Porfolio Review

by December 28, 2008
On China Milk

Regarding Profit/Loss account

China Milk’s Business Prospects remain strong, despite their tough industrial environment. This can be seen through their sustainable sales figure and net profit growth. Revenue up 25.11% and Net profit up 8.7% based on 2nd Quarter, 6mths Ended revenue and net profit up 26% and 15.2% respectively.

Regarding Promised Growth

As promised, the company has increased in herd size from 16,000+ to 21,000+, raw milk production has began, reduce the reliance of selling cow semen, as raw milk takes a bigger pie of revenue structure.

With regards to the new raw milk process venture, two main important things will be happening,
1) New plant in Daqing, Heilongjiang will process between 50 to 80 tones of raw milk per day.

2) Yinluo is the new brand name from China Milk. Its product range will initially include flavored milk, yogurt drinks and eventually ice cream. Marketing of their products will begin in other Northeastern provinces of Liaoning and Jilin, and the major cities of Beijing and Shanghai thereafter.

Regarding Balance Sheet

Balance sheet remains very healthy, with cash/cash equivalent excluding assets, exceeding total liabilities by 0.7billion RMB.

Regarding Finncial Ratios

NAV per share increased to $SGD 0.54 from 07’s $SGD 0.492 with no changes in shareholdings.(Using exchange rate of $1 to 5RMB)

Financial Ratios like ROE (28%), PBV (0.8 times), PE (3.1times) remains excellent for bargain hunting at a price of $0.395-0.41

Regarding Risks

Matters involving why the company is still holding on to soo much cash? A accounting fraud? as mentioned by JP Morgan. Risks involving a substantial holdings by a family/one person and of course those unseen risks like disease, famine, demand for milk etc.

Recommandation

Milk industry in China, because of the milk scandal, the demand for milk in China has indeed fallen, yet despite this grim fact. If you were to think and reason, eventually this abstinence to milk will be over, just like previous food related disease like Bird flu, Mad Cow etc etc. Milk will then return back to its original demand-this time: safer and much more regulated. In my opinion, China Milk will be able to benefit more from this crisis as opposed to many common believes, though i must also point out the fact that the management is aware and curiously optimistic about their company's future.

This is because many of its milk producing competitor are more or less wiped out. Regardless whether or not it's future milk process sector were to grow or not, their intrinsic value remains at $1.10 if China Milk were to remain its EPS of 0.13 (2008) 0% growth for the next ten years.

Recommends buying more at $0.395


On FSL Trust
Although i don't own this stock yet, i recommend a curious buy for this gem. A lot of monitoring need to be done for company as i'm new to this new investment structure which is like a REITs but involves only renting out ships and not buildings or office spaces etc. Yet because of much uncertainty that this crisis has invoked to the shipping industry, i would never have bought this gem at $1 plus or recommend it. But since it has fallen to $0.45 per share, bringing forth a 50% discount to its NAV, i guess its a good buy. Here are the reasons why i will be buying:

-Very high dividend payout of at least 15cents per year. But expects DPU to ease moderately.
(Yield might not be sustainable, despite this fact, its still attractive at 0.45)

-NAV per share is $SGD1.10

-Intrinsic Value $0.70 or $1.10 based either on Dividend Discount or NAV your choice.

-Therefore at a price of 0.43-45 per share, significant discount is present.

-Estimated Contract value per share is $1.78

-Diversified Ships and clients, ships are young and have substantial value to them.

-Likewise, clients are so far not giving any problems and have not default.

-Do not take up operational costs of the ships, un likes other shipping trusts

-Strong Cash flows.

-FSL Trust was the only Trust which employed a full time risk assessment officer to assess the credit-worthiness of potential lessees on an ongoing basis

Risks to monitor FSL
And here are the reasons why this gem needs to be monitored more closely. This is what i wrote to myself on Microsoft word

"-Whether or not the company is even able to sustain this dividend payout has yet to be tested in this strong bear market. However, setting a limit of tolerance, of 7 cents, if company dividend should go below that, escpially for payouts in 2009 and 2010, activate sell.

Take note that NAV per share. This is because if the company NAV per share keeps dropping per quarter, this will result many refinancing problems/dividend zero payout/Loan to market convent , setting a limit of NAV $SG 0.70 per share.

Company takes up too much debt to finance, their expansion. Take not, if too much debt taken upon DER reaching above 2 times be careful and get ready to sell.

Intrinsic value hit about $1.20 or higher, with no improvements in fundamental. Sell.

Any default by the clients. Consider a sell, if there are two or more defaults in 2009.

Likewise, take note of receivables and all those Red flags, annual report to come out in March 2009."

On China Essence

Update on China Essence as of Dec 28 2008
Regarding Profit/Loss account

Share price has seen fallen to a low of 0.23-0.25 cents.
Just like China Milk, China Essence remains strong amidst uncertain and bearish times. This can be seen again through its 3mth’s revenue up 29%, whereas NPAT drop slightly at (7%), this was due to a 200%+ increase in administrative costs, and a 100% increase in financial related cost. Reasons are as follows

Administrative cost explained

(i) The increase in costs incurred by the operation of the new production facility in Inner Mongolia, amounting to RMB3.9 million; (one time cost unless they expand some more.)
(ii) The provision for directors’ fees and performance bonuses of RMB4.0 million for the six months ended 30 September 2008;

Financial related cost explained
(i) Finance costs on bank borrowings increased by RMB7.8 million from RMB0.9 million for the six months ended 30 September 2007 to RMB8.7 million for the six months ended 30 September 2008,
(ii) Mainly due to an increase in bank borrowings by RMB347.8 million for the six months ended 30 September 2008.
Despite increase in these costs, overall 6mths ending at 30Sept 2008, total revenue is up 39% and NPAT up 9%.

Regarding Balance Sheet
Total liabilities at 713.3million RMB
Total assets at 1.6billion RMB
Current assets minus off current liabilities have an extra of 200k RMB
With ever increasing reserves of 749million RMB, the company’s balance sheet is more or less healthy.

Regarding promised growth
The Group have incurred capital expenditure of RMB407.0 million during the six months ended 30
September 2008 and these related mainly to the cost of land acquisitions, construction of new plants and the acquisition of machinery and equipment. This mainly comprised of new production plants for potato starch with production capacities of 80,000 tones per annum
(“t.p.a”) in Nenjiang, Heilongjiang province and in Zhalantun, Inner Mongolia, and potato protein (8,000 t.p.a) and potato fiber (80,000 t.p.a) in Daqing, Heilongjiang province, and in
Ahlihe, Inner Mongolia.
The Group has conducted further testing of the production facility during this harvest season and has commenced large scale production in late September 2008. The Group intends to sell protein suitable for the animal feed market to local and international distributors. They anticipate this to be one of the Group’s key performance drivers in the second half of FY2009.

After this year’s harvest season, the Group will conduct further testing of the production facility and commence large-scale production in December 2008. Potato fiber is used as a high-grade animal feed. The Group intends to sell potato fiber to local animal feed manufacturers

The Group will continue to expand its distribution network to penetrate regions in the PRC where it currently does not have a presence, and enhance its presence in existing markets.

With the addition of the planned capacities, the Group believes it will maintain its position as one of the leading potato processing producers in China.


Regarding Financial Ratio
Nav per share has increase to $SGD0.483 from 0.45
PE ratio at 2.3times
ROE remain amazingly high
PTB roughly at 0.7-0.8times
Price at $0.23-0.25

Regarding Risks/Short falls
A few orange flags have been noted, under their balance sheet, inventories and receivables remain high, even though the latter account have been reduce slightly. Take note of these two accounts Inventory at 144,032k RMB and Receivables at 100,776k RMB
Take note also of its 6mth ended operational Cash Flow, if Operational Cash flow remains negative (11,770k), find out why?
Lastly take note of revenue, figures in the coming years 09 and 10, since they spend so much on expanding operations, their sales have to increase just as much.

