S chips

A couple of emails and messages from friends came in after another one of the S chips reported audit irregularities. It is not surprising, especially after I highlighted some companies during our discussions which later turn out to have problems.


I was disturbed by the various sell side research analyst, brokerage houses and some related forum writers (some of whom are trusted and appear on public frequently). They issued a constant flow of reports urging people to buy S chips and high yield dual listing counters without a concern for whom the target audience are and what are the effects. 


Let me set it here, most of the readers are mid to old age folks who are investing their nest eggs. True in that caveat emptor and it is their choice to invest, but seriously, you do not shun away from liability just by writing irresponsibly, unintelligently and covered by a disclaimer! 


As such, I think it is appropriate for me to share with readers some of my means to avoid these pitsfalls and elaborate which other counters I think is best avoided. (Not saying theres fraud or whatsoever, but to exercise more caution)


Firstly, S chips are cheap for a reason and we all know that. One has to not only dig deep into the numbers,read every single footnote carefully but also understand whats going on and take a step back and look at the big picture. Ask yourself "Does it all make sense"? If investing is like investigation, then investing in S chip, SMEs will have to be investigation on steriods.


There are many factors to look at it and I will draw a brief outline which is time tested and certainly effective across business cycles. Please look at the cases individually in entirety, it does not mean low PE, PB is good and neither does large cash position and no dividends means it is bad. Bear with me, it will be a little long winded. 


Framework 

1. Financials 
• Do the numbers in Income statement, balance sheet and cash flow all tie in?
• Look at balance sheet and cashflow and specifically track the uses and sources of funds and understand the rationale of the changes.
• Also look at operating assets and relationship to revenue and cashflows such as receivables, fixed assets etc
• Are there funky valuations or calculations? For example how China Milk uses fair value accounting for milk 
• Do not assume the numbers are right but try to understand the business before dissecting the numbers. 
• For example, for a certain industry and for firm X with a certain size, what should be an appropriate revenue and margins, what are the returns expected and requisite cash flows. If numbers differ vastly, attention is needed.
2. Management of the firm 
• Whats the background of the management? 
• Is the management heavily vested and does he sound vested? (Ex.Sinomem CEO sound disinterested in whats his expansion plans are - we shall see how the takeover turnsout)
• Any unusual transactions or details of the management? Example share sale.
3. Officers of the firm 
• Who are the auditors? were there discrepancies or multiple changes? especially if its due to disagreement to audit fees 
• Who are the sponsors? Are they of high quality?
• Are the independent directors relevant and are they related to the executive board?
4. Corporate action
• Dividend history? If no, see if retained earnings give rise to better profitability.
• Were there cases of raising capital even when firm is profitable and has hoardes of cash?
• Interpersonal or related party loans and transactions especially with offshore entities
• Dual listing simply means larger investor base at a higher than current cost of capital over time since there are listing fees and an overenthusiatic investor's expectations 
5. Business
• Understand the business cycles and find out why the firm is so profitable when others are not and vice versa. This is especially so for firms with no competitive advantage and/or no dominant market position
6. Logic 
• Many other considerations fall in this category where it is a combination or a factor not listed above.
• Look and the company and think about what it has done and if it is logical. For example;
• Did the firm issue equity at a large discount to market price even when their current valuations are cheap?
• does a firm invest heavily even when utilization rates are low?
• saying that it is hard to get loans in China thats why maintaining low loan amount simply doesnt make sense. Officers were essentially pushing loans in 2009/10

Below is a incomplete list of S chip firms which I have been tracking on and off and there may be a lot others out there which I may not have the time to go through such as Guanzhao Industrial forest. While such actions once carried has to be perpetuated, such constant actions can be spotted and reveal facts. Just as Erasmus mentioned, "A rolling loan gathers no loss", so is a fraud until the whole act breaks apart.


Hopefully this post will save some investors out there. Remember, look beyond the numbers!!!

Fraud Schips China Gaoxian Hongxing Hongwei

Some overview of valuations and impacts

I was thinking about this one night and did up some quick calculations.
QE2 is ending June 2011, of which a total of $2.2 trillion were released (QE 1 + 2). (All USD)

To paint a perspective:

• SGX mkt cap is $600 bn
• HKEX is $2.7 tr, Japan $3.8 tr, US is abt $20 tr mkt cap 
• World mkt cap is about $50 tr, so QE is abt 4.4% 
• Asia exchanges are mostly 1 trillion or less except for China, Japan and Hong Kong
• Est. about 7 significant exchanges in Asia, so its $7 trillion +2.7 + 3.8 = $13.5 tr
• With investors for QE 2 money investing 40/60 in west/east investment allocation,
• QE 2 withdrawal will at least bring a 10% decline in indices 
• A 50/50 will mean 8.8% decline and 0/100 hints at over 16%
• I am assuming money goes to equities, as everyone has been "Buy stocks, sell bonds"
• This excludes money propping the markets 60% from the lows when world grew <10%
• But of cos, the sharp decline in 2008 was oversold largely due to fear
• Now investors will invest only in higher quality indices
• Likely declines in excess of the estimated figures for the better indices, HKEX, SGX etc 

Japan has 55 reactors in the nation, although not all in the hot spot, still poses a major headache and a high probability of another accident on top of an unlikely second natural disaster. So if you think that the recent 15% decline over 2 days for Japan seems to be it, perhaps one should reassess the situation. The odds are high, and causal losses high. I will try to display some compelling figures to back up my point.


