Chlorophyll Inc

Hi guys, I am looking at stocks that fit a few criteria,

1. Below book value
2. Increase in EPS
3. PE below 15
4. Issue Dividend

With this four criterias, Only a few companies are listed and i will be doing some instant screening on them.

This is the result.


Haw Par Corporation Ltd.

Its price is relatively high now with a PE of 14+, but it is below book value by 11%.

Very healthy balance sheet and reasonable profit. There is a sharp decline of profit from 150m last year to 78m this year. Prior to the last 6 years, its profit is rising consistently.

They have 2 core operation, medication and leisure.

Medication would be the Tiger brand. Your medical sticker and cream. Leisure would be underwater would in singapore, pattaya and chengdu. Haw par villa also under them.

They dabble heavily into investment also, which caused the severe drop in profit.

Upon furthur research, their increase in profit is not due to their core operation. Core operation remains stagnant and they focus alot of time in investment. Obviously, they have poor marketing. >_<

Reccomended by stock analyst to buy. But i don't really reccomend it due to lack of economic moat and lack of focus by management. Currently, its price is trading at $5.9.


Tye Soon Limited
PB of 0.5562 and PE of 11.6580. Seems like there is a 45% MOS on the NAV. However, they made a huge lost of 6.1M in 2004 and only till 2007 did they break even that lost.

Didnt do any furthur research due to lousy earnings.


Time Watch Investments Ltd.
PE of 5.210, Lousy Earnings. Net profit margin is less than 7%


Hiap Moh Corporation Ltd
Dividend of 43.7975%
PE of 7.4151
PB of 0.6921

WAH! So high dividend and seems pretty undervalued! Lets look at the business and financials.
Aww... No wonder so hi dividend.. They delisted already..lol Akat..
-By Norman Yeo founder of private group investors Project zero

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 :]

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.

The next candidate for my cash rich portfolio and testing of Graham's Cash rich firm theory, China Paper comes to met these requirements.

• Price Advantage-Current market share price ranges within 0.12-14 as @ 26April 2008 give significant margins to...


• Net cash value is 17cents which gives me a 28% pure discount margin of safety.
  Intrinsic value is 30cents which gives me a 58% discount to intrinsic value (average)


• EPS of 7 SG cents for FY 2008 /ROE of 0.15%-0.13% on average


• Strong cash flows/Strong balance sheet


• Industry looks resilient and business model resembles more of a need then that of a want


• Cash rich company which is expanding, in times such as these. Indication of good management decisions


• Deal with recent problems such as environment water treatment plants, swiftly and efficiently.


• Possible to receive high dividends this year.


• Growth:

Development of new products:
The construction of the production facilities for coated paper by subsidiary Linyi Zhenyuan Paper Co. Ltd. Using $210million RMB which is funded by internal funding coated paper is generally used for printing a broad range of materials, including high quality magazines, leaflets, advertisements, brochures and educational materials.

Expansion in capacity:
Expand the production capacity of its existing paper chemical products facility using $80million RMB funded by internal funding

Huge untapped market potential: In the Shandong Province alone, there are just 22 players left from the previous 320 due to such regulations. Hence the industry trend can play nicely into China Paper’s hands.

Risks
Biggest risks involving S-shares are governance, as such the following have to be take noticed of:

• Should not be taking extra loans due to high amounts of cash in it’s cash balances as of FY 2009


• Take note of the usage of the cash reserves, they either have to declare dividends or expand.


• Take note of more fund raising (done it twice so far), twice once in IPO the other in addition of 42million as at Aug 22nd 2008, possible red flag here.


• Take note of sudden changes to independent directors


• Ensure that receivable do not spike without a proper reason. Current total receivables are 108m RMB relative low when compared to 300m+ RMB in cash.


• Low liquidity, share price might stay stagnant for quite some time.


• Competitors are unknown. Future IV will depend on how they expand and how prudent the management is.


