SGX. The name is China Enersave. Investors will do well to read up on the not-so-great developments thus far.
http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_C00AF58E46FDF7164825759A0030BE44/$file/CG_Memo_of_Understanding_for_the_Proposed_Acquisition.pdf?openelement
Basically, C&G is signalling to its investors that there is not much light at the end of the tunnel for the textile industry. To me, textile is a commodity and there is no pricing power for companies in this industry. Of course, this does not mean that C&G will report a loss in the next few quarters but growing profits will become increasingly difficult as we move on. This is the main reason why i did not buy into C&G after looking through its report in 2006. Yes i missed out on the wonderful gains as the share price went up throughout 2007. But again, a uptrending share price tells you nothing on the business and industry outlook, which one ultimately has to take into consideration when buying shares.
The next thing investors should take note of is the interested party transaction involved for this latest acquisition. Mr. Lam Chik Tsan who is the Executive Chairman and Director of C&G, owns 60% of the issued and paid up share capital of Vendor. Accordingly, the Vendor would be deemed as an “associate” of Mr. Lam Chik Tsan and an “interested person” in the context of the Proposed Acquisition. It should also be noted that Mr. Cai Junyi who is the Company’s Executive Director and Chief Executive Officer, owns approximately 17.5% of the issued and paid-up share capital of the Vendor. The 2 of them in total owns 77.5% of the vendor.
Waste to energy may be the next big thing that the China government is trying hard to promote and rollout. From the environmental viewpoint, this is a positive move forward. But being constantly in the news does not gurantee profits, which is the main driver of share price. Also, one should question how did the independent valuers arrive at the RMB359 million figure. Till now there is only 1 operating waste incineration power plant in Jinjiang. The Target Group has also commenced preparations to construct waste incineration power plants in Huangshi and Hui’an and construction of these plants are expected to be completed by September 2010 and March 2010 respectively. In addition, memorandums of understanding have been signed with the relevant administrative authorities of the Anxi County in the Fujian province of PRC and Chonburi, Thailand. Sounds good. However, one should be aware that memorandums of understanding can be cancelled on short notice.
All this talk of a new promising waste to energy business venture caused me to recall a similar company listed in SGX. The name is China Enersave. Investors will do well to read up on the not-so-great developments thus far.
Saturday, April 4, 2009
Permit obtained for more creative accounting
A country's laws, policies and regulations are set by government. However, such things can be changed in a short time if the concerned parties pushed their case hard enough. On 2nd April, the Financial Accounting Standards Board (FASB) in United States allowed banks more discretion in reporting the value of mortgage securities.
Good news? Surely it will be for banks. Perhaps in this coming quarter, we can expect lower impairment charges and write-down values. To me, this is a move of desperation. There is no more credibility in doing accounting. When the market is fine, nobody made noise as most were raking in copious amount of money. Now that the chips are down, banks want to have the freedom to set their own asset prices.
Valuation of assets and liabilities is a malleable matter. Long ago accountants grappled with the issue of which master they should serve, since their constituents can have conflicting interests. According to best practices, accountants should chosen the path of conservative reporting as it has shown to serve most constituents well. It may not be fair to all but life is not always fair.
Generally, a bank's assets are made up of the following:
1) Cash
2) Securities
3) Loans
4) Other assets (plant & equipment)
With the investment banks, there will be an extra category of asset based on derivatives and other financial instruments.
Loans represent the majority of a bank's assets. A bank can typically earn a higher interest rate on loans than on securities, roughly 6%-8%. You can find detailed information about the rates earned on loans and investments in the financial statements. Loans, however, come with risk. If the bank makes bad loans to consumers or businesses, the bank will take a hit when those loans aren't repaid. Because loans are a bank's bread and butter, it's critical to understand a bank's book of loans. Due to the worldwide boom in real estate in recent years, a large portion of loans are back by properties.
The biggest problem facing banks now, are that derivative asset values are virtually impossible to estimate, many loans are in forbearance if not default, and securities based upon mortgages are underwater and untradeable. Banks have a very difficult time marking to market because there is no market. There will be no simple solution in sight. Nevertheless, banks are posting huge losses as they need to mark down their assets every quarter according to the old accounting rules.
Will the new accounting rules set by FASB change anything?
Sadly no. The assets on the books of the banks are trash and they and the government know. That was why in the absence of buyers, the government has to step in to mop up the 'toxic assets' as stated in Geithner's plan. The main objective is to create a market for the underwater and untradeable assets. Even though the transacted price of the assets are low, the government just want to be able to buy time and ride out this downturn so that the assets need not be written-off. If things turn out well a few years down the road, the government may even book a profit at the exit point.
Marking asset to fair value will cause more pain in a downturn. But when asset prices move back up, profits can be recorded in the earnings statement. It is well-known that FASB made the rule change under great political pressure. However, such a hasty implementation may have huge unintended consequences. All parties involved could have inadvertently planted the seed for the next financial disaster/bubble.
