Showing posts with label Portfolio. Show all posts
Showing posts with label Portfolio. Show all posts

FSL a value buy.

by June 13, 2010

First Ship Lease Trust ("FSL Trust") is a Singapore business trust that currently owns a diversified portfolio of 23 modern vessels comprising tankers, containerships and dry bulk carriers. FSL Trust leases its vessels on long-term bareboat charters to international shipping companies and derives stable cash flow from the lease rentals. As at 31 March 2010, FSL Trust’s lease portfolio has remaining contracted revenue of US$743 million over an average remaining lease term of 7.5 years. As stated on the company's website.
Now an update on FSL, an unfortunate event has occurred to the company, both of its ships ‘Verona I’ and ‘Nika I’ that is leased by Groda Shipping Ltd have requested FSL to retake those ships and have defaulted on bunker payments. To summarize the negative impact this have on FSL is that in total, FSL have to cough out about US 10million to settle the problem.

Now as value investors, we tend to look at problems as opportunities, problems that can provide value investments that is. So as mentioned this is the value i see in FSL

Simple Qualitative analysis which is looking at business advantage
1) Business wise, FSL will use the 4.8million in its cash position to release the ships that is being retained in the both countries; this is estimated to take about 1-2 weeks to release the ships.

2) The 4.8million used to release the ships is claimable, it just a deposit with the court to release the ships.

3) There will be litigation or lawsuit with Groda shipping Ltd for causing these problems.

4) The client Rosnett will most likely take the ships back since Rosnett is a client of Groda who uses FSL ships,

5) Nevertheless even if Rosnett doesn’t want to lease back the ship back under their control,

according to the FSL's investor relationship (IR), they have been proactive in looking for clients and do have some potential clients wanting to rent their ships.

6) Recall that FSL ships are young and have substantial value to them.

7) According to FSL, interest payments to loans will not be charged higher by creditor because of

this incident.

8) As stated in their new statement, the rest of the 21 ships provide the trust with Strong Cash flows.

9) 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

Quantitative analysis which looks at price advantage

Price as of June 13 2010, is 0.37 this gives a
1) Net asset value advantage of: $0.62- $0.37=$0.25 about 67% below NAV

2) Calculation of expected yield for the this year, 1st Quarter already paid 1.5 US cents

3) 2nd Quarter guesses will be a conservative estimate about 0 US cents*

4) 3rd Quarter guesses will be a conservative estimate of 0.75 US cents

5) 4th Quarter guess will be back to 1.5 US cents

6) Total Dividends collected: 4 US cents = 5.6 Sg cents (conversion rate of 1.4)
Assuming that from 3rd quarter onwards the problem with Verona and Nika is settled by then, a 0.75 DPU is estimated to be given
Then for the 4th Quarter i assume the business trust FSL is back to it's normal routine with 55% dividend pay out policy a 1.5 US cents will be dished out once again.

7) Therefore my estimate of an annualized return will be about 15% dividend yield at a price of 0.37 per share

Now, let us consider some of the risks to my assumption and risk in general relating to FSL

Risk to FSL
1)* FSL have already incurred a one time 10million cost due to this problem, because of that there might not even be dividends this coming quarter (2nd Quarter).This is the reason why i think for the 2nd quarter, there will not be dividend is because of the case with Verona and Nika, the complications , the extra cost etc having to take these into consideration, a 0 DPU (Distribution per unit) for the 2nd quarter is to me a conservative estimate.

2) The other risk here is that, Nika and Verona are not being release due to other unforeseen problems, the longer the delay the lesser the future dividend payout.

3) Another risk is that, the other 21 ships might have problems due to furture economic problems like in the UK region. FSL clients like Siba Ships, James Fisher and Schoeller Holdings are are from Europe/UK represents 25% of the total revenue to FSL. Could be vulnerable to any future weakness

On a side note: It’s weird that in 2008 when i bought FSL at 0.47 cents, I called FSL's IR about the shipping company Groda, telling them that this company do not have any significant data on their economic moat and financial statements, i asked the IR how they know whether is a quality client to FSL? Their reply if i remember correctly was that this is a growth company, sort of a potential client to have.

