Level13 Financial Ramblings

7 timeless pitfalls of investing

2010-03-28T12:24:00.000+08:00

Regardless of institutional or retail investors, chances are, they would have committed these sins at one point or another.

1) Placing forecasting at the very heart of the investment process.
An enormous amount of evidence suggests that investors are generally hopeless at forecasting. So using forecasts as an integral part of the investment process is like tying one hand behind your back before you start.

2) Investors seem to be obsessed with information.
Instead of focusing on a few important factors (such as valuations and earnings quality), many investors spend countless hours trying to become experts about almost everything. The evidence suggests that in general more information just makes us increasingly over-confident rather than better at making decisions.

3) The insistence of spending hours meeting company managements
We arent good at looking for information that will prove us to be wrong. So most of the time, these meetings are likely to be mutual love ins. Our ability to spot deception is also very poor, so we wont even spot who is lying.

4) Fourthly, many investors spend their time trying to ‘beat the gun’ as Keynes put it.
Effectively, everyone thinks they can get in at the bottom and out at the top. However, this seems to be remarkably hubristic.

5) Many investors seem to end up trying to perform on very short time horizons and overtrade as a consequence.
The average holding period for a stock on the NYSE is 11 months! This has nothing to do with investment, it is speculation, pure and simple.

6) We all appear to be hardwired to accept stories.
However, stories can be very misleading. Investors would be better served by looking at the facts, rather than getting sucked into a great (but often hollow) tale.

7) Many of the decisions taken by investors are the result of group interaction.
Unfortunately groups are far more a behavioural panacea. In general, they amplify rather
than alleviate the problems of decision making.

San Teh revisited

2009-11-13T17:21:00.001+08:00

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.

Dummies guide to crisis 2007-09 (Part 4 of 4)

2009-09-23T23:29:00.002+08:00

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.

Dummies guide to crisis 2007-09 (Part 3 of 4)

2009-09-13T20:09:00.002+08:00

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.

Showing at a cinema near you! (In the near future)

2009-09-08T11:04:00.005+08:00

New characters from the Disney-Marvel merger........ :-)

IRON MOUSE!

DONALD HULK!

SPIDER MOUSE!

Heads you win. Tails I lose!!!

2009-09-04T20:03:00.006+08:00

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.

Dummies guide to crisis 2007-09 (Part 2 of 4)

2009-08-29T13:57:00.003+08:00

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

Dummies guide to crisis 2007-09 (Part 1 of 4)

2009-08-25T22:07:00.002+08:00

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.

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.

Greed and 'good' GDP

2009-07-22T21:35:00.004+08:00

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.

The surge in China's stock market & real estate prices

2009-06-30T14:35:00.003+08:00

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.

No better way to lose - Jackpot machines

2009-06-21T12:42:00.002+08:00

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.'

Pay 83% premium for hope?

2009-06-06T20:18:00.003+08:00

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.

Current outlook of S-REITs

2009-05-24T15:30:00.002+08:00

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.

Gauging the market through equity risk premium

2009-05-10T19:42:00.004+08:00

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.

Thinking from the business perspective

2009-04-26T10:48:00.004+08:00

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!

Beware of interested party transaction

2009-04-16T21:26:00.003+08:00

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.

Permit obtained for more creative accounting

2009-04-04T11:43:00.007+08:00

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.

Iconic major shareholder holds the upper hand

2009-03-14T14:37:00.003+08:00

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.

Beauty China turns ugly duckling

2009-03-05T13:52:00.001+08:00

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.

Important criteria met for Bright World takeover

2009-02-23T10:31:00.002+08:00

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.

False illusion of China's stock market

2009-02-17T18:04:00.003+08:00

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.

Value destruction by Contel

2009-02-08T21:10:00.003+08:00

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.

Price movement of DBS shares over the past month

2009-01-30T14:19:00.003+08:00

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.

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.

Eight stages of life by Vittachi

2009-01-22T09:24:00.002+08:00

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!

Hear no evil, read no evil

2009-01-12T13:49:00.001+08:00

“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.

"Viagra" needed for porn industry

2009-01-08T16:50:00.002+08:00

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."

Short term bull, long term bear

2009-01-04T12:15:00.004+08:00

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.

Trade receiveables is important! (Suneast case)

2008-12-29T20:27:00.004+08:00

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

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

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

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

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

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

Wish all a very happy new year.

Desperate, Bold Step by DBS

2008-12-22T21:01:00.004+08:00

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

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

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

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

Have a merry christmas. Cheers!

Very much in the woods

2008-12-12T15:38:00.001+08:00

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

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

Have a great weekend.

Updates on Bright World takeover

2008-12-04T14:03:00.003+08:00

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

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

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

Eight years recap

2008-11-21T15:22:00.002+08:00

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

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

Macau - Glitter no more

2008-11-16T14:31:00.003+08:00

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

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

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

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

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

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

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

China's agricultural industry

2008-11-09T17:36:00.001+08:00

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

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

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

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

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

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

Stock challenge game

2008-11-04T19:57:00.002+08:00

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

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

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

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

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

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

Cheers!

Sweeteners for Bright World takeover

2008-10-30T23:52:00.002+08:00

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

Things that have been changed:

1) Valuation and purchase price of BW.

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

2) Triggers for the issuance of the additional shares

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

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

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

Comments:

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

Crude oil price is all rubbish!

2008-10-28T17:26:00.002+08:00

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

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

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

Everything is slippery and red

2008-10-24T16:26:00.001+08:00

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

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

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

Saving mini investors

2008-10-14T18:01:00.003+08:00

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

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

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

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

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

Rule 2:
Never forget rule 1.

Target Vs Reality

2008-10-06T14:55:00.002+08:00

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

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

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

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

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

Smile

2008-09-30T09:32:00.000+08:00

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

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

My view on Bright World takeover (Part 2)

2008-09-22T22:19:00.007+08:00

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

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

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

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

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

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

3) The Chinese authorities may not approve this takeover.

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

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

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

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

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

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

My view on Bright World takeover (Part 1)

2008-09-15T13:20:00.001+08:00

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

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

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

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

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

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

Value in textile industry? No way!

2008-09-02T22:31:00.004+08:00

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

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

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

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

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

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

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

Drawing inspiration

2008-08-25T11:14:00.001+08:00

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

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

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

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

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

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

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

The value of house work

2008-08-18T17:24:00.001+08:00

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

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

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

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

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

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

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

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

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

Countdown to recession

2008-08-16T18:15:00.003+08:00

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

Price Movement

2008-08-04T22:23:00.003+08:00

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

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

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

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

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

Temasek reduces Merrill Lynch stake - True or False

2008-07-25T12:46:00.003+08:00

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

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

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

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

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

RTO = Ready to offload

2008-07-12T14:39:00.006+08:00

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

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

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

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

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

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

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

Who's the real culprit?

2008-07-04T18:45:00.001+08:00

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

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

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

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

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

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

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

Competitive advantage period (CAP) --- Part 3

2008-06-30T23:08:00.002+08:00

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

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

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

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

BP world energy review

2008-06-23T21:43:00.002+08:00

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

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

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

For more, go to BP.com

Competitive advantage period (CAP) --- Part 2

2008-06-04T21:49:00.003+08:00

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

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

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

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

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

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

Competitive advantage period (CAP) --- Part 1

2008-05-19T13:22:00.002+08:00

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

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

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

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

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

Appraising San Teh

2008-05-04T14:18:00.003+08:00

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

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

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

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

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

Using EVA

2008-04-21T22:01:00.004+08:00

Economic Value Added (EVA) is a frequently used ratio by investors from developed market economies. The basic idea of this formula is based on the foundation that the main goal of a company is to maximize profit. However it does not mean book profit (the difference between revenues and costs) but economical profit.