Signs of Bottoming out.

by December 24, 2008

"Invest when fear is the greatest"-Warrant Buffet.
My favourite quote by my investment idol and mentor. Many experts and financial analysts have been trying to time out a bottom, even though its impossible to do so, don;t ask why its impossible to do so, its just the same as asking why did God allow Adam to eat the fruit if he is all knowing in the first place?

Likewise, if financial experts are not able to time to market, then who im i to do so? To make an important statement before i write out this article, is that im not trying to "time out" the bottoming of the market but to "look out for signs" of bottoming out.
Two important differences between the two notions, timing out the market is basically trying to use past data like for example using the percentage of decline from the great depression and trying to forecast/factor it into today's market trend , or using the average of the 1973 oil crisis add the decline in the asian financial crisis thus adding the percentage weight age calculation and forcasting it which gave raise to results like STI will hit bottom at 1600 or 1500, DOW will hit bottom at 7800 because... so on and so forth, its hectic, its very opinionated and sounds almost like bullshit. But looking out for signs of bottoming is much more easier,logical and maybe, just MAYBE more reliable then timing out the market.

So what are the signs to look out for bottoming of the market? In order to do that, i choose to look at two specific events

1) The previous peak bull year 2007

The signs in those years were

+Everyone was talking about investment,equities, shares ( remember China shares)
this includes, the hawker centre aunties,uncles,taxi drivers, the maids in orchard including prostitutes in geylang. I clearly remembered attending a TA (Technical analysis) conference Nov 2007, because i had passed my TA programme and was there to receive my certification. The room was packed with aunties and uncles, all of them including my lecturer were in united agreement that STI will hit 4000-4200 in the coming mths. Everyone was happy,optimistic and very very GREEDY.

-So if i were to reverse it, the sign to look out for is, everyone in previously mentioned , have stopped talking about investments, have shunned away from equities, have believed that once again stocks come from the devil. Everyone will be sad, pessimistic and very very FEARFUL.


+Experts like analysts/IMF forecasters/brokers during 2007 were issuing reports upon reports, screaming their lungs out about how good prospects are for the following year or years to come that stocks are the way to go, Soo many Strong Buy issues, analyst forecast and estimates were SO optimistic even for penny stocks, forecasting growth like 30-40%, likewise brokers were getting richer by the hour because trading activity ,buy sell buy sell buy sell was getting heavier and heavier each day, "STI trading volume reaches red zone of 4.7billion shares". Penny stocks then, like Alantac Tech: 50 cents per share, Jade tech at 43 cents and Baker Tech at 32 cents.

Blue chips like Cosco trading at $8.20, SGX at $15.10, Singtel at $4 plus and Keppel Corp at $16plus. Price to book value was like 4-5 times, PE ratio everywhere was exploding especially Raffles education 100 over times. IMF forecast next year's growth to be 3-4% because of raising China and India ,warns of inflation.


-Now reverse the points above and you get, signs like




IMF chief warns 2009 may be 'even darker'




Analysts cutting their forecast and their consensus estimates, they gave even very good companies like ChinaMilk/Erza bleak outlooks, they suddenly become very silent about reports on ferrochina which they so passionately issue "Stong buy" reports

Penny stocks, just as their name suggest, become penny value like 1-2cents etc :Jade as of Dec 24th 2008 trading at 1cent, Baker Tech at 2cents and Alantac at 4cents.

Blue chips are getting no bluer, in fact they are deteriorating almost every day, SGX now at 5.10, Cosco at 0.91 ouch! Singtel at $2plus and Keppel corp at $4plus. STI trading volume shrink to a low of 400-500millions.

+Government 3mth T-bill yields during 2007 was a temping 2.1% to soak up excess liquidity

-Government 3mth T-bill yields now, at 0.41% below Fixed deposit rates, (ok i'm sry i made a mistake, sometimes FD is indeed better then T-bills lol) very rare for this to occur though.


2)With the above mentioned, i now look at another event the 1997 Asian financial crisis and try to match its similar effects to today's event

1997 crisis: Experts were claiming that this problem will drag on for years! I actually when to the library to check out the 1997 news, titles like "Asian in deep trouble!" "Bleak outlook for the next 10 years" "A repeat of Japan's 10 year depression, Asia could be next" "Recession could be deeper for 2008"

2008 crisis:News paper and view from experts recently have titles like "Great depression no. 2?" "Take your $ out from stocks now, unless you want to hold for 5 years" "Greater then the great depression?" "World growth to slow? Don;t be too optimistic" "Asian will feel deep impact from US meltdown"

1997 crisis: I heard many stories of bankers in Asia or people related in the financial world were taking their lives away, committing suicide, jumping down HDBs etc, people then were blaming the Asian governments/ banks for many things.


2008 crisis: "Investor who lost big to Madoff kills himself" http://news.yahoo.com/s/ap/20081224/ap_on_bi_ge/madoff_investor_suicide, soo far only one or two related new of suicide, more to come? Maybe... but there are reports that people are feeling depressed, losing their live savings etc, again alot of blaming especially cases that involve Lehman brothers/Mini bonds/MAS should take charge/ President Bush as the worse president in History etc etc

1997 crisis: I looked into the advertisement section of strait times and TCS (Tcs is now known as Channel 5) Gurus at full force, claiming that they accurately predict this and that, broadcasting results of their trading activity "I made $100,000!! In this bear market!!", claiming to make lots of money during this bear run, pessimistic forecasters suddenly become famous on business times section, saying thing like "i told you so" "As mentioned before STI will hit.." blah blah blah.

2008 crisis: Just look at Business Times now, or the Strait times business section, i don;t have to write anything more.

Now, looking at the signs above they are indeed quite similiar, however the very important question still lingers. Is it time to invest? This question can only be answered by yourself and your judgement, to me i think we have already bottomed or rather missed the bottom and that slow recover is at hand. However i might be wrong, we still have problems like the Big Three car makers despite the loans given to them, we still have falling US house prices etc etc, then there is question that this crisis is as big as the great drepession which lasted for only 3 years without government help. Now the crisis is about 2years or so. Come to the worse just another year or pain? Who knows.. my advise for this coming christmas, Start investing for pity's sake.

Singapore Government T-bills

by December 15, 2008
Today's article will be on government securities, the reason why i got interested into this part of the investment spectrum (i usually go for equities) is because i suddenly found myself holding a lots of cash. Cash that are rotting away in my saving bank account like adolescent teenagers gathering around computer game shops, wasting their time away playing online games.

Then the question strikes me... what am i to do with this sum of money that i was soo blessed with? I couldn't just leave it idling around my account and let inflation eat it's value away, year after year, day after day. Plus, i needed the money to pay off the upcoming loans and university fees for the next few years to come, liquidity therefore has to be given top priority here.

So, how can one earn better returns without being exposure to any big or even systemic risks and yet have the privileged to use the cash at any given time ?

For the general public out there, many people will assume such an investment exist only in forms of Fixed Deposits offered by our local banks. However, in my opinion, Fixed deposits instrument do not offer very good interest rates (returns) at all! In fact if you take a quick look at the facts below, (to keep with consistency, we shall only look at 1 year rates, capping it at 50k)

Visit http://singaporesearchsite.com/singapore-tips/fixed-deposit-interest-rate/ for full chart

you will find that no yearly Fixed deposit rate reach above 1%, the most is offered by RHB at 0.935% with a 50k deposit. Now this fact alone, proves one point. That Fixed deposits gives out F***ing disgusting returns, and it makes me want to throw my shoes at them.

So is there a better alternative? One that is as safe, if not safer then a fixed deposit that gives better returns ?