On the sides, if you are able, lend the Japan a helping hand. I am impressed by the attitudes and the "non exploitation" of situations in the nation vis the chaos and looting seen during Hurricane Katrina at Oregon.

QE Quantitative easing Japan Disaster

Brightworld Precision (SGX)

Firm is a China based 'S' chip that manufactures metal stamping machines.The machines help manufacturers produce the frame of the train carriage (10% of sales in 1-2 year time), home appliances (34% of sales) and car chasis (32% sales). 


Recently they had a good book order from a China state owned Rail company (CNR). Firm grew their profits on average of 14.8% annually and is currently at 9x PER. Management is stated to be confident of at least 40% rise in profits for 2011 as it doubled for 2010. 


Whats interesting is that it is now branded as one of the "premiere" S chips that gives out large dividends (by S chip measures, latest yield is around 4%) and with a government infrastructure expansion, RMB150 billion per year investment in railroad for next few years and automobile boom supported a spin to its story. Bright world is likely to see some very strong interest in the coming months. It also helps the insiders own over 77%, making this firm a likely privatization candidate given its strategic position. 


Do note the products are still not too differentiated which explains the price impact on sales in 2009. 


Disclaimer: The author has a small position in this counter for experimental purposes.


Bright world Brightworld

Bonus

I was just reminded that a bonus share issue is a neutral action, with no change to valuations.
Well that is unless the crowd has sentiments on a counter in either direction.

Updates

• Roxy posted a solid set of results and a S$0.01 dividend (2.2+%)- AGM 31 Mar 2011
• 33% rise in revenue and 53% rise in profits 
• Profit is S$31m from property devt and S$12m from hotel, property investments and S$10m from revaluations of property. Ex revaluation, profit rose 19% 
• Developments averages 90+% sold
• cash at S$157m and total debt of S$357m (taking on debt to finance the new developments which have seen very strong take ups)
• Significant improvement in AOR and ARR for hotels segment
• Most importantly, the hotel property is now valued at S$ 326.6m vs. 232.4m at Dec 2009.This is carried on the books for S$70.4m 
• NAV on books is S$169.8m or S$0.266 per share
• Hotel revalued alone will bump it to $426m or S$0.669 per share (excluding all misc revaluations from development property and the Kovan centre).

• AEI posted a 50% dip in FY 2010 results and a S$0.01 dividend (6.6+%)  - AGM April 2011
• Remain focused on electronics and precision engineering, revenue (bulk of total group sales) declined 27%
• China auto part production to start (final stages)
• Construction faced cheaper imports and a stronger dollar (expected), revenue declined 50% 
• Cash decline mainly S$4.6m in PPE, S$1.7m share buybacks. 
• Total cash and investments = S$26.9m  while current market cap is S$39m (approx 68%)
• Probably need to head down for AGM to find out more about expansion plans

• Koon is slated to release FY2010 results today - (To be updated)
• Expect to see stronger income from the precast as well as construction
• Probably a lower cash amount due to capex on their Aussie power plant
• 1 March 2011 Updates and a S$0.01 dividend (3.5+%)
• Revenue at S$74m, fell 41.8% in line with revenue subtracted for the marine business (Sold off) which made a loss of S$0.122m on S$4.5m revenue 
• Operating profit up 34% to S$13.5m and NPAT up 20% to S$12.7m from S$10m a year ago
• Remember my estimates of consistent S$5-8m / year operating profit? LINK HERE
• Cash is at S$22m, in line with what I put out to be less than S$30m [Including acquisition of associates (Tesla) and with a capex of S$6m, it works out to be S$22m]
• The firm has outperformed my estimates for this year as there was a gain of S$1.5m from buying Econ at below book value and gain of S$4.1m from Tesla and disposal of equipment and machinery. Ex that, NPAT will lie in the range of S$5-8m as stated.
• With concerns earnings may not be recurring, order book is now S$60m (excluding the Vietnam project) and precast order book of S$31m. Precast is loss making due to start up costs involved as mentioned earlier and expected to contribute meaningfully for 2011
• Upside remains favorable and in the worse case scenario of no vietnam project + declining construction revenues, earnings will converge to the S$5-8m / year level as stated, especially with higher depreciation from the new equipment and machinery acquired in 2010. So that means even in the worse case, there is still upside of approx 20-25%. Bullish upside scenario remains likely

AEI Corp Roxy Pacific Koon

Olam concerns (SGX)

Decided to write a post on this firm after a CLSA analyst wrote up on it. 
Many have known that I have expressed concerns with this firm since 2005 and amazingly it is a market darling and still garners much support from the market especially institutions. (Just look at its credit ratings).