4) Through out 2008 to 2010 the NAV of FSL have changed from $1.10 to 0.84 to 0.66 and finally to 0.62, this dropping value in NAV is quite a concern to me, well some ppl might say it is due to the world depression and devaluation of asset, but as a investor i have to be vigilant on this , as NAV per share is one of my favourite yardsticks to determining MOS (Margin of Safety)

My estimate of FSL intrinsic value in the next 7 years will be worth

$0.62-0.70 today. this value is based on a very conservative estimate that FSL DPU in 2017 is a miserable SG 0.08 cents.

Some comments

So the question is at 0.37, is FSL a value buy? Is the probability of benefits higher than the unknown risks involved? Do you see the current problem with FSL a long or short term problem? Is there an opportunity here?

My answers: Yes, Higher, Short and Yes. =)
Continue Reading

Oh well..goodbye.

by November 03, 2009
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?
Continue Reading

Portfolio Update :July 2009

by July 24, 2009
Every half a year, I will do a simple summary update on my companies; what have they been doing during this past six months and if possible what are they going to do for the imminent future. So to start off a simple recap on my current holdings are as follows
1) Capital Commercial Trust (CCT)
2) China Milk Products Group Limited
3) China Essence Group Ltd
4) First Shipping Least Trust (FSLT)
5) China Paper Ltd

Let's begin with..
Capital Commercial Trust (CCT) has a portfolio consists of 11 quality office buildings primarily situated in the prime location - Central Area - of Singapore. The properties are Capital Tower, Six Battery Road, One George Street, HSBC Building, Starhub Centre, Robinson Point, Raffles City Singapore (60% interest through RCS Trust), Bugis Village, Wilkie Edge, Golden Shoe Car Park and Market Street Car Park. In Malaysia, CCT holds 30% stake in Quill Capita Trust (QCT), a commercial REIT listed on the Bursa Malaysia Securities Berhad that owns commercial properties in Kuala Lumpur, Cyberjaya and Penang. CCT also has 7.4% stake in the Malaysia Commercial Development Fund. Going forward, CCT will unlikely be acquiring new assets/buildings due uncertainties of the future, until such that the latter proves otherwise, CCT will continue to expand seeking out good assets to enhance shareholder value according to Lynette leong CEO of the trust.
In addition, CCT has recently issue rights to pay down their current debts in doing so reducing their debt ratio from 40%+ to a low of 31%, the rights was issued in May-June period and was oversubscribed by 1.35times.
CCT’s latest quarter to quarter distribution per unit increase 29% from 2.58cents to 3.33cents after factoring in the rights unit. Which give an 8.2% annual yield using June 2009 share price of $0.81 and a 9.5% yield for my own holdings in the company which averages out to be $0.64 per share? This is because of improved operating margins, higher rental rates and good cost cutting measures.
Net asset value after rights issue is $1.54 which gives me a 140% margin of safety which in my view is substantial enough to continue to hold on to CCT.
In debt aspects, CCT has 8 assets to secure additional debts, strong balance sheet due to the rights issues and about $665million untapped balance from S$1.0 billion multicurrency medium term note programme. This is important to know, because it shows that CCT has at least defences against downward risks for the coming future. The ability to refinance is therefore in my opinion decent. About $900million of debts will expire in 2011.

A question was posted to the CEO of CCT during the Asian investment conference on the new supply of offices in Singapore, what is CCT going to do about this in light of new supplies that might push down rent rates and entice tenants to switch. Her reply was that the government have been reducing new supplies of A graded office spaces about 8million sq feet in total for the next 5 years and should the time to get new good valued office buildings comes, CCT will not let the chance go by.