Like choosing between Gold and Copper, the Singapore government securities also known as (SGS) is definitely a better alternative as compared to a FD and not many people know because the banks in this country keep so silent about.

So lets start with the basics, what is SGS?

SGS are marketable debt instruments issued by the Government of Singapore through the Monetary Authority of Singapore (MAS). These debt instruments can be in the form of either Treasury bills or bonds. The Singapore Government is obliged to pay the holder of the Treasury bill or bond a fixed sum of money on the maturity date of the security. Thus, when you buy SGS, you are lending your money to the Singapore Government. Although SGS cannot be cashed in before their maturity dates, investors can always sell them in the SGS market. SGS primary dealers are prepared to buy and sell SGS at any time.

So the next question is why does the government issue these instruments?

They do so because of the following reasons
1)Provide a liquid investment alternative with little or no risk of default for individual and
institutional investors;

2)Establish a liquid government bond market, which serves as a benchmark for the
corporate debt securities market; and (simply means, other companies uses this rates as a comparison to give out their own loans and bonds, wonder why banks don't follow suit?)

3)Encourage the development of skills relating to fixed income financial services
Available in Singapore.

SGS's investments are for?

People who have lots of spare cash, either waiting to invest (but still don;t know what to invest) or need to use the money in the near future. Earn extra interest given the amount of short time.

People who do not want to be exposed to systemic/market risks, people who want to invest in very very very safe investments.

People who likes the feeling of the government owing them money.

People who wants to diversify their portfolio, instead of holding cash or putting in FD , this is a better alternative.

Types of instruments offered by SGS

T-bills: They are short-term securities that mature in one year or less from their issue date. T-bills are bought and sold at a price less than their face (par) value, and when they mature, the Government will pay the holder of the T-bill an amount of S$ equivalent to the face value of the bond. Therefore, the interest earned on the T-bill is the difference between the purchase price of the security and its face (par) value. The Singapore Government issues 3-month and 12-month T-bills. For example

Issue code: BQ08150N 3mth T-bills is sold at $0.98 per unit. You bought 1000 units, therefore you spent $980. After three mths, the government will return you a full $1000, this $1000 is known as the "par value" and is 100% guaranteed by the government. Thus your profit is $20. So if you want to calculate the yields (how much you got back as a percentage) $20/$980*100%=2%

Bonds:They are debt securities that pay a fixed rate of interest (called the coupon), usually every six months, for the life of the securities and then their face (par) values on redemption on maturity. In Singapore, SGS bonds are issued with maturities of 2, 5, 7, 10 and 15 years. And if you are wondering what is the meaning of securities, simply go look up the dictionary.

Visit http://www.sgs.gov.sg/pub_guide/faqs/publ_faqindinvestors.html#4 for more examples


Is SGS T-bills better then short term Fixed Deposits?

Just to keep things simple, looking at only 3 mths FD vs 3mths T-bills rates. On average FD 3mths rate is 0.35% vs 3mths T-bills rates of 0.56%-0.675%. Then some of you might wonder the difference between the current rate of T-bills and FD is not much, only 0.34% difference. Consider this , a difference of 0.34% of $1000 is $3.40, if you have $100,000 the difference is $340, likewise $1million is $3400 for every 3 mths. Plus rates in T-bills last year was a whooping 2.1% for a 3mth deposit.

What determines the yield rate?

The yield rate is determined by a few factors, factors like the SIBOR/
Domestic Interbank Rates/ the amount you bid, the outcome of the bidding/ and many other factors that are interlinked between the world's markets.

HUH? Got bidding arh?
Yes, that whats makes investing in SGS fun. The bidding will involve competing for the amount of yield (returns) you want to get. Say for example, you want a return of 1.25%, then in your application, you state that you want to bid at 1.25%. However, the higher your bid, the chances of you getting the bill is lower, because other people might bid at 1.1% or 0.90% and in this case, they will get the bill first (priority is given to the lowest bidder). Take note also that if your bid is above the "cut off bid" say at 1.09% (lol) you get nothing.

Then again, you can try bidding again for another T-bill issue, (the government issues T-bills on a weekly basis). There are soo many T-bill issues, that one might wonder which one to pick, but according to my interview with the SGS lady on the phone, she says it will depend on your holding preferred period like how long you want to hold for say 3mths or 6mths or 1 year, the yield will then depend on your luck and the outcome. And if your not comfortable bidding and finding it too troublesome, apply for non-competitive bid which will give you the best outcome of the bids provided the T-bill has a uniform pricing function.

So how to apply?

Simple! Go to any of your local bank like DBS/UOB* , walk towards the "can i help you?" table and talk to the lady. Tell her you want to apply for Government T-bills. The lady will kindly usher you to a relationship manager , that's where you have to be careful, because many banks do not encourage this type of investment, they will probably suggest you to buy their structured products for better returns. Note also that they wouldn't be able to or not willing to answer your questions regarding SGS products because its not under their bank's products. So if you survive their persuasions to buy their products, they have no choice but to issue you a form, thats where your IC comes into play. Have also you bank account no. ready, the process of creating your very own SGS account is at hand.

(Takes about 5 working days). Once your account is done up by them, they will issue you another form, which is the bid form, where you indicate which type of T-bills or bond you want to invest in? What yield you want to bid? Which Issue code? Competitive or non-competitive? Etc. So before you apply for the bid form, make sure you know what type of Bills or bonds you want, how long you want it to be, and what kind of returns you expect from etc.

Any trouble like don't know, what the hell I'm talking about, feel free to call up the nice SGS lady at Tel: (65) 6229-9150 or email them at sgddiv@mas.gov.sg.

Another alternative is to open an account with POEMs visit http://singapore-fixed-deposits.blogspot.com/2008/03/treasury-bills-your-alternative-to.html for more information.

What other people say about SGS

"Under the current market turmoil, there are still some safe havens for your investment monies. Besides Singapore Treasury Bills, Singapore Government Bonds are also one way to invest in relatively safe assets. The MAS’s recent auction for its 5 year Singapore Government bonds yields 2.65% per annum which is higher than even the highest fixed deposits promotions by the banks. This is one area for consideration for those risk adverse investors. Definitely safer than Structured Products such as Lehman Minibonds or DBS High Notes 5 series.
T-bills are short-term securities that mature in one year or less from their issue date. T-bills are bought and sold at a price less than their face (par) value, and when they mature, the Government will pay the holder of the T-bill an amount of S$ equivalent to the face value of the bond. Therefore, the interest earned on the T-bill is the difference between the purchase price of the security and its face (par) value. The Singapore Government issues 3-month and 12-month T-bills"-
blogger


"Because many people do not know about such instruments, their ignorance has caused them to lose out the ability to maximize their returns even under very safe investments"-Financial planner

"Most clients, come in every 3mths to renew la. So if you ask me , whether this product can lose $, i don't think so. Why would clients keep coming back to renew their application if they are losing money?"-Karren Tan Relationship Banker


An update on upcoming articles/analysis

by December 14, 2008
Deal to huge amount of time and research required to analyst more investment gems, i have to take a break and spend more time doing what i do best (looking for gems and analysing them).
Upcoming articles to look out for are as follows

1)Singapore Government T-bills and why you need to invest in them

2)Suntech RIETS, an oversold gem? Smart money seem to be pouring in

3)FSL Trust an update on Risks.

4)Saizen RIETS*

5)Porfolio update, no window dressing, purely updating and finding more risks related to China Milk/China Essence and Sino Tech.

Enjoy your holidays and have a good year ahead :)

Market Gem: FirstShipLease Trust

by December 01, 2008

Core Business:
-(FSL) First Ship Lease
-Highlighted in blue: Writtern in the context of a bicycle shop for better understanding

Its simply a business that collects money from a lot of people, use/manage and invest that money to buy boats, then rent it out to shipping companies, in which these companies pay FSL the rent fees in which these fees go into paying all other expenses, whats leftover will be distributed to Shareholders. Think of it as one of the bicycle rental shops you see in East coast Park, where you're one of the owners of this shop, renting bicycles to families ,kids and friends wanting to have a good time.