1. Firm has pretty weak cash flows (see diagram below) and high leverage (Net debt/equity is over 1.8x, gross over 3x) due to using leverage to plug the shortfall in FCF
2. Firm is an acquisition machine, adding that to capex will mean free cash is ..literally not there
3. Heres the funky part, the firm uses GC/NC or gross/net contribution (approx 300% of NPAT) to measure firm performance. Net profit is what it is, no 2 ways about it. You do not hold a weight loss competition by measuring volume changes.
1. GC = Sales less COGS (ex all exceptional, interest income and change in FV of convertible)
2. NC = GC less finance costs (ex finance cost for capital investments)
3. It may be argued GC/NC are used for segmental measurement, however capital cost are still costs that needs to be matched to revenues, as well as changes in FV of derivatives. Especially so when a bulk of acquisition of companies and their fixed assets are from taking on more debt.
4. The funky stuff are for firm strategy, probably for performance measurement and remuneration of the senior management. 
4. Compensation is relatively high to speak the least for the performance they are showing
5. Complex business - I only vaguely understand the business after repeated reading of the annuals
6. Margin accounts is (of 2010 figures) 10% of revenues, 1.5x of profits, 33% of derivatives held, 19% of inventory and 89% of cash. Given we do not know the margin split attributable to whichever assets, rising commodity prices will nevertheless mean more cash needed in margin accounts which already has a high level of working capital tied in it.
7. Company management was sensitive to questions on risks, performance measurements etc
8. Valuation wise, Olam is US$ 5 billion, smaller than peers of US$ 9- 20 billion. Putting faith in their figures, Olams PE and EV/EBITDA is about 30x/15x vs peers of 17x / 13x (From CLSA report). This is despite ROA and ROE not being significantly higher. That is pricey!
9. Export incentives are substantial - read below. Do note that governments can remove it.

Source: CLSA report, my comments in red 

CLSA also recently did an negative opinion report, I was curious and took a read. Surprisingly, the management replied back in a tone that was very similar to what we saw in 2000 where many tech firms rebutted. 

Link to Olam Mgmt's reply

1. Olam said Nigeria government incentives are not 30-40% of profits but 15-20% of total export sales revenue and that it does not directly flow to profits.
• 2 things come to mind - Firstly, Olam bases the figures all on revenues and not profits. Secondly 15-20% of revenue is still substantial isnt it, and on a profit basis will be even larger?
•  The incentive is equivalent to a direct cash profit that adds on to gross profits (sets off expenses). Incentives are on a FOB sales value basis. Olam claims it passes a bulk of the incentives back to the suppliers and farmers. The validity of the claim in terms of amount and proportion is beyond me to check.
• For 2010, incentives receivables are added to income statement is S$104m / 95m and on balance sheet S$ 96m / 133m . To give you an idea, net profit for 2009/10 is S$252m / 359m.
• Nigeria contribution to revenue is 5% small yet to profit is larger,so it backs up the above point.
2. Differences between unaudited and annuals for inventory, cash, capex, COGS and margin accounts.
• Olam mentioned in the rebuttal 
• For incentives, cash accounting instead of cash accounting which CLSA claims should be used and therefore annual reported figures should not have differences. That also means the incentives can be applied with discretion
• Differences in capex / PPE was reclassification (Acquisition to business combinations)
• Differences in comprehensive income due to reclassification (Subsidiaries in various jurisdictions and/or between line accounts within group account). 
• Did not explain the differences in interest expenses 
• It seems like although numbers are likely to be correct and accurate as claimed by Olam, the figural changes may hint at loss of information between the auditors and the firm itself as well as the firm strong reliance on short term funding and acquisitions to fund growth.

While the CLSA analyst may seem to have not have been precisely accurate, a majority of the hinted discussions do shed some light on the firm and raises many points to think about. Kudos to the analyst.

Disclaimer: Author does not hold any position in the above related counter.

Olam CLSA

Longcheer SGX

Longcheer is a China based mobile handset designer and manufacturer.
It is seeing odd volumes and share price has fallen precipitously from S$ 0.70+ to currently S$0.305.
Some facts I am seeing gives me negative vibes.

1. Tao Qiang, Non exec director and co founder of firm has his shares forced sold on market by a financial institution. Does this sound familiar or what? 
2. CEO sold shares too
3. Over half of sales are in India and is expected to see bad sales since the firm's key product (low to mid end feature phone) is being taken over by the higher end smart phones. 
4. China's massive inflation --> Wages too 
5. Theres a put option liability with strategic investors. So its a pseudo private placement with conditional hurdles which Longcheer did not fulfill. Im just wondering why not a plain vanilla private placement?

I have not taken a closer look but at first glance not too positive about this firm. Will dig deeper and find out more. 

Disclaimer: The author does not hold a position in this counter yet.

