News Highlight (3)

by May 31, 2009
Mature man earns $800,000 in capital gains and more
Full time retail investor Isaac Chin, 60 , was waiting on the stock market sidelines with $3million in cash when the local benchmark STI sank to a record low in march.
He decided that the market has bottomed out and backed his judgement by investing the full $3m in four REITs that month.

"When the STI hit 1,457 i bought heavily into A-Reits, CapitaMall Trust (CMT), Suntec Reits and CapitalCommerial Trust (CCT) he claims. "At that time, my friends advised me to wait for better bargains should the STI hit the 1260 level as predicted by soo many" My rationale was that a further 'discount' of 200 points was good but unnessary as the STI had dropped from about 3900 a year ago. I was proven correct.
The sum of $3million came from loans from two banks in August last year against his thee condominium units , which werw valued at about $6million then. Based on the interest charge of 2% on the loan, the monthly instalment works out to about $20,000. This amount includes the principal and interest repayment for 14 years.

"I pay a 2% interest on the loan based on the reducing valance. The four were bought at very attractive prices with dividend yields averaging 10-12%. Simple mathematics taught me that i can make a difference of at least 8% per annul with a further potential for enormous capital gains when the economy and share prices recover in a few years' time", he said.

He said that he had bought A-Reits at $1.03, CMT at 97c , Suntec Reits at 65c and CCT at 0.62c a unit. He added that he liked the four Reits as their dividends are non-taxable and they represent prime real estate here. As of Friday 29Th May 2009 , all Four Reits rose in share price giving him a capital gain of about $800,000.
Taken from Weekend Business Times 30-31May 2009
Possible lesson learnt from here.
1) Have guts, to invest when others are fleeing
2) Find low interest borrowing methods and invest in financial instruments that give high yields
3)Benefit then from the spread.
4) Know what you re doing. In terms of weigthing risks and returns

CCT update 22nd May 2009

by May 22, 2009
What are rights issues?
Under a secondary market offering or seasoned equity offering of shares to raise money, a company can opt for a rights issue to raise capital. The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A rights issue is offered to all existing shareholders individually and may be rejected, accepted in full or accepted in part. Rights are often transferable, allowing the holder to sell them on the open market.
To issue rights the financial manager has to consider:
Subscription price per new share
Number of new shares to be sold
The value of rights
The effect of rights on the value of the current share
The effect of rights to existing and new shareholders
A right to a share is generally issued on a ratio basis (e.g. one-for-three rights issue). Because the company receives shareholders' money in exchange for shares, a rights issue is a source of capital.
Rights issues may be underwritten. The role of the underwriter is to guarantee that the funds sought by the company will be raised. The agreement between the underwriter and the company is set out in a formal underwriting agreement. Typical terms of an underwriting require the underwriter to subscribe for any shares offered but not taken up by shareholders. The underwriting agreement will normally enable the underwriter to terminate its obligations in defined circumstances. A sub-underwriter in turn sub-underwrites some or all of the obligations of the main underwriter; the underwriter passes its risk to the sub-underwriter by requiring the sub-underwriter to subscribe for or purchase a portion of the shares for which the underwriter is obliged to subscribe in the event of a shortfall. Underwriters and sub-underwriters may be financial institutions, stock-brokers, major shareholders of the company or other related or unrelated parties. The Panel’s guidance covers both non-underwritten and underwritten rights issues.

Basic example
An investor: Mr. A had 100 shares of company X at a total investment of $40,000, assuming he purchased the shares at $400 per share.
Assuming a 1:1 rights issue at an offer price of $200, Mr. A will have the option to subscribe to additional 100 shares of the company at the offer price. Now, if he exercises his option, he would have to pay an additional $20,000 in order to acquire the shares, thus effectively bringing his average cost of acquisition for the 200 shares to $300 per share ((40,000+20,000)/200=300). Although the price on the stock markets should reflect a new price of $300 (see below), the investor is actually not making any profit nor any loss.