On overseas acquisitions, CCT unlikely be buying foreign office buildings because of reasons such as “not in vision”, “the lack of influence and economics of scale”, “political issues” and “the lack of expertise”.
Comparing CCT with my requirements of holding is as follows
* The trust must focus on office rentals in Singapore
* The trust must have good debt management
* The trust has to actively enhance DPU
* The trust must build good relationship with tenants
* Share Price must be significantly below NAV
* Share Price must allow a yield of more than 8%

China Milk
The only company whose annual report is that of a glass of milk. :] A quick look at their finances
Total revenue for 2009 is 723million RMB, up 25.5% from 2008, net asset value per share up 0.5cents to 2.96 RMB which equates to $SG0.59so far so good ya, but as we look at other components net profit dropped by a whopping 20.4% and EPS from 65RMB cents drop to 52.0cents..Why arh? Upon closer inspection of the P/L account, the accounts "Change in fair value of derivative financial instruments" dropped from a positive 76.9million at a negative 12.6million RMB. Just to keep things simple, this account has something to do with repaying their zero coupon convertible bonds that are due 2012. , as stated in their notes to financial statements "The fair value loss resulting from change of the derivative component of convertible bonds...blahx3"

China Milk's Chairman 2009 message indicated the effects of the melamine scandal the on the company. The bad effects are poor public confidence in some local brands thus giving more opportunities for foreign brands to enter the market which they are perceived as safer. Stricter government controls have resulted in higher cost for the farmers, thus they who are clienteles of China Milk will scale down their herd size thereby reducing the demand for bull semen and cow embryos. The positive effects is that most small milk companies in China are either wiped out or having a hard time coping with the strict high cost requirements, therefore China Milk has a n increase opportunity to build their own brand "YinLuo" instead of relying on others for their milk processing business.

On another aspect, the balance sheet of China Milk at first got me worried, because their receivables increased substantially from 60.2million to 119.3million, management reviews that some of their customers were facing tighter cash flows...however the management stated that 2/3 of this balance has been subsequently received. Whatever that means, I will be subsequently reviewing this matter, the thing about S-shares is that once receivables start building up, something is really wrong...soo as an investor of the company must really take note of such figures. Operational cash flow remain healthy ,cash balance stays at 1.6billion rmb and once their convertible bonds mature in 2012, the convertible debts will amount to 1.4billion or less.

Comparing China Milk with my requirements of holding is as follow
*Company must maintain their profit margins
*Company must take care of their high debts with their also high cash holdings
*Company balance sheet must be healthy with receivables in check (looking into it)
*NAV must be increasing
*The usual must also be strong /Operational cash flow/EPS/ROE/Net margins.

China Essence
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
Have to keep a vigilant eye on the coming quarters of China Essence, especially its trade receivables that have increased to about 150% from 104million to 269million. Yes no doubt it could be good for a commodity linked company (especially in China) such as essence to expand fast, but if they compromise their capital management because of their rapid expansion then it's not worth holding on to this stock as this might result in bad debts in turn casing troubles like banks demanding back their money, thereby draining the company's cash balances and it could be a going concern problem.
First Ship Lease Trust (FSLT)a.k.a (FSL)
FSL Trust owns and leases vessels to maritime companies (lessees) on a long-term bareboat charter basis (7 years at least), with a total of 23 vessels in their portfolio all of which the trust does not operate thus saving on operational cost and are diversified among different vessel types and of course different clients.

FSLT has the highest debt to equity ratio among the companies under my holdings, with 67% DER; $544 debts vs. $366millio in equities. Refinancing will be needed by 2012 $265million of expiring debts that is..In light of this situation the trust have already started reducing their distribution pay outs per unit (DPU) since 4th quarter of 2008. Previous policy was 100%, now it has been reduced to 75%, 15% of which will be used to repay debts. Total DPU for 2008 was $0.17 Singapore cents. Estimated DPU for 2009 will be $0.17*0.75=$0.12 holding other things constant like current exchange and DPU payouts for the 3 other quarters. OCBC mentioned that they believe the Trust will further reduce their DPU payouts to 50% in the near future, so my estimated DPU should be around 0.08-0.09 cents for this year. This ultimately gives me 17-19% yield for this year and 14-15% next. Well, some people might find the yield high but my previous expected yield was 34% when i bought it at $0.47 during sept 2008... lol. Kudos to those who bought below $1. Going forward, the trust will probably not acquire new ships, more reducing of DPU to be expected and hopes that the shipping industry will recover asap.
FIY, none of FSL clients have delayed payment or negotiated payment on rentals.
Comparing FSL with my requirements of holding is as follows
*Trust must still have diversified clients and rental of ships (Duh...)
*Trust must take measures with regards to its high debt levels
*Trust's policy of not incurring operating cost must still be implied
*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 payout for 2009 and 2010, activate sell.
*Any default by the clients, have to be taken noticed. Consider a sell; if there are two or more defaults in 2009.So far, clients have not created any problems.
I had at first difficulty completing this post, because there are so many annual reports and analyst report to read T_T. Imagine those people with 50 or 60 companies in their portfolio! How hard will it be for those people to keep in touch with their companies?
Continue Reading

