Sunday, December 2, 2012

Olam vs. Muddy Waters

Thought I would use a quick look during the weekends to run through Muddy's 133 pager report on Olam and summarize it here. The post is merely a run through and does not imply the author is agreeing or attempting to distribute/disseminate the content of the Muddy Waters report.

Points are

  1. Capex/acquisition heavy with poor assets 
    • Crown flour mill (0.9% thin margin, cash burn)
  2. Capex attribution  
    • S$571M less investments that were annnounced
    • S$996.2M of capex were not attributable over the last 4 years
  3. Accounting Issues
    • 62.5% of non cash gains from negative good will from revaluations (SK Foods, tt Timber)
    • Rest from biological gains (I.e you dont sell the trees but change your estimate of its values)
    • Non cash accounting gains account for 37.9% of PAT from 2010 to 2012
  4. Financials 
    • Sept 2012, S$3.75B of debt due in 12 months despite S$1.38B in cash
    • Firm consumed S$2.5B in operating cash flowfrom FY2009 to 1Q2013
    • Significant margin account restatements, one over S$1B in 2008 
    • Significant impact of derivatives revaluation on profits (sensitivity up from S$3.8M to S$12M from 2011 to 2012 despite fall in value of derivatives)
    • Undisclosed account changes (page 35-41 of Muddys report)
    • Low rate of project and investment returns
    • Nigeria export incentives and grant income flows to Olam but is not sustainable
  5. Solvency and liquidity 
    • Refinancing quantum of S$4.6B over next 4Qs
    • FY 2012 has only 3 weeks of operating cash, over S$600M of cash out of S$1.1B are from withdrawals of broker margins. S$445.7M cash are from overdrafts at over 20%
    • Recent quarters saw a withdrawal of cash from margin accounts and mentioned no need to maintain the account as they net off positions daily
  6. War of words 
    • Mentioned Olam was defensive, Olam advised Muddy to go long and work with firm. Muddy declined in a abrasive manner
    • Muddy offered to pay for a debt rating on Olam
    • Olam 45 page rebuttal HERE
Some takeaways 
Most points were previously covered by others including CLSA previously and now further written in depth by Muddy which is well appreciated. 

Tuesday, November 20, 2012

Updates 4Q 2012

Sincere apologies that I have been largely away and unable to write more.

2012 largely has been fairly interesting, apart from the usual problems "still" plaguing in Europe (Spain and Greece) again. It is also interesting to note several large Japanese corporates are suffering from the stronger Yen, weakening domestic corporates and of course holding of the relevant companies' stock (ex. Sharp, Panasonic) especially the financial institutions. Link of news from Bloomberg HERE

More importantly, I was glad to know someone has similar findings to what I wrote about OLAM  previously HERE. Stock has also fallen some 12 % in 2012 YTD alone.

The single most interesting corporate action in Asia involving F&N also took a new twist with OUE coming into play with well known funds like Farallon coming into the bid which imho is playing a financing role. This highlights the scarcity of assets as well as the silent expansion of global capital largely resulting from quantitative easing which in turn results in the inflation of prices.

Other updates as follows:
  1. Roxy Pacific 
    • recent dividend policy of paying out min 50% of net operating profit of the hotel business which translates to about $6 to 10m per annum. Link HERE
    • Mgmt also upped their capital in the hotel business 
    • 3Q revenue declined vs 2011 and is above 2009 levels, mainly due to 2011 benefiting from a large revaluation gain of $9.7m from Kovan Centre 
    • Grand Mecure is now worth some $438 M
    • Cash of $240M, debt of $433M, NAV $230M (pre-adjusted). With the hotel its $612M
    • Property development has some $844M of sales to be recognised, with $112M recognised
    • Hotel occupancy came down from 94 to 92%, while Revpar is up about 6% to $200. Its the star performer for 9M2012 thus far
    • Good to note that since the last call, the firm is up some 79% from post split cost of $0.29 to $0.52 currently (i.e market value of $491M)
  2. Haw Par 
    • I still hold my ground that this is a rather solid firm which has been misunderstood to be a pharma/ leisure company but really in essence an investment holding co
    • Results are up significantly but do not take it to heart since 2011 9M results were marred by a exceptional loss of $13.4M
    • Firm has $2.3B in assets and only $0.1B in total liabilities. Out of $2.3B, $1.78B is in AFS financial assets (i.e stocks, bonds) and $0.14B in cash and liquid deposits.
    • Market values this firm as $1.4B currently
    • Lastly, it helps to note Mr. Wee (both Jr and Sr) are constantly buying back.
  3. World Precision 
    • Exposed to the slow down faced in China. However things are picking up from data signs of PMI and all. Will continue to update this shortly. 
  4. Koon 
    • Firm recently announced their plans to move into Malaysia property development supported by a rights issue. 
    • That in my opinion is not their niche and Im still trying to get my hands around it. 
    • The application date is 26 Nov 2012 so please take note.
  5. Nanyang Holdings 
    • No significant action on this front except that the recent HK government goals to revamp the industrial area in Kowloon which is helping to add value to many companies holding plots of land in that area, among which Nanyang is one of them. 

