Profit Hunting

Short Notes on Petra

2012-01-06T20:26:00.000-08:00

Article from The Edge (Singapore) Dec 26th. Short points:

Petra accounts for 11% of worlds cocoa grinding capacity, fourth after ADM and Cargill (14% each) and Barry Callebaut (12%)
In Petra's Indonseia market, they sold cheap chocolates. The Top Wafer bar comntains 12% cocoa powder, while normal chocolate contains 30% chocolate butter. They used wafer instead, and did everything possible to bring the price to IDR500 (7c).
Worldwide, chocolate companies are vertically de-segregating. Nestle focuses on consumer brands. Barry Callebaut is the largest chocolate maker in the world - has economies of scale.
Analysts (on cocoa grinding): Petra is a small player in Europe, may lack necessary economies of scale. Claudia Lenz, who covers barry Callebaut for Bank Vontobel: In Asia, the demand for compounds and fillings [cocoa powder based products] is much higher than for 'real' chocolate [cocoa butter]. In Europe, the market consists more of real chocolate and I'm not sure whether Petra foods has fully adapted to that.
John Chuang (CEO): Petra's board has debated on whether to seperate the consumer and ingredients business, but a decision has yet to be made.

Short Notes on Eu Yan Sang

2012-01-06T17:44:00.000-08:00

Article from The Edge (Singapore), Dec 26 2011.

Eu Yan Sang

Interview with Richard Eu:

As of Sept 11, EYS has 189 stores in SG, M'sia, HK, Macau and China. Also sells products to supermarkets and convenience stores. 23 TCM clinics in SG/M'sia, and 2 integrative clinics in HK.
Growth can no longer be dependent on further expansion in the TCM space alone, will hit saturation at some point. In the company's early years, growth was 20%... "Now our growth rate is slowing down...How do get into another phase of growth where you can look at 15 to 20% growth? Thats why we have to go beyond TCM."
Plans to acquire a stable of brands to move into the natural wellness space (eg: detox, organic)
EYS stores already carry a range of natural foods, health supplements such as honey mart honey, zing spa products, ProNature oatmeal.
Want to separate TCM brand from company. Mentions Nestle: They have their own brand, but also a portfolio of other brands (e.g.: Maggi, Nespresso). EYS must own and develop other brands. "Its going to take years, probably beyond my time."
Article mentions past failures: "Red, White & Pure" restaurant launched in 2006 which combined TCM based cuisine with spa treatment...failed and was disposed of in 2009. "It was the wrong time and wrong location" In Aug 10, EYS paid A$3.56m for Healthzone, esp. for its retail franchise in China. Healthzone collapsed last month, probably has to be written off.

My opinion:

I think this is a slippery slope. From medical, tested and proven treatments, to things which may be beneficial, to things that are rubbish:

Some of EYS current business is equivalent to (the western idea of) selling medicine or pharmaceuticals (whether prescribed e.g.: antibiotics, or over-the-counter e.g.: panadol). The items sold are backed by (some) scientific research, or 5000 years of TCM tradition, so do generally work.
Other products are like health supplements (e.g.: birds nest), may be the equivalent of buying vitamins or fiber supplements. Don't know if they work, but it may.
At the bottom, we have practically any cosmetic, weight loss, anti-aging product. These are marketing driven fads....bust cream, slim-10, anti-oxidants, ginko, whatever else....

There are more and more competitors as you move down the slope, with fewer barriers to entry and chances for brand building. It is a riskier business. EYS is good at their core business, but it will be hard to move beyond that, especially if they want to move into a crowded, fickle and marketing driven industry.

Should EYS be valued as a value stock (PE 5-10), rather than as a growth stock (PE 15)?

Stocks I don't like

2011-12-26T04:11:00.000-08:00

As a value investor, looking to buy solid, undervalued stocks when the markets go into a tailspin, these are the things I avoid.

Technology

Building a sustainable competitive advantage is meaningless in the tech sector, where industries quickly change to become unrecognizable. So I would not buy technology stocks based on low valuations or high market share (e.g.: Microsoft and Cisco today, Nokia several years ago). If I was to buy tech, it would be as part of a growth strategy: in a bull market, with a stock at all times high, with growing sales and their new products that are changing the world....just remember to leave once the party is over: today's hot product is tomorrow's junk....

I also like the idea of avoiding any product/service whose input and output is information (See 'Software eats part of the world'). e.g.: credit cards, newspapers, TV, bookstores.

Change is bad for value investing.

Banking and Finance

Banks are a black box. They make money by lending it out and hoping people can pay back. There is no way to judge the quality of earnings from their cashflow statements. In addition, banking crises occur regularly enough that we can consider them a part of human nature.

So for a long term investor, don't buy when times are good, as the next crisis will hit and drive down the share price of your bank. And don't buy when times are bad, as they can go to zero. Bill Miller beat the S&P for 15 straight years, then in 2009 he "bought ‘cheap’ financials after the credit crunch, but later they got even cheaper". Like Bear Stearns and AIG. He resigned a few years later.

Investment banks are worse, some seem deliberately designed to store risky assets until they blow up.

How do you know which banks are good and which are bad? If Bill Miller and GIC cannot get it right, what makes you think you can?

REITS

I've two main objections to REITS:

First, Singapore Reits must payout 90% of their income as dividends. So they are in perpetual debt. Meaning that you are taking for granted low interest rates and access to finance....forever. Ironically, I think they would be better long term investments if they could use their income to payoff their debt.
Second, how many REITS bought property at low, low prices during the 08/09 market crash? I cant think of any. A-REIT even made a rights issue at the bottom of the downturn. Some people may even get the impression that REITS are not run to benefit their shareholders.

Stocks I'm interested in

2011-12-18T02:03:00.001-08:00

Still waiting for a recession, and drawing up a list of stocks that I want to buy. And others that I still have to look in to (*).

Dominators: Buffet-like companies, with large market share and only a handful of competitors, these companies have a sustainable competitive advantage in their industries. These stocks will never go to zero, and could rise 50-100% from bear market trough to bull. Might be possible to hold these stocks forever:

Coca Cola: Buffet's largest holding. Strong distribution network gives it a moat.
UPS: Only a 2 or 3 competitors worldwide, and one in the US. Buffet also holds some.
Diageo: Largest spirits producer in the world , and a cashcow; sales nearly double its closest competitor.

Local Blue chips: Big players in Singapore or the region: Also will probably never go to zero, though they do not have a sustainable competitive advantage. Usually rise 50-150% from bear market trough to bull:

Diary Farm: Large player in Asia supermarkets & convenience stores. Low debt, generates cash.
SIA Engineering (*). Or maybe STE (*).
Raffles Medical Group (*), or possible its overseas competitors (eg: The hospital in Thailand...).
A property development company (freehold property only): Wheelock, SC Global (*), or CDL (*). Wheelock has historically been the most astute in its timing, but has been doing nothing for the past few years. Check the others, esp. their debt, and how their properties are values on their balance sheet.
Eu Yang Sang: Low debt, and a long history of being profitable and generating free cashflow.
Goodpack (*): Large share of natural rubber shipments, and gaining share in artificial rubber. Has it started generating free cashflow yet?

Small fry. Risky, but I try to target those with few competitors and good balance sheets, to avoid the ones that go to zero. These are also very illiquid. May rise 2-4 times from bear to bull.

Petra: Love their branded consumer distribution, as a producer and distributor of Chocolates in Indonesia. Not so keen on their cocoa processing.
Silverlake Axis (*): Handles a large proportion of banking transactions in SEA. Clients have long term (3-5 year) maintenance contracts, giving a stream of future profits.
HDD industry: There is a small company which makes a large percentage (worldwide) of the HD actuator arms - forget its name (*). Alternatively, Seagate may be worth looking at. Always a large risk of obsolescence when buying tech: this is a bet that HDDs will still be around to hold information in the cloud.
2nd Chance Properties (*): Plans to change to the property business, by buying commercial property in a downturn. Interesting idea, though I have not looked at the company yet.

Punting:

China Mingzong. Currently selling at 5X earnings, (as far as I can make out) in a non-cyclical industry. They don't have pricing power, but their industry should grow. Largest competitor may be a fraud, no guarantees about this one either. May buy a little with money I can afford to lose in the hope it goes up 5-10X in the long term.
AirAsia: Don't know where to classify this one, they are in a new industry...in fact they are the industry - no one seems to be able to replicate them profitably after years of trying. But they have fuckloads of debt and unimaginable future capital commitments.

Lets see if 2012 brings a chance to buy....

Diageo (DGE:LSE)

2011-12-17T06:30:00.000-08:00

World's largest spirits maker. They make Johnnie Walker, Smirnoff, Guinness, Baileys among others. Most of their products are number 1 or number 2 in their markets:

Competitive Advantage

Diageo's worldwide sales are twice that of their nearest competitor, Pernod Ricard. The third (or forth) largest producer, Barcardi, is privately owned and does not disclose sales. Next come 'Brown & Foreman', and Beam (formerly Fortune Brands), which have 1/3rd or 1/4th of Diageo's sales.
Notes:

Diageo reports in Pounds, currency conversion values above from here and here.
Diageo owns 1/3rd of Moet Hennessey.

Diageo's margins seem slightly lower than their competitors:
Notes:

All exclude excise and corporate taxes, except possibly for MH.
All include discontinued ops except Beam - the difference is negligible

MorningStar believes that Diageo has a strong distribution and sales network in North America (33% of sales, 44% profit in 2011), "resulting in operating margins in North America in excess of 35%, well above the firm's consolidated margin in the high 20s, and higher than most of its competitors."

Cyclical

From the above graph, operating Margins of all companies were affected by the 08/09 recession.

Sales did not fall however (Organic sales growth of zero in 08 and 2% in 09). Organic sales generally rise by high single digits (5-8%) during good times.

Business Model

The company is a cashcow, regularly generating profits and free cashflow year in year out:

How much of their costs are fixed, and how much variable?

From the above graph, many of their costs seem seem to be variable, not fixed:

I'm not sure how staff costs can be variable.
For marketing: I guess when times are bad, advertising is cheaper.
Cannot tell what their 'Others' cost is. 2009's dip can be partially explained by a 1bn loss from the Pension scheme.

This an asset light business. There's very little depreciation or operating leases, and most of asset are brands (intangibles).

High inventories:

Morningstar notes that: "About one third of Diageo's volume ... is derived from maturing products, which can sit in inventory and age for up to 30 years. ... Diageo expenses these input costs on an actual usage basis, meaning that it could be 10-30 years before today's cost inflation affects the income statement. Therefore, we suggest investors look closely at cash flow in addition to earnings when valuing Diageo."
They have about 2.7bn of Maturing Inventories, over 80% of it intended to be held more than one year.

Beyond future 0-8% organic growth, acquisitions are required. Diageo looks for companies with "strong local routes to market":

Worldwide: MH is most desirable, but not for sale. Diageo is currently negotiating to buy Jose Curevo.
Diageo is restricted from entering into Tequila, Cognac and Chapagne, due to their agreements with HM and Jose Curevo. There may also be anti -trust restrictions if it ends up owning to many popular brands in the same category.
Recently bought a 23.6% stake in Halico, Vietnam's leading spirits maker for £33m. Bought Mey Icki, which controls 80% of the market for Raki, at £1.3bn, at 9.9 times 2010 EBITA.

Balance Sheet

£6.7bn long term debt. Slightly over 3 years profit (before-tax).

Pensions liability underfunded by £838m as of June 2011:

Their actuarial assumptions (p130. eg: salary increase, inflation) look OK.
Discount rates are 4.9 to 5.7%. About 40% of the fund is in equities, with an expected return of 8.3%. Probably OK.
The group expects to make 163m contributions in 2012.

Negligible operating leases: 368m over the next 5 years.

Cashflows

Net Cashflow from Operations (basically CFO minus tax and interest) is usually higher than their reported profit. Outlays on Cash Flow from investment are usually quire small:

Conclusion

I would buy in a recession.

SG Property Development Rules

2011-12-10T19:35:00.000-08:00

New (and existing) rules applying to property developers (BT Fri 9th Dec, front page, Kalpana Rashiwala).

Old rules:

Any developer buying a Government Land Sale (GLS) residential site had to complete development in 5 years (no time limit on sales).
When buying a private sector residential site, foreign developers have to obtain a Qualifying Certificate, which requires 5 year limit for the TOP (development) and another 2 year limit on sales. Any developer with even a single foreign shareholder is considered 'foreign', hence CDL, Capitaland & Wheelock face these limits. Only local, privately owned developers (Far East, Hoi Hup) were except.