• Company might lack economic moat, despite resilience of industry, not much is known about its competitors. Or how easy it is for others to compete its profits away

What others say:
In light of the economic crisis in China, sectors that have been flagged out to be
relatively resilient are paper production, printing, tobacco and health care, just to name a few.
China Paper’s growth is also strongly supported by the rampant education sector in China,
which can be said to be recession-proof in some ways. Moreover, in China today, there is a
strong demand and a general under supply for printing paper. This was mainly due to
environmental regulations causing the shut down of smaller uncoated printing paper players
since mid-2007, leading to a drop in supply of 6.5m tonnes/annul. In the Shandong Province
alone, there are just 22 players left from the previous 320 due to such regulations. Hence the
industry trend can play nicely into China Paper’s hands.

China HongXin Ltd is one of the many cash rich S-shares, which im very interested to look at and possiblily include in my portfolio...the share price as of this writing is $0.13. Their Net cash value per share (using only cash less off all liabilities then dividing the dearrived figure by the total amount of issued shares) is $0.10 and Net current asset per share is $0.23. What these data means is..if i buy into China Hx at a share price of $0.13, i should get back at least$0.10 in cash, another $0.06 in value and get their business for free! In addition (according to them) their business is doing well with strategic plans and contracts being established, opening 100 new sport stall, having a consistent history of earnings, strong cash flow (barring this FY 2008) expected to bring in higher profits and revenue. Wow, sounds very attaractive hor.. but whatever sounds too good, it usually is!


Soo i took the liberty to research on a few thing, with regards to the company.
I believe the following factors are the reasons why China Hx is trading at such an attractive or (disgusting) share price to some investors.

Reasons are as follows :
· Fear of fraud, inflated cash and accounts related beacuse we are dealing with an S-share!
· Fear of poor internal control and governace
· Is the cash really there?
· What have they been doing with the cash if its really there? Huge jump in recievables.
· Business of selling Sports apparels not that attractive or resilent in a sense, plus their industry is very competitive as well.


So to address the following concerns and risks, this is what i found out.

To answer the first question ->Does China HX have proper Governance in place?

I looked at their Cooperate Governance report which indicates
· No signs of directors or independent ones leaving the company soo far
· Board Composition and Balance.
The Board consists of five (5) directors of whom, three (3) are independent.

The list of directors are as follows:
Executive Directors Wu Rongguang (Appointed 28 April 2005/ Chairman of the Board)

Wu Rongzhao (Appointed 6 May 2005/ Chief Executive Officer)
Non-Executive DirectorsBernard Tay Ah Kong (appointed 20 September 2005/Independent)Chan Wai Meng (appointed 20 September 2005/Independent)

Alfred Cheong Keng Chuan (appointed 20 September 2005/Independent)

· A bit about the independent directors
-Mr Bernard Tay Ah Kong is currently the Non-Executive Chairman of Horwath First Trust, which is a Certified Public Accountants firm. Mr Tay is also an Independent Director of several public companies listed on the SGX Mainboard and Catalist. He is the Senior Advisor to the Government of Huzhou City, Zhejiang Province of the People’s Republic of China. The President of the Automobile Association of Singapore and Vice-President of the Singapore Productivity Association


Then i look at who chairs the committee's of the company.
· People in the Nomittee/Audit/Remuneration committee
Mr Chan Wai Meng (Nominating Committee Chairman)
Mr Alfred Cheong Keng Chuan
Mr Bernard Tay Ah Kong
All three committee’s are chaired by independent Directors

· Foo Kon Tan Grant Thornton have expressed their willingness to accept re-appointment.
· Update: RSM Nelson Wheeler and Tan Grant Thornton have expressed their willingness to accept reappointment their verdict for FY 2008 accounts "A true and fair view will established".
In addition China Hx was listed 166th position on the governance and transparency index (march 2009) which is quite high relative to 679 positions in the index.

Next question: Is cash really there? Did they inflate their cash holdings?

Research shows that in FY 2006 , their cash balances were 545,442k rmb

in 2007, this figure jumped to 2.6billion rmb, the reason...
There was an Issue of shares on placement 2,376,959 on FY 2007
Latest FY in 2008
Share premium: 2,645,397
Retained profits: 997,480 increase from FY 2007 of 598,192

· Basically the fear of created cash figures should have subsided due to the glaring fact that 2.3billion RMB were raised from SGX IPO listing on 2007.