Tuesday, July 24, 2012

(APB) Asia Pacific Breweries / (F&N) Fraser & Neave

Currently theres a 2 way bidding war for APB as well as a related part-owner, F&N. Its interesting to think about how this will pan out eventually. Any expressions are solely my views and not to be an advice to buy or sell. 

A chart I have done up on the situation. 

Total APB shares: 258.213774m 
Total F&N shares: 1,160.119932m

Kindest Place
Private entity related to ThaiBev, owned by son in law of owner of ThaiBev.

ThaiBev / TCC (Thailand's leading brewer and beverage company) 
- Total of 7.128% (22% * 50%) + 8.6% = 15.728% of APB
- Holds US$108m of cash

Heineken (Dutch beverage company)
- 3rd largest globally after Anheuser-Busch InBev and Carlsberg/SABMiller
- JV with F&N to create APB (Tiger beer) 80 years ago
- Total of 32.4% (via JV) + 9.49% (direct) = 41.89% of APB 

Kirin (Japanese beverage co)
- Bought 14.97% of F&N stake from Temasek for US$953M/ S$1.3B in 2010
- Total of 10.024% (indirect) of APB

Event timeline:
1) Kirin bought a passive stake in F&N from Temasek in mid 2010

2) ThaiBev offers S$2.78B/ US$2.2B for 22% of F&N (S$8.88 per share, 12% premium to S$7.96 per share) while TCC will fork up S$0.9202B for 8.6% of APB (S$45 per share, 18% premium to S$38.10 per share price on 19 Jul 2012). 

3) Both stakes are acquired from OCBC, Great Eastern and Lee Rubber Group financed with bridge loan from HSBC, SCB and SMBC. Total S$3.7B paid for 15.728% of APB

4) Heineken came in, unhappy with the current state of the JV (especially on Kirin buying F&N from Temasek) and is buying APB whole for S$50 per share (S$ 5 more than ThaiBev's bid). This works out to be S$5.1B/US$ 4.1B for F&N's stake in APB and values S$7.5B/ US$6B for the entire APB stake that Heineken does not already own

5) Citigroup and Credit Suisse are advising Heineken, while HSBC and Morgan Stanley advised ThaiBev. F&N hired Goldman Sachs 

Why the acquisition?
Tiger beer are widely distributed in various SEA markets ex. Vietnam, Cambodia, Thailand and others like Mongolia, Papua New Guinea and the Solomon Islands. After China, beer consumption is the highest in Vietnam, of 37 vs. 75 liters per capita in the UK. APB is the market leader in Indonesia, Malaysia and Singapore. Furthermore, alcohol licenses in Muslim countries are restricted and such networks are highly valued. C.25% of 2011 global beer sales of US$618B came from Asia Pacific. 

From Heineken's 2011 annuals, Vietnam was its 2nd-largest market in Asia. Asia beer volume growth was also favorable, evident from Heineken's 6.2% growth in 2011 vs. 0.2% in Western Europe. Western Europe counts for 35% of Heineken's operating profit vs. 8% for AB InBev and 1% for SABMiller (quoted by Sanford Bernstein), and Asia under 7%. Heineken bought Mexico’s Femsa in 2010 for US$8B and has the smallest emerging market presence out of the top 3. ThaiBev on the other hand has a loss making beer division while its spirits business is thriving. 

Kirin acquired Brazil’s Schincariol for US$2.57B in August 2011. It also paid US$386M for Australia's Little World Beverages in June 2012. Kirin bought out the stake it did not already own in Australia’s Lion Nathan. in 2009 for US$2.5B, Australia’s then 2nd-biggest brewer by market share after Foster’s Group.

ThaiBev might risk a credit downgrade as its net D/E will hit 3.5x upon acquisition while Heineken's will be 2.2x. 

APB LTM EBITDA is S$754M and the latest Heineken bid (@S$50 per share) values the firm at S$12.9B. APB PBT have grown 24% CAGR to S$613M in 2011. Margins expanded form 15 -22% in the decade. F&N itself derives 38% of its NPAT from the beer business with the rest in property and printing. 

The average premium in 45 beer takeovers in the last 2 years is 25%. The median takeover multiple is 13x for 9 brewery takeovers (worth over US$1B) in the last 5 years. The deal is valued at 17x EBITDA, 21x to PBT and 28x to NPAT of S$ 456.8m (including non controlling interest). This hints at some pricey valuations. At this juncture, while Heineken's bid seems strategically reasonable, the same cannot be said if ThaiBev continues bidding. At FYE 2011, ThaiBev had BHT3.5B/ US$111.2M in cash, a fraction of Heineken's 827M/ US$1.03B.

Value of the stakes (@S$50 per share)
Kirin's 10.024% stake (indirect) in APB is worth S$1.294B/ U$0.9988B, a gain of 4.8% with US$/S$ of 1.2956 (24 July 2012), excluding other portion of F&N not valued. If using F&N's market value alone, its stake is now worth S$1.396B or gain of 13%. 