What this means is that you have been “forced” to pump in more of your money just to maintain your ownership of the company.

The company: Company X has 100 million outstanding shares. The share price currently quoted on the stock exchanges is $400 thus the market capitalization of the stock would be $40 billion (outstanding shares times share price).
If all the shareholders of the company choose to exercise their stock option, the company's outstanding shares would increase to 200 million. The market capitalization of the stock would increase to $60 billion (previous market capitalization + cash received from owners of rights converting their rights to shares), implying a share price of $300 ($60 billion / 200 million shares). If the company were to do nothing with the raised money, its Earnings per share (EPS) would be reduced by half. However, if the equity raised by the company is reinvested (e.g. to acquire another company), the EPS may be impacted depending upon the outcome of the reinvestment.

CCT ISSUES RIGHTS
CapitaCommercial Trust (C61U.SG) said Friday that it will offer 1.4 billion units under a rights issue to raise about S$828.3 million. The trust will offer one rights unit for every existing unit at S$0.59 each, it said in a statement. Units of CapitaCommercial closed Thursday at S$1.06 each. Proceeds will be used to reduce borrowings, and for general corporate and working capital purposes. CapitaCommercial is managed by CapitaCommercial Trust Management Ltd., which is an indirect wholly owned unit of CapitaLand Ltd. (C31.SG). The rights issue is fully underwritten. DBS Bank Ltd., Cazenove & Co. (Singapore) Pte. Ltd. and United Overseas Bank Ltd. are the joint lead managers and underwriters, the trust said.

The reasons for doing so is to reduce their gearing, improve financial flexibility by boosting its balance sheet and improving its credit profile. According to Daiwa Institute of Research, CCT is building up capacity to refinance debt and creating a buffer against potential asset write-downs. What this simply means, is that CCT’s assets (their buildings) are falling in value and are raising more capital in order to build more confidence with their existing or future lenders and to prevent early redemption of loans for etc their $885million due next year in 2010.

WHAT TO DO NOW?
Basically there are only three decisions for the unit holder to decide. Either..

1)Activate your rights issue

2)Sell your rights issue.

3)Sell everything.

Do give me the opportunity to explain the process of each decision in detail to the best of my knowledge :)

Take for example you bought CCT at 0.70 per share in march 2009, say you bought 10 lots, spends a total of $7000 barring out all commission and extra transaction cost to make things simple. So, initially your expected yield from CCT for FY 2009 is $1200 which is 17.1%

Now, if you choose decision 1) which is to activate your rights issue, you have to spend another (0.59*10,000)= $5,900. The rights issue share price of 0.59 represents a 44% discount to the stock’s last traded price of $1.06
And a discount of 61% discount to their new estimated calculated NAV figure of $1.51 after taking into account the revaluation and completion of the rights.

Therefore in total you spent $12,900 in order to maintain both your expected yield % for FY 2009 which is $1200 and margin of safety to NAV. And if you have noticed, the % yield has dropped from 17.1% to a mere 9% , this is because i did not factor in any positive effect coming from the extra capital that will help CCT this year or in the future, just to be conservative. Therefore the downside here is, the opportunity cost , what you can do with the $5,900 if you didn't put it into the rights?

Ok, now.. if you choose decision 2) which is to sell your rights issue, then you need not spend $5,900 and he initially get the extra profit if he sells his right at $1.06? WRONG! The stock market will not be soo stupid to maintain the share price of CCT at $1.06, my good guess is that the market will pressure the share price of CCT to about $0.80-0.91 at best. So, if we assume that the share price of CCT after their trading halt is lifted at $0.80, the profit made from selling his rights would probably amount to ($0.80-$0.59= $0.21*10,000 = $2,100). Looks like a good decision to make right? Can save the extra $5,900 plus get another extra $2,100 from selling his rights. However... if he decides to sell, he compromises his dividend yield for FY 2009 and the future years for holding CCT. His expected dividend yield will fall 50% from getting $1200 to getting only $600 for FY 2009 and for the rest of the years. Your margin of safty from NAV was intially 75%, will drop to 53% , this then is evident of dilution.