However.. the worry that net profit for FY 2008 was inflated 448,515k increase 7.7% from FY 2007 or through out the years cannot be deal with , just by simply looking at their annual reports. The reason why i think China Hx Net profit of 2008 should be lower then in 2007 is due to terrible economic conditions and stiff competition in the industry, yet one can argue that it could be that the Olympics last year helped with it’s increased sales?

The next Question to ask is, having received 2.3billion, what exactly did the company do with it after 2 years?

Their accounts stated on their Balance Sheet's assets are as follows
-1.98billion in Cash
-1.159billion in Receivables
Equity
-Share premiums of 2.6billion
-Retained profits of 900million

As mentioned by some analysts, they were not comfortable with the high recieveables and they indicated that the risks here is that the amount stated in Cash is not actually there, but in other accounts like inventories or receivables (account manipulation) etc.

The cash amount is place in
China Construction Bank
Zhanlan Branch
1st floor, Mingfa Hotel
Nanhuan Road
My take is that, they indeed have cash , whether or not there was manipulation in the accounts i also cannot tell.. that's why the FY 2008 auditors opinions are vital in my deduction of whether China Hx is honest in their accounts. Having a "true and fair view" should more or less prove that China Hx is honest? Some more got two auditors appointed, should be enough.. i think..i don;t expect them to issue any more shares to gain capital or establish any more loans in the future though.

Proceeding to the next question:
Why a huge jump in prepayments/receivables?

------SGX questions to China Hx management--------

Prepayments, deposits and other receivables increased from RMB278.7 million as at 31 December 2007 to RMB1,159.2 million as at 31 December 2008. Approximately RMB1,155.5 million (2007: RMB277.5) was advanced to distributors to facilitate the setting up of approximately 358 (2007: 100) new stores in 21 (2007: 20) provinces/cities during the year ended 31 December 2008. The RMB277.5 million advanced to distributors in 2007 was fully collected in 2008.

Please disclose the terms of the advances to distributors (ie. repayment period, penalties).
The advances to distributors are unsecured, interest-free and repayable within one year. In the
event of a default in repayment by a distributor, the Group will take over the distributor’s operating rights to the store and its assets in accordance with the advance agreement made with the distributor.

Please provide an indication if there are any difficulties in recovering the advances
particularly given the current market conditions.

As at to date, the Group has recovered up to an aggregate amount of RMB50.3 million from the distributors. The distributors have kept up with the repayment schedule and we have not encountered any collection problems from the distributors.
As at 1 January 2009, the Company has ceased to provide such advances to the distributors. The Company will continue to pursue collection of the outstanding advances from distributors and will provide updates of the repayment of advances from distributors in its quarterly results.

Why keep soo much cash?
The cash will be used to support the Group’s operations in the current financial year.

Why don’t declare dividends for final part of the year?
In addition, the Board would like to clarify that in view of the uncertain economic environment, it
was deemed prudent to maintain its cash position and not declare a final dividend for the year.

Quickly, i ran thru my "spotting the red flags" screening test for China Hx
Checking Red Flags in balance sheet of China HX.

1) Is there a growing gap between cash flow from operation activities* and earnings (total cash flow has to be higher then net earnings for refinancing purposes ), the important thing is cash flow from operation have to increase as much as NPAT
2008 (‘000) and 2007 (‘000)
Operational Cash flow: (357,503) and 79,991
Net income: 448,515 and 416,453
Problem here, failed test.

2) Net Earnings grown faster then sales? No

3) Disproportionate increase in account receivable vs Sales increase
Sales: 2,889,000 and 2,046,000
Accounts receivable: 1,159,152 and 278,665
Problem here as well.