ThaiBev's stake will be worth 8.6% (direct APB stake)*S$12.91B = S$1.11B + 22%*S$8.04* 1160.119932M = S$3.162B. Compared with the cost they paid of S$3.7B, seems like the market has not caught up with the partial offer. Heineken urgently want this taken over and it seems to be at almost any costs.

What could happen? (and the probability)
  1. Heneiken successfully bids for APB - (high)
  2. ThaiBev bids higher for APB - (low to mid) since they have poorer financials but seem needy of a profitable brand and network. 
  3. ThaiBev bids higher for F&N - (mid to high) expressed interest in real estate and F&B
  4. Kirin bids higher - (low to mid) low stake and needs additional 15% for a general offer
  5. Kirin with another party (likely ThaiBev) to block bids - (low to mid) as Kirin holds c.10% and ThaiBev holds c.15% of APB
  6. Third party comes in with the higher bid - remote given the high valuations 
  7. Deal falls through, no one buys anything - almost 0 probability 
1 and 3 is high likelihood. 5 is also possible but to justify blocking Heineken for the sake of ThaiBev seems far fetched and only logical if ThaiBev bids up. but that would mean an illogical purchase on ThaiBev's part in terms of valuations. On the other hand, Heineken with over 40% will serve as a more effective block against any tie ups. 

My guess is that its probably 1 only happening. Kirin might actually consider bidding (i.e 4 is likely as well). They have a EBIT cover of 6x and D/E of 1.34x vs. Heineken's 4x and 1.95x. Further, Kirin has also seen a decline in revenues in the past year with operating margins of over 6% while peers are 12-18%. It might make sense for them to gear up and secure Asia Pacific. In order of probabilities from highest to lowest, its 1, 3, 4 and 5. F&N board has till 27 July to consider Heineken's proposal. 


-2 August 2012 (Update)

Coca Cola was quoted to explore bid for F&N beverage business, reportedly worth some S$3 bn.

- 6 August 2012 (Update)

F&N board accepted Heineken's offer and pending to table the offer to the rest of the shareholders. Various sources suggest a possibility of Thaibev and Kirin to go against the offer. Given their initial interest to purchase F&N for the breweries + beverage business, the probability of rejecting Heineken's offer is high, contrary to what the price is showing now.

APB went gradually from S$34.69 (16 Jul) to a high of S$52 (25 Jul). It has hovered around the S$50 price levels to currently S$48.85. F&N gapped up from S$6.82  (27 Jun) to S$8.40 (27 Jul). Currently it is at S$8.20. There is a small likelihood that recent F&N investors may face a loss in event the deal falls through. 

- 7 August 20212 (Update)

ThaiBev offers S$55 per share for APB shares held by F&N (7.3%). This is higher than Heineken's previous bid of S$50 per share. While Reuters quoted a ThaiBev spokesperson to not wish for Heineken to exit the JV, it seems like a plan to buttress their share purchase with backstop from Heineken. A point to note is that a good amount (c.30%) of APB's volumes are for Heineken and pulling out its license will result in a much weaker APB. Kirin was also quoted to mention they are more interested in F&N Berhad, the Malaysian entity to APB.

Vichate Tantiwanich from ThaiBev mentioned the firm is looking to increase stake in F&N as they currently do not have board seat and influence. Real estate seems to be a pull factor. Board control is necessary not only for a profitable business but also to have access to returns from trading the listed assets.  Notably Heineken and Carlsberg offered 23x EBITDA in a 9.5B pound tskeover of Scottish & Newcastle in 2008. 

Current ownership tally. 

-14 Aug 2012 (Update)

Thai Bev raised its F&N stake to 26.2%. Looks like the original idea was right. But it does seem they are overpaying greatly. F&N is likely to be trying to achieve control since entire buyout would force ThaiBev to overgear. Credit ratings will be down at least 2 notches.

- 27 Aug 2012 (Update)
F&N approved Heineken's US$6.35B offer for shares held by F&N and APB's minority shareholders, F&N's board also agreed not to engage in talks or accept other offers for its interests in APB. Heineken also attached a S$55.9M break fee on its offer and set a 15 Dec deadline (120 days). Heineken announced an offer of S$53 per share (S$5.4b/S$4.3B) for APB and additional S$0.163 for non-APB assets held by APIPL. Includes public market purchases.

F&N states that it will return S$4B (US$3.3B) to shareholders through capital reduction. F&N will cancel 1 share for every 3 shares held, with a cash distribution of S$8.50 for each share cancelled. The price is based on VWAP for shares from 16 to 24 Aug. This means for every 1000 shares (1 lot), one will receive S$2,805 in cash and 330 shares cancelled, and still own the same proportion of the company. As of 14 Aug, ThaiBev holds 26.4% of F&N and stand to receive cash distribution of S$1.056B. Kirin with 15% in F&N will get some S$600M. 

