Sunday, December 14, 2008

Bought Li Heng and Wilmar

Bought 25 lots Li Heng at 31c (9-12-08):

Bought 3 lots wilmar @ 2.89 (11-12-08):
Wilmar might be considered a 'China stock' because it sells a lost of palm oil in China.

Saturday, December 13, 2008

Cambridge got Refinancing!

Refinance $390m for 3 years throught 3 banks: HSBC, NAB and Royal Bank of Scotland.

Note that: "A portion of the Loan is subject to syndication on normal market conditions". So we are not completely there yet.

My calculations for how this will affect DPU:
  • Quarterly borrowing costs (from 3Q08 results) will rise from 3.1m (@3.1%pa) to 6.6m (@6.6%pa).
  • Reducing their revenue by 10% to account for the recession, and following my previous calculations (here and here), I get a yield of 3c per share.

China textile industry consolidates

Interesting post from D.O.G abt consolidation in the China textile industry after years of growth.

According to this article from a PR firm (I cannot confirm the figures) on Li Heng:
  • In 2007, China became worlds largest nylon producer... but is still a net nylon importer, relying on imports for high-grade nylon.
  • The nylon produced by Li Heng is of a quality that borders on domestic and import grade (e.g.: undergarments, swimwear)
  • Li Heng is a leading producer of high-end nylon in China with a 15% market share...and has one of the highest operating margins (34%) among textile players
  • Polyamide, a by-product of oil, comprises over 90% of Li Heng’s cost of sales.
  • Inventory management is important as nylon has a shelf life of only 5 months
  • To address cost pressures, Li Heng is looking to produce its own polyamide by 3Q09
I have not looked at Li Heng closely - have not even looked through their financial results.

Bought Midas

Bought 14 lots at 57.5 cents on Wed (9-1-08).

It is one of the few stocks in an uptrend. Price/vol action does not look so good however, monitor to make sure the pullback is in lower volume.... Fridays action was a bit worrying.

Just trying to ride the trend. Techincals only, no fundamentals.

Moody's cuts rating for Frasers Centerpoint

(Dec 1st 09) Moodys has downgraded Frasers centerpoint to Baaa1 rating (medium grade), saying it does not have 'scale and diversity' and is unlikely to obtain it.

Picture of US market turning bullish

Shows the markets change in tone in the last 3 weeks.
  • First week (21st-28th Nov): market is still in correction. We have clear price/vol divergence. 5 days in a row!
  • Second week (1st-5th Dec): collapse on Monday, follow thru day on Tues. Rest of the week has up days on higher vol and down days on lower vol. Friday's employment report was shocking, but the market ignored it. This 'ignoring bad news' has switched me to bullish.
  • Third week (8th-12th Dec): One distribution day on Thurs, not enough to derail the rally (The volume from Yahoo seems to be wrong - IBD registered it as having +4% higher vol than the previous day). For the second and third weeks, all the other days were up days on higher vol and down days on lower vol.
We await:
  • Continuation of up days on higher vol and down days on lower vol. No more distrrinution days.
  • How does the market react to bad news?
  • Need to see Dow break thru 50MA:
I think theres a 60-70% change this is the start of a tradeable rally. Excpecting a 20-30% bear market rally - use trailing stop loss. Cut loss if it fails in the first place.

Monday, December 8, 2008

Barry Ritholtz: S&P oversold

Extracts from here (dated Dec 7th 08):

"Over the past 100 years, we’ve only seen the relative strength of the S&P 500 drop to this level five times, and each time, it has been a major buying opportunity, although not necessarily a major bottom. If you look at 1929, it was a low but it wasn’t the low, and there was a bounce. It was the same thing after Sept. 11 — from Sept. 21, you had a 40% bounce in the Nasdaq before you went down to make all-time lows."

"There is a significant rally, 20% or 30%, waiting to happen. But there’s also the possibility of a lower low, as we get deeper into the recession, if things take a terrible turn for the worse."

"The most important [rule] is that we always have a stop-loss...we use trailing stop-loss...When the market starts heading south, we get taken out."

Friday, December 5, 2008

Using IBD's 'follow through day'

How the FTD has fared in the recent volatile market.

Previously they said that 1 in 5 follow through days failed. But in recent week's choppy markets, it has failed more. From "The Big Picture" (12-2-2008):

"Lately, we've seen a higher failure rate. The S&P 500 has nabbed three follow-throughs in recent months: Sept. 25, Oct. 16 and Oct. 28. Each time, the benchmark index has failed to build on that gain, reversing and falling to lower lows. Follow-throughs in other indexes have also failed. " [Note: From memory, one of these FTDs were undercut the day immediately after with a savage 8% loss on high volume. The others were undercut in a matter of days.]

Calling a market rally or correction is an exercise in trend following. The FTD is just one of their tools to give an earlier signal. If there ever was an indicator designed to give false signals in a volatile market, the FTD - occuring on an daily increase on higher volume than the previous day - would be it. IBD has always stressed not just to jump in and buy just because of the FTD, but to take it as a signal to keep a watch on leading stocks to buy at the aporopriate breakout point.

A reminder that the FTD by itself is not enough to confirm a uptrend:

  • it must also be conformed by the action of leading stocks (a form of market depth)
  • and from recent experience, should also be confirmed by further price/volume action of the indexes ie: up days in higher volume, down days in lower volume.
  • and may also be cofirmed by the markets reaction to news (ignoring bad news)
And always cut loss if it dosen't work out.

Monday, December 1, 2008

Praying its only a bear market rally

Citibank report on the severity of the bear market and recession. Yeah, and they of all people should know:
  • the current US consumer-led recession is much worse than the 2001 tech bust
  • The 2001 bust lead to a 91 week bear market in Singapore
  • Current bear market only in 54th week
  • "Bear markets typically do not hit the trough or end until the economy is past the worst phase of the recession. In the 1985/86 recession, the bear market ended at the tail end of the recession. In the 1997/98 Asian crisis and 2001/02 tech recessions, the bear market ended in the middle of the recession, during the quarter where contraction was most severe."
Chart showing the Dow's 5 straight previous days of recovery on declining volume.


In case its not obvious, I'm really hoping for another leg down. Most of my money is on the sidelines.

Short notes on Diary Farm and RMG

Don't qualify as value investments yet, but interesting to watch out for:

Dairy Farm

A retailer, operating Shop-n-save, Guardian, Cold storage, 7-11 and F&B in Asia.

Growth: 07 EPS was 19.2c at 257m. 1H08 operating profits up a mssive 63% from 113m to 187m. Mostly to top line growth: revenue up 18%, gross margins unchanged at 30%, but operating margins up massively from 4 to 5.5%, as admin costs were unchanged.

Balance sheet: Expansion funded by borrowing: FY08 Long term borrowings up 12% to $449m to fund expansion. FY07 Balance sheet had 400m long term debt (approx 1.5 times earnings) with 395m cash (not sure how much of it needed for working capital). They were net cash in 2006.

Business model: Company in growth phase. Good story if they can keep opening stores, while keeping admin expenses low or fixed. Historically, they try opening stores in many formats in different countries, grow those that succeed, and shut down or sold those that fail (eg: Franklins in Aust 2002, recently ceased Guardian in Thailand).

Conclusion: Too expensive to buy as a value stock: even if FY08 earnings follow 1H08's 60% increase, their PE @$4 is still 12.5. Possible future growth stock, meeting many CANSLIM criteria, but don't buy in a falling market.

Wait for: See if the recession affects their sales first: mgt makes a monthly report in SGX announcements.

Raffles Medical Group

Owns/operates one hospital and largest chain of clinics in Singapore.

  • (FY07) Hospital gave majority of revenue (58%) and profit (76%). Hospital business has much higher operating margin. This hospital business model is highly leveraged (due to high fixed costs).
  • Clinics business is more stable.

Business model: Main costs are from staff, then from consumables, which both grow in line with revenue. Not broken down based on segment.