Longcheer

Koon - Undervalued

I am tempted to write a long prose but shall subject myself to write in a concise manner. This is an attractive investment and I encourage readers to take a closer look. Financial institutions arent able to touch due to its small size and laggard financial databases.


Background 
A firm with a long history in marine engineering, they did the Sentosa Cove, Pulau Tekong, Marina bay and  many other renown land reclamation and shore protection services. They are listed on both ASX and SGX and currently they have the following businesses.

1. Engineering (Mainly Marine and coastal)
2. Land based Rentals (Mostly for internal uses and rents out the excess equipment and trucks)
3. Precast Construction (The pre built HDB rooms or highway tracks etc, ready to assemble on site)
4. Western Australia Power generation (1 of 4 plants approved and ready by 2011, rest 2013)
5. Marine vessels and barges (recently sold off) for S$14.6 mil in cash

Why buy?

• Firm has 163.888 mil shares at S$0.28 or S$46 mil in mkt cap (after 1 for 1 bonus issue)
• Cash is at S$40mil including ($1.78 + $3.7)m on precast and Tesla acquisitions. Conservatively including the capital outlay for the Australian power plant of around S$9m, that still leaves $30m. Note that subsequent outlays for the 3 other plants will be much lesser as a bulk of the fees go to land and design/fitting of the generators.
• Firm earned S$10 mil in 2009 and this was when Marine was losing money
• Recently acquired 2 pre cast firms out of 9 in Singapore (one from Sembawang Group) and hints at HDB precast contracts since they conform to government's regulations and standards
• Precast production capacity of 1000 m3 per day (Including Malaysia Yard) and is currently at less than half utilization with room to expand. The other 7 goverment qualified yards are 400-500 m3 capacity each (implies a Koon market share of over 20%) and are operating at full or close to full load
• Firm ventured into Aussie power generation with 4x 9.9MW diesel plants and brings recurring revenues when plants are idle. Potentially this plants can be used 20-30 years. Latest Pricing by IMO was at A$ 140,000 per MW per year so it means A$1.3mil per plant or A$5.5mil for 4 plants. And the reserve price is set to increase as the government sets it 2-3 years in advance based on various fuel, construction costs etc involved.
• Firm also entered into building a port in Vietnam, Sao Bien for S$225 mil
• Meeting with management was good, very candid, conservative people who focus on value rather than volume and it shows in their gross profits. 2009 for ex, revenue fell sharply but net profit/margins grew
• Singapore is an island = much room for marine engineering. Koon as the largest and most specialized players, it is very very unlikely to go out of business, especially with PSA shifting out of Tanjong Pagar and into Tuas. Theres also new MRT lines yet built.

Risks 

• Vietnam port project is 90% of total engineering projects and is meeting delays as firm is seeking comfort to secure payments (In my opinion a prudent move and its a sweetener if it works, doesnt affect the underlying other businesses)
• Order book may or may not grow fast for the pre cast (unlikely as currently they are contributing maiden profits, currently S$34mil order book even at half year 2010) 
• Firm does not have a record of dividends (Fine as long they compound the cash better than I do which is not that hard to achieve!)
• Forex risks - hedging is expensive for now and I expect impact to be positive over time and the exposure to AUD is very small for now.

Expectations (AUD SGD 1.2967)

• Many of the engineering firms have a PER of between 6-9x.
• Excluding the Vietnam port business (in terms of profits): 
• Aussie power plants will generate S$0.16mil/0.67mil for 1/4 plants (10% margins assumed)
• Pre-cast contributed S$0.6 mil for 1H 2010 and likely $1 mil (2011) and $2m normalized
• Current utilization is low, can expect it to double (will still be conservative)
• Land based rentals is consistent, generating about S$2 mil per year 
• Construction was S$8mil in 2009. This figure is a large bulk and conservatively the firm can hit S$ 2-4 mil / yr
• Total operations will yield S$5.67-8.67mil / yr profits on a normalized basis 
• With a PER of 5, thats about S$28-40mil
• Adding cash of about S$30mil, that works out to S$58-70 mil 
• Adding the Vietnam port, assuming 10% margins will be S$22.5 (below industry average margins)
• So its a total of S$80.5-92.5 mil firm value, potentially 75.4-101.5% upside and even if Vietnam port deal goes off, thats still 26-52.5% upside with virtually no downside! 
• Don't forget, its 5x PER I'm using. The Australian plant runs 20-30 years (not 5 years implied by 5x PER).If the power plant is used, a higher kicker rate per MW will be charged on top of the idle rate.

Disclaimer: The Author owns shares of the above mentioned firm.

Koon

First post for the year

Dear Readers and Investors, this is the first post for 2011.
While last year was pretty much a bull hidden in the choppy prices, this year is set to be a consolidating market. There are definitely much less opportunities compared to last year and I have instituted the following:

1. To start selling if the price is right 
2. Demand more safety in valuations and not to venture into relative valuation buying (I.e, Co A & B not cheap but A is cheaper vs B so buy A)

Anyway, I have spotted yet a few quality firms but pricing remains an issue. Todays market has come down hard on many small caps and hopefully more so in the next few days and weeks. Ill start to post and write in time to come, my timing is bad so do not assume whenever I write, its the best time to buy. 