F&N is down 3.7% from its 52-week high of S$8.59, reached in the days before Heineken raised its offer for APB to S$5.4B or S$53 per share last week. Heineken's direct and deemed interest in APB has gone up to 84.24%. This includes the 2.68% stake Heineken bought on Tuesday for S$367M or S$53 a share. Temasek Holdings was said to be among the sellers (1.4%) in a married deal on 21 Aug 2012 at S$53 per share of APB.

Heineken said it would fund the deal with available cash of about €2B ($2.46B), its unused revolving credit facility of another €2B and a new bridge loan arranged by its financial advisers, Credit Suisse and Citi. 

- 10 Sept 2012 (Update) 

News state Thai Bev is seeking S$9B ($7.3B) share backed loan for possible F&N takeover. ThaiBev has already bought 29% of F&N for S$3.6B, funded partly by a S$2.8B loan, but does not have a seat on the F&N board. If ThaiBev's holding hits 30%, it would be obliged to bid for all of F&N.

- 13 Sept 2012 (Update) 

ThaiBev and TCC collectively owns 30.36% and offers to buy out entire F&N at S$ 8.88 per share, a US$7.2B cash offer. The consortium are advised by Morgan Stanley, DBS and UOB, offer is 2 weeks before shareholder vote on Heineken's offer for APB. The group mentioned they will not incur additional debt for the purchase. 

- 25 Sept 2012 (Update) 

Heineken completed purchase of 8.6% stake held by Kindest Place. ThaiBev and TCC also mentioned agree to vote for sale of F&N's stake in APB to Heineken.

- 28 Sept 2012 (Update) 

F&N's capital reduction plans fell through with 54.3% voted for, well below the 75% needed due to the Thai consortium voting against it. The other 94% of the F&N holders voted for the capital reduction. APB's S$7.9B/ US$ 6.4B sale to Heineken was formalised. Kirin is also expected to sell its 15% stake in F&N to the ThaiBev/TCC consortium. 

- 10 Oct 2012 (Update) 

F&N board stated ThaiBev's S$8.88 per share offer is not compelling but fair based on sum of parts valuation of S$8.3-11.22 per share. F&N directors intend not to tender unless acceptances reach 50% and offer becomes unconditional. ThaiBev and TCC collectively owns 33.5% of F&N. F&N on the other hand also rejected a US$1.14B offer for its hospitality business by Overseas Union Enterprise. ThaiBev closed up 5.1% and F&N up 0.6% to $8.93. The offer for F&N ends 29 Oct.

Sources: Wall Street Journal, Financial Times, Straits Times, Business Times and various public news sources. 

Sunday, May 13, 2012

Mid May Post

Recently managed to squeeze out time to resume on my reading/learning.

Some notables: 

"Opportunities don't come to people who don't take absolute risk, who don't put away two or three or four years of their life. They don't come to you with a wife and kids in the suburbs. You can't be successful unless you accumulate a little bit, and the only way to accumulate is to live on nothing."
- Richard John Siemens

"Investing can be very lonely, especially if you are a contrarian. You have to have a point of view, to have a belief and see something that other people don't. A lot of times you see something that other people don't, there's nothing there and there are other times when there's something there and the question is whether is it worth to invest your time and money in it.
- Eddie Lampert (Richard Rainwater Legacy)

My thoughts are:
So true yet so hard for people to accept logical approaches that goes against the grain of human psychology.

Tuesday, May 8, 2012

1Q 2012

Dear Readers,

Some long overdue updates on the portfolio. 
Due to the problem with Google spreadsheet, I had to remove the live portfolio from the blog so I guess I'll have to manually input the numbers and update the performance manually. 

In the backdrop, 2012 is looking to be rather interesting, yet again due to the macro issues similar to August of 2011. Greece defaulted as declared by ISDA with the haircut on the sovereign debt (debt swap) and Spain/Italy is wobbling uncontrollably while elections woes brings everyone back to reality. ("Hey where are all the equity bulls now?" ..They come and go in increasingly rapid pace). 