Cyclical: Cannot just fire all the specialised staff if there is a sudden slowdown in business, so this makes their model highly susceptible to any sudden slowdown in demand.

Growth (long term): NRA 31 Jul 08: "The current utilization at Raffles Hospital is maintained at circa 40%-60% at 200 operating beds. We expect capacity to peak in FY09 at 300 beds". The hospital has 380 beds. So adding another 1/3 to their revenue will increase profit by 1/3.

Balance sheet: Small amt net cash (4m)

Valuation: Earnings approx 5c a share. At a price of 60c, this gives a PE of 12. If we can factor in the expected 1/3 long term increase, gives PE of 8.They are paying abt 70% of their FCF as dividends (7.7 out of 10m) No capex.

Wait for: Everything depends on end demand for their services. Wait 1 Quarter (end Jan) and see if hospital is affected by the recession. If it is, earnings will drop, and at trough, I would expect it trade at a higher PE (like 12).

Or else, wait for a disease outbreak (like SARS), which would affect the both their businesses badly, and then buy.

Tuesday, November 25, 2008

Bought more Cambridge

Bought 15 lots at 21c. Now holding the maximum I care to be exposed to, for a company of this risk profile. Now waiting to see if/how their financing issues are resolved.

Monday, November 24, 2008

CIT again

Quick update. Two points:

First, outlook from S&P downgraded from 'positive' to 'stable'. Dependent upon:

"(1) CIT’s strong business profile; (2) the expected strong support from the local banking community; (3) adequate liquidity in the domestic credit market; and (3) the significant progress that CIT has made in achieving Sharia-compliant status, which would further diversify its refinancing sources."

Basically no effect. But everything depends on them obtaining credit.

Second, 3Q DPUs were down because management took their fees in cash, instead of shares. I should have accounted for this when calculating the yield in my previous post. The new calculations for 3Q08 are:

Rental revenue: 18.3m
Non-finance costs: 3.8m (includes the new management fees)
Borrowing costs: 3.1m
Operating Profit 11.4m

Excludes profits/loss from revaluation and interest rate swaps, as this is not counted in DPUs.

After cutting revenue by 10% (due to SMEs going bust in a recession) and doubling the future finance costs (to 6.2%, due to credit crisis), we get 6.5m. Annualise (times 4) to get 26m. Divided by 800m units issued, gives 3.25c per share.

At a price of 22c, thats almost a 15% yield.

The assumptions are very conservative:

  • 1 in 10 businesses going bust: even if it does happen, they should be able to rent the buildings out again.

  • Doubling the interest rate (to 6.2) is also on the high side. A 14th Nov Phillip's report has estimated their interest rate cost at 4.78%. From an Oct report by DMG on Fraser's CT looking for financing: "management cited spreads of 200 – 250 bps over SIBOR", which in Sept (the height of the credit crisis) was 5.5-6%.

Wednesday, November 19, 2008

Sold Keppel, Bought A-Reit

Sold 1 lot Keppel at $4.58 on 17th Nov. Keppel was a mistake because I have not had time to study it properly.

Bought 3 lots A-Reit yesterday at $1.30. By my calcumations, this should give at lease a projected 10% yield.

Saturday, November 15, 2008

Value hunting #5: Wheelock Properties

[Edited 24th Jan - too many mistakes - the values of the developments re-estimated, also take development costs into account. Changes in italics.]

  • Develop and sells high end luxury homes (4-5m price range).
  • Rents retail properties (Wheelock Place, from 2011 onwards: Scotts Square retail).
  • Owns some of SC Hotels, a construction company. I am ignoring this.
Wheelock has 1.2bn shares issued.

1) Business Model

Buy property when cheap, develop, sell when hot. Gotta time the market successfully, Singapore property market is like a yo-yo. Interesting commentary on that. Wheelock did a great job selling property at the peak, now it has to collect its payments - build fast then collect debts. We concentrate on its balance sheet....

2) Revenue recognition

The income statement less relevant as earnings are not recurring - it is just realizing the revenue/income from the past sales. Wheelock recognizes based on (estimated) percentage of total construction costs (07AR, footnote 2.19). However, actual *payment* would be based on URAs standard payment scheme. So their cost/revenue recognition may be ahead of the payments.

Wheelock did not sell any properties under URA's deferred payment scheme.

3) Balance Sheet (as of Sept 08):
  • Abt 8.3c per share cash (100m), taking after subtracting all their debt and tax liabilities.
  • Investment property of 790m (65c per share). This is wheelock place, 99yr tenure from 1990. Last revalued Dec 07. Their operating revenue from this (excl. revaluations) are abt 2c per share (footnote 19 in 07AR). Don't know how the hell this valuation is justified.
  • Development properties, whose costs/revenue are gradually recognized as they are completed. See the notes on revenue recognition above.
  • I've estimated cash per share owing, listed red in the table below.
Table below is for 3Q08 results (30th Sept). Next results should be out mid-Feb.

(the whole table is modified - 24th Jan)

Property Description
and price estimate
% sold and completed (based on URA's payment scheme, not Wheelock's revenue recognition)
% Payment collectedPayments owed
The Cosmopolitan and The Sea View
Both 100 sold.
Both 85% completed in 3Q08 results.
60% (as of Sept 08)
But 25% totaling at least 62m.
was paid in Oct. This is not counted here, and is still included in receivables.
Add 192m (16c/share) to cash.
Ardmore II
118 4 bdrm units. Priced 4.2m-5.5m. So revenue conservatively is 500m.
Assume 200m development costs. Gives 300m.

100% sold.
Building 20+th story. So 30-40% complete by URA's definition.

TOP scheduled 2010.

Assume all 30-40% collected as part of the cash, since the foundations were already finished before 2Q08 (30th Jun)
60-70% awaiting, assumed not recognized so not in receivables. Translates to 180-210m or 15-17.5c per share.
Scotts Square
388 1,2 and 3 bdrm units.

ASP $3,994 psf (3Q08 results, Sect 10).

From floor plan(Apartments-->floor plan): scotts wing has at least 150,000 sq ft, orchard wing 72,000 sq ft, total 222,000 sq ft. So 620m for the 70% sold. Deduct development costs of 168m. So 452m for the 70% sold.

70% sold.

Piling work in progress, so 20% complete.

Expected TOP 2011.
Assume only 20% collected
80% unrecognised, so not in receivables.
Gives 361m (or 30c per share).

At least 30% of the development's units sold to Singaporeans. So up to 40% may be sold to foreigners.
Orchard View
30 4-bdrm units.

No idea what it can sell for.
Expected 2009.
To be launched for sale upon completion, so no URA payment schedule.
Ardmore IIIWait till next property cycle.

4) Conclusion:
  1. After selling The Sea View and The Cosmopolitan, they should have 300m net cash (abt 25c/share). Confirm this in 4Q08 results.
  2. At least 15-17.5/share owing on Ardmore II. Since buyers should have already paid 30-40%, they probably will not walk away.
  3. Biggest risk is the 30c/share owing from Scotts Square. Only 20% payment was collected, and it will not be completed until 2011. Do not know how many of the buyers will walk away, especially if they are foreigners.
  4. Orchard View and Ardmore III. Dont know how to value them.
  5. (80+ yr lease for) Wheelock place, with its 2c/year revenue.
What price would I buy?

5) Another way to play this....

Wheelock's David Larence has been very shrewd in the past buying property when it is cheap. You may wait a few years for him to make another purchase, in anticipation of the property market improving - which would be a catalyst for property counters (Wheelock included) to go up. It would be interesting to look at a graph of Wheelock's share price over the last few property cycles and see if share price appreciation was preceded by their property acquisitions. Alternatively, buy your own property, though the freehold stuff is too expensive for me and the 99yr depreciating-crap is too risky to touch....

Sunday, November 9, 2008

Value Hunting #3: Frasers Centerpoint Trust.

REIT that owns several shopping malls, located next to MRTs in S'pore. It owns Northpoint (expires 2089) (excluding Northpoint 2), AnchorPoint (freehold) and CauseWay Point (exprres 2094).