New rules:

For any site bought after Dec 8th, must develop and sell all units within 5 years. Otherwise they must pay a 10% additional buyer's stamp duty (ABSD) at the end of the 5 year period (with interest).

My thoughts:

Levels the playing field between private and publicly owned property developers.
Forcing developers to sell during a downturn may exacerbate it. Every last unit must be sold within the timeframe. Would these measures be removed? Retroactively?
I used to like Wheelock due to their astute market timing. As they have no undeveloped property in its landbank: they are now restricted to developing and selling any new land withing 5 years (previously it was 7).
SC Global may benefit, as they have a large bank of prime freehold land bought before the restrictions came into force.

LVMH

2011-11-25T06:59:00.000-08:00

Worlds largest luxury goods seller. 2010 revenue/profit breakdown:

Fashion & leather goods (38%/62%)
Wine & Spirits (16%/22%)
Perfume + cosmetics (15%/8%)
retailing (27%/5%)
watches + jewelry (4%/3%)

First we look at the first 2 segments separately.

Leather and Fashion

I never imagined that I would ever, in my entire life, see a line of people queuing to shop for thousand dollar handbags.

It is difficult to convey how luxury goods are a part of everyday life here. The car you drive, the watch or clothes you wear, do really mean something. Women can instinctively identify a myriad of branded handbags, jewelery and watches at a glance.

The book "The Cult of the Luxury Brand", believes that Asian countries follow a model in their adoption of Luxury goods; the final stage is where Japan is now, where it is a 'way of life'. They write about the ubiquitous LV in Japan: "It is well past the stage of a trend, it has become an enduring requirement - like sushi or green tea - essential to the Japanese way of life...the company has taken the trend to conform to its logical end: To be Japanese means to have a Louis Vuitton bag. The brown bag with the original monogram pattern and pale leather trimmings has come to define the Japanese national identity."

In short, luxury goods are not a luxury. They are a part of everyday life. From junior office ladies to tai-tais, many people here must have them to function in society. This bodes well for the continuing consumption of luxury goods, which can be supercharged by an emerging China and India.

Comparing sales and profit margins of other brands with LVMH is hard, because LVMH does not break down sales for the many brands they own (LV, Fendi, Donna Karan, Loewe, Marc Jacobs, Celine, Kenzo, Giovenchy, Thomas Pink, Pucci, Belutti, Rossimoda). The chart below show show the total amounts for 'fashion and leather' for LVMH, compared with individual brands for other companies (so not really an apples-to-apples comparison):

From the above, their flagship LV brand, has, at most, twice the sales of the nearest competitor.

[For Coach, converted to Euros at a rate of 1 USD = 0.7394 Eur]

LVMH's margins are among the highest in the industry, only occasionally surpassed only by coach. The LV brand itself would probably have even higher margins, as they are lumping in all brands together.

LVMH's 'leather and fashion' revenue did not fall during the 2008 crisis. It may have been due to China, LV did not break down the figures.

Wine & Spirits

2010 revenue and profits are split evenly between "Wine/Champagne" and Spirits.

The champagne market is highly fragmented, with many producers. This article (free here) puts MH at an 18% global market share. It also discusses how MH is trying to tie up supplies in the (govt mandated) champagne growing regions. I would put MH as the largest player in a fragmented field, but with no real dominance or pricing power.

The champagne/wine market is highly cyclical, as with any commodity that has a fluctuating price and takes time to grow. e.g.: champagne grape glut in 2009, wine grapes in 2003.

For spirits:

MH trails the largest playes in the spirits market (2010 revenue: 3.3 bn Euros). The largest player is Diaego (revenue: 15 bn Euro) and Pernod-Ricard (June 09 revenue: 7 bn Euros).
MH's products do not appear in the top lists for spirits.
HM has a 44% share of the cognac market. Cognac went out of fashion in the early 90's, but is now revived due to rappers and China.

HM is not a leader in this market. The Champagne market is highly cyclical. And the spirits market is subject to changing fads and fashions.

Business Model and Risks

For the company as a whole, about 10% of their revenue is spent on advertising.

In the luxury goods business, the main aim is to develop a 'buzz'. Usually done by having celebrities and A-list people wear your products, appear at your parties, etc. This creates a fashion, which people talk about and want to imitate. This 'buzz' is the heart of the luxury goods business - it feeds it and is fed by it. I'm not sure exactly what creates it, but its more than throwing millions of dollars at advertising.

LVMH's income statement is quite sketchy: cannot tell how much of their costs are variable and how much are fixed. The financial statements are short: LV does not even break up their sales/margins by brand; contrast to Coach for example, which provides same store sales.

The chairman, Bernard Arnault, owns 47% of the company and has direct control. Two of his five children currently work there: Antoine Arnault has a management role and is on the board of directors, Delphine Arnault is a director, and nephew Harry Seaman may be involved as well.

LVMH owns many unrelated businesses. Ranging from a stake in Hermes (designer bags costing 50K), to cosmetics retailer Sephora (similar to 'Watsons', but for cosmetics), to Charles & Keith ($30-$40 women's shoes). Does not seem to have any focus. Combined with their sketchy financial information, makes it hard to track.

To conclude:

LVMH's main business is Fashion and Leather goods. The others are just sidelines or distractions. And are in more competitive markets, so unlikely to make the same margins as leather goods.
This is the only area they have have a competitive advantage in. The LV brand probably sells twice as much as its closest rival, and has the industry's highest operating margins.
This market has the potential to boom, thanks to China/India.

I'm not sure if I'd be comfortable buying this stock.

United Parcel Service (UPS)

2011-10-28T22:42:00.000-07:00

The largest delivery company in the world. It is still quite dependent on the US: 60% of revenue and 57% of profit came from domestic operations in 2010.

Their segmental results are broken down into:
- US Domestic (ground delivery of letters or packages, both sending and receiving in the US)
- International Package
- Supply chain and Freight (Truckload (TL) and less-than-truckload (LTL) deliveries) - in the US and surrounding countries)

Competitive Advantage

DHL wrote off 3.9bn when it exited the US domestic market in 2009. Fedex and UPS are the only 2 large players left, and are compared below.

First, market share. UPS has larger (about 80% more) revenue for US deliveries. They both have similar revenues for International.
'International' here means the package was sent to *or* from the US.

Next, margins. This is difficult because both companies break down their segments differently. Fedex breaks down their margins into 'Express' vs 'Ground' (disregards if the packages are domestic or international):
We can see that:

Ground handling has a lot higher margins than express.
Express margins are more cyclical: were worse hit by the 2009 recession, due to falling revenue (Express fell 8% from 08 to 09, vs a 4% increase for Ground).

UPS breaks up their segments differently. Each of their 'Domestic' and 'Intl' segments is a combination of express and ground. Their 'Domestic' was an even mix of express/ground in 2010. Express has made up a larger and larger proportion of the mix since 2007.

We can't compare directly to Fedex due to the segment differences.

UPS has significantly higher margins overall. Morningstar says this is probably because of 1) their integrated network (same network used for both express and ground delivery, unlike Fedex, which uses separate networks), and 2) more mail being funneled through the network.

CashFlow

For the last 10 years, from 2001 onwards, UPS has generated free cashflows all except one year.

Balance Sheet

Long term debt on their 2010 balance sheet is minimal (about 10b), together with some others (e.g.: post-retierment benefits), totals about 18b. Thats about 5-6 times their 2010 income (3.4b).

Off the balance sheet: they have another 3bn operating leases and purchase commitments (included in income statement), plus 2.5bn capital lease (not in income statement). All spread out over the next 10 years.

Industry Outlook

Depends on trade (national and international).

In the short term, this depends on the economic cycle.

In the long term, international trade has been increasing since WWII. It would take drastic scenarios for trade to go down (e.g.: trade war, rise of additive manufacturing - a possibility explored by DHL).

Conclusion

Company with a large moat. Half US, half international. Highly cyclical. Buy in a recession.

Defined Pension Plans

2011-10-21T21:24:00.000-07:00

Many US companies have underfunded pension plans, which are not shown on thier balance sheets. In a good case, its several years of earnings. In a bad case, the company may be bankrupt.

We are looking at 'Defined Benefits Pension Plans' where the company is liable for providing stipulated retirement benefits for employees at a future point in time. These are unlike the 'Defined Contribution Benefit Plans', where the employee/employer contribute a fixed amount (401K plans in the US, similar to CPF in Singapore). Liabilities for defined benefit pension plans may be quite big, are not on the balance sheet, and therefore ignored by the financial ratios (eg: PE, debt/Equity).

How are Pension Costs Calculated

Aim here is to understand the meaning behind the pension numbers in the financial statement, process and assumptions that go into the numbers we read. Here is how I imagine it they are calculated (I am not an accountant).

Step 1: Get the current 'fair value' of pension fund assets: This is quite straightforward and objective, as most pension plans consist of liquid assets (equities or bonds).

Step 2: Calculate the Projected Benefit Obligation (PBO): really a series of guesses upon guesses:

Estimate how much will be owed in future. There is a lot of guesswork here based on the employees' pay rises, retirement age, etc. Some terminology: changes to the final PBO as a result of these assumptions changing are labelled as 'Actuarial loss/gain' or 'Experience loss/gain'.

Reduce this to a number in the present by applying a 'discount rate'. This gives the PBO: an estimate of how much you need today to pay off your future obligations.

Step 3: Compare these numbers from steps 1 and 2: Is the plan under or over funded? 'Funded status' must be stated n the footnotes, but if underfunded, the liability does not have to be recognized on the balance sheet...hide it it the footnotes somewhere.

Step 4: Calculate how much the pension cost in the current year, then decide how much of that to expense in the income statement.

Calculate the current pension cost. This appears in the footnotes, something like 'Components of Pension Expense' or 'Net Periodic Benefit Cost'.... It consists of:

Service cost: Because all employees are now 1 year closer to retirement.
Interest cost: Because we now have 1 year less to payout our obligations. This depends on the 'Discount rate' in Step 2 (higher rate --> lower PBO --> higher interest expense every year).
Subtract the Expected return on assets. This can be increased/decreased.
The result is how much you expect the pension to cost you every year.

But....this amount does not have to be fully recognized in the income statement. It may be smoothed out (exceptional gains or losses can be deferred over five years).

In summary, its quite a complex model to reduce a set of future estimates into a few simple numbers, and in the end those numbers may not even be added to the income statement or balance sheet.

Summary of Things to Check

From Investopedia:

1) Locate the 'Funded status', if underfunded, is the liability recognized on the balance sheet?

2) Check the assumptions used:

Rate of salary increase used to calculate the graph in Step 2.
Discount Rate (step 2): Is it reasonably low? I'm not sure....what is a reasonable expected annual compound growth rate for equities or bond investments?
Expected Return On Assets in Step 3: Should not be significantly higher than the discount rate.

3) Is the pension cost/expense fully expensed in the income statement, or deferred?

4) See what proportion of the plan is funded by equities and bonds. Bonds are safer: as they are held to maturity, the only risk in holding them is that the underlying company goes bankrupt. Equities may rise or fall in value when the time comes to sell them.

A look at UPS

I'm using United Parcel Services (UPS) as an example, simply because its the next stock I'm looking at. Numbers are from its 2010 annual report. Page numbers refer to the page number in Adobe Acrobat (not the numbers printed at the bottom of the page).

Funding Status:

(p89) UPS' pension plan is worth 20m886m, with a BPO of 25,619m. As calculated, it is underfunded by 4.7bn. And all of this underfunding is recognized on the balance sheet (p90).

Assumptions used (mostly on p87 'Actuarial Assumptions'):

UPS has been using between 6.5-7% for the past 3 years. This may be acceptable: to me its not conservative, but not high either. p60 states that a 0.25% decrease in the discount rate results in a 850m increase in projected Pension Plan obligations.
Return on assets: UPS has used between 9%, and 8.75% in the past 3 years. Seems high, either for equities or bonds. p60 states that a 0.25% decrease in ROA will increase costs by 46m/year.
Rate of salary increase. UPS has used 4.5%, seems realistic.

There is an interesting note on p60:

"Our 2011 pension expense will be higher than our 2010 expense due primarily to two negative factors: the decline in discount rate used to determine expense from 6.58% for 2010 to 5.98% for 2011, (good: 6% discount rate is conservative) and the required amortization of unrecognized losses, the majority of which relate to 2008 asset losses, outside of the corridor we utilize for accounting purposes. These negative factors are partially offset by the additional discretionary contributions that we made in 2010 and 2011 that increased the expected return on assets used for expense calculation purposes." (Did they buy equities....? probably not good to buy high in 2010 and 2011 to make up for losses in 2008.)