On the portfolio, some notable mentions are: 
  1. Koon - Still remains undervalued while management has taken efforts to diversify. Also wrote down some amount on their Vietnam port project. 
    • Announced dividends of S$ 0.05/sh ex 10 May 2012. 
  2. Roxy Pacific - Recently rallied on announcement of 1 for 2 stock bonus. The institutional analysts who once have this firm a hold/sell are all starting to recommend a buy. Valuation of the hotel is up to over S$ 410m while carried at S$70+m on their books. Revenue declined on slower property development but a bulk of their developments are over 90% pre-sold with over S$ 700+m of sales yet to be recognised. Firm market value stands at over S$$400m.
    • Gave dividend of S$ 0.02/sh - April 2012.
  3. Nanyang Holdings - Still a good 40-50% discount to firm value. Firm now owns 4% of SCSB bank. Occupancy rate of commercial buildings previously 80+% are now all over 90% which was a pleasant surprise. HK government also released more announcements for plans to convert Kowloon into a residential work-play hub which is positive to the properties the firm owns there. There was also news that the founder unfortunately has also passed on.
    • (Will update this position shortly)
    • Announced dividends of HKD 0.50/sh - March 2012
  4. AEI - Pending updates from new plant in China for automobile parts engineering. Operationally still weak but inventory and receivable levels are satisfactory. Gross profit declined on higher COGS as expected due to the Japan earthquake/Tsunamis and Thailand floods (Supplies hard disk components). The firm also extended the M2B loan of USD 2.5mm for a security of over USD 21m consisting of properties in Cambodia and stock of listed firm on JSX but the convertible loan is carried at 0 value on their books.Current market cap of S$31m, net cash of c.S$23.7m with S$6.2m of potential loans receivable. Will keep a close tab to determine if there's any cash burn and if its ideal to increase the size of this currently small position.
    • Announced dividends S$0.01/sh ex 4 May 2012. 
  5. World Precision - Recently increased marketing awareness and size/position of the company. 1Q Sales took a slight decline due to the tight operating environment in China with the slowdown in capital flows and decline in incentives for promoting infrastructure and automotive markets. Firm is one of the few rare China based firms to have a good operating track record and good cash dividends payout. Their recent article on "The Edge" magazine also reflect frustrations of the founder on their depressed valuations, suspect something may be in planning on the horizon for this company. Also notably, their balance sheet has deteriorated slightly, will keep a close tab on this firm.  
    • Announced dividends of CNY 0.135/sh ex 9 May 2012. 
  6. Haw Par - Went long at the high 5s due to the unrecognised see through earnings, solid operating businesses and grossly undervalued assets. (I understand the risk that many view this as a value trap). 
    • Announced dividends of S$0.14/sh ex 22 May 2012
  7. Currently about over 40% invested and under 60% in cash at the moment. 

I have listed dividends for ease of reading and cross reference. It does not imply my insistence on only stocks that give dividends in any way. Thats all for now, will post a follow up on the performance for 1Q 2012. 


Friday, April 20, 2012

Expedia (NASDQ:EXPE)

These were my unpublished thoughts pre-spin off of Expedia during 4Q 2011. I chose not to participate due to the fact that both businesses were neither cheap nor are they fantastic, coupled with poor overall climate.

Looking back with hindsight, at then level of $25.02, after the firm did a one-for-two reverse stock split, i.e  2 expedia pre-split to 1 trip advisors and 1 expedia post-split which is now at $35.95 and 31.53 respectively. Returns will be 34.9%.

I was also contemplating a long Expedia and short Priceline but thankfully Priceline though pricey, has some strong reasons to defend its valuations a little (at that time). I would have been killed had I shorted Priceline. Why? Take a look here, courtesy of Google Finance.