Approximately 625m shares issued.

Majority of FY08 profit/revenue (65-70%) comes from Causeway Pt., abt 25% from Northpoint, 5+% from Anchorpoint.

Listed on SGX as "FrasersCT". Not to be confused with Fraser Commercial Trust (formerly Allco), which is "FrasersComm".

1) Business Model
The usual stuff for a REIT: Borrow money, buy over and lease building, pay the difference as dividends.

2) Cyclical Aspects:
30% of their tennant's leases are due for renewal in 2009.

3) Financing:

28% geared. Financing takes up only a small amount of their profit. In FY08, borrowing costs were only 12m of out of revenue of 84m and profit of 37m.

Their total debt is 260m, due for refinancing July 2011. All debt is at fixed rate of 4%.

In Mar 07, was assigned A3 rating with stable outlook by Moodys.

4) Risks:
  • Tennancy renewal, in a declining economy. Smaller tennants can just go bankrupt and walk away. They should have no problems re-leasing due to the prime area, but I will not expect their rentals to increase.
  • FCT holds a 31.06% stake in Hektar Real Estate Investment Trust (“H-REIT”), is a pure listed retail REIT in Malaysia with properties in Selangor, Melaka and Johor. I am wary of this. I have seen many retail peoperties in Penang start out as cool, hip and happening places, and slowly degrade over the years to become ghost malls. People in Malaysia have cars or motorcycles, so their malls in Malaysia are not 'protected' agains obselesence by their location. Malaysia is very different from Singapore.
  • Woodlands MRT has a lot of empty surrounding land.
5) Future growth

Long term, can grow from the properties fed by their Parent, Fraser Central Ltd, which owne 54% of FCT. Would need to wait for the finance costs to come down or share prices to rise in order for this to happen.

They have a 5 year right of refusal over Northpoint2, Yew Tee, Bedok, CenterPoint. Not sure when the 5 years starts from? They also have a put/call option to buy Northpoint2 expires July 2010. These contracts are probably meaningless, since they are controlled by their parent anyway.

Will not factor this into calculations due to the economy.

6) Valuation:
FY08 DPU was 7.3c. Yield of 10.4% at a price of 70c. I will not factor in any increase in rental due to the current economy. Assume it remains constant.

7) Conclusion:

First remove the 3.4m distributions from Malaysia.

I will assume that long term (after Jul 2011), their borrowing costs go up from 4% to 5%. This is a wild guess, it may go up more or less.... but should be quite safe since the banking crisis (not economic crisis) should be over by then. This would add 2.4m to their borrowing costs.

Altogether, this reduces their profit by 12%, giving approximately 6.4c DPU per year. For a yield of 10%, I need a price of 64c.

Friday, November 7, 2008

Value hunting #4: Boustead

Attracted by this company's net cash position of 20c, with a share price of 71c. The company has been growing profit at least since 2003. FY08 EPS was approx 9c/share (accounting for share split and extraordinary item) or 58m total.

Note for calculations: the share split in Aug 08. Pre-split had 260m shares, post split 520m. Mkt cap @70c will be 364m.

Historically the company was a mish-mash of unrelated businesses, owning among other things, a sushi deli. Management sold off the unrelated business and started concentrating on their core competencies in 02/03.

1) What does it do?

Boustead has two business segments:

  • The smaller one (15% of revenue, 21% of profit)is from Geo Spatial (Provision of geographical mapping IT services). 90% of their clients are government, and 60% of the revenue is recurring.
  • The larger one (70% revenue, 60-80% of profit) is engineering services, divided into 3 parts: a) energy, consisting of oil and gas projects and solid waste conversion, b) real estate solutions: building industrial and residential facilities, and c) water and waste water: small new segment, not yet profitable.
2) Balance sheet
Negligible debt. Small operating lease commitments, roughly 3m a year.

In 1Q08 (June 08) results, they have 140m cash. Subtract 28m for taxes and some more for working capital, as a rough guess, I get 100m, which equals about 19c/share nett cash.

Boustead's 40% owned associate GBI has confirmed the 200m sale of an industrial property to SEB Asset Management (the investment arm of a European bank). Slated for completion end of the year. Fingers crossed the cash actually comes through... in these wild times. When it does, this will add another 15c/share cash to Boustead's balance sheet.

3) Cyclical Aspects
Common sense suggests their engineering business is cyclical, and risky:
  • Large amounts of money/credit are required to fund infrastructure.
  • Revenue is project based, not recurring. The products they produce are not consumable.
  • Revenue and profits are recognised for as % of project completion, however there may be credit risk. It isn't over till the cash actually changes hands.
How does a recession affect their profits? From their FY02 AR (March 02), which nicely covers the 4 quarters of negative growth in that recession: For their construction projects:

"However, gross profit margin was eroded from 29.7% of FY 2000/2001 to 19.8% of FY 2001/2002 because of the generally soft construction industry that was weakened by excessive competitive pricing."

Applying these same gross margins to their entire FY08 profit I get a profit of 17m. Blending it with an unchanged profit for Geo Spatial (taking it as 20% of the profit) gives 25m, or approximately 5c a share.

The above is guesswork for a bad but realistic scenario. A worst case one would involve losses, which I cant model because too many factors.

I have not been able to find their results way back from from the Asian Financial crisis.

4) Conclusion:
At 70c per share, minus net cash of 40c, and with a EPS of 5c, this would still give a PE of 6.

If we ignore the Engineering Services completely (because it is too hard to model), and just take the Geo-Spatial profit (2c/share), their PE at 70c would be 15, and at 60c it would be 10.

There are too many unknowns to be certain, but my gut feeling is that this is OK..... Cash only, no CPF due to the cyclical and risky nature of their business. Definite buy at 60c. Mabye 70c, not sure....


“If you can keep your head when all about you are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you, but make allowance for their doubting too,
If you can wait and not be tired by waiting…Yours is the Earth and everything that’s in it.”

- Rudyard Kipling

Sunday, November 2, 2008

Value hunting #2: Cerebos

Got interested in this when wifey wanted to buy me some Brands Essence of Chicken when I was sleepy on the weekend. And I thought "$20 for squashed chicken. Who makes this....?"

Cerebos (80% owned by Japanese company Suntory) makes it, among other things.

1) What do they do:

A breakdown of their 3Q08 results by product and region:

- 89% of their profit comes from 'liquid health supplements', mainly BEC. Most of that profit comes from Thailand (82m), a little from Taiwan (15m), neglible amounts from S'pore & Malaysia (<4m).2) Balance sheet:
From 3Q08 results: About 130m surplus cash on the balance sheet (approx 20c per share).

3) Cyclical Factors:

You would expect that demand for health products would be resilient in bad economic times. You would be wrong. From digging through old Netresearch-Asia reports (subscription required):
  • 3rd Dec 01:"The 1998 crisis already showed us that Brands, although a premium health supplement, was not immune to economic downturns and the consequent decline in consumption."
  • 26th Jun 2000: "Margins for BEC had collapsed from more than 20% to less than 8% at the height of the crisis".
  • 20th Jan 2000, talking about their subsequent recovery: "Brands was operating at close to 50% capacity utilisation in FY98 is now back at close to 70%"
4) Valuation:

The current low PE of about 9 (excluding their surplus cash) seems a value trap, given that sales are expected to fall in a recession.

When the trough comes, the PE may not be low as this is a cyclical stock. As an example, in Dec 01 it was trading at $2.12, with a PE of 12 (excluding the 66c cash/share).

5) Conclusion

This is a cyclical stock. Wait for a year or two, to see the effect of falling sales on their share price. Buy when we are in the middle of a recession. If we have a rapid and sustained recovery, we should see (cyclical) 20-30% profit growth for several years afterwards.