Is the pension cost fully expensed?

The Net Periodic Cost is calculated at $903m (add columns on p87). This was fully expensed in 2011 (p69 cashflow statement - the amount is added to CFO i.e.: deducted from earnings).
I think p90 shows a buildup of pension costs from past years (total $5900m in 'Amounts Recognized in AOCI'). Not sure of the terminology - I think it means this just has to be recognized in future years, which is what they were talking about above (interesting note on p60).

Conclusion for UPS Pension Plan:

Can't find anything wrong.
Wait for the 2011 Annual Report, to see what the BPO looks like with a more realistic 5.98% discount rate, and how much of the of the $5900m accumulated costs (loss) they recognize.

Added more money

2011-10-04T16:58:00.001-07:00

Added 260K. From sale of overseas apartment. Now have 510K.

If we get a recession, and I am able to buy stocks which don't go to zero, I am going to be rich.

ECRI calls Recession

2011-10-02T06:09:00.000-07:00

New recession call from ECRI. At a minimum, a shallow one, but if there are unexpected shocks, it would be deeper.

Continuing the chronological listing of ECRI's calls:

31 Aug 11: Summary of Member Report Issued Aug 19, 2011
Job Market to Remain Weak. Still cant tell if slower growth or recession. Has been persistent, not pronounced or pervasive. No upturn in sight yet.
17 Sep 11: Radio interview: Skating on this ice.
Fwd looking indicators show continued slowing. Risk of a new recession is "quite high", don't yet know. Should know by end Nov.
30 Sep 11: US Recession (Bloomberg)
Recession "now inescapable". Over a dozen 12 US leading indexes (different aspects in the US economy), all showing contagion. Vicious cycle to start. Will continue to be pronounced, pervasive and persistient. "If Europe cleans its act up and everything is good, there's still going to be a recession." If there is an unpredictable event (eg: Lehman imn 08) it will be worse. How long? Don't know yet. Right now, minimally, its a shallow recession. Recessions kill inflation.

Good. Soon I'll get a change to use the money I've been hoarding.

Cargill to set up cocoa grinding plant in Indonesia

2011-09-28T06:05:00.000-07:00

From BT, Tues 22 Sep 2011, p11.

Cargill plans to spend U$143m setting up a 65-70,000 tonnes/yr cocoa grinding plant in June 2013.

Indonesia has a 10% export tax on cocoa beans to ensure domestic raw-material supply. Tax allowances also given for the plant.

Market Timing with ECRI

2011-07-29T14:58:00.001-07:00

I like these guys. Their announcements are clear and straightforward. And if they don't know something, they say it.

They do not make predictions, they just observe changes in their indicators. Their Weekly Leading Index (WLI) tracks short term changes in the economy. It has an average lead of 10 months at business cycle peaks and three months at business cycle troughs. The stock market is one component. Their Long Leading Index (LLI) is proprietary and leads about a year. It does not include the stock market.

We don't interpret the results ourselves, but wait for ECRI to make news releases. There is a lag, firstly because they are predicting the economy, rather than the stock market, and secondly because they alert their customers first. Too bad it seems they are not interested in individual subscriptions.

Lets see how useful their results have been:

They firmly called the recovery at point 1, in early April 09:

03 Apr 09: WLI Edges Up: "With WLI growth rising to a 23-week high, an upturn in the U.S. growth rate cycle is now in clear sight". [Note: Good call. Would have doubled my profit.]

From late 2009 to late 2010 (at 2), there was talk of a "double dip recession". ECRI generally discounted this. [I started following their releases here]:

31 Oct 09: No Double Dip: Growth is "broad based". "On the issue of double-dip recession, we do not see a real downturn in the next few quarters".
27 Nov 09: Sharp Recession Sharp Recovery? WLI is "consistent with a steady economic recovery."
US Yearly growth gauge down, double dip unlikely (6th Feb 10): trends pointing to a double-dip recession are "nowhere in sight."
28 May 10: WLI Growth Tumbles: "The downturn in WLI growth evident since early 2010 has recently intensified, so it should be no surprise when U.S. economic growth slows noticeably in the months ahead," [Note: we must distinguish between a slowdown in growth and a slowdown]
19 Jul 10: Slowdown Call came long ago: "For now, ....the data indicates slowdown, not recession"
01 Sep 10: Recession or Soft Landing? Currently in a slowdown. Historically, slowdowns result in a recession more than 50% of the time. Inconclusive, will make a call by end Nov.
18 Oct 10: No Double Dip recession but Jobs Growth to slow: "We categorically rule out a double dip recession." GDP/production/jobs numbers will go weaker, but not negative...may feel like a recession.
06 Mar 11: Big Picture Outlook: Cyclical expansion is speeding up. Growth will continue at least till Sept.

In Mar 11 (at point 3), they signal a slowdown in growth rate (not a recession):

06 Mar 11: Global Industrial Growth Downturn and Growth to Peak for Global Industrial Sector: "We see, unambiguously, a downturn in the growth rate of industrial activity (incl. commodity prices) by this Jun/Jul. Not a recession, its a change in the rate of growth (2nd derivative). Expect strong market reaction. Global. [Note: Would SELL here if I was following them]
09-17 Jun 11: Soft Patch not a blip, A prolonged slowdown, Throttle back in economic growth Ahead?, Mirror Image of last Fall?: Growth will slowdown at least till end of year. US slowdown will spread to broader US economy. No recession till end of year, not sure after that.
19 May 11: ECRI Sees slowdown but no new recession
29 Jul 09: Slowdown Undeniable and Shocks during slowdown are risky: Not in recession yet. But combination of slowdown and any external shock is risky. Cannot rule out recession next year.

So far, their calls have been spot on. Lets see how the latest one turns out.

Always Coca-Cola (KO)

2011-07-10T01:59:00.000-07:00

The world's biggest seller of sugar water, and a cashcow. Their competitive advantage is their distribution network. This is a short post - nothing to say that hasn't been said elsewhere - the only question is what price I would buy it.

The company estimates they account for 1.7bn out of 55bn (about 3%) drinks drunk daily (this must also include water). They now sell a large number of drinks, not just Coke. In Singapore, for example, we see Minute Maid Pulpy, Heaven & Earth Tea, Vitamin Water.

Quick summary of business
Coca Cola is actually 2 businesses: concentrate production, and bottling. (From Morningstar): The pressure on bottlers' margins and the demands by the syrup makers for distribution and production flexibility have been sources of conflict between the parent companies and their bottlers for many years. (In 2010) Coke has followed the lead of its great rival PepsiCo PEP by acquiring the North American operations of Coca-Cola Enterprises CCE, in a strategy intended to eliminate these conflicts and make the firm more responsive to changing consumer tastes.

Geographical breakdown
Looking at profit, note that:

Only the North American sales include bottling.
Any bottling done in other regions is in the 'bottling investment' category.

I'd estimate that half their profit comes from emerging markets (Pacific, Latin America, Africa & Eurasia, and perhaps a bit of Europe).

Cyclical and Growth
Trying to get some idea of their growth rate. Looking at growth over the 2008/09 recession. "Unit case volume" growth measures the amount of liquid sold:

They seem to be getting:

zero growth in developed countries (~45% of their 2010 profits).
high-single or low-double digit growth in developing countries (~55% of their 2010 profits).

Looking at these: 4-5% long term annual growth seems realistic (all driven by emerging markets).

Valuation
Discounting the 5bn extraordinary profit from buying over CCE's operations, their 2010 EPS is $2.87.

Morningstar (seems to) estimate their earnings at $4.20 per share (?), up significantly from 2010. They project lower growth of 4% in emerging markets, with growth following inflation rate in developed markets. They recommend buying at 13 PE (~ U$ 55)

Economic Moats

2011-06-10T20:54:00.000-07:00

From "The Little Book that builds Wealth" by Pat Dorsey of Morningstar.

He gives a list of common economic moats. This is simpler and more stringent than using Porter's 5 forces. His approach is to go beyond the numbers and find the reasons for high margins.

Brands. Not as important as we think:

May offer a sustainable competitive advantage if the brand makes people pay more for the same product (e.g.: Tiffanys vs Blue Nile).
Most brands are for differentiated products, (e.g.: Coke, Mercedes-Benz), these two examples do not cost more than their competitors. A brand's popularity is no indication of an economic moat.
Brands can be lost e.g.: Kraft used to dominate shredded cheese market, but was replaced by supermarket generic brands.
Can't think of any in Singapore.

Patents

Patents. "Beware of firms which rely on a small number of patents. The only time patents constitute a truly sustainable competitive advantage is when a firm has a demonstrated track record of innovation that you're confident can continue." e.g.: 3M
Again, none in Singapore.

Regulation

Prefer industries with strong regulatory barriers to entry, but where the government does not want to control prices. In SG, perhaps Vicom?

Switching Costs

When it costs the customer a lot (in money, time, inconvenience or risk) to switch products. eg: changing bank accounts. Good example is providers of large scale IT projects to government/defense/banks. Maintainence can only be obtained same provider for the projects lifetime, usually 10 years. e.g.: Silverlake Axis

Network Effect

People need to use the product because others use it. e.g.: Facebook, MS-Word, E-bay, Visa. Google does not have this, for example.
Or the company has a strong branch network e.g.: Western Union (money transfer).
In Singapore, Goodpack perhaps. SGX may be a negative example (compared to HK).

Cost Advantages

Better processes. e.g.: Dell, AirAsia. This is a temporary moat, until the competitors are able to copy (usually takes a long time). Not sustainable.
Location. Mostly for heave and cheap commodity products e.g.: cement, landfill
Ownership of resources. e.g.: own cheapest mineral deposits.

Scale

Large distribution networks. Extremely hard to replicate. e.g.: McDonald's, Coke, Fedex. On SGX, Petra?
Economies-0f-scale (large fixed costs). Can't think of any in SG. Mabye Keppel?
Dominating a niche market. e.g.: Some HDD component suppliers in Singapore.

Eroding Moats

Avoid tech, products/markets change too fast (e.g.: Dell, Nokia). Also avoid anything affected by technology changes e.g.: newspapers, communications (post/phones), book-retailers, cameras). Hmm....these days, the internet changes everything...doesn't leave us with much to look at.
Change in market landscape....the strength of customers/suppliers. eg: Walmart erodes the brand advantage of many consumer goods.
Entry of Irrational competitor e.g.: a competitor facing bankruptcy or supported by govt.
Falling margins is a sign of an eroding moat, may be hard to determine the cause.

A final note. Identifying economic moats, and determining if they are sustainable or being eroded, requires a lot of research on the industry. Probably years. Probably beyond a part-time retail investor.

Eu Yan Sang

2011-04-02T06:45:00.000-07:00

Regional TCM company. Main business is M'sia, S'pore and HK, attempting to expand into in China:

What they do (breakdown by 2010 revenue):

81%: Retailing. Their main business. Their chain of 171 retail outlets sells their branded TCM and health products throughout HK, S'pore & Msia..
11%: Wholesale. Mostly in HK/China. In HK, sold to large chain stores like Mannings/Watsons. In China, sold to pharmacies/hospitals.
Abt 8%: Clinics and others.

Their main products seem to be of two types:

Proprietary medicines, taken from a complex traditional formula, put in powder/capsule form, and scientifically tested for results. eg: Bak Foong pill (menstrual symptoms), Bo Ying compound (f0r babies)
Generic products, branded with a label (e.g.: birds nest, essence of chicken)

Business model:
Cashflow generated from operations is used to expand their retail network, introduce new products, and start other new businesses. They have been very successful with the first two - in 7 years from 2002 to 2008 (both troughs in recessions), revenue and PBT (excluding exceptionals) have more than doubled.