4) Unusual increase in inventories vs. sales increase
Not a problem here

5) Any Large assets write off? (No)

6) Quality of the earnings
-Did they include profits from the past periods? (No)
-Under provide for future expenses with current sales, bad debts? (Possible)
-Increase in reliance of earnings sources apart from main business? (No)
-Cutting pay in workers, employees, R&D etc? (No)
Important point to take note, because company has already bleached two of my screens, I must take note that every quarter I must see that receivables top drop and operational cash flow to increase.

Insider data reviews that
Overlook Partners fund bought 25million shares on March 4th @9.5cents
Chairman bought 1million at 19cents in November 2008
Wasatch fund sold at 6cents @ 28.9million 12th March 2009

Summary of good and bad points
+ Governance is alright, no directors have quit
+ Nomittee/Audit/Remuneration committee all chaired by independent director
+ Cash is there, in FY 2007 IPO was established, 2.3billion RMB was collected
+ Net Cash is 0.17cents, still give a decent margin when comparing to a share price 0.10-12
+Don’t foresee any borrowing, as the IPO issues are more then enough, high liabilities incurred by the company is not visible as of now.
+With respects to the questions asked by SGX, I don’t see how the Chairman could have answered any of them better, the company just IPO in 2007,of course Capital cash is need to kept with them, to expand and to support operations!
+ Share price advantage at 0.09-0.11 give significant margin to target price of 0.25cents NCAV. 66%!
+Positive new and forecast by the company

The bad
-Question about it’s net profit sustainability, fact or inflated?
- Question as to whether what exactly they did with the cash, are the components reflected correctly in the accounts?
-Their receivables are super high which gives raise to bad debts, but $0.17 is the Net cash per share so it still worth it to invest at $0.13 do take note.
- Questions asked by SGX and replies from Chairman not those satisfactory, sounds fishy especially the part about not declaring dividends.
-Business model might not be resilient in this crisis, despite optimistic forecast for the company, possibility is high for the company to bleed cash this year and the next.

Scenarios
Scenario 1: Pure and out alright fraud
China HX Management really did inflate accounts, possible higher amounts in receivables and lesser of cash. Share price cannot sustain 0.13cents (buying level), however if liquidation of company is activated, confident to get back more then 0.17cents per share.

Scenario 2: Running away
This is the worse possible outcome. CEO runs away with cash, lawsuits plus investigation, might result in the loss all invested capital.

Scenario 3: Deterioration of share price
As time goes by, receivables are denied or written off as bad debts, company yield in huge net loss because of huge expanding. But confident that share price would’t vary much at 0.09 cents.

Scenario 4: Honest accounting
Share price will raise drastically, back to 0.23 or more, yielding a 200-300% return.

Comments:
"Well, you are a vested shareholder in this company thus you will know more about the workings of this company.I am referring to the loans given to distributors from a standalone point of view. What you said is true since such a good loan given to distributors can indeed build goodwill between the company and them. From the standalone point of view, I find it to be strange that the company lends money to distributors and the guarantors are the significant shareholders and the executives of the company. The guarantor of any loan is not supposed to be the lender itself. Now let us think of the risk. In the event that the company is unable to recover the loan from the distributors, it will recover the loan from the guarantors of the loan instead. However, the guarantors of the loan are the significant shareholders of the company. So what can they do to prevent themselves from paying this loan ? Since they are the significant shareholders and the executives of the company, can they write off this loan ? In short, there is a potential for the abuse of power for this scenario.The scenario that I am suggesting may seems to be far-fetched and I'm trying to evaluate the risk of this arrangement of loan with the distributors. There is no right or wrong actually as I'm trying to raise this point up for discussion. I hope this helps". -Moneytalk.sg

China Essence have been agressively (in my opinon) expanding it's operation since mid of FY 2008. It's growth strategies are as follows for the coming year/s

1) Increase Potato Starch production from 170,000 to 250,000 tonnes. (To commence in FY2010 3Q)

2) New production line to increase Potato Protein from 8,000 to 16,000tonnes (To commence in late FY 2009)

3) Likewise Potato Fibre from 80,000 tonnes to 160,000 tonnes. (To commence in May 2009)

All three growth strategies, were funded by internal fundings and bank loans amounting to 570RMB million spent in 2008.