Friday, October 31, 2008

Value Hunting #1: SMRT

1) Introduction

Operates 89.4km of rail line, with 51 stations. Based on its 1Q08 (ended June 08) results:
  • 3/4 of profit from MRT.
  • 1/4 from building rental at MRT stations.
  • small losses for bus and taxis operations, which are not counted in the above, and excluded here.
Its contract to operate the EW and NS lines lasts until April 2028. 10+30 years license for the future Circle Line (CCL).

2) Business Model

They own (the right to operate) the rail and trains. After deducting operating costs, the remainder is profit:
  • About 40% of their operating costs come from Staff. That the CCL line will be fully automated, so this gives a higher fixed cost while meaning that extra staff do not have to be deployed if train frequency increases.
  • 18% for depreciation
  • 17% for fuel and electricity
  • 8% for repairs and maintainence.
Surprisingly, fuel/energy prices are only a small part of their costs.

3) Future Growth

  • Circle line. From wikipedia: 33km long, underground, fully automated line. 6 km is scheduled to partially open in mid 2009, and the line is expected to be fully operational in 2011.
  • Boon Lay extension: 3.8km extension, 2 new stations beyond Boon Lay. Operational Feb 2009.

So we are looking at a 10% increase in operations (and hopefully revenue and profits) in by end 2009. And an additional 30% increase by 2011 (for the remainder of the CCL).

Far future:
  • 14km extension to the Boon Lay extension above, opened by 2015. To bve operated by SMRT.
  • Thomson Line, 27km, probably by 2020.
  • Downtown line, 40km, probably by 2020.
  • LTA has announced that the tenders for operating the Thomson and Downtown lines will be only for 10 years, not the current 10+30 years enjoyed by SMRT.
4) Risks
  • terrorist attack
  • SARS
  • Capex will eventually be required for more trains, if they want to increase frequency of trains during rush hour. Fat chance.
  • In their 30 year license with LTA, the license fee set at 1% till 2010. After this we do not know what the fees are. I think they are unlikely to raise them when Temasek owns 54% of SMRT.

5) Valuation
  • 1.5bn shares outstanding, 1Q08 profit is 2.6c, estimate 10c for whole year.
  • 240m dollars cash, BUT 90m spent on acquisition. 1Q08 results says they will spend 91m (6c per share) on FY08 dividends.
I will take into account their projected 40% growth for the next 2 years, giving EPS of 14c. In a bear market, I want a PE of 8.

6) Conclusion
I need to see the share price drop to $1.12 before I am comfortable buying.

Value Hunting: Introduction

Hunting for value in a fallen market. I have 20K cash (from here). I may also use CPF money.

When catching falling knives, I want to be absolutely certain of the value that I am buying. Like buying $1 for 50c. That way, even if they fall below my buying price, I still have the conviction to hold for the long term. I only want companies that have these characteristics:
  • Must have a recurring income stream, selling products that people will still use in a recession. Usually selling cheap, consumable goods for cash (e.g.: hamburgers, train rides, etc). Not for example, selling corporate IT systems or oil rigs.
  • Should have a projected PE of 8 with small projected growth. May have a larger PE of 12 or 13 if they have projected continuous annual growth of around 20%. These are the type of valuations I saw in the 01/02 bear market.
  • I prefer to deal with companies that have most of their operations in developed countries. I will halve the amount I buy for companies that have their main operations in third-world countries like India, China, Indonesia, etc. And I would not use CPF money for them.
  • The usuall stuff abt having some sort of defensive moat or compeditive advantage their operations, as well as a good balance sheet also apply.
If the stocks do not reach my target prices, I won't buy. If the market recovers and runs away from me, I can use a more 'growth orientated' strategy (with appropriate cut-loss). From past experience, whenever I rushed and felt 'compelled to buy something', I always lost money.

Tuesday, October 28, 2008

Industrial Properties 'the only bright spot'

From OCBC Investment Research 'Property Sector' report 28th Oct 08:

Industrial properties- the only bright spot in 3Q08. Office and retail properties registered declines in prices and rental rates in 3Q08 on a weaker economic outlook but on a brighter note, the price index for industrial properties climbed 0.9% QoQ to 115, underpinned by the 2.6% increase in prices of multiple user warehouse. Industrial rental index also increased by a marginal 0.1% QoQ to 110.4 as vacancy rate continue to decline to a decade-low of 6.6% in 3Q08.

Wednesday, October 22, 2008

Bought Keppel Corp

1 lot @ $4.49. Now trading at $4.17.

Have not had time to do a full analysis:
  • Most of their profits come from Oil and Gas (73% of revenue, 72% of profit, counting their investments (K1 and other offshore and marine) under this category)).
  • They have orders until 2012.
  • I expect oil prices to remain high, and to recover when economic growth comes back. Despite all credit crisis and stock market crash, oil is still above $70.
  • With 35c profit in 1H08, they have a PE of 7.1 at a share price of $500. However I should discount or ignore their property profits as being cyclical.

Monday, October 20, 2008

Bought Cambridge and A-REIT

Bought 11 lots Cambridge @ 27c.

Bought 3 lots Ascendas REIT, 2 lots @ 1.59, 1 @ 1.58.

Long term. No cut loss. This is a gamble that the Banking Crisis will resolve - monitor the TED spread and SIBOR/SOR to confirm this.

Saturday, October 18, 2008

Ascendas REIT

Quick notes. Got my attention with a trailing yield of 10%.

1) Competitive Position

Their clients are mostly blue chip eg: Singtel, Daikin, etc

According to their 08 Annual report, they have:
- 42% share of the hi-tech industrial space in Singapore
- 33% of Business & Science Park space in Singapore
- 11% of Logistics & Distribution space in Singapore

2) Cyclical factors

A report by CIMB says that:
  • There is a 18-24 month lag time from the business slowdown to a pinch on real-estate demand. (The recession started 6 months ago, lets assume we'll see this).
  • Default payments were 1.8% of gross revenue in the 2004 recession.
I will model 4% for defaults.

3) Financing. When it is due?

Has 1.5bn dollars of debt, due at different stages. From their FY07 AR, showing when their debt is due:

This consists of:
  • 238m short term loans (revolving credit facility) - due within 2009 (SOR + margin)
  • 279m Transferable loan facility : due Jan-Mar 2010 (SOR + margin)
  • 300m notes due Aug 09 (SOR + 0.325). Related IR swap fixed at 2.9% until Sept 2012. Have 'firm commitment' to refinance 200m.
  • 350m notes due May 2012 (SOR + 0.265)
  • 395m notes due May 2014 (SOR + 0.200)
Not sure how to interpret this: potentially 817m needs to be refinanced by early 2010.

"As at 30 September 2008, A-REIT has 76.7% of its debt hedged into fixed rate for the next
3.93 years.". Unlike Cambridge, the hedging seems to be tied to the loans, and is not separate from loan renewal:
"The nearest refinancing requirement (excluding existing short term borrowings) is the Commercial Mortgage Backed Security (CMBS) of S$300 million due in August 2009. The Manager has fixed the interest rate at an all-in rate of 2.9% at the start of its issuance. The related interest rate swap contracts have a remaining weighted average term to maturity of 3.04 years as at 30 September 2008."
I am not sure if all their outstanding loans are tied to interest rate swap contracts, but for now will assume it so.

4) The numbers:

After reducing their revenue by 4% (190m - 7.6m), and increasing doubling their (non-hedged) finance costs (Add 6.2m to 27m), their 1H08 profit would drop by 13%. Their annualized DPU (15.3c) currently yielding 10% would drop to 8.7% (at a price of $1.50). This is good, but not irresistible... TODO: take a look at their growth prospects, to help determine target price.

[Updated 14th Nov] Based on the above, set my buy target price at $1.33. This is a projected 10% yield, in the bad case scenario

Cambridge Industrial Trust again

Share price has been hammered to sub 30c recently. Market must be afraid they cannot obtain financing. A quick review of their numbers:

1) Their 2H08 earnings (for 6 months) summarized in 4 lines:

Rental revenue: 35.5
Non-finance costs: 7.1m
Borrowing costs: 5.5m
Operating Profit 23m

This excludes interest rate hedging and change in investment property value (which they do not pay out in DPUs anyway).