EYS has been profitable every year since listing in 2001:

Their core retail TCM business has been growing steadily and profitably, but overall profits have been more sporadic. Excluding the exceptional charges smooths out their core profits:

The exceptional charges are usually impairments to non-core businesses, write-offs and exceptional gains from sale of businesses. EYS' previous attempts to diversify into other areas have mostly failed:

Year	Exceptional Charges
01	none
02	-0.7 (impairment of goodwill: Oxford natural products) -1.4 (provision for diminution in value of investment?)
03	-2.9m (Write off for Oxford Natural Products) -0.7m (Provision for impairment Botanical Health Resources)
04	-1.4 (Impairment of goodwill - Australia (Your Health, Aroma Fresh))
05	-1.5 (Impairment of Goodwill - unknown...possibly Botanical Health?)
06	+3.2m (special gain: divestment of Synco)
07	+1.3 (special gain: sale of property) +1.4 (special gain: sale of Elixir)
08	-2.4m (write off RedWhitePure) -0.5 (YourHealth) -3.9 (impairment of investment in unquoted shares)
09	none
10	none

Only 6 of the past ten years have generated FCF, due to high CFI:

Most of the CFI (orange bar above) was spent on new retail outlets (furnishings and fixtures):

02: 7.4m (+9 outlets)
03: 7.8m (+13 outlets)
04: 5.4m (+9 outlets)
07: 4m (+13 outlets). 9.5m construction-in-progress
08: 7.5m (+19 outlets)

Competitive advantage:
They may have some sustainable competitive advantage due to 'upmarket' branding. Cannot quantify. No market share figures are available. The TCM market is large with no clear segment boundaries (e.g.: many small TCM businesses selling herbs). And no clear competitor in the same up-market segment (in S'pore at least).
I don't know if their proprietary products are truly unique, a quick search shows other brands have have similar products (1) (2).

Since the TCM market is so fragmented, I guess they have little or no pricing power. From a 2004 DBSV report:
The TCM market in Hong Kong and China is highly fragmented with many small retail operators and CPM manufacturers. The supply and retail of raw and processed herbs are carried out by 800 medicinal halls and retail outlets in Hong Kong and significantly more in China. There are, however, only 4 major retail chains in Hong Kong and China, namely Eu Yan Sang, Tung Fong
Hung, Nam Pei Hong and Beijing Tongrentang.

Inventories
Critical for retailers. Generally, EYS seems to stock slightly less than 1 quarter's sales as inventory:

Over the long term, have become more efficient, as sales have risen compared to inventory.

Balance sheet
From their latest Dec 2010 results, they have 5.6m long term loans. Less than one year's earnings.

From their Jun 09 Annual Report: they have 22m operating lease commitments within one year.

Cyclical
Does their business suffer during a recession?

In the 2002 recession and 2003 slowdown (SARS), same store sales suffered:

For 2003, the chairman noted that "SARS had a huge impact on retailing...tourist travel was sharply reduced...consumers stayed away from shopping centers".

However, in the 2008 recession, I can see no effect:
Can't draw a conclusion, other than sales seem affected by long recessions.

Valuations
Typically how low does EYS' valuation go in a bear market? EYS reached a trailing PE of around 6 to 7 in 2002 (long recession), and 9 to 10 in 2008 (short recession).

What a red flag looks like....

2011-03-04T01:04:00.001-08:00

China Hongxing. With hindsight:

Steady increase in receivables over the years. The YoY doubling in 3Q09 would be the tip-off here.
Change of auditors in Oct 10. Lesson here is to go through the past 5 years SGX filings before buying.

Also, institutional ownership was no help (BT, Mon 28th):

China Hongxing has a strong institutional following that includes Skagen Funds, Fidelity, JP Morgan Asset Mgt and State Street.
Singapore based private equity Tembusu partners has invested in Hongwei.

Added more money

2011-02-20T03:53:00.000-08:00

While waiting for the next recession....which there is no sign of yet....

Added 50K to portfolio. Savings from overseas assignment. Now have 250K. Moved it to an account paying 0.2% interest. Inflation is the big risk here.

Line-of-Credit approved for AUD 90K against overseas property. Must keep in mind:

Can only reasonably withdraw AUD 50K for the rent to cover the loan amount
Large forex risk. AUD very volatile, In 08, dropped 30% in a week against SGD, recovered in several months.
At some time it may worthwhile to sell the property instead. Probably if it hits 30x gross rent. Bank's valuation at 250K last year was 24x gross rent. Also, get my Singapore PR renewed first.

Still doing nothing. Busy looking for new job.

Dairy Farm

2010-11-26T06:54:00.000-08:00

Asian retailer. Owns and runs supermarkets, hypermarkets, health and beauty, and convenience stores.

Slow but steady grower. Over the last five years, sales are up 48% and profits up 70%.

Business Model
-------------------
Use cashflow generated from existing operations to set up new retail stores. If it succeeds, keep growing. If it fails, sell off and try again.

Most stores are owned and operated. Stores usually rented through operating lease. Convenience stores may be franchised.

Expanded steadily over the years:

Not sure how many convenience stores are franchised and how many owned.

Balance Sheet:
------------------

Their expansion has usually been through internally generated cashflow. Very conservatively financed: total borrowings almost always less than one years operating cashflow:
The debt above does not account for cash held - most years they were net cash.

Keep in mind their high fixed costs, esp. operating leases, below.

Competitive Advantage:
-----------------------------
For supermarkets/hypermarkets, they have a significant presence in HK, Malsysia, S'pore and Indonesia, but would not have pricing power (like Walmart in the US or Coles/Woolworths in Australia).

HK

Largest supermarket operator with 276 stores. Closely matched by ParknShop (Hutchinson Wampoa) with approx 280 stores.
Many other players: Yu Kee Food with 70 stores, DCH food mart with 60 stores, Jusco (AEON) with 10 stores.

M'sia

M'sia market more fragmented. DFI may be the largest, but have many competitors:

DFI has 69 supermarkets, 58 hypermarkets.
Carrefour: 22 hypermarkets, 5 supermarkets
Jusco (AEON): 25 stores (09 AR)
TheStore: 58 supermarkets, 5 hypermarkets
Tesco: 34 stores, probably hypermarkets

S'pore
DFI is first or second largest (95 supermarkets, 7 hypermarkets) vying with NTUC (100 supermarkets) with a few competitors:

Sheng Siong: 23 supermarkets and hypermarkets
Carrefour: 2 hypermarkets

Taiwain:
Seem to be a smaller player, running smaller stores open 24hr. No hypermarkets.

DFI has 299 supermarkets
Carrefour: 64 hypermarkets
Article: http://thelostswede.com/?p=33

Indonesia:
2nd largest, far behind Carrefour. This 07 report gives the 5 largest chains:

Matahari: 53 foodmart, 11 hypermarts (for sale, Wallmart?)
Carrefour: 66 hypermarkets, 14 supermarkets
PT Hero, now owned by DFI: 113 supermarkets, 35 hypermarkets
Alfa, now owned by carrefour: who may be forced to divest
Superindi (Delhiaze): 66 stores

Cyclical
-----------
How much of their gross margin (in 09: 2117m) is taken up by fixed costs?

Employee costs: 627m (~ 29%)
Operating lease: 515m (~ 25%)
Depreciation and amortization: 147m (~ 7%)
423m PBT (~ 20%)
The other 400m (~ 20%) don't know

First 3 items are fixed costs (~ 60% of gross margin). Any slowdown in sales could have a large impact and swing their profits into losses.

How did they fare in the 08 recession? (The recession started with 2Q08 being the first quarter of negative growth in SG and HK):

Topline: No slowdown in sales, and gross margins did not fall:

Bottom line. This time break up by segment:

Can see:

Increasing operating profits throughout the recession.
C-Stores profits dropped even after the recession. Mgt said this was due to China restrictions on selling tobacco.

But, sales and profits were helped by the opening of new stores. Trying to estimate on a per store basis for their different segments:

Supermarkets/hypermarkets are combined, I'm taking one hypermarket to equal 4 supermarkets.
Did not exclude stores opened less then a year - not available. Could skew the results lower for stores opened halfway through the year.

We get:
Due to seasonality, show the YoY % change (e.g.: compare 2H08 with 2H07):

We can see:

SSS for H n B is unaffected by recession. However profit was.
C-stores most affected: biggest plunge in SSS and profit on 2H08.
Supermarket/Hypermarket are still affected, but by less. Seems not all goods they sell are non-discretionary.

Comparing with the Operating Profit chart, we can see that even though sales/profits dropped on a per store basis during the recession, they were opened enough new stores to increase the overall numbers.

US Mkt in correction

2010-11-20T17:30:00.000-08:00

Still tracking IBD's market direction calls. Even doing nothing now, I may want to position trade in years to come.

IBD flagged market under pressure on 12th Nov, due to the build up of distribution days (Dow 5, NYSE 4, ):

"Avoid trying to predict the market's next move. The next step could be a correction or a resumed uptrend. The past 12 times IBD termed the market outlook as "under pressure," the next move was to correction six times and to resumed uptrend six times."

Then 'in correction' on Nov 16th:

Recent history shows no consistent pattern. In four of the past six cases, the Market Pulse's outlook remained at "correction" for nine sessions or less. In two cases, the correction label stuck for four or five weeks.

The market was overbought, and ready for a correction. Lets see how far it goes.

[Update: 12-Dec-10]
Uptrend resumed on 3rd Dec, even with no FTD, due to the strength of market leaders and market depth. No breakdown yet.

6 years is a long time....

2010-10-31T05:34:00.000-07:00

I've stopped trading, I am not wired for TA. Position trading sounds good in theory, but in practice I cannot predict the market direction clearly enough. Whipsawed by non-trending markets. The time and risk to get a mere 10-20% return is not worth it.

My best bet is to wait for the next bear marker or recession, when I can easily get a 50-100% gain within a few years with less risk. I am comfortable going against the crowd. Wait for:

Newspaper says recession and job loss.
Stocks fallen 50% from previous highs
Revenues have fallen for 2 or 3 quarters, PEs become compressed.

Historically, bear markets may take up to 6 years in to occur Singapore (1998, 2001, 2003, 2008). 4 more years to go....

Next time, remember to:

Buy and hold. Bull markets last a lot longer that expected, and its painful not to participate. Don't know when/if I'd sell.
Beware the market taking off too fast (e.g.: Mar 09, or after the AFC).... Need a simple criteria to catch this and speed up my buying.

In the meantime, my goals are:

Save enough for a meaningful stake.
Research and track enough SGX companies (aim for 10) that I would be comfortable buying when things are going to hell..

AirAsia

2010-10-01T02:42:00.000-07:00

AirAsia is the largest LCC in a rapidly expanding market.

Their expansion is fueled by debt. How do their numbers stack up?

Balance sheet and Cashflows

Cashflows from Operations are quite good (ignoring unwinding of interest rate swaps). eg: in 09 they generated enough CFO to pay off their debt in 10 years.

Problem is due to the Capex, mostly funded by debt. CFI has been larger than CFO every year since listing (with the single exception of 09).... and not just a little but larger, usually double or triple....

Existing Debt

How is their debt hedged?

Footnotes 28 and 35:

Approx 80% term loans, 5% bonds (sukuk)
Approx 90% denominated in USD (700m). 35c: Abt 60% of this protected by a currency hedges (settlement dates "in accordance with the loan instalment repayment dates").
Overall interest rate approx 5%.
2.7% long term debt is floating, the rest covered by interest rate caps or swaps.

Not much risk there...

When is refinancing required? Safe for the next five years, with 4-500m a year due for refinancing, should be safely covered by CFI. The are:

2013, when 420m sukuk due (940m in total due for that year)
More than half their debt (400m out of 700m) is due after 2015, not detailed when.

I believe that current debt levels are sustainable.

Future Capex

As of 09: 16bn contractual capital commitments., with 8bn optional.

AirAsia has deferred aircraft orders 3 times: in July 09 8 A320s, another 8 in October, and 7 in October this year.

Year	Planes Due
2011	9
2012	24
2013	24
2014	26
2015	7

Source: table from The Star, adding the latest deferment. I did not find anywhere to confirm these numbers.

Tony Fernandez stated they would like to receive 12 aircraft per year, and keep their current gearing level (Oct 2010). additional financing may come from the planned IPO of AirAsia Thailand, Air Asia Indonesia and AirAsiaX.

Main risks:

Fuel prices. In 09, fuel was their largest cost (30% of revenue). Higher fuel prices will increase airline ticket prices industry-wide, lowering the difference between full service and LCCs.
External events. e.g.: SARS, 911, tsunami
They trip up on execution. eg: New routes/planes are not filled as they expected.

Conclusion

Sexy, fast growing and profitable company. But too much debt. Need to see:

Clarification of future expansion plans. In particular: timetable for plane deliveries, debt refinancing schedule. Calculate if their cashflow can support it.
Since I only buy shares in a severe downturn, see how well revenues hold up. Rising or flat sales in a declining economy will confirm that the Asian LCC market is still in its growth stage. Eventually the market will mature, and follow the general economy.