Why i pick this stock?
-Diverse Revenue Sources.
With 23 ships, they consisting of seven container ships, nine product tankers, three chemical tankers, two dry bulk carriers and two crude oil tankers. In other words , our shop has many different type of bicycles to rent, bicycles that are specialised for beginners (three wheel), adults, professionals and for lovers( twin sitter) to capture the demand of the many people in east coast park, unlike other shops which only have one type of bicycle (etc: Rick marine)

-Young Fleet
As the company buys mostly new ships, its fleet’s average age is only about four years, compared with the industry’s average 9.3 years. The young fleet, combined with an aggressive growth strategy by acquisition ensures stable cash flow which will buoy its hefty dividend.
So apparently this bicycle shop of ours, was just set up, the bicycles we ordered are made from China,Korea,Japan and Romania are all very new and have been fully rented out.

-High Earnings Visibility
FSL rents out ships with very long-term contracts of about 10 years on average, This allows FSLT to maintain a high proportion of contracted cash flows while the staggered expiry profiles enable contracts to be renegotiated at different time, thus mitigating business cycle risk.
Due to some crazy event happening at east cost park, customers who rented our bicycles, wanted to rent it for 10 long hours, in doing so, contracts and ICs of the bicyclists have been signed and taken respectively :), remember the longer our customers rent from us, the more money is made.

-Bare boat Charter
(Not subject to crew and fuel cost)FSL only enters bare boat charter with its lessees which means bunker charger and lubricant oil will be borne by bare boat charterers, not FSL. Its as good as saying , the maintenance of the bicycle, like lubricating the wheels, pumping the tires, repairing any spoiled parts will be done by the cyclists themselves and not the rental shop. Thus this will result in more money earned by our shop.

- FSLT has range of financial solutions .
Against this backdrop, FSLT is able to offer a range of financing solutions which will
maximise the value of their capital and this includes 100% financing and flexible lease structures which include purchase, extension and early buy-out options, and fixed and
floating rate leases. FSLT is able to finance a range of vessels such as crude oil and product tankers, container vessels and dry bulk carriers.

-Deliciously high dividend yields
"As mentioned that the forecast DPU for FY 2008 is expected to be 10.432 US Cents per unit. This translates to about 2.61 US cents per share, or about 3.57 Singapore cents using a rate of 1.37 to the USD. This would mean a potential DPU of 14.30 Singapore cents for FY 2008;Thus, Management is taking a big risk that the unit price will adjust upwards significantly so that equity issuance can be done at a higher premium to the current market price. implying a forecast dividend yield of 12.4% at today's closing price of S$1.15 per unit." -by Musicwhiz.

Thus if you relate this to our bicycle shop, whatever amount received at the end of the day or month mostly belongs to you

Threats:
· Largest risk is the credit risk associated with its lessee base

The fear of defaulting payments from clients, just like some people who run away with the bicycles and you realise that the ICs they gave you belongs to other people.
-Though these risks have been minimised through screening of clients and diversifying client base. Industry outlook is not looking good, with global recession at hand, credit risk of clients are heightened. With this in mind, i took the liberty and do abit of research on FSL's current clients, looking into their solvency, current ratio etc


http://www.box.net/shared/qajelqpevp

The only clients that im not happy with, its Groda Shipping, Geden and Siba Ships. I will need to call FSL's IR (Investors' relations) to find out whether they have more knowledge on their clients. But since the management is very experienced in their industry, i suppose that these few companies are credible. This is the probably the main reason why, the share price have dropped from $0.96 IPO pricing to $0.455

· Residual value is subjective to shipping rent rates
-The average lease IRR of 7.5% taking into account the cost of the vessel, lease revenue and an assumed residual value based on a 20-year average. If shipping rent rates continue to fall, then FSL have lower their shipping rent rates as well, in doing so, reducing the amount of dividends received. If there isn't enough demand for bicycles, rental shops have to lower their rental rates to remain competitive, this will also pressure our rental shop to do so, thus unable to maintain continue high rate of dividend payouts.

· Asset values could decline in a cyclical downtime

-Thus affecting NAV per share, however as stated by DBS FSLT is not allowed to sell vessels that are under bare boat charter leases. Thus, any revaluation is purely academic.

· Equity markets not conducive to raise funds.
-Obvious, today as of this writing, the financial world experiencing credit crunch and all, FSL share price have dropped, resulting in high cost of equity, cost of debt should also raise in such uncertain times. Therefore any plans to expand fleet have been limited or reached their limit.

-Taking into account this problem with expanding yields might not be that high in the near future, as funding by debts is already limited by their policy 1:1. Therefore might be a possibility that the management will cut back on dividend pay outs, so that internal funding might be established. Its like, our bicycle manager, who wants to import more bikes, however not enough money to do so, because he has been giving out alot of money in the past and not keeping enough reserves to buy up more bicycles. He cannot go to the bank to draw more loans, because he has drawn enough and nowadays people don't dare to invest in anything, especially new businesses in asia.

-Funding for loan repayment problems: Of course there is that problem with refinancing loans that are borrowed by the company, with the first few loans expiring in 2014, it is in my hope that by then, the markets will recover from this crisis and able to fund these loans either through equity or internal funding or via more loans. Whatever the case, this risk is still


-Their industry outlook:
Not looking good, with the impending global recession and credit crunch which will adversely affect the growth in the shipping industry. For bare boat chartering the competition was few and fragmented. FSL stands a good chance in this industry.


Future Growth Drivers

· FSL Trust’s growth strategy is to grow vessel portfolio through asserted acquisitions with long-term bare boat charters. Upon the successful closing of the 3rd Yang Ming vessel by the end of October 2008, FSL will have a fleet of 23 vessels.

· More marketing by them, to help investors understand their business model. This fact will be another catalyst in the future that might push up prices

Having brief looked through at the fundamentals of the company, the next important fact is to look at the price you pay for this company. As stated earlier in this article, at a price of $1.15, the forcasted total dividend yield for 2008 is 12.8%. Now, because of the crisis and all the other crap, the share price now as of Dec 1th 2008 is 0.455, which represents an estimated yield of 37%!!! In other words, you will recover your capital within 2.5 years, this is provided that FSL maintains its dividend payout at $SG0.15cents per year. With reference below,

Margin of Safety

Current Share price: $0.455 as of 1st DEC 2008

The Nav per share: $SGD0.84 (as stated in their fact sheet)

Adjusted Nav: $0.70

Intrinsic value: $0.69/$1.16/$1.95

Using Gordon's Dividend Discount Model, i calculated the share price to be $0.69 using a Pessimistic assumption that FSL DUP falls to 2007 figure, with No growth for the next ten years
An Intrinsic value of $1.16 with an average assumption of using 2008's yield , with no growth
And finally an optimistic assumption of $1.65, using 2008 yield with no growth for the first 3 years followed by a 10% growth for the subsequent 7 years.

Percentage discounted: at least 50% margin of safety as compared to NAV per share

Confused? Don't be! Just know that these are the targeted price to sell (should share price raises in the future) based on your own understanding of the company's outlook, risk and business. Come on, at a price of 0.455 per share is a ridiculously good offer in my opinion and should the company go down under, you are expected to receive at least around $0.84 . It just like paying $400 for the entire bicycle rental shop with all the new bicycles worth about $800 and still have the potential to earn more money from renting them out.
Additional Information
I wrote and called the IR for additional information, this is what i got.

Dear Sir/Mdm, thanks for taking time to read my email, i have some questions regarding FSL trust.

As a retail investor, i would like to know if whether any internal management, CEO, CFO etc was there any buying or selling of their holdings recently?

