Hot Singapore Stocks -- Not!!

A post from a long-lost blogger

2010-09-05T20:46:00.002+08:00

I received another of my Google Adsense cheques just recently, and was frankly quite surprised to get it because I haven't been posting for more than siz months. To be sure, I haven't been active for probably more than 2 years with my hotstocknot picks, as my last few postings were more rants on than anything else.

But this shows the quality of my blog, and I'm speaking in all frankness without bragging. The fact that people continue to come back to read my postings on various stocks several years back --- and why they should NOT buy it then --- speaks for itself. And I am pretty sure more than 90% of the hotstocknot picks have turned out to be right, based on today's prices as well as how fundamentals for the businesses have turned out. Just look at Raffles Education --- a darling when I first posted, and now a reject and a pariah stock. Or look at Lian Beng --- a construction stock which was ramped up to 60-70 cents during the heydays of the construction industry. Or how about Advanced, Autron, Biotreat, China Sun, China Petrotech, Cosco, Ellipsiz, Enviro-hub, Federal, Global Voice, Jiutian, Luzhou, Pine Agritech, Sino-Environment, Sky China, Sun East, Unifiber, Yellow Pages? All these are unmitigated "successes" of my hotstocksnot picks. My blog would, in all certainty, have been a short-seller's treasure trove.

Today since I have some time, I would just like to highlight some of the sectors in the Singapore market I'm optimistic and pessimistic about on the basis of fundamentals and general valuation, but it's up to the individual investor to decide for himself what individual stocks he would pick for the sector. Here goes:

Good sectors
- Commodities - All, especially agriculture
- Healthcare - look for niche and don't forget valuation
- Domestic consumption - check out Hong Kong market, don't forget Guangzhou Asian Games coming
- Tourism and retail - the "remaking of Singapore"
- High-end property
- Semiconductor components manufacturing and distribution
- Infrastructure builders - be selective, but many have dropped big-time already, so valuation is good

Bad sectors
- Telcos - Next generation broadband will be bad for all
- Shipbuilding - the good days are gone; come back 10 years later
- Offshore oil & gas - I give you a site: ODS Petrodata, check out the utilisation rates and charter rates for rigs and you'll be scared
- Container shipping - 40-year globalisation trend is weakening
- Construction - told you need to be selective; be careful of those dependent on building residential/commercial/Singapore-centric
- Mass market property
- Hard disk drive component suppliers

If you find a stock that is not talked about, with metrics that haven't declined too much during the crisis of 2008, and which has rebounded smartly since then, and valuation still at single-digit PE or below book, and not in any of the "hot" sectors currently, then go for it. The market is currently still in a re-rating phase and will pick new stocks to re-rate week after week. Money from a new carry trade based on the US$, plus huge capital exiting China under a loosening RMB regime with China promoting internationalisation of the RMB, all point to a magnificent bull market going forward.

That's why there isn't much point for hotstocksnot picks now, or indeed over the last 2 years!

Resorts World Casino - An Analysis

2010-02-15T10:31:00.002+08:00

This is meant to be an analysis of the casino demand dynamics --- not the IR. As far as I'm concerned, the centerpiece of both the developments is the casino, and everything else, including the convention centres or Universal Studios, are but secondary. The casinos are meant to subsidise all the other developments, so if they fail, the peripheral IR developments will be in trouble.

So there're "crowds and crowds of people queueing to enter the RWS casino", according to our mass media. Let's sieve out the opinions and go for the facts.

The consistent number that was reported is that there were 6,000 visitors to the casino as of 6 in the evening yesterday. The casino openeded at 12 noon. At first glance, it's hard to get your mind around this number to gauge whether that's sizeable. I read earlier that RWS was planning to open about 500 tables at opening. Assuming that all 6,000 visitors stayed inside the casino over that period of time, that would mean a maximum number of 12 at every table. But hold on --- from my experience at other casinos eg. Genting Highlands, at least half, maybe three-quarter, are likely gambling at the jackpot machines or the computerised gambling machines (you can play roulette, tai-sai, bacarrat etc at these gaming terminals with a central dealer manning the counter) --- this means maybe a likely average of 5 per table instead. Now everyone who's been to a casino will know that 5 at a table is pathetic or at best average.

And that's on the casino opening day with so much inbuilt hype.

For some more perspective.
Case 1: Genting Highlands. According to Wikipedia, in 2006, the resort had 18.4 million visitors. Assuming all are visitors to their casinos, it would mean 50,000 visitors per day or 13,000 over the similar period of 6 hours --- double RWS's numbers yesterday. And this for a casino that is decades old, with no more novelty value, and situated inconveniently at the top of a mountain.

Case 2: The Venetian Macau, of a similar scale to the RWS casino and belonging to Las Vegas Sands tycoon Sheldon Adelson, drew 114,000 people over the first 24 hours of operations in August 2007. That's nearly 30,000 over 6 hours --- 5 times RWS's numbers.

If you think about it, the qualitative economic factors underlying the RWS casino are inferior to that of Genting Highlands, from the operator's point of view. A punter to Genting Highlands is a captive customer to the overall resort development. Lim Goh Tong was brilliant in his conceptualisation of a mountain casino resort because a punter winning at the casino is likely to spend his table winnings at the variety of restaurants, retail outlets, theme park etc available in the resort --- he is likely to be emptied of his pockets no matter whether he wins or loses at the casino. RWS offers no such captive money because the psychology will be different ---somebody winning at the tables is free to take his money out, catch a cab and spend it elsewhere in Orchard Road etc. There are no natural obstacles to him doing so unlike the seclusion of Genting Highlands. More so if it's a local punter .... he can come in bermudas, punt a few rounds at the table, and catch a transport back home if he manages to recoup that atrocious levy.

If the opening reception is an indication of things to come, it might be soon when the operator will turn to the authority for concessions. Whether it is abolition of the $100 levy for the local retail audience or relaxation of controls for junket operators marketing to foreign high rollers, there will be some social tradeoff in the process.

And that's not forgetting that in 6 months' time, there is imminent competition from the rival LVS operator at Marina Bay. Good luck to Genting punters --- those in the stock, more than those at the casino, will need it.

Last but not least, happy Chinese New Year!

Sources:
1) Genting Highlands link: http://en.wikipedia.org/wiki/Genting_Highlands
2) Venetian Macau link: http://www.lvrj.com/business/9612252.html

Weekly Summary 11-15 Jan

2010-01-17T21:24:00.011+08:00

Indices

STI 2908.42 -14.34 (-0.5%)
FTSE Midcap Index 716.65 -2.55 (-0.4%)
FTSE Smallcap Index 579.48 -0.16 (0.0%)
FTSE Fledgling Index 729.5 6.18 (0.9%)
FTSE REIT Index 624.04 -0.93 (-0.1%)
Property Index 96.42 0.87 (0.9%)
Financials Index 99.14 -1.26 (-1.3%)
Construction Index 108.36 2.23 (2.1%)
Commodities Index 108.80 -0.69 (-0.6%)
Retail Index 111.52 1.40 (1.3%)
Env/Water Index 101.74 -1.24 (-1.2%)
Energy Index 170.41 -1.40 (-0.8%)
China Index 106.88 -1.69 (-1.6%)
FTSE China Index 307.6 -3.31 (-1.1%)

HotStocksNot Indices Charts
(Note: Trendline for the week is enclosed between two blue lines on the charts)

Property Sector Index

Financial Sector Index

Construction Sector Index

Commodities Sector Index

Retail Sector Index

Env/Water Sector Index

Oil&Gas Sector Index

China Stock Index

Stocks Summary
Stocks below $1: Week's Top Gainers & Losers

Stocks between $1 to $2: Week's Top Gainers & Losers

Container living

2009-10-25T14:30:00.006+08:00

Some pictures for starters:

Shipping container city

Trailer trash living

A Singapore condo in development

I hate it when some "award-winner" comes up with crap and brands it as creativity, and his customer falls for it hook, line and sinker. The parallels are obvious; a picture (or rather three) tell a thousand words. I will never buy this rubbish because I won't know which way to turn when I come out of the lift.

This is not an advertorial. Hahaha....

Remember the name Alvin Foo

2009-06-20T11:51:00.002+08:00

Incredible! Comparing Temasek to Berkshire Hathaway and concluding that the former has outperformed the latter!

I have no problems with an incredulous claim if there's solid evidence to support it. But like somebody else from another forum has said, how can you conveniently use Berkshire's share price as an estimate of its return when it is a function of the market, and then use another measure for Temasek which is an unlisted group? The correct way to measure it would be to sum up the market value of all Berkshire's listed stakes and do an estimate of the value of its unquoted stakes, then do an apple-to-apple comparison to Temasek. I'm sure it will be much more accurate (and uncomplimentary to the latter).

Obviously Alvin Foo doesn't have the time to do that. And it just gives me the impression that they don't have the moral/intellectual courage to justify a preposterous claim with equally compelling evidence.

I'll be watching you. Or rather, I won't be reading you after this, my Foo.

Swine flu may be less potent than first feared

2009-05-02T14:02:00.002+08:00

I'll make it an exception in posting a non stock-related piece of news on this blog. This is because I hate kateks who wish the whole world to die so that they can gain.

From Associated Press/Yahoo 2 May:

The swine flu outbreak that has alarmed the world for a week now appears less ominous, with the virus showing little staying power in the hardest-hit cities and scientists suggesting it lacks the genetic fortitude of past killer bugs.

President Barack Obama even voiced hope Friday that it may turn out to be no more harmful than the average seasonal flu.

In New York City, which has the most confirmed swine flu cases in the U.S. with 49, swine flu has not spread far beyond cases linked to one Catholic school. In Mexico, the epicenter of the outbreak, very few relatives of flu victims seem to have caught it.

A flu expert said he sees no reason to believe the virus is particularly lethal. And a federal scientist said the germ's genetic makeup lacks some traits seen in the deadly 1918 flu pandemic strain and the more recent killer bird flu.

Still, it was too soon to be certain what the swine flu virus will do. Experts say the only wise course is to prepare for the worst. But in a world that's been rattled by the specter of a global pandemic, glimmers of hope were more than welcome Friday.

"It may turn out that H1N1 runs its course like ordinary flus, in which case we will have prepared and we won't need all these preparations," Obama said, using the flu's scientific name.

The president stressed the government was still taking the virus very seriously, adding that even if this round turns out to be mild, the bug could return in a deadlier form during the next flu season.

New York officials said after a week of monitoring the disease that the city's outbreak gives little sign of spreading beyond a few pockets or getting more dangerous.

All but two of the city's confirmed cases so far involve people associated with the high school where the local outbreak began and where several students had recently returned from Mexico.

More than 1,000 students, parents and faculty there reported flu symptoms over just a few days last month. But since then, only a handful of new infections have been reported — only eight students since last Sunday.

Almost everyone who became ill before then are either recovering or already well. The school, which was closed this past week, is scheduled to reopen Monday. No new confirmed cases were identified in the city on Friday, and Mayor Michael Bloomberg said the outbreak in New York had so far proved to be "a relatively minor annoyance."

In Mexico, where swine flu has killed at least 16 people and the confirmed case count has surpassed 300, the health secretary said few of the relatives of 86 suspected swine flu patients had caught the virus. Only four of the 219 relatives surveyed turned up as probable cases.

As recently as Wednesday, Mexican authorities said there were 168 suspected swine flu deaths in the country and almost 2,500 suspected cases. The officials have stopped updating that number and say those totals may have even been inflated.

Mexico shut down all but essential government services and private businesses Friday, the start of a five-day shutdown that includes a holiday weekend. Authorities there will use the break to determine whether emergency measures can be eased.

In the Mexican capital, there were no reports of deaths overnight — the first time that has happened since the emergency was declared a week ago, said Mayor Marcelo Ebrard.

"This isn't to say we are lowering our guard or we think we no longer have problems," Ebrard said. "But we're moving in the right direction."

The U.S. case count rose to 161 on Friday, based on federal and state counts, although state laboratory operators believe the number is higher because they are not testing all suspected cases.

Worldwide, the total confirmed cases passed 650, although that number is also believed to be much larger. Besides the U.S. and Mexico, the virus has been detected in Canada, New Zealand, China, Israel and eight European nations.

There were still plenty of signs Friday of worldwide concern.

China decided to suspend flights from Mexico to Shanghai because of a case of swine flu confirmed in a flight from Mexico, China's state-run Xinhua News Agency reported.

And in Hong Kong, hundreds of hotel guests and workers were quarantined after a tourist from Mexico tested positive for swine flu, Asia's first confirmed case.

Evoking the 2003 SARS outbreak, workers in protective suits and masks wiped down tables, floors and windows. Guests at the hotel waved to photographers from their windows.

Scientists looking closely at the H1N1 virus itself have found some encouraging news, said Nancy Cox, flu chief at the federal Centers for Disease Control and Prevention. Its genetic makeup doesn't show specific traits that showed up in the 1918 pandemic virus, which killed about 40 million to 50 million people worldwide.

"However, we know that there is a great deal that we do not understand about the virulence of the 1918 virus or other influenza viruses" that caused serious illnesses, Cox said. "So we are continuing to learn."

She told The Associated Press that the swine flu virus also lacked genetic traits associated with the virulence of the bird flu virus, which grabbed headlines a few years ago and has killed 250 people, mostly in Asia.

Researchers will get a better idea of how dangerous this virus is over the next week to 10 days, said Peter Palese, a leading flu researcher with Mount Sinai Medical School in New York.

So far in the United States, he said, the virus appears to look and behave like the garden-variety flus that strike every winter. "There is no real reason to believe this is a more serious strain," he said.

Palese said many adults probably have immune systems primed to handle the virus because it is so similar to another common flu strain.

As for why the illness has predominantly affected children and teenagers in New York, Palese said older people probably have more antibodies from exposure to similar types of flu that help them fight off infection.

"The virus is so close," he said.

In the United States, most of the people with swine flu have been treated at home. Only nine people are known to have ended up in the hospital, though officials suspect there are more.

In Mexico, officials have voiced optimism for two days that the worst may be over.

But Dr. Scott F. Dowell of the CDC said it's hard to know whether the outbreak is easing up in Mexico. "They're still seeing plenty of cases," Dowell said.

He said outbreaks in any given area might be relatively brief, so that they may seem to be ending in some areas that had a lot of illness a few weeks ago. But cases are occurring elsewhere, and national numbers in Mexico are not abating, he said.

A top Mexican medical officer questioned the World Health Organization's handling of the early signs of the swine flu scare, suggesting Thursday that a regional arm of the WHO had taken too long to notify WHO headquarters of about a unusually late rash of flu cases in Mexico.

The regional agency, however, provided a timeline to the AP suggesting it was Mexico that failed to respond to its request to alert other nations to the first hints of the outbreak.

The Mexican official, chief epidemiologist Dr. Miguel Angel Lezana, backtracked Friday, telling Radio Formula: "There was no delay by the Mexican authorities, nor was there any by the World Health Organization."

In the U.S., Obama said efforts were focused on identifying people who have the flu, getting medical help to the right places and providing clear advice to state and local officials and the public.

The president also said the U.S. government is working to produce a vaccine down the road, developing clear guidelines for school closings and trying to ensure businesses cooperate with workers who run out of sick leave.

He pointed out that regular seasonal flus kill about 36,000 people in the United States in an average year and send 200,000 to the hospital.

Die kateks die

2009-04-27T22:26:00.001+08:00

When you see people wishing for swine flu to kill more people so that their stocks may rise, you know that these are the people who should be exterminated by the virus in the first place.

Die kateks die. Pui.

City Developments @ 6.01 (Property/ Singapore)

2009-04-19T17:38:00.006+08:00

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Weak sector outlook

2.SOTP valuation is below current price

I have been very bearish on property for quite a while, and this latest hotstocksnot coverage shows that I have not lost this pessimism over this sector yet.

My recent views over Singapore property are well-documented in my Trendspotting blog article in February titled "Continued weakness in Singapore residential housing". In it I outlined the liquidity situation, supply-demand dynamics and valuation comparison to historical prices and concluded that private residential demand plus prices will remain weak through the next 1-2 years. My views sector-wise have not changed. Though global liquidity conditions might have improved, my understanding is that local banks are only lending out based on 60% of home value, while unfavourable supply-demand conditions will not resolve themselves so fast. There is talk now that HDB prices will be next to fall; that removes a price support mechanism for mass market private residential housing, erstwhile the strongest of all private housing (together with old-money landed housing).

There are three acknowledged property giants in Singapore: Capitaland, City Developments and Keppel Land. Of these, City Developments is generally regarded as having the best acumen and being the most prudent. In particular, it is known for its prudent accounting policy, where it does not revalue (upwards) the valuation of the property landbank on its books, unlike most other property developers.

This is why alone among the big developers, City Developments is trading above its NTA/share. However, a rough SOTP (sum of the parts) valuation of its various segments shows that at the current price, there is little bargain to be had, especially when one surveys the post-Lehman wreckage on the market (even after the recent 25-30% market rally).

In the most recent FY, the Property Development division of CDL contributed ~55% of the profits, the Hotels division (through 54%-owned Millenium & Copthorne) accounted for ~30% and the balance was contributed by the Investment Properties division. These are the three main arms of CDL and my SOTP is based on a balance sheet assessment along these three lines.

First, the Property Development division, for which CDL is most well-known for. This is held at $2.9B on CDL's FY08 balance sheet. I would like to divide its development properties into two time periods based on their time of acquisition: pre-2006 and post-2006. A look at the URA price index below illustrates the reason for my division:

As one can see, private home prices started rising from a base since 2006, reaching its peak in early 2008. Hence my personal judgment would be that development properties acquired since 2006 will not make money for CDL; on the contrary they are likely to lose money, especially that acquired in 2007 when euphoria was at its peak.

An examination of balance sheets in FY05 and in FY08, plus a general overview of the development landbank acquisitions over '06 to '07, shows that the post-06 landbank are valued at around $1.5B on CDL's current books, with the remaining half being acquired pre-06. I'd mark down the value of the $1.5B post-06 landbank by 20%, while marking up the $1.5B pre-06 landbank by 50%. The post-06 landbank includes prime landbanks like Quayside Collection, Anderson 18, Futura, Lucky Tower; that is why I think CDL will make significant losses on this landbank. On the other hand, CDL is known to have an undervalued landbank acquired in earlier years: for example, as far back as 2003 I can find landbanks that still remain on CDL's FY08 books, properties like land parcels in Pasir Ris, Swiss Club Road, Tampines/Upper Changi Road. I am ready to assign a 50% profit margin on these landbanks.

The net result of this is to add $0.45B to the recorded value of the Development Properties segment on the books.

Now for the Hotels division. Here the work is made easier because Millenium Copthorne is listed in London. The stock is traded at 2.25 pounds over there, but NTA/share is 5.75 pounds. Hence price/book ratio is 0.4X or 60% discount to book. Bringing across the 60% discount to CDL's hotel properties (recorded as Property Plant & Eqpt item) on its book translates to a $1.35B discount to the book value of its Hotels division.

The discount to book is reasonable because the return to equity of the global hotel industry is going to be trading under cost of equity for some time, given the severe hits to business travel and discretionary spending worldwide. M&C, furthermore, is heavily exposed to the West, especially in the UK; it is therefore likely to be hit hard.

Lastly, the Investment Properties segment, of which office properties comprise the majority of this segment, This accounts for $2.3B on CDL's books. I resist the temptation to mark down the value of this segment, because of CDL's prudent policy of no property revaluation which means the valuation of these investment properties have not been blown up during the economic boom. Instead, I use the price/book valuation for a peer as the guide --- in this case I use local office property kingpin UIC. After stripping away substantial revaluation gains for UIC through 2005-07, the NTA of UIC should be ~$1.40, which means at current price of $1.09 UIC is trading at 0.8X price/book. For simplicity sake, I will leave CDL's Investment Properties segment's book value as it is ie. valuation at 1X book.

The net result of revaluing CDL's net asset value is to subtract (1.35-0.45)=$0.9B from its current book value of $5.4B, which means CDL's book is worth around $4.90/share according to general market valuations today. I put the last four words in italics because a large part of my SOTP valuation is dependent on comparative valuation with peers and market valuations of certain segments. Clearly when the economy recovers, the valuations will change. For example, when the travel industry recovers, the Hotels segment might no longer be valued at discount to book; it might indeed trade at a premium to book. My above analysis merely shows that in the context of today's market and peer valuations, CDL is NOT a bargain and hence should be eschewed for other more deserving investments.

Singapore Market Summary 20 Mar (Fri)

2009-03-22T23:41:00.010+08:00

Indices

STI 1596.92 12.06 (0.8%)
FTSE Midcap Index 310.63 0.67 (0.2%)
FTSE Smallcap Index 240.96 -7.96 (-3.2%)
FTSE Fledgling Index 347.35 3.87 (1.1%)
FTSE REIT Index 307.13 2.80 (0.9%)
Property Index 40.05 -0.41 (-1.0%)
Financials Index 51.74 0.26 (0.5%)
Construction Index 41.78 0.75 (1.8%)
Commodities Index 43.33 1.18 (2.8%)
Retail Index 58.50 0.56 (1.0%)
Env/Water Index 36.22 1.74 (5.0%)
Energy Index 62.83 1.66 (2.7%)
China Index 48.87 1.10 (2.3%)
FTSE China Index 137.16 -4.86 (-3.4%)

HotStocksNot Indices Reconstitution: 20 Jun 2008

Property Index: Individual Component Stock Changes

The base index for the Property Sector Index, based on 11 Jul 08, starts from 100.

Financials Index: Individual Component Stock Changes

The base index for the Financials Sector Index, based on 11 Jul 08, starts from 100.

Construction Index: Individual Component Stock Changes

The base index for the Construction Sector Index, based on 11 Jul 08, starts from 100.

Commodities Index: Individual Component Stock Changes

The base index for the Commodities Sector Index, based on 11 Jul 08, starts from 100.

Retail Index: Individual Component Stock Changes

Link to Base Prices as at 9 Jun 06. The base index for the Retail Sector Index, based on 9 Jun 06, starts from 100.
For corporate actions involving index stocks (new placements/deletions/new additions need adjustment to base market cap) see Corporate Actions.
(Note: Base index has been adjusted on 5 May 08 to account for last corporate action.)

Env/Water Index: Individual Component Stock Changes

Link to Base Prices as at 9 Jun 06. The base index for the Environmental & Water Sector Index, based on 9 Jun 06, starts from 100.
For corporate actions involving index stocks (new placements/deletions/new additions need adjustment to base market cap) see Corporate Actions.
(Note: Base index has been adjusted on 30 Apr 07 to account for new shares issued over 2007)

Energy Index: Individual Component Stock Changes

Link to Base Prices as at 9 Jun 06. The base index for the Energy Sector Index, based on 9 Jun 06, starts from 100.
For corporate actions involving index stocks (new placements/deletions/new additions need adjustment to base market cap) see Corporate Actions.
(Note: Base index has been adjusted on 6 Feb 08 to account for delisting of Labroy Marine)

China index: Individual Component Stock Changes

Link to Base Prices as at 9 Jun 06. The base index for the China Stock Index, based on 9 Jun 06, starts from 100.
For corporate actions involving index stocks (new placements/deletions/new additions need adjustment to base market cap) see Corporate Actions.
(Note: Base index has been adjusted on 11 Sep 07 to account for delisting of Want Want)

The indices are updated by the formula:
New index value = New adjusted market cap/Base adjusted market cap X 100

SGX Small Cap Stocks Summary

Market Summary: Volume is measured in unit volume (unit shares) and dollar volume (dollar shares). This gives a perspective of general market attention (expensive blue-chips or cheaper small caps)

Top Movers: Only small/mid caps below $1 share price - for focus. Volume is measured in dollar volume to give perspective of actual money volume going into a stock, without distortion of low absolute price (tendency is for these shares to have high unit volume)

Obama is getting pissed at greed .... and so should we

2009-01-31T19:06:00.002+08:00

Barack Obama getting tough on 'Wall Street idiots'

WASHINGTON: A day after President Barack Obama bashed bailed-out banks for giving huge bonuses, the White House pledged action against such Wall-Street "irresponsible" behaviour and a Democratic senator proposed capping executive salaries at companies accepting government funds.

"We must have our financial institutions survive but not with a culture that thinks it's all right to kick the taxpayer in the shins," Senator Claire McCaskill said proposing a law that would prevent executives from making more than the $400,000 salary of the US president.

"I am mad," McCaskill said in an angry speech on the senate floor. "We have bunch of idiots on Wall Street that are kicking sand in the face of the American taxpayer. ... They don't get it!"

Top executives at the biggest financial services firms often collect tens of millions of dollars in compensation. Citigroup's Indian American CEO Vikram Pandit was paid $216 million for taking over as chief executive of the bank in 2007.

Bank of America CEO Kenneth Lewis made more than $20 million in 2007, according to Forbes. Over the past year, the two banks have collected more than $50 billion in government funds from the Treasury Department and Federal Reserve.

Citigroup, which also intended to purchase a private jet, cancelled the order following a public outcry over reports of corporate excess by companies getting bailout funds.

The bill follows some tough words by Obama, who said Thursday that it was "shameful" for financial executives to walk away with $18.4 billion in bonuses last year.

McCaskill, an early endorser of President Barack Obama's candidacy, said an average of $2.6 million dollars had been paid in bonuses to executives from the first 116 banks that got money from the $700 billion Troubled Asset Relief Programme (TARP).

At the White House, Obama spokesman said the president's upcoming plan for financial stability also would address executive compensation and bonuses.

"I think you will see the president and his economic team outline a plan to deal with what he found irresponsible yesterday," Robert Gibbs told reporters. "Stay tuned, because something on that is coming soon." He declined to say more.

CapitaCommercial Trust @ 96 cts (REIT / Singapore)

2008-12-21T15:29:00.003+08:00

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Rents set to fall

2.Interest expense set to rise

3.Relative yield valuation is not attractive

And finally I resume my Hotstocksnot coverage. It has been a turbulent year and I have been so absorbed, enthralled and traumatised by the stock market that I preferred to spend time on my own stockpicking rather than highlighting hotstocksnots. Besides, valuations had plunged and it was getting difficult to find overvalued stocks.

CapitaCommercial Trust (CCT) had dived together with the general market, especially with the REIT segment, since the middle of 2008, hitting as low as 60 cents in early December. It didn't help that it was axed from the MSCI Singapore index in November, which further added to the selling pressure. However, in recent days, it has rallied strongly by over 50% to 96 cents on improved sentiment over property given lower interest rates. It is my view that this is not sustainable and the stock has become a hotstocknot, although it is substantially off its 2007 highs of >$3.

I will address my viewpoint along three main issues: revenue, costs (the difference will of course be earnings), and valuation.

The expected drop in demand for office space as a result of the financial crisis is probably known to all. That is the reason why CCT dived so sharply the last few months. But let's try to quantify the likely impact on the rents of CCT's properties, and hence revenue, in order to judge whether at the reduced price of 96 cents CCT might be a bargain.

Of CCT's portfolio, four properties provide the main revenue stream: 60% Raffles City Trust (30% of total gross rental), 6 Battery Road (24%), 1 George Street (17%), Capital Tower (11%); together they contribute >80% of CCT's gross rental revenue. The last three are office-dominated properties located in the CBD, with Raffles City being the exception (15% office/40% retail/40% hotel & convention). In particular, 6 Battery Road and 1 George Street are prime CBD office towers with peers commanding the highest rentals of $17-20/mth psf; this segment is also the one that has risen the fastest over the last few years. Capital Tower and Raffles City Tower (the office segment) occupy the second-tier, with peers commanding about $11/mth psf. Note that these estimates were obtained in Aug 2008; that's right, before all the mess really started.

Three things are worth noting that will have significant impact on future rents at these properties. Firstly, 35% of CCT's gross rental is derived directly from banking, insurance and financial services customers, while other segments likely to be badly affected (hospitality, property services, fashion retail) could range from 25-35%; effectively two-thirds of CCT's customers will be hit badly by the looming global recession (though of course, they might not terminate leases). Secondly, in CCT's core niche: Grade A downtown core office space, there is looming supply overhang come 2010 onwards: as at May 2008, Singapore had 6.7M sqft of Grade A office space; a walk along Shenton Way will make it clear that this supply is poised to surge, with newbuildings at various stages of completion obvious from Robinson Road to Raffles Place to of course, Marina Bay. For the last one alone, the Marina Bay Financial Centre alone is poised to add 3M sqft when both phases are completed by 2012. Property consultants had expected office rents to soften in 2010 even before the financial crisis, but the looming demand-supply dynamics look positively bleak now. Thirdly, and the scariest of all, median Category 1 (ie. prime) office rentals according to URA figures have tripled from $4.5/mth psf in 4Q04 to $13.50/mth psf in 3Q08, and it is fair to say that 3Q08 was near the peak in terms of Singapore prime office rentals. If rates were to even half from the peak, CCT yields would be disastrous.

Of course, this impact would be mitigated by lease renewals which should have upside pressure, since expiring CCT leases apparently are substantially below average market rents in the same category (a fact CCT has highlighted repeatedly during every presentation). Looking at the percentage of leases expiring in 2009 in each main property as well as the gap between CCT rates and average market rates, 6 Battery Road and 1 George Street have the most potential to provide rental growth in 2009. But my feel is that the gap between CCT rates and market rates are likely to close not by the former going up, but by the latter coming down. Also note that 1 George Street was purchased in mid-2008, before the financial crisis really hit the nadir; it can't have been a good bargain in retrospect in light of ensuing developments.