Petra foods

2010-08-29T01:06:00.000-07:00

Consists of 2 businesses:

Branded consumer division, which manufactures their own branded confectionery products and distributes 3rd party products in SEA (mainly Indonesia).
Cocoa ingredients division, which processes cocoa into chocolate ingredients used by chocolate manufacturers (e.g.: Mars, Cadbury, Meiji)

The Consumer division is well established, the Cocoa Ingredients is still starting up. In 09, Cocoa Ingredients accounted for 70% of EBITDA, despite both divisions having similar revenue.

Cocoa Ingredients
------------------------

Involves processing cocoa beans into cocoa powder, cocoa liquor and cocoa butter. The last two are commodity products, the last may have some value add (by customizing to different customers needs).

Business Model:

High capex, high volume, low margins. Borrow money. Build processing plant. Borrow more. Buy large quantities cocoa beans, process them, and sell the resulting commodity products at a slight profit. The low margin nature of the business is shown by single digit margins for EBITDA (No Gross & Nett margins were provided by business segment).

	04	05	06	07	08	09
Revenue (U$ mil)	266	302	328	597	874	945
EBITDA	22	26	28	27	22	28
Margin (for EBITDA)	8%	8%	8.5%	4.5%	2.5%	2.9%

They use derivatives to hedge against cocoa price movements. Management says they consider "the cocoa market to be a forum for managing risk rather than an opportunity for profit." [p5 09AR] i.e.: no trading profits. Gross cocoa grinding margins are not provided by Petra and its competitors for comparison.

Compeditive Advantage:

[From Apr 2010 S&P report, SGX research scheme]
One of the largest cocoa grinders in the world, based on grinding capacity:

14%: ADM - publicly listed.
14%: Cargill - private
12%: Barry Callebaut - publicly listed, vertical integrated chocolate provider.
11%: Petra
5%: Blommer

Petra is large enough to stay around... but in this sort of market, the top players are evenly matched: everyone is a price taker.

Its top three customers, Nestlé, Cadbury and the Mars Group each account for about 5%-7% of revenue.

Cyclical:

Cocoa grinding margin is affected by the difference in the price of unprocessed cocoa beans and the finished product. This seems cyclical - there was a glut of grinding capacity in 2002, and there was some margin compression last year after ADM and Cargill added capacity before the 2008 crisis.

(Wikipedia) If the combined butter and powder price is less than 3.2 times the bean price, grinding becomes uneconomical. Historical average is 3.5. See 'combined cocoa ratio' - grinding cocoa beans produces equal amounts of cocoa powder and cocoa butter (cocoa liquor is an intermediate produce, irrelevant here).

High cocoa bean prices per se do not affect their profit margins, as it is run on a cost-plus basis. Cocoa beans are bought (or secured through futures) after receiving an order. However record high prices increase working capital requirements, which hit Petra's cashflow in 2009.

The industry is highly cyclical, depending on the grinding capacity and the demand for it. I cannot predict the cycle, but Petra should be large enough to ride it out.

Industry Trends:
Continued increase in outsourcing trend expected. Attractive for chocolate makers to outsource the capital-intensive production of ingredients.

Branded Consumer
------------------------

Business Model:
Manufacture and distribute their products (48% 09 revenue). Distribute 3rd party products (52% 09 revenue).

Competitive Advantage:
Petra has a more than 50% share in Indonesia's confectionery market. Closest competitor is PT Mayora Indah’s Beng-Beng (14.5% market share). Combined mkt share of MNCs is less than 10%.

Large distribution network, with 110 air-conditioned stock points and a fleet of delivery vehicles delivering directly to 70,000 outlets.

Cyclical:

May be affected by:

cocoa, sugar, milk price.
general economy. Branded Consumer revenue dropped 11% yoy in 4Q08, after rising

Whole Company
--------------------

Free Cashflow

Petra has been consuming cash for the last 6 years:

	04	05	06	07	08	09	1H10
CFO	7.3	41	29.5	-29	18	-64	-55
CFI	-14	-45	-35	-50	-78	-81.9	-19

Notes on CFI:

07: 28m PPE (15.8m brazil + europe, and 12.1m upgrade indonesia production capacity). Remainder 22m: acquire 70% Hamburg plant
08: Almost all PPE: 76m to cocoa processing. 59m of that to Hamburg.
09: Half PPE: 41.3m for cocoa processing. 26m of that to Hamburg. Hamburg finished.
1H10: 70% is for purchase remainder of Hamburg plant.

Capex has dropped significantly in 2010 - management stated that have stopped all 'non-critical' capex.

In 09 and 1H10 CFO ballooned due to inventories. Inventories rose due to:

rising cocoa prices (25% in 2009):

Increased volume:

Cocoa Ingredient division - Volumes processed (000's mt)

05	06	07	08	09	1H10
114	136	148	160	234	119 (up 12% yoy)

Balance Sheet

High debt. Long term debt may be 5 to 10 times 2010 earnings. And it may increase more.

Total debt at 1H10 is U$514m. Of which 314m is current and 200m is long term. For comparison, FY09 earnings were 19m, earnings for 1H10 (alone) were 17.8m

Three things to watch:

1) Inventories. During 1H10, Cocoa inventories (for Cocoa Ingredients) rose 16%, while Cocoa processing volume rose only 12% yoy (search for 'mt' in Financial Results). Cocoa prices fell over this period:

From http://tfc-charts.w2d.com/chart/CC/W

Why are inventories rising faster than production, when the price of cocoa has fallen? It may make sense as they are ramping up production, and I do not know the exact time the inventories were bought. Not a red flag yet, but something to watch for.

2) Debt Maturity

Most of the 314m current debt is funded by short term borrowings:

For the U$200m non-current debt, $US130m of it is due between 2011 and 2014. They will have to refinance in the next few years:

45m MTN due between 2011 and 2014
25m MTN due between 2011 and 2013
20m Term loan due 2011
SGD 60m (approx U$45m) MTN due 2012

Management said they are starting to fund inventories using medium term funding, I have not seen this appear in the numbers yet.

3) When can they start generating free cashflow to pay off their debt? Thev'e stopped capex, any remaining cost is working capital.

A simple back-of-the-envelope calculation... As most WC is for inventory, this would depend on their processing volume and the cocoa price. Assume their inventory level in 1H10 at 400m was for the 87% utilization that period. Assume they increase to 98% utilization, then another 10% is needed: 40m at current prices. If cocoa prices change, this affects the all the inventory (i.e.: the 400m, not just the 40m):

Worst case, if Cocoa prices go up another 100%, they may need U$500m. Best case if they drop 50% then reduced by 180m.
Others
---------
This stock is very illiquid. Mkt Cap @ $1.00 is 525m. Approx 82% held by insiders (those with > 5%), gives free float of 105m. Fund managers cannot buy. Not trade-able, even by retail investors. Suitable for long term fundamental buy only.

Indonesian family owned business.

Conclusion:

Consumer business is a cash cow, with high barriers to entry. I like it.

Ingredients processing is a cyclical, commodity business, with high capex and working capital requirements. I don't like it. They have spent heavily since listing in 03 to become one of the largest cocoa processors in the world (processing capacity up from 7% (2003) to 14% (2010) of worldwide capacity). However they will never gain pricing power in such a fragmented market which has several strong players. Capital expenditure is now over after 1Q10, but more working capital may be required if cocoa prices rise (40m to 500m).

From comparing the two divisions, we can see why the chocolate makers are outsourcing their production....I wonder why Petra is doing the opposite? Well... if they didn't raise money to do this then they would never have listed in the first place...and we wouldn't have a chance to buy in.

Wait to see:

Inventories vs utilization vs cocoa prices
When can they start generating free cashflow?
Then do they pay off their debt?
How do they refinance their remaining debt?

And lastly... wait a while, years if need be... for the market to drop...

Neither here nor there...

2010-08-28T18:42:00.000-07:00

The US market's uptrend came under pressure 11th Aug, correction on 24th Aug. To me, this 'uptrend' was not significant enough to position trade. IBDs ratings do not work in a trendless market. I do not yet have this crucial skill to judge the state of the market (up, down, trendless) without hindsight.

However, following IBD does work well in a bull market. The previous examples I saw were from bull of 2003-2004. Waiting for a FTD, when the (brief) corrections are over, buying stocks that did not fall would have been profitable then. I'll keep my subscription to IBD while I see if I can learn to judge the markets better.

I have done nothing since June. Zero gain, zero loss. Right now, I do not know if the current market is still in a trading range, or correcting.

I am not cut out for swing trading, especially with a full time job. Position trading is difficult as I can't judge the market. I am changing my strategy to wait for stocks to be cheap, similar to end-08 or the 2001-2002 bear market. I may have to wait another 5 years....

Resist the urge to do something....

[Update: 13th Sep 10]
There was a FTD on 1st Sept. I am still doing nothing.

US market: new bull market?

2010-07-17T20:54:00.001-07:00

After 2 attempts that died out within a few says, we get a FTD on Jul 7th:

A distribution day occurred on day 7 of the rally. S&P500 down 2.9% on 30% higher vol, Nasdaq down 3.1% on 10% increase. Mitigating this (from IBD):

Higher volume partially accounted for by options expiration
Friday's volume increase in Bank of America alone accounted for most of the NYSE's increased trade.
Many top-rated stocks fell with the market, but in reduced or only average volume. This was a sign of strength, especially considering the options expiration day, which typically boosts trade.

I'll take this to be a normal pullback in a bull market until proven otherwise. Trying to determine the US market trend for the Singapore market.

I think its time to dip my toes in the water. Looking for SG stocks that are showing signs of accumulation, but also have clear support (cut loss) levels...it may still turn out to be a range bound or downtrending market. Have to remind myself that it is only when things feel uncertain..then it is safer to buy.

Goodpack

2010-06-26T23:27:00.001-07:00

Since the market's doing nothing, decided to go back to fundamental research for companies to buy during the next bear market.

Goodpack is probably the closest thing on SGX to a CANSLIM company. It has shown profitable profitable growth for at least the past 4 years, is entering new markets, and while being the largest player in its segments, still has room to grow. On the negative side, its market is cyclical. And it has consumed cash for at least the past 4 years due to high capex.

1) Business Model

They rent IBC containers for customers to transport their transport natural rubber, synthetic rubber and juices, from one point to another. For the past 4 years, all profits, plus money from additional debt and share issues, have gone towards building up their fleet of IBCs.

a) From their 09 P&L:

Main costs are for logistics and handling (40%), staff expenses (8%) and depreciation (15%). The last two are fixed, the first looks like a variable cost but cannot be sure.
Nett profit margin of 30% is very high.

b) From their 09 cashflows:

	06	07	08	09
CFO (incl. dividends)	14.8	22.5	28.1	42.5
CFI (all outflows)	51	34.3	81.9	59.4
CFF (new bank borrowings)	34.1	23.5	68	15.1
FCF	36.2	11.8	53.8	16.9

The company still requires cash to grow, probably a long time from being a cash cow. Most of the cash used is for purchasing Property Plant and Equipment (95% of PPE held on balance sheet are IBCs).

There's also a small drain in cashflow for working capital - for the past 3 years, the increases in inventories or accts receivables could be justified by a corresponding increase in sales.

c) From their 09 balance sheet:

Long term borrowings are 107m, abt 4.1 times their 09 profit. Quite high, but still manageable.
All of their debt is floating rate (as of June 09, there is no hedging - item 4bii footnotes).
Most of their debt is unsecured at SIBOR+1%, but the latest (Aug 08) 20m loan is at SIBOR+3%. Are they finding it harder to borrow?
Vast majority of their long term assets held are PPE, which consists of IBCs.
Minimal operating lease commitments (~ 3m), but this may increase later as Goodpack leases IBCs from its supplier.

My view is that their debt is manageable now... But it could be a risk if they keep rolling it over or adding to it.

On Jun 18, they announced a 300m medium-term note program where the company may issue these notes when appropriate. 300m is a bit much, zero interest rates will not last forever.

From a Aug 09 article:"Asked about the supply of additional IBCs for the new business to come, David said Goodpack will not be coming up with money for the capex. Its Chinese supplier, who is also a shareholder of Goodpack, has agreed to build the IBCs for lease exclusively to Goodpack."

2) Competitive Advantage
IBCs are supposed to be cheaper and more environmentally friendly that the conventional wooden pellet packaging. It is also cleaner with less contamination, esp. for rubber.

a) How big a player is Goodpack?

