Portfolio
Oh well..goodbye.
As much as it pains me to document this for my future use. It is necessary to learn from the mistakes of my stock holdings so far.
Divested China Milk 3th November 2009
Reasons:
-Revenue derived from the sale of our pedigree bull semen dropped by approximately 91.6%. -China Milk lost almost all its margins -Operating Profits drop by 80.8% -Cannot see what the management is doing to overcome the obstacles they are facing.
Did not study company’s external factors-Government impact, their suppliers.
-The drop of the raw milk price was mainly attributable to the raw milk buyers/milk processers exercising more testing/quality procedures which have led to their costs going up and that they are reluctant to absorb such costs; and on the other hand, the influx of cheaper imported milk powder.
- More stringent government controls on the quality of raw milk resulting from melamine incident in China lead to higher costs of keeping dairy cattle by local farmers.
-Increase in cheaper imported milk powder was mainly caused by excess supply of milk powder from overseas which resulted from excess raw milk being produced in overseas countries. This has also caused the decrease in the raw milk prices abroad too.
Did not study their competitors, not only locally but aboard.
-Intense price competition by local and overseas producers of bull semen and cow embryos will continue to keep prices of China Milk’s bull semen down and the demand for the Group’s cow embryos low
- Imported milk powder is now selling in China at more competitive prices => milk processors may choose to process milk products with the imported milk powder rather than purchase raw milk from farmers.
-There are also some advantages that milk powder possesses over raw milk, for example,
i.) as long as you have bought the milk powder from a reputable source, then there would not be any quality issues;
ii.) Easier shipping and transportation; and
iii.) Longer shelf-life as compared to raw milk which is significantly more perishable.
Did not apply buffet’s rule no.1: Invest in companies with long good record history.
Did not apply buffet’s rule no.3 properly: Know the industry, is it price competitive.
No doubt, the milk industry is very lucrative in China, but competitors overseas outshine China Milk taking away its future growth prospects, moreover management don’t seem to be doing anything to tackle this problem.
China Milk going forward process
-Focus on herd size expansion
-Actively participated in marketing events such as food fairs, sampling booths at supermarkets and promotional activities at shopping malls => showcase Yinluo brand of dairy products and gather consumer feedback
-Adopting an effective cost management strategy as the Group envisions lower revenue and smaller margins ahead, in view of the challenging business environment
Willing to buy back again, if the company can get back its margins &Operating profits in the coming quarters. The company needs to show me it is able to overcome competitors & their advantages, to take back their market share.
Divested SinoTechFiber 3th November 2009
Did not act fast enough when fundamentals were dropping.
Focused too much on their high profit margins, contracts with the government, high ROE all these are too good to be through. Especially its industry (Textile) where competitors very easily come in taking away its profits and future growth. In addition, consumers in this industry is also very flicked minded, certain times they demand cotton then fibre then linen.
Mistake learnt: Study the industry properly! Have a long term vision (2-3years from now) of where the company will be given that it is operating in this industry, what are they doing to keep it their edge?
Divested China Essence 3th November 2009
The business involves selling potato starch/protein and products related to that commodity.
The company is expanding very rapidly since the beginning of this year, the expansion is so rapid that a huge chunk of their cash reserves are gone and there have to take up extra loans and debt related instruments. A quick look at the latest balance sheet/cash flow highlights indicates the following
-Cash balances from FY 08: 484.3million drops to FY 09:168.3million
-Gearing shot up to 61.8% in FY 09 from 36.5% in FY 08
-Debtor Turnover up 77 days from 34 days
-Inventory turnover up 85 days from 53 days
-Operational cash flow drops from a positive 217.3million to a negative 62.5million
-Net decrease in cash flow 314.3million due to heavy investment inputs
Despite all these, this is the result they give me,
-Revenue drop 36%
-profit drop 58%
-Company losing its margins.
-Gearing is not improving, increased to 61.9%.
-Their growth prospects do not excite me any longer.
Lessons learnt here: Be vigilant and take time to update all released reports by the company, especially those small to medium size firms/ high growth firms/start ups.
-Best is still stick to Buffet’s 1st rule: Invest in good long track record companies.
Company’s argument
-Current slowdown in demand is temporary
-Long term demand for potato starch remains firm due to its wide application in food and non-food industries
-Earnings supported by China Essence’s wide range of other potato starch-based and by-products
-China Essence continues to expand its distribution network in China, especially in Guangdong and Fujian in the Southern region; as well as Shanghai
Perhaps then the company will prosper through its good local distributors and product quantity coverage, in the mean time; all those expansions do not seem to yield any good result by far, debtor turnover is what worries me.
Total Invested: $4347
Total Loss Accepted: $1437
Final word: Perhaps I’ve made another mistake? Are my reasons for divesting these stocks too short sighted? Are my initial reasons for holding on to these stocks like
Huge cash reserves
Good economics of scale (Didn’t study enough)
Strong economic moat (Did not understand enough, how strong it is)
Low PE ratio of 7 times, acceptable PBV of 1.9, Strong ROE
Also too short sighted?