Finally, if you choose decision 3) which is to sell everything, you probably earned, assuming share price of CCT is 0.80 after trading halt , [(0.10*10,000)+(0.21*10,000)]= $3,100 , you get back roughly $3,100 in pure profits and no worries of any exposure to things related to CCT. CCT also will have no worry to you dividends for the future years to come. All is settled,closed and silent

To decide which decision creates more value for the holder, it has to be determined by the investor him or herself. It all boils down to whether you still have confidence in CCT's growth and business model and assets.

As for me, lets look at the reasons why i bought CCT in the first place.

1) Want to gain exposure to Singapore’s rental of Office buildings, mainly banking, insurance and financial sector. In addition, a bit of Malaysia’s rental business
2) This Trust has formidable reputation with strong backing from parent company CapitaLand
3) This enables the trust to easily obtain loans, like the recent $580million using one building as collateral. Refinancing in this credit crunch environment is supposedly not a problem.
4) Past performance reviews consistent increase in revenue/profit margin and operational cash flow. Note that these are bull years, might be misleading.

5) It is also known that the trust builds good relationships with their clients

6) Their clients’ a.k.a tenants are well known and respected, like GIC, Starhub, JP Morgon, Standard Charted Bank (Big client with 15.2%)

7) Potential Upside in the future, involves increasing of rent rates (cause theirs is low as compared to market rates $7.18 vs. $11.40 psf), growth in further acquisitions in the future via Asia or mainly Malaysia.

Soo, since they issues the rights at 0.59 per share..should i choice 1)? 2)? 3)? Hahah :]

News Highlight (2)

by May 17, 2009
Value Hunting
Since the start of the sub-prime meltdown, investors' confidence has been at an all time low. In fact, investors' risk aversion has never been so low in the past decade. The US $/Jap Yen cross rate used often as a risk aversion barometer by the market, reached a historic low earlier this year. For a value investor, such times represent a once in a decade (if not a lifetime) chance to pick up beaten stocks at very cheap valuations. It's like your favorite departmental store offering more then 50% discount. In the financial market however, there appears to be a tendency for investors to go against such a logic. They tend to buy only as prices rise, however they will be better off behaving like the rational departmental store shopper and buy only when assets are on sale.

A tired and proven method of successful investing is to buy stocks selling at a low multiple of their earnings. Earnings are what a company has left after it has paid its expenses, a company selling at low earnings multiples is very often a better value pick then say another which is selling at a high earnings multiple.

Of course we have to compare the price-earnings multiple to its peer companies in the same industry( or/and its historical PE ratios) and also the broader indices to determine whether this company us indeed a value buy. Also a company's price to book value (PBV) is an important measure of a company's value.... those companies trading at a very low price to book ratios tend to outperform those with a high price-to-book ratios over the long run (then again, the chances of a low PBV survival rate for the next 5-10years is lower then those with a higher PBV).

And as many good old value investing books will tell you, having a "margin of safety" is imperative, especially in markets like this where it is possible to buy way below your perceived value of the stock if one is patient. This will not only minimise your gains in the long run when the market recovers-as long as one is patient and disciplined enough to follow this strategy religiously.

Many investors aim to buy only at the market bottom (especially those with limited capital), but many fail simply because it if often harder to predict the market bottom then to chose a value stock. Instead given the current conditions right now when many fundamentally strong stocks are priced at cheap valuations, it might be time to start nibbling on some of these value stocks, rather than attempt to catch the market at its bottom and risk missing out on this opportunity entirely.