Estimated market share from Kim Eng (19 Mar 2010) report:
They are trying to gain an advantage being the first mover and largest player in the IBC space.

David Lam in a Dec 07 interview: “One of the reasons, our customers prefer to work with us is because we have the global presence. Our nearest competitor has 60,000 IBCs compared to our 1.6 million. They are after just a niche market."

b) Goodpacks IBC design is patented. (I think this is for the rubber IBC). The patent was sold by the founder to the company in 09.
The carrying amount of patent at June 30, 2009 is US$4,700,000 (2008: US$Nil) and the remaining amortization period for the patent is 20 years (09 AR, footnote 16). Why 20 years (from now)? This is the normal patent life, I don't see how it would apply unless the patent application was just made.

c) Sample compeditor is CHEP: subsiduiary of brambles: "issues, collects, repairs, washes and reissues more than 255 million pallets (mostly wooden) and intermediate bulk containers worldwide."

3) Cyclical Aspects
Their main business is shipping natural/synthetic rubber (~75% revenue in 09). The main usage of rubber is for car tires. And they are also looking to gain entry into shipping parts for the automotive industry. Thus they will be mostly dependent on the automotive industry cycle, which (I think) depends on the general economy.

In 09, revenue from natural rubber fell approx 18% due to 8 months of bad sales that year.

4) Growth and Valuation

Revenue growth for at least the past 3 years:

Segment	07	08	09	Notes
Synthetic Rubber	25.7	36.3	43.3
Natural Rubber	36.6	42.4	34.6	Downturn in 09 - only 5 months good sales
Juices & others	12.8	20.9	24.5	Drought in 07
Total	75.2	99.6	102.4

The natural rubber market is probably saturated (see 2a), but the growth is expected in Synthetic rubber. The natural rubber market size is 6.8m tonnes, synthetic rubber is 13m. The company is also trying to break into automotive parts and ink.

5) Summary

The Good:
Growth.
- Is a leader in its segments, but still has room to grow (synthetic rubber, juice).
- Entering new markets (auto, ink).

The Bad:
- Cyclical, mostly based on auto market. Witness the 09 decline in natural rubber revenue. Do not know if the largest expense on their income statement ("Logistics and Handling") is a fixed or variable cost.
Debt - Already quite high at 4X 09 earnings. Why the 300m note program? Zero interest rates will not last forever.

Conclusion:
Wait till after cyclical downturn to buy.
Watch their debt. Including any new operating leases for IBCs from their supplier.
If their revenue drops, try to confirm whether their "logistics and handling" costs are fixed or variable.

US Market

2010-06-18T19:09:00.000-07:00

For the record.

IBD signaled a market correction around the start of May.

There was the intraday flash crash on May 6th.

A Follow-thru-day on Wed 2nd June suffered a distribution day on the 4th. A distribution day within the first few days of the FTD nearly always marks the end of the trend. The FTD went nowhere.
Another FTD on 4th Tues 15th. Market has been flat since then for the past 4 days, with no distribution. Not very bullish either. IBD notes that "for the 10 best follow-through days since 2000, there are none that look identical to the action of the past three sessions." Right now, I think this is one has a 50/50 chance.

[Update 30th Jun 10]

Markets fell last night on heavy volume.
S&P:

Nasdaq:

The downtrend continues.

[Update 11th Jul 10]
Another FTD was signaled on Wed 7th Jul. But vol was only up 1% on that day. Market has kept going up in the crucial few following days - 5% last week - but on low vol. IBD notes: "A strong uptrend may create regrets among investors who stay on the sidelines for the first few days after a follow-through. A false signal could create quick losses for anyone who buys stocks. But this fledgling uptrend has done neither."

Bespoke notes:

8th July: Breadth: many stocks still trading below 50MA. "For bulls, this means there could be a long way to go before the rally runs out of steam. For bears, this shows that even after a pretty big rally, breadth remains rather weak."
8th Jul: The heaviest falling stocks have been the best performers in the rally. Is it just short covering?
9th July: Bearish sentiment highest since March. Fuel for a rally?

Mixed signals. Since I've no opinion on market direction, won't do anything.

If stocks on the SGX pull back to support levels, I can consider dipping my toes in. The STI, and many SGX stocks, have been trendless rather than downtrending.

Sold everything

2010-05-22T03:11:00.000-07:00

Sold everything abt 3 weeks ago:

10 lots NOL @ 2.04
5 lots parkway @ 3.31
2 lots citydev @ 10.32
18 lots midas @ 0.99
10 lots wing tai @ 1.75 (bought @ 1.85).

Altogether a 6.5K loss, including brokerage.

At one point I was up 5.5K. Must change the way I trade:

- Don't feel compelled to buy just because of the bull, only buy carefully on retracement. Mkt takes money a lot easier than it gives it. It is not reasonable to go from 0 to 100% invested, or even 0 to 50% in a few weeks. Edge my way into a rising market.

- Learn to recognize when the market is overbought. The length and strength of the rally:

11 weeks without a dip is too long.
The rally (follow thru day) started on Mar 1st, and it kept getting more and more overbought.
At one point we had 8 consecutive weeks of gains.

- Learn to recognize when individual S'pore stocks are overbought. This is harder: possibly I should just say that when a stock has shot up and is now far from support, I can consider selling. NOL for example?

Remember, speculating is just a way to skim a little off the market...to keep out of trouble.... until the next bear market opportunity.

Bought citydev

2010-04-25T04:51:00.001-07:00

Bought 2 lots @ 11.06 on Thurs 22nd Apr.

Has retraced slightly on low vol.

Cut-loss at previous low (10.56).

The rally that won't die

2010-04-25T04:38:00.002-07:00

US:

Market still in uptrend. Despite Greece, Goldman Sachs... etc, it is still going up.
IBD reports favorable breadth (IBD 100 still rising).
8th consecutive week of gains.

Back in Singapore:

GS sparked off a round of selling in the local market. Now we have had 5 days of almost continuous broad-based selling. My broker suggested that this is a safer time to buy, as all the contras are wiped out.
Also gives an opportunity to select stocks based that have retraced slightly (not below a previous low) on low vol... as a way to sort the wheat from the chaff.

Tiong Woon

2010-04-25T04:03:00.000-07:00

Bought at 56c (21-Apr-10), healthy retracement on low vol:

Sold several days later, as it gapped below moving average during the ,market's broad based fall.

May have been a mistake to sell, as vol was low when it fell.

I think the mistake here was the original buy decision - buying in an overbought market, and also buying a stock with cut-loss too far away.

Sold Osim

2010-04-25T03:40:00.000-07:00

15 lots at 0.92 on 22-Apr-10.

It was (and still is) not completely certain that the stock is undergoing distribution:

Was only one day's selling.
Market fell heavily, and broadly that week too.

So hard to tell....One reason for selling was because of the high drawdown (stop loss at 0.87).

Don't think this trade was a mistake... it just didn't work out.

Bad Trade: Straits Asia

2010-04-25T03:31:00.000-07:00

Bought 6 lots at 2.34, sold at 2.11.

Mistake was to buy when the market was overbought. Must learn patience. Don't have to be invested, even in a bull market.

Sold Capitamall Asia

2010-04-15T04:58:00.001-07:00

Sold Capitamall Asia on 21st Apr, at 2.21.

Not a shred of anything bullish in the chart:

Bought OSIM, Parkway

2010-04-13T05:21:00.000-07:00

Osim:

Breakout after flat for 3 weeks.
Bought 15 lots @ 95.5 cents

Long term chart shows next resistance at $1.12:

Short term chart shows previous low at 87.5c (cut loss slightly more than 8%):

Parkway:

bought 5 lots @ $3.25
healthy retracement, still in uptrend. Support probably 3.20 (MA).

[Updated 25/Apr/10]

It has retested 3.14 twice since then. This level is also a previous high.

Was a mistake to buy this too soon, before the support became apparent, by retested at least once... or having a clear low..., which we still don't have, so not sure if this is it.

Still, the retracement is healthy:

low vol
Did not fall much in the broad-based selloff that lasted the whole of last week.

Will hold for now.

Accumulation is more apparent on weekly chart.

Fortis is still accumulating, up to 25% by 29th Mar.

Sold Venture

2010-04-13T05:19:00.000-07:00

Sold 2 lots at $9.51.

Still in uptrend, but overbought, approaching resistance.

It has shot up on healthy accumulation, from 8.36 to 9.50, 10% in 3 weeks. I bought halfway through, so 5% profit in 7 days. Since support is below my buy price, decided to take profit.

May be able to buy back on a healthy retracement, if it could establish a support level.

Sold ARA

2010-04-13T05:06:00.000-07:00

Sold 15 lots @ $1.17.

An uncertain decision:

Main reason to sell was that it was not rising, even in a bull market. And I'm impatient.
But falling MACD with steady price can mean that it is just working off its overbought condition...
... but stock is still in an uptrend...
in a bull market.
Uncertain price action, yesterday: accumulation, today: distribution.

This decision is either going to look very smart or very dumb with hindsight, but when pulling the trigger, everything is uncertain.

Sold CWT

2010-04-13T04:58:00.001-07:00

Sold 20 lots @ 1.04.

Although not 100% the uptrend is broken, the weight of evidence points to it:

Accumulation examples

2010-04-11T01:37:00.000-07:00

I missed these: Accumulation shown by small bursts up on high vol and retracing healthily on low vol.

CSE:

Straits Asia:

Missed this one as I was busy at work yesterday, had already shot up after I looked at it.

Don't chase now, too risky...I'm half invested in a bull market, so doing OK...the bear can appear and turn profits into losses within a few days, like in Jan. Buying on pullback will help to avoid this.

Bought Venture

2010-04-06T04:59:00.000-07:00

Yesterday 5th Apr 10, bought 2 lots Venture @ 9.04.

I told my broker I was interested in the morning, after it broke through $8.98, she called me and said that this could be an opportunity if it holds that level...

Support levels are:

$8.98 (recent high)
$8.63 to 8.66 (previous low... but not clear)
$8.38 (clearly the previous low) - I'll take this as my cut loss level for now.

Sold Ho Bee, SC Global

2010-04-06T04:54:00.000-07:00

Mon 5th Apr, sold:

11 lots Ho Bee @ $1.84
10 lots SC Global @ $1.86

Main reason for selling was that my cut loss level was too far down...was a mistake to buy. Secondly, they were not performing even in a bull market.

Made small loss on the brokerage.

Don't know the market trend...

2010-04-02T02:56:00.000-07:00

The Singapore market has been going up:

only had short 1-or-2 day pullbacks in the past few weeks...
not enough to remove the contra players and create any short-term oversold condition.. where I can enter safely.

Not sure of the trend: await direction from Uncle Sam.

The US market has not significantly corrected, and is still overbought.... don't know what the trend is:

The market has moved in a tepid way (several distribution days and bearish candlestick formations in the last week)....
but it has still been rising, killing the shorts.
IBD's tone changes daily.

Now that 1st quarter window dressing and the low-vol Easter week is over, wait to see what happens...

Dur to the uncertainty, I would buy on retracement, instead of breakouts.

US market: strong uptrend... but overbought

2010-03-23T06:48:00.001-07:00

Nasdaq's follow thru day was on 1st Mar, strong uptrend since then:

US market yesterday reversed (upward) strongly (healthcare bill passed), and ignored bad news (USD up, Greece). OK so far... BUT the US market is looking overbought.

This uptrend has been lead by Nasdaq. In S'pore, however, the tech stocks (Venture, HIP, STATS) have been miserable.

Bought NOL

2010-03-23T05:48:00.000-07:00

Friday 19th Mar 10. Bought 10 lots NOL @ 1.97.

It had rebounded off its resistance-turned-support line at around 1.93. I bought the day after. It went below that the next day, but seemed to recover today.

Resistance at $2.20.

The retest of the 1.93 line a few days ago is not significant enough to make it a 'previous low' when viewed on a longer timeframe... I am a little uncomfortable buying with such 'flimsy' support...a break here would not convince me the trend was going down...hence the trade is a little too 'short term' for my liking... to open to be whipsawed.

But there's not much to buy...

Bought ARA

2010-03-17T05:53:00.000-07:00

Bought 6 lots @ $1.15, 9 lots @ 1.16.

Cut loss probably at $1.08.

Bought Ho Bee

2010-03-09T04:47:00.001-08:00

Bought 11 lots Ho Bee yesterday (9th Mar 10) @ 1.84, as it had broken out of triangle.