Heart of a value investor.

by March 06, 2009

Ouch ouch ouch~It's my 10th mth anniversay of value investing, started since May 2008 when i first started buying equities listed on the exchange. And yes, no doubt like many other value investors out there, i feel your pain. Portfolios have been more or less destoried by the current economic crisis. None of my market gem soo far have exceeded their buying value, some even detoriated to a point that, almost all of its value are gone (drop 80-90%). Soo far, my porfoilio have dropped by a whooping 50-60%, no surpise there of course, since most of my market gems consists of mid-market caps and S-shares. Then MANY people will say, oh you should not have bought into S-shares, S-shares sucks or say something like, you shouldn't have gone into the market too soon, or you should have bought into options to hedge your losses etc.

What i have to say to these people is, you say it best..when you say nothing at all!(In other words shut the hell up!), because your opinions are based on hindsight and by making comments based on events that already happened makes your sound like a hypocrite. I say to you people, if market were to raise drastically or that the recession wasn't as bad as predicted, then the same people with the same comments and opinons will sound like this "Oh you should have bought earlier, why soo fearful? or Damn, S-shares are really super shares, how come you never buy more?"

Nevertheless, what happened, has already happen, now the important thing is what you do now with the time that is given to you? What measures can i take as a value investor?

The first step is to reaffirm my faith in value investing.

I strongly (and will always) believe that value investing is one of the best ways to go about building your wealth. History has already proven it (thru people like Buffet/Filch/Graham), market cycles of upturns and downturns have been going on since the dawn of investing, and no doubt the downside will eventually lead to an upside vice versal.

The second step is to reconfirm the principals i have established with regards to my investing.

I re look at the small piece of parchment i wrote before i bought my very first stock in may 2008. This is what i wrote..

-Buy into good companies at acceptable or low prices
the word "good" is defined by me as companies whose business model is more related to a need and that of a want. The words "Acceptable" or "low" prices is defined as margin of safety relative to it's intrinsic value or Net asset value

-Do not buy into any stocks without doing proper research or understanding regardless of how cheap it is or how many people are talking about it

-Go slow. Do not throw everything into one company and do diversify.

-If mistake are made, write it down, cut loss once fundamentals have changed.

Regards
Yourself at 18th May 2008

The third step is probably to go review my investments with my principals have i followed it soo far?

1st Investment made on 18th May 2008
CHINA MILK
Type:S-shares
Business: Selling Bull semen, milk process etc. Their business is simple to understand, and its more of a need because milk is a commodity and cannot be substitute easily by soybeans. As long as demand is there for products like yogurt/sweetener/ice cream/dairy products/cheese in China, China Milk's revenue is sustainable of course pending the intrusion of competitors, frauds etc

Research: Have been doing for 1-2mths, studied the industry, its historical ROE/Revenue/Net profit/Margins/PTB/Future plans/Capital structure/Risks involved

Price bought at 0.705 per share, give me a discount of 30-40% below its intrinsic value of $1.20 which i calculated with a conservative approach.

Bought only 2 lots, just in case the share price were to drop.

Soo, these are the thought processes that goes thru my head and when I'm planning to buy a certain company. Of course China Milk's share price have dropped to $0.30 as at 6th March 2009. However I'm not upset because, the fundamentals are still there, their business model as expected is still strong (due to increased in revenue/net profit/sustained margins etc) and paper loss was acceptable because i only bought two lots.