Value investing is no rocket science, but it requires more effort than brains to discover the best value stocks out there. Just be warned that value investing is not for those looking for a quick gain. Only those who are patient enough to see out the end of this entire sub-prime crisis and the start of the next bull run will make a decent gain on the value stocks that they have picked up today. Caveat emptor.

Writtern by Jason Low end of 2008

News highlight (1)

by May 11, 2009
News highlight, a special feature to be included in my blog, where i pick certain phrases/paragraphs of notion/ideas/good advise from the news , stored it up for future reference and debates. :] Enjoy..

"Should we be invested at this stage of the equity market? The past may shed some light in helping us to strategies our move. According to a study done by Fidelity, it is shown that historically,bear market inevitably give way to bulls (Duh..) The 12mths following bear market troughs have always with one stock returns averaging nearly 46%. The implication is that we cannot afford to miss out investing during the first year of a bull market. However, we do not know if or when the market has hit its trough, therefore dollar cost averaging is the way to go. My conclusion is that investing should be based on strategy. Look at time-tested and proven strategies such as dollar cost averaging, diversifying to instruments that carry different risks and returns, locking in profits in a systematic manner and letting time win the war for you. Stay away from the new and exotic financial instruments that sounds to good to be true (probably time is need to test how good this investment product actually is) and do not try to maximise your returns . Do not be fixated with a strong view and place all your investment or a significant amount into a particular asset. The stock market will make a complete fool of us at some point. Try not to take an all-or-nothing approach. For example, in the current market conditions, when there are conflicting views on whether the market has hit a bottom, a sensible strategy would be to allocate 50% of your investment to a regular investment programme into growth funds and 20% into regions, countries or sectors that you think have hit the bottom and are now recovering on a firm uptrend. Hold the balance 30% in cash as spare capital. This is to wait for the "real" bottom, in case the market has yet to do so. Using this strategy, investors will benefit regardless of whether this is a bear market rally or the start of the next bull market because you already have investment exposure.

To highlight one final point, i will quote Mr Buffett : "No matter how great the talent or effort, some things just take time. You can't produce a baby in one mth by getting nine women pregnant" Investment requires time in the market."

Writtern by Albert Lam
Invesmtnet Director
IPP Financial Advisor

Update on Cash Rich Portfolio

by May 07, 2009
Update on the top 7 cash rich firms that meet both my requirements and Graham's NCAV.
China HongX bought @ 0.09 as of 7/5/09 is 0.18 total % gains = 111.76%
Sino FibreTech bought @ 0.07 as of today is 0.13 total % gains = 97%
Synear Food bought @ 0.16 as today is 0.255 total % gains = 59.38%
Sinopipe bought @ 0.07 as of today is 0.10 total % gains = 42.86%
China Sky Chem bought @ 0.16 as of today is 0.175 total % gains = 9.37%
China Flexi bought @ 0.13 as of today is 0.14 total % gains = 12%
China Paper bought @ 0.13 as of today is 23.08%
Total average gains soo far = 51.21%

I noticed something, it seems that firms whose shares are traded below their net cash, if they have a larger share holder base etc China Hx with 2.751billion shares they tend to raise faster then those with ..say China Paper with only 475million shares?

This is the trend i observe la.. I also note that because these firms present more risk to investors, therefore more returns are expected and received. Portfolio information is available at http://www.box.net/shared/fp65zs6krg

I'm i happy with my gains so far? Yes of course, who wouldn't? 51% gains within a mth. However as a value investor, i ought to know that these gains might be temporary. I have to be well grounded , stay alert on when to sell, when to buy more, constantly check if there is a change of fundamentals especially their net cash. and have a bit more guts to buy when others are fleeing. :]

Note:China Milk was also bought @0.20, today share price 0.495, which shouldn't be included in this cash rich portfolio. But is included in mine, so an investor should stick to the top 7 picks if he or she wants a purely cash rich portfolio.