The difference between economical and book profit is that economical profit is the difference between revenues and economical costs, which are book costs and opportunity costs. Opportunity costs are presented by the amount of money lost by not putting available sources (like capital, labor, etc.) to the best alternative use. This relation is possible to describe in following way:
Book profit = Revenues – Costs
Economical profit = Total revenues from capital – Costs of capital

A basic construction of EVA measure is clear from the following formula:
EVAt = NOPATt – Ct x WACCt
where NOPATt is Net Operating Profit After Tax,
Ct is long term capital,
WACC is Weighted Average Cost of Capital

If EVA > 0, then we can say a company is successful. This is the only case when wealth of shareholders increases because they gain more than what they put in originally. In case EVA = 0, a company produced just as much as it was invested and EVA less than 0 leads to destroying of shareholders' wealth.

Companies which can gain the highest level of profit (NOPAT) while using minimum "cheap” capital will experience positive results. It is possible when investments are consistently driven by criteria of net present value. Therefore EVA represents an interesting measure of judging the performance of companies.

What is Competitive Advantage?

2008-04-04T19:17:00.001+08:00

The true definition i got from the internet for competitive advantage is as follows:
An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers than its competition. Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.

There are two main types of competitive advantages: comparative advantage and differential advantage. Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales. A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers.

What are the types of advantages that help protect you from the competition? How do you get to the point where you have a wide economic moat as Buffett calls it? Well, one thing that isnt a source of a moat is technology because that can be duplicated and always will be. Technology is one type of advantage that is short-lived. There are others, such as a good management team or a catchy advertising campaign or a hot fashion trend. These things produce temporary advantages but they change over time, or can be duplicated by competitors.

An economic moat is a structural thing. If your competitors know your secret and yet still cant copy it, thats a structural advantage. Thats a moat. Frankly, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting. One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot and Lowes. Another source is the network affect, like eBay or Mastercard or Visa or American Express. A third would be intellectual property rights, such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here. A fourth and final type of moat would be high customer switching costs. Paychex and Microsoft are great examples of companies that benefit from high customer switching costs. These are the only four types of competitive advantages that are durable, because they are very difficult for competitors to duplicate.

Normally in the IPO prospectus of companies, we see the following mentioned as competitive strengths/advantages:
1) We are a leading manufacturer of XXXXXXXX.
From 2002 to 2004, we have been ranked first in terms of sales.

2) We have an established brand name.
We have built up an established brand name within the industry.

3) We are amongst the most technologically advanced manufacturers.
Our strength also lies in the technology we employ in our operations.

4) We are a manufacturer of quality products.
Several of our products have won awards for excellence and quality.

5) Our commitment and ongoing efforts to R&D.
Our management places a strong emphasis on R&D and our R&D initiatives are focused on
developing and introducing new products to cater to our customers’ needs.

6) We have an experienced and capable management team.
Our Executive Directors have approximately a total of 40 years’ experience.

Can you see the difference?

Acquiring a business - How not to do it (China Powerplus case)

2008-03-24T11:21:00.001+08:00

Investors need to evaluate motives for a merger in order to asses whether the newly formed entity is likely to create long-term value or not. There are numerous questions concerning motives for any merger that need to be asked and answered when evaluating the new company. Among others, investors need to know if a merger makes sense and what are the chances of the new company making it in the tough world of capital markets.

On 15 January 2008, it was announced that JGL shall sell and Powerplus shall buy 50% of the fully paid ordinary shares of China Steel Australia held by JGL. Powerplus is currently in the process of acquiring 142,450,000 China Steel Australia shares from JGL, representing a 46.25% stake in China Steel Australia at the Consideration (RMB 155,302,000).
The payment can potentially increase another RMB 11,419,000 if the audited FY2008 consolidated net profit after tax of China Steel Singapore Pte Ltd is greater or equal to
RMB 48,000,000. Currently, China Steel is listed on the Australia Stock Exchange.

In my point of view, this is a lousy acquisition. Below are the reasons:

1) The net profit for FY2008 will surely exceed RMB48 million due to the non-recurring and non-cash financial income of the convertible loan it is holding on its accounting books. For FY2008, this will amount to RMB41.7 million. For evidence, please read up the prospectus of China Steel.

2) Powerplus have grossly overpaid for the acquisition. Please refer to my earlier posting on “What is synergy?”. I will demonstrate with some calculations why this is so.

Powerplus has paid RMB155.3 million for a 46.25% stake. This means the valuation of China Steel is RMB335.78 million. This figure excludes the “extras” that they will pay if the profit exceed RMB48 million. Let’s look at what is the amount of premium they have paid in this deal. After the listing in Australia, the total book value of China steel is expected to be AUD$7.813 million (RMB50.39 million). Powerplus has paid an astonishing high 6.6 times book value for a 46.25% stake. Whatever synergy and cost benefits that one can reap from such an acquisition disappears with such a high purchase price.

3) Chances are that in total, Powerplus will pay RMB166.7 million. Assume that the true earnings (without exceptional items) for FY2008 is RMB38 million. For that, Powerplus is able to claim RMB17.6 million by virtual of its shareholdings. This translates to a return of 10.5%. This kind of investment hardly inspires any confidence considering the ROE of Powerplus for FY2007 is 15.5%. If we take out the cash component, the adjusted ROE is an excellent 35.5%.

4) Shares in JGL is owned by Dr Lim Seck Yeow’s wife and son (Mdm Tan Geok Bee & Mr Hung Lim). Conflict of interest is present. Enough said.

5) Potential dilution of Powerplus’s stake as China Steel seek to raise funds for the new plant in year 2009.

6) Convertible loan agreement with an individual called Zhang Guangxia. He may get in the region of 130 million shares. Potential stake dilution.

The whole deal smacks of bootstrapping. When a company’s earnings increase as a result of the merger transaction and not due to the allegedly created economic benefit from the merger, this is called the bootstrapping effect or bootstrapping earnings.

Below are some of the factors that will impact the earnings of China Steel in the near future:

A) Barriers of entry not exactly high. China Steel has developed its own internal know-how which has contributed to the success of that company. This know-how is not protected by patent or similar rights. There is a risk that competitors may copy this know-how or develop similar or better know-how and produce better or less extensive product that currently produced by China Steel. There is also a risk of employees leaving the China Steel and disclosing know-how to competitors.

B) Reliance on a single key customer and supplier and contract with Huaguang expires on 8 October 2010.

C) High raw material prices. Coke is one of the main raw materials used by China Steel in the production of Nickel Pig Iron. The ever rising coke prices have caused China Steel to get customers to supply their own coke. There is no guarantee that this arrangement will work out.

D) Taxes will be incurred from 2009 onwards.

Structured warrants - Love or hate them?

2008-03-07T13:31:00.001+08:00

A few days ago, the local newspaper reported that despite the current bearish sentiments in the Singapore stock market, financial institutions are still continuing to issue structured warrants on the exchange. The reasons these institutions give to encourage investors to buy them include leverage, hedging of risk...... blah, blah.

Make no mistake, the issuing of these structured warrants are cash minting machines for these financial institutions. For those that are unconvinced, pls talk to friends or relatives working in the structured warrants department of these institutions. I believe it will be interesting to find out if the top management of these companies make use of such warrants in their own investment plans. But that is another story for another day.

There are a few reasons why these structured warrants generate income. Firstly, they are being issued at a premium. Generally, one could use the black-scholes formula to calculate the warrant's fair price. So strictly speaking, if one buy the warrants on its listing day, one is overpaying for it. Would you pay $1.3 for a dollar note?

Secondly, the financial institution's risk are fully hedged using the dynamic delta hedging process. Of course there are variations of how this can be carried out. In short, the institution will go out on the open market to buy and sell the underlying share in order to maintain a delta neutral position. It doesn't matter whether the price of the underlying share goes up or down. Under ideal conditions, the income earned will be equal to the premiums charged. However, in reality, this amount can fluctuate too. But not to worry, at the end of the day, the institutions will still collect their cheque.