2) Assume recession, deduct 10% from their revenue. I am assuming that 1 in ten business go under, as they are renting out to SMEs.

Rental revenue: 31.2
Non-finance costs: 7.1m
Borrowing costs: 5.5m
Operating Profit 18.6m

Assuming 800m units issued, DPU would be 2.3c per share (annualized: 4.6c).

3) Their current weighted average interest rate is currently 3.1%. What happens when this changes?

a) Assume interest costs double to 6.2%
Operating profit (excluding hedging) comes to 13.1, which gives 1.6c DPU (3.2c annualised). At a share price of 30c, this is a 10% yield

b) Assume Interest costs go up to 10%
Operating profit (excluding hedging) comes to 6.4, which gives 0.8c DPU (1.6c annualised). At a share price of 30c, this is a 5% yield.

4) Another way of looking at this is to assume someone wants to buy the entire assets of the company. Benjamin Graham: buying $1 for 50c. I don't look at NAV because this is a meaningless number that may change - the reason to buy the buildings is to get an income from them.

Lets remove the finance costs from the equation.

Rental revenue: 31.2
Non-finance costs: 7.1m
Operating Profit 24.1

48.2m annualized.

At a share price of 30c, Market cap is 240m. Buy it all. Then pay off the debt of 370m. Your total cost is 610m. With 48m annual profit, you would get your money back in 12 years. Most of the buildings have 40 years remaining on the lease (the shortest has 24).

I believe the market is pricing in scenario 3a (about a 6% borrowing cost). Their (potential) problems finding funding and the recession do not justify the low price, assuming that the credit crisis does resolve.

I will buy abt 3K worth. Not more, in case there is something wrong with it, and I need to be able to sleep at night if I lose the 3K.

Strategy and allocation: Oct 2008

Where I am now:
I have $67K cash. The only share I own is 11 lots of Pfood (spent 9K, currently worth about 4.4K @40c, ouch).

Where the world is:
  • Banking crisis: This is where where banks can't or won't lend money. Governments are doing everything possible to stop get banks to start lending. There have been many banking crises before - it is not the end of the world. For companies that need capital, monitor the TED spread (here), and the SOR and SIBOR rates.
  • Recession: I expect a recession. It is normal to have recessions after booms, and especially after credit crisises. Dont know how long it will last. Worst case, several years.
  • Bear market: We are probably still in a bear market - too volatile to call any direction. From IBD: All the single largest day gains have previously occured in bear markets. dont know if there will be a quick recovery, like after the Asian crisis, or a multi year bear market like in US the 70s.
My Plan:
Use 32K of my portfolio for value investing. This is 'buying on the way down':
  • Buy good companies when they become so cheap they are irresistible.
  • No need to rush, can buy slowly over the next year, as I find them.
  • Probably allocate small amounts to these companies (especially the second liners - around 5% each) as this style of investment has some risks - you lose everything if you get it wrong.
Use the other 35K (plus any extra if I did not find good companies to buy) for growth investment, speculation. This is 'buying on the way up':
  • Wait for IBD to signal a follow through day, and identify leading stocks which have either: broken out (or at least held their ground), or made bottoming patterns on the SGX.
  • Buy slowly and with cut-loss, as it may be just a tradeable rally, or a false signal.

How low can the market go?

Sometimes, stock values become so low they defy belief. Then you can just throw away your charts and buy for the long term, based on fundamentals. Are we there yet?

A look back....

First, lets wind back the clock 7 years to look at previous bear markets. I first came to Singapore in early 2001 with $5000 in my pocket. I arrived from Australia, which had escaped unscathed from the Asian crisis and had been in a bull market for several years. After buying a shares booklet from 7/11, I was astounded. Many mid cap companies with excellent fundamentals were trading at ridiculous valuations. From memory:
  • Comfort was trading at a PE of 7 or 8, with a yield of 7%. With excellent cashflow, low debt, almost a monopoly with queues of poor uncles lining up to drive taxis, it had been able to increase its profits by 10+% for several years. I sold remember selling 2 weeks before the takeover by Delgro was announced :( fund my stupid HDB rennovations.
  • Robinsons was then a premier department store (as my wife said, it was the only one to segregate its offerings by price level (John little, Robinsons and 'Marks and Spencer') giving a more pleasant shopping experience. More importantly, it was profitable every year, and two thirds of its share price was cash. I didn't buy, no money. It eventually doubled.
  • Unisteel, with a 50% market share, trading at a PE of 12. It was to grow 20+ %for several years. I bought at 78c and tripled my money in 3 years. Before I bought it, it had traded around 30+c.
  • Want-Want, selling branded rice crackers, trading at a PE of 5 or 6, showing 20% growth. It traded at 60c, then moved up to 80c - I thought I missed my chance and didnt buy. It eventually reached $1.90.
I remember thinking that I thought I had come to Russia or Phillippines some other dirt poor, corrupt, disintegrating country! Where else would I find profitable companies with low debt, free cashflows, long operating history and potential 20+ percent growth, selling for single digit PEs?

Are we there now?

I cant find the same degree of undervaluation in the market right now. Key differences are:
  • In 2001/2002, we were in a recession and earnings were coming off a low base, hence the potential growth. After going several years through the recession , things were so bad that they could only get better.
  • The stocks mentioned above usually were blue chip (Robinsons) or had a sustainable competitive advantage (Comfort and Unisteel). Want Want was the exception. Looking at the blue chips today, for example, Comfort-Delgro, SMRT, Ascendas REIT, they do not yet have projected single digit PEs or yields of 7-8%. Trailing PEs are cheap, projected ones are probably not. The companies that have the ridiculously low valuations are the second liner companies which are a little weaker (eg: Cambridge REIT) or have a small market share (eg: TPV) in their industry, are are operating in China where it is hard to even determine their market share and count their competitors (let alone list their competitors).
  • Also, I don't mean to say that once stocks reach that level they will not fall anymore. My past experience does not even cover the Asian Crisis (STI went to 800+) where stocks were even cheaper. what I mean to say is that at these levels, I would use about 50% of my cash, which I did not need for 5 years, to buy and monitor them for the long term, with the expectations that some of them will double or triple in years to come. (The other 50% cash I will use for speculation).
Buffet once said in dealing with the 1970s crash, "I feel like an oversexed guy in a whorehouse". I felt like that in 2001. I don't feel that yet. Close, but not yet.... we are getting there. I will detail my search for undervalued stocks in future posts.

Friday, October 3, 2008

China Susnine

Attempted fundamental analysis of China Sunsine (symbol: ChinaSsine).

China Susnine is a small specialty chemical company producing chemicals for the tire industry.

1) Competitive position

Their aim is to expand capacity to grow market share to 25% by 2010. From an Aug 07 article: "We are now China's largest maker of rubber accelerators. A market share of 25% [will] gives us pricing power... ".

In June 08, management believed they have a 19% China market market share (8% global) as China's largest rubber (2nd largest global), based on global rubber usage figures.

In an 2Q08, China Sunsine's annual production capacity for accelerators was 49,000 tons. This compares to:

Global producers:
NameCapacity (tons)
Lanxess (spinnof from Bayer)45,000 (estimated)
Chemturaless than 30,000
China Producers:
Tianjin Organic (SOE)26,000
Zhenjiang No. 2 Chemical (SOE)19,000
(figures from company announcement on SGX: 'Clarification of press article', 11/9/08)

Based on these figures (from the company), they seem to be one of the strongest players in their niche, with only 2 or 3 other competitors being able to produce 1/2 as much as them. However the market is still fragmented, with many players.

2) Business Model

From their 1H08 results (at 92% utilization rate): raw materials are by far the largest proportion of costs (75-80% of revenue). Administrative (3.8%) and selling expenses (2.5) are next biggest. Their business model is similar to Pfood, in the sense that they add a small amount of value to their raw materials before selling as a consumable product.