Good news? Surely it will be for banks. Perhaps in this coming quarter, we can expect lower impairment charges and write-down values. To me, this is a move of desperation. There is no more credibility in doing accounting. When the market is fine, nobody made noise as most were raking in copious amount of money. Now that the chips are down, banks want to have the freedom to set their own asset prices.
Valuation of assets and liabilities is a malleable matter. Long ago accountants grappled with the issue of which master they should serve, since their constituents can have conflicting interests. According to best practices, accountants should chosen the path of conservative reporting as it has shown to serve most constituents well. It may not be fair to all but life is not always fair.
Generally, a bank's assets are made up of the following:
1) Cash
2) Securities
3) Loans
4) Other assets (plant & equipment)
With the investment banks, there will be an extra category of asset based on derivatives and other financial instruments.
Loans represent the majority of a bank's assets. A bank can typically earn a higher interest rate on loans than on securities, roughly 6%-8%. You can find detailed information about the rates earned on loans and investments in the financial statements. Loans, however, come with risk. If the bank makes bad loans to consumers or businesses, the bank will take a hit when those loans aren't repaid. Because loans are a bank's bread and butter, it's critical to understand a bank's book of loans. Due to the worldwide boom in real estate in recent years, a large portion of loans are back by properties.
The biggest problem facing banks now, are that derivative asset values are virtually impossible to estimate, many loans are in forbearance if not default, and securities based upon mortgages are underwater and untradeable. Banks have a very difficult time marking to market because there is no market. There will be no simple solution in sight. Nevertheless, banks are posting huge losses as they need to mark down their assets every quarter according to the old accounting rules.
Will the new accounting rules set by FASB change anything?
Sadly no. The assets on the books of the banks are trash and they and the government know. That was why in the absence of buyers, the government has to step in to mop up the 'toxic assets' as stated in Geithner's plan. The main objective is to create a market for the underwater and untradeable assets. Even though the transacted price of the assets are low, the government just want to be able to buy time and ride out this downturn so that the assets need not be written-off. If things turn out well a few years down the road, the government may even book a profit at the exit point.
Marking asset to fair value will cause more pain in a downturn. But when asset prices move back up, profits can be recorded in the earnings statement. It is well-known that FASB made the rule change under great political pressure. However, such a hasty implementation may have huge unintended consequences. All parties involved could have inadvertently planted the seed for the next financial disaster/bubble.
Saturday, March 14, 2009
Iconic major shareholder holds the upper hand
On 11 March, major shareholder, Tong Jun Kian, announced a mandatory unconditional cash offer for all issued shares of Iconic Holdings (IHL) after having acquired an additional 10.21% stake from Akzo Nobel Coatings via a married deal, increasing his total shareholding interest, together with the relevant persons, in Iconic to 57.12%. The shares are being offered at $0.10, an approximate 20% discount to $0.125, the last transacted price on 9 March.
As of March, there are 111,806,820 shares in issue. Effectively, Mr Tong has valued the company at $11.18 million. For this takeover, he just need to pay $4.8 million for the 42.8% stake which he do not own. IHL is currently a shell company because it completed the sale of its surface coatings business to The Sherwin-Williams Company in July 2008. With the disposal, IHL does not have a core business. Its remaining operating business comprises principally the sale and distribution of adhesives and chemicals carried out by its subsidiary, Hernon (Asia) Pte Ltd. Based on the HY2008 Announcement, the IHL Group’s assets comprise substantially of cash as at 31 December 2008. In order to continue its listing status, IHL has 12 months from the disposal of its core business (which was on 31 July 2008) to acquire a new business.
Since the acquisition of a new business is unlikely to materialise by July 2009, Mr Tong has decided that he will buy over the whole company and delist it. Is this a good offer for the current shareholders? Based on its balance sheet for HY2008, IHL has a current asset of $23 million, of which $18.6 million is cold hard cash. Its liability is neligible. So, if we only take the cash into consideration, the value for each share should be about $0.16. Clearly this takeover offer greatly benefits Mr Tong, as he is trying to pay 62.5 cents for each dollar backing.
Despite the unattractiveness of this offer, shareholders do not have better choices as the daily trading volume of the shares is very low and it is time consuming to wait for the company to delist on its own after July 2009.
Thursday, March 5, 2009
Beauty China turns ugly duckling
To say that it has been a roller coaster ride for the shareholders of Beauty China (BC) in the past 2 days is a gross understatement. No retail investor could have been prepared for the extreme volatility that we have witnessed on BC’s share price. On the morning of 2nd March, BC called for a trading halt pending announcement. BC closed at $0.37 on the previous Friday (27th Feb). The much-awaited announcement that was made on Tuesday noon disclosed that the founder, Mr Wong, was in discussion with some parties regarding the sale of his 38.7% stake.