To sum up, issuing of structured warrants, which picked up over the past few years, are new methods of generating income for these institutions. Please open your big eyes to understand the big picture before putting in your hard-earned money.

Intelligence is over-rated, really!

2008-03-04T14:18:00.001+08:00

A short quiz:
What is the difference between investing, speculating and gambling?

Ans:
In investing, the probability of winning is >90%
In speculating, the probability of winning is 50%. You lose when brokerage fees are factored in.
In gambling, losing probability is >95%

Definition of investing:
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.

As in most countries, those people who call themselves “investors” are not investors at all. They are speculators. In the short run, particularly while capital markets are rapidly developing, speculators may be able to earn high returns by rapidly trading stocks without doing thorough analysis. But in the long run, you cannot earn sustainably high returns from mere “gut feelings.”
People like to speculate because they become addicted to their own belief that they are about to make money. And when they do make some money, they turn greedy as their actions have been justified by a positive result. In terms of brain chemistry, the anticipation of profits activates the dopamine system in the brain, flooding our neurons with a signal of excitement.

Greed is generated in the same regions of the brain that produce pleasure when we find food or shelter or love. These basic reward circuits are among the oldest systems in the human brain.
Geniuses have them, too. Brilliant people are better at generating great ideas than the rest, but they are no better at controlling their own emotions than you or I.

Luck has a great deal to do with it. Whenever a stock trades, the buyer thinks the seller is making a mistake. The seller thinks the buyer is mistaken. Only one of them can be right. After they both pay their dealing costs and any taxes on the transaction, neither may show any net profit for his pains. In the short run, almost anyone can be right a few times in a row, by luck alone. Even in the long run, luck can rule the day. It can take years, even decades, to determine whether an investor has genuine and repeatable skill or is just lucky. The danger comes when you believe you are skillful and, in fact, you turn out to be merely lucky.

If one do not put policies and procedures in place, in advance, to control one's emotions, one will never be able to resist the siren song of the markets when the markets go mad. Common sense and good judgment are vastly more valuable than intelligence.

No coffee for 3.5hrs

2008-02-28T19:31:00.001+08:00

Yesterday, Starbucks closed all its 7100 company-operated outlets across the US for 3.5hrs to retrain its 135K employees on the proper method of handling breverage tasks. A business analysts said it made sense to address training issues in one mass session because its shares are 50% lower since late 2006.

WHAT CRAP!!

Firstly, employees come and go. Training should be a continuous process. All employees should take the training seriously.
Secondly, just because the share price fell by 50% so we should have a mass training to clear all errors and discrepancy is similar to saying that we should cut cost and improve business efficiency after the share price performed poorly.

Personally, i will look at companies differently if they can
--- train its employees properly
--- cut cost when it should
--- look for ways to improve business efficiency
on a daily basis!!!!

Quote of the day:
Whenever you find yourself on the side of the majority, its time to pause and reflect (M-Twain)

Realization-of-value problem

2008-02-12T00:12:00.000+08:00

What kind of business do you want to own? Investors out there know that identifying what to invest in is a mind-challenging event. There is no better reward than seeing our money appreciate based on our own decisions and conviction. We are taught by the grandmasters (Buffett, Fisher) that one should only invest in businesses that have superior economics and selling for the right price. But what is a desirable purchase?

There is no business that is perpetually bad. Stock prices do not go down forever. With that in mind, most businesses were possible candidates for investment as long as they are selling at a bargain price. Through calculations, one could find out the intrinsic value of any business and if their stock price falls below that value, we should buy it to add into our portfolio. In this way, we wouldn’t be too concerned with the nature of the business we are buying. Simple isn’t it. A portfolio of such stocks can be built up based on the belief that someday the price will rise to or above the stock’s intrinsic value.

However, investors with this investment strategy will face the realization-of-value problem. In short, what do you do if the stocks you bought continue to sell below their intrinsic value for many years? The magnitude of returns depends on time. If the realization of value doesn’t occur, every year that one waits, the projected annual compounding rate of return diminishes. And if it takes longer than a few years, one could even end up with an annual compounding rate that may be less than what one could get from bonds or other financial instruments.

In reality, many companies were incapable of being analysed and their intrinsic value could not be determined. Quantitative reasoning, though reflective of the quantitative side of a business, does not fully articulate what is happening in the business. Stable earnings may allow one to place an intrinsic value on a business, but they will not always indicate the nature of the business’s underlying economics.

One solution to this problem would be to identify a near term catalyst which will move the stock price up north, and to insist on a bigger margin of safety before the purchase.

Enjoy the holidays

2008-02-06T23:21:00.000+08:00

Happy chinese new year to all. Hope you make good money this year.

Cheers!!!!!!

Myth on decoupling

2008-01-16T19:37:00.000+08:00

Recently there is much discussion on the decoupling theory between Asia and US markets. Unfortunately, it may all be a delusion. In fact, the powerful forces of globalisation make decoupling virtually impossible.

For an economy to technically decouple, it must satisfy three criteria. Firstly, it must have robust self-sustaining domestic demand - especially private consumption. Secondly, there has to be diversification in export goods and trade partners. Thirdly and more importantly, it must have policy autonomy - the ability to establish independent monetary, fiscal and currency policies.

Be aware that the slowing that has occurred in the US to date has really been in homebuilding, financial and automobile sector. These 3 sectors can be considered the main pillars of the US economy. The impending slowdown in the next three to six months will manifest in the consumer demand sector (evident from a miniscule private consumption 4Q07 forecast growth of 1%), which is America’s most global sector.

China is at the top of the external vulnerability chain. Its export sector, which rose to nearly 38% of GDP in 2006, surged at a 41% year-on-year rate in 1Q07.
A more critical point in the decoupling debate: the United States is China’s largest export market, accounting for 21% of exports. As the US economy slows, the biggest piece of China’s export dynamic is at risk.

The day will come when the rest of the world can escape the pull of the US$13.3 trillion US economy, especially when the BRIC nations mature. Until then, it is too soon to count the Americans out and the theory of decoupling will remain a case of hope over reality.

Forward looking in Y2008

2008-01-16T18:56:00.000+08:00

Everyone seems to be talking about recession these days. But as far as investing is concerned, the 'R' word just doesn't matter. Why? Let me explain. By definition, a recession can only be confirmed after 2 consecutive quarters in which "real" GDP (adjusted for inflation) declines. So normally, the public will only know that they are in a recession 6 months after it started. At that time, it will be too late to pull out your money from equities.

Basically, successful investing is about having foresight. Search for business that have a high probability of continuing their growth and cash flow regardless of economic conditions. If you are not convinced, look at the price chart (attached picture) of the company called Whole Food. Besides that, one should also be on the lookout for corporate actions that are potential catalysts which will propel the stock price higher. To achieve excellent returns in Y2008, strong stock-picking acumen is needed. You can no longer rely on a rising tide to lift all boats.

Saying no to SUNEAST

2007-12-30T22:29:00.000+08:00

A few months ago, i found some "advertisements" on the listed company SUNEAST on various online forums and decided to take a closer look on the company's financial reports and news announcements. In early november, I sent out an email to their CFO, with the aim of clearing some of my doubts after doing my own analysis. But unfortunately, till now, no reply has been forthcoming. So much for transparency and investor relations. Below is the entire content of my email.

Hi Ms Jennifer Shum,
As a retail investor, I am currently doing some analysis on Suneast before taking any investment position. While going through the company's financial reports and news announcements, I have the following questions. As such, I hope that you are able to address my doubts.