Now we examine the costs dimension. The main component is clearly interest costs. Based on 3Q08 figures, annualised interest rate on CCT's total debt of ~$2B is approximately 3.5-4%, composed of both bank loans and note issues. Most of the loans are due over 2009-11 in the proportion 25%/35%/25%, and it is clear, at least for the loans expiring in 2009, that refinancing will be at substantially higher rates. Let's use the increase in rates of ~3% that Cambridge Trust had to fork out for refinancing recently as a reference, and that means CCT could have to pay 75-100% higher interest. Since a quarter of loans expire in 2009, interest expense is more likey to rise 20-25% in 2009, and this could easily take 20% off distributable income. And in 2010-11 as loans expire the interest expenses could rise further and cut further into income. And we're not even examining the issue of bond covenant breaches yet, which could take things down further.

Now for the final issue of valuation. Based on 2008 figures and annualising the 3Q08 figures (due to mid-year acquisition of 1 George Street) distribution would optimistically be 12cts/unit or yield of 12.5%; unitholders should be happy to get this distribution for 2009 for it is probably the best that could be achieved. If we take into consideration the increase in interest costs as described above distribution should be about 10cts/unit (and probably even lower in 2010-11). Add to that the pressure on office rents given the terrible economic recession which could lead to unilateral lease terminations especially by financial customers; at best customers will reject any rental increases (URA reports that 3Q median office rental rates have begun to decline). Let's say CCT manages to achieve distribution per unit of 10 cts for FY09, by some miracle. That means yield of slightly >10% at current prices. For a sense of perspective, in the US corporate bonds overall now yield 8-9%; I guess CCT debt could be considered middle-of-the-road (and hence comparison can be done apple-to-apple) since its corporate family was rated Baa1/Baa2 (low-end investment grade) just recently in mid-2008. For the case of REITs the units could, I guess, be considered a form of junior debt and >10% yield might be just about fair given the non-guaranteed nature of the payout, its last place in the payout structure plus the expected decline in payout trend over the next few years. Indeed, if you ask me, there might be room for some convertible arbitrage which would create additional downward pressure on the unit price.

So, a 10% expected yield (an optimistic figure as I pointed out earlier) is not great by relative valuation standards.

So why the recent surge? Well perhaps it had just fallen too fast too quick. As I pointed out earlier, the REIT was one of those kicked out of the MSCI Singapore index recently, together with Venture, Yanlord and Keppel Land, providing a catalyst for downward adjustment. An interesting observation is that three of those four exclusions have been among the greatest gainers in the recent market bounce. Do I think it is sustainable? No, I don't think so, unfortunately.

References:
(1) URA 3Q property update

Poll
I agree that CapitaCommercial Trust is a hot-stock-not: Agree/Disagree

Lehman mini-notes/DBS Hi-Notes/Merrill Jubilee notes

2008-10-11T15:04:00.002+08:00

This is not the first time people have complained about mis-selling by irresponsible financial advisers at various financial institutions. In 2004 when CAO collapsed there was also an uproar over the Rainbow equity-linked notes issued by DBS whose return was apparently linked to the WORST return from ANY stock within a contract-specified basket. Heads I win and tails you lose --- that's how overly-complex structured notes work. The target audience, it has turned out, appears to be the elderly who look to put their money in fixed deposits but end up being persuaded to buy structured notes which are "capital-protected". Now if post-mortem newspaper analysis reports had not enlightened me on the difference between "capital-protected" and "capital-guaranteed" I would have thought they were synonymous.

Anyway, those affected and feeling aggrieved because they felt they had been victims of predatory misrepresentation should really find legal means to redress the issue. Tan Kin Lian, ex-NTUC Income CEO, has been helping to do the legwork to find means of bringing the case up on behalf of affected investors through appropriate means, and his bloglink is below. Please forward the link to those of your relatives/friends who might be interested.

Tan Kin Lian's blog

New HotStocksNot Sector Indices

2008-07-13T21:34:00.004+08:00

As I mentioned in an earlier writeup on the new FTSE indices, the sector indices produced by them are not up to scratch for various reasons (will elaborate individually below). Meanwhile SGX has discontinued the previous sector indices that they used to generate. I don't really know what they are doing. So I decided to produce several own sector indices to fill the gaps. Below are my new sector indices with the component stock listing, using the same index calculation methodology/conventions as for my current sector indices. They will start running effective tomorrow (14 Jul).

New Indices

The new sector indices are:
1. Commodities index (this theme has to be tracked given its prominence)
2. Construction index (tracks the remaking of Singapore theme)
3. Financials index (FTSE Financials index covers both financials and real estate and hence is confusing)
4. Property index (FTSE Real Estate index includes China stocks; my property index is meant to track Singapore developers)

To recap, component stocks are typically chosen on the basis of the following:
1. Market cap
2. Trading liquidity
3. Track record
4. Expectation of future performance (stability, growth, trading liquidity)
5. Intangibles (eg. institutional coverage, mindshare in investors' and traders' general attention span)

Commodities Stock Index

Note: All market caps as of 11 July 2008.

Component stock
Market Cap (S$M) Adjusting Factor
HotStocksNot Oil&Gas Index 174.62* 100.00
Wilmar 30523.60 0.25
Noble 6945.60 1.00
Olam 4060.40 1.00
Golden Agri 8030.60 0.50
Indofood Agri 3228.60 1.00
Straits Asia 3278.50 1.00
STX Pan-Ocean 5825.80 0.50
Mercator 523.00 1.00
GMG Global 484.90 1.00

* The oil and gas commodities segment, instead of being covered through individual component representative stocks, is instead represented by the index value of my existing Oil & Gas sector index. The index value is multiplied by the adjusting factor (which is why it is so big) to obtain its nominal representative "market cap" in the Commodities index (its initial weight is about 1/3 of the total Commodities index)

Construction Stock Index
Component stock
Market Cap (S$M) Adjusting Factor
Tat Hong 932.20 1.00
Rotary 417.40 1.00
United Engineers 701.80 0.50
Hong Leong Asia 659.10 0.50
Pan United 322.50 1.00
CSC 250.10 1.00
Chip Eng Seng 230.30 1.00
Yongnam 194.80 1.00
Low Keng Huat 166.20 1.00
HG Metal 152.90 1.00
Lian Beng 124.50 1.00
Tai Sin 117.70 1.00
Koh Brothers 98.30 1.00
Hiap Seng 83.50 1.00
KSH 52.90 1.00
OKP 58.40 1.00

Financials Stock Index
Component stock
Market Cap (S$M) Adjusting Factor
DBS 28947.90 0.50
UOB 28557.90 0.50
OCBC 25575.30 0.50
SGX 7437.10 1.00
Great Eastern 7819.20 0.50
UOB-Kayhian 1217.50 1.00
Hong Leong Finance 1506.70 1.00
Kim Eng 906.10 1.00

Note that because the market caps of the three banks are so big, the adjusting factors of 0.5 are used to tone down their weighting in the index to prevent their overwhelming representation.

Property Stock Index
Component stock
Market Cap (S$M) Adjusting Factor
Capitaland 16430.50 1.00
City Development 10202.40 1.00
Hong Kong Land 13428.50 0.50
UIC 4063.60 1.00
Keppel Land 3490.00 1.00
Wheelock 2058.10 1.00
Guocoland 1961.20 1.00
Allgreen 1447.20 1.00
Wing Tai 1166.30 1.00
Hotel Properties 1275.80 0.50
Ho Bee 587.50 1.00
Hong Fok 418.80 1.00
SC Global 447.50 1.00
Orchard Parade 345.50 1.00
Guthrie 323.40 1.00

FTSE Sector Index
The FTSE REIT sector index will be included in the daily update. It provides a good update to the market performance of the REIT sector.

HotStocksNot Indices Reconstitutions 2008

2008-06-23T15:56:00.004+08:00

Since I formed my various sector indices in June 2006 I have not reviewed the component stocks, only removing certain ones when they were delisted. Since it's exactly two years to the month since then, I thought it's a good time to review the stock components and add new ones/remove old ones where appropriate. Below are the revisions, effective immediately.

Choosing of component stocks

To recap:
Component stocks are typically chosen on the basis of the following:
1. Market cap
2. Trading liquidity
3. Track record
4. Expectation of future performance (stability, growth, trading liquidity)
5. Intangibles (eg. institutional coverage, relevance to China sentiment, mindshare in investors' and traders' general attention span)

I also will usually not include stocks that were listed within the last 6 months because their post-listing track record is absent.

China Stock Index

Remove: (X9 stocks) Sinomem, Fung Choi, Asiapharm, HTL, China Dairy, Luzhou Biochem, C&O Pharm, CHT, DMX Tech

Add: (X9 stocks) Sino-Enviro, Synear, China Energy, Sunvic, Yangtzejiang, China Aviation, Sihuan Pharm, China XLX, Yanlord

Oil&Gas Stock Index

Remove: (X3 stocks) K1 Ventures, SSH, Sky China

Add: (X5 stocks) Swiber, Hiap Seng, CH Offshore, Mermaid Maritime, China Oilfield

Enviromental/Water Stock Index

Remove: (X2 stocks) Zhonghui, Dayen

Add: (X2 stocks) Epure, CNA, ecoWise

Plastics Stock Index

Will be discontinuing this one as it has already served its purpose of contrasting sector underperformance with the rest. Most of the stocks here are so illiquid that it is not worth tracking further until further notice.

Retail Stock Index

Remove: (X3 stocks) Metro, Popular, Pertama

Add: (X4 stocks) Thai Village, Challenger, The Hour Glass, Guthrie

A writeup on Silverlake Axis (on NextInsight)

2008-06-12T08:48:00.002+08:00

No, this is not a hotstocknot article. I wrote this article for NextInsight about one of the lesser-known stocks in my virtual portfolio, and thought I'd reproduce it here in my blog. As always, grab the facts, but be sceptical of my opinions and think it through yourself.

You may be aware of a Stock Challenge organized by NextInsight and that I am one of the invited participants. In my virtual portfolio is a stock called Silverlake Axis, and I’m writing this article as many people are not familiar with it.

The company is a software services provider for banks, with a focus on Asian banking. Here is how the company describes itself on its website: “Silverlake Axis is a leading provider of end-to-end universal integrated banking solution. The Group's award winning Silverlake Axis Integrated Banking Solutions are implemented at over 75 customer sites in Asia including 40% of the Top 20 Largest Banks in South East Asia.”

I shall not go too much into the details of what constitutes core banking software, which is what Silverlake provides.

Generally, my research on a company’s business does not go beyond the first layer. Instead, I generally try to understand the competitive strengths of the company and its place in the industry value chain, rather than its product specifics.

Silverlake (market cap: S$381 million at stock price of 34 cents) has two key characteristics which appeal to me:

1. Financial strength

It has a very clean balance sheet with little debt and a lot of cash. It has a business model which produces strong operating cashflow because it collects licence income from its software. Its recurring capital spending is modest.

The cash it generates, plus the contracts it secures from Asian banks, suggests that the intangible assets associated with its Silverlake software are significant.

As a result, the fact that it’s trading at 5X NTA (net tangible assets) should not be given too much negative attention.

If a stock continues to generate high returns on its equity (>50%) with limited cash reinvestment, then that is a classic Buffett stock (think See’s Candy).

Related to its ability to generate strong cashflow, Silverlake has strong dividend payouts. It even issued a quarterly dividend of 0.5 cents recently after its Q3 result, bringing its payment to date to 2 cents in the current financial year.

I always like to focus on financial and earnings strength and sustainability, plus dividend sustainability, first and foremost because it gives a downside cushion – that is, it automatically allows me to manage the downside risk.

2. Business potential

One of my main investing approaches is to pick sectors that I like and Malaysian banking really does look quite interesting to me, especially Islamic finance. Malaysia has the biggest share of Islamic banking: it accounts for 70 percent of total global Islamic bonds in issue and 40 percent of global Islamic unit trust assets (see my article on Malaysian banking and real estate).

Arabs love Malaysia. They’re busy buying up stakes in Malaysian banks: RHB, EON, Affin. Think petrodollars and you will realize that the potential is enormous. The barriers to entry are immense: there’re few Muslim countries with reasonably strong financial infrastructure. Even as the Arabs come in, Malaysian banks are expanding outwards. Maybank is the best example, albeit getting some bad press as well from its aggressive acquisitions in Indonesia and now Pakistan, and it might not stop there.

What this all means for a Malaysian banking solutions provider like Silverlake is threefold:
* as the best-known Malaysian banking software company the potential of serving new Arab banks setting up shop in Malaysia is exciting;
* it can use its connections with these Arab banks to establish a beachhead in the emerging banking market in the Middle-East itself (it has already made a breakthrough there last year);
* it can follow its key Malaysian banking customers out of Malaysia (it has a strong working relationship with Maybank).

There are risks, too

Nowadays in the aftermath of the US subprime mortgage crisis, people won’t touch anything banking-related with a ten-foot pole.

In the case of Silverlake, it is important to note the geographical distribution of its banking customers.

It has a predominantly Asian (indeed, mainly Southeast Asian) clientele but it is being broad brushed together with other players in the financial industry. Its downgraded valuation is actually a good thing for the stock and its buyer, not a bad one.

The main risks are:

- Failure to secure more contracts. The last quarter saw a significant drop in licensing revenue due to fewer contracts, and a subsequent drop in share price. This should be monitored.
- IT spending of banks goes down globally as they become more cautious. Right now general IT industry vibes are that IT spending is still strong (which is why HP bought EDS, I think).

This is an above-average risk, high potential return stock, in my view. But the risk was higher several months back when it was trading at 60-80 cents. Now the valuation risk is significantly reduced at 30-40 cents. Over a down-and-up cycle, this could be a multi-bagger if Silverlake plays out its cards well.

Brokers' views

DBS Vickers, Kim Eng Securities and OCBC Securities have ‘buy’ recommendations on Silverlake at current prices. Interested readers can check up their reports for further opinions and research. As far as I know, there are no "sell" calls around.

Stock picks (on Nextinsight)

2008-04-07T11:33:00.004+08:00

I agreed to take part in a stockpicking game by Nextinsight recently where I would choose stocks to buy given $100k (hypothetically of course). Since the picks were published over there today, I thought I'd replicate it here as well for readers' interest:

Note that I could easily switch stocks, so please take my views with a pinch of salt and do your in-depth research accordingly. Also, I won't be following up on this investing game in my blogs. For regular updates, you can go check out the Nextinsight website (www.nextinsight.com.sg) where they do the writeups.

Acid test 2H07: Stock Performance

2008-03-02T22:43:00.004+08:00

(P.S: Click on the pictures to get a better view)
A belated semi-annual review of my hotstocknot picks. Remember that reference comparison prices are stock prices on the last day of 2H07 ie. Dec 31 2007.

As before, I review two lists of the stocks: the more recent picks from May-Oct 2007, labelled 2H07 Assessment, and the picks slightly further back from Jan-Apr 2007, labelled 1H07 Assessment. This constitutes my half-to-one-year medium-term horizon where I typically judge the performance of my picks.

As before, the mark of excellence is the 20% threshold for half-year comparisons (1H07), it becomes 40% for full-year comparison (2H06). As before, I concentrate on total return --- the price plus incorporation of all dividends during the period in question, as well as any stock splits/bonuses.

Assessment of 2H07 stock picks

2H07 Summary
Blue: 2 stocks
Green: 0 stocks
Yellow: 1 stocks
Red: 1 stocks

Have been slack and hence haven't done much articles for some time. Of the four I covered up till end-October, two have been on target (in blue), while the other two were off-target at least up till end-2007.

It is worth noting that since then, the depressed market has hit all four stocks below my price call. Those two blue ones, Ezion and HLG, have had it even worse; they're now about one-third to one-quarter of my price call. No market correction can do this if the company is sound. I'm completely vindicated in at least two of the hotstocksnot picks here, while the other two are still marginal.

Assessment of 1H07 stock picks

1H07 Summary
Blue: 5 stocks
Green: 1 stocks
Yellow: 1 stocks
Red: 1 stocks

Remember that the threshold return for colour coding is set at +/- 40% since this stocklist is further back.

Again, my hotstocknot picks as judged by end-2007 prices have been good; 5 out of 8 (blue) were spot-on. Since then, they have plunged downwards even more.

The other three non-blue ones were relatively marginal. With the big correction, I'd like especially to point out that I reverse my call on at least one of them --- Guthrie; I would call it a bargain stock now. Don't say I never recommend hot stocks.

I will try to do some more writeups. Perhaps I should do some shorting to really benefit monetarily from them.

Nice link: Blog

2008-02-23T12:02:00.002+08:00

I just checked from Google Adsense that the Search feature provided above was actually used by many readers to find Edison Chen photos. Quite surprising.

But anyway, here's a nice link as my show of appreciation to all you lusty oops I mean great readers out there. Check it out for 430+ photos compiled into one movie:

http://www.logavideo.blogspot.com/

An Overview of 2007

2008-01-01T22:33:00.000+08:00

(P.S: Sorry for any disturbances the advertisements above may have caused you)
If this overview is written at the end of 2008, it would be much clearer whether 2007marked the decisive turn of the 4-year global bull market or whether the now infamous subprime issue was another wall of worry that the bull market eventually scaled gingerly. As it is, the bull market that reached near-hysteric proportions by July 07 was cut dead in its tracks by the sub-prime crisis that unfolded and the volatility since then has been amazing; market strategists are left equally divided on the likely market direction in the coming year, and the general consensus is that the volatility will continue. Right right.....

1Q07
I had written on 1Q07 earlier (see article). The STI ended 2006 just below 3000, and it breached the psychological 3000-mark decisively in 1Q07. Construction stocks seized the investing public's imagination (I called for construction recovery to be the theme of the year for 2007 in my end-2006 HotTrendsWatch article), with strong price rallies in stocks like Lian Beng, Koh Brothers, Low Keng Huat. This quarter also witnessed a significant correction that brought the STI briefly back below 3000, but by the end of 1Q the equally strong rebound was complete. The correction was partly triggered by some bearish comments by Alan Greenspan on the state of sub-prime debt and its possible effect on the economy; it turned out to be remarkably prescient later in the year.

2Q07
Read my earlier writeup on 2Q07. The key themes had established themselves for the year. Domestic reflation, marked by property, which was marked by en-blocs at increasingly high psf ppr prices, and construction, which was marked by bullish forecasts on demand and orderbooks for the next 5 years; oil & gas, marked by high demand for offshore and onshore infrastructure and support vessels. Stocks linked to these themes rose throughout the quarter.

But the hot story for this quarter belonged to the penny stocks. Speculative frenzy built up over this period, and reverse takeover and other sexy stories, albeit sometimes of dubious origin, drove the penny stock market. Examples are Armarda, HLG, Lottvision, Ban Joo.

3Q07
The speculative frenzy on penny stocks continued until late July. That's when the market peaked.

And so began the real story of 2007. It started with Merrill Lynch selling off its sub-prime debt at huge discounts, and suddenly the liquidity in the market for these debt dried up, and suddenly Bear Stearns found several of its funds in trouble. Then banks started distrusting each other as they started to realise what was good collateral (the bonds and debt-related derivative instruments they held) might not be that good as huge markdowns on market value continued; they stopped lending to each other and inter-bank rates rocketed. The credit crunch spread to Europe, and to a lesser extent to Asia. By mid-August global markets had swung from extreme optimism to extreme pessimism, with significant negative impact on asset markets (including stocks).

The Fed began its rate-cutting cycle and that stabilised the markets, leading to a rally that brought the markets back near to peak towards the end of the quarter.

4Q07
However, that hoped-for stability did not materialise. The market swung back and forth over 4Q, as credit crunch fears kept persisting. Also, fears of a looming US recession started to materialise in popular media.

Volatility is seldom resolved on the upside. Hopes of Asia decoupling from the Western economies are also starting to fade, given that even if trade flows can decouple, it is quite impossible to expect financial flows to as well. The end of the quarter was marked by recapitalisation exercises funded by sovereign funds from Asia and the Middle East, in an ironic twist from that of a decade ago, when Asia was at the centre of the storm.

It is in this environment that we enter 2008 with some apprehension and plenty of things to hope for but little to expect.

Overall
This was an extract from my writeup on a summary of 2006:

"2007 will be considerably more challenging simply because people's expectations of the stock market have been raised, such that 20% annual return will be considered a failure. Under this kind of circumstances, there is great potential for the greater-fool theory to manifest itself as people keep bidding prices higher in anticipation of other people coming in to take over their line of stock; the challenge will be to exit at the high."

Indeed, such greater-fool behaviour did manifest itself, especially in 2Q07 and early 3Q07. However, the rewards were great as well, if one held steady through 1H07. Nobody would have expected such wild gains by the broad market over this period; I myself expected the 2007 environment to be "considerably more challenging". It just shows that the broad relationship between risk and reward to be generally close. For 2008, I find it difficult to make a call. If pressed, I would be contrarian and predict good rewards if one stays invested through 1H08 and then to be careful in 2H08; the consensus opinion appears to be a weak 1H08 but recovery in 2H08. My second view is that the investor might start pulling out his hair if he practises the buy-and-hold philosophy through 2008. Let's see how things pans out.

Lian Beng @ 61.5 cts ( Construction / Singapore )

2007-10-28T12:17:00.001+08:00

Final Poll Results: 63:27

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Cyclicality of industry might be overlooked

2. High current valuation for construction segment

3. Limited upside for current property developments

Lian Beng is one of Singapore's largest home-grown builders and is poised to benefit from the multi-year construction boom seen to last for the next 2-3 years at least. The market has recognised this and run up its price from ~15 cents at the start of 2007 to >60 cents today. This will be another hotstocknot call on valuation grounds.

Firstly, it is important to recognise that construction, as a downstream service provider to property development, is subject to cycles like the latter (though less because demand from government is often counter-cyclical). This must be factored into valuation as a risk.

Lian Beng, besides being a construction player, has also recently taken equity stakes in property developments which it is building. There are hence two parts to its valuation: construction and property development. Let's consider the former first.

The company by its recent disclosure has a construction order book of about S$575M. I would expect it to be spread over the next three years. These include mainly private housing projects and a contract to build the substructure for the Marina Bay IR, seen as a plum project. By most brokerage estimates, the group's annual revenue is expected to be in the region of $300-400M over 2008-10, which I shall not dispute. As for margin, there is an abundance of construction projects which might lead to a shortage of building capacity, which means the bigger builders can cherry-pick projects offering good margins. Margin expansion is certain; however note that although many small builders (and a few big ones like Econ and Chew Eu Hock) have failed during the doldrum years, there are the foreign builders such as Ssangyong, Sato Kogyo, Penta-Ocean and China State Construction which have been undertaking mega-projects with plum margins (eg. Vivocity, Esplanade, also the Marina Bay IR hotel recently) over the years; the building capacity constraint should not be overstated. Let's use pre-tax profit margin of 5%, a reference from the last construction boom of 1999-2000. That brings an after-tax profit of $16M on $400M in annual revenue, or 3 cts earnings per share. (Furthermore, it should be noted that according to Lian Beng's latest FY07 results, it would have been close to net loss if not for other income that is non-recurring, in a period when construction was already on the recovery trail).

In order to derive what P/E the construction arm is trading at, let's look at the income that could be derived from Lian Beng's current property development stakes. It has equity stakes in three condominium projects: a 20% share of a Simon Road development (land cost $290M), a 10% share of an Upper Bukit Timah development (estimate land cost to be $70M by scaling up construction costs), and a 25% share of Lincoln Lodge en-bloc (land cost $240M). It also has full control of a development at Mountbatten Road at land cost $40M. Note that all these deals were done from June 2007 onwards, which means Lian Beng is not an early bird to the game and can hardly expect windfall gains given the government controls recently. Applying a 30% profit margin to land cost, I would calculate the overall undiscounted gains from Lian Beng's current developments (accounting for its equity stakes) to be ~$50M, or 10 cts per share.

Subtract this from current price of 61.5 cts and we get market valuation of Lian Beng's construction business to be 51.5 cts/share or forward PE of 17X. It is rather high, remembering my earlier note of construction being a cyclical business and all my assumptions being quite liberal so far. There is limited upside from this point.

The construction industry outlook is good but this is not one of the better stocks in terms of valuation. Caveat emptor.

Afternote (on 13 Nov):
I just read that Kim Eng had set a target price of $1.22 for Lian Beng in a report that says "Ah Beng is back!". My comment that "Kim Eng is mad". They are assuming a pre-tax profit margin of 15% which explains why their target price is so high while I call it a hotstocknot (I assume margin of 5%). Let's see who is right. For reference, peer KSH reported interim profit with pre-tax margin calculated at ~4.8%.

Poll
I agree that Lian Beng is a hot-stock-not: Agree/Disagree

The new FTSE indices

2007-10-07T21:24:00.000+08:00

The new FTSE indices start running tomorrow and so far the new STI plus the China theme index are the ones that have been given more press attention. Of course, below the new STI index are the midcap index, smallcap index and then the fledgling index (interesting name). And there are a whole host of sector indices tracking the various sectors. The FTSE site does not seem to explictly present the stock components of these various indices, so I did some data crunching and the index constituents for each index are presented below, together with my comments if any. The constituents are sorted in descending order of index weight (which is a function of adjusted market capitalisation):

New FTSE STI index
There are 30 constituents.

FTSE Midcap index
There are 50 constituents.

FTSE Smallcap index
There are 195 constituents. I only show the top 40 constituents. The remaining ones can be accessed via the links provided below.

Next 40 stocks
Third 40 stocks
Fourth 40 stocks
Last

FTSE Fledgling index
There are 222 constituents. I only show the top 40 constituents. The remaining ones can be accessed via the links provided below.

Next 40 stocks
Third 40 stocks
Fourth 40 stocks
Fifth 40 stocks
Last

FTSE China index
There are 50 constituents.

Sector indices
I have some doubts about the FTSE-generated sector indices, because the components do not seem to capture the sector well. For example, the Oil & Gas index comprises only 9 stocks, with no Keppel or Sembcorp Marine or infrastructure builders like Rotary. The problem lies in the constraint that a company can only belong to one of the sectors as defined by FTSE; hence if Keppel belongs to the Industrials sector index, it cannot also be classified under the Oil & Gas sector index. Also, the sector index weightings do not add up to 100%, even though the number of constituents is correct. That is perplexing. I believe the FTSE sector indices are still a work-in-progress.

Real Estate Developer Index

Real Estate Trust Index

Oil & Gas Index

Basic Materials Index

Industrials Index

Consumer Goods Index

Healthcare Index

Consumer Services Index

Telecommunications Index

Utilities Index

Financials Index

Technology Index

Reference:
(1) FTSE website

Ezion @ 1.87 ( Offshore support / Singapore )

2007-09-09T22:39:00.000+08:00

Final Poll Results: 10:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. High valuations

2. Concept/growth stock will find difficulty in attracting further money given current tight liquidity environment

It has been a while since my last writeup and it's time I got back to my old routine.

It seems mightily obvious that tomorrow the market will drop and hence my call materialises straightaway, but a reminder: my call is more for the medium-term of 6-12 months, and anyway a weekend is when I feel like doing some research and do my writeups.

The "honour" this time round belongs to Ezion, known several months back as Nylect and going nowhere both business-wise and stock price-wise another couple of months back. Yet, within the last few months, it has probably been among the listed companies with the most corporate activites, as reflected in the flurry of corporate announcements in the SGX website.

Ezion/Nylect was originally an M&E services provider in the construction industry until Chew Thiam Keng, the former managing director of KS Energy, came into the picture and took up a 145M share placement at $0.056/share in February 07, acquiring effective majority control. What followed was a re-positioning of the group as an offshore vessels charterer/services provider with some small charter deals and further fund-raising exercises, with a 17M new share placement at $0.42 in May, another 29M placement at $1.29 in July, and another 14M coming up soon. Key among the deals was Ezra Holdings, which has gained significant clout in recent years, taking over part equity control from Chew via a purchase of 20% equity stake in Ezion via a 50M-shares vendor sale.

The reasoning the market adopted, in running up the stock from the low 10-20 cts to its current stratospheric $1.80+, was that Chew had prior experience in running KS Tech to become a strong player in the offshore rig market, and could apply the same Midas touch to Ezion. Besides, Ezra could contribute further backing and deals to the company as an equity-holder (indeed, it provided a letter of intent for multi-year charter of 2 units of Multi-Purpose Self–Propelled Jack-Up Rigs from Ezion in July .... units that the latter did not actually own). Lastly, the institutional holders that took up stakes in Ezion via the last two placements --- Legg Mason and Stichting pension fund (a Dutch pension fund) --- surely suggested "big boy" interest?

While there is certainly some logic behind the above suppositions, the exuberance might have been overplayed. That the company was under the red-hot offshore oil-and-gas theme play accentuated the bullishness. The valuation looks abominable. Adding the sum-total of all placement receipts of $53M to the previous net equity of $12M equals $65M, divided by a new total of 275M shares outstanding, equals 23.5 cents net tangible assets, mostly cash. That translates to 7.9X P/NTA ratio. That compares with a P/NTA ratio of 6.4X for Ezra, the most richly-priced of all offshore players. Furthermore, the balance sheet assets of Ezra are primarily in fixed assets (ie. vessels), while that of Ezion are mainly in cash. Under many circumstances, cash is king, but this is an exception, because offshore vessels are heavily in demand now, and the aggressive moves of Ezra over 2004-2006 in vessel orders turn out to have put it in prime position for securing offshore projects; the book value of the fixed assets on its balance sheet are most likely substantially below current market value, having been acquired some time back. On the other hand, Ezion will have to convert its cash on hand into fixed assets that will not come cheap in the current buoyant environment with tight shipbuilding capacity and/or resale market, and as we move along the cycle it might well position itself too late as overall industry vessel supply builds up. The risk is significantly higher, and at a higher valuation furthermore.