(All amount in US$)
1) Business
  • Spun off from Microsoft in a IPO in 1999
  • Online travel agency co, stand alone or package, owns,, Seatguru and
  • Competing with Priceline (PCLN), Orbitz (OWW), Ctrip (CTRP), Travelocity, Yahoo travel, Bing travel and Kayak (search only). Notably Orbitz is most often quoted due to availability for price comparisons
  • Spinning off worlds largest trip reviews site, Tripadvisors (TRIP) with flagship site and 18 others travel media/ad sites such as AirfareWatchdog, CruiseCritic and FlipKey
  • Expedia purchased TRIP in 2004 for $237mm and has 2 classes of equities, A and B
  • TRIP has a booking fee estimator (simple no frills system) and combined information of itinery which is greatly appreciated. Furthermore, it also has a good stock of reviews (over 40 million entries) on various locations and hotels which no other competitor has yet and it helps to retain users
  • Business model wise, PCLN operates on a auction model with fixed travel times so price discovery and money saving are key. EXPE is more of higher end, more flexibility type of travel booking. 
  • PCLN also has no booking fee vs EXPE, however 2009 all dropped booking fees, typically $6.99 to 11.99 hidden in government taxes and fees. However some like OWW still charge for multi carrier itineries
  • EXPE also does not have cancel or change fees if performed 48 hours before
  • Some may prefer to have no fuss and book a secured quality lodging over an uncertain PCLN even it means a premium or slight discount for EXPE especially for sales tickets
2) Business Segments 
  • Hotel bookings - Negotiate deals with hotels, sometimes even buying up inventory to resell at a mark up. So the firm earns a portion of total sum paid for the hotel rooms, not as booking fees
  • Airline ticketing - Firm gets unpopular seats from airlines at a discount on these sites and the site can opt to sell at a mark up
  • Tie ups with and in China and has yet to realize its full potential
3) Financials 
  • EXPE is at 274.06M sh * $ 25.02, approx $6.85B mkt cap and around 17x PE 
  • TRIP's 35% of revenue and profit is from EXPE
  • 2010 EXPE / TRIP 
  • Revenues                        $3.35 / 0.486B (or 14.5% of total), growth 13% / 38% 
  • Revenue TTM                 $2.80B / 0.401B, growth 9% / 34% 
  • EBIT                                 $ 0.83B / 0.26B (or 31% of total), growth  / 33% 
  • Unique visitors / month -   73M / 40M
  • Registered users -             ? / 20M
  • EXPE has grown revenues at 13.24% and FCF by 20.9% p.a over last 5 years
  • Estimated 10-15% annual growth for TRIP
  • Bulk of EXPE revenue is hotels (60%), airline booking (12%) and cruise/car and destination (10%)
  • 15% of bookings are for multi package bookings for same itinery
  • Bulk of TRIP revenue is CPC (Cost per click abt 80%), rest CPM (display ads 15%) and others 5% 
  • Firm also estimates global online travel ad/media to be worth $750B 
  • The firm generates an annual ave $500M fcf TTM, high $600/ low $400 @ crisis, mostly $500mm. At current prices, EXPE is at 11x FCF
  • EXPE will lose hedge against ad costs from TRIP, rising ad/op costs also hurt 1Q 2011 bottomline 
  • TRIP may introduce new businesses such as direct hotel bookings which is EXPE's main business and carries a higher margin than airplane tickets (CEO Dara Khosrowshahi said spin off will not affect EXPE ability to compete against PCLN)
  • EXPE and OWW stopped posting American Airlines (AMR) flight details and impacted earnings. However to note, AMR contributes only 1% to sales and airline booking is only 12% of total revenue. The issue is that AMR tried to have more of the customized flight fees to itself without going through EXPE since it offered a combined hotel and airline package through other sites such as PCLN and 
  • Liberty Interactive owns 19.3% of EXPE and may have influence on the management decisions
  • New entrants like Gogobot offers a combined package deal with social media (Seeded by Schmidt of Google) 
  • Google's purchase of travel data specialist ITA Software will affect the entire online travel space. it is also using search algorithms to favor Google places over other sites and it is noted for 2010, upstream traffic directed to TripAdvisor from Google has declined while same period from Facebook was up 30%. 
  • Then spin off will be by 3Q 2011
  • The most interesting thing is TRIP makes money regardless of which broker as long as theres ads and affiliate fees when bookings are made on the affiliate sites 
  • Tencent bought a 16% stake in Elong (EXPE's china arm) for $84.4M. Tencent is akin to the Google of China with their own facebook and messenger services and 674M active users. It is traded on Hong Kong as 0700 HK. EXPE added 8$ for $41.2M. Both deals done in 2011.
  • Elong has a 9% market share versus Ctrip (Nasdaq) with 53.6% in 2010
  • PCLN trades at 52x PE and gained 150% since 2009 (now trading at $26B mkt cap) while EXPE is below its 2009 price. 
  • Travelzoo inc (TZOO) also trades at 64x PE
  • Orbitz (OWW) is significantly profitable, focuses more on airline segment
  • Travelocity (Not listed)
  • Kayak (Not listed) - search only and referral 

Sources : Wall Street Journal, Firm websites, various sources

Recruit holdings (0550 HK)

Similarly, I wrote this in 2011s and was unable to take action due to the partly some convoluted paper process to apply from my country to this counter in Hong Kong and the various fees involved (broker quoted) . Will T reminded me that this would have done very very well.