Q1) The 51% acquisition of NuXD was completed on Feb 2007 for HK$60 million. According to the 2 nd quarter financial results, the group has cash holding of HK$105 million as at 31st Dec 2006. Can you explain why Suneast choose not to use its cash holding for the acquisition but instead opt to undertake a fund raising exercise through the issuance of US$15 million worth of secured floating rate notes to Deutsche Bank and thus incurring an effective interest rate of 13.5% at inception?

Q2) In the 2007 annual report, I have extracted the following statement from the chairman's message from page 4: "The results of its efforts have been very encouraging. Cruiser is today one of the leading ready-to-drink brand in Taiwan. Similarly, since NuXD took over the sales and marketing of Coors Light in 2006, it has become one of the best selling beers in Taiwan's entertainment outlets." Can you provide the evidence from an independent market research firm to back up the above statement?

Q3) Can you justify the need to have a pre-payment of HK$179 million for advertising and promotion activities?

Q4) On page 72 of the annual report, the fair value of the exclusive distribution rights in NuXD is stated to be HK$120 million. Can you explain how Suneast arrived at this figure? Any independent valuation done?

Q5) Suneast obtained an unsecured bank loan of HK$35 million for FY07. As I see it, there is ample cash holding on the balance sheet. Can you justify the need for this bank loan?

Regards

With the above questions in mind, i would not recommend SUNEAST even though the share price is low. One big negative point on the company is that the management has decided to change its business focus just one year into its IPO. I welcome those vested to provide answers to the above questions and convince me why the shares are worth buying.

A proposal to Hotung

2007-12-18T10:44:00.000+08:00

I have been a shareholder of hotung for slightly more than a year. But for the past few years, the share price was consistently trading at huge discount to its net asset value. I believe the time is ripe for the management to address this problem. As such, i have sent out an email to Hotung last week outlining my proposal. Below is the entire content of the email.

Dear Management Team of Hotung Investment Holdings Limited,
As a current shareholder of Hotung which is listed in Singapore, I fully appreciate the efforts put in by the management team in the past few years to turn the company around to profitability. For many years the share price of Hotung has not reflected its true value and since fiscal year 2007 is drawing to a close, I would like to take this opportunity to recommend a proposal which the management can consider.

Proposal: To change the trading currency of Hotung shares from USD (United States Dollar) to SGD (Singapore Dollar).
Below are my reasons for the proposal:
1) The USD (United States Dollar) will be on a general downtrend in the foreseeable future due to the various economic problems and interest rate cuts.
2) The change in trading currency will enhance liquidity of the counter as it removes the necessity and cost of foreign exchange conversion. With easier settlement of trades, retail investors, in particular, will find it more convenient to trade in Hotung shares.
3) By denominating the shares in SGD (Singapore Dollar), the potential pool of institutional investors may expand as several funds and insurance companies in Singapore, which are permitted to invest only in SGD-denominated stocks, can now consider Hotung as an investment option.

In reality, there are many factors that caused Hotung's share price to stay low which we may not know of. However, for a start, the management can take a pro-active step to improve the conditions and reduce the uncertain variables on which the shares are traded. In my humble opinion, a change of trading currency is the way forward at this moment.

Yours sincerely

TAX CUTS EXPLAINED (Just for laughs)

2007-12-12T15:11:00.000+08:00

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Because you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80. The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man," but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

Share buybacks

2007-12-04T10:56:00.000+08:00

The following are some of the benefits of share buybacks.

1) They will allow Singapore companies to compete on more equal terms in international financial markets with foreign companies which are able to repurchase their shares.
2) Companies with excess cash can quickly and efficiently solve the problem by returning the excess funds to the shareholders.
3) A share repurchase by a listed company may have the effect of increasing the market price of the company's shares.
4) A share repurchase may promote a competitive price environment which will help to reduce uneconomic takeover activity by allowing a potential target company to quickly adjust to its debt equity ratio.
5) A share repurchase may allow a listed company to acquire small shareholdings, such as 'odd-lots', thus reducing the company's administrative overheads and allowing the relevant shareholders to sell without incurring material transaction costs.
6) A share repurchase may be useful in allowing companies to resolve disputes with dissenting members.
7) A share repurchase gives the company flexibility in setting or fine-tuning its capital structure.
Under Singapore law, no treasury stocks are allowed. Shares purchased or acquired are deemed cancelled and the rights and privileges attached to those cancelled shares expire.

Lastly, if the company is doing a share buyback, you can be sure that the company won’t go bankrupt in the next 6 months or so. It is against the law for an insolvent company to do a share buyback!

The Minsky Moment

2007-11-26T16:45:00.000+08:00

Hyman Minsky, who died more than a decade ago, spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval.

Today, with the markets in turmoil, his views are reverberating round the globe as economists and traders try to understand what's really happening. Indeed, the Minsky moment has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand.

At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived.

Little wonder why many analysts have agreed that we are in the midst of a Minsky moment, bordering on a Minsky meltdown. With more writedowns at the end of the year, be prepared for a nasty 2008.

Stocks & Discount rate

2007-11-20T21:56:00.000+08:00

Many people dismissed the Fed Reserve cut on discount rate lending to banks in the middle of August as a "last ditch symbolic gesture". At the end of that day, many stocks markets around the world went up. New research by US academics shows that the rise could have been predicted. Even though the study was done in the US markets, there is plently one can learn from.

This report, available from the CFA institute shows that the discount rate is a good indicator of the direction of monetary policy. When it changes direction, it signals a shift between the expansionary and restrictive monetary policy.

A strategy would then be to buy defensive stocks when the discount rate goes up. These are sectors (resources, utilities and consumer staples) not highly sensitive to the overall economy.
When there is a rate cut, the strategy would then be to buy cyclical stocks (financials, technology).

From 1973 to 2005, this crude strategy would have beaten the market by 3.78% a year. As such, the discount rate seems to be a powerful signal tool.

Agape love

2007-11-18T20:59:00.000+08:00

Probably the biggest reason the dog has become man's best friend is because we know that when it comes to love, a dog can always outdo us. The highest form of love, agape love, which is completely unconditional, is something that people often have to work at or grow into. Agape love seems to come naturally between parent and child, but it's more difficult between husband and wife, and harder still between friends. To love someone regardless of what wrongs they have done you is very difficult for humans.

A dog, however, is born with an endless capacity for agape love, and doesn't even have to work at it. You can be a complete grouch, ignore your dog, and refuse him your love. When you decide you're ready to be sociable again, your dog doesn't pay you back by ignoring you too. He's just happy you're there. More amazing still, is that the love that dogs and owners feel for each other lasts a lifetime. This is the ideal love humans strive for, but often fail at.

Learning to know somebody intimately is often the beginnings of dislike, sometimes even of contempt. However, dogs never lie about love. Among humans, love often does not survive a growing acquaintance, but in a dog, love seems to grow with acquaintance, to get stronger, deeper. Even when fully acquainted with all our weaknesses, our treachery, our unkindness, the dog seems to love strongly and this love is returned by most dog-loving humans. We, too, seem to love our dogs the more we get to know them. The bond grows between us and our dogs.

This is why we need dogs. They do something for us that rarely a human companion can do. No matter how much you mess up your life, or how much wrong you do, no matter how many mistakes you make or how often you make them, regardless of your looks, income or social standing, your dog never judges you. He always thinks you are wonderful and loves you with all his heart.

LMA - Caution needed

2007-11-08T13:20:00.000+08:00

The price of LMA went to a low of $0.35 recently after the profit guidance announcement. For those who bought at $0.35, well done. I suppose there will be a rebound after the initial shock. However, i would urge caution for investors who feel that it is a good buy at current price due to low P/E or low price to cash flow or other financial ratios.

The point i want to make is on the qualitative aspect of the company.
1) For those who bother to read up on the IPO prospectus again, you will find that the IPO is actually an exit strategy for many of its pre-IPO investors. Nearly 90% of the shares offered are from the selling vendors. Ask yourself why the pre-IPO investors want to cash out from a company holding patents of a widely used product?