The further restructuring and expansion of Ezion will also rest on further fund-raising exercises. The recent liquidity squeeze shows us that nothing can be taken for granted now; capital from now on might be at a premium and while that doesn't mean nobody will be putting money into any venture, it certainly suggests funds will be a bit more discerning with their money. While Ezion has raised cash to follow through with some of its deals secured in the past few months, it is unlikely that new funds will be so glad-handed as to inject new equity without looking at the bottomline after the restructuring; the first FY statement post-restructuring is still several months away, and concrete and strong profitability are unlikely to be seen for some time. It may be cruel to call it a concept stock but until real numbers emerge, that is essentially what Ezion is.

In a risk-averse environment (which might be what we are transitioning towards), value trumps growth. Ezion essentially is a play on streams of accelerating earnings extending far into the future ie. a growth play (being kind now by not calling it a concept play). This is the kind of stock to avoid when there is basically no anchor to its stock price; remember that in an environment with increasing risk aversion, future earnings are discounted at increasingly higher rates and growth stocks will face greater markdowns than value stocks.

Poll
I agree that Ezion is a hot-stock-not: Agree/Disagree

Acid test 1H07: Stock Performance

2007-07-17T08:34:00.000+08:00

(P.S: Click on the pictures to get a better view)
My semi-annual review of my hotstocknot picks. As before, I review two lists of the stocks: the more recent picks from Nov 2006-Apr 2007, labelled 1H07 Assessment, and the picks slightly further back from Jul-Oct 2006, labelled 2H06 Assessment. This constitutes my half-to-one-year medium-term horizon where I typically judge the performance of my picks.

As before, the mark of excellence is the 20% threshold for half-year comparisons (1H07), it becomes 40% for full-year comparison (2H06). As before, I concentrate on total return --- the price plus incorporation of all dividends during the period in question, as well as any stock splits/bonuses.

Assessment of 1H07 stock picks

1H07 Summary
Blue: 3 stocks
Green: 2 stocks
Yellow: 3 stocks
Red: 6 stocks

Given that the blue-chip (and hence slower-moving) STI has risen 20% from the start of 2007, while the SESDAQ has approximately doubled, I won't be too hard on myself here. So I have 6 bad hotstocknot picks (in Red); but out of these, I would still think I have made relatively good contrarian calls in Guthrie, Amara and Auston because their momentum has lagged significantly since, though I have failed to appreciate the strong sustained institutional interest in Banyan Tree and the seemingly uncontested structural steelworks niche of Yongnam. As for Sitra ... suffice to say that this is a sleeper hit which I don't know where it is coming from.

Indeed, I'd rather take pride in the other calls, seeing that anything below 20% gain for this half-year is a significant underperformance to the rest of the market. In particular, my "good picks" would be Osim, GemsTV, Luzhou Biochem; things have panned out exactly as I'd seen they would.

Assessment of 2H06 stock picks

2H06 Summary
Blue: 0 stocks
Green: 4 stocks
Yellow: 7 stocks
Red: 6 stocks

Remember that the threshold return for colour coding is set at +/- 40% since this stocklist is further back.

I am inclined to be a bit harder on myself for this batch of picks. That's because over the course of one year the supposedly unfavourable valuation/fundamentals (according to me) should have weighed into the prices, so if they didn't then I'm wrong. Furthermore, I remember that in the last review (in early 2007) this batch of hotstocknot picks was quite unsatisfactory as well. My major inadequacies were in Federal, Ezra and Yanlord.

But on the whole, not too bad, given that there are many green and yellow stocks (ie. below 40% gain/loss), for a banner year starting from post-correction July 2006 till now. I am particularly proud of my views in Thai Beverage, China Sun, China Precision, Ipco and Eucon where I have been vindicated by corporate developments subsequent to my hotstocknot calls.

All in all, I've enjoyed doing the background research for these articles and I've gained from the work personally. It's been hectic this year and I've done less articles but they will still be coming.

Quarterly Summary 2Q07

2007-07-08T21:01:00.000+08:00

2Q07 Summary
First of all, note that the 2Q performance lasted from start of March until 29 Jun, the last trading day of 2Q. I have been one week late in coming up with this review so do not mistake the closing prices as that of last Friday's (6 July already).

It has been a scintillating second quarter. Yet again there is a dramatic rebound from a sharp market downturn, similar to that in May 06. However, it appears that this time the rebound was even quicker and stronger. I estimate that indices were back to new highs within one month of the sharp drop, while it took several months for the market to recover from May 06.

It cannot fail to escape market watchers that small caps in particular have had the most amazing run of any theme/sector in 2Q. Nearly 50% up in 3 months! All thanks to the RTO phenomenon which means calling hotstocksnot is turning out to be particularly hard for me nowadays; if it's cheap it's now good; if it's mid-priced its business is probably decent; if it's expensive it's probably semi-bluechip and hence has too strong fundamentals to collapse. This sort of thinking seems to be market dogma nowadays.

When one looks at this kind of figures, the natural reaction is to anticipate a market correction anytime soon. However, remember we were all waiting for one at the end of 2006. As always, when in doubt, revert to fundamentals to assess the likelihood of a strong rebound in the event of a market correction. A sizeable margin of safety won't do harm either, though it's getting harder to pick those with such qualities.

As in 1Q07, below are the best and worst performing stocks over the quarter. They are arranged first by absolute amount gain/loss, then more relevantly for many, the percentage gains/losses. Note: several stocks appear to have gained/lost massive amounts but this is because of corporate moves like share consolidation, stock splits etc, so be careful (eg. Delong underwent a 1-for-10 consolidation).

Indices
STI 3548.2 316.96 (9.8%)
SESDAQ 262.29 86.76 (49.4%)
SGX Finance Index 2539.52 163.00 (6.9%)
SGX Property Index 1649.84 156.00 (10.4%)
SGX Hotels/Rest Index 1602.54 217.91 (15.7%)
SGX Construction Index 741.81 195.10 (35.7%)
Retail Index 137.50 15.43 (12.6%)
Plastics Index 117.00 29.52 (33.7%)
Env/Water Index 175.69 23.10 (15.1%)
Energy Index 183.43 37.74 (25.9%)
China Index 199.84 34.82 (21.1%)
PP China Index 249.65 42.08 (20.3%)

Stocks Summary

By Absolute Amount

Stocks below $1: Quarter's Top Gainers & Losers

Stocks between $1 to $2: Quarter's Top Gainers & Losers

By Percentage

Stocks below $1: Quarter's Top Gainers & Losers

Stocks between $1 to $2: Quarter-Year's Top Gainers & Losers

Tiong Woon @ 88 cts ( Cranes / Singapore )

2007-06-05T21:34:00.000+08:00

Final Poll Results: 30:14

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Historical margins and high valuations suggest little further upside

2. Unconvincing track record

3. Incongruous expansion strategy

I have been bullish on the infrastructure sector for a long time now ("Infrastructure boom"), and the current optimism on construction stocks has vindicated my views. In light of the ongoing regionwide infrastructure boom, why a bearish call on Tiong Woon?

This is not because of a pessimistic outlook on the sector per se; the benign outlook on infrastructure and construction in Asia remains intact. It is more of a valuation call, reflecting my view that at current price, upside may be limited.

After a long 2-3 year lull period over which the company's share price has languished in the region of 20-30 cents, the stock has broken out this year and now trades at three times its previous trading range. It has coincided with a market-wide revaluation, compounded with current bullishness over construction-related stocks. Its 1H07 pre-tax profits were double that of the previous year's, and together with several recent initiatives including setting up of their Saudi Arabian operations and proposed acquisition of a tower crane company, fuelled further market optimism on the company's prospects.

Assuming the excellent 1H07 results are sustained into the second half, Tiong Woon should report about $17-18M pre-tax profits for the whole of FY07. This is reasonable because the company achieved ~$8M pre-tax profit for 2H06 and $8.8M for 1H07, exhibiting a reasonable trend over two half-years in what I would see as a non-seasonal industry. Based on $18M pre-tax profit taxed at 20% (the effective rate actually varies, but I use an average based on previous trends) it works out to 20X PE for FY07 based on current market price of 88 cents. Hardly cheap since such a valuation is comparable to market leader Tat Hong, roughly four times its size.

It is always difficult to value a stock which seems to have excellent prospects whose cashflows are yet difficult to ascertain. That is partly the reason why such stocks are typically well-traded; because you have equal numbers of people sanguine about its prospects and those unsure about its high valuation; high uncertainty brings high liquidity. For asset owners like Tiong Woon which basically are dependent on asset demand and prices, perhaps a good performance measure is the return on asset (ROA) ratio and a useful way to get a perspective is to look at the historical evolution of this ratio.

The figures suggest that it might be difficult to advance too far from the 10-11% pre-tax ROA peak achieved within the last 7-8 years. Some might argue that we are seeing a new paradigm given the lack of construction capacity, but I say, what's the further upside? Tat Hong has guided for a 10% rise in rental prices over the next year, which may be seen as an industry projection. That may be taken as a profit growth of 20-30% over the next 1-2 years as the industry supply bottleneck works itself out, before demand wanes and tight supply of construction equipment eases.

But Tiong Woon's valuation seems to have priced in all the upside but little downside. It is worth pointing out that the abovementioned profit growth is by no means guaranteed, looking at the company's track record: although profitable, it has been unable to grow profits significantly in FY04-06 amid an infrastructure boom from which rival Tat Hong was able to benefit. Investors will remember late 2003 when the stock was ramped up to nearly 70 cents on hopes of mega-contracts from an oil-and-gas consortium it formed to explore opportunities in Russia; in the end hopes came to nought and prices went back the way they came. The episode illustrated how easily the stock could be ramped up (it was Commerzbank that was accummulating back then) and how easily it could collapse when expectations were not met. To me, for the present, it is especially incongruous that for a company of its small size, Tiong Woon is chasing contracts around the world (wind farms in China, crane transportation to West Africa, new ventures in Saudi Arabia) when the boom is right here in Singapore (to those who think it will feature strongly in the IR construction, I say it's more dream than reality). The pushers are now JP Morgan and some French bank (Credit Agricole). Let's see how things develop.

Poll
I agree that Tiong Woon is a hot-stock-not: Agree/Disagree

HLG @ 0.39 ( Hotels / Singapore )

2007-05-13T21:46:00.000+08:00

Final Poll Results: 16:6

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Still loss-making ex-non-recurring items

2. Should be worth less compared with last peak cycle

3. A greater fool game

In the current red-hot penny stock-dominated market, anything goes. Cheap sub-10 cent stocks are "potential pickings for RTO plays". If they remain cheap, punters will see them as bargains. If they surge up, it is the market "signalling" that business restructuring/acquisitions are in place and hence these are also punt-worthy. What a win-win situation.

HLG was previously known as LKN-Primefield, with operations running from property development to construction to operations of hotels and restaurants to even computer distribution; it is the hotel operations that is the group's main business nowadays. The group was badly hit by the Asian flu in 1997-98 when they lost over $100M over the two years. It remained in the red all the way up to FY04, losing an average of ~20M every year due to high debt servicing and depreciation, and only stopped bleeding red ink from FY05 onwards on the back of an "asset rationalisation" program ie. asset divestments (not that it had not been selling off assets in earlier years ---- it had been doing so as well, albeit in a considerably weaker market).

From my point of view, the current valuation of HLG is one of the most glaring examples of over-valuation in a bull market. If one looks at the previous two FYs (FY06 and FY05) where HLG/LKN had supposedly turned around, and strip away non-recurring gains (asset disposal gains in both years and substantial exchange gains in FY05) the group was actually still loss-making in its business --- comprising hotel operations in Shanghai, Qingdao, Cameron Highlands, Singapore (since sold off), and service apartments in China.

If the value is not in the future earnings (based on track record), then surely it's in the assets? Judging from the gains made in disposal of LKN Building and Tristar Hotel (both in Singapore) these two years, there is indeed some value to be unlocked. The books indicate negative NTA, but the assets might be worth more on liquidation. How do we value them?

Perhaps we can do a short-cut method and compare current market valuation of the group to the last up-cycle before all the financial trouble set in for LKN. In 1997 LKN was trading at $1.50 with 147M outstanding shares, equating to a market cap of $220M. Fast forward to May 2007, and with 853M shares in issue (due to bank debt and bond conversion to equity) HLG is trading at $0.39 or $330M total market cap. If we take the 1997 pre-crisis market cap as the upper limit of what the market considered LKN's assets to be worth (remember, the sentiment on emerging economies then was equally sanguine), then current value of HLG is definitely overvalued. The present assets held under HLG are but a subset of what LKN had during 1997. Since 1997, HLG has sold, among others, its Equatorial hotel, LKN-Prinsep House and its Jurong East HQ building in Singapore, a 25% stake in Shanghai's Pidemco Tower (probably would have been worth a lot today), its Suzhou property development company, plus the abovementioned recent sales of LKN Building and Tristar Inn. And it is under considerably more financial risk today, even after all the debt-to-equity conversions, given that its capital structure is horrible: it still owes $170M in long-term loans with zero equity backing. Bottomline is: only value subtractions from its 1997 business operations.

So why the charge up from sub-10 cents to nearly 40 cents recently? Rumours swirl around talking of M&A plans. As I said earlier, rationalisations of value abound in a bull market: the stock surges up and everybody assumes there must be an underlying reason and hence the price movement itself justifies its own celestial orbit. Forget about the price movement. Some might remember that Hong Leong Asia's recent attempted takeover of LKN via their vehicle Grace Star, at an opportunistic 2 cents per share, was knocked back; by then they had accummulated 45% of HLG after conversion of their substantial holdings of HLG's convertible bonds. What might they do after failing to take control? Buying up at substantially elevated market prices? Also remember the debt restructuring several years back that left the three local banks --- DBS, UOB, OCBC --- with tens or even hundreds of millions of the company's shares. What all this means is a substantial share overhang with enormous profits marked at today's market prices, for Hong Leong and the three banks.

A saying comes to mind:
"There is a tide in the affairs of men. Which taken at the flood, leads on to fortune; Omitted, all the voyage of their life Is bound in shallows and in miseries"

We are undoubtedly in the midst of a flood of liquidity at the moment. Who will take the fortune, and who will be bound in miseries? It is not wise to play the greater fool game with such stocks now.

Poll
I agree that HLG is a hot-stock-not: Agree/Disagree

Lottvision @ 58.5 cts ( Gaming / China )

2007-04-17T22:31:00.000+08:00

Final Poll Results: 16:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Overvalued concept stock

Gaming in the biggest potential market in the world ---- that sounds like a potent combination and perhaps it is what has propelled Lottvision to its current dizzying heights from the 10 cents just early in Jan 07 --- a quintupling in market value.

The company was previously known in its previous incarnation as Multivision, where it specialised in surveillance camera systems. It had been quiet ever since it sold off most of its surveillance systems business in early 2006 (distributing a one-off dividend to shareholders from the sale); now although it still has a surveillance system division, the company has professed that it is concentrating on expanding the lottery business in China.

In view of the fact that (1)the surveillance system business has had an unsteady earnings track record since the main arms were disposed of, and reported losses in the most recent 3Q07, and that (2)the company does not appear keen to focus its efforts on this business further, we can at most measure the value of the business by its tangible book value. Excluding the substantial "intangible assets" (no longer relevant since they do not value-add if Lottvision do not plan to grow further) and interest in PAL (the lottery arm), the surveillance system division is at most worth about 10 cents/share according to the accounts.

And that means the interest in PAL is valued at nearly 50 cents/share currently. PAL in its present form operates mainly in China, with a 51% stake in the leading domestic lottery terminal distributor, a 100% subsidiary providing venue management consultancy services to domestic lottery centres, and a 60% stake in a JV to develop interactive mobile lottery games. The entire premise of Lottvision's upward surge recently is, I believe, due to a restructuring that has turned a JV relationship between Lottvision and Melco in the form of PAL, into an ownership structure where Melco effectively controls Lottvision as the latter's largest shareholder. Melco is of course the listed group vehicle of Macau tycoon Stanley Ho.

Many believe that Stanley Ho's involvement will add tremendous value to the group. He certainly has connections and track record. Indeed, part of the reason for Lottvision's strong surge is the sudden realisation of Stanley Ho's involvement, even though technically, Melco was already linked with Lottvision in the PAL venture last September when the JV was first set up. Melco's vehicle in the JV then was via Bright Ally, which is why nobody realised the link.

What are my reasons for calling a hotstocknot then? It all boils down to valuation. As analysed above, the 50ct/share valuation for 70% of PAL (the other 30% directly under Melco) under the new structure suggests that this 70% stake is considered by the market to be worth $300M, based on 620M shares (including the 176M new shares to be issued to Melco in the restructuring). And all this for an operation that, from inception in September-December 2006, incurred a loss of HK$3.5M. This is one hell of a concept stock.

How can one justify paying this kind of money for a money-losing operation? It is of course easy to tell me not to be myopic and that I should instead focus on the size of the Chinese lottery market and the high annual growth rate of 30-40%, and the personal influence of Stanley Ho. But look at it this way: out of the three operating arms of PAL, the venue management consultancy arm has only recently started, and the technology solution venture is work-in-progress; this leaves BTI--- the lottery terminal division as the only mature lottery operating business in PAL. It supplied 60% of the lottery terminals purchased by China's sports lottery administration centre ..... and PAL still made a loss? That is surely a statement about the profitability of the business!

Another possibility, of course, is that the operating expenses for starting up the other two arms are sucking up funds. If so, where is the break-even point? That is the classical problem with concept stocks: there is a lack of clarity about when the business reaches a self-sustaining stage, a situation which actually encourages heavy trading and speculation (there is evidence that the more unclear an outcome, the more likely people are to trade); the problem is: one doesn't know when the music stops.

Can anybody tell me how to value PAL's business? I seriously doubt so. Lottvision/Melco are certainly not going to be allowed to operate lotteries in China under the present lottery system (only two state agencies are allowed to do so); they can only participate via provision of related services (eg. venue management) and products (eg. terminals, software platforms). It hardly suggests any kind of monopolistic advantage; if foreigners are now allowed to operate casinos in Macau and compete with Stanley Ho, surely the path is open for them to provide related services/products in mainland China under a deregulating regime (eg. Tabcorp entered JV to provide support for China's lottery market - Jun 2005). Lotteries are rather mature in the three main cities of Guangzhou, Shanghai and Beijing, and expansion is expected to be driven by growth in regional provinces; however distribution costs would be higher in these areas. This is not a Genting IR-type venture where the development is ground-breaking, receives support from the government and is guaranteed a duopoly for ten years; the PAL business is supporting an industry that is actually not new in China (lotteries have been around since the 1980s), experiences (undefined) competition in its products/services, and is loss-making with no guarantee of a turnaround in the near future.

And Legg Mason is buying aggressively into it? Perhaps the right conclusion to draw is that their accumulation explains why the stock's price has been rising, rather than that one should buy in because Legg Mason is buying.

References:
(1) Lotteries and Gambling in China: A Market Analysis 2002

Poll
I agree that Lottvision is a hot-stock-not: Agree/Disagree

Quarterly Summary 1Q07

2007-03-31T13:33:00.000+08:00

1Q07 Summary
From the word go, the markets went on a spectacular run from the beginning of 2007. After some false scares (eg. a brief market correction after Indonesia's sand ban was initially announced), the big one came almost right after the Year of the Fire Pig was heralded, leaving many roasted. But amazingly, we are now almost where we were before this massive correction set in.

If we examine the sector indices below, it is clear that small caps have done very well. And the broad theme that has shown strength appears to be domestic reflation, as encapsulated in the performance of property, construction, hotels --- all recording >20% sector index gains over the quarter.

Also included below are the best and worst performing stocks over the quarter. They are arranged first by absolute amount gain/loss, then more relevantly for many, the percentage gains/losses. Note: several stocks appear to have gained/lost massive amounts but this is because of corporate moves like share consolidation, stock splits etc, so be careful (eg. Time Watch, Genemedix were shown as top gainers but the reason was in fact due to share consolidation).

Indices
STI 3231.24 245.41 (8.2%)
SESDAQ 175.53 32.04 (22.3%)
SGX Finance Index 2376.52 152.60 (6.9%)
SGX Property Index 1493.84 307.07 (25.9%)
SGX Hotels/Rest Index 1384.63 377.54 (37.5%)
SGX Construction Index 546.71 98.11 (21.9%)
Retail Index 122.07 4.19 (3.6%)
Plastics Index 87.48 -6.90 (-7.3%)
Env/Water Index 152.58 26.53 (21.0%)
Energy Index 145.69 18.97 (15.0%)
China Index 165.02 26.23 (18.9%)
PP China Index 207.57 30.61 (17.3%)

Stocks Summary

By Absolute Amount

Stocks below $1: Week's Top Gainers & Losers

Stocks between $1 to $2: Week's Top Gainers & Losers

By Percentage

Stocks below $1: Week's Top Gainers & Losers

Stocks between $1 to $2: Week's Top Gainers & Losers

Luzhou Biochem @ 65.5 cts ( Sweeteners / China )

2007-03-27T08:04:00.000+08:00

Final Poll Results: 6:5

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Raw material risk might escalate as corn prices remain high

2.Substitution demand abates as sugar prices fall

The main dynamics that drive my coverage of this stock are similar to that for China Sun last August. The key issue is still that of commodity prices.

Except that here we're looking at two materials. They are corn and sugar.

The main business of Luzhou is production of corn sweeteners, which comprises nearly 70% of FY06 revenue. A smaller proportion is taken up by corn starch and miscellaneous by-products, which take up the other 30%.

Corn is the common and the main raw material for these products, and accounts for a big proportion of the direct costs that comprise over 80% of FY06 revenue. Sugar, on the other hand, is important for another completely different reason: it was the high price of sugar in early 2006 that prompted a shift to corn sweeteners as a substitute, hence raising Luzhou Biochem's margins then.

A series of corn price charts from 2004-06 taken off CBOT (Chicago Board of Trade) is shown below for comparison:

Corn prices

Sugar prices

The drastic surge in corn prices that has sustained its momentum into 2007 has its origins in the use of corn for production of ethanol, further propelled recently by George Bush's plans to strongly support ethanol as an alternative fuel. The high corn prices has already claimed China Sun as a victim, as well as its peer on the Hong Kong Exchange, Global Bio-chem. Both are trading substantially lower.

As for sugar, it surged in early 2006 on the back of demand from ethanol production, particularly in Brazil. However, strong supply due to rising plantings and bumper crops has overwhelmed demand leading to a continued slide in prices through 2006. What is clear is that the substitution demand effect for corn sweeteners will be affected by this abundance of sugar, the incumbent choice.

It is not surprising that Luzhou Biochem's gross margin has declined year-on-year starting from 3Q06 onwards. There is a double squeeze: pricing pressure and possible demand reduction on the revenue side, and upward cost pressure on the raw material (corn) side. Although it enjoys a 9.5X trailing PE valuation, it was in a year where the sugar substitution effect was in full play. It is difficult to see it happening again in 2007.

Luzhou was fully aware of this and has been expanding production rapidly in an attempt to compensate for possible slowing margins by growing production volume. The success of this strategy is still uncertain; meanwhile the commodity price trends suggest that Luzhou could be in for a bad 1Q07, as corn prices sustain their heights while sugar prices dip below their 1Q06 price levels one year ago. The investors who bought the recent placement of 36M new shares at 73.5 cents might, indeed, eventually constitute an overhang instead of a support.

References:
(1) CBOT Commodity Prices

Poll
I agree that Luzhou Biochem is a hot-stock-not: Agree/Disagree

Lifebrandz @ 12.5 cts ( Lifestyle / Singapore )

2007-03-15T23:19:00.000+08:00

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Little leverage from past(discontinued) business

2. New business can be volatile

3. Barely profitable

4. Little margin of safety based on P/NTA

Lifebrandz in its previous core business was running several lines of healthcare/slimming products (eg. Extrim) which ultimately proved to have peaked at its time of IPO as new competition entered the fray and shot down its margins. Now it is in the "lifestyle" business which basically is a euphemism for its night entertainment business in the form of the several nightspots that it opened to some degree of success. The main area that it operates is the Cannery at Clarke Quay, where it appears to be one of the main players.

So what is a "lifestyle group" like this worth? It is rather difficult to say, because it has not established a track record of profitability and sustained growth, and I cannot think of similar peers either in Singapore or elsewhere. There appear to be some people who think it is worth at least 11.5 cents, which was the placement price for new and vendor shares recently in February.

I am usually quite cautious towards companies that decide to take 90-degree turns on their corporate direction and take on new core businesses. The market doesn't like it too: just look at how Want Want was shot down years ago when it announced it wanted to build a hospital in China. A recent case is Sun East, which inexplicably announced it is going into the alcoholic beverages industry. In Lifebrandz's case, it discontinued its health and slimming products operations and went into the nightclubs/pubs business. My main gripe on such radical business diversification/restructuring is this: what happens to the brand equity built up, the institutionalised knowledge built up over the years, the contacts and distribution network? All lost. Then it has to build up a new business from scratch.

In Lifebrandz's case, the health/slimming products business was obviously faltering, hence the change in business direction. That was a logical move. But my point is: as investors, do we want to place our faith with an untested business that does not build on previous networks? We have a choice, unlike the owners of Lifebrandz who didn't.

The Ministry of Sound at Clarke Quay opened in December 2005 and from my reading is the one that is driving topline and probably bottomline for Lifebrandz's business. It is still staying strong and I remember reading a recent article citing it, together with Zouk and the new St James' Powerstation, as the three hotspots in Singapore's night entertainment industry. But Singapore's nightclub scene is notoriously fickle, as novelty plays a big part of the attraction, and it remains to be seen whether MOS will be another Zouk whose appeal spans decades. It may be fair to say though, that any growth from now on will be plateauing, rather than exponential.

It is also the case that upfront developmental costs (advertising, setup etc) is likely to increase expenses at the start. That is why I felt the losses incurred in FY06 attributed to this new core business are to be expected and excusable. However, looking at today's newly-released 2Q07 results, it appears that the group is still barely profitable. True, it had set up new eateries and bars at Clarke Quay in late 2006, adding to its operating expenses and investment cash outflow, but surely the setup costs should not be as large as those involved in developing the original concept of MOS, and of the Cannery, from scratch (marketing, publicity expenses especially)? And we are not sure about the future success of these new investments anyway.

Consider the management outlook in the latest 2Q07 statement. The group has "identified several exciting projects in fast-growing markets like Macau, Shanghai, Beijing which it will be pursuing in collaboration
with strategic partners over the next two years", which strikes me as being rather incongruous given that the home base is still developing. It hardly has any "brand equity", being a relatively new business, that would be exportable! (btw: I just watched Channelnewsasia where it was announced that they would be opening Buddhabar, a nightspot, in Macau's Cotai strip, which corroborates their assertion that they would be expanding overseas)

On this basis, let's consider the valuation. Post-placement, the NTA per share would be about 3 cents, so at 12.5 cents Lifebrandz would be trading at >4X NTA. PE is irrelevant for a stock that is barely profitable. The original core business had been discontinued and the new business is barely a year old, so don't talk to me about intangible assets. It is still too early to talk about this as a growth stock which might justify high PEs. Is this a good bargain? One thing I know, and that is the margin of safety is very thin indeed.

Incidentally, regarding the placement: a third of it, or 70 million shares, was vendor placement, which one may interpret as insider cashing out. Of the 122 million new shares, a quarter (29 million) was taken up by UOB Kayhian directors (UOB were the placement agent). It either signals that the UOB directors were extremely bullish on the stock that they didn't want to sell it to outsiders, or that not many was interested and so they have to swallow it themselves and then find some way of disposing later. I tend to believe more in the latter.

Poll(please vote)
I agree that Lifebrandz is a hot-stock-not: Agree/Disagree

Amara @ 63.5 cts ( Property / Singapore )

2007-02-08T20:00:00.000+08:00

Final Poll Results: 5:1

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Revalued Tanjong Pagar properties do not give sufficient margin of safety

2. Controlling founder family selling

Amara Holdings has been surging up in recent weeks on the basis of its being perceived as undervalued; half a year back it was 25 cents and a quarter back it was 30 cents; now it is more than double. It is riding the wave of property stock reratings running across Singapore right now.

Amara has undoubtedly being revalued due to the market recognising it as an asset play. The flagship properties are in Tanjong Pagar: the Amara Hotel et al. Let's take a look at the asset valuation.

We draw the three relevant assets out from the balance sheet:
Development properties - S$115M
Investment properties - S$135M
Property,plant,equipment - S$146M

These three items form ~85% of the total assets and the properties under them are why Amara was rerated recently.

Development properties refers to the residential developments undertaken by Amara's property division, and comprises mainly (by GFA) a development at Upper Bukit Timah (The Linear). Profits from development properties take time to come on stream and have to be discounted as they only flow in over later years. The main development is not expected to outperform heavily and hence I leave things at that and move on to the next two items.

The Tanjong Pagar properties that are the centre of attention are classified under the latter two items.

Under Investment Properties, one sees the Amara Shopping Centre and the 12-storey Amara Corporate Tower (office building). Note that the properties are revalued tri-annually by an independent professional valuer and revaluation reserve updated accordingly on the balance sheet. The last one was by Chesterton in December 2005, on the basis of open market value, and my question is: how much would the above properties have appreciated since then, assuming that the Dec 05 valuation was accurate (should be lah!)? 20%, 30% maximum increase? That's about it, even with all the hulabaloo about the the IRs and the residential developments nearby (eg. the Icon, One Shenton). Based on 30% value appreciation in 2006 alone, it would add about 7 cents/share to book value.