Answering some readers queries:

1. Why did I buy Roxy and not Tuan Sing and Guthrie, since both are property plays?
• Do note that Roxy is very undervalued and their hotel assets are not carried at market value
• Tuan Sing, Guthrie or perhaps even Gallant Ventures as an extreme example has assets that are deeply under-reflected in their firm market value but requires a certain amount of effort/cost or both to unlock it. The hotel for Roxy is already there.
• Last but not least, management of Roxy are locals and are conservative individuals, they think and act on behalf of shareholders, and are experts in the Joo Chiat area. This can be backed up by their historical purchase prices I have set out in my earlier posts.
2. Should I buy Gold to hedge or perhaps miners?
• This depends largely on individuals, to me - I subscribe to the thought that Gold itself serves little use except for storage and it is a relatively inert element (I.e, does not mix or react) and we can be sure the supply will be pretty constant. 
• Further, inflation hedges may removes opportunity costs for your money. You may well buy good companies or unit trusts that gives good payments. Gold has also had quite a run up since
• Miners - theres only one in Singapore and relatively new. Miners have inherent risks and their prices may not track the gold prices. Many factors such as transport, extraction costs etc will come into play. Miners are mainly listed in Australia, US and UK. There may also well be a case of USD/Pound depreciation and yet Gold prices will fall. Do full research to protect your capital.

2010 - Year End Investors Summary

Dear Readers,


2010 was an eventful year.I am thankful for the people who encouraged and continued to believe in me. I did not have much interaction with the public except for a few emails exchanging pointers and learning from one another on investing and businesses. So feel free to keep those emails and phone calls coming in.


Hopefully the blog helped some people in their fight against poverty. It was enriching to get involved in managing a sum even though it is unofficial and as a one man show, tough challenges surfaced and were solved, lessons were learnt and I was pleased to know that the recommendations did well. I only started in March 2010 when market has already ran up from its 2009 lows and intermittently I had to work a few months. Effectively, I spent only 6 months on investments in 2010.


I always believed investment is 50% analysis and 50% execution. In 2010, I became more aware of my personality especially in buying or exiting positions and I must say while analysis is fine, my execution is not. I have spotted many opportunities but often unable to pull the trigger due to various reasons. This led to a less than satisfactory performance and missed chances. It is also not often there are chances and of course courage to double down and one should buy more irregardless of price movements if theres sufficient value left.


The year also taught me to look beyond numbers and understand business as it is, for example Parkway. Not excellent numbers but do understand the rationale, the bargaining forces involved. Management as well as industry factors is crucial and should be accounted for. I still remain pretty much a sector agnostic person who continues to look for cheap and good stuff, taking into account the occasional macro winds.


Lastly, there should be a lot of cash in the holdings only when the general market is overvalued.


Turning to the portfolio, I am pleased to put up the list as mentioned. Dates and positions are definitely not back-dated and follows the posting for each of the positions in chronological order. Mentioned in the blog positions are generally larger positions I have and others are small or miscellaneous positions I did not enter into and hence did not blog about but do contact me if you wish to view my write up on the position. I do have a write up for all positions listed here.


Positions


2010 saw the STI being up 10.09%. 
Mainly Roxy and AEI corp are carried over from 2010. Roxy had a good run due to some coverage (albeit lagged) by the institutions but I firmly believe there remains substantial value in the hotel as well as icing on the cake from the development projects. As mentioned, management is astute and are highly focused on value rather than volume and looks set to recognize another year of good earnings (Directors implicitly agreed too with their share buybacks and set up of new hotel subsidiary). AEI on the other hand is a leader in the Aluminium extrusion field and has a large collateral coverage from its loans to an external firm. Free cash flows are strong and firm was sold down on Aluminum derivatives losses. I subsequently bought down more on that and it turned out that losses became realized gains as the firm pared their derivatives stake. Management is young and continues to support the share price by buybacks. Only risk foreseeable will be Aluminium costs which I believe will be hedged out well.

Looking to 2011, I am sure macro will continue to be dominant and increasingly certain sectors like energy (especially coal), consumables and agriculture will be more in play. Also, your author will strive to focus all energy into investing and the blog since I have ended my work and left that role. We will continue to seek undervalued counters and beat inflation whilst making a modest annual return.


I enjoy and look forward to hearing more from you, the readers and investors and all the best to 2011.


Best Regards,
Mervyn Teo


Singapore, Lion Asia, AEI Corp, Parkway, Javelin, Qinglingp, Harbin Power, Asia Satellite, Guocoleisure, Transpac, Roxy Pacific, Year End Review, 2010

Gallant Ventures or Gallant Bubble

Recently theres a renewed hype over Gallant ventures and the stock flew 41.5% + 13+% over 2 weeks, from S$0.255 to S$0.415 now. I was thinking, wow thats a pretty good return and I started to wonder why I did not buy that counter. Then I went to view the reason - a research report done on it and started to see if it indeed justifies the run up.