Any advice?
Divested China Milk 3th November 2009
Reasons:
-Revenue derived from the sale of our pedigree bull semen dropped by approximately 91.6%. -China Milk lost almost all its margins -Operating Profits drop by 80.8% -Cannot see what the management is doing to overcome the obstacles they are facing.
Did not study company’s external factors-Government impact, their suppliers.
-The drop of the raw milk price was mainly attributable to the raw milk buyers/milk processers exercising more testing/quality procedures which have led to their costs going up and that they are reluctant to absorb such costs; and on the other hand, the influx of cheaper imported milk powder.
- More stringent government controls on the quality of raw milk resulting from melamine incident in China lead to higher costs of keeping dairy cattle by local farmers.
-Increase in cheaper imported milk powder was mainly caused by excess supply of milk powder from overseas which resulted from excess raw milk being produced in overseas countries. This has also caused the decrease in the raw milk prices abroad too.
Did not study their competitors, not only locally but aboard.
-Intense price competition by local and overseas producers of bull semen and cow embryos will continue to keep prices of China Milk’s bull semen down and the demand for the Group’s cow embryos low
- Imported milk powder is now selling in China at more competitive prices => milk processors may choose to process milk products with the imported milk powder rather than purchase raw milk from farmers.
-There are also some advantages that milk powder possesses over raw milk, for example,
i.) as long as you have bought the milk powder from a reputable source, then there would not be any quality issues;
ii.) Easier shipping and transportation; and
iii.) Longer shelf-life as compared to raw milk which is significantly more perishable.
Did not apply buffet’s rule no.1: Invest in companies with long good record history.
Did not apply buffet’s rule no.3 properly: Know the industry, is it price competitive.
No doubt, the milk industry is very lucrative in China, but competitors overseas outshine China Milk taking away its future growth prospects, moreover management don’t seem to be doing anything to tackle this problem.
China Milk going forward process
-Focus on herd size expansion
-Actively participated in marketing events such as food fairs, sampling booths at supermarkets and promotional activities at shopping malls => showcase Yinluo brand of dairy products and gather consumer feedback
-Adopting an effective cost management strategy as the Group envisions lower revenue and smaller margins ahead, in view of the challenging business environment
Willing to buy back again, if the company can get back its margins &Operating profits in the coming quarters. The company needs to show me it is able to overcome competitors & their advantages, to take back their market share.
Divested SinoTechFiber 3th November 2009
Did not act fast enough when fundamentals were dropping.
Focused too much on their high profit margins, contracts with the government, high ROE all these are too good to be through. Especially its industry (Textile) where competitors very easily come in taking away its profits and future growth. In addition, consumers in this industry is also very flicked minded, certain times they demand cotton then fibre then linen.
Mistake learnt: Study the industry properly! Have a long term vision (2-3years from now) of where the company will be given that it is operating in this industry, what are they doing to keep it their edge?
Divested China Essence 3th November 2009
The business involves selling potato starch/protein and products related to that commodity.
The company is expanding very rapidly since the beginning of this year, the expansion is so rapid that a huge chunk of their cash reserves are gone and there have to take up extra loans and debt related instruments. A quick look at the latest balance sheet/cash flow highlights indicates the following
-Cash balances from FY 08: 484.3million drops to FY 09:168.3million
-Gearing shot up to 61.8% in FY 09 from 36.5% in FY 08
-Debtor Turnover up 77 days from 34 days
-Inventory turnover up 85 days from 53 days
-Operational cash flow drops from a positive 217.3million to a negative 62.5million
-Net decrease in cash flow 314.3million due to heavy investment inputs
Despite all these, this is the result they give me,
-Revenue drop 36%
-profit drop 58%
-Company losing its margins.
-Gearing is not improving, increased to 61.9%.
-Their growth prospects do not excite me any longer.
Lessons learnt here: Be vigilant and take time to update all released reports by the company, especially those small to medium size firms/ high growth firms/start ups.
-Best is still stick to Buffet’s 1st rule: Invest in good long track record companies.
Company’s argument
-Current slowdown in demand is temporary
-Long term demand for potato starch remains firm due to its wide application in food and non-food industries
-Earnings supported by China Essence’s wide range of other potato starch-based and by-products
-China Essence continues to expand its distribution network in China, especially in Guangdong and Fujian in the Southern region; as well as Shanghai
Perhaps then the company will prosper through its good local distributors and product quantity coverage, in the mean time; all those expansions do not seem to yield any good result by far, debtor turnover is what worries me.
Total Invested: $4347
Total Loss Accepted: $1437
Final word: Perhaps I’ve made another mistake? Are my reasons for divesting these stocks too short sighted? Are my initial reasons for holding on to these stocks like
Huge cash reserves
Good economics of scale (Didn’t study enough)
Strong economic moat (Did not understand enough, how strong it is)
Low PE ratio of 7 times, acceptable PBV of 1.9, Strong ROE
Also too short sighted?
Any advice?
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