2) Potential Conflicts of Interest.
The relationship between Venner, Mr. Gaines-Cooper and Mrs. Gaines-Cooper are described in "Management—Arrangements or Understandings.” In addition, a number of our Directors are directors of companies which supply or manufacture our Products. Mr. Gaines-Cooper, Mrs. Gaines-Cooper and Mr. Curtis-Bennett are directors of Venner Trading and FMT. Mr. Gaines-Cooper is a director of Venner Singapore. The info above is taken from the IPO prospectus but they still exist till today.

3) Low sustainable competitive advantage in LMA's patent.
The original master patent relating to the basic design of the LMA-Classic™ airway device and the later single-use version of it, the LMA-Unique™ airway device, expired in December 2002. However, LMA hold or have applied for patents for features in their products.They include the aperture bars in use on the LMA-Classic™, LMAProSeal™ and LMA-Flexible™ devices and the LMA-Fastrach™ handle. Our aperture bar patent protection does not extend to the United States. In my opinion, the patents are not valuable as the competitors can always substitute the features will something else. In short, expiration of patents + low technology product will cause an influx of competitors. Sad to say, the airway product is no longer exclusive. It is becoming a commodity and thus, usually the company with the lowest cost will survive.

4) Over the years, LMA has spent a sizeable amount of cash to buy innovative products, intellectual property rights and distribution companies in its bid to boost the earnings. Please look at my earlier posting to understand why we should generally avoid companies with continued capital investments.

Cheers!

Quotes on statistics

2007-11-05T16:45:00.000+08:00

Information is just signs and numbers, while knowledge involves their meaning. What we want is knowledge, but what we get is information. (Heinz R. Pagels)

There are two kinds of statistics, the kind you look up and the kind you make up. (Rex Todhunter Stout)

He uses statistics as a drunken man uses lampposts - for support rather than for illumination. (Andrew Lang)

Statistics, like veal pies, are good if you know the person that made them, and are sure of the ingredients. (Harvard President Lawrence Lowell)

Why you should not trade unit trust.

2007-10-27T20:48:00.000+08:00

The following conclusion was reached according to the Dalbar Study, which originated in 1995 in the United States, to determine the profitability of trading for the small investor of mutual funds (unit trusts).

An investor who bought an S&P 500 index fund would have earned 11.9% annually for the twenty years from 1986 through 2005. The average equity investor, however, earned a 3.9% annual return. Investors who hold their investments have the potential for greater success than those who try to “time” the market.

The Buy & Holders will love the results as it "proves" that buying and holding is better than trying to switch to so-called "hot" funds. However, one should not just buy and hold mindlessly.
There are a few reasons for the underperformance of the average equity investor:
1) Investors poured money into recent "hot" funds after hearing and seeing huge gains.
2) The fund managers are then unable to successfully invest the large cash inflows.
3) Investors selling away the funds after a few quarters of tepid performance.

To improve one's chances of coming out on top, my recommendation is to buy a low cost passive fund. Not to mention returns, a high cost fund will immediately burn a hole in your pocket.

What is synergy?

2007-10-21T22:53:00.000+08:00

Mergers and acquisitions are arguably the most popular and influential form of discretionary business investment. Synergy is a word often found in the press release of the reasons given by the acquirer when they bought over another company. Like a major R&D project or plant expansion, acquisitions are a capital budgeting decision. Stripped to the essentials, an acquisition is a purchase of assets and technologies. But usually, the acquirer often pay a premium over the stand alone market value of these assets and technologies. They pay for something called synergy.

The common definition of synergy is 2 + 2 = 5. However, the accurate definition should be increases in competitiveness and resulting cashflow beyond what the 2 companies are expected to accomplish independently. It can simply be modeled as:
NPV = synergy - premium

From the above formula, one can understand why the share price of the acquirer usually drops after the announcement. If a high premium was paid, the net present value of the assets and technologies gained will be negative if the expected synergy did not occur. According to a McKinsey study, more than 60% of the the acquisition programs were failures because the acquisition strategies did not earn a sufficient return on the funds invested. Companies that do not understand this fundamental fact risk falling into the synergy trap.

Quote of the day
The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. A too high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments.
------- Warren Buffett (1982 annual report)

What drives the stock market?(2)

2007-10-07T11:11:00.000+08:00

Behavioral-finance theory holds that markets might fail to reflect economic fundamentals under three conditions. When all three apply, the theory predicts that pricing biases in financial markets can be both significant and persistent.

Irrational behavior.
Investors behave irrationally when they don't correctly process all the available information while forming their expectations of a company's future performance. Studies have shown that investors often put too much weightage and focus on recent events and results, regardless of the level of significance. This is an error that leads them to overprice companies with strong recent performance. Others are excessively conservative and underprice stocks of companies that have released positive news. Similarly, stock prices of companies tend to get oversold after 1 or 2 quarters of weak financial earnings.

Systematic patterns of behavior.
Even if individual investors decided to buy or sell without consulting economic fundamentals, the impact on share prices would still be limited. Only when their irrational behavior is also systematic (that is, when large groups of investors share particular patterns of behavior) should persistent price deviations occur. Hence behavioral-finance theory argues that patterns of overconfidence, overreaction, and overrepresentation are common to many investors and that such groups can be large enough to prevent a company's share price from reflecting underlying economic fundamentals—at least for some stocks, some of the time.

Limits to arbitrage in financial markets.
When investors assume that a company's recent strong performance alone is an indication of future performance, they may start bidding for shares and drive up the price. Some investors might expect a company that surprises the market in one quarter to go on exceeding expectations. As long as enough other investors notice this myopic overpricing and respond by taking short positions, the share price will fall in line with its underlying indicators.
However, this sort of arbitrage doesn't always occur. In practice, the costs, complexity, and risks involved in setting up a short position can be too high for individual investors, especially in singapore market, where the terms and conditions do not favour the short-sellers.

What drives the stock market?(1)

2007-10-01T13:25:00.000+08:00

As stock markets around the world are into the bull mode, investors have been asking the themselves the above question. During the past few decades, the academic theory brought forward was that financial markets accurately reflect a stock's underlying value. But lately, the view that investors can fundamentally change a market's course through irrational decisions has been moving into the mainstream.

With the exuberance of the high-tech stock bubble and the crash of the late 1990s still fresh in investors' memories, adherents of the behaviorist school are finding it easier than ever to spread the belief that markets can be something less than efficient in immediately distilling new information and that investors, driven by emotion and greed, can indeed lead markets awry. Some behaviorists would even assert that stock markets lead lives of their own, detached from economic growth and business profitability. A number of finance scholars and practitioners have argued that stock markets are not efficient—that is, that they don't necessarily reflect economic fundamentals. According to this point of view, significant and lasting deviations from the intrinsic value of a company's share price occur in market valuations.

Most agreed that behavioral finance offers some valuable insights—chief among them the idea that markets are not always right, since rational investors can't always correct for mispricing by irrational ones. In fact, significant deviations from intrinsic value are rare, and markets usually revert rapidly to share prices commensurate with economic fundamentals. Therefore, investors and managers should continue to use the tried-and-true analysis of a company's discounted cash flow to make their valuation decisions.

Situations for outperformance

2007-09-25T11:09:00.000+08:00

Many variables, including economic cycles and degrees of market saturation, help a company to enter the top stratum and remain there. What follows is a closer look at four ways companies outperformed the market’s returns to investors. Even the most successful large companies aren’t likely to outperform over time if they don’t find themselves in one of these situations.