To cut the long story short, Gallant ventures basically is a firm co-owned by Sembcorp Industries, Salim Group (Indonesia) and JTC of Singapore. The firm owns about 18,400 Ha of land in Bintan and Batam (mainly Bintan). The story goes that now the firm started to sell land at prices of S$90-300 psm, average of S$110 psm, also backed by a couple of recent transactions. The prime is Lagoi Bay and neigbouring land surrounding the Northwest Jetty. Gallant is currently building out the Lagoi area and so has residential and other investors flocking in to buy a piece of the land around the area.


So key businesses are:

1. 18,400 Ha of Bintan land - "to sell, develop etc" (1 Ha = 10,000 sm)
2. Provides utilities (electricity,water and communications), resorts and ferry services to the island
3. Bought a 29% stake in a South Kalimantan Iron ore producer (Silo) for S$ 14 million - "miner"
4. Bought a 49% stake in a Shanghai land for S$288 million (81,326 sm) - "building condos"

I went to do a fast calculation and this is what I got:

The "target price" was around $0.70 per share if I remembered correctly.

No disputes on utilities, mining businesses since the assumptions were fairly reasonable.

Then I noted the following :

1. Cash and debt were not accounted for entirely
2. I played around the Shanghai property figures and the above is the maximum I got and it represents almost a 71.6% return on investment for Gallant (cost was S$288mn + S$114mn in development cost). (Note: I was really optimistic on the figures). It has the potential to be much lower.
3. Resorts and Industrial parks should be accounted as a loss, but I took it as 0. I dont understand how can one assume an entity loss making now, to be making good profits in future when there are more future visitors. The businesses are not related (industrial parks vs tourists) and secondly the resorts are loss making now when you have 400,000 visitors a year. How is it going to change in future with expected a million visitors in 2015 with even MORE resorts?
4. The calculation above also supposes that empty land (be it industrial or for residential/hotels/resorts) are taken at S$ 1 psm. This is really wild land ..like little or no roads, no pipes, no infrastructure no nothing. A bulk of them are on the other side (East, North eastern) of the island without ferry access. 
• Assuming Lagoi Bay is worth S$30 psm, it comes up to about S$ 451.3 million. S$110 psm transaction price is for undeveloped land near beach front
• Landbank 1 is the area around Lagoi Bay and I put it as S$3 psm with expanding roads and infrastructure
5. Note that I did not use NPVs and discounted figures will yield lower figures

Conclusion of the story: 

The numbers of the $0.70 per share value seems a tad too high, price wise at the former S$0.250-0.270 range is reasonably attractive. My assumptions are optimistic (in my opinion very!), I did not use NPVs, no efficiency discount for Lagoi Bay land, assuming 100% take up of the shanghai property (which is quite a bubble now) and of cos the 100% smooth running of the Indonesia mines. There are many further things not accounted for including development costs. Capital expenditure for the utilities part amounted to S$300+ million alone. While developing resorts and tourists area may not need that much, it sure needs at least 20-30% of that amount or (S$60 - 90million) to build extension roads, expand telco towers and reach, building pipes for portable water etc for a similar area (Development costs is around S$ 1000-1700 psm) . The story does not hold up well and is too good to be true. And oh, did I also mention that the firm has quite a bit of debt on their books?

PS: I welcome any discussion on this, this post just reflects my thoughts and may or may not be right/accurate. Currently Gallant Venture is trading at S$0.415. The only thing for sure is I spent 3 hours on this.

Disclaimer: The author does not have a position in the above counter be it long or short. This is neither a recommendation to buy or sell the stock.

Gallant Ventures, Value

December updates

Dear readers,
I have some important ideas on hand, did not realize such undervalued counters are still available currently, guess its the work or lack of work thereof that allows more time to dig deeper. I will be on a company visit on one of the firms and will update shortly on my findings.
Stay tuned.

December, Updates

Some good quotes

November proved to be an exciting month with little investing going on.
I came across this prose which i thought accurately reflected my current situation. This was quoted by Leon Cooperman of Omega Advisors and was authored by Mr. William Ward. 


Coincidently, I too believe firmly in his other quote: "The more I try, the luckier I get". 
Failures are necessary for one to grow from the mistakes and learn to live with it.


Before you speak, listen.
Before you write, think.
Before you spend, earn.
Before you invest, investigate.
Before you criticize, wait.
Before you pray, forgive.
Before you quit, try.
Before you retire, save.
Before you die, give.


I am finally done with my project soon, I will continue to post more ideas in the coming days or weeks.
This will be followed by the end of year performance summary and breakdown.