*** Please be reminded the numbers and situation to this firm have change and is outdated.

(All in HK $)
Businesses Background 
  1. Printing services 
  • Prints educational, lifestyle books for publishers and presses, 7th largest intl exporter to US
  1. In-flight magazine advertising
  • Only HK listed firm working with 4 largest China airlines and one in Taiwan, leader in China
  • Global in flight airline ads revenue worth US$1 billion in 2006, probably US$2 billion now assuming 15% growth per year. So with $616m or US$79 million revenue, its about 4% of global market share. A journal also mentioned Asia taking 30% market share, and China is probably internal flights + some externals, so I would think its around a fifth of Asia's total air traffic so that works out to be 6% of global market share. So 4-6% is feasible.
  1. Recruitment magazine advertising
  • 2010 return to profitability - likely further shrinkage with shift to internet model
  • Carve-out of printing business, Recruit will hold 57.98% post event (at least 50%) 
  • 25 Feb, PN15 submission approval granted and 18 Mar, PGL submitted listing applications
  • IPO and share placemen of PGL, after which spin off preferential PGL to shareholders   
  • Parent price at
  •  $2.70, 311.71m shares = mkt cap $840m, PE of 4.9x, PB of 1.7x
  • In 2010, firm earned $169.5m/ $319.2m (net/ gross profit) over $1152.5m of revenue 
  • In 2009, firm earned $92.8/ $208.1m  (net / gross profit) over $698m of revenue 
  • CAGR growth of over 27/ 24% for revenue / profit resp.
  • S/D costs went up $76 to $110m (44%) as the most significant impact to P&L
  • Net cash is approx $100m, including financial derivatives and investments 
  • Trade receivables went from $224.2 to 340.3m while payables 138.8 to 128.7m (2009 to10)
  • SH equity stands at $495.5m, firm earned $77/ 50m of FCF
  • Segmental results (2009/2010)
  • Advertising 
  • Revenue $243.7/ 616.6m, profit $47.5/ 122.3m 
  • Assets $171.1/ 218.65m, liabilities $69.8/ 65.93m, net  $101.33/ 152.723m
  • Printing 
  • Revenue $454.3/ 534.9 m, $66.7/ 74.0m profit 
  • Assets $411.54/ 483.67 m, $71.1/ 67.7 liabilities m, net $340.435/ 415.978 m
  • March 2009, spin off Cinderella Media scrapped. (I.e travel advertising too good to give up!)
  • The long range price is $2.20-28 so if carve-out fails, a likely immediate loss of 18.5 - 21.4 % 
  • 4 hurdles to be cleared are, shareholders (check), both firm's board and listing approval
  • The advertising is asset light and more efficient in generating profits
  • RONA 2009/2010 is 46.8/ 80% for advertising versus printing of 19.5%/ 17.7%
  • Valuations
  • The closest competitors trade 7-9x PE but growth and ROE/ROA are not as good or even negative
  • A recent outdoor advertiser was listed on HKSE for 10x PE
  1. Printing business (slowing growth, lower ROA)
  • Valued at lower of 5-6x PE or 1x PB
  • With normalized profits of $70mm and net assets of $415m, = value of $350-420mm
  • Recruit once subscribed for 4.18% (407.273mm shares)of PGL at $0.30 through conversion of loan to equity
  • That values entire PGL at $2,923mm. Whilst this figure is off as it is a conversion instead of a cash payout, we believe management remains optimistic on the value of PGL
  1. Advertising business (fast growth and grows 20-30% p.a, higher ROA)
  • With a PE range of 10x
  • Normalised profits of $100mm = value of $1,000mm
  • With fast growth, higher PE of 12-15x plausible but pegged it at the lower range
  1. Combined entity 
  • Total value $1350 - 1420mm 
  • If purchased now, you will still get the printing business for free!
  • Expect the combined entity to trade at conservatively $1350 - 1420
  • Possibly higher if the advertising business takes off
  • Represents a conservatively possible 60 - 69% return 
  • The IPO and spin off is positive for the parent, Recruit as:
  • Parents gets cash for the IPO listing, possibly for expansion of new businesses
  • The ads business is asset light and with little depreciation, the solid earnings will be visible
  • Possible acquisition candidate due to strong balance sheet and phenomenal growth
  • A higher re-rating of the business is highly likely 
  • Fears of ending of airline ad contracts may be alleviated as logically, a 5+5 year extended contract duration is feasible (since they are the market leader) and hence a minimum of 10x PE is definitely reasonable. Every new contract hereon adds to the $100m profit
  • The IPO and spin off is positive for the subsidiary PGL as:
  • More understanding to the firm = more demand
  • Shareholders get less of the free spin off = less pressure selling = more stable pricing
  • Parent retains over 57% ownership, giving more upside potential for PGL
  • PGL executives incentives are more aligned to the performance of PGL
  • Other positives 
  • Insiders are taking part (Stock incentives and buybacks recently)
  • one of them an ex JCDecaux staff 
  • In 2009, the printing business raised sales by 36% while overall export market dipped 10% with 20% excess production capacity 
  • Management foresaw publishers will reduce suppliers to maintain bargaining clout
  • Competent management able to manage paper prices and fx exposures
  • One of the most solid balance sheet and profitable presses in the print industry 
  • Institutions typically buy in post spin off due to risk mgmt and trouble of selling subsidiaries
  • Spin offs take on average 6-12mths to happen from announcement and 1 year to realize value in a study conducted by Penn State in 1990s

    UE E&C

    Posted this to remind myself. I wrote this in mid 2011 at compelling price levels but was not comfortable with the non-niche business segments and cyclical construction industry and hence did not take up a position in this. Seems like I was sorely wrong on this...

    Took me a while to comb through new firms and old in Asia and after much consideration, I have decided to write on this interesting company.

    • One of Singapore's established engineering and construction player with 30 years of operations.
    • Spun off from UE in 2010 at $0.48/sh, 70 mm shares offered on top of UE holding 200mm. With 60mm placement and 10mm via public.
    • Firm being related to UE is naturally related to the Straits Trading / OCBC empire (note common directors)
    • Business units (revenue %)
      • Construction - 85% Bulk of the business, fluctuating and thin 2-5% ebit margins
      • Engineering (mech and electrical) - 8.2% Decent small business with 10-15% ebit margins 
      • Building materials & equipment - 6.8% Small but profitable with 20+% ebit margins
    Investment Thesis
    • BCA (Building Authority) expects S$22-28 bn of public constructions and 7-9b in 2010 for private sector.
    • Firm enjoys a position of being related to both public and private segments.
    • Simply a statistical play, Mr. market is paying me S$20mm to buy a firm for free. 