It has since pulled back to the trendline, but on lower vol.

Cut loss would be at 1.63. Resistance at 1.82, 1.93 and 2.24.

Bought SC Global, CWT, CapMall Asia

2010-03-04T04:33:00.000-08:00

Yesterday Wed 3rd Mar 10:

Bought 20 lots CWT @ 91.5c. Cut loss at 87c (-5%)
Bought 10 lots SG Global @ $1.82. Cut loss at 1.64 (-10%)

Today Thurs 4th Mar 10:

Bought 8 lots CapMall Asia @ $2.28. Cut loss at 2.19 (-4%)

Aim was to buy stocks that are in an uptrend (or may be bottoming, for CapMallAsia), but are not to overbought, in case the market direction heads down again.

CapitaMall Asia

2010-03-03T06:35:00.000-08:00

Don't have data for this so have to use the chart from SGX.

Price/vol action looks good, accumulation in green above, is it reversing after a long decline?

May be added to STI, expected to be confirmed Mar 11th, takes effect Mar 19th.

All time low is $2.19, giving a 7% cut loss @ $2.35.

Not sure if it is above the 25 and 50 EMAs.

ARA Asset Mgt: Pennant?

2010-03-03T05:40:00.000-08:00

Matches textbook description of pennant:

Strong uptrend before start of formation.
high vol on flagpole
So far, replacement vol has been low

To trade, would need to see:

Continuing low vol on retracement.
Retracement does not last longer that 3 weeks (some books say one month). Currently on day 6.
High vol breakout.

Cut loss would be just below the valley.

Take note:

1 for 5 bonus issue proposed approx Apr, need a multiple of 5 lots if buying.

[Update 13th Mar 10]

No pennant. It did not break out with a big strong white candle... rather we got a couple of pussy candles. A breakout finally occurred yesterday:

The uptrend is still intact. If I buy now, cut loss would be at $1.08, 7% below last closing price of $1.16.

SC Global and SingLand

2010-03-02T07:22:00.000-08:00

Sold Straits Asia

2010-03-01T04:33:00.000-08:00

Straits Asia dropped below the 200EMA for on heavy vol, has rebounded with light vol.

Sold 9 lots today (1st Mar 10) @ 2.07.

Loss is $1400, includes brokerage. It may be easier to handle it as a percentage, which is 7.1% of the trade, or 0.6% of my capital.... acceptable.

Watching & waiting

2010-02-23T05:10:00.001-08:00

Still unsure mkt direction. Watching:

M1. V. Strong trend, but no clear entry point.
Parkway: same
Goodpack: same
Biosensors: same
PLife Reit: Maybe, but not expected to be a leading stock
Suntec REIT: Maybe, just at its 25 and 50 MAs.
SC Global: See if it respects 10 month upsloping trendline. Current >.
UOB KH: Upsloping 10 month trendline sppt (from weekly chart)
Singland: broken H&S
Thomson medical center. Holding up well, but illiquid.
Tianjin Zong Pharma: same
Broadway Indust: is respecting green MA. But v illiquid.
Breadtalk: same

Mabye:

Stats chippac

CWT

2010-02-22T06:30:00.001-08:00

Still in an uptrend, above its MAs. Recently worked off its overbought condition:

Resistance zone at 96 to 99c (previous high, as well as from previous year). Clear after than, till $1.17.

What prevents me taking a position?

market direction unclear.
Ideally I would like to see another peak, so a clearer resistance-trendline (triangle) can be drawn. But this stock has not historically behaved like that.... too jumpy, short consolidation periods.
Possibly buy on clearer market direction and 4-red/1-green.

Note, stock quite illiquid, may have to take half position only.

Ho Bee

2010-02-22T06:15:00.001-08:00

Ho Be has held up well:

Still (mostly) above MAs despite the Jan correction.
Not badly affected by Friday's anti speculative measurement announcement.

Next resistance is at 1.90 (top of triangle) followed by 2.24 (2007 highs):

What prevents me from taking a position?

uncertain market direction
wait for a breakout from triangle (blue line resistance).
Would be nice to see a lower MACD-H form as it retests 1.59 sppt.... could I buy on support then? Maybe...only if market direction becomes clearer.

Note the pullbacks in previous breakouts (Nov/Dec). Would I count on this again? Probably not. But don't get scared out of the position if I take it.

Straits Asia again

2010-02-20T03:37:00.000-08:00

This trade has been quite stressful:

My broker called me yesterday to suggest that critical support was at 2.03 (200 EMA) several hours before it bounced off from there... She suggested I buy more but I didn't because don't want to risk any more on one trade.
She said critical resistance is around 2.25, which is the 50MA and the blue trendline (connecting head and shoulder).

In hindsight, maybe I should have waited for the trend to be clearer before buying both for:

the overall market, and
to break the head/right-shoulder trend line. Or at least a HHHL.

Bought Straits Asia

2010-02-18T05:58:00.000-08:00

Bought 9 lots Straits Asia Resources @ $2.20.

Seems to be have made a failed H%S pattern, which may be bullish if enough weak holders have been shaken out.
It promptly dropped 3% after I bought it. Today's engulfing candlestick (not shown) looks bad. Since I'm in the dare, nothing to do but see how it works out.

Cut loss level at the previous low, $1.93

Market direction still uncertain

2010-02-18T05:52:00.000-08:00

I give abt 50/50 odds that this correction is finished. So I do not know if we are still in the correction, in a sideways market, or in a new uptrend.

We have had ~ 10% correction, I was expecting a 10-40% one.

For the US mkt, IBD has not signaled a follow-thru-day, though they note signs of stocks building bases and the market showing strength. Volume still not conclusive. Once they signal a follow thru day, I put it at a 60-70% chance the correction is over.

If I wait until I'm 100% sure, there'll be no money left on the table.

SMRT

2010-02-14T23:21:00.000-08:00

Did not fall during the Jan correction, sppt may be forming at 1.85.

Can't see how I would play it yet, probably wait for some combination of:

1.85 to be retested again
Longer consolidation with narrow MAs. Previously it took 2 months (Aug-Sep) to consolidate. Currently 1.5 months.
Breakout, but it is very hard to read volume on this counter,
Market direction to be clearer.

My hunch is to buy at sppt, since breakout is too difficult on this counter.

SIA Eng

2010-02-13T18:10:00.000-08:00

One of the few stocks still above its MAs:

Awaiting:

TL break, with either high vol or same-day MACD crossover.
Or alternatively, when support becomes clearer may buy near support. Need clearer mkt direction before doing this.

CDL Hospitality trust

2010-02-12T20:23:00.001-08:00

Nice setup:

How would I play this?

Buy at sppt 1.62?
Wait for triangle breakout?

On the negative side, there is a lot of overhead resistance form last year:

A quick look at the fundamentals:

Yield is 5%, at a 95% payout ratio (@ stock price of $1.69).
(Before the Aust acquisition) Gearing was low at only 283m (3 yr loan due Jul 2012). Properties are carried on balance sheet at 1.5bn, giving leverage of 19%. MAS regulations (Sect 9.2) allow 60% leverage, but most REITS aim for 40%. Thus they could potentially double their borrowings (and yield).
(For Aust Acquisition) Expected to be fully funded via debt through debt in A$ and SGD (expected 50/50). Post-acquisition, H-REIT’s debt-to-assets ratio assuming 100% debt financing will be approximately 30.0%. (When are these debts due?)
Have not checked how cyclical this CDL Hospitality's income is. Read somewhere (the Egde) that their hotels still had to pay a minimum rent even if their occupancy was low....won't check this now.

Due to low gearing, has a plausible growth story.

Stocks not going down

2010-02-01T04:20:00.000-08:00

Most stocks dropped like rocks in Jan, these are the ones that haven't. Question mark (?) means 'maybe':

wing tai (?)
tianjin zhong xin pharm group
thomson medical centre
starhub
smrt
singpost
QAF (?)
pfood
parkway life REIT
pacific andes
osim (?)
M1
Hong Leong Asia
Frasers Centerpoint Trust (?)
Fortune REIT (?)
epure (?)
dairy farm
CWT
china fishery (?)
China essence
CDL Hospitality trust
ARA Asset Mgt (?)
Aqua Terra

Sold Everything

2010-01-25T18:02:00.000-08:00

Yesterday, 25th Jan 2010. Sold:

3 lots SIA Eng @ $3.53
14 lots Amara @ 53c
1 lot SIA @ $14.00
10 lots Mermaid @ 80.5c
23 lots Hong Fok @ 71.5c
Hiap Seng Engineering 15 lots @ 64.5c
GuocoLeisure 14 lots @ 71c
Yangzijiang 7 lots @ $1.13
Straits Asia 3 lots @ 2.32
NOL 6 lots @ $1.77
Rotary 10 lots @ 1.04
KepLand 3 lots @ 3.43

Sold because the market looks to be correcting. Yesterday I put it at an 80% chance. Last nights limp rebound, after 3 consecutive down days on the US mkt, seems to confirm this (vol down 28% on NYSE, 24% on Nasdaq):

Short term, I missed the rebound.... too bad.

From Nov 09 to Now, lost 3K. Main mistake was getting to carried away with the bull market and chasing stocks without a tight stop loss.

Sold Wheelock, Wing Tai

2010-01-22T05:56:00.000-08:00

Today, 22 Jan 2010. Sold:

5 lots Wing Tai @ 2.03
5 lots Wheelock @ 2.06

Sold because I want to cut my exposure to potential losses as these stocks are trading quite far from support.

Was careless to enter into these trades.

Sold Capitamall Asia

2010-01-22T05:55:00.000-08:00

Sold 4 lots today @ $2.34

Sold Olam

2010-01-22T05:50:00.000-08:00

Olam dropped yesterday on high vol, breaking down through triangle. And dropped again today on high vol, making a LL.

Sold 4 lots @ $2.51 on 22 Jan 2010.

Noble also dropped on higher vol, are commodity stocks starting a downtrend?

"SGX Trading Volume Surge Seen as Bullish"

2010-01-18T04:36:00.000-08:00

In big letters on the front page of today's BT.

I don't take this as a sell signal, wait for it to appear in the new paper or the ST.

Start looking out for signs of euphoria...

SGX market

2010-01-16T22:52:00.000-08:00

US mkt dropped on high vol Friday (possibly due to options expiration), following a similar high vol drop on Tues. Maybe going back to a pattern of higher highs on low vol. Having risen since Mar, it is overdue for a correction. This gives a cautious undertone.

But in Singapore, there are no signs of a correction yet:

1) Leading stocks for this rally show no problems, their pullbacks are all on low vol. The leading stocks are the ones which broke out earliest on high vol, or which ignored the Sept-Nov consolidation period and have been in an uptrend since March. Some are:

High end property developers (Wheelock, Wing Tai, SC global, KepLand).
SIA Eng, mabye SIA.
Noble, Straits Asia
Suntec REIT, Frasers Centerpoint trust

2) Friday's top 20 vol shows only 6 out of 20 stocks below 20c. Still seems ok, we do not see too many pennies around the sub 5c level (eg: Jade).

3) Stocks are suddenly shooting up on massive volume in a single day.

There is no time to look at support and resistance on charts, wait for pullbacks and buy. Have to buy before the stock moves. Just throw money at the bull and hope something sticks.

Amazing how fast everything has changed.

Bought Olam

2010-01-16T22:35:00.000-08:00

13th Jan 10. Bought 4 lots Olam @ 2.71 on broker's recommendation.

It appears to be in a large triangle consolidation.

Bought wheelock, wing tai

2010-01-16T22:30:00.000-08:00

On 11th Jan 10, bought:

5 lots Wing Tai @ $1.97
5 lots Wheelock @ 2.13

No real analysis, still trying to get into the bull market. High-end private property seems to be one of the leading sectors (SC Global, Wheelock, Wing Tai, KepLand).

Bought SIA

2010-01-16T21:49:00.000-08:00

1 lots @ 14.54 on 11th Jan 10.

This stock broke out of a brief consolidation in mid Dec. Bought it on low vol retracement.

I may have jumped the gun, as I did not wait for it to successfully test the support level and confirm the uptrend.

Bought Hiap Seng

2010-01-16T21:40:00.000-08:00

15 lots @ 65.5c on 7th Jan 10, on retracement as it broke out of triangle

The price/vol action so far looks healthy - retracement on lower vol. But need to see if it can clear 70.5c.

Bought guocoleisure

2010-01-16T21:36:00.000-08:00

Bought 14 lots at 71c on 7th Jan 2010.