According to Amara's accounting policies, investment properties that are substantially used for group corporate operations are classified under the line item "Property,plant,equipment", and under this lies the Amara Hotel. According to the latest annual report, Chesterton had also done a revaluation on the hotel in December 2005 and determined that there was a revaluation surplus of S$87M over the book value (which was last updated in the 1980s or 90s). The surplus for this item is not reflected on the books. Based on 576M outstanding shares, and factoring a generous 30% revaluation over 2006 due to the IR effect, it works out to a increase in book value of about 20 cents/share.

Amara's reported NTA is 25 cents per share. Its operations are about breaking even ex-extraordinary items, based on past track record, so all the value derives from assets. Add all the revaluation from above, based on generous rough estimate, and we have 25+7+20=52 cents/share revalued net assets per share. I of course ignore value appreciation in all other properties of which there are not many significant ones except probably the Shanghai mixed development. Nevertheless, the interest in this stock is due to its undervalued Singapore property exposure and so we leave things at that.

A recent broker report (BNP) estimates book surplus for Amara's properties at a $0.66/share surplus contribution to its NAV, which hence gives price target of 91 cents (NTA $0.25 + $0.66). That is the broker's estimate but the rough estimates I have done above does not indicate a bargain in any sense now. Remember, additionally, that these revalued assets are at least two steps away from cash conversion --- first a buyer has to be found, then payment has to be received from them. In this sense, asset backing is inferior to earnings as a source of value, because for the latter, it is only one step from cash conversion (revenue recognised, only receivables has to be converted to cash). A time discounting factor, equal to the cost of equity for the individual investor (say 15%), will be applied for every year the asset value is not realised. It is prudent to apply this discount, especially when Amara is not generating value from its operations per se.

At 63.5 cents market price and 50-odd cents revalued net assets backing per share (my estimate) pending realisation, where is the margin of safety?

An unlocking of value will also depend on the commitment of the controlling shareholders to create shareholder value. Just look at how the various members of the founding Teo family have been disposing of their shares on the open market since the share price started rallying in late 2006 ----- that does not give the minority investor much confidence, does it?

Poll(please vote)
I agree that Amara is a hot-stock-not: Agree/Disagree

MAE Engg @ 23.5 cts ( Alternative energy / Singapore )

2007-01-30T22:25:00.000+08:00

Final Poll Results: 4:2

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Concept stock with no track record

2. Acquisition goodwill is staggering at current price

3. Dangerous to hold when market sentiment peaks

How does one analyse the valuation of a concept stock?

What is a concept stock? The best and most recent examples would be dot-com stocks, with no concrete earnings but armed with a blinding idea that captures popular imagination. These ideas tend to sound extremely plausible and promising, of course; the investors are not fools in the conventional, IQ aspect of the term.

What is the danger of a concept stock? Consider a company making losses and with negative equity. It then acquires a new business with a hot concept, pays for the acquisition with new shares, and then voila! Two things are achieved:
1) The negative equity on the balance sheet is wiped out, because "new equity" is injected, via the new shares issued to pay for the acquisition.
2) The new business, which might still be losing money, gets a high valuation and obtains exposure to the capital market
Who really cares how good the acquired business is? Well the original shareholders might care because they will be diluted .... but if the acquiree has a "hot" concept that captures market imagination, it inevitably will raise share price post-acquisition. And so everybody leaves happy.

This is just the danger of a concept stock I am describing of course, and MAE Engineering and its new biodiesel business may well turn out to be the best thing since sliced bread. But let's lay down the case for MAE Engineering:
1) Negative equity of -1.2 cents/share pre-acquisition (would have been even more negative before the rights issue that doubled MAE's shares outstanding)
2) Market turnaround was entirely on the basis of the new upcoming acquisition of a 38% stake in Lereno, a Malaysian specialist biodiesel manufacturer, which owns a proprietary winterised biodiesel technology that allows biodiesel to be used in temperate climates. Plans to build biodiesel plants in Malaysia (licence was available) and also Singapore (talks with EDB) further ignited market excitement.
3) Lereno is loss-making. According to filings, MAE's equity-accounted share (38%) of Lereno's results for the year ending March 2006 is negative S$0.5M, meaning Lereno lost about S$1.3M in the year. Lereno's NTA (net tangible assets) at the end of this period was S$1.4M, which means MAE's notional acquisition value of S$17.5M (paid in new shares valued at $0.05/share) factored in enormous goodwill. Current market valuation of 23.5 cents/share, of course, values the goodwill even higher. Incidentally, this goodwill need not be recognised on MAE's balance sheets because equity, rather than consolidation accounting, will be undertaken as share of Lereno is only 38%. Those hoping for more insight into Lereno's assets and liabilities will be disappointed.

How to value concept stocks properly? I don't know, and will not attempt to estimate anything for MAE's future prospects here. Processing the palm oil, in abundant supply from Malaysia and Indonesia (see "The coming biodiesel boom in Malaysia and Indonesia"), and then selling it as biodiesel in Europe where there is growing political will to diversify fuel sources away from Russia (see Russia's dominance in energy supply to Europe, and associated problems, in "Russia as an energy superpower"), sounds like a viable idea, but totally unquantifiable given the lack of industry and company track record. One thing to note about the proprietary winterised biodiesel technology though --- it is hardly as exclusive as they claim, because using additives to make winterised biodiesel has long been known (see link for example). Note that the claim made by Lereno is that the technology is "patentable", not "patented". That makes a lot of difference; it's probably one big step to heaven from earth that has to be taken.

The other thing of course, is that for those who are concerned about the market peaking, concept stocks with no real earnings are the exact ones to avoid. Market timing through complete sellout of one's portfolio may be unwise (might be too early), yet a heavier allocation to quality businesses may be prudent when top volume counters are mostly pennies day after day.

Poll(please vote)
I agree that MAE Engineering is a hot-stock-not: Agree/Disagree

Guthrie @ 41 cts ( Engineering & Property / Singapore )

2007-01-22T22:09:00.000+08:00

Final Poll Results: 3:1

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. High opportunity costs

2. Offer price may not be revised

I had received one or two comments that I have been writing less articles on my blogs nowadays, and to them my answer is: it's a bull market! Time to be more diligent in dynamically reconsidering each of my portfolio positions because buy-and-hold may not be valid when position sizes are rising so fast. Hence less time for literary writeups in my blogs. But nevertheless, it is still useful to articulate my thoughts. Several of my mega-wins have originated from such articulations leading to further research and subsequent position take-ups. I would strongly encourage fellow investors to do the same.

Guthrie is one of the stocks that I had traded in and out recently. It is one of the oldest companies in Singapore (since 1821) and is a mini-conglomerate with interests in property, leisure/hospitality and engineering. Although its engineering (M&E engineering) segment contributes >50% of the group revenue, it is the property segment which has contributed most to the bottomline in recent years, about >90% of EBIT (earnings before interest and tax).

The story surrounding Guthrie in recent weeks is the takeover offer by an investment company held by Guthrie chairman Putra Masagung and Salim group's Anthony Salim. The stock went up from the low-30s to the mid-40s on such takeover talk, but has corrected and stagnated subsequently on confirmation of the offer price --- a disappointing 39.5 cents. There is hope that the takeover price will be revised upwards, which is why the price has hovered above the proposed takeover price since then (though not by much).

There are several reasons why I think it may not be profitable to buy the stock. First of all, the opportunity costs are high. During the offer period, the market price is unlikely to go far above the offer price --- the latter now serves more or less as a mental anchor to the valuation of the stock. This was the primary reason why I traded out of it the moment the offer price was announced.

Secondly, the offer price may not be revised upwards. It is clear that the value of Guthrie lies in its property segment, in particular its stake in Jurong Point Shopping Centre. In addition, it also holds minority stakes in several heartland shopping malls like Hougang Mall, White Sands, Tiong Bahru Plaza and Century Square, via Asian Retail Mall Limited which is controlled by Prudential. The fact that Masagung and Salim bid a low price for Guthrie shares shows that they are not overly keen to secure the takeover, despite the various conspiracy theories being thrown around by vested investors. Investors also point to the per-share NTA of 46 cents as a baseline that a revised offer price should start from; this is such an obvious point that it cannot have failed to impress on Masagung and Salim in the first place; they are likely to have strong reasons why they are not willing to offer up to this price for the group. Note that the stock had already doubled from 20 cents since mid-2006, probably pricing in the value of the property investments held by the group.

Thirdly, the fact that the Executive Chairman (Masagung), an insider, is involved in the offer is disconcerting. It is true that investors will not want to sell out to the 39.5-cents takeover offer. However, circumstances may change to make them change their mind: opportunity costs of holding (as mentioned above), or a poor set of results (coming up in February), say. As it is, profit trends for FY06 point to a forward PE of >20X anyway, a rather high valuation in itself.

In the end, it may follow the way of the CK Tang offer. Holders were also reluctant to sell out at Tang Wee Sung's offer price of 65-70 cents per share as well (and it was a good price) on the basis of the perceived value the Tangs retail frontage on Orchard Road could fetch, but have become more receptive when it became clear that that offer price was as far as the Tang brothers would go, and that share price could just collapse should the offer lapse in an unsuccessful takeover attempt. Guthrie's baseline support in the near-term will be at 39.5 cents (and hence might be a defensive option for those who believe the current bull market is going to collapse any time soon), but given the abovementioned 20-cent pricing as recently as mid-2006, surely there would be some concern about price support should the takeover offer be withdrawn eventually. Maybe only those who believe fervently in the future of Jurong Point and the Centris next door would want to consider holding this irrespective of any takeover attempts.

Poll(please vote)
I agree that Guthrie is a hot-stock-not: Agree/Disagree

Banyan Tree @ 1.38 ( Hotels / Singapore )

2007-01-14T14:02:00.000+08:00

Final Poll Results: 5:6

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Turmoil in core market

2. Expensive valuation: Expected FY06 PE of 30-35X

3. As much a property play as a hotel play: double risk

Anyone who is bearish on Thailand should not be in Banyan Tree. And I am one of them.

I had previously considered writing about Banyan Tree but had decided against it because of the secular trend of Asian tourism on the rise and the fact that Banyan Tree is a well-established hotel brand in a niche tourism market (resorts and spas). But it is difficult to cast it as a buy given Banyan Tree's strong tourism, and less obviously, property, exposure to a country that has become a rather uncertain political mess recently; therefore it is a hotstocknot.

I am talking, of course, about Thailand. There is no need to elaborate further on the financial and political developments that have shaken the country lately but suffice to say that it has become rather volatile. If one thinks the Thai market is likely to remain in the doldrums for the next year or so, is it wise to buy a company exposed heavily to the Thai tourism industry? Consider both market valuation and fundamental/business effects. The market of a country in turmoil will be de-rated to a lower multiple; add to that the likely stagnation in earnings that form the fundamentals (for Banyan Tree, bear in mind that tourism expenditure is highly discretionary expenditure). The impact on stock price is therefore, double-layered --- PE drop on top of earnings growth drop.

What is the degree of exposure of Banyan Tree to Thailand? According to its mid-2006 prospectus, as of March 2006, out of the 1986 rooms available in its Banyan Tree/Angsana/Colours of Angsana/co-owned hotels/resorts, 1040 of them, or >50%, are located in Thailand (mainly Phuket). About 80% of its revenue is derived from assets in Southeast Asia; no prizes for guessing which country in Southeast Asia is the main contributor. Consider also, that in FY05, when the tsunami hit Southeast Asia (and the Maldives as well), the group's bottomline nearly went into the red, with net profit collapsing to S$1M from S$30M in FY04.

The momentum of expansion for Banyan Tree post-IPO seems to be swinging to Northeast Asia (Japan, via tie-ups with Okura, and in China) and the Middle-East (opening of new hotels/resorts), and yet in the absence of track record Thailand remains its core centre of operations. The lack of price correction in the stock following all the recent negative developments in this core market just accentuates the headwind against the stock (stock price was supported by buying in of Capital Group).

Consider the valuation aspect. If we accept management's projection that FY06 full-year results (coming up in February) will be better than FY04's S$30M, then FY06 PE will be in the region of 30-35X. That is an expensive valuation in itself, but consider further: much of the profit will be due to contributions from the property sales segment which are expected to be >S$10M in 4Q06, which is why management is confident of posting improved net profit over FY04 despite only reaching S$19M net profit over 9M06. Indeed, property sales has made up half the EBITDA (which can be loosely interpreted as operating cashflow) over 9M06 with hotels investment/management contributing the other half. If I am cynical, I can see property sales as low-quality earnings because asset disposals are typically of a non-recurring nature. Given that Banyan Tree seems to see this as a core part of its operations, one may still note that given that a large portion of these sales are villas in Phuket, the future outlook for new property sales may be pessimistic given the uncertainty in Thailand.

All bets are off if some private equity group flush with liquidity decides that the group is a good acquisition to get exposure to emerging market tourism in the Asia-Pacific, on top of a recognised brand-name; my feel, however, is that the risk of business underperformance far outweighs such an upside possibility.

Poll(please vote)
I agree that Banyan Tree is a hot-stock-not: Agree/Disagree

Sapphire @ 5 cts ( Building services / Singapore )

2007-01-07T23:28:00.000+08:00

Final Poll Results: 8:0

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Declining core business

2. RTO, if any, likely to value shell company at much lower prices

To me, it is one of the symptoms of a peaking market flush with liquidity that a stock like Sapphire can quintuple within the space of several weeks, offering the chance for equity holders arising from a debt restructuring exercise to exit at good profits.

Consider its predecessor IRE Corp, with key shareholder being the Wuthelam Group (via Nippon Paint and Yenom Holdings) at its time of listing in late 1999. It had strong government contacts --- the various town councils, as well as several big private sector developers as customers for its building services, which included maintenance, upgrading and architectural finishes. Its listing price of $0.23 valued it at S$30M market capitalisation based on 128M outstanding shares. It had been enjoying growing profits over 1996-98, the three years before IPO; its revenue base was >S$200M over 1997 and 1998.

Flash forward to the present. The company, after seeing profit decline in 1999 and 2000, bled red from 2001 onwards as construction contracts dried up and effects spread downstream in the sector, leading to a debt restructuring (conversion to equity) having to be undertaken for the company in FY05 that caused outstanding shares to balloon to >3B shares by 2006. Most of the shares were converted in the range of 1-3 cents per share --- maximum. In FY06, Sapphire's revenue base was S$20M; in 1H06, its topline was S$2M. At current price per share of $0.05, based on 4.5B shares (including most recent placement of 500M shares), the market values the new reincarnation of Sapphire at S$225M --- 7 times its IPO market valuation at arguably similar levels of optimism in the construction industry, but where the decline in core business is all too clear.

As a construction recovery play this company is far from the best, in terms of core business and in terms of valuation as described above. The talk, instead, is of another reverse-takeover (RTO) play which has provided the fuel for the stock's upward charge these few weeks. In particular, the interested party is said to be in the oil and gas industry. Some point to Labroy Marine's Tan Boy Tee and ex-KS Tech alumni Tan Kim Seng being participants in the recent private placement as corroboration of this rumour. This is of course a possibility --- but let's examine the numbers.

What is the value of a shell company listed on the SGX? The companies that are targets for RTOs typically have cheap share prices and by themselves do not have any growth potential nor significant corporate value --- essentially shell listings. Wilmar's RTO of Ezyhealth valued Ezyhealth shares at $0.06/share (pre-consolidation), or S$16M for original 262M Ezyhealth outstanding shares. Indofood's imminent RTO of Cityaxis valued Cityaxis shares at $0.04/share, or $5M for original 135M Cityaxis outstanding shares.

An RTO of Sapphire at current market price would imply the acquirer paying >S$200M for the shell that is Sapphire. Forget about the share price surge that has occurred in Ezyhealth and Cityaxis upon announcement of their respective RTOs that took them to way above their RTO prices --- the thing is that firstly, Sapphire as an RTO target is too expensive at current prices, and that secondly for the retail investor, there is very thin margin of safety even considering potential price surge upon actual realisation of RTO, given current lack of information about who might be doing the RTO, the RTO valuation metrics etc. Several debt-restructuring and original shareholders are already taking the chance to exit.

And of course, there might not be any RTO at all. What is the alternative exit strategy for the retail investor then?

Poll(please vote)
I agree that Sapphire is a hot-stock-not: Agree/Disagree

Acid test 2H06: Stock Performance

2006-12-31T16:52:00.000+08:00

(P.S: Click on the pictures to get a better view)
As per my previous review of my hot-stock-not picks in June 06, I review two lists of the stocks: the more recent picks from May-Oct 2006, labelled 2H06 Assessment, and the picks slightly further back from Jan-Apr 2006, labelled 1H06 Assessment. This constitutes my medium-term horizon where I typically judge the performance of my picks.

The colour codes remain the same, but while the mark of excellence is the 20% threshold for half-year comparisons (2H06), it becomes 40% for full-year comparison (1H06). The scale is slightly different. As before, I concentrate on total return --- the price plus incorporation of all dividends during the period in question, as well as any stock splits/bonuses.

Assessment of 2H06 stock picks

2H06 Summary
Blue: 4 stocks
Green: 6 stocks
Yellow: 5 stocks
Red: 10 stocks

A bad half-year for me in terms of my HotStockNot picks, if I may say so myself. Brings me crashing down to earth after the last 1.5 years where my Hotstocknot picks have generally been quite good. Out of 25 stockpicks for 2H06 (ending Oct 06 since Nov-Dec 06 are too recent to judge properly), 10 stocks defied my prediction to end up >20% above the price at which I made the call. And quite a number have done exceedingly well, led by Sino-Environment, Genting and Yanlord which all recorded >100% gains. Stocks like Enviro-Hub, Jiutian and Ezra have also come into prominence, recording >50% gains.

One observation from these outperformers is that it has been detrimental to defy the fundamental underlying trends in selecting hotstocknots, whether it is the recycling theme (typified by Enviro-Hub) which is attracting big money, the O&G support theme (typified by Ezra and Federal), the China environmental protection theme (typified by Sino-Environment) or the China education theme (Raffles Education). Judgment on the basis of valuation risk is simply not adequate when sector growth story continues to be intact and market liquidity is flush. This half-year has been one of growth stocks and growth themes, and on retrospect, I might have been better off calling hotstocknots on laggard sectors facing headwinds (rising raw material prices, slowing demand) like the plastics and technology sectors.

The generous reader might also consider that given the surging upward momentum in the STI over the last half-year, anything less than a 20% total return for a particular stock would be considered an underperformance --- in which case I would have 15 stocks for and 10 stocks against. The cynical reader will observe that if he had held a portfolio of these hotstocknot picks, he might just have done quite well for himself instead, on the sole basis of those 10 red-coded stocks that have left me with egg on my face.

Assessment of 1H06 stock picks

1H06 Summary
Blue: 2 stocks
Green: 6 stocks
Yellow: 5 stocks
Red: 2 stocks

A relatively balanced spread. Remember that the threshold return for colour coding is set at +/- 40% since this stocklist is further back.

In the general scheme of things, it has been unwise to call hotstocknots on government-linked companies, as I have found in Capitaland, Singtel, Starhub and Singpost. These are companies with stable businesses and one must not underestimate the amount of growth they can generate from government contacts, as well as the amount of market support they often derive by virtue of their government links. I have found only limited success in highlighting certain GLCs such as Chartered Semiconductor and SPC, which face headwinds that not even (limited/tenuous) government linkages can resist.

A special note of mention: China stocks which were downgraded as a group in late March 06. Although there is no specific measure since my China Stocks Index only began in June 06, it was clear that they have declined or at least lost significant momentum since the heady early months of 2006. So I claim victory there, though it was probably pretty obvious to many that the way the China stocks were rising in March was plainly unsustainable.

The performance of my hotstocknot picks for 2H06 in particular has shown the danger of shorting stocks in a rising bull market. Even if one feels valuation is too stretched, the market might not agree and instead might go for the growth story without discounting the valuation or underlying business risk. Nevertheless, I will continue to highlight hotstocknot stocks where I feel the balance is not right --- but will try to show a greater sensitivity for market tendencies/preferences.

Retail Sector Index: List of Stocks

2006-12-26T17:12:00.000+08:00

("Last price" refers to price on 9 Jun 06, the base index date)

The Retail Index is one that I have been wanting to do for some time. It seems like a good time now, with all the hulaloo about Singapore's tourism drive, the IRs, the revamping of Orchard Road, the current late-stage economic cycle. All these are expected to bring the long-languishing retail sector to the forefront.

The list of stocks in the index totals 15, and there are four main factors that guide inclusion/exclusion.
1. Market cap
2. Investor mindshare
3. Subsector representation (ie. I try to pick from most important retail sub-sectors for representativeness eg. department stores, luxuries, books, food, drugs, specialty etc)
4. Trading liquidity

Note that trading liquidity is less important in my list of considerations given that most retail stocks have been lightly traded due to lack of market interest.

The index will be weighted by market cap, as per normal.

Some points:
1) This index is meant to track Singapore's local retail sector. Hence foreign retail stocks like Hongguo and China Hongxing are excluded.

2) For reference, Singapore's Department of Statistics' Retail Sales Index classifies the retail sector under the following main activites: department stores, supermarkets, provision/sundry stores, food & beverages, motor vehicles, petrol service stations, medical goods & toiletries, wearing apparel & footwear, furniture & household equipment, recreational goods, watches & jewellery, telecommunications equipment & computers, optical goods & books, others. Some of these sub-sectors cannot be represented in my Retail Index due to lack of representative listed companies (eg. provision & sundry stores, recreational goods). Some sub-sectors' participating listed companies do not have their major operations in that segment (eg. petrol retail is a small part of SPC's operations, car distributorship in Singapore is a small part of Jardine Cycle & Carriage's operations, which centres on Indonesia) and hence they are excluded.

3) Restaurants belong to the catering sector which is not considered part of the retail sector, hence not represented (refer to SGX's Hotels & Restaurants index)

4) Again, index factors are used to scale down importance of certain stocks whose market weight is overwhelming (Capitamall REIT) or is disproportionate to their relevance/importance to the local retail sector (Osim). I also scaled up Kingsmen's importance by using index factor 2, given my belief that it will be a key play on the retail sector.

5) Although strictly speaking, an income-based REIT should be tracked by total return ie. cash distribution in addition to price appreciation, I have omitted this step for the Capitamall Trust since it is the only REIT in the index.

As before, I have backdated the index such that it starts on the same base as all my other indices ie. on Jun 9 2006. Hence there is a ready curve from Jun 9 till today. At last count (22 Dec) the index stands at 112.0, which means on average the retail index component stocks have rallied about 12% over the last six months, underperforming the STI.

As before, placements, delistings, rights issues of the index stocks will adjust the base market cap. So far I've had no chance to. The maths as follows:

1. Rights Issue
Adjusted Base AMV = Old Base AMV x (Old Current AMV + Payment for Rights)/(Old Current AMV)

2. New Listing
Adjusted Base AMV = Old Base AMV x (New Current AMV including New Listing)/(New Current AMV excluding New Listing)

3. Delisting
Adjusted Base AMV = Old Base AMV x (Old Current AMV excluding Delisting)/(Old Current AMV including Delisting)

Auston @ 20 cts ( Education / Singapore )

2006-12-24T10:16:00.000+08:00

Final Poll Results: 9:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Poor core business fundamentals

2. Ridiculous valuation

3. Insiders selling out

Auston is a regional private education provider which has been embroiled in a scandal that drew in CAD investigations in 2004-05 due to profit overstatement. It has recently sought to reposition itself in online gaming through a new acquisition.

The stock was thinly-traded at 4-5 cents over the last two years, but has recently inexplicably shot up to as high as 22 cents on high volume, which is drawing new market interest in the stock. It looks totally unsupportable.

First a look at its core business and growth potential. Its corporate problems has badly impacted the student recruitment as well as dealings with business partners (some education partnerships lost) over the past two years, with directors, both independent and executive, coming in and out in a flurry. It has been forced to recapitalise at unfavourable share prices (compared to its IPO price of 28 cents) reflecting its sorry state of affairs. Although the restructuring has probably pulled it out of desperate straits, the sense is that its education business might have stagnated due to increasing competition and loss of brand equity, to the extent that it is entering a new business, online gaming and e-commerce, through a new acquisition Australia-based M2B Game World. Also, its education business appears to be shifting emphasis overseas, with collaboration with a partner (and substantial shareholder) Hong Bo in Wuhan,China and plans to open a resorts management school in Cambodia. That, to me, is operating from a position of weakness when it has not managed to build up its brand in the local market.

The financials and track record over the past few years corroborate its declining business. Its student enrolment problems are reflected in halving of group revenue every year since 2003, from S$13M in FY03 to S$3M in FY05 (it appears to have stabilised in 1H06). Given its high operating expenses, which may be considered to impart considerable operating leverage effects, the result has been steadily increasing losses. As of 1H07, the company was still making losses. There is a profit guarantee of S$500K from M2B Game World for each of the next two years, though it is probably inadequate to overturn the deficit. Cash-flow wise, Auston has been consistently operating cashflow-negative, which is why it has had to recapitalise consistently to facilitate its restructuring process. A sad state of affairs.

To consider the valuation aspect, first consider the number of times it has gone to market to raise new capital, which is just mind-boggling. From an initial 68M outstanding shares post-IPO in 2003, the number of ordinary shares today is 275M shares, through a series of rights and warrant issues, new share placements, and an acquisition paid for by new shares. And this is excluding 34M warrants which are now deeply in the money (exercise price $0.025) and another 50M new shares which Auston is preparing to issue again. That brings total potential shares to 360M shares. And most of these were issued at really cheap prices of about 5-6 cents (rights and warrants issue even less). If we consider the 2003 IPO price of 28 cents to be fairly valued, that the business can be said to have deteriorated since then (a fair comment given the above observations regarding its business), and that share capital is ballooning to 5 times the original ..... and one has to see the ridiculous valuation of 20 cents for an Auston share now. For information, one Auston share is now backed by just 1 cent of net assets; about 50% of its total assets comprises intangible goodwill on acquisition of M2B Games World.

So one asks: why would the market value Auston at 20 cents per share, and on huge recent volume some more? Seriously, nobody really knows. Perhaps it is some fundamental developments which have altered the company's outlook completely, for example its tie-up with Hong Bo, a supposed major education provider in China, or its online game venture which might be very lucrative. But if so, the insiders and substantial shareholders certainly don't know it. M2B World, which held 26% of Auston by virtue of the new shares issued for its M2B Games World business, halved its stake to 13% through market sales in December. Former chairman Li Zongyang, also recently, sold his warrants at 6.5-7.5 cents, as well as all his shares, and resigned as chairman; at 20 cents mother share price surely the intrinsic value of these warrants would be more given that their exercise price is just 2.5 cents? Reverse takeover by a third party? Anything is possible of course. What's more probable, though, is creation of market liquidity and price jack-up by a certain market entity in order to create exit opportunities for the 240M equity instruments issued over the past two years, and/or to justify the placement of 50M new shares at the placement price. We have all seen the case of Hengxin recently; it is clear to all that it was a pre-placement price jackup to facilitate the upcoming cashcall, only to be thwarted by certain dissenting board directors.

Those who call for a buy on the basis of the recent price surge on huge volume are putting the cart before the horse. I do believe that market prices can reflect certain fundamental news that are not yet made public. However, existing business fundamentals and track record should corroborate the price surge if one is inclined to take price signals as clues to implied fundamentals. Otherwise, he will just be shooting in the dark. No sympathy for him if he shoots himself.

Poll(please vote)
I agree that Auston is a hot-stock-not: Yes/No

GemsTV @ 1.40 ( TV Retail / Singapore )

2006-12-14T22:24:00.000+08:00

Final Poll Results: 6:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Expensive valuation, in particular P/NTA

2. Growth in UK might slow

3. Expansion in new markets may only bear fruit after some time

This is one of the biggest IPOs of 2006, raising >S$200M in its offering. It is quite amazing that just two years back it was loss-making and just one year back its revenue was just < US$40M and with net profit US$5M, comparable to a bigger SESDAQ or a small Mainboard stock.

At the current price the stock is trading at ~35X FY06 PE and 5.5X P/NTA. Note that excluding IPO proceeds, NTA would only be about $0.06/share. The IPO managers must be applauded for coaxing so much money out of the IPO investors, whom to be fair are mainly institutions who probably know better.

It is clear that investors buying in are doing so because of the phenomenal growth story of GemsTV in the UK in a short period with limited resources, suggesting that the business model is asset-light and could possibly be very scaleable and transportable to other countries with mature home shopping markets, in particular the US. Who am I to say that this is doubtful?

Let's start with an examination of the growth momentum in GemsTV's core market, the UK; if growth is intact there is still something to fall back on should expansion into new markets, as planned for in the IPO, be less than satisfactory.