At first glance, it looks like good news for the shareholders as some parties are interested in acquiring a stake in BC, which was previously a market darling before this downturn. However, it occurred to me that assuming the party was to successfully take control of Mr Wong’s 38.7% stake, it would also need to make a general takeover offer for all shares it does not own at the similar price it paid. If the ultimate intention of the other party is to takeover the whole company, then it seems odd that only Mr Wong alone is in negotiations and not the whole board of directors.
My belief that there was something fishy behind this deal was further reinforced when there was no spike in the share price after the trading halt was lifted. Investors react negatively and the huge wave of selling caused the share price to close at $0.11. It was down 70.3% on just half day of trading. If there is a chart for the most spectacular collapse of share price in the shortest period of time, BC will definitely rank on top. After the market close, BC came out to announce that some of Mr Wong’s shares were sold due to margin call. With that announcement, we finally had a clearer picture what this was all about.
Currently, there is no rule that requires the disclosure of shares that are pledged. Seriously, the authorities should look into this issue and consider making the necessary changes to protect the minority shareholders. This is not the first time such thing has happened and it wont be the last time. A similar incident occurred in Jade Technologies last year.
At first glance, it looks like good news for the shareholders as some parties are interested in acquiring a stake in BC, which was previously a market darling before this downturn. However, it occurred to me that assuming the party was to successfully take control of Mr Wong’s 38.7% stake, it would also need to make a general takeover offer for all shares it does not own at the similar price it paid. If the ultimate intention of the other party is to takeover the whole company, then it seems odd that only Mr Wong alone is in negotiations and not the whole board of directors.
My belief that there was something fishy behind this deal was further reinforced when there was no spike in the share price after the trading halt was lifted. Investors react negatively and the huge wave of selling caused the share price to close at $0.11. It was down 70.3% on just half day of trading. If there is a chart for the most spectacular collapse of share price in the shortest period of time, BC will definitely rank on top. After the market close, BC came out to announce that some of Mr Wong’s shares were sold due to margin call. With that announcement, we finally had a clearer picture what this was all about.
Currently, there is no rule that requires the disclosure of shares that are pledged. Seriously, the authorities should look into this issue and consider making the necessary changes to protect the minority shareholders. This is not the first time such thing has happened and it wont be the last time. A similar incident occurred in Jade Technologies last year.
Monday, February 23, 2009
Important criteria met for Bright World takeover
This posting is to follow up on the latest development of Bright World. BW just announced its financial results for FY2008 last friday. As i have expected all along, they are able to meet the profit requirement of RMB18 million for Q4 2008. Pls refer to the links below for my earlier posting:
http://level13-analysis.blogspot.com/2008/10/sweeteners-for-bright-world-takeover.html
http://level13-analysis.blogspot.com/2008/09/my-view-on-bright-world-takeover-part-2.html
Having a profit after tax of at least 91% of what was achieved in FY2007, BW has successfully overcome a large hurdle in ensuring that the takeover by CHAC turns out to be a reality. Of course at this moment, nothing is firmed up yet. There are still pre-conditions to be fulfilled. The obstacle that everyone will focus on now will be the shareholders' meeting organised by CHAC. In that meeting, which will take place before 10th March, CHAC shareholders will vote on the takeover offer. The green light from the authorities on both sides should also be made known in March. Once all these have been passed and approved, the share price of BW should move up towards the $0.70 region.
http://level13-analysis.blogspot.com/2008/10/sweeteners-for-bright-world-takeover.html
http://level13-analysis.blogspot.com/2008/09/my-view-on-bright-world-takeover-part-2.html
Having a profit after tax of at least 91% of what was achieved in FY2007, BW has successfully overcome a large hurdle in ensuring that the takeover by CHAC turns out to be a reality. Of course at this moment, nothing is firmed up yet. There are still pre-conditions to be fulfilled. The obstacle that everyone will focus on now will be the shareholders' meeting organised by CHAC. In that meeting, which will take place before 10th March, CHAC shareholders will vote on the takeover offer. The green light from the authorities on both sides should also be made known in March. Once all these have been passed and approved, the share price of BW should move up towards the $0.70 region.
Tuesday, February 17, 2009
False illusion of China's stock market
China's benchmark stock index rose yesterday to a 5-month high on investor enthusiasm about added liquidity amid rising bank lending, shrugging off declines in other Asian markets on news of Japan's economic contraction. The benchmark Shanghai Composite Index climbed 3 percent, or 68.59 points, to 2,389.59, its highest close since August 29. The Shenzhen Composite Index added 1.9 percent to close at 763.3.
The rise was driven not by economic fundamentals but by a surge in bank lending, which has sent money flowing into the market, analysts said. The government says lending hit a new monthly high in January, driven by a massive stimulus plan. "The economic fundamentals are not strong enough to support the market's rise," said Zhang Xiang, an analyst for Guodu Securities in Beijing. "The market is in an irrational state, which is not going to last long." The rise came despite a government announcement yesterday that foreign investment in China fell 32.7 percent in January from a year earlier. That was on top of last week's news that January exports fell 17.5 percent.