Again, no real plan. It broke out of a triangle a while ago.

Bought mermaid

2010-01-16T21:28:00.000-08:00

On 6th Jan 2010, bought 10 lots at 91c.

This one broke out of a triangle a long time ago.

No real analysis when I bought, just throwing money at a bull market.

Bought more Hong fok

2010-01-16T21:23:00.000-08:00

Bought 10 lots @ 71c on 6th Jan 2010.

No plan, just trying to average up, bull market got a little crazy.

Sold Bukit Sembawang

2010-01-16T07:42:00.000-08:00

Bought 1 lot at $5.12 on 7th Jan 2010, trying to average up.

After that, it fell for several days on high vol.

Most other stocks are retracing healthily on light volume. This is the only one I've seen with heavy distribution. Especially so amongst property stocks. Even thouh it looks oversold, the chart is too unhealthy to hold.

I sold 3 lots on 14th Jan @$4.96, made a small loss of abt $200.

SGX market action (Tues 5th Jan 10)

2010-01-05T05:58:00.000-08:00

Still strong, but a little more mixed than yesterday:

- A few stocks flew 5-10% on high vol (KepLand, SIA Eng).
- Many others faltered the second half of the day (Amara), so we get a few black candles. On high vol too, but usually slightly lower then yesterday's breakout.
- 162 stocks above 20c making new highs, comparable to the peaks of the March and Oct bull mkts. Approaching short-term overbought levels.
- 8/20 stocks in the top vol list below 20c. Still OK.

Swissco

2010-01-04T06:26:00.001-08:00

Another consolidation/triangle breakout. Vol on breakout was just barely 2X 5 day MA.

But note that its near resistance (83c) right now.

SGX breadth: rally continues

2010-01-04T06:06:00.000-08:00

Rally continues. The market feels crazy now, the sensible thing to do is to wait for pullback. Today, every stock on my watch list (vested or not) jumped on high vol.

But based on the market depth (stocks above 20c making 1 months highs) the rally could go further, if compared to the last two rallies in Apr-May and Jul-Aug:

7 of the top 20 vol stocks are below 20c. 2 below 10c. My guess is that we are still in the middle of the rally.

If everyone else is waiting for the pullback, it won't occur.

I am only 42% invested. What should I do?

Bought Amara

2010-01-04T05:51:00.000-08:00

Bought 14 lots at 59c, at today's high. Another stock that has broken out of triangle consolidation.

Cut loss at 51c, possibly at 53.5c.

Every stock I am watching (vested or not) went up on high vol today. Market is going up so fast it is difficult to make descisions

Bought CapitalMallAsia

2010-01-02T19:09:00.000-08:00

28th Dec 09, bought 4 lots @ $2.54. Purely on broker's recommendation. Reason is that it looks oversold.

Cut loss at $2.51.

No chart, this counter does not appear on any of my software.

SGX Breadth again

2009-12-29T23:13:00.000-08:00

Chart on previous post had an error, the stocks were not filtered by price correctly. It was supposed to be only sub-20c stocks, but all were included, and warrants were also included.

Here is one counting one month (25 day) new closing highs for all SGX stocks:

If we suspect the 'breakout' is caused by too many penny stocks flying, this one excludes stocks that closed below 20c on each day being calculated for:

This one excludes stocks that closed below 50c on each day being calculated for:

Just in case we still suspect penny stocks, this counts only the ones trading below 20c on the day being calculated for. ie: opposite of second graph.

I can only conclude, the rally in the last 2 days was broad based. And it was not based based on penny stocks.

SGX breadth jumps

2009-12-29T07:30:00.000-08:00

Note: Graph here has an error, see next post.

In the last 2 days' rally, SGX breadth jumped significantly. Scattered dots below are the number of stocks above 20c (as of today's price) making 1 month highs. Looking at the 'peak' readings (dots marked with green circles) breadth has been declining since August. Last 2 days shows a clear break in this trend.

Is this the start of a new bull? My guess is... yes.

The number of new highs, although larger than the previous 4 months, is still a lot lower than in the Apr and Aug peaks, so this rally could have some way to run. Also, the SGX top 20 vol shows only 5 stocks below 20c, so there isn't too much junk flying yet.

TOL:

I need to be more aggressive in buying. How?

The mkt does seem overbought after 6 straight up days (US indices), should I wait for a pullback? Would only be expecting a brief 1-2 day pullback, similiar to the Mar rally.
Many stocks are now quite far (mabye 10%) away from their support (cut-loss levels).
Maybe I should just double up my existing successful bets, which were small, as bought in a non-trending market.

US mkt: start of new rally?

2009-12-29T07:20:00.001-08:00

Last week, all 3 indexes broke out of a 6 week trading range. The only problem is that vol was low due to the Christmas hols, so hard to confirm if this is real. I also don't have market breadth figures.
All 3 indexes currently up 6 consecutive days....is the market overbought? If we are in a bull, I only expect short 1-2 day pullbacks, similar to the Mar rally.

Bought Straits Asia

2009-12-28T22:40:00.000-08:00

Bought 3 lots @ $2.52 yesterday, 28th Dec 09.

Was bought to my attention by my broker 8 days ago - a broken inverse H&S:

Neckline (cut-loss) at $2.33.

I bought yesterday, No real reason for the timing except that I'm looking for stocks with a clear cut loss point. It was on top volume list. The market is crazy now.

Bought Yangzijang

2009-12-23T05:46:00.000-08:00

Bought 7 lots on @$1.18 on 18th Dec 09.

Hoping for a 'bounce back' after correction in uptrend. Can't say if it has worked yet. Cut-loss would be at $1.12.

Bought NOL

2009-12-23T05:31:00.000-08:00

My broker called to recommend this one and I remembered it was another triangle. She recommended at $1.54, but I only got in a few hours later.

Bought 6 lots @ $1.58 on 18th Dec 09.

Bought Hong Fok

2009-12-23T05:21:00.000-08:00

Bought 13 lots @ 64.5c on 7th Dec 09.

Noticed it as it had a triangle with well defined support, up days on higher volume and MACD-H Divergence. Bought after it seemed to break the triangle - the price has not moved for two weeks since.

SGX breadth sucks

2009-11-26T07:02:00.000-08:00

The graph below shows STI (blue) with the daily number of SGX stocks making 1 month highs (the scattered dots) since the start of the March rally. These are smoothed as a 1-month moving average (red line). Sub 20c stocks are excluded.

The divergence since Aug is too clear. How long can this continue? Either the STI must go down, or the number of stocks making highs must go up.

I did not find this indicator useful in predicting past market tops. So it is only to show what is happening now.

Bought SIA Eng

2009-11-25T04:34:00.001-08:00

Tues 24th Nov 09. Bought 3 lots @ 3.07.

Cut loss 2.85.

SIA Eng

2009-11-23T06:04:00.001-08:00

After 5 months of flatlining, breaks out on high vol.

Large C&H.

Sppt @ 2.85, next resistance at 3.25.

Still a non trending market until proven otherwise, makes me hesitant to buy on breakout.

Perfect buy point would have been several days ago after it pulled back to the support.

Bought KepLand

2009-11-20T20:59:00.000-08:00

Fri 20th Nov 09: bought 3 lots @ $3.05.

Cut loss at $2.75 (previous low).

KepLand breakout?

2009-11-19T07:16:00.001-08:00

$3.00 is the previous June high, as well as 50% of the white candlestick.

Pros:

Clearly broken out on high vol, with low vol retracement.
Daily price/vol action shows accumulation since July.

Cons:

Buy on breakout risky in non-trending mkt. Next sppt after $3.00 is hard to determine. At what point would I cut loss?

US mkt currently down nearly 2% tonight, see how it goes and how this S'pore mkt reacts tmr. Will KepLand hold at $3.00?

Bought Bukit Sembawang, Rotary Engineering

2009-11-18T05:10:00.000-08:00

Wed 18th-Nov-09:

10 lots Rotary Engineering @ 1.07
2 lots Bukit Sembawang @ 4.88

Both showing MACD-divergence, may have broken out of trendline. I await: HH on high vol.

My scanning criteria. I want:

tocks that have not fallen much in the past 2 month.
Volume should be high on up-days and lower on down days. Rotary shows this, BS a little. In the current market, there are a lot of stocks showing distribution (eg: SGX, Guocoland).
MACD or MACD-H divergence with price.

I took positions abt half my normal size, because still not sure of overall market direction:

US indexes making new highs, but no solid volume confirmation, and depth had not confirmed the uptrend (12th Nov) either.
Singapore market seems trendless.
But the individual charts good with well defined cut loss points... must remind myself that by the time everything is perfect, the opportunity will be gone.

With hindsight, bought at intraday high as they went down today :( But at least today's down was light volume.

Added more money

2009-11-18T04:58:00.000-08:00

+70K to my account.

Now have 225K cash, almost all of my savings.

Sold everything

2009-11-02T05:10:00.001-08:00

Because we are in a correction.

Today (2nd Nov 09):

10 lots Midas @81.5c
20 lots Boustead @ 73.5c
2 lots Kep Corp @ $8.07
12 lots RMG @ $1.33

Singapore market (not juat STI) is holding up remarkably well.

Update tomorrow (3rd Nov 09):

Sold 26 lots Cambridge @ 44.5c

Calculated a nett 28K gain (approx 28%) over 2.5 years (July 08 to now)... this includes a terrible bear market and probably the fastest recovery we'll see in our lives. Includes dividends, and estimates brokerage.

Now keep a watchlist of counters showing strength - this correction may end in a week or two.

Watching Bukit Sembawang

2009-11-02T05:01:00.000-08:00

Has held up well:

Bought 1 lot at 4.82 and 4 lots at $4.83 in the past few weeks, but sold them at $4.79. Lets see if it holds up during the correction.

US market: finally in downtrend

2009-11-01T04:52:00.003-08:00

S&P500 now down 5% from its high, and showing clear patterns of distribution.

Should have sold after the weak vol rebound on Thurs, but too busy/tired at work. Sell tomorrow, even though SGX will be hammered. Holding will just compound the mistake.

I still think this is a correction in a liquitidy-driven uptrend, which may end next year. Keep reminding myself: I do not know for sure.. do not know how far the market will fall until after it happens.

From memory (no records) most corrections last for 2 weeks. Correction is now one week old and 5% down. So I should be still look for opportunities - monitor stocks showing strength and see.

Just a note that IBD's distribiution day count method was a little unreliable in the 2 months leading to this downturn. There were many 'market under pressure' calls amd one false 'market under correction' in Mid Aug - which was corrected a day later'. Probably does not work in a non-trending market, wait at least a few days for confirmation (weak volume rebound) before rushing to sell.

Sold China Fish, Straits Asia

2009-10-25T23:35:00.000-07:00

Sold 5 lots Straits Asia on 14th Oct 09 @ $2.04.
Sold 6 lots China Fish on 19th Oct 09 @ $1.29.

SC Global

2009-10-17T07:11:00.001-07:00

Summary of article on SC Global (BT, Mon Oct 5th 09, Ven Sreenivasan). Future reference for next bear market, need to verify the figures below:

1$.42bn debt
But asset base is 2.38bn - is developable land valued at cost.
900,000 sq ft landbank, target and higg end of market. 400 units unsold inventory in projects such as the Marq, Hilltops and Martin No 38.
Landbank carried on bookas an avg cost of $1500 psf (is this cost price?)
Company has sold 20% of its inventory, and is collecting payments progressively.

US market: going up on low volume

2009-10-13T05:15:00.000-07:00

Not sure. My view:

This rally is driven by liquidity, not fundamentals. Unlike '98, Asia cannot export its way out. Expect years for the world economy to rebalance. Governments in every country, from the US to China to Australia to Singapore have given some sort of 'stimulus package'. One day the morphine will wear off.
My gut feel is that the rally still has some way to go. I dont feel the optimisim for the end of a bull. Still, I could be wrong - this sentinment is not a measurable indicator. I await further signs eg: penny stocks (sub 5c) on SGX hitting top 20 vol, more bullish news reports, less doubt, more participation by the masses.

US market has been making new highs in low vol since August:

Graph from Bespoke Investment group showing breadth has improved since August (possibly since July).

Uncertain. Market may still be in trading range - so I'll buy on dips, cut loss when going up. The S&P chart above shows the mini-rallies from July to now lasted 8-13 days. Tomorrow will be day 7 of the current 'mini rally'. The SGX has now gone back to faithfully following the previous night's US moves (where it used to preceed them).