Although i have to admit, i made a few mistakes soo far, like buying into SINO-TECHFIBRE at 0.60 2 lots as an Olympic gift to myself without doing much study on it's industry , which is super competitive and their business model is not much of a need. No surprise, Sino-tech went Olympic on me and drop to a disgusting low of $0.10 per share. Then ppl will ask, how come you never cut loss? Well, because i didn't study the industry it was in, and still not interested in doing so, Sino-Tech's internal fundamentals were still very strong for the whole of 2008, until when it came to it's 4Q results, it shocked me that their net profit/margins have dropped by 24% and 50% respectively. Plus, by the time i know about this, the share price have already fallen to $0.12. Soo i was thinking, if i were to cut loss now, i will lose about 80-90% of my investment capital, which i deem pointless to save that $240 (Bought only 2 lots heng arh), its as good as losing 100% of my capital. I rather keep, in hopes that the company will regain its fundamantal :].

Step 4 is to see if my principals need any adjustments.
Probably nothing much to change, maybe i just add this :

The words "Acceptable" or "low" prices is defined as margin of safety relative to it's intrinsic value or Net asset value. But do take note that intrinsic value has it weaknesses like using past data to discount and Net asset value can change drastically etc: REITs due to high valuation from the pass years, that's why margin of safety is very important.

and maybe this

-If mistake are made, write it down, cut loss once fundamentals have changed. Your cut loss, have to be in detailed, either absolute amount (Must cut if it's drops to 0.45 etc) or by percentage (cut when it drops by 50%)

Step 5, what have i learnt soo far

For the entire investing year 2008, i learnt
-To separate noise from real information. Noise might include friends opinions,rumors and some times even analyst's forecasts and buy calls
-Don't be swayed by movement in market prices
-You can copy your investment idol's holdings and try to mimic them, provided that own research and understanding of the company have to be well established first.
-Study the industries in which the company is in. It's economic moat etc.
-Beacuse of the incidents regarding S-shares, even figures and data cannot be trusted. Although this cannot be applied to all S-shares, a note to myself to be alert about this. Check internal control and Auditor's commentary.
-My process of calculating intrinsic value needs improvement, need to study more on Dividend Discount model and Discount Cash Flow model.
-Fundamentals can change drastically, very good exmaple is Sino-Tech Fibre. Thats why , and again i say, margin of safety, buying slowly, deep reserach will more of less lower this probablity of change.
-To countiously learnt from experience investors, their thought processes, their experiences in past recessions, keep a filterated open mind and humble yourself.

Lastly...
As a young value investor, i think the most important thing now is not how much my portfolio have dropped or have been beaten to a pulp by the market. It is, what lessons where learnt, during the this process, such as my investment thoughts,opinions and valuation and how to apply this experience in the future to avoid mistakes or reason for success that have been made since my journey soo far.
Continue Reading

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.
Continue Reading

The Bargain Hunt List

by October 21, 2008
An Example
My aunt Peggy never completed her O levels. She was always very playful and lazy during her school days. Even now as an adult, she always seem to be job hopping once every few years. She claims that most jobs are a bore to her and doesn't bring in much money. In addition, she doesn't like to attend courses to upgrade her skills to look for a better or position. In fact, everything that involves exams or studies, she tries her very best to avoid.
Not much of a smart person by anyone's standard. However I consider her smart when it comes to investing. Why do I say that? Well because, long ago she and some of her friends were talking about how their friends in the financial world, were making tons of money, just by buying and selling stocks.

The prospects of making tons of money, would ignite anyones' curiosity and thus she wanted to find out more. After attending many many technical analysis, trading , timing the market and guru courses, much to her displeasure, she came out of those courses even more confused and unconvinced. Then one afternoon, after she got fired from a job because she was always late, she came to my house to chit-chat with my mum.

During their conversation together, my aunt asked my mum these very simple questions... "Jas, do you know how to play the stock market? In the whole wide world, who is the best in making the most money from the stock market?" And of course the person that my mum mentioned, turned out to be none other then Mr Warren Buffett.

To cut the long story short, my aunt forced herself and me to the library to hunt for books written about or depicting the essence of Warren Buffet. I still remember vividly, that we had to argue with the librarian regarding borrowing 10 books, when the library’s policy was that only one person's entitlement is to four books.

As seasoned investors, we all know that Warren Buffet focuses on value investing and that he is well known for a lot of good timeless principals on investing. Knowing my aunt, she of course didn't practice all the principals that was taught by Buffet ,like understanding the company business or ensuring that the company has good free cash flow, all these principals was just too "Chime" (Difficult) for her to understand.
But the principals she applied was these two "Buy when fear is the greatest" and "holding it forever". Of course she was quite annoyed with the latter, saying "Siao arh...as if I can forever".