Depreciation is small (2%) so it is not a capital intensive industry. Hypothetically, even if utilization was to halve with all other costs being fixed (with only raw materials being halved), they would still be profitable (profit would be reduced from 42m to 8m).

The biggest factor is raw materials costs. SIAS research, in their Dec 07 'Initiation of coverage' reports that raw materials contributed 80-83% to their costs of sales in 04, 05 and 06. Aniline contributed 35-40% of the above raw materials cost (they did not give the numbers to show how it was derived), meaning it contributed 28-33% of the total cost. How has the aniline price fluctuated recently?
  • Benzene, the main raw material of aniline, spiked in May 08, before
  • From this chart (from Netresearch free 'Initiation of Coverage' report on Sp Chemicals), we see that Aniline prices rose 18% in 1H08.
Accelerator chemicals make up only about 1% of the cost of tyre production, so the company believes they can pass on any production-cost increases to their customers. Lets check the gross margins for past quarters to see if they were able to pass on any raw material price changes:

3 Months Ended
Revenue (RMB 000s)
Cost of Sales (excludes export rebate listed in Earnings Stmnt)
Gross Margin
Dec 06
Mar 07

Jun 07
ASP is RMB 19,455 per ton
Sep 07

not available yet

Dec 07
The y-o-y margin decrease is entirely due to raw material prices. The company results include the export rebate, which I stripped out.

Article: "Sunsine had to produce a range of accelerators with varying margins, instead of concentrating on just the high-end, since it wants to meet the needs of clients".

Article: Sunsine experienced a shortage of internally-produced MBT, ... used as an intermediary product for the production...

The shortage was .caused by sales volume increasing, year-on-year, in the past two quarters by an average of 35% each in Q2 and Q3. As a result of the shortage, Sunsine had to buy MBT from external sources at a higher price.

Article: This year (in 2007), China Sunsine dropped average selling prices by 8.4%, a move aimed largely at edging out from the market some of its 100-odd Chinese competitors, especially the smaller ones.
Mar 08
ASP increased 8.1% from Mar 07
June 08
ASP increased to
RMB24,764 per ton (up 27% y-o-y for the quarter). Group passed its cost increases on to customers.

Sep 08

not available yet

Even though Aniline increased substantially in 2Q08 (approx 18% y-o-y), ASP increased 27%, which means that it was able to increase its prices by more than the raw materials increases.

3) Quality of Earnings

Next I check for any problems with inventories or accounts receivables:

3 Months ended
(RMB 000s)
Accounts Receivables (trade + other)
Cash Inflow/(Outflow) due to working capital
CFO excluding WC
Dec 06
Mar 07
125.6not given

not given

Jun 07

Sep 07

Dec 07


Mar 08


Jun 08


Sep 08

Working capital is very volatile on a quarter-to-quarter basis. But they generally seem to make money from operations (the sum of the last two columns is positive, overall).

The increased inventory in 2Q08 (up 90%) probably makes sense due to increased production (up 40%) and rising costs (e.g.: aniline, up 18%). Monitor this in 3Q08 results.

From 1Q08, the depreciation policy has changed to increase the useful life of new machinery from 4 to 7 years. This can be ignored, firstly because depreciation is such a small cost, and secondly, because it only applies to new (and future) capex, not for previously bought equipment. This change only decreased the deperciation expense by 0.1M RMB.

The company stated (somewhere) they have (or had) a policy of only allowing a maximum of 5% revenue from single client - but I cannot find this in their 07 AR.

4) Debt

China Susnine had no long term debt in 1H08 results. They report that they have finished using their IPO proceeds with a surplus of 32.1 RMB mill (out of 100 mill).

Future plans for 2008 are:
  1. expand 5000-ton anti oxidant TMQ plant to 10,000 tons. Cost not given.
  2. expand 5000-ton insoluble sulfur plant to 10,000 tons. Cost not given.
  3. Increase capacity for MBT (an intermediate product): new 10,000 tons facility by 3Q08. Cost <= 20m.
Generally, past increases in capacity of 5,000-10,000 tonnes seem to cost 20-30m RMB. Lets assume this for a and b above, for a total cost of 70m.

No plans are given for beyond 2008. Here, they mention plans to produce aniline in-house, this must be later on.

Conclusion: FY08 capex can be covered by cash flow from operations based (50m in FY06, 59m in FY07).

5) Cyclical Factors
  • Raw materials, as mentioned above. The article above about benzene prices mentions that China is building a new benzene plant which is expected to depress prices.
  • Will follow the fortunes of the China tyre/automative undustry. See below.
6) Potential Growth

Entirely dependent on China's tire industry.
  • Expected to grow, as China's GDP and car ownership grows. Seems to be experiencing a cyclical downturn now (along with the rest of China).
  • Note on history of US type industry .... grew fast in the 1920s, then declined as the inductry consilidated...this is not a problem now but may be something to watch out for in years to come. Michael Porter may have written abt tires.
7) Valuation

At a share price of 20c:
  • In 1Q08, the company declared a dividend of SGD 1c, giving a yield of 5% (assuming share price of 20c).
  • FY-7 earnings were approx SGD 3.8c (18.22 RMB cents), giving a PE of 5.3.
8) Chart

Doesn't show anything.

9) Misc

Several misc. risks with this company:

1) All the information we have comes from company itself.

2) Family controlled and run: "Mr Xu’s two sons help him run the business. Eldest son Xu Jun, 37, is an executive director. The family has a deemed interest of 53% in the company". From article.

3) Very Illiquid. Only 5m shares were issued to retail investors. This means that funds cannot buy on the open market.

Because of these risks, especially number 3, I would limit any purchase to half of normal.

10) Conclusion

May be a good opportunity to buy a leader in (a small specialised segment of) China's automotive industry.

For now, wait. Market is still bad. The PE is low, but may stay low in such a bad market. I believe the PE will not go lower unless earnings drop.

Pfood: WTF happened?

On Sept 30th:

First thought was that this is something to do with China pork industry. But if there were problems the HK people would know about it first - Yurun's chart shows no selling:

I've lost abt 4K (unrealised), a small enough amount that I can still sleep at night. Even if I lose the entire amount invested (abt 10% of my portfolio), I would be able to recover.

Either theres something wrong with pfood in particular, or else the price has been hit irrationally, eg: by shortists or a fund being forced to sell quickly. I don't know. Given pfood's track record, it is probably the latter. But I decided not to buy more at a lower price, just in case.... I will probably regret it, but being able to sleep at night is more important.

Before it fell, I was previously tempted to buy more pfood, as it is the only good buy idea I had. Luckily I did not. This highlights the importance of risk management. Meaning "not getting killed when you are wrong".

Sunday, September 14, 2008

Oil prices: Two contrasting views

On one hand, Charles Maxwell, who started as an energy securities analyst in 1968 says:
  • We will see $300 a barrel -- or roughly $250 in today's dollars -- because oil supply will be so short. ...That will be in 2015, after the peak of oil [supply]. But even earlier, around 2010, more than 50% of the non-OPEC world will have peaked in its production of oil so the dependence on OPEC will become extreme.
  • "Oil is unique in that when it begins to disappear, there really aren't any good substitutes, which there are for so many other commodities, It's that lack of substitutes that forces the pricing mechanism to balance supply and demand."
  • [What's on the horizon over the next two years?] Supply and demand will be equal temporarily. There are three or four Saudi oil fields coming on stream, but there won't be any more low-sulfur crude fields coming on after the end of 2010. There's also the recession, which takes away some demand, but oil prices will remain high.
On the other hand, oil production may surge by 2015:
  • The Gulf could deliver an extra 10 million barrels of crude oil per day by 2015, with investment of almost $300 billion in boosting oil production currently underway
  • "Our analysis shows that if all current projects across the region meet their projected targets in barrels of oil a day, it would mean that by 2015 the hydrocarbon-rich countries of the GCC will be supplying more than half of that future added oil capacity of 21 million barrels...".
  • Interesting that the 2015 date is similar to the one predicted by Jim Rogers.