First, we put the growth of GemsTV UK into perspective based on information provided in the IPO. GemsTV launched its first GemsTV channel in the UK, in partnership with Eagle Road Studio, in October 2004, which means for FY05 the TV revenue segment was relevant for only 8 months (excluding sales to third-party networks which I assume were not important). As Eagle Studio revenues were not consolidated, one can only work out the total value of GemsTV jewellery products sold via this channel by examining its segmental sales. In FY05 Europe (interpret UK) segmental sales was US$28M, which is probably mainly to Eagle Studio which then resells it through its TV channel. If we assume a 100% markup by Eagle Studio, a reasonable assumption looking at the kind of gross margins GemsTV made in FY06 on consolidation of Eagle Studio, total TV sales of GemsTV jewellery in FY05 was probably ~US$50M (conservatively). Annualise that and FY05 TV sales would probably be US$75M. That is pretty impressive. At the same time, it makes for more realistic comparison with FY06 revenue of US$128M; revenue growth is ~70%, still impressive of course but clearly not the fourfold increase on FY05 that the IPO figures seem to suggest.

Additionally, if we assume FY05 profits were primarily from TV sales (FY04 bottomline was marginal without it) then overall annualised pre-tax profit, including the value-add from Eagle Studio, would be US$7.56M/40% X 12/8 = US$29M, where US$7.56M was the pre-tax profit earned by GemsTV in a 40-60 profit sharing arrangement (hence the division above by 40%) with Eagle Studio before the latter was acquired by GemsTV, annualised to ease comparison for 8 months' of operation in FY05 compared versus a full year in FY06, where pre-tax profit was US$42M. Again, FY06 profit growth over re-cast FY05 profit figures was still great (~35-40% growth) but not overwhelmingly so compared to the IPO prospectus representation.

The purpose in all this is to describe the probable trend of GemsTV prospects in the UK, its core market. The way in which revenue ramped up upon launch was quite phenomenal, and my guess is that the novelty aspects of it as well as the vaunted reverse auction system and game format were probably very interesting to the main customers --- idle housewives all over the UK. The revenues and profits from the UK TV sales were much higher than that suggested by GemsTV's IPO figures for FY05, due to lack of contribution from Eagle Studio. When the latter was bought over and revenues/profits consolidated, FY06 revenue and profit shot up. But perhaps the UK growth might be nearing maturity. If one examines the most recent 1Q07 figures, despite GemsTV's claims of good weather causing the relatively poor revenue performance (potential viewers all enjoying the sunshine outside), the fact is that profit margins had continued to drop. In the same statement, the company said "mild weather in the UK continued into Q2 FY2007" and that "continued competition from The Jewelry Channel, one of our major competitors in UK which was launched at the end of the last financial year, may also affect our future revenue in the UK". That in itself is ominous.

No wonder that GemsTV is looking to venture into new markets. A negligible amount is earmarked for upgrading of facilities in the UK market; ~40% is to be spent on expanding into the US and another 20% on entering the China and Japan markets. It could very well succeed if it manages to gain a foothold; after all it has a track record of ramping up so rapidly in the UK from what was basically nothing (which is why people are buying into it --- and these are not stupid investors).

It might depend on the risk appetite of the investor and his investing horizon. If the investor is willing to take a chance, GemsTV could be huge if it succeeds in the US whose home shopping market is about 2.5X that of the UK. And it is not unreasonable given that GemsTV has already succeeded in another country (UK) with a similar culture. The 35X PE could easily be whittled down if it succeeds in breaking the US market alone.

Being more valuation-focused, I myself am not inclined towards such stocks given the low NTA backing. Besides, near-term, one should not expect huge contributions from new markets. Given that the US operations, through DirecTV, only came onstream in late November 06, it may not be in time to catch the Christmas shopping season that defines the year for many American retailers (just look at Osim's Brookstone); this means that the investor has to be rather patient if he wants to see the rewards of any market expansion (say one year down the road .... too long for me). In the meantime, one really has to rely on gut feel to size up GemsTV's progress in the new markets.

At the same time, everybody knows about the weakening US consumption market now. Consumer sentiment is faltering. Jewellery is highly discretionary expenditure. It may not facilitate a smooth market entry.

Poll(please vote)
I agree that GemsTV is a hot-stock-not: Yes/No

Yongnam @ 13.5 cts ( Construction / Singapore )

2006-12-05T22:52:00.000+08:00

Final Poll Results: 8:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Track record indicates margin volatility that should be factored

2. High financial risk

Some might be surprised at my pick of a construction company because it is clear that this is a sector on the upturn, and quite likely in the early waves too. I agree on this point, and yet obviously one should know from past construction cycles that euphoria can surround the valuation of construction companies, making them prone to price volatility.

The recent upsurge by Yongnam has been partly driven by industry talk regarding its possible participation in the IR projects (believe it is the Marina Bay IR). That, coupled with the speculative excitement surrounding the impending announcement of the winner of the Sentosa IR development, have created the buzz that has lifted all related boats (construction stocks). Yongnam was 2.5 cents as late as August 06; today it trades at 13.5 cents, up >5 times. That is a quantitative indication of speculative liquidity layered upon re-rated fundamentals.

Some background on Yongnam: its operations consist of three main arms -- structural steelwork, specialised civil engineering and mechanical engineering. The first two are the two major arms, making up about 80-90% of the group revenue; the structural steelwork division provides steel structural forms for buildings like Vivocity, One Raffles Quay and Fusionpolis; the civil engineering division's current main contracts are for the Kallang-Paya Lebar Expressway and the various stages of the Circle Line. The less important mechanical engineering arm operates out of Singapore, doing work like mechanical systems integration in power plants. Yong Nam's main revenue base is Singapore, where it has been operating for the past 20 years.

Frankly, it will be quite difficult to forecast the future results of Yongnam and I shall not attempt to. The company boasts a $150M order book which means probably two full years of work are secured. Supporters will argue that even if its PE looks high now (I will discuss it further below), what is to say that further orders (such as the IR construction) will not boost revenue and profits exponentially and make trailing PEs irrelevant? After all, the construction sector recovery is still early in its cycle.

Well, there are two main issues. The first is the inconsistency of the profit margins. For Yongnam, over 2001 to 2004, turnover ranged between $60-80M, but pre-tax profit margins ranged from negative (in FY01, FY02 and FY03) to >10% in FY04, and then down to 1% in FY05 and recently 3% in HY06. If we cast our eyes back to the last construction peak cycle in 1996-97, group margins ranged at 9-10% before sinking by half or more in 1997-98. The contractors' margins ultimately depend on the developers and main contractors, who can squeeze them to control costs, especially when number of construction suppliers is high and hence creating a state of perfect competition. That is why companies like Econ, L&M, Wee Poh and Chew Eu Hock have suffered badly during cycle downturns when margins contract. Many of these companies are gone from the scene now; however don't think that life will be much better for the remaining operators. In Yongnam's IPO prospectus its main competitors are listed are foreign suppliers and multinationals, particularly Japanese ones like Nippon Steel. It might be a big player on the local scene but there is no guarantee of fat margins despite big order books (or even if it secures any IR contracts, where I tend to believe there is no smoke without fire). Yongnam's track record of margin volatility should be accounted for by a lower, more prudent valuation.

The second issue is the heavy gearing of Yongnam. Losses sustained in the early 2000s have culminated in a balance sheet financed almost entirely by debt. Of the financing sources for the approximate $125M total assets (55M fixed, 55M work-in-progress and 15M working capital), $40M is normal trade and operating liabilities while $80M is bank debt; only $5M is shareholder's equity. That means a horrifying debt-equity ratio of 16X, and which translates to an annual interest expense of $4-5M per year. Interest coverage was just above 1 in FY04 and FY05 (ie. EBIT, earnings before interest and tax, was barely adequate to pay interest), and operating cashflow was negative in those two years. In HY06, a profit surge allowed interest expense to be covered comfortably. However, my point is that one has to be aware of the track record of the company in bad times and not just bet on the recovery cycle. The balance sheet financing dynamics mean that interest is going to be a drag on profits for a long time yet.

The recent winning of the case against UOB for the ownership of one level of Springleaf Tower will alleviate the situation, but only to the tune of about $10M (see the specifics of the court decision). That is not a lot.

Perhaps just to give a perspective, we annualise the HY06 results of Yongnam, which were relatively splendid when compared to past years' performances. Given the percentage-of-completion revenue recognition method it employs, where progressive project stages are successively recognised, the revenue and profit trend should be relatively smoothened. HY06 profit was $2.7M; annualised FY06 profit would be $5.4M. The outstanding shares amount to 746M; however this is not all because we need to factor in 220M Yongnam warrants with exercise price 3 cents which are now deep-in-the money due to the recent surge; total share base would then be 966M and diluted earnings per share = 0.56 cents, yielding PE of 24X. Not cheap for a stock with high financial risk as highlighted above, although sector outlook should be quite good.

For another perspective of Yongnam, look to the trading history. Comparing present sector optimism to another similar period in the late 1990s when there was a minor sector rebound, Yongnam's market cap peaked at ~$90M then. Then, it had just IPOed (its 1999 IPO price rated it at $65M market cap) and had enjoyed several years of profit, with price trading at close to NTA. Today, its market cap (let's exclude warrants here) is ~$100M, with a patchy track record over the previous 4-5 years. NTA per share is 0.6 cents; P/NTA is >20X! Financial risk has increased tremendously.

As always, the directors bought early into the recovery story, at prices from 3 to 6 cents. Note, recently, however, they have begun to dispose of large chunks of warrants at significantly higher prices. That might be useful information for those who believe in the power of insider transactions as a leading indicator of stock prices.

Poll(please vote)
I agree that Yongnam is a hot-stock-not: Yes/No

Sitra @ 36.5 cts ( Wood products / Singapore )

2006-11-24T07:52:00.000+08:00

Final Poll Results: 1:0

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Expensively priced relative to peers

2. Micro-player with no obvious competitive strengths

3. Uncertain outlook for household discretionary expenditure

4. Limited fundamental benefits from Chew family linkages

Sitra was listed just last week and shot up to over 30 cents from its IPO price of 21 cents. At 36.5 cents, it is trading at 14.7X FY05 PE. It is not purely a furniture industry player; more accurately it is a wood-based products supplier/distributor. The demand and upstream cost dynamics may be taken to be similar to furniture players, so some SGX-listed furniture peers are listed for comparison. HTL, the erstwhile market leader, is languishing at 7-8X trailing PE, having corrected sharply these few weeks. Man Wah is trading at 8X PE. Lorenzo, a recently-listed sofa supplier, trades at 7X PE with little liquidity. Koda, probably the most comparable peer because its niche is also outdoor wood-based furniture, trades at 8-9X PE. So what distinguishes Sitra? Let's try to identify the structural competitive strengths that could justify the apparently high pricing.

Tradtional definitions of competitive strengths centre around three main factors: cost, differentiation, focus. It is difficult to see that Sitra enjoys any kind of cost advantages from economies of scale because it is such a small company. Its FY05 revenue was only S$59M, comparable to Koda which has a longer track record post-listing. A possibility that it could manage costs better is due to its background as a timber merchant before it went into selling wood products; the company obtains its wood raw material from Indonesia where it has long-established relationships. As for differentiation, Sitra is looking to establish branding for its products but consider the two segments in which it operates: their wood-based products segment consists of products like wooden flooring, decking, fencing and doors/windows --- how much differentiation and enhanced margins as a result of branding can come out of them?; the second segment, outdoor furniture, though higher margin and more differentiable, in actual fact only comprises 10% of Sitra's total revenue and was established in the late 1990s. Focus cannot be a competitive strength because the company can hardly be a major or leading player in either of its segments; wood-based products or outdoor furniture are hardly defensible niches.

Consider the growth prospects for the company. Examining the trend of the most recent financials (1Q06 vs 1Q05) in Sitra's prospectus, there is unlikely to be a quantum leap in growth for FY06 over FY05. Consider the IPO proceeds raised. Out of the meagre S$5M proceeds, $1.3M goes to listing expenses, $2.2M goes to working capital and only $1.5M can really be considered as expansion/growth capital. It is unlikely that the IPO will give the company a growth fillip financially.

The industry prospects are not good. Upstream timber prices are rising (the company said as much in its prospectus regarding FY06 prices), meaning margin crimp if companies are unable to pass the costs to their customers (now this is where differentiation would come in useful). Downstream demand could be peaking, given that such wood-based home products and furniture are considered bigger-ticket discretionary expenditure and hence relatively cyclical. It is debatable whether the cycle is peaking, but one could take the cue from the price collapse of HTL.

Given all the pessimistic factors listed above, why has Sitra opened so strongly? The most obvious explanation must be the Chew brothers factor. The management is staffed with members of the Chew clan, including the CEO and COO. The Chew clan also includes Patrick Chew and Chew Hua Seng, bosses of the over-achievers Midas and Raffles Education respectively. So the market is betting Sitra will complete the hat-trick of stock market successes. Is this fundamentally a sound reason? Well, there might be some spillover institutional interest, but the possibility is not great; quoting a mantra of Warren Buffett, where an average sector meets a brilliant management, it is usually the reputation of the former that prevails. Perhaps Raffles Education could provide some creative design guidance on new lines of furniture products from Sitra; that would be the most direct link that I can think of :-)

Poll(please vote)
I agree that Sitra is a hot-stock-not: Yes/No

Osim @ 1.77 ( Health products / Singapore )

2006-11-14T23:05:00.000+08:00

Final Poll Results: 9:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Brookstone operations showing evidence of decline

2. Core operations showing evidence of deterioration

Given that two out of the three quarters of FY06 had not exactly been satisfactory for the high standards priced into Osim's valuation, it is surprising that the market has not punished it more severely. It is now back at 1.77, about 50% higher than its year-starting market cap (after adjusting for its mid-year 1:5 split) and just 15% off its peak. Yet things are not exactly rosy, looking at the trends indicated in the financials.

First-off, the big acquisition of 2005, Brookstone. It is clear now that its equity-accounted results are having a big impact, albeit of the negative flavour, on Osim's quarterly financials. Below is a listing of the quarterly results for Brookstone alone starting from 1Q05:

Period: 3Q06, 2Q06, 1Q06, 4Q05, 3Q05, 2Q05, 1Q05
Net profit/loss (US$M): -10.3, -11.0, -11.3, +17.0, -14.5, -5.7, -6.8

Considering that in FY04, Brookstone’s sales rose 15% over the previous year to US$500 million while earning a net profit of US$21 million, it has severely underperformed in FY05 and FY06 so far, looking at the quarterly trends. Summing up the quarters, Brookstone incurred ~US$10M losses in FY05 and looks like incurring another big loss in FY06; stagnant sales growth year-on-year exhibited so far in FY06 suggests there is unlikely to be any miracle in 4Q06 (although it will be a profit). Frankly, it looks like the Osim consortium bought a dud --- as a number of Singapore companies making major acquisitions overseas have experienced (eg. Yeo Hiap Seng), in an attempt to secure an instant North American sales and distribution network. There is no free lunch in the world, and much work would have to be done to get a declining company back on track. Even worse, Osim has tacked heavy debts onto itself to finance the acquisition, from a cash-rich position before the acquisition to a high gearing of debt-equity about equal to parity now.

So far up to 2Q06, the counterweight to Brookstone's poor performance had been Osim's core massage chair business, which had hitherto been having impressive growth rates. A popular figure used to check the popularity of retail outlets is the use of same-store sales, since sales growth could be due to new outlets rather than any growth in product or brand popularity; growth due to new outlet growth is less desirable because they add to fixed overhead burden. In 3Q06 my estimates for this figure have exhibited a sharp decline in both the North Asia and South Asia markets: in North Asia, number of outlets are 17% more than in 3Q05, while sales growth in this region has declined 5%; in South Asia, number of outlets are 24% more than in 3Q05, while sales growth in this region has only been 17%. It is a dramatic decline from the previous quarters where sales had grown 30-60% year-on-year despite low store unit growth. And to add to it, profit margins have declined, leading to a drop in profit even before associate (Brookstone) impact. The more cynical can claim that Brookstone losses were used to disguise the extent of the core business deterioration, when in fact Brookstone losses in 3Q06 had actually been less than that in 3Q05 (-US$14M).

It may not be advisable, of course, to cut things too fine by analysing results quarter by quarter if we consider company strategy and budgeting (eg. marketing) tends to be drawn out over an entire year; however, Osim themselves have identified the systematic reason: the North Asia market, especially in China, is plagued by imitations that have eroded revenue and margins. Could this trend continue?

The buyer of Osim now will be betting on two things: firstly, that Brookstone eventually works out fine in the fourth quarter and that Osim can piggy-back on its sales network in the US to expand sales in the North-American market; and secondly, that Osim's brand equity is something worth buying into despite all the teething acquisition problems. Would one be willing to place this bet? I wouldn't, for a stock trading at 20X FY05 PE looking at a reduced FY06 net profit. It is true that it has had a strong track record, yet the 3Q06 results exhibiting a slowdown in core operations gives ample evidence to suggest reconsideration. Ron Sim purchased more stock after the 3Q06 results to show his confidence; of course he would, since he started the company and holds >50% of its stock on whose share price his wealth depends.

Poll(please vote)
I agree that Osim is a hot-stock-not: Yes/No

Berlian Laju @ 31.5 cts ( Shipping / Indonesia )

2006-11-08T23:10:00.000+08:00

Final Poll Results: 3:2

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Chemical tanker and oil tanker market rates may have peaked

2. Substantial shareholder sale disguised as IPO

Berlian Laju already has a primary listing in the Jakarta stock market and recently conducted a secondary listing on the SGX with little fanfare. Given that oil-related stocks had lost some of their shine due to stagnating oil prices (a casualty being Chemoil which cancelled its highly-touted IPO on the SGX), the company sold its shares at ~30 cents, a discount to its Indonesia share price of ~35 cents.

Based on its current price on the SGX, it trades at 15X PE. For a shipping stock, it is hardly attractive. However, it has one of the world's top chemical tanker fleets, and also has significant interests in oil tankers, and gas tankers to a lesser extent. If one has learnt anything about shipping the past few years, it is that PE ratios mean nothing; a high (or even negative) PE may suggest that rate recovery is near, while low PEs often signal peaking of the cycle. So let's take a look at the prospects of Berlian Laju's various segments.

60% of Berlian Laju's fleet are chemical tankers by number, but of the three main segments --- chemical tankers, oil tankers, gas tankers, revenue contribution by the first two are nearly equal, with the third an insignificant 5%, according to HY06 revenue split. By gross profits, the oil tanker segment outweighs the chemical tanker segment by a 3 to 1 ratio. Consider that as late as FY04, the chemical tanker segment's revenue was >3X that of the oil tanker segment, and boasting profits 60% more than the oil tanker segment. Although the rise of the oil tanker segment was partly due to a doubling of its fleet while the chemical tanker fleet remained stagnant, the fact remains that the oil tanker segment had been driving the topline and more importantly, bottomline growth of Berlian Laju the past 2-3 years primarily through margin expansion, a manifestation of extremely high oil tanker charter and freight rates.

Chemical tanker rates have already corrected over early 2006; the segment gross profits dropped by 40-50% in HY06 over HY05, on stagnant revenue. Oil tanker rates appear to have remained strong at time of IPO, yet consider the following projections (picked up from Forbes Asia) --- crude oil tanker charter rates have fallen recently to US$70,000/day, and are projected to keep dropping to probably half that rate by next year. This is due to progressive delivery of new vessels that is seen to increase global fleet capacity by ~7% while demand for oil tankers is expected to rise only 4%. Yes, the turn of the shipping rate cycle is starting to come for the oil tanker segment as well, as new vessel deliveries from the shipyards start to come on stream progressively. Demand rises, supply crunch, rates rise, demand slows, supply shock, rates fall. This is a cycle that will never change.

Given that the outlook for both key segments look grim (the gas tanker segment is insignificant), the earnings may have peaked for FY05-06. The clincher is the structure of the company's SGX secondary listing. All the 550-600M shares were vendor shares, from the main shareholder's accounts (from 63% of total shares before IPO to 48% after). What is this but a share disposal disguised as a public IPO? The purpose of the exercise appears not to raise funds (which would have been welcome given that the company is already strongly geared at debt/equity ratio equal to parity) but rather to mobilise a massive dose of liquidity and effort to sell a big portion of shares at one go. Looking at the outlook, I can understand why. And if the main shareholder is selling, why should you buy?

Poll(please vote)
I agree that Berlian Laju is a hot-stock-not: Yes/No

Labroy Marine @ 1.87 ( Marine / Singapore )

2006-10-31T23:00:00.000+08:00

Final Poll Results: 4:2

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Doubts over sustainability of orderbook growth

2. Margin crimp possible due to factor price inflation

3. Unfavourable valuation comparison with peers in key segments

It is time for this stock to correct.

One of the market stars over the past two years, it has been a beneficiary of the recovery of the marine industry as a result of underinvestments leading to soaring charter rates; later on it has benefited from high demand for offshore vessels and then offshore rigs, both being required infrastructure for offshore oil exploration/production.

At the moment Labroy Marine is priced like a growth stock poised to deliver 25-30% medium to long-term growth, at 28X trailing PE and ~22X forward PE (assuming 30% earnings growth for FY06).

Many see this company nowadays as a shipbuilding play but the fact is that a majority of its operating profits (EBIT) are from its shipping division -- about two-thirds in FY04 and about 60% in FY05. Part of that has been due to vessel disposal gains contributing ~$10-15M every year, credited to this segment. Nevertheless, for a segment that contributes a majority of profit on a minority of revenue (~25 to 35%), it has to be seen to be as important as the other key segment (shipbuilding & repair). If one looks at this segment's asset composition, it is an impressive fleet of mainly tugs and barges, for transportation of energy-related commodities, mainly coal in the ASEAN region. In other words it is in the area of marine logistics, an interesting area if you ask me and probably offering sustainable revenue/profits over the next few years in terms of freight rates. A direct comparable is Sembawang Kimtrans, whose forward FY06 PE (ex-extraordinary items ) is likely to be 13-14X assuming 30% annual growth. Both are of about the same scale (~$100M revenue base) so it is not unreasonable to value Labroy's shipping segment at a similar forward PE.

That Labroy is valued higher than that suggests the inherent optimism regarding its other key segment: the shipbuilding and ship repair segment. Perhaps it may be clearer to split this into separate sub-segments that operate under different dynamics: the ship repair sub-segment, the incumbent shipbuilding sub-segment, the new offshore rig sub-segment.

From figures in the 1H06 financials, ship-repair activities contribute to ~20% of the total shipbuilding & shiprepair segment. This suggests that most capacity is being configured for shipbuilding at the yards.

The incumbent shipbuilding segment has been growing rapidly, and its order book is probably about $900M to be fulfilled over the next 3 years. It is worth noting that a large proportion of new orders, especially in recent times, has been for offshore AHTS vessels (a trend described in my earlier writeup "Demand trends within the shipbuilding industry"). You can't argue with a strong order book.... but look at the historical margins. Previous years' shipbuilding operating margins (without rigs) have been in the region of 7-8%, not exactly attractive. On the demand side, one wonders when the orders will dry up, given all the frenzied global shipbuilding for offshore vessels. The ship repair market is counter-cyclical, but shipbuilding is highly cyclical. It is worth keeping this in mind, and to balance the current optimism in the industry with the inherent risks historically (not too long ago it was seen as a sunset industry). On the supply side, there is inevitable upward rise of factor prices --- steel, labour. In particular, there has been reports of skilled labour shortage given the construction work taking place across Singapore (building construction, oil&gas facilities construction); there is a great deal of labour overlap with the marine industry in terms of job requirements. Indeed, recent profit trends over 1Q06 and 2Q06 for Labroy suggest such margin crimp: the rise in order book has been unable to work its way down to gross profits which have remained the same, suggesting gross margin drop (and possibly overly-aggressive bidding?).

Coming to the offshore rig segment, which has provided, in my opinion, most of the excitement surrounding the stock over the past year, the recent orders of two more rigs brings rig-related order book to ~S$950M. From the HY06 results, it is quite difficult to tell the performance of the new rig sub-segment by itself. The willingness of the Norwegians to order two more rigs recently must suggest that they are satisfied with the construction progress of the first two. However, two main questions still linger: firstly, whether the steep learning curve (highlighted earlier this year, seemingly forgotten) might translate to initial bad bottomline performance, and secondly, whether recent oil price downtrend could slow down the pace of new rig orders. Note that there has been a trend of speculators ordering new rigs in the hope of being able to sell them at higher future prices; these would be the first to go when the oil market downturns. Keppel, the world leader, has seen a slowdown in rig orders since 1Q06; Sembcorp Marine has recently been downgraded by one of the ang-moh brokers due to a seen slowdown in the rig market. Sembcorp Marine is probably trading at 20-25 times forward FY06 PE; it is a much bigger player than Labroy.

If you ask me, at 20X PE and for the same businesses and growth drivers (eg. offshore rigs), Cosco is a much better bet given its comparative strengths (eg. cheap labour), positioning (in the largest growth economy in the world) and backing (strong parentage and technical links with Sembcorp Marine).

Poll(please vote)
I agree that Labroy Marine is a hot-stock-not: Yes/No

Thai Beverage @ 28.5 cts ( Alcohol / Thailand )

2006-10-25T22:26:00.000+08:00

Final Poll Results: 3:2

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Insipid domestic consumption growth in beers and spirits

2. Increased regulatory and political risk

It is increasingly hazardous to make my hotstocksnot predictions as the market surges to new highs day after day. In the early part of 2006 it was all about China stocks; this time the rise looks to be more broad-based, starting with the blue chips but increasingly seeing mid-cap participation. These are exciting times.

Of course to look at it another way, it also suggests that there are new batches of stocks that could potentially surface as overvalued stocks for me to write on. However, over-valuation may not yet have set in across the market yet (just my personal opinion). Here I cover Thai Beverage, which I would view as a stable stock that I don't see as worth buying because of limited growth potential and hence limited ability to participate in any market rally.

The first point to establish is that this stock is all about the Thailand alcohol consumption market. Out of its total BT90B revenue in FY05, export sales constitute BT0.7B, or <1% of total sales. The total BT16-17B raised in its SGX IPO was almost all used to offset its high debt, which means there is no immediate abundance of working capital to finance overseas expansion. Indeed, Everton football club's (my favourite football club) jerseys no longer endorse Chang beer, an indication that the company might be scaling back on overseas marketing efforts.

The Thais are one of the biggest alcohol guzzlers in Southeast Asia (not surprising given that most of the countries around are Muslim) and some might argue that paying 16X trailing PE for a market leader in the domestic economy beer and spirits market is cheap or at worst, fair. Yet if we examine certain trends from a bottom-up perspective, domestic growth looks limited and unexciting.

The two main segments of Thai Beverage's operations are the beer and the spirits segment. According to statistics provided by the IPO, Thailand's consumption CAGR growth rate in these two segments are 10% and 3% respectively. Thai Beverage's spirits segment has a much high margin than the beer segment --- about 3 times the latter's. According to the latest 2Q06 results, the group's beer segment sales growth year-on-year was ~10% and spirits segment sales growth was near-zero ---- corroborating the nationwide trend. This consumption trend does not bode well for the medium-term.

Regulatory risk will be a big factor. Direct costs constitute ~80% of total costs of operation, and excise taxes (ie. alcohol production tax) constitute 70% of these direct costs. Those studying the group's sales and profit trend from 2003-2005 would have noticed a quantum jump in net profit from the BT7B range in FY03 to the BT10B range in FY04 and FY05 despite little change in sales. This was not due to any sudden increase in pricing power, but rather mainly due to the decrease in excise taxes from the BT48B range to the BT45B range. Government policy and attitude towards alcohol consumption plays a big role in corporate bottomline here. Now put into perspective the recent reports of a hardened stance towards alcohol consumption by the Thai government: a full ban on advertising of alcohol, a possible raising of the drinking age to no less than 25 years old and even possible raising in excise tax. Thai Beverage has claimed that the advertising ban will in fact be good for the company because it creates barriers to entry against foreign brands; that is debatable but they have missed the point ---- which is that regulatory headwind will be strong in the future given that the spirit of these regulations are to limit alcohol consumption --- tell me how good that can be for domestic alcohol producers.

This regulatory risk is closely allied to the political risk which has emerged out of nowhere with the overthrow of Thaksin. Suddenly foreign investors have a new government to deal with, one that has no track record unlike Thaksin who, despite his faults, was the one who drove domestic consumption with his Thaksinomics. Already, Temasek is suffering the brunt of the backlash against Thaksin-friendly foreign investors. The reaction towards increased country risk must be to raise the equity risk premium, and the side effect would be to lower interest and liquidity in Thai stocks/investments.

It would be advisable to avoid Thai-related stocks for the medium-term. Nestle, for example, has recently disposed of its Thai dairy products business and exited the country.

References:
(1) AP-FoodTechnology.com article Oct 2006: Alcohol firms fight ad ban in Thailand

Poll(please vote)
I agree that Thai Beverage is a hot-stock-not: Yes/No

Plastics Sector Index: Jun 9 - Oct 20

2006-10-22T19:42:00.000+08:00

Performance of index so far:

See List of Component Stocks (Jun 9 valuation).

No corporate actions that have needed adjustment to base market cap so far.

Plastics Sector Index: List of Stocks

2006-10-22T19:11:00.000+08:00

("Last price" refers to price on 9 Jun 06, the base index date)

My new index is the PSI. The "P" stands for Plastics, not pollutants. Apparently it is an index several readers are interested in, according to some straw polls I took. Which is also good, because the Plastics index provides a contrasting view to the other indices I've been tracking, which (save for the Env&Water index) have been trending up significantly since June.

The list of stocks totals 10, and there are only two main factors that guide inclusion/exclusion:
1. Market cap
2. Trading liquidity

The index will be weighted by market cap, as per normal.