The motive is correct but the end result will lead to another downtrend soon. China government's aim to relax bank lending is to help support the existing businesses and companies tide over this uncertain period. However, the funds are not directed to the parties which needed them the most. Instead, the money is being used to speculate in the stock markets. These speculators are likely to exit the market at the first sign of bad news. As such, the run-up over the past month is not sustainable.
The rise was driven not by economic fundamentals but by a surge in bank lending, which has sent money flowing into the market, analysts said. The government says lending hit a new monthly high in January, driven by a massive stimulus plan. "The economic fundamentals are not strong enough to support the market's rise," said Zhang Xiang, an analyst for Guodu Securities in Beijing. "The market is in an irrational state, which is not going to last long." The rise came despite a government announcement yesterday that foreign investment in China fell 32.7 percent in January from a year earlier. That was on top of last week's news that January exports fell 17.5 percent.
The motive is correct but the end result will lead to another downtrend soon. China government's aim to relax bank lending is to help support the existing businesses and companies tide over this uncertain period. However, the funds are not directed to the parties which needed them the most. Instead, the money is being used to speculate in the stock markets. These speculators are likely to exit the market at the first sign of bad news. As such, the run-up over the past month is not sustainable.
Sunday, February 8, 2009
Value destruction by Contel
I pity those investors who are vested in Contel since their IPO days (although i dont think the number is high). 1.5 years ago, i had a posting, in which i advised all investors to avoid Contel due to its constant and urgent need for capital. On top of that, free cash flow was non-existent.
http://level13-analysis.blogspot.com/2007/07/raising-capital-at-contel.html
Let me do a recap on the amount of money that Contel raised ever since it was listed and you can make up your mind if it was indeed a value destruction job.
In Dec 2005, Contel was listed at an IPO price of $0.22. It managed to raise $9.1 million. There were about 250.92 million shares outstanding. Thus, the market cap was around $55.2 million. At that time, the book value per share was $0.162.
On 7th June 2006, Contel announced a proposed issue of up to $50 million in principal value of non-interest bearing equity linked redeemable structured convertible notes due 2011 in ten equal tranches of principal value S$5 million each to Advance Opportunities Fund. Investors should head for the nearest exit when the news was released. In a report
http://www.sfc.hk/sfc/doc/EN/speeches/public/surveys/07/exchange_audit_report_070404.pdf by the Securities and Futures Commission on the 2005 work of the Stock Exchange Listing Division published in April 2007, the SFC said (para. 48, p.12):
"In the last few years, several companies issued a particular type of convertible note, now commonly referred to as "toxic convertibles"... In the absence of other factors, each conversion is likely to lead to a reduction of the issuer's share price and an increase in the number of shares into which the remaining notes can be converted, resulting (because of the falling share price) in a spiral of further dilution of existing shareholders and reduction in share prices. In the worst-case scenario, the notes are converted into shares at the par value and the convertible noteholders may end up holding almost all the company's shares."
In June 2007, after taking $26.5 million from Advance Opportunities Fund and seeing the outstanding number of shares balloon to 417.85 million, Contel terminated the subscription agreement of the convertible notes.
In July 2007, the company decided that it needed more funds and so set up an arrangement with ABN AMRO Bank relating to the issue of US$8 million (S$12 million) zero coupon convertible bonds due 2010.
In Dec 2008, Contel made a private placement of its shares and raked it another $2.167 million.
As of 30th Jan 2009, the number of shares outstanding is 486.6 million.
The downfall of Contel is complete with this announcement on 31st Jan 2009. http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_D44C1AC0FBF95ECC4825754F003F55A1/$file/Contel_Galaxy_Business_Disposal_Annc__finalised.pdf?openelement
From the period between Dec 2005 to Jan 2009, the total amount of cash that went into Contel was nearly $50 million. However, the amount of dividend it paid out was ZERO.
I rest my case.
http://level13-analysis.blogspot.com/2007/07/raising-capital-at-contel.html
Let me do a recap on the amount of money that Contel raised ever since it was listed and you can make up your mind if it was indeed a value destruction job.
In Dec 2005, Contel was listed at an IPO price of $0.22. It managed to raise $9.1 million. There were about 250.92 million shares outstanding. Thus, the market cap was around $55.2 million. At that time, the book value per share was $0.162.
On 7th June 2006, Contel announced a proposed issue of up to $50 million in principal value of non-interest bearing equity linked redeemable structured convertible notes due 2011 in ten equal tranches of principal value S$5 million each to Advance Opportunities Fund. Investors should head for the nearest exit when the news was released. In a report
http://www.sfc.hk/sfc/doc/EN/speeches/public/surveys/07/exchange_audit_report_070404.pdf by the Securities and Futures Commission on the 2005 work of the Stock Exchange Listing Division published in April 2007, the SFC said (para. 48, p.12):
"In the last few years, several companies issued a particular type of convertible note, now commonly referred to as "toxic convertibles"... In the absence of other factors, each conversion is likely to lead to a reduction of the issuer's share price and an increase in the number of shares into which the remaining notes can be converted, resulting (because of the falling share price) in a spiral of further dilution of existing shareholders and reduction in share prices. In the worst-case scenario, the notes are converted into shares at the par value and the convertible noteholders may end up holding almost all the company's shares."