Quotes, William Ward, Leon Cooperman, Omega Advisors

AEI Corp (AEI SP)

Dear all,

My sincere apologies for the long period of silence. It has been a trying year for me. I got work as a project based consultant and the busy (and largely erratic) work schedule resulted in less time for investments. In my opinion, if I do not have time to give quality analysis and recommendations not only for myself, but also for readers and investors alike: I will refrain from writing. This is a way to avoid pushing the limits of multi tasking.

I will continue to write as it is therapeutic process for me to invest, think and write and thank you for all your encouragements. I am glad that my past posts have contributed to your wars against poverty. Please do keep your emails and stock or any other investment views/suggestions (if any) coming in.

While I was certainly delighted that my holdings all rose in value, it does not correspondingly reflect a rise in firms' performance and their operating matrices. Most firms in the broad consumption theme have largely recovered from their earnings, giving rise to the 100-200% jump in earnings (excluding the Commodities and Marine giants, likes of Keppel and Sembmarine etc which are a different animal on that front). On closer look, many firms' earnings are normalizing, for example Johnson n Johnson, GE, Nestle, Samsung, Hon hai, Mitsubishi etc. BYD and Chalco were extreme examples though.


The fact that large caps are laggards versus the small caps (even in Asia) also shows the optimism (or rather overoptimism) in investors. The effect of QE2 will also further bring a support (although a highly unstable one) to equities vis-a-vis credit.

The focus will still be on undervalued counters and to maximize compounded returns (of which I have not fared too well this year) despite the macro outlook. I bring you my write up on AEI corp written a few months back before its dividend payout as well as the follow up write up. As mentioned, I have a couple of ideas in mind however it is not attractive from a price point perspective. 

1. Background 
• Only Aluminium extrusion firm with a manufacturing base in Singapore 
• Products include 
• Precision - electronics, clean room and automation equipment (80-90% of sales)
• Infrastructure - public works, interior designs, signages and advertisement panels (10%)
2. Financials (From 2002 to 2009) 
• 261.196 mil shares * S$0.21 = mkt cap S$54.85 mil
• Equity grew at CAGR of under 12% for 7 years (ex dividend) (not fantastic but not bad either)
• ROE at least 10% for most years except 2007 (6.9%) and 2004 (8.7%) despite 0 leverage
• A loss of S$5.78 mil in 2008, the only down year since 2002 due to:
• skyrocketing aluminium prices
• S$ 4 mil impairment of convertibles in a China JV for Aluminium products
3. Why buy 
• Only firm with facilities in Singapore, allows for fast turnaround and altering of prototypes
• Experience and network in Singapore (KK hospital, NUS, SIA building, Great world city, Shangri La Sentosa, Clark Quay MRT and Sg-Msia Johor link) 
• Strong financials with real recurring owner's earnings and current price implies a dividend yield of over 13% for 2009. Firm is able to support this for another 4+ years without gearing up.
4. Risks 
• Spike in LME aluminium prices (considerable current risk)
• Slump in electronics and SG construction orders (unlikely since strong recovery in 2Q09)
• Firm does not hedge its USD exposure (Electronics)
5. Expectations 
• 261.196 mil shares * S$0.165 per share = mkt cap S$43.097 mil
• Planned capex in extrusion plan to cost S$ 6 mil 
• End of yr est.cash and equivalents around S$ 22-25 mil (53% of mkt cap)
• This excludes:
• S$3 mil convertible loan given to An Yang (Well Global) (recovered)
• US3 mil or S$3.513 mil in convertible loan to M2B of $6.513 (approx $6 mil). 
• M2B loan is fully guaranteed with assets worth S$200mil, far above loan amount and 200% above current market cap even if is discounted by half.
• I would expect it to trade 
• With FY09 profit at $8.54 mil, its around 5x PER
• Lowest price point will be 4x PER (only S chips trade below that), downside of 18%+
• Conservatively at 7-8 x 2009 PER, or S$ 59 - 68 mil, or S$0.22 - 0.26, 36-57% upside

Post August 2010 - What has changed?

• I realized cash for this firm is largely irrelevant, however it remains a statistical play rather than a business operations play (so do not expect outsized returns)
• Strong earning base (although volatile) and the asset coverage is much more crucial
• Judging current conditions, of the 3 risks, seems that only #1 is likely but thats offset by a weak USD
• With aggressive buybacks, shares are at 256.39 mil x S$0.155 = S$39.7mil mkt cap (4-5x PER)
• The firm had its scare as 1H earnings plunged to a loss, however as mentioned MTM swings (S$4.1mil for the firm) should not affect judgement unless it is highly probable
• Without the MTM losses, (which the firm reversed recently), yoy 1H 2010 earnings grew 16% or so
• Firm still has the massive M2B loan, strong financials, dominant operating position and a management with an eye for cheap stocks

Looking to add more whenever possible

If the management should happen to read this, I will be happy to drop by your office for a chat


Disclaimer: Author owns shares in AEI Corp

AEI Corp, Singapore, owner's earnings, value stock, cheap

Fast September update

It is funny how the markets are rising not because firms outperform expectation but rather did not do as bad as expected. China data seems too good to be true, despite the huge dangling municipal loans for massive infrastructure expansion .


