Graham goes to China.

ARHH, EEEeee, omg.. NO!...shit you.. enough with the Shouting/Screaming/Squealing, not much good can be said S-shares nowadays, from inflating accounts to runaway CEOs , S-shares has indeed made an infamous impact to investors all over Singapore, especially value investors out there who taught they bought it cheap, but it went even cheaper on them.

Yet despite all the negative sentiments and great avoidance, could there be value in these S-shares that are soo oversold to the point where market caps are way below Net current asset value? Could the testing of the theory "The best time to find a value buy is when fear is the greatest" be especially applied to S-shares, since people are indeed very fearful of this part of the investment world?
If so what should one do , if one is considering placing some of their investment capital into these shares?

I attempt to answer these questions by using Benjamin Graham's Net Current Asset Value Strategy.

Finding low-risk stocks should be priority number one in this market. Benjamin Graham, considered by many to be the architect of fundamental analysis, described a strategy for identifying deep value stocks, which in his view are low-risk candidates, in his book, “The Intelligent Investor,” published in 1949. Graham’s strategy, dubbed the “net current asset value” approach, apparently works very well.

One research study, covering the years 1970 through 1983 showed that portfolios picked at the beginning of each year, and held for one year, returned 29.4 percent, on average, over the 13-year period, compared to 11.5 percent for the S&P 500 Index. Other studies of Graham’s strategy produced similar results.

Despite the impressive results, Graham’s net current asset value (NCAV) approach is relatively unknown to individual investors. That’s probably because finding stocks meeting Graham’s requirements requires some digging or perhaps for such a long time, no or very little stocks were trading that low.

No Web site provides tools to screen for NCAV stocks. However, it’s not hard, and anyone willing to devote a couple of hours to the task should be able to come up with a few candidates.

Graham's Value Strategy Graham’s NCAV strategy calls for buying stocks trading below their calculated value. Many value stock selection strategies can be described similarly. What’s different is how Graham determines value. Book value, the usual value measure, is a firm’s assets minus its liabilities. Graham does the same calculation, but only includes current assets (cash, inventories, and accounts receivables) in the computation. He ignores long-term assets such as buildings, equipment, patents, and the like. However, he still counts all liabilities including short- and long-term debt, and everything else that appears in the liabilities column of the balance sheet.

Thus, net current asset value is current assets minus total liabilities. Graham’s NCAV strategy calls for buying stocks trading at two-thirds or less of their net current asset value.

That’s a stringent requirement, since most companies have negative NCAVs. But Graham was looking for firms trading so cheap that there was little danger of falling further. His strategy calls for selling when a firm’s share price trades up to its NCAV.

Finding Graham's Value Stocks According to Graham, some of the companies meeting his NCAV criteria could end up failing, so he recommended buying a large number of stocks to diversify the risk. the rest of the Article is from:

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So, after reading that article i was thinking, if Graham was here right now, and he was taking a good look at these S-shares, which of these shares will he pick according to his NCAV strategy?

Therefore, using the formula given (Total Current assets - Total Liabilities)/ total no. of shares i went to look at 40 over S-shares, barring and deleting the ones i already know that didn't meet Graham's NCAV etc Cosco, i accumulated the results via this excel file.

Excel file sharing link

Based on the excel file, the second table shows a total of 12 of S-shares that meet Graham's requirement,while the third and final table shows only 7 out of 12 S-shares get selected in the final portfolio of proposed S-shares to diversify upon
How these 7, got selected was based on 3 criteria that would hopefully increase the chances of landing a "higher quality" S-shares that also satisfy Graham's requirement. The 3 criteria are as follows..

1)They have to yield in positive net profit and cashflow for the whole of FY 2008 and this year's 1st quarter results despite current economic downturn! This is to make sure that as of now, their current are not affected by negative net profits burning away the cash reserves. Sino-Environment and sunshine with massive losses to their net profits for FY 2008 failed these criteria and didn't make it into the list.

2)Current asset components has to be more of cash and less other accounts especially receivables. Receivables are accounts that people owe to the company, so by avoiding s-shares whose net assets consist mainly of receivable we avoid a situation when these S-share's receivables are not received thus turning into bad debts and write-offs. Take for example, of the 15 S-shares that pass Graham's test, China Angel Food and Pan Hong Property group didn't make it into the list because their current assets consist mainly receivable and the latter has other accounts like "property under development" in their current accounts.

3)Their business model must make sense and their websites are properly managed/updated. Even simply things like keeping a website updated like broadcasting the latest annual report cannot be achieve, how can the firm take on big stuff like expanding, surviving the current crisis if small simple things cannot be managed well?
With that said, some risks involved in diversifying into the 7 S-shares even though it was filtered by both Graham's formula and me,
-Include currency risks,
-Future use of the current assets by management,
-And of course probability of fraudulent data presented by the firms due to lack of cooperate transparency is still quite high, especially with recent news regarding some S-shares.


One problem i find about using Graham's NCAV strategy is that , if the formula only favour firms that have huge current assets, it leaves out firms that are expanding or hold higher amounts of long term assets..I'm curious about,what is the management going to do with those cash or current assets? Why aren't they expanding or using the assets to improve their economic moat? Isn't that prove that management has no clue as to how to invest their current assets? The NCAV has already factored out ChinaMilk/China Essence/ which i deem a few good firms with a vision and are expanding.

Nevertheless, this current crisis is soo server that it FINALLY presents the opportunity to apply Graham's NCAV on some of these shares, i will keep track of these top 7 S-shares and calculate how much they will yield after a year or so.

Any thoughts on the 7 S-shares? Do let me know :] Happy investing.

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