No one knows, so no point trying to predict the future. Just follow the trend, though this is easier said than done....

Thursday, August 28, 2008

Oil prices

Some notes on commodity and oil prices, mostly from Jim Roger's "Hot Commodities":

On Commodity markets:
  • Historically, commodity bull markets have lasted an average of 18 years. The last one started 1999.
  • Commodity bull markets are bad for stock markets. The last stock market bull run started in 1982, and probably ended 2001.
  • So we are probably halfway through the current commodity bull market. If this is true, I expect the stock market to stagnate in the next 5-8 years. e.g.: Brief 'mini-rallies' of 1-2 years, whose gains are lost in the subsequent declines.
  • During a commodity bull market, retracements of 40-50% are common.
On Oil:
  • It takes 8-9 years to bring newly discovered oil supplies to market. North Sea and Alskan oil were discovered in '69 and 68 respectively, and both shipped in '77.
  • 1998 was a trough in oil prices ($10), by 2006 it was $70. As an estimate, the current oil bull market may end in 2015 to 2018.
  • We will know when the bull market ends when:
    • Higher prices causes long-term changes in consumer behavior to decrease demand. This may be starting to happen now: eg: MRT usage increasing, Americans driving less, China and M'sia cut oil subsidies, Americans debate nuclear power.
    • New oil comes to the market. eg: Recent Brazil 5-8 billion-barrel Tupi oil field. Iraq mabye (used to produce 2.5m bpd). To judge the size of oil finds: The world used 87m bpd in 2007.
  • The wildcard is Saudi Arabia. Most of their oil production is from ghawar oil field. No one knows the size of their reserves (Satellite O'er the Desert). Or even if they will still want to sell it if they have a change of government: 15 of the 19 Sept 11 terrorists were Saudis.

Tuesday, August 26, 2008

Cut loss #3

On Mon 25th, sold Boustead at $1.11 (pre-split $2.22). This trade lost me $770.

Total losses from this misadventure (excludes pfood) are $4515, including brokerage.

Sunday, August 24, 2008

Back to doing nothing....

Its very important to take losses as quickly as possible. And not let it get to you. In a bear market, my number one aim is to preserve capital. I am waiting for either:
  • the market to turn (which could be any time from now to 12 months later), or else
  • for stocks to become so undervalued that they are a screaming buy (like in the Asian crisis or SARS). With the exception of pfood, I do not see great quality companies trading at bargain prices. There is no blood on the street yet. Maybe if we get a recession....
Back to doing nothing.....

Cat photo from

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing,unless there is something to do. Most people always have to be playing; they always have to be doing something. They can't just sit there and wait for something new to develop. I wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, 'I just lost my money, now I have to do something to make it back.' No, you don't. You should sit there until you find something."

Jim Rogers

Cut loss #2

On 21st Aug, sold everything except pfood (long term investment) and boustead (still waiting to confirm if the split shares are debited into my acct):
  • HI-P at 57c (loss $465)
  • Sp Chem at 57.429c (loss $-640)
  • Oceanus at 39.5c (loss -$720)
Total realised loss (incl. Venture, excl Boustead and pfood) is -$3745.

I was hoping for a tradeable rally like the Mar-May one, but we don't seem to be getting it. In the US, we have:
  • Too many distribution days at the start of the rally (4 in one month)
  • No clear leadership in sectors. One day financials are rallying, other days energy, other days tech.
  • Failed breakouts.
In Singapore we have a continual sea of red as the STI broke through the 2800 level, and has not even made an attempted rebound.

Saturday, August 23, 2008

Pfood 1Q08 results

Released on 12th Aug: quarterly profits up 160%, due to rising sales (up 20%) and lower COGS (up only 11%). A massive increase in gross margin (from 76m to 256m) has more than made up for other issues:
  • higher selling costs (up from 35 to 52m)
  • lower contributions from Pine Agritech (53m to 23m)
  • Higher tax rate
Management comments: "The nationwide supply shortage of live pigs is expected to continue to ease".

Tuesday, August 19, 2008

Cut loss #1

Sold Venture. At 9.10 it has cut through all support levels like a knife thru butter. Lost $1920 (incl brokerage).

Expect to cut more losses in future.

Saturday, August 16, 2008

Dosent seem to be working....

My recent buys do not seem to be working. Have not got clear signals to cut loss yet, but there is a good chance I will. The US rally seems to be weak, with too many distribution days, and the SGX stocks are down (median -3%, excluding the sub-20c counters) from the day that I bought (31st July) till today (17th Aug).

My maximum cut loss will lose me just under SGD 5.5K, which is nothing to lose sleep over. Excluding pfood (as an investment), I have lost abt 2.6K to date.

In the short term, the SGX is out-of-synch with the US market. Think the SGX is due for a short term 'bounce' soon, and will wait for that to either confirm there is a rally or cut loss on the weaker counters:
  • Venture is too near support to cut now. Wait and see. The recent fall could possibly be seen as part of a normal reaction as volume was not too high.
  • SP-Chem and Boustead have done nothing on weak volume...either way, wait for breakout or breakdown.
  • Oceanus is still in an uptrend, despite Friday's fall (low vol). Trailing stop loss at 39.5c
  • HI-P still in weak uptrend, and the recent fall can be seen as a normal reaction.
Wait and see....

I should probably learn more abt overbought/undersold indicators to time my purchases better in the short term.

Monday, August 4, 2008

Bought oceanus, venture, HI-P

Bought 10 lost oceanus @43c.

Bought 10 lots HI-P @59, 4 lots @ 59.5. Sell if breaks 48c

Bought 1 lot Venture Mfg @ 10.94. S if breaks 9.33, or consider selling if price/vol pattern changes (want to see up days on high vol, troughs on low vol).

It is scary to buy so much in a fledgling rally that has not yet proven itself. I wonder if my stop-loss levels are too wide and loose. most trades have potential losses of 20%. Mabye I should be more cautious.

Sunday, August 3, 2008

Market rallying?

IBD flagged a (potential) rally on Tues 29th July,

Abt 4 of 5 follow through days end up as a bull market, or at least a tradeable rally (like the March to May one). Thurs and Fridays mkt action consisted of the market absorbing bad news, as it fell on lower volume. Have to watch how it responds to the rest of US earnings season. Commodity prices are another big risk. We will not know whether it is a false signal, a tradeable rally, or a new bull market till after it is over. (Examples of follow through days in the 00-02 bear market).

Looking at Venture, HI-P


On weekly chart, long term support at 9.33

On daily chart:
  • May be seeing a reversal after selling climax in mid-Jan.
  • Since end-Jun, we start seeing accumulation days (green vertical-dotted lines).
  • Still below 200MA. Possible support 50MA

  • May be have reversed after long decline. Now above 200MA.
  • Key support at 48c.

Friday, August 1, 2008

Bought pfood, SP Chem

Bought 14 lots SP Chem @ 61.5, due to the counter's relative strength in the last two months. See if it manages uptrend.

Sp Chem: Cut loss if fall below 66c:

Bought 11 lots pfood @ 83.5. Long term buy based on China pork industry cycle. Expect it to break downtrend and rise to abt $2 in 6mnths to 2 years. Look to sell when it is in $2 area. No cut loss.

Thursday, July 31, 2008

Bought oceanus, boustead

10 lots oceanus @42c, 3 lots Boustead @ $2.35. Bought due to their holding up well during recent bear market. Sell if the stocks break their uptrend or the market turns down.

Oceanus: Quite hard to pick a level of support whose breach would mean the trend has changed. Cut loss below 36.5c, this is also the 50MA. Also cu loss if the pattern of 'moving up on high vol days' is broken.

Boustead: Cut loss below 2.18, as indicating a possible change in trend:

Looking to buy SP Chem.