In June 2007, after taking $26.5 million from Advance Opportunities Fund and seeing the outstanding number of shares balloon to 417.85 million, Contel terminated the subscription agreement of the convertible notes.
In July 2007, the company decided that it needed more funds and so set up an arrangement with ABN AMRO Bank relating to the issue of US$8 million (S$12 million) zero coupon convertible bonds due 2010.
In Dec 2008, Contel made a private placement of its shares and raked it another $2.167 million.
As of 30th Jan 2009, the number of shares outstanding is 486.6 million.
The downfall of Contel is complete with this announcement on 31st Jan 2009. http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_D44C1AC0FBF95ECC4825754F003F55A1/$file/Contel_Galaxy_Business_Disposal_Annc__finalised.pdf?openelement
From the period between Dec 2005 to Jan 2009, the total amount of cash that went into Contel was nearly $50 million. However, the amount of dividend it paid out was ZERO.
I rest my case.
Friday, January 30, 2009
Price movement of DBS shares over the past month
The price of DBS has fluctuated greatly in the past 1 month or so. This increase in volatility has benefited short term traders. Fundamentally, there is no change in the business condition and environment that DBS is operating in. All said, these movements are not unexpected and can be anticipated if one is able to understand the effects of corporate actions and read the market well.
I am not suggesting that the share price is being manipulated. The point I want to make is that there are certain ‘invisible hands’ in the market (how else do you explain the buying of 100-200 lots at one go) and their buying and selling stirs up the volume and interest of this counter.
In the period straight after the rights announcement was made on 22 Dec 2008, the share price went down as the public reacts to the fact that DBS needed a capital boost and upon conversion, the rights will dilute future EPS and dividend payout.
After the initial fall, the share price went up under higher volume in the last week of Dec before the ex-rights date as the investors went in knowing that they will be entitled to the rights and they (the rights) can be sold in the open market in the event that the shareholders do not wish to hold them. The share price continue to firm in the first few days of Jan as investors are aware that it is in their interest for the price to remain high so that the rights can be disposed off for a substantial amount in the near future.
The fall in DBS share price start to accelerate on the 8th Jan, 2 days after the commencement of the rights trading. By then those who wanted to sell their rights would have sold and the incentive to keep a high share price is no longer present. More investors exited the counter as they took profit on the main shares that they bought just 1 week ago. As evident from the graph on the right, the turnover volume is the highest at this point in time.
In the period straight after the rights announcement was made on 22 Dec 2008, the share price went down as the public reacts to the fact that DBS needed a capital boost and upon conversion, the rights will dilute future EPS and dividend payout.
After the initial fall, the share price went up under higher volume in the last week of Dec before the ex-rights date as the investors went in knowing that they will be entitled to the rights and they (the rights) can be sold in the open market in the event that the shareholders do not wish to hold them. The share price continue to firm in the first few days of Jan as investors are aware that it is in their interest for the price to remain high so that the rights can be disposed off for a substantial amount in the near future.
The fall in DBS share price start to accelerate on the 8th Jan, 2 days after the commencement of the rights trading. By then those who wanted to sell their rights would have sold and the incentive to keep a high share price is no longer present. More investors exited the counter as they took profit on the main shares that they bought just 1 week ago. As evident from the graph on the right, the turnover volume is the highest at this point in time.
Immediately after Chinese New Year, the counter was in play again as the price went surging up based on the trades done and volume turnover. I believe this happened in anticipation of the new shares, which will be added on 2nd Feb. In light of the events that took place, I am confident that the price will go back down to the $8 range next week. My conclusion is based on the anchor price of $8.37, which is the theoretical price DBS should be trading in after the conversion of all the rights.
In short, the price movements that we have observed are typical of a blue-chip company with strong following and high liquidity, which decided to do a rights issue. I have no doubts that the share price of Capitaland will follow the same pattern should they issue renounceable rights too.
Thursday, January 22, 2009
Eight stages of life by Vittachi
Stage one: The Intern.
Arrives late. Explains that he got lost. Told to make coffee. Makes undrinkable black gunge. Sits in on meetings at which he realizes - with horror - that he knows nothing about anything being discussed. Spends most of the day feeling useless. Asks inane questions such as, "Please, sir, do we have to ask before we go to the toilet?" At midday, eats packed lunch from home.
Stage two: The Short-Contract Worker.
Arrives early. Waits outside until a staff member arrives with a key. Devotes all his energy to volunteering for assignments because he is desperate to get hired full-time.
At lunch, he eats sandwiches at his desk while doing everyone else's work. He leaves the office last, at 9pm, but still arrives the next morning before the rest of us.