Perfecting the business model
Some companies held onto their top positions for at least a decade by continuing to perfect the business model that made them initially successful—and not going beyond it. This group includes a number of high-tech players, as well as retailers and pharmaceutical companies. For most, the core business was still in its high-growth phase thanks to one or more breakthrough products or services. Obviously, management plays a key role in guiding these businesses to innovate and to capture opportunities. But without the undercurrent of real growth in a segment, it becomes very challenging for even a strong management team to deliver outsized performance. Most companies come upon a big idea only once or twice in their entire existence. A global high-tech company, for example, has generated new ideas as its leading breakthrough products slowed down, but the new ones have had a much smaller impact on the overall business. Consequently, the company’s stock performance has lagged behind the market in the past five years. Very few companies have produced a steady stream of new and substantial growth opportunities by aggressively reshaping the business portfolio.

Extending the business model
A second group of companies (for example J&J, P&G), largely in consumer products and pharmaceuticals, outperformed the market by taking advantage of intangible assets such as brands or patents to increase their profit margins and returns on capital. But though owning strong intangible assets was a necessary condition for their performance, it was insufficient on its own. With that as their base, they differentiated themselves from competitors through strategic clarity and consistently strong execution.
As a result, these companies earned high and increasing returns on invested capital. The accumulation of strong brand capital enabled companies in this group to erect effective barriers to price-based competition—barriers that in turn helped them improve their margins constantly. This group of companies also appears to have grown, after adjusting for inflation, at a rate faster than the growth of GDP, probably by taking more market share from competitors.

Rising commodity prices
Many companies owe their sustained outperformance largely to increases in the price of whatever commodities they produce. The price of commodities, such as oil, steel, and commodity chemicals, in turn reflects a number of complex economic, political, and competitive factors beyond the control of most businesses. From the standpoint of fundamental performance, commodity producers do not necessarily stand out: their returns cover their cost of capital but not much more. Their margins remain steady, and their growth is on par with the expansion of real GDP. At the same time, their TRS performance can be volatile as commodity prices swing. The performance of companies in this group of commodity producers may differ widely as a result of the quality of their assets and, to a much lesser extent, of their operating strategies. Over a 40-year period, a majority of commodity players did not outperform the market.

Turning around large underperformers
A small group of companies managed to outperform the market over a decade by dramatically improving their hitherto poor operations. These companies, from diverse industries, regained their vigor after a prolonged period of suboptimal performance and margin erosion. Against the backdrop of low market expectations, their operating margins and returns on capital improved substantially—often under the leadership of new managers—which led to better-than-market returns. For this group, revenue and profit growth tended to be lackluster.

Big round china bubble and more

2007-09-23T14:00:00.000+08:00

For those contemplating to put in more money or start investing in China funds, please read up on the following link.
http://www.webb-site.com/articles/incredibubble.htm

"This time is different." How many times have you heard that? As an investor, you should be aware that those are the four most dangerous words.
Walk away and ignore it every time you hear this. This time is never different, at least not in the context of economic and stock market cycles.
Asset bubbles and debt crises are as old as international lending. But I don't think we are going to have to wait too long for the next one.
The bull market of the past few years are driven mainly by excess liquidity. Yes, rich-country interest rates are still stunningly low, even allowing for global disinflation. Craving higher returns, global-portfolio funds are increasingly washing up on the shores of distant emerging markets. With growing world demand once again soaking up emerging-market exports, and with low interest rates making debt finance easy, debtor countries have the best of both worlds. But it is not going to last.
Investors ought to realize that last year's 30-40% average return on emerging-market equities was an aberration. Such explosive returns will not be repeated on a yearly basis. As all prices get higher, squeezing out similar returns will only get exponentially tougher.

Why some companies belong to grade AAA.

2007-09-12T13:05:00.000+08:00

Fact: Only 9 out of 1,077 (less than 1%) large global companies outperformed their competitors on both revenue growth and profitability over a decade, a McKinsey study finds—confirming that such strong performance is rare.

Characteristics that made the 9 companies outperform:

First, the top nine performers strongly preferred organic growth: they made few acquisitions and divestitures when compared with other companies in their industries. Further, none of the deals these companies made were transformational; that is, no divestiture or acquisition had a value exceeding 30 percent of their market capitalization in the year before the deal.

Second, it was found that all nine companies had higher market-to-book ratios than their competitors did. (The M/B ratio is a measure of corporate performance that compares a company’s market cap with its book value.) In fact, these top performers logged M/B ratios more than two times higher than those of poor and average performers, as well as 25 percent or more higher than those of companies that excelled at either revenue growth or profitability, but not both. These findings indicate that the nine companies rely on intangible assets more than the rest do. Their ability to generate value from knowledge-intensive intangibles (such as copyrights, trade secrets, or strong brands) represents a good starting point for further exploration of their superior performance.

Companies to avoid

2007-09-02T13:13:00.000+08:00

People spend a lot of time discussing what companies to buy. But in the spirit of not losing money, it's equally worthwhile to understand the types of businesses that we investors should steer clear. At this moment, there are 5 main categories:

1. Businesses that rely on some fad or sexy growth stories and no cashflow.
Sometimes, share price of a company goes up because the management is touting a new technology or painting a rosy picture over their business prospects. Investors take in the stories and chase up the prices. In all cases, it will be wise for investors to dig for more information before commiting their money. Looking at the cashflow the company can generate is one of the trick. Personally, i will avoid if the company cannot have positive cashflow regardless how glowing the prospects are. These are growth stories without any substance. Also, after promising so much, if the financial results do not improve sufficiently, the share price will be dealt a crippling blow.

2. Businesses dependent on research
It's quite reasonable to believe that research can be a competitive advantage for certain companies. Nevertheless, there is an obvious downside to research. Often, innovative companies are required to do research simply to maintain their competitive position. And if the research dries up, the company suffers.
For instance, consider the plight of Creative. Early on, Creative has had impressive periods of earnings growth because of new breakthrough products and promising future developments. But since the bursting of the internet bubble, it has been on a downward spiral. The company has seen Mp3 player market share eroding in its ever present fight against Apple and earnings have suffered. Creative still produces fine products but the race to keep pace is costing shareholders money.
This is in stark contrast to a company like Diary Farm, which could develop nothing for a decade and still have a healthy business. While I don't think this is sufficient reason to sell off all your tech or biotech stocks, you can understand why certain legendary investors avoid such investments.

3. Debt-burdened companies
In general, one should avoid companies with a lot of debt. This makes sense. During the best of times, large amounts of debt mean that cash that could be put toward growing the business or rewarding shareholders is instead servicing the debt. In a crisis, debt greatly limits a company's options and can sometimes lead to bankruptcy.
A more subtle point is that great businesses throw off piles of cash. Great businesses generally don't need to use huge amounts of debt leverage to achieve an acceptable return for shareholders. So, if a company needs debt to achieve reasonable returns, it's less likely to be a great business.

4. Companies with questionable management
Management has incredible power as they often hold more than 50% of the stakes. If executives want to enrich themselves at the expense of shareholders, either directly or by misrepresenting the company's prospects, individual shareholders have almost no hope of stopping them. One should avoid companies where there's even a hint that management lacks integrity. Some clues to look for here include excessively optimistic press releases, overly generous compensation or options grants, and frequently blaming external circumstances for operational shortcomings.

5. Companies that require continued capital investment
Over the long term, shareholders make spectacular returns by buying businesses that are able to achieve extraordinary returns on capital. This leads to excess capital that the company can use to repurchase shares, pay a dividend to shareholders, or reinvest in further growth. Companies that constantly need to make additional capital investment to keep the business going are the antithesis of this ideal and the main beneficiaries will not be the shareholders.

On free lunch & active management

2007-08-16T19:20:00.000+08:00

Inherent in asset allocation theory is that the best performing asset classes varies from year to year and it is not easily predictable. Therefore having a mixture of asset classes is likely to meet your goals. A more fundamental justification for asset allocation is the notion that different asset classes offer non-correlated returns. As such, this diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. This is as close to a free lunch as you will get in the world of investing.