Still waiting for pfood to breakdown to 83.5c, or break out of 93c

Wednesday, July 23, 2008

Peoples Food

Fundamental Analysis. Risks are in red. Opinions (as opposed to facts) are in blue.

Pfood is one of the largest meat producers in China. Its business is to buy live pigs from farmers, slaughter them, package and process into manufactured meat or fresh meat, which is sold in its retail outlets.

About 20% of Pfood's profits came from soy-beans (Pine Agritech) and less than 1% of profit comes from Chicken. I will ignore these segments and concentrate on pork.

1) Competitive position
a) China's pork market is highly fragmented with over 30,000 producers (article #1). The top producer holds less than 5% market share. In 2007, pfood was identified as the second lagest producer.
b) The three largest pork producers are Shanghui Henan (Shineway), Pfood and Yurun. It is hard to get an idea of their exact size:
  • In a paper, their 2004 turnover is listed (on p16) as 16020, 10047 and 7921 million RMB respectively (however the number for pfood is wrong as it was 6500 million RMB in 04....)
  • Another article says that in 05, Shanghui had revenue of 20 billion while Yurun had 4.45 billion. In 05, pfood has 7.6 billion.
  • Only thing I can get from this is a general idea that Shangui is 2-3 times bigger than pfood in terms of sales, and pfood is abt 50% bigger than Yurun.
c) Some more information about these competitors:
  • Shanghui was an SOE, sold to a private group (headed by Goldman Sachs!) in 2005. I believe its subsidiary was listed on Shenzen Exchange (code 000895.SZ), not sure if it still is.
  • Yurun is listed in HK (1068.HK). It also does property development and unrelated stuff.
I find it difficult to find information since I do not speak Mandarin.

I would like to be able to plot a graph showing trends of the 3 companies' revenue, gross profit and operating profit quarter-by-quarter throughout the years. This would compare their market share, branding power, and production efficiency respectively. Plotting these metrics is the only objective way of keeping track of a company's competitive advantage, and I don't have the information to do this here. Since I cannot keep track of this, I do not intend to hold these shares for years and years.

2) Business Model

I try to get a feel for how the company makes money by going through the financial statements:
  • Their main cost is in raw materials. Operating profit margin is abt 10%, and almost all the cost is raw materials.
  • Low depreciation, this business does not require much capex.
  • So basically their business model is to buy stuff, add a little value, and try to sell it as quick as possible.
3) Quality of Earnings

Next I check for any problems with inventories or accounts receivables:

End of PeriodRevenueProfitAccounts ReceivablesInventory
057,667 (+17%)736
880 (+200%)
068,702 (+13%)852
1,318 (+50%)
078,861 (+2%)491
924 (-30%)
1Q08 2,562 (1/4 of year only)142
757 (-22%)

  • Accounts receivables is low, usually < 5% of profit. Most of their working capital is tied up in inventory.
  • Pfood's management made a decision in 04 to increase the inventory in subsequent years due to the SARs crisis - hence the jump in 05 inventory. In 07 and 08 they are drawing down the inventory. Perhaps they are expecting prices to fall.
As mentioned before, depreciation and cash-flow-used-for-investment have been minimal. Pfood has always generated high free cash flow, even during its worst years.

4) Debt

Peoples food has consistently had low debt (less than one years earnings) throughout the years.

5) Cyclical Factors

This is where Pfood may shine!

The pork industry is highly cyclical due to the time lag between high market prices, and the time it takes to breed more pigs. From trough to peak, the average time is 2 years (ie: 2 generations of pigs), though this cycle time may vary from 1 to 3 years.

Peoples food benefits from low live pig prices, as live pigs make up their raw materials (80-85% of Cost Of Goods Sold).

Unfortunately, Chinese pig prices rose dramatically in 2007, mostly due to an outbreak of Blue Eared disease from June to September 07. China has since said the disease is under control. The Chinese govt will do anything possible to increase pig supply, including subsidizing, vaccinating and insuring sows. The last should be very effective as it removes the risk of raising pigs.

If the pork cycle follows its normal course, we should see more and more people raising pigs, and should see a price drop in 1 to 3 years time (Sept 2008 to Sept 2010). We may be starting to see this happen: (From

Shandong’s live pig in stock up 45.6%
[22 July 2008]
The number of live pigs in stock in China's eastern province of Shandong for the first five months of 2008 jumped 45.6% year-on-year, guaranteeing a steady pork supply. Contributing to this is the preferential policy and rising profits. The provincial government expects that the total live pigs in the province to reach 33.4 million by the end of the second quarter of this year, rising 45.6% over a year earlier.

In Jan 08, the snowstorms killed about 6m pigs. This may delay the recovery a little.

In June 08, the Sichuan earthquake reduced the pig stock (

Pork production in Sichuan to fall
[9 June 2008]
The earth quake in China’s Sichuan province has killed about 3.65 million live pigs and 184,500 sows in the affected regions such as Deyang, Mianyang, Chengdu, Aba, Guangyuan and Ya’an, according to a report of People’s Daily, saying that total pig production in the province is expected to fall 10% from last year to about 90 million heads while pork production to fall 9.5% to 6.7 million tonnes year-on-year.

A secondary factor pushing up the pig price is the price of corn, up 25% in two years. This seems to be less of an influence that the disease, looking at the second chart in the above article.

Baring disease or natural disaster, then pork prices should fall significantly sometime between Sept 08 and Sept 10. Lets estimate it happens in Sept 08. Since the stock market tends to look 6 months ahead, maybe I should buy pfood in Mar 09. However prices will not reach their previous 2006 lows due to rising corn prices.

6) Potential Growth

Long term, there are two sources of potential growth for the industry:

a) Consolidation: From article:

Dr Zhou Guangzhong, professor and vice president of Nanjing Agricultural University and chairman of the Chinese Society of Animal Products Processing, told the World Meat Congress in Brisbane this year that he expects large and medium meat processors to have 70 per cent of the market by 2020.

If pfood was to double its market share by 2020 implies 6% annual growth.

b) Increased meat consumption: Another article (Aug 05):

Chinese average meat consumption will increase by 20 kg or more in the years to come....At present, a rural Chinese consumes 50 grams of meat per day, and the figure for an urban citizen is less than 100 grams, the paper said. The goal is to let the average Chinese eat 100 grams of meat, or more, every day....

However, China's per capita meat consumption is less than 53 kg now, compared with the 70-130 kg consumed by citizens in developed countries.

I don't believe in modeling things like this, since:
  • I cant keep track of Pfood's market share anyway (See 1c), and
  • this would involve having an opinion and trying to predict 10 years into future, rather than relying on facts.

7) Valuation

Trailing PE is abt 10. Annualizing its 1Q08 results (i.e.: multiply by 4), we get a profit of 568m RMB. With a market cap of SGD 989m (@ 87c), this gives a PE of 8. A bit too low! I'm usually wary of low PE stocks, but can't find anything wrong here.

8) Chart

A falling knife since May 07:

Just yesterday dropped though the support zone at 89-94c - really lucky its taken me 3 days to finish this blog entry! Next support is around 83-84c, I will wait to see if it reaches there before buying.

9) Conclusion

Buy. Peoples Food's profit is inversely correlated to live pork prices. These are cyclical, and if things follow their normal course, we expect pork prices to fall in 1 to 2 years from now. Every article I have read indicates it is highly profitable to raise pigs in China now (unlike in 2006).

Risks: pork recovery could be derailed by pig disease or natural disaster.

Without being able to judge Pfood's performance against its competitors I'm just buying for the shorter term cyclical effect. I would sell when the stock reaches its previous high, around $2.00. I expect to wait 1 to 3 years for this to happen.

Catching a falling knife, especially in a falling market, is risky. It is dangerous to assume that I know more than everybody else in the market. This time I will take the chance. No cut loss, since I am buying on fundamentals. For risk management I would limit this one stock to 10% of my portfolio.

I will consider more on how I handle risk management and overall trading strategy in this sort of market later.

Pig photos from