    • Trading at S$ 0.37 per sh with 270 shares in total or approx S$100mm in mkt cap
    • Despite being in the construction/ ppty field, it has mostly generated cash flows which is a big plus 
    • Firm had a bumper year in 2008 -09 due to ION Orchard, Marina Bay Sands and several other mega projects which is unlikely to happen in the near future. So earnings of S$40mm in 2009 will probably revert to 2007 levels or slightly over at around 7-10mm range.


    • Slowdown in ppty sector (likely but not significant for 2011). 1H 2011 rev down 13+% and profit down 7+% 
    • Negative margins for constructions and engineering, likely for construction (biggest revenue contributor).
    • Firm suffering cash burn in future (historically leveraged to be involved in ppty devt and construction).
    • Only 70mm out of 270mm shs are floated of which  60mm is in the hands of institutions, some of which if you check are known long term holders like 2G capital.
    • Firm did mention no dividends promised in the prospectus and I believe may be valid since the entire sector is slowing and that firm has historically been in a negative working capital situation. May not be a bad thing since it may hint at stronger bargaining power to have faster current asset turnaround versus their liabilities.


    • I would expect to pay above net cash and securities value of S$120mm. (Downside is capped)
    • On top of that, I will pay around 5x owners earnings on a worst basis, about S$4-9mm = S$20-45mm.
    • So total value will be approx S$ 140 - 165mm or 40-65% upside from current levels.
    • However if you look at it, it is one of the dominant players in both construction and engineering with above average margins. If you pay 10x, that's equivalent to S$160 - 210mm or 60 -110% upside.

    Disclosure: Author does not own a stake in the firm described above.

    China Yurun (1068 HK)

    All figures in HKD
    China Yurun has been one of the market darlings for a while but a recent spade of negative developments have exposed the firm's vulnerability to market cycles. Further, there have also been observations that led me to think that this firm may not be what it seems.


    1. Their Hog farms do not have any livestocks at all (Bloomberg)
    2. 3 of 5 exec directors exercised and sold their options at $17-18 nish per share
      • CEO and ED sold 2.45 and 2.5 mm shares post exercise during 24-26 August
      • While CEO still holds, his stake has been steadily declining while the ED holds zilch now
    3. Subsidies received from government to the tune of $0.7bn when profit/sales is  $2.7bn/ $21.4bn
    4. There has been heavy capex and firm continues to report low utilization (1H 2011 spent $1.6bn, which is substantially all of its profits in 1H 2011) and spent $3bn+ in 2010 when profits were $2.7bn. Net assets doubled from $8.4 to 14.4bn 
    5. China had a total 15.09mm hogs volume in 2010 while the firm had a slaughtering capacity of 35.6mm hogs? They preparing to take over the world?
    6. Lease prepayments are a whopping $2.7bn while PPE stands at $9.7bn and total assets at $13.6bn. And the prepayments are so regularly paid ($0.6-0.8bn p.a) while not regularly disbursed/paid down and the sum accumulates. Adding prepayment for PPE, its a regular $0.9bn p.a outflow
    7. Ownership certificates for $2.1bn worth of land is not obtained despite being paid for (suspected to be related to lease prepayments)
    8. Company land pledged to support loans of the Chairman's personal property development venture
    9. Negative goodwill recognized as income to the tune of $0.18bn and also occured for past years. This means the company has purchased consistently firms at a price below their recorded book values. The surplus is then accorded to Yurun as profits.
    10. Further, companies bought were revalued at aggressive levels of 80-1000x earnings as hinted by "Long Term Value Researcher" in Seeking Alpha 
    11. Despite sales growing from $13.8 to 21.4bn, trade receivables was stagnant at $0.58bn in 2010. Over receivables grew due to enlarged VAT tax recoverable and derivatives
    12. The firm has $5.9bn in cash and $3.6bn in total loans
    13. Contracted commitments were $1.6bn and authorised commitments not contracted were $1.2bn, totalling $2.8bn for 2010 versus $0.38bn in 2009
    14. Placed 90mm shares ($23.88) in April 2010 and 47mm ($30.00) in November 2010 to end with total shares currently of 1810 mm
    The Defense of Yurun
    1. They are in slaughtering and processing, not in hog farming. Hog farming is the private business of Chairman. (Still does not explain the absence of live stocks)
    2. Chairman and executive director Zhu Yi cai owns 25.94% or 470.7mm shares (15 July 2011)
    3. Assuming price of carcass meat is US$1.50-2 per pound and market weight of a hog to be 250 pounds, thats US$375 -500 per hog. With 15mm total livestocks, that works to be US$ 5.6 - 7.5bn of value or RMB35 - 47 bn at USD RMB of 6.384. So that ties in with the 60% market share Yurun claims
    4. KPMG are the auditors

    Monday, February 6, 2012


    Hi to all,

    My apologies that I have not been updating this site recently. There have been some changes in my life and the current schedule has made writing more difficult. I dislike writing/posting analysis for the sake of doing it and will under no circumstance fall into that category.

    I will follow with some updates soon to come.

    Also just a quick update, the portfolio remains intact hence far and I will post up the updated 2012 portfolio on the spreadsheet.

    Thanks for the understanding.