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!
Sunday, April 26, 2009
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.
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