Secondly, the trust have loans tranches A/B expiring in 2012 and 2014 respectively, in light of this, what steps are being taken to ensure the trust is able to pay up in full and in time?

Lastly, should the market recovers in the near future, are there any measures taken to educate investors about these new shipping trusts? What i mean is, many investors are turned off by the low EPS, ROE and high PE ratios stated in BT (Business Times) and the annual reports, what these investors might not know is that most of the income has been given back to shareholders, that is why EPS and ROE are low and PE is high?

Looking forward to your reply

Thanks
Akat
His reply:
Dear Akat,

Thank you for your email.

The CEO and CFO are board directors of the trustee-manager and their transactions in FSL Trust units need to be publicly disclosed. You can find the disclosures at http://www.firstshipleasetrust.com/ir_newsroom.html. The CEO and the CFO each bought 50,000 units on 22 Oct and 23 Oct respectively.

The first loan tranche is due in 2012 which is more than three years away. We do not know how the markets will behave during this period. However, the preferred option would be for FSL Trust to increase its asset portfolio via an equity raising or through other forms of unsecured capital. Depending on the amount to be re-financed, the re-financing would be supported by fresh unencumbered vessels and the existing asset portfolio. In the "worst case" scenario whereby FSL Trust is unable to re-finance the loans, FSL Trust will re-negotiate with the lenders with a view to amortize the loans over the remaining life of the leases. This is no different from a typical ship finance mortgage loan profile.

Our investor relations programme is on-going and we do not intend to wait until the market improves to engage the investment community. The trustee-manager has been on roadshows in Singapore, Asia and the US to promote FSL Trust to institutional investors while in Singapore, it has participated in seminars organised by SGX and SIAS. These efforts, along with regular updates to the FSL Trust corporate website, will continue.

We thank you for your support. Please do not hesitate to call me on +65 6825 8027 if you need further clarification
Regards
XXX

Last words
A waiting bird, never get the worm.
FSL is a rather new concept to the investing world, its like a unit trust but the assets are based on renting out ships and not real estates, the trust does not have a long history, but are managed by people with long experiences in the industry.

Many people tell me to avoid industries like shipping, properties, tourism and retail, just wait for the right time to invest. But my concept of investing is to buy LOW and sell high, and by the time is right, the price of this share will no longer be low , but high. Why wait for the economy to recover then start to invest? This is what i don't understand, and many friends think that way too! Their reasoning is that if the economy recovers it will be much safer to invest. But Cmon guys, shouldn't safety be measured by how much discount you got from buying the stock and not how many people already gone invested in that stock? Think about this, good discounts are everywhere, why wait?

Ps: Thanks to Musicwhiz, DBS asset management, Business Times for all their information and help.

Update on strange gem: ABK

by November 21, 2008
Referring to article "Pick up this strange Gem" written as of Nov 10th 2008.
Under sub-title "+++Other positive points to take note of++++" i quoted that one of the possible ways that ABK might recover is to tear up contracts on risky residential mortgages, this will in turn induced a strong recovery.

As of Thursday November 20, 2:51 pm ET , published article at

Ambac shares rise 80 percent after liabilities canceled
Despite Dow drastic drop of 445points.
http://biz.yahoo.com/rb/081120/business_us_ambac_shares.html?.v=1
NEW YORK (Reuters) - Shares of Ambac Financial Group (NYSE:ABK - News) rose more than 80 percent on Thursday, after it reached an agreement to cancel contracts covering structured debt valued at $3.5 billion, allowing it to reduce loss reserves. Ambac Assurance Corp, Ambac's main unit, paid $1 billion to get out of four contracts it had written to guarantee collateralized debt obligations, reducing the bond insurer's liabilities. It said the terminations would allow it to reduce reserves set aside for market losses on these guarantees.
Ambac shares rose 86 percent to $1.42 on the New York Stock Exchange, after closing at 76 cents a day earlier.
Ambac's stock has lost nearly all its value over the last year, falling from $24.74 last November.
Bond insurers, which guarantee payments on debt in the event of default, have been hit hard by the credit crunch and have lost their "triple-A" credit ratings after posting billions of dollars of losses from exposure to mortgages and complex debt instruments, hampering their businesses.
Both Ambac, and its larger rival MBIA Inc (NYSE:MBI - News), have seen little new business since it lost its top ratings.
Research firm Friedman, Billings, Ramsey on Thursday said Ambac's contract cancellations were "positive," but did not "answer ongoing business model concerns."
Bond insurers have been seeking federal support under the government's $700 billion financial rescue plan.
Friedman, Billins said short of government assistance, Ambac would have a "difficult road ahead."
(Reporting by Lilla Zuill)

Highlighted in turquoise indicates positive developments
Highlighted in red indicates negative developments
Because, one of my strategies is to wait until ABK prices drop to a range of $1.10 to $1.30, the share price has drop even lower then that at 76cents just yesterday and rose to $1.25 today, this fact alone should have induce anyone who followed this strategy to enter at a price below $1.10 ,giving to holder of this stock approximately 40-50% returns in just two days.
Again i have to emphasis that this strategy is not "value investing" but "Value Speculating" , and yes this term exist under Gramham's Intelligent Investor book. Because of upside odds are very low at $1.10 as deemed by my research, the upsides of any good news will catapult the stock and the chance of that happening is higher as compared to the downside risks.

Now ABK trades at $1.25 per share even though Dow has dropped 445 points, any recovery or bargain hunting to take place of two days of heavy selling is very possible and ABK stock could raise to a further $1.40-$1.60 region.

Did i apply my own strategy? Unfortunately i didn't, as i'm was stuck in camp yesterday doing guard duty..BASKET!

Diamond Dust

by November 20, 2008

The diamond dust story.
There was a story that happened back in the late 1990 s, depicts of a young man who got hired as a maintaince worker (cleaner in short) in a diamond refine factory in Japan. His daily job scoop was to make sure, the factory was clean and free of dust before and after the factory closes.
Diamond refinery operations back in those days were still somewhat medieval, there were no machines, no proper cutting tools, everything from the unloading of raw diamond rocks to the crafting of diamonds where done by hand.
Because the factory was huge, everyday the young man would sweep for hours upon hours and carry tons of plastic black bags, filled with dirt and dust to throw into the nearby dumping container. But there was one evening he noticed that one of the bags he was about to throw into the container, had a small cut underneath and shinning dust was flowing out, in small gentle amounts on the ground.
Sensing an opportunity, the young man took one of the bag of dirt, home and started sifting through the dirt , painstakingly separating dirt from diamond dust. Eventually after 68 days of doing so, he managed to come out with a bag of diamond dust, that was eventually sold to a underground dealer. This resulted in a huge inflow of cash for him that was enough to get him through his university education.

Came across a bag of diamond dust.
It was a Wednesday evening; the sky was heavily burdened by dark clouds, threatening to rain at any moment. I just came back from camp and was in dire need to do something fun on my lap top. As I was about to scroll my mouse towards the Warcraft Icon, my friend on msn nudged me. He asked me whether this company trading on SGX, whether is it a good buy? He quickly linked me to the website, which was http://www.sunshine-holdings.com/investor.html. I was initially surprise to hear him say he wanted to invest, because, just like many of my friends, they have no interest what so ever in investing, some even go as far as saying stocks are from the devil. Regardless, I took a quick look at the website and was pleasantly surprised that this company “Sunshine Holdings” was trading at a disgusting low of 3 cents (18th Nov 2008).

My mind quickly project these words in my mental frame, “Penny stocks-High risk....good buy?-Maybe-maybe not.....go study it-find what’s left over” . So I took the liberty of researching quickly through their company’s website to see first if I understand what they are doing , their business model and most importantly what’s left over in the company. What invoked my interest further is that the company has assets amounting to 2,188,968,000 RMB and Liabilities at 1,135,704,000RMB as of September 2008 in their annual report.