Stage three: The New Hire.
Arrives slightly before other staff. First to take his seat at meetings. Talks constantly about "our vision." Starry eyed and enthusiastic. Does much of the work that gets done, although he is constantly interrupted by older staff wandering into his room to sit on his desk and spout rubbish. Leaves at 8pm.
Stage four: The Experienced Executive.
Arrives at exactly 9am, not a minute early or late. Has a lot of work to do, but spends most of his time transferring it to other people. Occasionally buys lunch at the wine bar for people at stages one, two and three, because he enjoys the way they worship him. Leaves at 7pm.
Stage five: The Senior Manager.
Strolls into the office at 9.40am. Cannot avoid work completely, but does the bare minimum. Lunches at private club, practicing his "vice president" look of worldliness and ennui, so as to be ready for the next stage. Sneaks out of the office on the dot of 6pm.
Stage six: Vice President.
Languidly ambles into the office around 11am. Finds work a total bore, so he gets people at stages one, two, three and four to do all of his work for him. Spends most of the day sitting on the desks of new hires to give them the benefits of his wisdom. Leaves the office at 5pm, pretending to be on the way to a client meeting.
Stage seven: Chief Executive Officer.
Comes into the office at noon, and then goes straight out again for a long lunch at his club, which takes him until 3pm. No longer even pretends to do any work. Leaves at 4pm for a quick round of golf.
Stage eight: Chairman.
Arrives late. Explains that he got lost because his memory is not what it was. Serves coffee from private percolator. Turns out to be undrinkable black gunge. Sits in on meetings at which he realizes - with horror - that he no longer knows anything about what is being discussed. Spends most of the day feeling terrifyingly useless. Asks inane questions all the time, such as, "Shall we open some overseas offices, or have we already done that sort of thing?" Before leaving at 3pm, he eats packed lunch from home, because he can't eat anything without bran.
Have a good laugh and a great chinese new year!
Arrives late. Explains that he got lost. Told to make coffee. Makes undrinkable black gunge. Sits in on meetings at which he realizes - with horror - that he knows nothing about anything being discussed. Spends most of the day feeling useless. Asks inane questions such as, "Please, sir, do we have to ask before we go to the toilet?" At midday, eats packed lunch from home.
Stage two: The Short-Contract Worker.
Arrives early. Waits outside until a staff member arrives with a key. Devotes all his energy to volunteering for assignments because he is desperate to get hired full-time.
At lunch, he eats sandwiches at his desk while doing everyone else's work. He leaves the office last, at 9pm, but still arrives the next morning before the rest of us.
Stage three: The New Hire.
Arrives slightly before other staff. First to take his seat at meetings. Talks constantly about "our vision." Starry eyed and enthusiastic. Does much of the work that gets done, although he is constantly interrupted by older staff wandering into his room to sit on his desk and spout rubbish. Leaves at 8pm.
Stage four: The Experienced Executive.
Arrives at exactly 9am, not a minute early or late. Has a lot of work to do, but spends most of his time transferring it to other people. Occasionally buys lunch at the wine bar for people at stages one, two and three, because he enjoys the way they worship him. Leaves at 7pm.
Stage five: The Senior Manager.
Strolls into the office at 9.40am. Cannot avoid work completely, but does the bare minimum. Lunches at private club, practicing his "vice president" look of worldliness and ennui, so as to be ready for the next stage. Sneaks out of the office on the dot of 6pm.
Stage six: Vice President.
Languidly ambles into the office around 11am. Finds work a total bore, so he gets people at stages one, two, three and four to do all of his work for him. Spends most of the day sitting on the desks of new hires to give them the benefits of his wisdom. Leaves the office at 5pm, pretending to be on the way to a client meeting.
Stage seven: Chief Executive Officer.
Comes into the office at noon, and then goes straight out again for a long lunch at his club, which takes him until 3pm. No longer even pretends to do any work. Leaves at 4pm for a quick round of golf.
Stage eight: Chairman.
Arrives late. Explains that he got lost because his memory is not what it was. Serves coffee from private percolator. Turns out to be undrinkable black gunge. Sits in on meetings at which he realizes - with horror - that he no longer knows anything about what is being discussed. Spends most of the day feeling terrifyingly useless. Asks inane questions all the time, such as, "Shall we open some overseas offices, or have we already done that sort of thing?" Before leaving at 3pm, he eats packed lunch from home, because he can't eat anything without bran.
Have a good laugh and a great chinese new year!
Monday, January 12, 2009
Hear no evil, read no evil
“Many stock commentators are saying that stocks are cheap, dividend yield is high, time to buy.”
“A value investor should not be obsessed about short term fluctuation. Long term value is more important. Now is the time to ferret out the wheat from the chaff.”
“If it is because of a short term bull market that commentators recommend/ investors buy stocks, it is speculation. Those commentators need to be fired and those investors need to be educated.”