Some points:
1) The index is likely to be positively correlated to the fortunes of the electronics industry (in particular, Singapore's), in addition to oil prices, because the key component stocks like Hi-P, FuYu, Sunningdale, Huan Hsin, First Engg) are plastic moulders for this industry. For information, the four key sub-sectors that Singapore plastic injection companies rely on are: wireless, printers, consumer/home appliances, and automotive.
2) China Precision fabricates plastic parts for its tuner components, while Full Apex uses PET chips for its bottles which are related to plastics. Hence both are included. However, given that they are excluded in most analyst reports on the plastics sector, I used an index factor of 0.5 on them to scale down their importance (by market weight).
3) Smaller plastic moulders like Avaplas, Juken, TTL are excluded because they are completely illiquid and make little impact.

As before, I have backdated the index such that it starts on the same base as my China Stocks Index and Energy Sector Index ie. on Jun 9 2006. Hence there is a ready curve from Jun 9 till today. At last count (20 Oct) the index stands at 91.8, which means on average the plastics index component stocks have dropped nearly 10% over the last four months even as the STI rallied.

As before, placements, delistings, rights issues of the index stocks will adjust the base market cap. So far I've had no chance to. The maths as follows:

1. Rights Issue
Adjusted Base AMV = Old Base AMV x (Old Current AMV + Payment for Rights)/(Old Current AMV)

2. New Listing
Adjusted Base AMV = Old Base AMV x (New Current AMV including New Listing)/(New Current AMV excluding New Listing)

3. Delisting
Adjusted Base AMV = Old Base AMV x (Old Current AMV excluding Delisting)/(Old Current AMV including Delisting)

Autron @ 11 cts ( Electronics equipment / Singapore )

2006-10-14T21:58:00.000+08:00

Final Poll Results: 4:1

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Options constricted by huge current debt

2. Growth limited by impending sales of Northeast-Asian operations

3. High receivables and writeoffs

Let's start by listing down the pros of this stock. It had previously been in the crosshairs of retail and even institutional investors for its substantial scale and play on the theme of electronics manufacturing outsourcing to Asia, due to its core business of distribution of electronics manufacturing equipment in the region. It has sunk terribly on the back of bad earnings these two years but some point to the balance sheet and say its net assets of A$93M convert to S$0.16 per share based on 694M shares (and conversion rate of A$1:S$1.2 ). Add that to the impending sales of its Northeast Asian businesses for US$60M to North Asia Strategic Holdings which would effectively release S$0.14/share to the group --- when it is trading at $0.11 now.

It would be dangerous to see it as a value play. To be honest I had been interested in Autron initially on the basis of precisely this premise, and yet now I think it's a hotstocknot primarily on the basis of clues from various discomforting corporate/shareholder moves, as discussed below.

Consider the moves of the abovementioned North Asia Strategic Holdings, soon to acquire the Northeast Asian operations of Autron in late October. Originally in May the plan had been for it to inject equity and convertible debt into the Autron group; however in August NASH changed its mind and proposed to buy the entire Northeast-Asian operations of Autron instead. Looking at the full-year results released in September (it incurred full-year losses when up till 1H06 it was profitable and seemed to be turning around its operations) and its fragile balance sheet showing ~A$100M current debt, it is likely that (1)Autron was negotiating from a position of weakness, and (2)the Northeast Asian businesses had greater value, and (3)it was more worthwhile to buy the Northeast Asian distribution business and take control than take a passive equity position in the entire Autron group (from the perspective of NASH).

Next consider substantial shareholder Kingdon Capital Management, which trimmed 3.3% off its previous 5.1% in Autron for around 10-11 cents in early October when the stock rose slightly on volume. It says a lot about its views about the acquisition deal, presumably closing just three weeks later, that it is instead taking the chance of high trading volume to exit the stock. It's a huge loss for them, considering that they bought in June 2005 at ~24.5 cents.

The problem with analysing the mechanics of the upcoming acquisition deal is due to the lack of detailed geographical segmental information regarding its Northeast-Asian business. The financial statements show that revenue contributions from Northeast Asia contribute two-thirds of the total distribution business revenue pie, but say nothing about profits. The asset distribution is opaque, because of high eliminations (possibly due to both geographical segments sharing assets). Autron did not help clarify potential gains/losses in their statements concerning the deal.

Reading past analyst reports, the promise appears to be in the Northeast-Asian markets, where Autron's long history of operations in Asia – more than 20 years in Greater China – has gained it numerous blue-chip customers eg. Taiwanese contract manufacturers. In particular, China as a key PCB producer is the key outsourcing centre and demand centre for manufacturing equipment. A restructured Autron with its focus on Southeast Asia would provide little attraction and would indeed be going the wrong way --- due to the long-term shift of manufacturing activities from Southeast Asia to North Asia. Disposing of its Northeast Asian distribution business also removes avenues for growth of its equipment refurbishment business --- another growth driver that was supposed to drive margin increase.

Enough about growth. What about value? Consider that A$125M (>S$0.20/share) of its total A$210M current assets is receivables --- half a year's worth of revenues. A$10M, or 8%, of these had to be written off as doubtful debts in FY06, compared to none the previous year; this leads one to be concerned about the quality of its earnings and its receivables (I believe these writeoffs were mainly responsible for its FY06 losses). On the liabilities side, as has been mentioned, current debt of ~A$100M has to be refinanced or repaid quickly --- a possible destination for the funds obtained from the sales of its Northeast Asian operations. There remains extensive risk in restructuring the business after the sale and there is little chance of the company returning more cash to shareholders beyond the 1-cent dividend it has declared. Nor is the full extent of the recently proposed share buyback program going to be exercised, in my view.

References:
(1) S&P research report on Autron Jun 2004
(2) UOB research report on Autron Apr 2004

Poll(please vote)
I agree that Autron is a hot-stock-not: Yes/No

Landwind @ 46 cts ( Medical equipment / China )

2006-10-04T22:49:00.000+08:00

Final Poll Results: 8:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Entire China healthcare sector facing regulatory uncertainty

2. Not cheap compared to peers that have corrected

3. Dependence on distribution strength rather than intellectual property

Just half a year ago the China healthcare sector, comprising the pharmaceutical companies and the medical equipment companies, were acquiring growing investor following --- not just retail investors, but also institutional investors. The logic was compelling --- medical services was always going to be necessary for the largest population in the world, and healthcare is both a defensive sector (being necessary services/products) as well as a growth sector equal to the best consumer products. And so they thought --- and since then Templeton has lost a fair bit of their Celestial gains in their subsequent investment in Asiapharm which has corrected sharply. Most other China healthcare-related firms listed on the SGX have been hit in their share prices --- C&O, Sunray, Star Pharmaceutical, Reyoung, Pharmesis.

The trigger event has been an ongoing reform of the medical products market in China. The government measures implemented include a campaign launched in mid-2006 to curtail ‘kickbacks’ or corruption within the medical equipment sector, introduction of more stringent requirements in the medical equipment and pharmaceuticals approval process by the State Food and Drug Administration (“SFDA”) to raise the quality of medical products in China closer to international standards, and restricting percentage of revenue from the sales of prescription drugs in hospitals (hence controlling drug costs).

It appears that this series of reforms has deep implications for the profitability of the healthcare-related companies, or at the very least has increased near to medium-term earnings risk. In the past, because of the government's long-time efforts in cost containment, physicians and medical institutions have been forced to deliver basic services at below-cost prices, but they have typically recouped losses through charges for medicines and high-tech tests (and hence equipment). In these two areas, the government allowed medical providers to charge prices that exceeded costs. So the price of physician consultation is extremely low, but medications and tests are overpriced. That is the reality; now the government appears to be clamping down on these two areas as well. That means margins for pharmaceutical and medical equipment manufacturers and distributors will be crimped.

This is a sector-wide phenomenon, and although some might argue that specific companies might have proprietary competitive advantages, discretion is the better part of activity when the sector faces a true headwind. This is corroborated by the operational difficulties that have afflicted previously steadily growing companies: AsiaPharm reported slowing profit growth, Sunray released a business update noting the "industry-wide slowdown" and more or less hinted at significant negative company impact due to this measures, and C&O released a thinly-veiled profit warning just yesterday albeit due mainly to lower contribution from an acquisition (where the explanation was rather convoluted).

In particular, it is worthwhile tracking the business update of Sunray, the most comparable company to Landwind since both are distributors of medical equipment (Sunray in gynaecological equipment, Landwind in ultrasound). Sunray is particularly worried about the "crack-down on corruption and commercial bribery in the healthcare sector, and the ensuing inspections of various medical institutions and hospital personnel", which have "led to delays in the procurement of medical equipment, affecting industry sales of medical equipment in recent months". Medical equipment are increasingly being procured through tender systems, which I interpret to mean takes some of the margin away due to increased transparency and a clearly-defined set of procurement decision rules. Notwithstanding the light that this throws on the shadiness of the purchasing deals done under the current system, it appears that the reforms suggest that medium-term outlook does not look good.

Landwind has corrected less than the rest, and has indeed recovered in price recently, probably due to recent coverage by brokers such as GK Goh who are projecting RMB83M FY06 net profits when HY06 profits was only RMB24M. The bullish projection was on the basis of new radiography products rollout in 2H06 but we have already seen the abovementioned trend of hospitals delaying/slowing down their purchases. Landwind is trading at 3X NTA and 12X trailing (FY05) PE: not exactly exorbitant but not cheap either, especially given the tepid medium-term outlook and lower peer comparables (Sunray at 7.5X PE). Note that its revenue base is not founded on in-house products, but rather primarily on distribution of foreign products from Siemens, Philips and Honda Electronics (85-90% of total revenue, with house products filling the rest). There are two further negative issues associated with its niche: it deals mainly in premium range equipment (as opposed to lower-end "standard range equipment") which are expected to see most impact from the government healthcare reforms, and its main value-add being an equipment distributor suggests that its most important asset is its China-wide distribution network --- and that is exactly what is being reformed now.

Expect to see some downward correction in profit margins in its next set of results.

References:
(1) OutsourcingHealthcare.com article: Perspectives on Growth of the Outsourcing Market in China's Healthcare Sector
(2) People's Daily article 22 Aug 06: NDRC deals with medicine and medical service price hikes
(3) Various announcements in SGX website, pertaining to Asiapharm, Sunray, Landwind
(4) CIMB GK Goh 28 Sep 06 report on Landwind

Poll(please vote)
I agree that Landwind is a hot-stock-not: Yes/No

Comparison of HotStocksNot CSI and PrimePartners China Index

2006-09-30T13:31:00.000+08:00

The PrimePartners China Index has just been launched and will go "live" on Monday. It's high time there is an official tracking index for China stocks listed on the SGX given their importance in terms of market cap and not-insignificant deviation from general market performance on many occasions. This index comprises of 25 representative China-linked stocks, and represents about half of the value of China companies here.

I decided to do a comparison of my own HotStocksNot China Stocks Index (CSI), started in mid-June, and the PrimePartners initiative. Below is a list of the component stocks in each index. The stocks that appear in both indices are highlighted in yellow. Those wishing to read more about my initial methodology for formulating my CSI may refer to a separate mirror site covering my indices. Those wishing to read more about the PrimePartners index may refer to this newslink.

The PrimePartners index stock selections has vindicated some of my decisions in formulating my CSI in several ways. Both are remarkably close in terms of number of component stocks: 25 vs 26 respectively. Main considerations are similar: large market capitalisation, high trading volume, good spread of industries. Many component stocks appear in both indices, more than half in both indices (though there're several notable discrepancies). In fact, my CSI covers >40% more market value (at total $20.2B vs $13.8B for PrimePartners). Note that my observations may be a bit biased.

Main differences:
1. The PrimePartners index appears less accommodating towards recent IPOs, comprising less of them. Glaring omissions include China Sky, Longcheer, China Milk, China Hongxing, Luzhou. Their index shows a preference towards "older" stocks, which explains why United Food, China FlexPack and China Paper appear on their list. It's a matter of judgment; while I did believe a stock being a recent IPO was a negative in terms of its consideration for a component stock, I tend to think market value, business scale and investor interest (reflected through trading liquidity) can outweigh such considerations; after all, the index should try to cover those stocks in the radar screen of most investors where the China theme is concerned.
2. Pine Agritech is a notable discrepancy at the top of the chain. I had made a conscious decision not to double-count it with People's Food.
3. Hongguo is a very surprising omission. So is the inclusion of the rather small United Envirotech, and also inclusion of Memtech but exclusion of Longcheer (for the telco theme).
4. My adjusting index factor used to discount market cap for stocks less obviously linked to the China theme is rather unorthodox and it is not a surprise that the PrimePartners index does not have any such provision. It requires some judgment but I feel it has been particularly useful in order to reduce the importance of certain large-cap stocks. Noble, Want Want and HTL were downward adjusted using this index factor concept; it is interesting that they were not included at all in the PrimePartners index.

Finally, what I will do in the future is to include both indices in my market summaries, to provide two perspectives of the SGX China stocks. I might as well, since my fixed infrastructure for updating my CSI is already in place :-)

Equation @ 21.5 cts ( Investments / Singapore )

2006-09-28T23:25:00.000+08:00

Final Poll Results: 8:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Possible investment gains in Citiraya do not justify valuation

2. Speculative play

This is the first day of Equation's trading on the SGX and I am already covering it. But of course, this is not a new stock. It is the hotstock formerly known as Heshe, and readers will probably be keenly aware of the reason for its surge these few days. One word: Citiraya.

Since it's called Equation, let's do some mathematics here. In fact, my writeup is going to be mainly equations.

Current position of Equation
NTA (Net tangible assets) as in FY06 statement = $12M
Additional money from subsequent rights issue = $13M
Total number of shares (incl. exercised rights) = 913M
NTA per share = $25M/913M = $0.027
Current price per share = $0.215
The discrepancy is nearly entirely due to the upcoming investment in Citiraya, hence let's look at what is the possible return on its investment.

The Citiraya equation
Inital number of shares = 630M
New Tranche 1 shares (to Equation and Oei Hong Leong) = 1900M (Equation takes half)
Total outstanding shares = 630M + 1900M = 2530M

(Now comes the hard part)
Let's take a lot of assumptions here, most of them (extremely) favourable to Citiraya.
Last FY results (FY03): Net profit = $17M (this is of course, partly fraudulent, but anyway....)
Let's assume Citiraya loses 50% of its business on resumption of normal operations, while maintaining margins of ~17% pre-tax (though if you look at Enviro-Hub, it looks more like the low 10s):
Then expected net profit for Citiraya = $8.5M

Expected EPS (earnings per share) = $8.5M / 2530M = $0.0034
Attach 20X PE: Market valuation = 20 X 0.0034 = $0.07

Returning to Equation (the company):
The benefit for Equation
Subscription price per Tranche 1 share = $0.0085
Hence total gain for Equation (based on above market value for Citiraya)
= 950M Citiraya shares X (0.07-0.0085) = $58M
Gain in asset value per Equation share = $58M / 913M shares = $0.064 (gain in Citiraya investment value)

Of course, the company has an option to subscribe to another similar-sized tranche after one year, but given that this is going to double outstanding Citiraya shares, the gain will be halved. Let's put it at another $0.03 gain/share down the road (might as well factor it in)

Hence total possible asset value gain = $0.095
Total NTA per share would then = $0.027 + $0.095 = $0.122 (given the track record of Equation's legacy businesses, I wouldn't expect any significant contribution to asset value from them in the medium-term)

Most of the market value of Equation would be tied to the prospects of Citiraya, and taking it as an investment play on Citiraya, the NTA of Equation becomes the most pertinent in estimating its market value. It is reasonable to take a 10% discount on the market value of its Citiraya holding when we calculate Equation's market value (typical conglomerate discount), which means
Fair market value of Equation = 90% X $0.122 = $0.11
To be generous and considering the rest of Equation's business (garments, F&B, property) at ~$0.06 (that was the market price before announcement of the Citiraya deal)
Adjusted total fair market value of Equation = $0.11 + $0.06 = $0.17 (at best)

Much of the sudden optimism about Equation's Citiraya investment has been due to Oei Hong Leong's recent pronouncement that he will give full support to reviving Citiraya due to his interest in electronic recycling (save the world). Oei Hong Leong is at heart a businessman, and an extremely astute one at that. It is difficult to see that he would be willing to commit more resources if Citiraya should find the going tough, without expecting something in return. He could inject funds, but of course it would be exchanged for further dilutory placements. It is difficult to see how Equation can benefit from this as it gets diluted further.

If one plays this game, he has to be aware of what game he is playing. It is no longer about value. It is about the desire, even need, for major stakeholders to keep prices and liquidity up so that they can tap the market for funds should the need arise.

Ok, so did I miss out anything in my Equation? (pardon the pun)

Poll(please vote)
I agree that Equation is a hot-stock-not: Yes/No

Biotreat @ 73.5 cts ( Water treatment / China )

2006-09-21T19:28:00.000+08:00

Final Poll Results: 6:1

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Credibility problems, both in operations and shareholder orientation

2. Possible problems in future fund raising

It is not just highly-priced stocks that one has to be careful of due to the law of reversion to the mean, but also he has to be careful against liberally applying it to stocks that have dropped sharply and which consequently look more attractive than before.

Everybody knows about Biotreat and the disastrous fourth quarter they had that has pulled down share price by ~40% recently. Those willing to bet that the fundamentals have not changed and that it was only one bad quarter caused by bad weather might want to do some bottom-fishing. But the question is: were the fundamentals good in the first place, and do they still remain uncompromised by the bad publicity?

What brought Biotreat to its high of ~$1.20 before its recent collapse was a stream of high-value BOT (Build-Operate-Transfer) municipal contracts whose value the company always declared in its press statements to attract attention. That is a marketing tactic and everybody does it. A brokerage (can't remember which) has discussed the concept of BOT recently and likened a company operating BOT projects as no more than a utility, since it basically invests and owns the infrastructure, and manages water tariff collection thereafter for a certain number of years before transferring ownership to the government. For a brief introduction to the various partnership models check out my writeups on Partnership Models Part 1 and Part 2. It is an increasingly popular model with governments for infrastructure construction financing because they do not need to fork out the capital; the private company does. Some private companies likes it because unlike turnkey projects which are one-time, BOT projects allow them access to a recurring income stream.

If one checks out the cashflow for Biotreat, never mind the profits, over the last two years, the effects of such a model are clear. I am not exactly cognizant of how operating profits are generated for BOT projects (firstly, since the company is building and owning the plant surely the revenue is an internal target; secondly, who is billed? My guess is that it is classified under receivables, to be received from consumers over several decades), but the working model requires heavy initial capital investment and so for FY05 and FY06 the sum of operating cashflow and investment cashflow has been consistently negative--- RMB360M and RMB640M respectively. Obviously they have to be heavily financed: in FY05 the spending was financed by loans and share placements amounting to RMB450M, while in FY06 the company issued convertible bonds amounting to RMB1B.

Now we come to the credibility problem, where, notwithstanding the rather comical explanation on floods washing away its bio-organisms, one wonders at the extent of the negative turnaround in profits in 4Q06. From RMB89M net profit in 3Q06, it collapsed to -RMB66M in 4Q06, a swing of RMB155M or half of FY05 net profit in one single quarter. Note that the rather substantial expenses relating to the convertible bond issue was sustained in 3Q06, and not 4Q. It is rather suggestive that quarterly results are not audited while year-end results are (a problem which appears to be addressed soon by new SGX requirements) and perhaps auditors had certain issues with the company as well, given the previous change of auditors from PWC to Moore Stephens.

The credibility problem is real and poses financing problems long-term. It has already had a run-in with the market earlier in 2004 on the issue of its extravagant employee share option scheme, and the recent earnings shock must surely reinforce the market perception that it is not shareholder-oriented nor transparent. This risk re-rating would probably spill over to the debt financing side as well. Those who are familiar with capital budgeting decisions would know that project rates of return are ultimately decided by the present value of future cash flows, and these are obviously affected by the discounting rate used. The higher the cost of capital, the higher the discounting and hence the lower the net present value. This is a probable scenario with Biotreat, as both avenues of financing --- equity (new placements) and debt --- are likely to become more expensive. Would its initial capital budgeting decisions based on the then-estimated cost of capital be affected? Definitely. That also applies to all future project possibiities. The company has accummulated about RMB1B worth of BOT/TOT projects since the start of 2006, and its strong RMB700M cash kitty, mostly obtained from the convertible bond issue, should be adequate to complete these projects. I also think that the next quarter's results (1Q07) are likely to be better than 4Q06, which included several provisions (cost overrun, forex losses) amounting to ~RMB55M (which only partially explains the RMB155M profit downswing from 3Q06). However, I also believe that Biotreat's fund-raising ability, and hence its ability to bid for future projects, will be heavily hampered, as mentioned above. Given that its BMS wastewater treatment segment accounted for 80-85% of overall revenue and profit (vs its other segment of sales of goods) and that the trend in China is towards BOT private-ownership projects, I would think that its performance in FY07 --- in securing new projects and in securing new capital --- would be crucial in assessing its long-term viability. Any attempt to project income on the basis of past results may be futile, and very risky.

References:
(1) Citigroup 4 Sep report on Biotreat

Poll(please vote)
I agree that Biotreat is a hot-stock-not: Yes/No

Short Note -- Link Submissions box (Sidebar)

2006-09-17T12:02:00.000+08:00

I have just added a Link Submissions box in my sidebar, which I've adapted from a Shoutbox used on other sites. The idea is for readers to submit links to articles relevant to stocks that I've covered on this site, so that we have regular updated understanding of the stock from different perspectives (mine is only one viewpoint after all). It's inspired by this website Fark.com where readers submit interesting article links which are then compiled for mass sharing.

How (I hope) it will work
Name: Optional (It'll just be labelled as Anonymous if empty)
E-mail/url: Pls fill in the weblink for the article
Message: A short description of the link (will be better if you mention which stock it's relevant to .... preferably to one of the stocks mentioned on my blog so that I can archive it later)

Viewing the links
- Readers can click on the Name in the box and it will link automatically to the article link submitted by the originator
- At the end of the day, I'll also compile the links submitted for the day and classify them under the relevant blog entry (eg. all article links submitted relevant to Ellipsiz will be archived under my Hotstocksnot blog entry on Ellipsiz)

Pls let me know if this will work. :-)

Ellipsiz @ 68 cts ( Semiconductors / Singapore )

2006-09-13T20:30:00.000+08:00

Final Poll Results: 7:5

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Doubts about immediate impact of K&S acquisition

2.17X ex-extraordinary item PE not exactly cheap

Having seen the high target prices set by DBS Vickers in late August ($1.10) and Kim Eng earlier this week ($1.05) I decided to take a closer look at Ellipsiz. And after looking through the relevant documents, I am rather mortified.

First, the growth drivers. Ellipsiz is a semiconductor services provider, and has three business segments – Fabless Solutions, Wafer Fab Solutions, and Manufacturing Test Solutions. These may also be classified as upstream (design), midstream(manufacturing) and downstream(quality and packaging) respectively. According to the analysts and corroborated by the segmental composition over the last few years, Fabless Solutions is the growth driver for the coming years, growing from nothing in FY04 to form 44% of the revenue pie in FY06, while the other two segments shrink in importance (particularly Wafer Fab Solutions). The optimism is no doubt generated by the acquisition of Kulicke & Soffa's probe card/wafer test assets in early 2006, an acquisition which Ellipsiz has been trumpeting now makes it the third largest probe card company in the world.

The projections are that company topline are expected to grow >40% in the coming FY07. Ever wonder why bottomline is less often mentioned? That should be a danger sign that all investors should note. The answer lies in the Kulicke and Soffa annual report for 2005. K&S has been making losses in two of its last three financial years (September being year-end), including the most recent FY05, and the drag has consistently been its Test segment, which "contributed" US$27M, US$21M, US$142M of losses respectively in FY03, FY04 and FY05 (note that FY05's huge losses were partly due to intangible asset/goodwill impairment charges of ~US$101M). The Test segment is where the probe card assets recently bought by Ellipsiz come from. To be fair, the probe card assets bought by Ellipsiz are but one part of the Test segment of K&S (they might even be profitable among the sea of red in the Test segment), but in the absence of further details one has to exercise extreme caution, especially when K&S's Test segment assets were so heavily written down (ie. deemed as less income-generative than originally planned) in FY05.

There are mergers that work and mergers that don't. A significant one recently in the same industry is STATS which had to spend about two years to digest its CHIPs. The integration process may be easier if the acquiring company is significantly larger than the acquiree. In this case, note that the newly acquired probe card assets of K&S generated US$65M sales in 2004, as compared to Ellipsiz's probe card division's (SV Probes) US$20M.

Next, let's check out Ellipsiz's financial statements. Although the FY06 profits looked great, note that about S$23M was due to extraordinary income from financial asset disposal gain ($10M) and negative goodwill from acquisitions, mainly K&S's probe card assets ($13M --- and it's not even tangible!). Also note that these extraordinary gains were all done in 2H06, which means exclusion of these extraordinary items reduces 2H06 profits to $5M, as compared with $8.6M in 1H06 (before the acquisition). Although the K&S acquisition has contributed $33M sales for 4 months of operation, it probably has also a similar impact on the P&L --- albeit negatively. Valuation-wise, ex-extraordinary items, full-year EPS is about 4 cents, which means FY06 PE is about 17 times. Kim Eng has a peer valuation comparison where it lists global peers in the probe card segment, wafer reclaim segment and distribution segment as trading at between 15-25X PE while Ellipsiz, with all the non-recurring FY06 gains, is trading at 6X --- a rather unashamed comparison if there ever was any. At the same time, they also forecast a ~45% pre-tax profit (ex-extraordinary) year-on-year growth in FY07, in proportion with a ~45% topline growth ie. margins are maintained.

It will be quite a miracle if the acquisitions can be digested so well that operating margins are maintained in FY07. As shown in the results for 2H06, there was already a post-acquisition impact. Technology often leaves people bedazzled, and the analyst and company reports are often full of market claims and technical terms that have a "shock and awe" effect on the reader. At the end of the day, what matters are the numbers --- and properly adjusted ones at that.

References:
(1) Kulicke & Soffa Annual Report 2005

Poll(please vote)
I agree that Ellipsiz is a hot-stock-not: Yes/No

Short Note -- "New" Indices

2006-09-09T18:20:00.000+08:00

Will be adding another few indices for daily monitoring, as this has proven quite useful for some, if feedback is accurate :-) This time, I'm not creating any new indices from scratch, because the themes I'm looking at are already reflected in existing indices on the SGX --- the All-S Equities indices. The Financial, Property, Hotels and Construction sector indices there are still quite relevant and well-updated, so there's no point for me to re-invent the wheel. These sectors also happen to be rather interesting proxies to the umbrella theme --- domestic reflation. I will include these with my self-created China theme, Energy sector and Environmental/Water sector indices in my daily summaries.

More details on the component stocks for these All-Singapore indices can be found in the SGX website:
Financial Sector Index
Property Sector Index
Hotels/Restaurants Sector Index
Construction Sector index

Obviously these sector indices will not start from 100, since they started way back.

I will also be just listing the various index changes daily; no charts until the weekend given the high number.

Also take the opportunity to introduce readers to my friend Lucy's site on www.dxxl.blogspot.com where she has kindly documented a history of my various self-created sector indices for easy reference by readers. Please give her your encouragement!

Weekly Summary 4-8 Sep

2006-09-09T16:25:00.000+08:00

Indices
STI 2510.14 18.65 (0.7%)
SESDAQ 109.94 -1.06 (-1.0%)
Env/Water index 105.15 -0.34 (-0.3%)
Energy index 119.25 -0.08 (-0.1%)
China index 116.12 1.06 (0.9%)

Stocks Summary
Stocks below $1: Week's Top Gainers & Losers

Stocks between $1 to $2: Week's Top Gainers & Losers

Singapore Market Summary 8 Sep (Fri)

2006-09-08T21:02:00.000+08:00

SGX Environmental & Water Sector Index

Link to Individual Component Stock Changes
Link to Base Prices as at 9 Jun 06. The base index for the Environmental & Water Sector Index, based on 9 Jun 06, starts from 100.

SGX Energy Sector Index

Link to Individual Component Stock Changes
Link to Base Prices as at 9 Jun 06. The base index for the Energy Sector Index, based on 9 Jun 06, starts from 100.
For corporate actions involving index stocks (new placements/deletions/new additions need adjustment to base market cap) see Corporate Actions.

SGX China Stock Index

Link to Individual Component Stock Changes
Link to Base Prices as at 9 Jun 06. The base index for the China Stock Index, based on 9 Jun 06, starts from 100.

Note that the charts are plotted on log-scales for y-axes to illustrate the percentage change rather than absolute change --- a scale useful for comparing across different ranges (eg. CSI vs STI) ie. relative price changes rather than absolute changes.

The indices are updated by the formula:
New index value = New adjusted market cap/Base adjusted market cap X 100

SGX Small Cap Stocks Summary

Market Summary: Volume is measured in unit volume (unit shares) and dollar volume (dollar shares). This gives a perspective of general market attention (expensive blue-chips or cheaper small caps)

Top Movers: Only small/mid caps below $1 share price - for focus. Volume is measured in dollar volume to give perspective of actual money volume going into a stock, without distortion of low absolute price (tendency is for these shares to have high unit

Federal @ 49 cts ( Oil services / Singapore )

2006-09-06T22:00:00.000+08:00

Final Poll Results: 2:1

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Exit of strategic investors that originally fuelled investors' hopes

2.Insipid track record

Consider the tale of Federal International. In mid-August 2006 it announced a splendid set of half-year results where revenue almost doubled while net profit jumped 150% year-on-year. This seems to justify its trailing PE which is >20X because if we extrapolate 1H06 performance to the full year, it suggests forward PE could be as low as single-digit.