How a mere $7,000 can turn into $98,000

My aunt, started stock picking during the end of 1997, what stocks she fished out, she wasn't willing to share. But she hinted that most of the stocks she picked up during that terrible Asian financial crisis were quite well known and she cannot imagine them delisting as they are too important and too big to fall. (Possibility DBS,Datacraft, Singtel, ST Engineering)

The important point here , is that she had the encourage to apply the principal of "Buying stocks when fear is the greatest". Even though everyone warned her not too. It takes real courage to apply this principal and im sad to say even i had my own doubts buying up stocks now. But value investors take comfort beacuse even though
my aunt applied this principal back then, she didn’t exactly buy at market bottom (STI then was 1090 at end of 1997). As the Asian Financial Crisis reached it's worse from march 1998 to Oct 1998 (STI bottomed around 807), my aunt's stocks fell even further and of course the temptation of selling was great.

But she also applied this principal to her investments "Hold forever notion", which she did and of course this principal not only saved her from realising paper loss but turning that paper loss to a huge paper gain in the coming years.

She of course she finally realise that , "Hold forever" simply means hold for like 10-30 years and not literally forever. And being a very practical aunt, she sold all her stock holdings 10 years after she bought at the end of 1997, this of course was just last year 2007. Just so happens that last year was probably the last peak of the Bull market in this decade.

She managed to cash out just in time before the huge Bear market appeared '08. Suffice to say she reaped gains of 1300% from $7000 to $98,000 this not including tax, inflation and dividends earned, just by applying two techniques taught by Buffet and with a bit of luck involved.

Aunty Peggy now sits right besides me with a big grin on her face , as I blog down her successful stock investment story. Her story is a shinning example that proves, if any investor who have the guts and ability to apply these principals in their investing, one can really reap huge benefit when the next bull comes out.

Summary in Singapore's context
>Invest when everyone around are sitting at the side lines, too fearful to move.
>Invest when taxi uncles and coffee aunties no longer talk about equities (because they too busy queuing up to get back their mini bond $ or liquidate their AIA polices).
>Invest , when everyone thinks its the end of the world

What Now?
Now I know that my aunt's success had to do with a bit of luck, because all the stocks she bought during the 97 crisis are still around up till now (so she claims), the fact that she didn’t even study the fundamentals of the stocks she bought, is already a risk itself.
To reduce the reliance of luck and risk, I painstakingly created Four portfolios, that I’m sure will be able to ride out the current Turmoil and fasten your hands around the next bull run.

Each portfolios have their own theme and reason that I gathered them for and using Low PBV and High ROE data as additional filter for value.

In other words these portfolios are created for people who are just too lazy to study what they invest just like my aunt. And for people who are young but have limited capital to invest.

The portfolios' ROE figures are based on all the company's past performances and I took the average out of that 4- 5 years of data. Like wise for the PBV figures, they are based on trading price when the portfolios were established on 20th Oct 2008.
Without further a do , I present to you the first of four portfolios:

Best of S-shares


This portfolio was created due to the very fact that investors in Singapore are literally scared of these China Based shares and they have good reason too, giving example like the high debt issue with FerroChina, the dishonest quality of their products, scandals and the runaway CEOs of China Dye. But we must not assume that all China shares based here are of that quality, some companies are indeed of good value and good growth prospects coupled with strict governance. And if you realise, all these S-shares I gathered have products and services related to a need, instead of a want. Businesses involving basic support function for society in China like cultivating potatoes related products for industrial uses (China Essence), creating farming equipment for farmers (China Farm), huge presence in shipping (Cosco) and providing foundations for railway works (Midas). This portfolio invokes the most fear among investors and if you’re too scared to invest in these China firms, then diversify across like buying just one lot for each firm will only cost you around $3632. Excluding commission and tax. Estimated upsidethis portfolio could be very high in the coming years. My top favourites : China Milk, Sino Tech and China Essence.