On Behalf of S-shares

by May 02, 2009

Again i touch on the topic of S-shares.. many people just love to condemn them, they're dishonest, disgusting, disgraceful etc etc. Nick names... of course, are plenty.. S-shares = Sucker shares/Ass Shares/ Stupid shares. Many claimed them to be worse then the over heated tech stocks that traded in 1999-2000, others, just simply disregard them and run 360 degrees the other way. (Photo edited by Lawrence Law Wen Yong)
Of course, there are good reasons why these are happening to them.. names like FerroChina/Sino-Environment/China dye (Just to name a few) are synonymous with titles like "High receivables" "Going concern?" "Frauds" "Runaway" "Cheap China".

In my honest opinion, its because of these bad happenings-calling of name, shunning them, fleeing 360 degrees the other way, which is why S-shares presents great value to investors in Singapore. If an investor seeking huge gains, were to take time to analysis in detail and determine their comfort level of whats good "corporate governance" "Company's prospects" and "Company's balance sheet/PL sheets" properly to them and have the guts to invest in these beat down S-shares.. huge gains are of course more or less certain! I say these with confirmation because my "Cash-Rich Portfolio" have already risen to almost 80-120% within this one mth.


Yet im not trying to boast or anything, what im trying to say is, that some ppl will say "aiyo, ure lucky thats why.." well maybe i was lucky..but the main reason why i created my "cash-rich portfolio" was because i wanted to test out Graham's theory, and "S-shares likely the only ones to meet his strict requirements and presents these opportunities (probably once in a life time) to young investors like me!" I could also say that, "invest when fear is the greatest" could very well be applied in this notion where everyone simply hates/shuns these shares, presenting great upside to anyone who dares put their money into these shares.


And as a investor/recommend/support of these shares, i get people and friends, they expressing their concerns saying things like I'm taking too much risks ...that i need more experience..i will most probably get burned etc. In my honest opinion again, i think one of the personality of risky investors the one who chase after high flying stocks or blue chips too early relative to those who seek out those "good" companies that are heavily avoided and beaten down to a blup. For example, blue chip SIA trading at $11.20 per share in feb this year, from $11.20 dropped to $9.60 in late march 2009 while S-shares like China Hx dropped from $0.17 to $0.05. So.. if investor A buys 10 lots of SIA , he would have lost $16,000 while investor S would have lost $1200, relatively speaking. So this is the risk im talking about, because i have limited capital, i cannot stomach the lose of 16k, while losing 1.2k is alright to me. A stock such as a blue chip has most of the good news factored into the price already, Thefore, if things changes, there are lots of profits that people can take away, thus leaving holding investors to suffer on the downside.

And with regards to getting burned, yes to be honest.. i have already got burned, bought Sino-Fibre Tech at 0.60 (1.4k) played with warren ts (3k) and possible lose of another (5.6k) IPO, total lose amount to 9k. 9k is indeed alot, but its better to lose 9k now, then lose 900k in the future right? Whats important is, to analysis the reasons why i lose this amount, what can i do to prevent this from happening again, and what lessons have i learnt from here? And of course being young have its advantages! So i don't see whats wrong with taking more risk at a young age, or getting burned for that matter as long as mistake could be learnt not be repeated in my future years and if you think of it, getting burned in S-shares is sort of limited relative to getting burned by blue chips. With that, i urge all young investors to start investing.. not next mth or week or tml..start NOW!!! and if you can't afford Blue chips, there is always the all soo juicy S-shares sector to explore for hidden market Gems!!!

Additional Information

Investing in Gold stock to hedged against the downside of the market. Big Gold companies such as Barrick Gold Corporation (ABX), Newmont Mining (NEM) and Gold Corp (GG) are trading on the New york stock exchange. Advise to act on:
1) Buy only on serve correction $300-$450 per tonne

2) Buy if US dollar collapses in the future, deal to over supply and mounting debts (both trade and balance sheet)

Risker Gold Stocks Royal Gold (RGLD) and Almaden Minerals (AAU)
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