Perhaps, perhaps. Let's look at the history of the stock starting from December 2005 to get a perspective. In early Dec 05 Federal was trading at ~30 cents with lethargic volume, and a look at its performance over FY04 gave little cause for great optimism: near-zero net profit growth over FY03, revenue drop (margins did increase though), 1H05 net profit growth was mainly due to a turnaround by a previously loss-making associate without which operating profit had dropped by half. As a matter of fact, it transpired that FY05 results continued in the same vein, with full-year revenue dropping yet again while profit remained stagnant.

In December 2005 the price catalyst came. Two Indonesian investors, hailed as strategic investors by the company, subscribed for a total of 42M shares at $0.33 in the group: Syailendra Bakrie and Nancy Latief were the proxies for Indra Bakrie and Rennier Latief respectively, both individuals with oil and gas influences in Indonesia. In January and February Syailendra Bakrie continued adding to his stake, and Federal's price rose to >70 cents --- a >twofold increase --- on optimism surrounding the Indonesian contacts the new investors would bring.

Some big new deals did come. In January 2006 Federal clinched a US$24M contract to provide integrated drilling project management services for an Indonesian oil company --- of which Rennier Latief is a director. In February 2006 their new arm, Federal Offshore, without any prior experience, secured a US$90M 10-year contract to charter out an FPO vessel to a Petrochina subsidiary operating an Indonesian oil concession with the Indonesian oil ministry. The last big contract was probably not due to Indonesian influence --- to supply pipes to the Middle-East for US$17M.

Despite Federal's strong performance in 1H06 as a result of these dealflow, the two strategic investors sold off a majority of their respective stakes in late June-early July, at probably ~50 cents. It is interesting to note that their last purchases were as high as 70 cents. But of course, they made money, and not a bad return .... probably 60% for getting in and out in the course of 6 months. There is little information on the new stakeowners, just the inscrutable names Fabulous Commercial, Excel Key, Unichem Assets Management. The lack of publicity probably suggests these are not exactly the same kind of "strategic investors".

It is also interesting to note the resignation in June 06 of a Federal director, also one of the three founders of the group. Will the dealflow dry up? The abovementioned long-term charter of the FSO vessel should provide some recurring income, but other than that it should be fair to say that the catalysts that propelled Federal's share price upwards earlier this year are gone. Given its rather insipid topline and bottomline track record so far (before 2006), and add to it the rather disturbing circumstances in which several stakeholders exited (management included), one should be cautious on this stock. A risky one even if one wants to get exposure to the Indonesian oil sector --- but where sector is strong but company looks dodgy, it's better to avoid.

Singtel @ 2.47 ( Telecommunications / Singapore )

2006-08-30T12:02:00.000+08:00

Final Poll Results: 2:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Limited growth in medium-term

2.Higher-than-normal future earnings stream risk may not be priced in

The No. 1 market cap stock on the STI and I shall divide a discussion of this stock into the short-term, medium-term and long-term.

Singtel has just gone ex-entitlement (comprising 1-for-20 capital reduction at $2.74) today. Other companies such as SPH and OCBC have undergone capital reductions in the past and have turned out the better for it, which is the reason why the price has held strong today. Besides the higher per share valuation for the capital distribution of $2.74 which limits any big drop by Singtel shares (although effectively the impact is probably only ~1-2 cents since it's a 1/20 reduction), the outstanding share capital has decreased by 5% (ie. 1 in 20) which increases EPS (earnings per share). However the short-term catalyst supporting the price has gone.

Singtel now trades at a trailing PE of ~9.5X and some might see it as a bargain, given its blue-chip status. However, the medium-term and long-term outlook are not exactly rosy. Let's consider the dividend discount model (DDM) for stock valuation:

P = D/(k-g)
where
P: theoretical price of stock
D: Dividend in Year 1 (ie. most recent year)
k: Cost of capital (proportional to risk of the stock)
g: Growth rate of dividend (assuming dividend payout rate remains constant, it equals earnings growth)

I'm not even going to try to calculate P through the DDM equation because it's so inexact given that a small change in spread between k and g gives a big variation in final value. However, it's worth appreciating the future direction of these two variables.

Consider the medium-term. Earnings (EBITDA, Earnings Before Interest, Tax, Depreciation and Amortisation) have been split almost evenly between Singapore operations, Australia operations (Optus) and Regional Mobile operations (various associates). The local(Singapore) operations have been stagnant over the last few quarters, with FY06 revenue and profit growth <5% year-on-year -- unsurprising for a mature market with high penetration rate. The Australian arm Optus has run into operational difficulties, experiencing significant EBITDA margin declines of ~5% for FY06 (and dropping further in 1Q07 recently) in another competitive market. The associates in the various emerging markets (Indonesia, Thailand, Philippines, India) have been driving growth recently with about 30% growth rates on average but Singtel has just signalled that any further overseas expansions/acquisitions are not forthcoming, with its capital distribution back to shareholders amounting to $2.3B. We should take this implicit signal seriously. Now, two out of three arms are not expected to have good growth in the medium-term --- that surely does not a buy call make. Overall group operational profit growth has been below 5% and implied value for g, as set out in the DDM equation above, would be very low (given high dividend and capital distribution).

Consider the long-term. The attraction of utilities plays has always been their steady cashflow which is low volatility and hence low-risk ie. implying low k in the DDM equation. Yet consider Singapore. The plan is to build an island-wide broadband infrastructure network (known as the Next Generation National Infocomm Infrastructure) as part of the nation's IT masterplan, which effectively is saying the government is subsidising a plan to erode away Singtel's local competitive advantage. By the time it is complete, voice-over-IP would be mainstream technology and what is Singtel's local competitive advantage but its ownership rights to an incumbent island-wide fixed-line infrastructure? At the same time all telco operators' margins are likely to be squeezed by telco liberalisation which include such moves as portability of cellphone numbers, to name but one of the most significant. In fact, telco operators the world over would be facing such a paradigm shift as convergence of the Internet and telecommunications takes shape, in a manner that will increase unpredictability of earnings going forward (see blog on "The impending decline of telecommunications"). What this means of course is that investors should demand a higher equity risk premium ie. a higher k in the DDM equation.

Lower g, higher k. Qualitatively speaking, Singtel is facing a headwind. And one wonders why they are underpaying their CEO, as reported by the papers (of course, underpaying is a relative word). If I were holding a stock where the potential risk outweighs the potential reward, I would want to sell out too.

Environmental & Water Sector Index: Jun 9 - Aug 25

2006-08-27T18:47:00.000+08:00

Performance of index so far:

See List of Component Stocks (Jun 9 valuation).

No corporate actions that have needed adjustment to base market cap so far.

Environmental & Water Sector Index: List of Stocks

2006-08-27T18:01:00.000+08:00

In coming up with a water index, I realised it made sense along the way to classify it under environmental engineering as the umbrella theme; water treatment, waste management and pollution control are services sought by the same group of municipal and industrial customers with the purpose of purification for industrial/residential use or to lower effluent pollutant levels to a minimal acceptable level before discharge. Environmental engineering is increasingly important as governments realise the importance of development for the long-term (case in point: China).

The list of stocks totals 11, and there are only two main factors that guide inclusion/exclusion:
1. Market cap
2. Trading liquidity

This rules out about 5-6 plays like Pan-Asian, Eco Water which are too small and/or too thinly traded to be considered.

The index will be weighted by market cap, as per normal. The main problem of weighting by market cap (known as value-weighted) is that big-cap stocks have a big impact, and in this case I found Hyflux and Biotreat, both billion-dollar market-cap stocks, would have too big an influence. At the same time, I didn't want to use an equal-weighted approach (ie. each stock has equal weight) both for consistency purposes as well as accuracy of representation. So, the adjusting index factor is used again to scale down market caps for the largest-cap stocks, in this case Hyflux and Biotreat.

I chose a scale factor of 0.5 to scale down these two stocks' market caps to bring them closer to the rest of the stocks. In a sense, my approach is a combination of the value-weighted approach and the equal-weighted approach. At the same time, due to Boustead being only a partial water play (it has other subsidiaries), it is also given a weighting of 0.5.

As before, I have backdated the index such that it starts on the same base as my China Stocks Index and Energy Sector Index ie. on Jun 9 2006. Hence there is a ready curve from Jun 9 till today. At last count (25 Aug) the index stands at 114.1, which means on average the environmental & water index component stocks have risen nearly 15% over the last two months.

As before, placements, delistings, rights issues of the index stocks will adjust the base market cap. So far I've had no chance to (rights issues for Dayen and Asia Environment have gone ex, but not considered as proper shares until warrants are exercised). The maths as follows:

1. Rights Issue
Adjusted Base AMV = Old Base AMV x (Old Current AMV + Payment for Rights)/(Old Current AMV)

2. New Listing
Adjusted Base AMV = Old Base AMV x (New Current AMV including New Listing)/(New Current AMV excluding New Listing)

3. Delisting
Adjusted Base AMV = Old Base AMV x (Old Current AMV excluding Delisting)/(Old Current AMV including Delisting)

Gallant @ 76 cts ( Property / Indonesia )

2006-08-24T08:00:00.000+08:00

Final Poll Results: 5:1

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Strong headwind for main businesses of Utilities and Industrial Parks

2.Lack of concrete plans for smaller segments of Resort Operations and Property Development

3.Valuation of >20X PE are scary; landbank should prudently be valued at book value

This is a straightforward stock: it is a direct play on the future fortunes of Batam and Bintan. Let's check out the fundamentals of these two islands.

Instead of looking at the much publicised analyst reports touting target prices of 88 cts-$1.02 these few days, I draw attention to one of the appendices of Gallant's IPO prospectus: Appendix B Outlook for Industrial and Resort/Tourism Developments in Batam and Bintan Islands; an independent market review report by Colliers. It contains some frank insights on the future prospects of these two islands.

The macro view is not rosy for industrial parks on these two islands. The main issues are increased regional competition, high fuel costs and interest rates; in particular one gets the sense that the prime concern is competition from other industrialised parks in Asia such as India, China, Vietnam and Malaysia. Accepting that Gallant's Batamindo Industrial Park (BIP) is the market leader among Batam's industrial parks, average occupancy rate of factory space has declined from 91% in 2002 to 83% in June 2005, while rental rates have reduced by as much as 50%. Bintan Industrial Estate (BIE) faces the similar set of challenging macro factors, exacerbated by the fact that it has no critical mass unlike Batam which has established its reputation for outsourced manufacturing. Industrial parks operation formed ~30% of Gallant's FY05 revenue.

Gallant also provides utilities services to industrial parks and resorts on Batam and Bintan, and the report has this to report of the services: tenant companies to BIP pay very high electricity charges, amounting to as high as 82% of the total recurrent cost incurred and payable to BIP for support of their operations (where such recurrent costs include rentals for factory and dormitory, electricity, demand charge for electricity, water, airconditioning and service fee); for companies that are occupying space that is purchased from BIP, electricity cost takes up an extremely high proportion at 91% of their total recurrent cost incurred; on an average basis, electricity charges constitute as much as 56% of the total recurring cost incurred by companies, constituting increased manufacturing cost pressure to companies operating in BIP. What this means, of course, is that there will have to be a tradeoff between Gallant's utilities and industrial parks division, because higher profits for one will erode competitiveness for the other. In addition, there are concerns over fuel price hikes putting an upward pressure in manufacturing costs, and no wonder: the Indonesian government has been progressively cutting fuel subsidies which effectively reduces the competitiveness of the industrial parks given the abovementioned high share of recurring costs occupied by electricity charges. Utilities formed ~60% of Gallant's FY05 revenue.

The tepid outlook for this 90% of Gallant's revenue pie (Utilities + Industrial Parks) is evidenced by the FY05 results, where industrial parks segmental profit declined 20% on 5% revenue growth, and utilities segmental profit declined 10% on 15% revenue growth.

And we are expected to ignore this and instead focus on the growth potential of the remaining 10% of the business.

What does this remaining 10% have to offer? Some optimistic reasons offered include recovery in visitor arrivals in Indonesia and increased business opportunities with the opening of the integrated resorts in Singapore. This segment was loss-making in FY04 and marginal in FY05; one wonders how much growth it could contribute to the group as a whole. The rumours about plans for a casino in Batam and the subsequent price run-up smell of speculation, given the unlikelihood of it happening.

Kim Eng's premise, on the other hand, is based on prospects for the property development business, which contributed nil to the group in FY04 and FY05. Gallant has 18,400 hectares of land held in its books at S$541m total (note: independent valuation by valuers). According to Kim Eng, Gallant expects that it can sell these lands for 5-30x its book value, based on indicative pricing, yielding a surplus of S$0.60/share (hence generating investor excitement); Kim Eng has "conservatively" only factored in the development of the Lagoi Beach Village (LBV) in Bintan.

Frankly, it is difficult to guess exactly which property valuation to believe, but I believe analysts are taught to err on the conservative side; that's the whole spirit behind book value accounting isn't it? We can always speculate on future selling prices of property but the fact is that Bintan (and probably Indonesia in general) is not exactly a "hot" destination and future resort developments are bound to be fraught with risk; developers seeking to buy land from the landowner (Gallant) would surely take this into account before bidding 5-30X book value for land parcels on which they might have problems recovering cost later.

As far as I can see, the most tangible piece of positive development is the recent agreement between Singapore and Indonesia to establish special economic zones (SEZs) on Batam and Bintan to revitalise investor interest, in a bid to strengthen the competitiveness of the industrial parks vis-a-vis regional competitors. However, detailed plans are not clear yet. The share valuation of Gallant, if we be generous and add back depreciation of $50M to FY04/05 pre-tax operating profit of $20M to yield $70M, is about 26X (given the nature of its business and large fixed capital investments, it is probably more relevant to consider EBITDA). The main business segments are facing headwinds which the abovementioned agreement is trying to reverse, not accelerating further growth. As for the other segments, the earnings projections and grand plans in the absence of concrete developments remind me of another stock --- Biosensors.

Short Note

2006-08-17T23:31:00.000+08:00

Hi guys,
Please don't leave your comments in my Daily Market Summary because I will replace it every day with a new one (for that particular day). Have had several such cases already.

You could leave your comments in the Feedback section; the link is in the Feedback button at the green bar on the title bar.

Sorry Quest, think I have deleted your comment accidentally :-p

Cheers everybody.

China Sun @ 82.5 cts ( Corn refining / China )

2006-08-15T23:08:00.000+08:00

Final Poll Results: 9:8

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Raw material risk might escalate

2.Unattractive compared to peer

3.Upside of fuel ethanol licence probably priced in

China Sun is one of the market leaders for the hot China theme and this has brought both institutional and retail investors (in that chronological order) into the stock over the past year, charging its surge over 1Q06. It has recently received favourable coverage from foreign brokerages (Merrill Lynch I think, that of Beauty China fame) which has enabled it to rebound to a similarly high level following the May market correction.

Yet I cannot see the attraction of this stock at this price level. People are buying in on the hope of the company winning a fuel ethanol production licence but the re-rating over this past year should surely have priced in the possibility, such that the downside from a failure to win the licence (which I believe is very possible ----the failure to win it, I mean) is greater from any upside in actually securing it. The dividend yield at its current price is a measly 1%. Compare it to a peer -- HKEx-listed China No.1 corn processor Global Biochem which is trading at 12X FY05 PE and has been exhibiting margin pressure as shown in its FY05 results (part of it due to unfavourable selling prices). China Sun is trading at 13.5X FY05 PE, and is seen as the fourth largest corn processor in China.

Global Bio-Chem is of course a more integrated corn processor which utilises a large portion of its in-house refined corn starch to produce higher value-added bio-chemical products, while China Sun's processes appears to end at the refining stage (ie. less vertically integrated), with ~60% production capacity in corn starch production and 40% in higher value-added items (in particular modified starch), with clientele in a diversified range of industries such as the paper manufacturing, food processing, textile, pharmaceutical industries. Nevertheless, the margin pressure is likely to extend to China Sun as well, and in this case the pressure comes from its input -- corn. This is the prime concern.

In some ways my analysis of China Sun is reminiscent of an earlier assessment of SPC. Both are refiners of a commodity whose downstream product demand constitute necessities in many industries, which leaves upstream input supply-demand dynamics as the key factor in determining margins. "Refining margins" are good so long as there is a demand-pull situation, but where cost-push situations arise (ie. high input prices unable to be compensated by higher end product prices) refining margins are squeezed.

An assessment of the quarterly gross margins of China Sun reveal its sensitivity to corn prices. The gross margin series is as follows:

Period: 2Q06 1Q06 4Q05 3Q05 2Q05 1Q05 4Q04 3Q04 2Q04
GM(%) : 33.3, 35.2, 34.6, 33.2, 37.8, 40.3, 40.3, 27.8, 31.1

A series of corn price charts from 2004-06 taken off CBOT (Chicago Board of Trade) is shown below for comparison:

In early-mid 2004 when corn prices were above 260 (peaking above 300) China Sun's gross margins were squeezed, even hitting below 30% in 3Q04. In 4Q04 and 1Q05 it recovered phenomenally to 40% because corn prices had dropped to 210 and remained at that level until mid-2005 when corn prices started appreciating to above 240; 2Q05 and 3Q05 gross margins were crimped. Again towards the end of the year corn prices corrected downwards allowing margin recovery for China Sun, but as we have seen in 2006 so far the whole cycle has repeated as gross margins have crimped due to corn prices rising again (at around 240 at last count). The 2Q06 results have seen further gross margin crimp at 33.3%, a possible reason why the share price has dropped today despite endorsements from several brokerages.

It is not surprising that China Sun's gross margin, and ultimately net profit margin, is so susceptible to corn prices. Corn kernel forms 70% of total direct material cost, which in turn forms 80-90% of total direct costs. Direct costs form 95% of total operating costs (overheads are negligible). Do the maths and you'll find that basically corn kernel accounts for 55-60% of total operating costs. At pre-tax profit margin of ~30%, every 10% rise in corn prices will drop China Sun's pre-tax profit by ~15%.

Think about it. Corn is now seen as the most viable agricultural resource for producing fuel ethanol after sugar-cane (supply is even tighter to the extent that sugar prices have escalated), and an example can be found in crude palm oil where an alternative use in biodiesel has seen prices soar to the extent that its incumbent user, the edible oils market, is poised to see a "sea change in demand structure" and "significant inventory destabilisation" (see my article on the biodiesel boom)--- basically, it will be badly affected by rising prices of its key raw material. That is what would happen to corn refiners whose key raw material might see a paradigm shift in demand and hence price adjustment. This is not going to be a cyclical phenomenon; it will be a structural upward shift.

Add that to the abovementioned price sensitivity of China Sun's profits to corn prices and it would not be difficult to see this key risk. It is ironic that what is touted as the company's key attraction --- its possibility of exposure to fuel ethanol --- could also trouble its core business through the process of raw material cannibalisation. It will be even worse if the company fails to secure the fuel ethanol licence. Perhaps that might explain why the fund managers who bought into this earlier are not going in the stock for the long haul (eg. Legg Mason sold below 5% already).

References:
(1) TFC Commodity Charts

Energy Sector Index: Jun 9 - Aug 11

2006-08-13T12:51:00.000+08:00

Performance of index so far:

See List of Component Stocks (Jun 9 valuation).

For corporate actions involving index stocks (new placements/deletions/new additions need adjustment to base market cap) see Corporate Actions.

Energy Sector Index: List of stocks

2006-08-12T18:37:00.000+08:00

One of the hottest multi-year themes must be the rise of the oil and gas sector and all related industries, so I've come up with an index composed of SGX-listed energy-linked stocks that I know to be followed by most investors in relation to the energy theme.

The list of stocks totals 25, and similar to the China stocks index, are chosen on the basis of the following:
1. Market cap
2. Trading liquidity
3. Track record
4. Expectation of future performance (stability, growth, trading liquidity)
5. Intangibles (eg. institutional coverage, relevance to China sentiment, mindshare in investors' and traders' general attention span)

The index will be weighted by market cap, as per normal, which means stocks like SPC and Keppel will have a bigger weightage. Originally I was thinking of using an unweighted price index in order that mega-stocks like Keppel and SembMarine do not overwhelm with their gigantic market caps; however in alignment with the value-weighted approach taken by the SES sector indices I decided on a market-weighted approach as well but using the adjusting index factor (similar to my China stock index) to scale down market caps of the blue-chips.

The deciding of the index factor is rather arbitrary, but basically the idea is to bring effective market caps of Keppel Corp and SembMarine below that of SPC, which as the de facto national oil company has got to be seen as the most heavily-weighted energy-themed stock. Keppel Corp consists of other arms like Keppel Land, so its index factor(0.15) is halved again compared to SembMarine's(0.3). Some explanations for the rest:

Noble - energy commodities merchant, but also handles agricultural commodities
K1 Ventures - partly energy-related portfolio
Tat Hong - also involved in non-energy related infrastructure
Boustead - energy-related business is only one of its businesses

The general weighting for the various energy-related sectors is as shown:

A reasonable distribution considering Singapore's world-leading strengths in rig construction and refining hub status, hence their heavy weightage.

I have decided to backdate the index such that it starts on the same base as my China Stocks Index ie. on Jun 9 2006. Hence there is a ready curve from Jun 9 till today.

Placements, delistings, rights issues of the index stocks will adjust the base market cap. So far I've had a chance to, since Interra and Ausgroup have placed new shares since Jun 9 (not to forget Ezra's 1:5 bonus, but that does not alter the base market cap). The maths as follows:

1. Rights Issue
Adjusted Base AMV = Old Base AMV x (Old Current AMV + Payment for Rights)/(Old Current AMV)

2. New Listing
Adjusted Base AMV = Old Base AMV x (New Current AMV including New Listing)/(New Current AMV excluding New Listing)

3. Delisting
Adjusted Base AMV = Old Base AMV x (Old Current AMV excluding Delisting)/(Old Current AMV including Delisting)

Ezra @ 2.50 ( Offshore support / Singapore )

2006-08-06T22:43:00.000+08:00

Final Poll Results: 5:2

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.One-time items in P&L

2. Long-term lease off-balance sheet

This is one of those stocks that I have been hesitant on covering in this blog for some time, for the main reason that it is providing direct support in a sector that I believe is on a multi-year uptrend: oil and gas exploration in Southeast-Asia. Yet with no discernible strong growth in recurring earnings padded further by what I see as increasing unrecognised balance sheet risk, seemingly ignored by the market in its inexorable share price rise, has convinced me to include it as a hot-stock-not.

One thing that should immediately be clear to even casual observers of this stock is that its strong profit growth these 2-3 years has been mainly due to well-timed vessel/securities disposals as below:
- $5.5M out of $8.2M pre-tax profit in 1H04 (without which there would have been little earnings growth)
- $6.5M out of $9.8M pre-tax profit in 1H05 (hence outperforming 1H04 exceptional gains)
- $22M out of $38M pre-tax profit in FY05 (due to securities valuation mark-up; taking away "other operating income" for both FY04 and FY05, earnings growth would have been only ~20%)
- $25M out of $35M pre-tax profit in 1H06, plus another $7M from associates and JVs; taking away "other operating income" for both 1H05 and 1H06, operational profit would have been stagnant

For those PE-inclined investors, stripping away all "other operating income" for FY05 and taking into account the 1:5 bonus in June 06, Ezra's trailing PE comes up to a whopping 36X.

That is surely a high price to pay for any company, even one in a hot sector. Ezra undoubtedly has been positioning itself well for the coming offshore support boom, but would you buy into them without an idea of how industry-wide supply of offshore support vessels has been growing? Surely others have been building new vessels as well?

The strength of Ezra has been its aggression in expanding its fleet, having doubled its fleet of mainly AHTS vessels to ~30 vessels through continuous ordering of new vessels through 2004-06. I also quite like their capital management where they have been financing expansion with a combination of debt, share placements and sales-and-leasebacks. However it may be worth noting their liability exposure, in particular the off-balance-sheet kind.

Consider the AHTS sales-and-leaseback deals. Since early 2005, Ezra has arranged two sales-and-leaseback deals covering 13 AHTS vessels which it had ordered, in order to release capital for further expansion. These two sales-and-leasebacks add up to US$260M or ~S$400M, and if we treat these as capital leases and insert them into the balance sheet things would look rather bad in the Liabilities column (of course, there would be a corresponding entry in the Assets column as well), given that Ezra's current NTA is ~S$170M.

Firstly, the exposure through long-term leases is huge.... here I am assuming that the value of the leasebacks is equal to the disposal sum; secondly, the value of the long-term lease liability is cast in stone while the the value of the assets (the right to use the vessels through the lease) could change. What I mean is that Ezra is locked into long-term leases for these new vessels based on buoyant market conditions and this might be risky given the value of these leases relative to its asset backing and potential volatility in the vessel chartering industry (we have all seen how the container ships and bulker chartering rates have floundered due to looming oversupply --- despite continuing buoyant world trade). The crucial issue is for Ezra to secure good long-term charters on it's customers' side. Since 2005 it has secured ~US$120M, or S$190M, worth of charters for its AHTS vessels, but that is for its entire current fleet of ~30 vessels. Compare that with the abovementioned leaseback deals that it is committed to and one has to sweat over Ezra's continuing ability to secure more chartering deals for its expanded fleet.

The execution risk for this company is immense, as is always when there is rapid expansion. It may be worth noting that the founding Lee family had been trimming their stake over 2005, as well as substantial shareholder KS Tech; both companies had been unwinding their cross-holdings. An area of promise, which might have fired up investors' imagination, had been cooperation between the two companies to own and charter offshore rigs; the incentive now seems less given the reduced shareholdings in each other, as well as Kris Wiluan's takeover of KS Tech implying a whole new paradigm in top-level relationships and potential partnership dealmaking.

Stock forum: ShareJunction

2006-08-02T22:18:00.000+08:00

Sharp-eyed (well... maybe minimum observation skills are required) readers would have noticed the Sharejunction logo on the sidebar. I thought I'd find out more about the forum from the horse's mouth, so here're some facts on Sharejunction from their administrator direct:

(1) It is an ALL-IN-ONE portal - meaning there are stock quotes, charts, portfolio, stock alerts, financial stock info, stock lists ...etc...
(2) The site is totally FREE - many of the services provided (eg. charting, stock alerts, financial stock lists) require paid subscription in other websites (think they're talking about Shareinvestor)
(3) Sharejunction is growing really fast - they are only 5 months old but now have more than 4800 registered members. Thousands of people use ShareJunction everyday (check out the stats on the site). There is a vibrant and rapidly growing community of investors learning and sharing with one another.

For those who are not avid readers of our national newspapers, Sharejunction was featured on a Sunday Times article recently (in the Investment section) and if I remember correctly one of the founders is a polytechnic lecturer. I thought I was good at multi-tasking already..... he puts me to shame. Just a snippet of gossip you might be interested to know :-)

Well, check out the forum yourselves through this forum link or by clicking on the Sharejunction imagelink on the sidebar. You get points for participating in the forum and if you get enough points you'll be promoted to Senior member, Veteran member etc ..... like RPG games hehe.

Thanks to the Sharejunction team for sparing their time to provide more info on their site!

Enviro-Hub @ 36.5 cts ( Recycling / Singapore )

2006-07-31T22:58:00.000+08:00

Final Poll Results: 1:1

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Questionable acquisition valuations

2. Benefits of Citiraya contacts may be overstated

3. Some concerns over medium-term outlook for electronics recycling

Enviro-Hub was formerly known as Leong Hin, and it is ironic that after suffering a terrible fate at the stock market following CAD investigations, it was acquired by Raymond Ng who is now trying to turn it into another Citiraya, a former market hotshot also now under CAD investigations. Of course, Raymond Ng is trying to replicate Citiraya's early success, not the scandals :-)

The acquisition of 65% majority stakes in two recycling firms has formed the basis for the restructuring: Cimelia, specialising in e-waste and platinum metals refining, and HLS Electronics, specialising in plastics recovery for IC trays manufacturing. Given that the previous operations of Leong Hin were slightly loss-making/breaking even, and that Raymond Ng is actively divesting these previous arms, it makes sense that a study of Enviro-hub's future prospects lie in these two new acquisitions (a third recycling-related arm, E-Hub Metals, generates insignificant revenue and is loss-making).

How profitable are these two arms? Looking at segmental results for FY05, Cimelia achieved $3.3M pre-tax profit on $17M revenue, while HLS contributed $1.9M pre-tax profit on $5.5M revenue. Relating to their part-cash/part-shares (of Enviro-Hub) acquisition values of $20M for 65% of Cimelia (hence valuing 100% at $31M) and $23M for 65% of HLS (hence valuing 100% at $35M), the effective FY05 PEs are 9X and 18X respectively. For private acquisitions, these are rather high acquisition multiples to pay (especially for HLS). If one were to examine the latest 1Q06 results, he would have found that subtracting the impact of an extraordinary gain on asset disposal of $2M, the newly-restructured Enviro-Hub's pre-tax profit would merely be $0.9M. Even allowing for seasonality (electronics industry is busier in 2H.... though even that is in question for this year), it is clear that annualised FY06 profit based on 1Q06 results may not justify the acquisition valuations paid out.

Going back to the acquisitions, the new shares issued by Enviro-Hub in part-payment were valued at ~$0.35/share. It would have been equivalent to $0.26 today, because there was a 1-for-3 bonus in mid-2006. So those shares paid out to the former Cimelia and HLS owners had actually appreciated in value (to current $0.365). That of course means that (1)the part-share deal actually turned out stupendously for those former owners; (2)buyers of Enviro-Hub shares today are hence supporting a valuation of >9X PE for the Cimelia acquisition and >18X PE for the HLS acquisition; (3)a possible share overhang? Already we see the former HLS owners cashing out in late July 06 through private placements.