Simple Theory of NAV

So common sense depicts, in order to find what’s left over in the company one has to take total assets (what the company owns) subtract liabilities (what the company owes) and then you get the NAV as known as Net asset value. The NAV for sunshine which I calculated was $SG0.24, the company share price is trading at 3cents, so in theory , if I was as rich as Paris Hilton who can spend $26 million on shoes/clothes/bags , I would have used the money to buy up the entire share holdings at $0.03, delist the company, pay off their debts by selling away all their assets , the left over, which in theory is 0.24-0.03 = 0.21 multiply by the total no. of shares which is around 890 million, I would have pocketed $186million Sing dollars in cold hard cash. Sounds good? Of course, who doesn’t want to earn $186million just by doing simple primary school maths and applying simple financial theory? But like all things in this world (especially in Singapore), nothing is that simple and straight forward.

Questioning NAV
If one wants to profit from the above theory, one has to research even further and ask vital questions and make assumptions like
1) How can a company’s share price be trading at such a huge discount to their NAV? Is the stock market that stupid?
2) Does the company’s Net Asset value really worth $0.24?
3) Because majority of the stocks are held by their own people and private entities (CEOs,CFOs, Banks, Mutual Funds etc ), by buying all the shares traded on the market, would not mean you have the power to command the company to delist.
4) And if you cannot delist the company, means you also cannot sell away all the assets or pay of the liabilities and get the leftover amount.
Because of this lack of power, due to the inability to buy up all the shares and force a delist notion now, give raise to risks like what will happen in the future? If the management decides to use their cash holdings (one of the most important assets) and invest in stupid things/ machines/ventures that doesn’t bring much profit or even worse, negative returns to the company?

What if they borrow even more loans from the bank, enter new businesses that, if turn out to be disastrous, will definitely eat into the NAV of the company. Remember because loans have interest attached to them, any management decision regarding the company’s new ventures/acquiring new assets/expanding have to have at least a return that can cover the established loan cost or the raise of equity or both. This then is known as COC (Cost of capital) which I will not go further explaining.


Rolf Banz's view
What is important now is, can a normal retail investor buying into these super cheap stocks like Sunshine Holdings , hold it for long term able to profit once or should the market realise their real NAV and price it as such?
Rolf Bnaz 's research shows that in the in 1981, he formally introduced the concept of a small-cap risk premium into the academic literature. For the 43 years through 1974, the small cap performance left large cap stocks in the dust his studies found. Because Small cap stocks are mainly compromise stocks that are trading below their NAV.

Why is this so?

While the markets are pretty efficient in certain areas, such as large-cap stocks, they are far from perfectly efficient, he believe, in the micro cap space. While this may not provide much opportunity for institutional money, it may be beneficial for individual investors.if the assets have value, and the company is not insolvent--two big ifs in net/net land--the stock may be dirt cheap, says Rolf Banz.

A better and safer way of measuring NAV
* A market cap that's below net current asset value, defined as: current assets less current liabilities, and then subtracting all the other long-term liabilities, including preferred stock and minority interest where applicable.others will recover. In that case, either business conditions improve, the company's acquired, or the market wakes up to the overlooked value in the firm. What’s difficult to do in some cases, however, is tell the difference between who will survive, and who won’t.

According to Ms Tey H.ling CFA, BBA , NUS graduate.

Of course, if the company has no intention to return the cash to shareholders and its operations are bleeding cash, then the share price may well have reason to be trading below the cash net of liabilities per share, (this is the real danger i emphasised earlier).

Auric's cash net of its total liabilities worked out to 99.7 cents a share. Its share price at the time was 90 cents. General Magnetics' net cash per share was 13 cents versus its share price of 14 cents. And k1 Ventures' net cash was 18.4 cents per share, compared with a share price of 20.5 cents.

United Food. Take into consideration other assets like inventory, accounts receivable, properties and land use rights, and the net asset value per share for the stock came to 40.7 cents. But have poor management strategy.

considered whether the company is currently generating positive cash flow, and whether the management is positive about the immediate future. Presumably, if both are positive, and yet the stock is trading at a deep discount, then perhaps the stock deserves a closer look.

The other two stocks which are trading at a discount, and yet have a positive operating cash flow as well as a positive management outlook, are Plastoform and China Powerplus

Now as of Nov 19 2008
K1: 14 cents
General Magnetics: 8cents
Auric: 55 cents
United Food:5cents
Plastoform:3cents
China Powerplus:5 cents
China Flexi Pack:17 cents

So to summarise when buying companies trading below their NAV

-Adjust your NAV caculation, take note of asset accounts like receivables, inventories,deferred taxes and especially Intangibles. Ask yourself, if you were to liquidate the company, how much does these assets worth now? Usually for me i discount 10% for receivables/inventories to factor in bad debts and inventory decay , 50% for tax deferred and 100% for intangibles to be extra conservative.

-Even better still, use Net current asset value calculation as stated above, if the share price trades , even below that figure, it supposed to be very safe liao.

-Preferably look for cash rich companies

-Companies with good management and business model, this can be since through their historical good ROE figures, the increasing sales and Net profit after tax. This rule is applied to all value investing practices though.

-Look at past NAV per share value, a good bargain is one with a stable increase in NAV through out the years of listing in the market.

-Consider also past and present positive operational cash flow.

- Because NAV figures keep changing , from one quarter to the next, it's best to take note of what the companies that you bought are spending on, whether is it in line with their company's main business, what reasons for spending soo much etc.

Pick up this strange gem?

by November 10, 2008
Lets say, on your grand wedding day, just two hours before the ceremony starts. Speaking from the groom's perspective, you were excited and can;t wait for the wedding to start. You imagine how both you and your "wife to be" would feel, while walking down that beautiful Alley with all your relatives, friends, family's' eyes all giving their full undivided attention to both of you. You anticipate your wife eyes to be surrounded with tears of joy when you slit that diamond ring on her hand. Before your imagination goes even further, you were suddenly interrupted by your ring bearer, he however bears bad news, that the diamond on the ring had mysteriously gone missing !! It could most likely be an insider theft says your ring bearer. The funny notion was, the theft, at least had the courtesy to leave the ring behind, taking only the diamond with him/her.

Now, its another 1.5 hour before your wedding begins. Both of you were in disarray, however something needs to be done quickly and decisively. You rushed down to a diamond ring shop just 5 miles from the church hoping to get a proper ring at least. But in disbelieve the diamond shop had closed.

You can't believe your crazy bad luck. As you knee down in despair , praying to God for a miracle , you spot a small tiny diamond that lies out the diamond shop on the ground You picked it up and examined it. You ponder hard, as to whether this tiny diamond was actually real or it actually came from a small stupid girl's barbie doll necklace. Remember, time was running out, you have less then one hour before the wedding starts, you caution yourself that your "wife to be" is a professional gem analyst and that any fake gem or diamond would be immediately caught by her trained eyes, this would then really upset her and that's what you do not want. You also do not want to be late for the wedding, because its generally not nice to leave your wife standing there alone in front of the congregation waiting for you. So the question is, you will pick up this small diamond and fixed it onto that ring or choose go down another 10 miles to buy a proper diamond ring and risk being late?



This story somewhat depicts my dilemma as to whether i should or shouldn't buy this stock trading on the US stock market. Just like the groom, im afraid that i might pick up a fake gem and upset my wife which is my portfolio. And if i don't pick up this gem (stock), im might miss out or be late for a huge rally that may come.