Without the aid of new revenue in place of the new productions by all three sectors, China Essence's Net profit for 9mth to 3Q of 2009, dropped by 8% despite a 21% increase in revenue. This was due to increased in Selling/Distrubution costs up 3.6% to 1.1million, Adminstratives up 35.6% to 8.2million due to expansion and loss of disposal of old factories and lastly finnace cost up by a whopping 103% to 18.4million due to increase in loans paying interest.

With that month full, now i shall touch on the risks that China Essence faces

1)Up coming loans need paying: DBS's $USD 60million (RMB about RMB 460.8million) to be paid by June 2009. Currently China Essence balance sheet states only RMB 262.5million in cash while the rest of the value is stuck in trade receivables 170.1million and inventories 245million. The risk here is, China essence must convert it's inventories and receivables back to holding cash on time and on target or risk borrowing more, especially at times like this when credit is scared.

2)Aggressive expansion plan for upcoming years in late 2009 and FY 2010, apparently these production lines will be activated only if demand meets its supply. According to statistics regarding potato related products as such, demand is at 800,000 tonnes, while supply is about 450-500,000 tonnes. These data is apparently taken from 2007, might not be applicable in 2009-2010, in fact no one knows what will be the actual demand for potatoes in China by 2009/10 all are estimates and cautiously outlooks. If however the demand were to drop drastically, China Essence is more or less doomed, with high interest rates to pay, aggressive expansion of new production lines but cannot activate cause no demand etc, China Essence will have to be forced to sell off it's new assets or old ones to pay back its loans, efforts and hard earned retained earning thru out 2006-2008 will be wasted, share price will plunged further (although its already at 0.19 cents).

Well then again, this are just risks that might not happen after all. Being a shareholder of China Essence, i wish the company all the best in the coming future especially its aggressive expansion, pray that demand will out strip supply still by then.

Note to self* once production begin, expect net profit to increase as well, if not might as well don;t expand if the company cannot earn more then its WACC (Weight Average Cost of Capital).

Good morning,

We understand that investors’ confidence in S-chips have been shaken recently, especially when some of the high profile SGX-listed Chinese companies have defaulted on their payments and suffered from negative media publicity. In addition, the prolonged global economic uncertainties have impacted the earnings outlook of some companies which are susceptible to fluctuations in consumer demand. Due to uncertain economic outlook and poor market sentiment, stock prices of many S-chips have suffered one of their worst declines in recent memory.

As you may be aware, China Essence’s share price has not been spared from the current turmoil. However, the company being one of the leading producers of potato starch products in China, is confident of the long-term outlook of the industry which is well-supported by strong growth fundamentals. While China Essence remains committed to its capacity expansion plans, it is adopting a prudent and cautious approach in order to minimise exposure to unnecessary risks.

If you have any queries or concerns pertaining to China Essence, feel free to call us or drop us a note. You may also wish to browse through the online Q&A which the company conducted with its investors post Q3 FY2009 results. Please click on “Online Q&A” at this link: http://www.chinaessence.com/ir.html Let us know how we can help to address your concerns.

Regards,
Charis

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

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


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



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

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


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

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

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

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

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

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

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


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

Regards
Martin Choi

Chief Financial Officer

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

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

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

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


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

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

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

Any large write offs?
Nope

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

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

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

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

Core Business:
Based in Longkou City in Shandong Province, Sino Tech-fiber produces polyurethane (PU) and microfiber synthetic leather, these products are then sold to manufacturers and trading companies that produce fashion apparel, sports apparel and equipment, luggage and travel accessories, as well as upholstery furnishings for furniture. Take not that Sino Tech-fiber is the producer and supplier of these raw materials and not a manufacturer of the end products.
Sino Tech---Processed materials ---Manufacturing companies---Finished products---China’s consumers

Profit breakdown and sales location:
Microfiber Synthetic Leather: 40% of sales
PU Synthetic Leather: 60% of sales
92% of sales come from China
6% of sales come from India
2% from other countries