The above are some comments on my earlier posting titled “Short term bull, long term bear”. All the things mentioned by stock commentators and stock articles found in various media channels (newspapers, websites, magazines) contain some truth in it. In reality, most people just accept things at face value. But as value investors, we must be discerning on what we buy. Some stock commentators are sell-side analyst themselves, and one must be prepared to take what they say with a pinch of salt, as they need to sound optimistic so that their clients will continue to trade.
Stocks are cheap. They are cheap on what basis? Cheap because P/E is low and dividend yield is high? If you are just using the above 2 metrics to conclude that stocks are cheap, then I would say you are missing the point. Metrics are not to be used in isolation. It can give you a distorted view of the truth. For example, many China textile stocks in SGX are trading at P/E of 2-3. On this basis alone, some would consider them cheap. However, the P/E will tell you nothing about the state of the textile industry in china, which is now on the brink of collapse. Many companies have folded (including China Printing and Dye) and things are not expected to return back to normal in this year.
What value investors should buy in times of panic are quality companies with a widely recognizable brand name, consistent positive cash flows, low debt and having a business model which serves a niche market. Textile companies in the commodities trade certainly do not fit into the above description. More often than not, the dividend yield that you see are based on historical payout, which indicates nothing on the amount and stability of future earnings of that particular company.
I agree that value investors should not be obsessed about short-term fluctuation. Value on individual companies can present itself at a different period of time. They need not appear in sync with the lowest point of the STI. It is not my intention to dwell too much on the daily ups and downs. The point I want to bring across is that I don’t see much catalyst for the stock market as a whole to go further up within the next 2 months. Do not forget that nearly half of the STI is made up of local banks. All will announce their lower earnings in February and we will find the January and Obama effects disappear quickly over the horizon. The upsurge, which we have observed in the past few months, can be classified as a bear rally. Bear rallies are not new occurrences. In the market downturn during the USA Great Depression, bear rallies also took place that sent the index up by 30-40%. There will be many false starts before the real bull run starts again.
For those who must invest, I would suggest dividing your money into four equal portions and start buying stocks once every 3 months from Q2 onwards. This dollar cost averaging method of purchase should be complete in Q1 next year. In this way, the cost price is spread out and the chances of suffering a loss after investing in a stock is lower.
“A value investor should not be obsessed about short term fluctuation. Long term value is more important. Now is the time to ferret out the wheat from the chaff.”
“If it is because of a short term bull market that commentators recommend/ investors buy stocks, it is speculation. Those commentators need to be fired and those investors need to be educated.”
The above are some comments on my earlier posting titled “Short term bull, long term bear”. All the things mentioned by stock commentators and stock articles found in various media channels (newspapers, websites, magazines) contain some truth in it. In reality, most people just accept things at face value. But as value investors, we must be discerning on what we buy. Some stock commentators are sell-side analyst themselves, and one must be prepared to take what they say with a pinch of salt, as they need to sound optimistic so that their clients will continue to trade.
Stocks are cheap. They are cheap on what basis? Cheap because P/E is low and dividend yield is high? If you are just using the above 2 metrics to conclude that stocks are cheap, then I would say you are missing the point. Metrics are not to be used in isolation. It can give you a distorted view of the truth. For example, many China textile stocks in SGX are trading at P/E of 2-3. On this basis alone, some would consider them cheap. However, the P/E will tell you nothing about the state of the textile industry in china, which is now on the brink of collapse. Many companies have folded (including China Printing and Dye) and things are not expected to return back to normal in this year.
What value investors should buy in times of panic are quality companies with a widely recognizable brand name, consistent positive cash flows, low debt and having a business model which serves a niche market. Textile companies in the commodities trade certainly do not fit into the above description. More often than not, the dividend yield that you see are based on historical payout, which indicates nothing on the amount and stability of future earnings of that particular company.
I agree that value investors should not be obsessed about short-term fluctuation. Value on individual companies can present itself at a different period of time. They need not appear in sync with the lowest point of the STI. It is not my intention to dwell too much on the daily ups and downs. The point I want to bring across is that I don’t see much catalyst for the stock market as a whole to go further up within the next 2 months. Do not forget that nearly half of the STI is made up of local banks. All will announce their lower earnings in February and we will find the January and Obama effects disappear quickly over the horizon. The upsurge, which we have observed in the past few months, can be classified as a bear rally. Bear rallies are not new occurrences. In the market downturn during the USA Great Depression, bear rallies also took place that sent the index up by 30-40%. There will be many false starts before the real bull run starts again.
For those who must invest, I would suggest dividing your money into four equal portions and start buying stocks once every 3 months from Q2 onwards. This dollar cost averaging method of purchase should be complete in Q1 next year. In this way, the cost price is spread out and the chances of suffering a loss after investing in a stock is lower.
Thursday, January 8, 2009
"Viagra" needed for porn industry
This piece of news is incredible. The porn industry is the last one you will expect to require a bailout. I very much doubt the government will help in this. If it does, very soon all the business leaders from various industries will be queuing up to ask for handouts from the government.