Some people think that active money management is a hoax or lure to quick riches, like gambling. IFA Harold Evensky sums it up pretty much when he says "to match the performance of a buy-and-hold (passive) portfolio, the active manager would have to be correct 70% of the time".
In short, he is saying that it's close to impossible for an active portfolio to beat a passive one. There are, however, some, exceptions. Consider Legg Mason's Bill Miller who beat the S&P Index for the last 15 years by posting a 16.2% return from 1990 to 2005. According to Bloomberg Magazine, this record puts Miller in the same league as Warren Buffett. The odds of finding this expert to manage your money are 1 in 2.5 million!

Level13 investor creed

2007-07-25T10:52:00.000+08:00

Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything merely on the authority of people who are above you. Do not believe in anything simply because it is found written in books. But after observation & analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it.

Just for laughs

2007-07-18T20:57:00.000+08:00

Classic Definitions & Cool Meanings:
1. Conference : The confusion of one man multiplied by the number present.
2. Compromise : The art of dividing a cake in such a way that everybody believes he got the biggest piece.
3. Conference Room : A place where everybody talks, nobody listens & everybody disagrees later on.
4. Classic : A book which people praise, but do not read.
5. Office : A place where you can relax after your strenuous home life.
6. Etc. : A sign to make others believe that you know more than you actually do.
7. Committee: Individuals who can do nothing individually and sit to decide that nothing can be done together.
8. Experience : The name men give to their mistakes.
9. Philosopher : A fool who torments himself during life, to be spoken of when dead.
10. Diplomat : A person who tells you to go to hell in such a way that you actually look forward to the trip.
11. Miser : A person who lives poor so that he can die rich.
12. Father : A banker provided by nature.
13. Criminal : A guy no different from the rest... except that he got caught.
14. Boss : Someone who is early when you are late and late when you are early.
15. Politician : One who shakes your hand before elections and your Confidence after.

Raising capital at Contel

2007-07-16T17:05:00.000+08:00

Contel Corporation Limited, a company listed in singapore. It is a ODM/OEM maker of digital media products, is driving its margin-focused business strategy on four fronts – revenue stream, product range, clientele, and geographical market reach.
Recently there are people who recommend me the stock due to its low P/E and high growth story.
However, I would urge caution at putting money into the company contel.
Below is the reason using the FY2006 annual report as reference.
It seems like contel is in urgent need of capital As shown in the annual report, it has US$6 million at the end of last year. To solve their problem, contel has issued convertible notes to Advance Opportunities Fund and collected S$26.5 million in the process. At first glance, it seems gd as contel does not need to pay interest on the notes. But it is clear that in the past months, Advance Opportunities Fund have converted all the notes into shares. So in short, they are actually raising funds through the issue of more new shares. Basically, the cost of capital is the highest for equities as compared to bank loans or bonds. An investor will expect 8-10% return in the long run for the shares.
My question is, why cant contel borrow S$26.5 million from the banks and pay the normal interest rate? With the conversion, there are now 417 million shares outstanding and the minority shareholders’ stakes are diluted.
However, the worst part is this:
Suppose Advance Opportunities Fund did not sell any of the shares after the conversion, it should be holding 167 million shares. With this amount of shares, it should be a substantial shareholder. However, I have yet to see any announcement of this nature!! This has led me to conclude that Advance Opportunities Fund has been selling away the shares that it converted in the open market so that it will always hold less than 5% stake at any one time. Seems that Advance Opportunities Fund is not too eager to hold on to the shares.
The historical P/E for the company at the current price of $0.24 is about 4. This value is quite low and i believe that is the part attractive to investors.
But one have to understand that for this low P/E story to hold, contel have to grow its bottomline by 20% or more. Below is a simple example why this is so.

In the FY2006 annual report, its revenues are US$178.9 million.
Assuming there is a revenue growth of 30% to US$232.57 million in FY2007 and the net profit margin remain unchanged, the estimated net profit will be US$13 million. With the current outstanding shares of 417 million, the estimated EPS is US$0.031 (S$0.0465) and the forward P/E is 5.16 at the current px of S$0.24. So I will say that the current price is a bargin ONLY IF it can achieve a net profit growth of 20% or more.
Besides, there is no free cash flow to speak about for the past 2 years and the profit margin is low.

Choosing funds

2007-06-28T13:17:00.000+08:00

Each day, we come across numerous fund/unit trust advertisements in the various print medium. It can get quite intimidating. What to look out for? Fortunately, there are a few pointers serious investors should take note of when searching for the next high performing fund.

1) Look for funds in operation for more than 5 years.
A fund should have been around long enough to invest in both good and bad markets. The longer the track record the better.

2) A long management tenure.
The manager should have a long track record at the same fund so that we are able to gauge his performance over time.

3) Low management fees (<1.5%).
Avoid funds with front- or back-end loads -- additional fees charged every time you buy or sell a share. Also we do not want to pay more for mediocre returns.

4) Relatively low fund turnover.
We want the manager to be investing, not trading. But remember, small-cap funds typically have higher turnover than large-cap funds.

5) Is the fund following its investment objective?
Check out the fund's top holdings. Are they consistent with its stated objective?

6) Check the fund's ability to beat the benchmark.
Again, that's the main reason why we put money in funds. Isnt it?
So as to achieve a better than average return.

7) Ideally the manager should also have a stake in the fund.
You would like them to eat their own cooking too, dont you?

Bond yield & bull run

2007-06-11T13:39:00.000+08:00

Equity investors will do well to take note of the movement & returns of other financial instruments. One good example is the bond market. It is one of the favourite destination for investors due to the following reasons:
1) consistent, stable long term returns
2) much less volatility (good for risk-averse investors)

The yield on the 4.5 percent security due May 2017 now trades at 5.18 percent. Last Thursday and Friday were the first time since August 2006 it had breached the key 5 percent threshold. This is one major indicator to start worrying about the present bull run.

How Bonds Affect Stocks
Why do bonds matter so much? Rising bond yields put pressure on the economy, by making all kinds of debt more expensive, including home mortgages and corporate loans. At the same time, higher yields make bonds more attractive to investors and thus make stocks relatively less attractive.

Just as important, if the debt markets run into difficulties, that could bring to a halt the rash of mergers that have been running at record levels and have been a key underpinning to the stock market. Higher rates drive up the costs of the heavy borrowing that leveraged-buyout specialists rely on to finance takeovers.

One factor in the bond-market woes: concern about inflation, or rising prices. Inflation eats away at the value of bonds, as interest payments that are a fixed number of dollars can buy fewer and fewer goods and services. Now, more economists are suggesting that inflation could be a growing problem, as global workers, even in China and India, begin pushing for higher wages. Foreign central banks also are pushing rates higher, amid strong economic growth around the globe.

In some ways, yields on U.S. bonds are simply keeping up with global bonds -- yields on European and Japanese bonds all have moved up in the last month. In the past, the fact that U.S. inflation is still running at a tame rate of about 2% might not have forced up U.S. bond yields. But the U.S. imports more than it exports and it has to borrow funds from abroad to pay for the difference. So yields on U.S. bonds must stay competitive with those abroad to keep attracting foreign investors.

The ECB also just recently raised rates thus putting a whole round of higher rates expectations which should start to work its way into global equities. Rates ARE headed higher in the UK, euro zone and Japan. The US will have to follow or see a major selldown in the dollar. Risk-reward ratio for equity investments is not that attractive now. Investors should stay away from expensive shares and companies with plenty of hot air (nice story but no substance).

Property dreamland in China? Think thrice!!!

2007-06-08T11:43:00.000+08:00

Nowdays, more reports are surfacing that real estate prices will continue to go up for the next 10 years. I cannot help but admire these writers for their power of extrapolation. This optimism is built on the demographic structure of the Chinese population for the next 10 years.