>Estimated Fear Level for this portfolio: 80%

>Recommended for people with nothing to lose and limited capital to invest

-----------------------------------------------------------------------------------


Avoided Sectors Porfolio




The next portfolio compromises of value stocks whose industries have been shunned away by investors here. We have shipping industry stocks like ASL, NOL being sold down to ridiculous level because of the high expectation of a deep global recession that will affect sea transport, we also have Banking stocks like OCBC and Hong Long (I picked only these two, because their strong balance sheet and not very well known to investor due to their banking presence in Singapore) whose industry are expected to remain in a downturn due to lower loans rate, and the recent credit crunch effects. Property stocks, with the falling demand and prices recently add no cheer to this sector as well. And finally the S-share sector, that have fallen greatly due to incompetence of similar S-shares, complete fear of these stocks.

This portfolio is better suited for investors who want to diversify across sectors where different fears for different sector are present, instead of just piling your money into one sector like the "Best of S-shares portfolio"

>Estimated Fear Level for this portfolio: 60%

>Recommend for people who want to invest in accordance with different fears in different sectors.

-----------------------------------------------------------------------------------
The Blue Chips portfolio

This is where my aunt becomes very interested in. But I caution investing in this portfolio too early , as the full effects of an uncertain recession has yet to be factored into these stocks even though the market has already fallen greatly. Nevertheless, I gather these few well known stocks and see how well they do in the coming years. The reason I picked these stocks is because, of their size, presence, importance and support they provide to Singapore's economy as a whole. I just can't imagine any one of those stocks going burst, etc: If SembCorp were to delist, that would mean that all our trash and rubbish have to be kept at home , because the business in charge of our waste system has gone bankrupt.

Should there be a bull run in late 2009 , this portfolio will be the first to rise in value beacuse they are well known and well documented by Analysts. Lastly , I ranked them according to their importance in Singapore. So if you do not want to spend so much capital investing, then choose the top 4 blue chips as stated in the chart. My good guess is that this enitre portfolio will mimic that of the STI index ETF.

>Estimated Fear level :30%


>Recommended for people with decent capital

-----------------------------------------------------------------------------------
Broker Recommendation Portfolio

This portfolio consist of stocks that are well recommended by brokers all over Singapore's investment realm. Out of so many well recommended stocks, I chose the best among the rest, simply by using the lowest status given by the brokers
According to them a status of

Less than 1.5 means Buy

Less than 2.5 but more than 1.5 equates to Outperform

Less than 3.5 but more than 2.5 refer to hold

4.5 And above relates to underperform and sell.


A whole list of recommended stocks can be found on Business Times Newspaper every Monday.

The reason why I created this portfolio is because, I want to test, can anyone without doing any research at all ,who relied solely on the very best recommendations by the Brokers at that point in time, can he or she reap big gains in the future? How much more or less returns this portfolio can achieve as compared to the other fear related Portfolios and of course the Blue Chip portfolio? After there is always a perception that brokers and analyst know what’s best right?

>Estimated Fear Level: 35%


>Recommended for people who love to listen to brokers and analysts

---------------------------------------------------------------------------------

Information on ROE and PBV

A ROE of 15% or more is considered in general as high, in a range of 8-14% considered decent and below 8% is considered low. However this ratio is best used when compared with another similar natured stock within the same industry.

A PVB of below 1 is considered undervalued, according to Benjamin Graham (Warren Buffet's mentor), a PBV of 0.7 and below is considered very cheap, and likewise a PBV of above 3 or 4 is considered high in general. Again have to compare with other stocks of a similar nature and industry.

All you need to look out for is a high ROE >15% and Low PBV <1


Finally I 'll explain more on the combination of these two ratios on another blog entry. As for value investors, these portfolios serve as a general guide only, more needs to be done in researching the stock's quality management, business goals concepts, future prospects, doing up and adjusting the NAV,PVB,ROE,PE, calculating FCF, forcasting etc.

With that said, I encourage anyone who reads this to invest, yes invest!! Because since this is a once in a lifetime crisis, wouldn’t it present a once in a lifetime opportunity?! Think about it.. Happy investing :)
Portfolios will be reviewed every 6 months, on this blog, until the next major bull comes.

Continue Reading
Subscribe to: Comments ( Atom )
Powered by Blogger.