This strange gem called ABK (Ambac Financial Gorp)
Their primary business is to provide financial guarantees and financial services to clients in both the public and private sectors around the world.
As such, Bond insurers like them have lost billions of dollars by moving beyond their traditional business of backing muni bonds and insuring risky sub prime debt. The losses could result in the insurers losing their coveted triple A debt rating, which is crucial for their business and of course that has come to pass. Recently they have received a Baa1 rating from Moody's Investors Service, Inc. with a developing outlook and a AA rating from Standard & Poor's Ratings Services with a negative outlook.



----The problems---------
1)Rating Risks

Since June, when Ambac was stripped of its "AAA" ratings,the insurer's ability to write new business has come to a virtual standstill. Continuing deterioration in housing and the economy, meanwhile, makes it more likely the company will face more claims on mortgage debt it has insured.

2)Broken Business Model/Negative NAV value

The company's business model is essentially broken, it's not going to be able to underwrite any significant volume of new business at any point in the foreseeable future, which probably suggests runoff as being at least the near-term and intermediate status quo for them," said David Havens, desk analyst at UBS in Stamford, Connecticut. Under Ambac's balance sheet, the company when to factor in Deferred tax benefit of $2.8billion, in which in order for this asset to be realised, it has to have an earnings that justify such a benefit. As such, with losses in its income statement, JP Morgan have to assume that this so called tax benefit has to be written down by 50% in doing so resulting in a negative net asset value of $3.24
To summarise Ø Ambac is a company with a broken business model saddled with substantial liabilities and negative tangible equity


3)Effects of the downgrade (http://www.istockanalyst.com/)
The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY. Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any further downgrade could accelerate the decline.
Prior to Ambac's downgrade, T.J. Marta, a fixed-income analyst at RBC Capital Markets, said a downgrade of the company would lead to downgrades of all the municipal bonds it insured. Subsequently, it will become more difficult for cities, counties and other local entities to issue debt for building projects
The more profound fissure opening is the potential for the loss of the triple-A guarantee rating for market leaders MBIA and Ambac, which would virtually put them out of business. Their business model depends on their ability to put the imprimatur of a triple-A rating, effectively performing the modern-day alchemy of turning leaden credits into gold.


4)Not too big to fall.


Ambac sold insurance worth about $60 billion of corporate,sovereign, asset-backed and other debt, mainly using credit default swaps. As concerns about the company's health increase, investors and banks that bought protection from Ambac may unwind their deals to offset the risk of Ambac's failure. With no news on any bailout or any government intervention, this insurance company is deemed not "too big" to fall. Suffice to say with many on going problems in the US financial world, companies like AIG/Fannie/Freddie all wanting a piece of the $700billion bailout, and with regards to the fall in Lehman brothers, this company is more or less on its own.

5) Long term negative effects

One rating agency published that “…the bulk of ultimate losses will be recognized over a longer period of time, as evidenced by cumulative loss levels which are currently averaging 1.5% to 4.2% across the vintages reviewed.” They further confirmed that, “Current losses are still low because loans remain relatively unseasoned in more recent vintages and partly because modifications may also be slowing down loss recognition. In other words, if one were to invest his or her money in this stock, one has to hold for a very long LONG time.


With a mountain of problems facing the company, there is always that small ray of hope that the company might overcome their problems and likewise become a gem for me to hold.

Therefore, Four glaring factors that invoke me to take note. They are

++Eye of Buffet++

1) Warren Buffet set his eyes on the company, he wanted to offered a second level of insurance on their municipal bonds of up to $800billion early as Feb 13, 2008 for three insurance company including Ambac. So the question here is, why would Buffet want to establish such a move? Did he see value in these companies such as Ambac? Or did he just want the high premiums by backing muncipal bonds because he is confident that the company will be able to pay the premium first regardless of what happens to their other assets and subsequently to their ratings?

++Reversal of Upgrade++

2)The fact that Moody downgraded the company to baa1 junk status, without doing an analysis of their portfolio goes to show that there is a possibility that Moody might just regrade Ambac again in the future.Ratings reversal upside potential, if Ambac were to achieve a AAA IFS rating from both Moody’s and S&P at some point going forward, I believe the stock may be able to outperform analyst's estimates.

++Doing all they can++
3)Yes they are! What do you do if your company is saddled with a huge amount of toxin assets, but have a good business model that has tested the passage of time for about 80 over years?
You first have to settle to concern of solvency. Because your assets are negative after factoring out those toxin sub-prime related instruments. Your liabilities do not decrease, so that gives raise to this liquidity gap. Which in turn downgrades your rating as a insurance company. Therefore, i listed down what they are doing or have been doing so far for the company.

  • Ambac has received approval from the Wisconsin Office of the Commissioner of Insurance (OCI) to utilize the resources of AAC to resolve this liquidity gap. They will continue to work collaboratively with the OCI as we seek to reduce balance sheet risk in an orderly fashion. Wisconsin Insurance Commissioner,is Ambac's main bond insurance subsidiary to make up this shortfall.

  • Ambac continues to pursue a number of loss remediation strategies in its direct RMBS portfolio. Those strategies allowed Ambac to reduce its expected ultimate loss by approximately $260 million in the second quarter of 2008, and they are working diligently to expand on those efforts

  • In addition, they are in active discussions with CDO of ABS counter parties. The successful resolution of these discussions would result in decreased uncertainty related to these exposures and likely would result in an improvement in their capital position. Collateralized debt obligations (CDOs) are an unregulated type of asset-backed security and structured credit product.

  • Aggressively managing their mortgage-related exposures and have made demonstrable progress in reducing the risk in their insured portfolio. Ambac’s financial strength will continue to improve as we de-lever and commute and re mediate their exposure.

4)I already missed out once! ABK traded at $1.30 as at 1st July 2008. I hesitated to buy , with obvious reasons. Then lo and behold, the stock traded at $8.06 in Sept and as of now at Nov 11 2008 it has fallen back to $1.46+ per share. Time to buy? Maybe ..maybe not. Because of the fact that ABK can raise to $8.06 , already breaks my heart and cause me to feel great regret for not buying. I don't want this to happen again.

+++Other positive points to take note of++++

One potentially bright point for Ambac's liquidity would be
if it makes agreements with counter parties to tear up contracts
on risky residential mortgages. Ambac said in a response to Moody's downgrade on Wednesday
that the rating agency failed to account for the early termination of some of its contract exposures, and for federal efforts to improve the liquidity of financial institutions. "Something that could change the game and prevent them from becoming even more unhealthy, would be to commute a substantial number of the chunky ABS CDO exposures and risks they have,"
said UBS' Havens. "That could very substantially improve their prospects." http://www.reuters.com/article/marketsNews/idINN0757391420081107?rpc=44


Strategies

  • Strategy 1: ABK trades at $1.48 per share at Nov 12th 2008. One has to wonder why hasn't the share price goes go all the way to zero? Just like in the case of Indy Mac. Could there be a slight possibility that they might surivive this crisis? Who knows? I believe the price at $1.48 per share has factored in lot of these negative news, like poor prospects,more losses, negative NAV, insolvency. To play safe i would like to go in at a price of $1.30-$1.10, would cut loss at $0.80. Take profit at $3.40

  • Strategy 2: Since ABK's rating have already been dropped to bbba1, i could wait on the sidelines and see whether the company is able to survive the effects of such a downgrade. Because my main concern is solvency, are they able to survive and not go bankrupt on me.

  • Strategy 3: Study the technical analysis throughly , enter when MA 10 and MA 40 cuts, stocastics indicates an upside cross over and RSI states upside potential. Or just wait for another huge bear market and then scoop up the shares from there.

  • Strategy 4: Wait for any government intervention to be factored in. Beacuse, like i said, the thing that bothers me the most is the company's solvency. If there is, government intervention in the future, i would be satisfied paying a price of $1-$2 per share, no more then that of course.

I know, im not following any of Buffet's value principals and the chances of me picking up a fake gem is quite high. Im i speculating ? Probably..but i already estimated the probability of the upside and the downside. And its looking good at $1.46 per share.