Building castles in the air
Here are reasons why we should ignore all this bullish talk and why the prices are not sustainable.
First, the current price of newly built houses and apartments in most cities is beyond the reach of the vast majority of citizens. Building costs are much lower than selling prices no matter how one calculates - that's not normal. Some economists estimate that the greatest part of the huge profits are swallowed by land authorities and developers.
Second, the real estate market in many regions is prone to bubbles because of intense speculation in the last few years. An economist from the National Development and Reform Commission, said this week the number of houses constructed over the past few years has actually surpassed demand. A large number of houses in many cities are left in the hands of developers or controlled by some speculative investors. One of the tricks developers play to bid-up housing prices is the so-called fictitious transaction - falsely reporting sales that never take place. Tomson Riviera, a luxury apartment block in Shanghai, which made a sensation in 2005 with its astonishing average price - 110,000 yuan (US$14,387) per square meter - will be investigated by the city government, along with other two projects, the Xinhua news agency reported on Wednesday.
Since the beginning of its "sales" in 2005, only three contracts were signed but all of them were canceled. There seem to have been no real transactions. A smokescreen to justify the price? The abnormally high price level of real estate in many cities in recent years cannot be explained by the great number of young people or the tension between supply and demand.
Why has it existed? One notable reason may be the notion that buying real estate is a good investment. Developers, media and some scholars tell people housing prices will soar. If people didn't believe this, there would be panic, the bubble would burst. In order to postpone that day, some people may deliberately be trying to mislead the public by talking about the age structure and the supply gap.

AUSSINO GROUP

2007-06-07T20:37:00.000+08:00

I would like to dedicate the following write-up to my friend who is moving to Australia soon with his wife. We have been friends for more than 10 years. Gosh.... think i will miss his laughter, jokes and passion for sports. Nevertheless, I sincerely wish the couple all the best in their future endeavors. Do keep in contact, for I will be seriously considering a trip to Down Under in the not too distant future.

Without futher delay, lets take a look at the following company.

BASIC INFORMATION
Company Name: Aussino Group Ltd
Stock Price: 0.355 (as at 7th June 07)
Currency: Singapore Dollar
Stock Exchange: SGX
Industry: Home Furnishing & fashion products

OVERVIEW
Aussino Group is a knowledge-based group involved in the design, product development, distribution and retailing of soft home fashion furnishings and fashion products. Their business strategy is to focus on the value-added front end (design & development) of the product life cycle and its distribution aspect. In this way, the need for constant capital expenditure on the manufacturing machinery is removed. Aussino's merchandise is available through more than 8,000 retail outlets worldwide. It has a wide range of in-house branded soft home furnishing products including "Royal Symphony", "Inspire", "Sino" and "Aussino" brands, which are targeted at the middle and middle-upper market. Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". All new AUSSINO and SINO collections are coordinated and manufactured in our network of 38 factories, coupled with products imported from Europe and U.S.A.

INVESTMENT MERITS
(i) Nature of business
As a designer and supplier of home furnishing products, the fortune of Aussino is closely tied to the growth in home sales around the world. For the past few years, we can see that property prices are on the uptrend in many parts of the world.
Home furnishings retailers benefit in several ways from the sale of new and existing homes. When existing homes change hands, remodeling and customization often follows, which can drive the sales of construction-related supplies to professionals, as well as to do-it-yourself homeowners. Additionally, as consumers furnish their residences, they often purchase new supplies.

(ii) Excellent long term earnings and profitability
For the last 5 years, Aussino’s revenue has grown by a CAGR of 22.7% and net profit before tax has also grown at a rate of 10.1%. The net profit growth (excluding other income) in FY2006 increases by 12.5% over FY2005. Similarly, its net profit margin grew from 7.9% in FY2005 to 8.6% in FY2006. The context in which the foregoing is achieved is commendable as the home furnishing industry is highly competitive.

(iii) Superb balance sheet and copious cash flows
The balance sheet is fundamentally strong. It has low debt and a net cash position (cash – total debt) of about $9million (3.7cents per share). In addition, Aussino has been able to manage its capital expenditure with internally generated cash flow. In fact, its cash flows have remained healthy despite the need to spend $3-4 million yearly for expansion purposes. For the record, the free cash flow generated in FY2006 was $12 million (FY2005: $5.8 million).

(iv) Consistent dividend policy
Its management has also been willing to fork out any excess cash to reward shareholders. Over the past 5 financial years, shareholders have been consistently rewarded with increasing dividend payments. The total amount of dividend paid-out so far was $15 million.

(v) Competent Management & Large Insider Ownership
Mr Anthony Lim has more than 15 years of experience in the retail, wholesale, export and import business. He founded the Group in 1991 and has identified business opportunities for the Group. Mr Anthony Lim expanded the Group's businesses to markets in U.S.A., Australia, Canada, China, Singapore and Malaysia. He continues to provide strategic direction and expertise to bring the Group forward to its next phase of expansion growth.

Currently, the insiders are holding more than 50% of the shares. As such, we can safely say that the interest of the top management and the minority shareholders are aligned.
So far over the years, there was no issuance of new shares and share options. This means that there is no dilution of shareholders’ stake. I take this to be a good sign that the company is able to move forward using its own resources and there is no excess compensation in the form of share options.

One foreign fund manager, Arisaig Partners (BVI) Limited has found this company to be attractive enough to take up a significant stake (14.27%) in it.

(vi) Diversification
In order to diversify its exposure beyond the home furnishing business, Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". For the last financial year, this business contributed 8.8% of the group’s revenue.
Aussino is also the exclusive distributor in China of a range of luxury ladies' and men's bags and accessories under the Calvin Klein, Gianfranco Ferre and Krizia international fashion labels.

VALUATION
Aussino is now trading at less than 8x historical earnings and it is even cheaper when the stock price and earnings are adjusted for cash (about 10.27% of its market capitalization is cash.). Over the last five FYs, Aussino’s EPS have grown by a CAGR of 12.3%.
Given its management excellent trade record in execution and in enhancing shareholder’s equity (FY06: ROE, ex cash is 34%, rising from 32.5%), Aussino is likely to continue on its growth path. A key contributor for its growth going forward would be its business in emerging markets like China, Middle East and Vietnam.

To supplement the above, a discounted cash flow analysis was performed. A conservative growth rate of 5% over the next ten years was modeled. The analysis also incorporated an estimated capital expenditure of $3.5 million every year. The discount rate used was 8% per year and the terminal value after 10 years is assumed to be zero. This yielded an intrinsic value of $0.45 per share; a margin of safety of 25% from current prices.
From the above calculations, we can conclude that Aussino is likely to be a growth stock trading at value prices, bearing in mind that its IPO price was $0.88.

RISKS
(i) Possible price competition
(ii) Increase in raw material prices
(ii) High risk when expanding to new markets

DRIVERS
• Attractive valuation and rock solid balance sheet
• Consistent top line and bottom line growth since listing
• Mutual fund managers are starting to take notice of the company
• Favorable future trends:
- The aging of the population, as well as recent concerns over geopolitical instability, has led consumers to curb travel to a certain extent and concentrate on their homes. As a result, consumers are spending more on outfitting their homes with new furniture, fixtures, and appliances. They are also remodeling entire rooms and adding amenities. This effect is known as the “nesting” trend that sociologists have seen over the last several years.
- The focus of both retailers and consumers is away from formal furnishings such as china and crystal, and toward more casual, soft lifestyle-oriented furnishings.

Opening speech

2007-06-07T20:28:00.000+08:00

My previous blog is gone. What the f%&$! Seems like they ran out of time trying to make it a viable business. Its ok. One door closes and another one opens. I welcome you to my new blog (value on level13) and a new beginning. In this blog, I will share some of my stock analysis. Please feel free to do the same in terms of feedback and comments. Ideas are to be shared..... :-)

CHEERS!