Two porn moguls including Hustler magazine founder Larry Flynt are seeking a five-billion-dollar bailout from Washington, arguing that the limp US economy has thrown cold water on the adult entertainment industry.
Flynt and "Girls Gone Wild" video series creator Joe Francis asked the newly convened 111th Congress "to rejuvenate the sexual appetite of America" in a bailout move similar to the one set aside for US auto manufacturers.
"Congress seems willing to help shore up our nation's most important businesses, (and) we feel we deserve the same consideration," Francis said in a statement.
"In difficult economic times, Americans turn to entertainment for relief. More and more, the kind of entertainment they turn to is adult entertainment."
The pair were quick to admit that "the 13-billion-dollar industry is in no fear of collapse, but why take chances?"
Francis, recently imprisoned for nearly a year on a prostitution-related charge after pleading no contest in a plea bargain, cited industry figures that show adult DVD sales and rentals decreasing 22 percent in 2008, as people turn to the Internet for adult entertainment.
"With all this economic misery and people losing all that money, sex is the farthest thing from their mind," Flynt said.
"It's time for Congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly."
Flynt said people were "too depressed to be sexually active."
"This is very unhealthy as a nation. Americans can do without cars and such, but they cannot do without sex."
Two porn moguls including Hustler magazine founder Larry Flynt are seeking a five-billion-dollar bailout from Washington, arguing that the limp US economy has thrown cold water on the adult entertainment industry.
Flynt and "Girls Gone Wild" video series creator Joe Francis asked the newly convened 111th Congress "to rejuvenate the sexual appetite of America" in a bailout move similar to the one set aside for US auto manufacturers.
"Congress seems willing to help shore up our nation's most important businesses, (and) we feel we deserve the same consideration," Francis said in a statement.
"In difficult economic times, Americans turn to entertainment for relief. More and more, the kind of entertainment they turn to is adult entertainment."
The pair were quick to admit that "the 13-billion-dollar industry is in no fear of collapse, but why take chances?"
Francis, recently imprisoned for nearly a year on a prostitution-related charge after pleading no contest in a plea bargain, cited industry figures that show adult DVD sales and rentals decreasing 22 percent in 2008, as people turn to the Internet for adult entertainment.
"With all this economic misery and people losing all that money, sex is the farthest thing from their mind," Flynt said.
"It's time for Congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly."
Flynt said people were "too depressed to be sexually active."
"This is very unhealthy as a nation. Americans can do without cars and such, but they cannot do without sex."
Sunday, January 4, 2009
Short term bull, long term bear
Last friday, the STI closed at 1829.71 points. Within 1 week, it went up 5.15% from around 1740 points. The picture on the right shows that the STI has breached the 50 day moving average ever since it went below that line in June 2008. This indicates a short term bullishness in the market right now. I expect the STI to go higher in the next few weeks and the reasons are as follows:
1) The Obama factor – This will be a change welcomed by all. Obama will take office in January 2009 and he has already assembled a group of very credible people to help him. The good news that most americans will be looking forward to is the stimulus package he will be announcing. I believed that the rescue package is not empty talk and it will most likely be the catalyst to kick start the economy which is under intensive care unit for the past months. What started off as a $350bn package has now ballooned to $600bn, and now its likely to top $1 trillion. Whether the $1 trillion is enough remains to be seen.
2) The fear factor has decreased - Most of the bad news have been announced and the peak of pessimism has passed. I would say the worst part was the period in Sept & Oct 08 when Lehman collapsed and AIG almost went under. The fear has somewhat subsided as governments around the world have signalled their willingness to inject cash to stimulate the economy and to bailout large companies in distress regardless of industry. The Chicago Board Options Exchange Volatility Index, reached a low of 39.61 on Wednesday, a level unseen since 2nd Oct 2008. The VIX, based on a number of index options, shows the market's expectations for volatility over a 30 day period.
Even though things are beginning to look brighter, I believe it is still too early to go long on stocks. Why?
1) Low volume in market - For those technical investors, its generally accepted that anything that goes up too quickly on low volume is not sustainable.
2) More bankruptcies and job cuts on the way - The IMF has predicted that 2009 will bring slower growth in emerging countries and negative growth in the UK, Europe and USA. Dont think that just because we did not see any news announcement, everything is well. Many small and medium companies are closing and employees laid off. This trend will continue for most part of 2009.
3) Lousy earnings outlook - Most companies will announce their financial report in Feb 2009. The earnings for fiscal year 2008 will be dragged down by the poor and difficult business conditions in the second half of the year. A lot of stocks are trading at a P/E level of below 10 in the SGX. If you think that the second half of 2008 is a bad dream for earnings, then be prepared for a nightmare in first half 2009. A lot of stocks are trading at a historical P/E level of below 10 in the SGX. However, when a 50% decrease of earnings take place, the P/E can easily double and the price no longer seem attractive.
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