Market Gem : China Milk

by November 04, 2008
Core Business
Supposily to be the largest company specializing in the production of pedigree bull semen, pedigree dairy cow embryos and raw milk in the growing dairy industry of China. Four areas of growth
1) Produces bull semen for sale to other farmers and insitutions
2) Using cow waste to make fertilizers and sell it
3) Soon to produce their own dairy products
4) Sale of raw milk

Risk:
Their cattles are reared in farms located in Daqing in Heilongjiang Province in the PRC.
Natural calamities such as drought, snowstorm, flood or other natural disasters would have a significant adverse effect on their operations and business if there is significant loss of their livestock or damage to their facilities that would disrupt their production processes.
Their business is highly dependent on the health and physical condition of their herd. Sickness or disease infection may lower the weight, milk yield and reproduction capability of our cows as well as the quality and quantity of the semen produced by our sires. They indicated that they have in place stringent health management
and hygiene control measures, which encompass the critical processes of processing and collection of
bull semen and embryos, milking of dairy cows, the sanitisation of cattle sheds and farms, as well as the
monitoring of the health condition of their herd and staff.
In addition, any unfortunate events that have negative impact on the dairly industry in China such as the recent Milk scandal, affects demand.


Is the company focused?
Focuses on breeding cows, selling the raw milk , creating more quality cows using semen, selling fertilizers also.
Profit comes mostly from semen.



China’s Demand for milk:
"So great is the demand for milk and milk products that China’s dairy industry has been experiencing a shortage situation of raw milk, primarily due to the inability of the local dairy industries to meet demand. In China, the average annual milk consumption per capita rose from 2.5 kg in 1984 to 14.3 kg in 2003" This pharse was stated in their annual report. However as we all know, the recent scandal has cause abit of a hicup in the Dariy industry of China. The important questiona to ponder is, will the Dairy Industry in China ever recover? How long will the downtrend in this industry last?
http://chinamilk.listedcompany.com/newsroom/20080926_193047_G86_B2C597F8D5621CE4482574D0003EAFAD.1.pdf

Future Growth Drivers
The company is improving their herd size to drive higher milk yield
• Continue to enhance internal breeding programme
• To import another 3,000 Australian Holsteins around June 2008
• Explore acquisition opportunities; targets identified
• In negotiation with a government-owned bull semen producer in Heilongjiang Province for a possible acquisition
Increase production ofquality bull semen and cow embryos
• Focus on growing/importing quality Holsteins and bull sires so as to raise production of bull semen and cow embryos, which Generally command higher margins
• Commercialize gender-controlled bull semen and cow
Embryos Move downstream to process Raw milk
• To commence milk processing for an existing major customer as soon as possible
There is a rapidly growing penchant for international food and beverage concepts which use a lot of milk and milk products. The PRC government has also been promoting the need for nutrition as evidenced by the government’s nation-wide School Milk Programmed.


Economics of scale:
Possibly the biggest company that has dairy farms in China.
Possible Competitor is Fonterra
With 9 farms in the cities of Daqing and Harbin, we own an impressive herd of 15,0412 pedigree bull sires,
Our Group owns a total of 100,000 square meters of cow-sheds, 125 million square meters of grassland and 1.83 million square meters of farm land

Market Leadership:
More than 700 model dairy farms have been established around Beijing and Tianjin, with 280,000 cows, according to the Chinese government. Plans are in the works for hundreds of other similar farms, and there are plans to speed up the use of selected dairy genetics

Focus a lot on research:
At China Milk, they placed a strong emphasis on research and development.

(From their annual report)
We collaborate with 12 external researchers and technicians from reputable research institutes such as the HLJ August First Reclamation University in the PRC, working on various initiatives to improve our efficiency, productivity and product quality.

These initiatives include the increasing of milk production in our cows; raising protein levels and fat content of our raw milk; increasing the success rate of embryo transplants; as well as enhancing the quality of embryos and Total Mixed Ration of cattle feeds.

Our collaboration with external researchers has also allowed us to process liquid manure from cattle, for the production of organic fertilizers that are biodegradable and environmentally friendly. These composite fertilizers are used in our farms, as well as sold to other customers throughout the PRC since February 2002.

Comment: Their economic moat seems to be fairly strong, though one must give this company more time to build up it's economic moat in the coming future. Suffice to say there are no competitors so far that can match up to the size and scale of China Milk.


Management holding their own shares?
The information can be found in our Annual Reports. And announcement through SGXnet will have to be made when management and directors are buying/selling shares.
At the moment, none of the management and the directors have been buying/selling shares since IPO.
Should you have any further queries, please feel free to contact me.

Regards
Martin Choi

Chief Financial Officer

Conservative debt
Long term liability: 1,074,869,000
Net Profit for the year 2008: 480,600,000
Comment:
Management is able to pay off total liabilities within 3 years if they are able to continue to yield NPAT figure in 2008. Suffice to say their reserves of 1.4billon RMB is also able to use if NPAT can’t cover.

ROE
Now looking at their ROE figures, im kind of impressed with the results. The first two columes are empty beacuse, im generally lazy to caculate ahah. But with ROE exploding to figures like 26%, i don't think there should be anything to worry about with regards to management's ablility to use cash to their best potentials.

Quality Net Profit after Tax
Check their depreciation, is it acceptable?
Looks acceptable
The Group’s depreciates property, plant and equipment on a straight-line method over the estimated useful lives,
starting from the date on which the assets are placed into productive use. The estimated useful lives reflect the
directors’ estimate of the periods that the Group intends to derive future economic benefits from the use of the
Group’s property, plant and equipment. The carrying amount of property, plant and equipment is disclosed in
note 12.

R&D as an expense or an asset?
Nil
Any one-off Charge or profit?
Yes, financial derivatives an increase of 877% from 2007. Take note, that once this is discounted, its Net profit growth is only a mere 8% and not 23%.
Still its intrinsic holds at least $1.00+
In addition , their net profit increase from 2007 to 2008 is calculated as $9million SG dollars or 42 million RMB, this doesn’t include the increase in financial cost of which I have no idea how it is link to the increase in the account change in fair value of F.I


Scanning of RED flags in the company
Is there a growing gap between cash flow from operation activities and earnings (cash flow has to be higher then net earnings for refinancing purposes )
2008 / 2007 and 2006 (All in terms of '000)
Cash flow: 402,903 / 381,350 and 289,850
Net income: 480,607/ 378,500 and 272,600
Not a problem here.

Net Earnings is growing faster then sales
Not a problem here
Disproportionate increase in account receivable vs Sales increase
Not a problem here

Unusual increase in inventories vs. sales increase
Sales: 2,217,316 and 1,800,000
Inventories: 149,944 and 134,377
Not a problem here

Any large write offs?
Nope

Quality of the earnings
-Did they include profits from the past periods? (No)
-Under provide for future expenses with current sales, bad debts?(No)
-Increase in reliance of earnings sources apart from main business? (No)
-Cutting pay in workers, employees, R&D etc? (No)

Capital Expenditure
The gorup have been spending alot on Capital Expenditure, this is vital for the company to no.1 establish their economic moat no.2 to get ahead of competiton no.3 to build up brand name and improve on their margins/net profit/revenue etc.
Common sense depicts that , the nature of their business does not require much capital to replace machines , factores or euiptment just like manufacting companies. Therefore , this is not a capital expenditure intensive company.

Final Comments
Beacuse finnancial ratio keep changing in accordance to share price, i decide not to post any ratio from now onwards. But buying China Milk from 0.80cents per share and below should be have a decent margin of safety with high potential to the up side.

Using Adam's koo EPS growth model
Intrinsic is $1.11 based on estimated no growth scenario and 0.13 dividends
At least $1.00 per share based on 0.10 with 5% growth.
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