Todays newspaper article on the new China's generation "P" or plastic people - to define a new generation of young workforce who work like robots routinely and  have no ideals or goals in life. Well, coupled with low wages and a very skewed gender ratio, wide rich poor gap and not to mention vast lands subjected to natural destruction will prove to be a headache for the nation.


Lastly, my apologies for the skimpy updates, I had some technical glitches with a failed hardware as well as also some miscellaneous urgent matters to attend to. I have some ideas on hand and will write promptly if they are good.


I still believe that markets are overvalued to a certain extent. The main core problems still exist in PIIGS. So is the massive leverage and unemployment issue in US. Now Japan is also under watch for the huge pension claims, rising Yen and dilemma of whether to apply a loose monetory policy. China is again trying to cool the market with measures to curb the residential property funding - with lock in of pre development sales cash in escrow. What a macro market it has been, And the debate between inflation and deflation. I dont see why both cannot happen at the same time. Just look at Japan.


Have a good week ahead.


updates, markets

Hi-P (H17 SP)

A good friend of mine asked me to look at this firm, which I did and heres my thoughts.
I wont write full on this firm - read on for details.

• Firm manufactures plastic moulds for electronic products
• Firm has been uphill due to consistent share buybacks 
• About 863 million shares out at $0.835 each = mkt cap S$720 million
• Debt levels are low with S$200 m+ in cash (thats why buybacks)
• Firm did not recover contrary to what they wrote. "recovery was 1Q to 2Q 2010, -ve to +ve
• but look at 1Q 2010 vs 09 and 2Q 2010 vs 09, both down.
• overall YTD is a loss vs a gain in 09
• Firm seems to be bleeding sales while fixed costs (almost all cost) remains similar 
• This is amidst dipping pricing (note the margins)
• Conclusion?
• Not something I want to go into - Don't understand the rally in it.

Hi-P, HIP, SGX, moulds

Roxy Pacific, E8Z.SI, ROXY.SP and general market (UPDATES)

My apologies for the recent inactivity, heres updates for Roxy. 

I am also looking at one other counter which I will reveal and provide analysis for shortly.

Markets are weirdly buoyant despite poor operating numbers and industry statistics amidst the backdrop of European crisis and and of further possible tightening in China. The upward moving trend is making it hard for me to buy since its like averaging up - does not make sense. Further, dips are shallow and short.

I neither a rocket scientist nor an expert economist with predictive ability so double dip or not - I do not know. There have been talks that rate hikes in China are unlikely but that does not imply there will not be monetary actions. I guess the only thing that can bring markets down is news of a fresh wave of tightening measures coupled with poor economic data.  There remains much structural issues unsolved in both US, Europe, China and even Japan that may pose greater problems which I will talk about soon. One of them is the large amount of bad loans stashed away and not surfacing due to low borrowing costs or innovative financing vehicles. (Note that both changes in rates and credit liquidity are crucial)

It does seem that theres some form of reflexivity now in the markets, people buying up due to large liquidity so much so people are starting to think that there may be a chance of a bull in between. While if that is true, it is still in the building up stage. If that turns out to be fake, it may act otherwise, with poor economics resulting in falling asset values. With a lower collateral unable to meet the LTVs, debts once again, requires more refinancing and payments and less entities willing to put up credit. People liquidate to refinance, pulling down other asset markets and more selling ensues as people switch from slightly bullish to " I knew it was a bear all along". 

Anyway, heres Roxy's short update.

• 2Q revenue up 27%, bottom line up 37%
• Cash and equivalent at $116.9m and debt at $270m (refer to previous update on why debt is not high)
• Lately Accor sold the 538 room Ibis hotel at bencoolen for $200m (3stars) or $374k / room so that is pretty much in line with Roxy's grand mecure hotel (4stars) which is also managed by Accor
• Still a far cry from the $400k/room levels for other similar quality names
• The quality and land may also mean upwards of $200m for Grand Mecure is very reasonable
• Hotel room AOR and ARR stable (refer to link below)
• 162 Haig and Straits residences had good launches and sales (100% and 77% sold) wow!
• Progress billings of $227.5m to be recognized from 3Q10 to 2012
• Group intends to launch another 2 projects in 2H 2010 out of the current 7 land parcels
• I saw the houses, pretty neat stuff. I would buy one if I could
• Security price is up from $ 0.29 to currently $0.32-33, mkt cap of $203 - 210m 
• Remember that hotel if revalued adds another $160m or so to the equity. So thats 70+% upside

See here for their 2Q presentation. 
http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_187BC87BDB05BE374825777600178BE6/$file/Roxy_Ann_Q2FY2010_Presentation.pdf

Disclaimer: The writer is vested in this counter 

Roxy Pacific, hotel, Joo Chiat, East Coast, Property developer, Singapore, reflexivity