By the way, if anybody is looking at Enviro-Hub's NTA and thinking $0.25 NTA backing sounds quite attractive, note that acquisition goodwill comprises nearly half of that. The acquisition of the two recycling subsidiaries was done at a heavy 3X premium to their book value.

It is clear what the market is pricing in. Recycling looks to be a good business to be in right now given high metal prices. Raymond Ng brings with him a string of connections from Citiraya. While I won't deny that it looks like a sunrise industry, the execution risks must not be underestimated --- here I play the devil's advocate and list down potential pitfalls/concerns:
(1)Raymond Ng's undoubted linkages to Citiraya might mitigate any contacts that he has in the industry which could have helped Enviro-Hub secure waste collection clients (ie. the electronics industry players). Already there have been several corruption lawsuits implicating staff of these companies in their dealings with Citiraya.
(2)The sweet spot may not be as sweet given growing realisation of the value of electronic waste. Pricing pressure by the electronics company suppliers is likely to increase, as they press for better prices for their waste.
(3)A downturn for the electronics industry would hit these recyclers badly because they depend on electronic waste volume from the MNCs; a downturn seems probable, from anecdotal evidence. Singapore, Enviro-Hub's main operation centre, would be hit by an electronics slump if it does transpire (not to mention the migration of low-end electronics manufacturers)
(4)There is fierce competition. Remember that Citiraya's high profit margins must be doubted because of all the accounting liberties it took, which have since been revealed. Consider a peer, Greenworld, which collects waste and recycles ferrous and non-ferrous metals from them --- it is only able to reap 2-3% net profit margin on its turnover, and its FY05 profit had fallen from FY04.

Given such considerable execution risk and valuation risk, it just doesn't make sense now to buy in and end up holding the baby for directors possibly cashing out. A good time to keep watch for signs of a strong business turnaround would be 4Q06, where the electronics industry is traditionally busiest and provides the most e-waste to recyclers like Enviro-Hub. If the company churns out great results during this busiest season, then it may then be time to look again.

Yanlord @ 1.08 ( Property / China )

2006-07-25T23:45:00.000+08:00

Final Poll Results: 3:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Will be affected by Chinese government clampdown on luxury housing

2. Stretched comparative valuation vs peers

This is one stock that just looks wrong from several angles: sector risk, company exposure, valuation.

My latest writeup on HotTrendsWatch ("Tapering of China's property boom") has highlighted the risks associated with the China property market, and why I believe it is due for a slowdown soon. The Chinese government has, through a series of credit tightening measures and more sector-specific policies (eg. strict requirements for foreigners buying into China property), made it clear that they are determined to cool down what they consider as one of the most overheated sectors in their economy – property. This policy commitment is driven by social discontent caused by rising unaffordability of residential property--- that is a powerful motivation. It generates a powerful headwind against further property developments straightaway.

Next check out the functional and geographical property exposures of Yanlord, both historical and present. The strongholds of Yanlord appear to be Shanghai and Nanjing; 60% of Yanlord’s previously total completed property GFA were in the former, and another 33% in the latter. For properties currently under development or being held for future development, the distribution is more diversified, but 37% is still in Shanghai, with the balance being distributed among Nanjing, Zhuhai, Suzhou, Chengdu, Tianjin. Shanghai, of course, is one of the areas undergoing skyrocketing property prices, and probably to a lesser extent Nanjing, Suzhou (both in Yangtze River Delta area together with Shanghai) and Zhuhai (Pearl River Delta area). The picture gets more ominous, when we consider Yanlord’s functional property exposure: about three-quarters of total property under development belong to residential developments, and probably all luxury --- Yanlord sees itself as a high-end residential property developer. From reports, it appears that buyers of luxury housing are disproportionately foreigners, which means Yanlord's customer base will be badly hit and probably will continue to be in the future.

Valuation-wise, typically RNAV is used for calculation of actual worth of property portfolio but since I don't have any broker calculations here I just revert to net asset value (NAV) per share. Yanlord's NAV per share is ~$0.50 which means it trades at 2X NAV; for comparison, Capitaland and Keppel Land, both listed as Yanlord's competitors in its propspectus, trade at ~1.7X NAV, while Singapore property developers trade at 0.8-1.3X NAV (eg. Wheelock, Wing Tai, Allgreen, Guocoland). Capitaland and Keppel Land both have strong exposure to China, and it is worth noting that both have been downgraded by brokerages immediately following the Chinese government's recent announcements on property purchase restrictions.

Given the huge IPO fund raised (S$260M), it is not difficult to see that Yanlord is probably a notable player in China's property market, particularly in Shanghai I would imagine. As much as a sector uptrend benefits the big sector players most clearly, it also works the other way: a downturn will also impact big players who have nowhere to hide. The earnings trend of Yanlord does give a clue of what government curbs can do to its bottomline: check out its 2004 results, where profit plunged (partly due to high exceptional income from a property development in 2003, to be fair) and the company admitted to lowering selling prices to stimulate demand. 2004, of course, was the year when Wen Jiabao initiated a soft landing through a series of administrative curbs targeting overheating sectors, one of which was property. Now we are in Round 2. Signs are that this is a sign of further measures to come. Avoid this stock, and perhaps check out Singapore high-end property if you really like property stocks.

China Precision @ 38 cts ( Precision engineering / China )

2006-07-18T23:26:00.000+08:00

Final Poll Results: 4:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Unattractive valuation vs peers

2.Exposure to rising raw material costs (esp. plastics)

3.Tepid medium-term outlook for electronics industry

What's the story about China Precision? That has to be the main question on the mind of investors who want to buy in on the back of a limited track record, since it only recently went IPO in early May.

Very little to go on, in my view. It may be another case similar to Jiutian, where good IPO timing (ie. bull market) generated high price levels that have since served as psychological anchor levels.

Optimists about the stock point to two things: its niche in electronic tuner components (80% of total group sales), and its association with Jurong Technologies which holds a 20% stake. Electronic tuner components are omnipresent in consumer electronics: in TV sets, set-top boxes, DVD players, PCs, satellite receivers, automobile audio systems. The volume of demand can only go up in the future for such items.

A truism if there ever was one. So it is for handphones and look where it has landed MFS Tech recently. And so it is for hard disk drives and look where Magnecomp is now. And those two were among the global leaders in their respective fields. The keys to the issue are twofold: (1)competitive strength: what differentiates China Precision from its competition? It has integrated manufacturing capability in precision engineering down to contract manufacturing, with the capacity for injection moulding for plastic parts, metal stamping for metal parts (note that tuners comprise both metal and plastic parts), down to surface treatment and product assembly... but so do a lot of bigger competitors (eg. Amtek) which, through their association with identical customers albeit in other product segments, could easily cross-sell their services, given no obvious crucial technological impediments; (2)the state of the industry: if the sector (contract manufacturing and electronics) undergoes certain transitions or cyclical downturns, margins and revenues are sure to crimp, providing a double whammy (check out China Precision's pre-tax profit margins from FY04-1Q06, where it appears to have compressed margins to secure orders).

Things are not exactly looking up for the electronics industry, as market observers would note. That was part of the reason why I covered Aztech and Eucon in this blog recently: the confluence of "export" and "electronics" themes do not exactly inspire investor optimism in a period of rising oil prices and toppish US consumption. Let's look at some relative valuations for manufacturing peers.

Amtek(diversified precision engineering): 8X trailing PE (expected 5-6X forward)
Surface Mount(electronics assembly in similar locations in China for similar Korean and Japanese clientele): 5X trailing PE
Hi-P(plastics moulding and assembly): in trouble, PE irrelevant
Beyonics(metal components and assembly): 6X trailing PE

China Precision, at 38 cents, is trading at 11X trailing PE.

In particular, one should watch out for the plastic components segment of China Precision, given the strong material cost sensitivity of precision engineering firms. The recent problems encountered by plastic moulders across the board, from tier-one firms like Hi-P to tier-two firms like Fu Yu down to smaller firms like Fischer, is indicative of their inability to pass material costs to customers. Metals working firms have had their problems in 2004-05, but there is still cost pressure (see Amtek).

China Precision might yet prevail, but surely given its recent IPO status it may be wise to watch for an established post-listing track record (in particular, an ability to sustain margins)? The low peer valuations, material cost pressures and lacklustre near-term industry outlook would provide strong headwind; the investor must not be too headstrong.

A last note: although Jurong Tech has a 20% stake in this firm, in the wake of its probably losing a big chunk of business from the disappearing Maxtor, surely it would be looking to reconfigure some of this released capacity for new customers? Why would it forward orders to a 20% associate, if it could do the job itself (for box-build, assembly)? Until there is evidence in the form of tangible business flow from Jurong Tech's incumbent customers (particularly Motorola, I would guess) for China Precision's tuner component fabrication services, it may not be a good time yet to go into this stock.

Ipco @ 9 cts ( Investments / Indonesia )

2006-07-12T01:13:00.000+08:00

Final Poll Results: 9:0

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Questionable long-term earnings power of various subsidiaries/associates

2. Lack of synergy between various arms/ Lack of continuity from past expertise

I have vague memories of Ipco. It was one of the first investments I had made when I first started out (see "My Investing Journey: The Construction Stocks") and it was involved then in trenchless construction for Southeast-Asian infrastructure. My investment did not have a happy ending, because I had underestimated the effects of the 1997 financial crisis whose effects eventually filtered down to the order books of construction companies towards the end of the millenium.

Anyway, Ipco today is a totally different beast, and I'm not sure it's the better for it. Over 2004-05 the company restructured under Managing Director Quah, divesting its infrastructure arms and capabilities acquired over the last two decades, to focus on opportunistic investments with near-term potential for listing on regional stock exchanges.

In 2004 Ipco's NTA was $0.20. In 2006 it is still around $0.20 due to negligible profit over the restructuring period, but the composition of assets is totally different. The attraction to many investors is the huge 50% discount to NTA, and I'll approach an assessment from this angle.

First of all, as an investment holding group with no real core business, I would apply a 20% discount to the NTA, similar to the treatment for a closed-end fund. That reduces the attraction a bit, as NTA then becomes $0.16.

Next we take a look at the asset composition under its balance sheet. Singling out the big items on the balance sheet, I can summarise that the assets go into three main categories: 45% intangibles ($80M), 35% other receivables ($60M), 20% net current assets ($40M). Intangibles in this case refers to goodwill, from acquisition of current subsidiaries (mainly ESA, IES and Asian Plan) at above book value; I shall explore these separately below to assess the value of these intangibles. But it is worth noting that Ipco's assessment of the value of the subsidiaries might be skewed in its eagerness to invest; that's why accountants use historical book value for NTA: for conservativeness. The 35% "other receivables" is mainly cash advances to Excellent Empire, a gas supply company in China, which the company is planning to convert to equity. I shall examine the individual main investments below. There are five of them.

ESA: 60% subsidiary, involved in semiconductor backend equipment. Ipco's $9.4M for 60% of ESA in 2004, with ESA promising pre-tax profit of >$7M over two years, suggests a valuation of ~5-6X PE (assuming 20% tax, $3.5M pre-tax profit per year), a fair but not cheap valuation for a private entity. The subsidiary seems to have achieved the target, but semiconductor industry outlook is mixed. Ipco has been talking about a listing for this subsidiary since 2004 but nothing has transpired. It is interesting that goodwill paid for this subsidiary was estimated at $15M. Ipco's valuation for ESA, if extrapolated to 100%, is 9.4/60% = $15.6M. This suggests that ESA's book value assets were negligible! Red alert.

IES: 90% subsidiary, involved in oil and gas engineered products. Ipco's $5.6M for 90% of IES in 2005, with ESA promising pre-tax profit of >$2.5M over two years, suggests a valuation of ~6X PE (assuming 20% tax, $1.25M pre-tax profit per year), again not cheap (we should note that where profit guarantees are given, they tend to be fulfilled, but with poorer results being filtered downstream). Goodwill should be negligible, say ~$3-4M.

CNA (formerly APMI): 40% associate, involved in automotive harnesses and seats. Ipco spent about $11M for a 40% stake in 2004, and its FY06 profit share was $1.3M, giving a PE of 8.5X basing on Ipco's buy-in valuation.... Another investment which has yet to fulfil hopes of a listing.

Asia Plan: 70% subsidiary, residential property development in Washington, USA. I estimate the bulk of goodwill to be in this subsidiary, ~$60M. Although Asia Plan seems to have been able to sell off its plots at significantly higher prices over purchase price, it mystifies me how much premium the original purchase price was over the book value, looking at the goodwill. Note that the company was unable to sell off any plots in FY05. There is widespread opinion that the US property market seems to have peaked as interest rates rise relentlessly, and Norris Homes' purchase recently of 50 lots might be an Indian summer.

Excellent Empire: 20% investment on natural gas supply in China. Ipco does not expect any significant profits in the short term from this investment; indeed further start-up costs might be needed. Hence it is extraordinary that it is willing to inject another $45M into Excellent Empire (through conversion of a previous loan into equity) .... which accounts for about a quarter of Ipco's NTA.

A common thread of my discomfort running through all these investments is the total lack of theme connectivity between the five investments. Electronics, oil and gas, automotive, property, gas supply: Ipco has no prior expertise in all these, with the probable exception of Excellent Empire's gas supply/infrastructure business. Where is the competitive advantage? Where is the synergy? The management would hardly be able to add value even if they owned a majority of the companies. Secondly, the lack of transparency regarding the main investments, as well as the lack of track record, leaves the investor with tremendous risk; and it is not as if Ipco had picked up bargains in the various investments, on retrospect. The ESA, IES and CNA arms seem to be relatively benign, but I do have major doubts about realisable value for Asia Plan's land plots and Excellent Empire's long-term execution risks which still have a long way to go.

On a last note, it is a shame that Ipco exited infrastructure because this is the segment that has shown the most potential for the long-term over the last few years as Asia reflates. If Ipco has persisted, I am sure it would have shown greater prospects, given its incumbent capabilities in various past infrastructure projects.

Eucon @ 24 cts ( Electronics mfg / Taiwan )

2006-07-05T02:18:00.000+08:00

Final Poll Results: 0:4

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Looming overhang from Europtronic distribution

2.Tepid medium-term outlook for electronics industry

3.Volatile business given high operating leverage

Those familiar with this stock will know exactly the reason why I am timing the hot-stock-not call now. There is a long thread on Eucon on the Channelnewsasia forum which gained considerable popularity due to Eucon's stellar stock performance since the start of the year (a 3-bagger for those who bought early), and those reading this thread will know that Europtronics, a key shareholder of Eucon and an SGX-listed company itself, is planning a distribution of its 25% holding in Eucon to its shareholders.

Eucon shareholders or those planning to buy should be left in no doubt of the effect of this move by Europtronics on Eucon's medium-term share price. It leaves an overhang of shares due to the massive supply of previously-locked up shares (under Europtronics) now ready to be sold by Europtronics shareholders (and sell they will, since it's effectively like a scrip dividend). A case in point is Sinwa, whose share price was depressed for nearly a year after KS Tech released its shareholding of Sinwa to the company's shareholders. Another more general example would be the Shanghai Stock Exchange which was depressed for several years prior to 2006 (despite the raging Chinese economy) due to a massive overhang of "non-tradeable" shares.

By itself, I am not convinced that the correction from 35 cents to below 25 cents recently suggests a rebound is imminent. The initial price rise was due to a recovery of the company's profits in 2H05 and 1Q06 which saw pre-tax profit margins recover to >20-25% on increased utilisation of its drilling machines. It was then propelled further by a series of analyst reports, none more optimistic than DMG Securities' price target of 76 cents based on projected S$34M net profit (based on 1Q06 net profit of S$6M and stronger demand for services in 2H06). There were even some insider buys around the 33-34 cent level.

Why am I not optimistic? The operations of Eucon can be divided into drilling and routing services segment, and PCB manufacturing segment. Although both segments contribute roughly equal revenue, the former segment's gross profit margins are much better than the latter's, at about 50% compared to ~25% for the latter. This means the drilling & routing services segment is more influential towards the bottomline: according to the segmental analysis in the FY05 results, it constitutes >60% of total gross profit. Yet this segment is a high operating leverage, high capital expenditure business, where the business will suffer if utilisation rate of the drilling/routing machines is low.

The fact is that Eucon is essentially an outsourcing operation to PCB manufacturers ie. they provide specialised services and possibly service swing demand. When electronics demand is high and manufacturing capacity is tight on the PCB manufacturers' side, demand for Eucon's services will be high. However, if the industry enters a slump, the manufacturers will simply rely on in-house capabilities to service the reduced demand. The PCB manufacturing segment, which is meant to complement the drilling & routing services to provide a vertically integrated capability, are also likely to be affected as it is not the company's core capability. What it means, in effect, is that Eucon's is a volatile business with volatile earnings.

This can be seen in its earnings trend. It demonstrated strong growth in FY02-03, then stagnated and experienced a downturn in late FY04 which lasted through 1H05 where depressed demand led to low utilisation of its drilling machines, then saw the electronics industry recovery, particularly in handsets, propel its profit recovery in 2H05 and 1Q06. What this teaches us is not to be over-optimistic on its profit projections. DMG's FY06 profit projections of S$34M are actually way above market expectations of S$21M, and its price target implies forward PE of 13X. If we adopt the market expectation of S$21M and use a conservative forward PE of 8X in view of the inherent earnings volatility (1Q06 might be near the peak, in view of less sanguine recent views on US consumption demand --- see my views on Aztech as well), we would be talking about a more realistic target of ~30 cents.

The intention here is not to provide a price target for the stock, but rather to illustrate how different earnings and valuation assumptions can affect the "target price" significantly. One needs to adopt an independent perspective, and recognise the inherent risks in a business and ascertain the sustainability of margins and earnings growth. In this case, not only is the outlook on the general electronics industry bleaker than before (one may compare recent muted price performances of peers Multichem, Jadason, Advance SCT), the share overhang is going to cast a further pall over any sustained price move ---- profit-taking is likely to provide strong resistance along each step of the way.

References:
(1) DMG Analyst Report on Eucon 28 Apr 2006

Acid test 1H06: Stock Performance

2006-07-02T22:27:00.000+08:00

Assessment of 1H06 stock picks

Assessment of 2H05 stock picks

(P.S: Click on the picture to get a better view
My first review of my hot-stock-not picks was at the end of 2005 where I reviewed my hotstocknot picks from May 05 to Oct 05. Here is the 2nd instalment; I do it half-yearly. The first list above is the list of stocks from Nov 05 to April 06 -- labelled 1H06 Assessment.

At the same time, since my medium term definition is from 6 months to 1 year, I also return to the May-Oct 05 picks and assess their performance over the past one year. That is the second list -- labelled 2H05 Assessment.

The colour codes remain the same, but while the mark of excellence is the 20% threshold for half-year comparisons (1H06), it becomes 40% for full-year comparison (2H05). The scale is slightly different. As before, I concentrate on total return --- the price plus incorporation of all dividends during the period in question, as well as any stock splits/bonuses.

1H06 Summary
Blue: 6 stocks
Green: 11 stocks
Yellow: 6 stocks
Red: 2 stocks

Just a quick review: my 1H06 picks have all been rather "good" as evidenced by the high number of blue and green shades (total 17 out of 25), with only a few yellow-coded stocks gaining slightly upon my reference price and two stocks throwing egg in my face: Midas and Technics. This might be because of the recent market correction; regular readers will note that at the height of the bull market around April to early May most of my picks were probably way above their reference prices.

There is one stock entry which I can't review, and that is "All China stocks" --- not shaded. I only started my China Stock Index in June, but I noted in my hot-stock-not entry during late March that it would be clear to all when the China fever died down. And so it did.

2H05 Summary
Blue: 2 stocks
Green: 12 stocks
Yellow: 9 stocks
Red: 5 stocks

As for the one-year picks (2H05) which I revisit, the results may perhaps be not that good. Remember that the threshold of excellence is 40% for this one-year assessment. My "good" picks number 14 out of total 28 --- a success rate of 50%. And there are 5 stocks which have risen way above expectation: Advanced, Pearl Energy, Mediaring, Pine Agritech, China Paper. To this, I say: sorry if you heeded my call, and perhaps next time you can use my blog for another purpose: to scout for potential multi-baggers :-p

Again, at the end of the day, the above comparison has just been an academic exercise or an exercise in personal vanity/personal humiliation. The stocks I have discussed would have done better or worse at various times during the last few months due to price fluctuations so such a static snapshot comparison somehow takes the dynamics out of things. Yet the key risks (industry, company, valuation) to the particular stock are still there and these should be what I hope to highlight and bring across in my blog articles. At the end of the day I still hope for the rising tide to continue despite its probable negative action on my "anti-portfolio"; for after all, it's likely to have positive action on my real stock portfolio.

Jiutian @ 59 cts ( Chemicals / China )

2006-06-28T13:14:00.000+08:00

Final Poll Results: 7:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Hopes for 2007 capacity expansion turbo-boosting profits may be unfounded given long time lag

2. Chemicals' ASP trend exhibits volatility

When a stock IPOs in a booming market it naturally gets an excellent valuation, both in the primary market and in the subsequent trading market, and this price level somehow anchors itself in the minds of investors/traders such that they associate this price level and valuation with the stock, sometimes undeservingly in my view. Stock pricing is sometimes, or even often, a matter of luck and timing.

Consider Jiutian. Its May 06 IPO price was 29 cents, and it jumped to >70 cents on its first day of trading. It then corrected sharply with the broad-based selloff in mid-May, but has since recovered some lost ground to around the 60-cent level recently. Yet, is its 16-17X PE (based on latest FY05 results) justified? I think not.

Jiutian operates in the specialty chemicals sector, which although less subject to commodity-like pricing pressure experienced by commodity chemicals producers like SP Chemicals (which explains the latter's single-digit PE pricing... <5X!!) nevertheless has to conform to average selling prices (ASPs) set by the prevailing market demand-supply conditions. The group operates in three chemicals segments: DMF, methanol and industrial gases, but based on segmental revenue and expansion plans it appears that DMF (which also includes methylamine, a secondary product) is the most promising segment and one that the company plans to concentrate its resources on. The production process for methanol, methylamine and DMF is sequential, where produced methanol is further processed to produce methylamine, which in turn is used to produce DMF; Jiutian can choose whether to sell the intermediate products directly to customers, or to use it as feedstock for downstream products. It is clear that it intends to do the latter ie. a vertically integrated operation, where a significant proportion of methanol produced is channelled into the production of methylamine and DMF. It thus makes sense that to analyse this company, DMF prices become the most important factor.

To get an idea of DMF's average selling price trend, we refer to its prospectus: the ASP (exclusive of VAT) in FY2004 (when its DMF started operations) and HY2005 were RMB 5,044/ton and RMB 4,837/ton respectively. The group also admitted to further ASP decline in 2H05 causing lower sales for that half, which it attributed to the result of trade tensions between the PRC and Europe and the US over textile exports. Instead of seeing its customer base as diversified (pharmaceutical, electronics, textiles), one might see the reverse side of the coin and conclude that the derived nature of demand for DMF is susceptible to fortune swings in any of these sectors. The "China consumer demand" card has been played too many times by IPO issuers that we should not use rose-tinted lenses to view the firms' prospects (see China Flexible Packaging for a prime example). One should also note that domestic DMF prices are often dictated by the three big producers China-Zhejiang Jiangshan Corp, Anhui Huaihua Corp and Hualu Hengsheng Group, all much larger producers than Jiutian, which leaves the company to be a price-follower.

In the short-term and the long-term, it is difficult to see strong profit growth potential for the stock. Short-term, two factors will drive growth: rising ASP and revenue growth. The former, as described above, might not be a straightforward upward rise, and the company can only be a passive beneficiary; there is the further cap on any strong price hikes due to competition from foreign imports. The second factor might be possible due to Jiutian's 50% capacity increase (from 20,000 to 30,000 tonnes in mid-05) but Jiutian's muted 2H05 performance arising from this capacity increase indicates that this is no sure thing (indeed, overall revenue from all segments actually dropped). In the medium to long-term, I guess investors are looking at the planned threefold increase (to 90,000 tonnes) in DMF and methylamine to justify the current high PE valuation. Without offering any quantitative figures, I throw a few buckets of cold water that could dampen bullish expectations: firstly, execution risk from now till 2H07 leading up to the construction of the new facility; secondly, it is inconceivable to me that Jiutian would still be the sole producer of DMF within 500km by then (a competitive advantage it is trumpeting to the world) given the pace of investment and the liberalisation of the chemicals industry to foreign MNCs both in imports and distribution (fully in end-2005); thirdly, the fact that it saves on energy costs by using coal to power its production process (as compared to others using more expensive natural gas, another competitive advantage, says Jiutian) is incompatible with the China government's new drive for sustainable development and environmental protection; fourthly, the raw material price agreement with former parent Anyang will be subject to review in 3 years' time in 2008 (yes, that's when the new plant is just completed), at which time I would expect a major readjustment if oil prices remain stubbornly high; and last but not least, the tax exemption that was the strongest factor in the 100% profit growth from FY04 to FY05 would partially expire in FY07, following which only 50% tax exemption would apply. The confluence of all these factors around the period when the new plant (on which so many hopes lie) is completed means that hopes for a corresponding threefold increase in profit then might be premature.

For a more sober look at the specialty chemicals industry, one can check out Megachem, a Southeast-Asia based specialty chemicals distributor whose gyrating fortunes since listing must serve notice that things can turn out poorer than expected. For a more sober look at how China's undoubted growing demand for chemicals (inline with economic development) can be divergent with the individual fortunes of chemicals companies' bottomlines, one only has to look at SP Chemicals, a much bigger player (but as noted above, in commodity chemicals).

References:
(1) ChinaPU 2003-DMF Market Review

STI	2908.42	-14.34	(-0.5%)
FTSE Midcap Index	716.65	-2.55	(-0.4%)
FTSE Smallcap Index	579.48	-0.16	(0.0%)
FTSE Fledgling Index	729.5	6.18	(0.9%)
FTSE REIT Index	624.04	-0.93	(-0.1%)
Property Index	96.42	0.87	(0.9%)
Financials Index	99.14	-1.26	(-1.3%)
Construction Index	108.36	2.23	(2.1%)
Commodities Index	108.80	-0.69	(-0.6%)
Retail Index	111.52	1.40	(1.3%)
Env/Water Index	101.74	-1.24	(-1.2%)
Energy Index	170.41	-1.40	(-0.8%)
China Index	106.88	-1.69	(-1.6%)
FTSE China Index	307.6	-3.31	(-1.1%)

STI	1596.92	12.06	(0.8%)
FTSE Midcap Index	310.63	0.67	(0.2%)
FTSE Smallcap Index	240.96	-7.96	(-3.2%)
FTSE Fledgling Index	347.35	3.87	(1.1%)
FTSE REIT Index	307.13	2.80	(0.9%)
Property Index	40.05	-0.41	(-1.0%)
Financials Index	51.74	0.26	(0.5%)
Construction Index	41.78	0.75	(1.8%)
Commodities Index	43.33	1.18	(2.8%)
Retail Index	58.50	0.56	(1.0%)
Env/Water Index	36.22	1.74	(5.0%)
Energy Index	62.83	1.66	(2.7%)
China Index	48.87	1.10	(2.3%)
FTSE China Index	137.16	-4.86	(-3.4%)

Component stock	Market Cap (S$M)	Adjusting Factor
HotStocksNot Oil&Gas Index	174.62*	100.00
Wilmar	30523.60	0.25
Noble	6945.60	1.00
Olam	4060.40	1.00
Golden Agri	8030.60	0.50
Indofood Agri	3228.60	1.00
Straits Asia	3278.50	1.00
STX Pan-Ocean	5825.80	0.50
Mercator	523.00	1.00
GMG Global	484.90	1.00

STI	3548.2	316.96	(9.8%)
SESDAQ	262.29	86.76	(49.4%)
SGX Finance Index	2539.52	163.00	(6.9%)
SGX Property Index	1649.84	156.00	(10.4%)
SGX Hotels/Rest Index	1602.54	217.91	(15.7%)
SGX Construction Index	741.81	195.10	(35.7%)
Retail Index	137.50	15.43	(12.6%)
Plastics Index	117.00	29.52	(33.7%)
Env/Water Index	175.69	23.10	(15.1%)
Energy Index	183.43	37.74	(25.9%)
China Index	199.84	34.82	(21.1%)
PP China Index	249.65	42.08	(20.3%)

STI	3231.24	245.41	(8.2%)
SESDAQ	175.53	32.04	(22.3%)
SGX Finance Index	2376.52	152.60	(6.9%)
SGX Property Index	1493.84	307.07	(25.9%)
SGX Hotels/Rest Index	1384.63	377.54	(37.5%)
SGX Construction Index	546.71	98.11	(21.9%)
Retail Index	122.07	4.19	(3.6%)
Plastics Index	87.48	-6.90	(-7.3%)
Env/Water Index	152.58	26.53	(21.0%)
Energy Index	145.69	18.97	(15.0%)
China Index	165.02	26.23	(18.9%)
PP China Index	207.57	30.61	(17.3%)

STI	2510.14	18.65	(0.7%)
SESDAQ	109.94	-1.06	(-1.0%)
Env/Water index	105.15	-0.34	(-0.3%)
Energy index	119.25	-0.08	(-0.1%)
China index	116.12	1.06	(0.9%)