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Sunday, 1 January 2012

Happy New Year!!!

Though I can't really find the time to blog anymore (at least in the near future), I can still squeeze a few minutes to wish all a very happy new year. May 2012 be a better year for all! Huat ah!

2 predictions I'll like to voice out (just for fun, for serious readers, please stop reading):

#1. The worst should be over for Euro-zone, its just too big to fail, sounds familiar?

#2. Singapore property market will crash? Doubt so, looks like a few more cooling measures are necessary.

Sunday, 8 May 2011

Awaiting my 2nd bundle of joy

Almost exactly two years after my 1st bundle of joy turn into a cheeky toddler, 'terrible two' that many called one, I'm expecting another one to join us to make this a noiser and messier home. I find balancing my limited time amongst family, work, investing, blogging and photography a very difficult task, especially when I need to dedicate much more time amongst the first 3. I am aware of my priorities, as much as I need to make tangible investments from the resouces generated from my work, I also need to make intangible investment of my time in my family. Thus blogging and photography (the only 'brainless' hobby that I can indulge in to let my brain rest) will have to take a back seat. If opportunities arose, I will still write an article or two. Otherwise, it will be a long while before I can return to serious blogging. I thank all faithful readers and fellow value investment bloggers who have contributed invaluable comments and ideas, and made my investment journey so far a very rewarding one!

Saturday, 5 March 2011

Watch out for the Intangibles!


A friend recently approached me to help him take a look at Healthway Medical. Once of the most glaring thing that struck me when I thumbed through its latest financial statement was the huge intangibles on its balance sheet. After I explained to him my concerns, I thought I might as well highlight it on my blog too.

Risk of high intangibles

Intangibles on the balance sheet arose primarily from when a firm acquires another business and pay a price higher than its the net tangible assets. This translates into goodwill that the acquiring company reports. Another common intangibles can be copyrights or patents that royalties can be collected. Whichever it is, intangibles have to be revalued periodically and amortized (write down) accordingly if necessary. Basically, intangibles are valued by how much revenue it can generate, forecast into the future, and discounted to present value. Thus should any estimated variables (forecast revenue) change, the value of the intangibles need to be readjusted. Thus, it is always easier to value licence, copyright etc, than pure good will.

What happens when an intangible asset is marked down? The same amount has to be reported on the income statement as a deduction against the revenue. If the amount is huge, a 'loss' is reported even though the company is actually profitable. On the surface, this might not seems to be a serious concern since the impairment does not even impact the cash flow. But the fact that a huge amount of intangibles got wrote off either meant the business acquired earlier on was worth much less (goodwill) or the copyright or licence couldn't bring in as much revenue as forecasted. Either way, the drop in net asset value following the amortization meant the price-to-book ratio will jump, a simple litmus test to indicate overvaluation.

Case study 1 - Healthway Medical

A look at Healthway Medical's latest financial statement shows that it carry $177.6m of intangibles out of total assets of $242.2m as of 31st December 2010, i.e. about 9.5cts out of 10.48 cts of NAV is intangibles! A check on Healthway Medical's Annual Report reveals that the intangibles are mostly made up of goodwill which comprises of discounted future cash flows from various clinics under its management. The anticipated growth rate of the revenue was 2-4% for 2010 to 2013 and 4% infinitely. Discount rate was 7%. Thus if these clinics failed to performed as targetted, significant amortization, and hence net loss, could occur. Against the NAV of 10.48 cts, the company's share price was trading at around 13.5 cts.

Case study 2 - IPCO

IPCO has $66.4m of intangibles out of total assets of $195.3m as of 31 Oct 2010, i.e. about 3.7cts out of 7 cts of NAV is intangibles. The intangibles also arose from goodwill contributed by the valuation of future earnings of its subsidiary, Excellent Empire, which holds a 90% equity interest in three companies supplying natural gas under 30-year exclusive contracts in the cities of Anlu, Dawu, and Xiaochang in Hubei Province, China. However, due to past aggressive (possibly unsustainable) growth rate in revenue, chances of future earnings unable to hit projections become very likely. Anyway, against the NAV of 7 cts, the current share price of 2 cts continue to seem attractive to me.

Case study 3 - Armarda

Let's now look at what happens when the intangibles got amortized. Armarda had a string of acquisitions since IPO and as of 31 Dec 2009, had amassed HK $98.8m of intangibles against 229.2m of total assets. The intangibles also arose from goodwill contributed by various businesses. Unfortunately, most of their revenue failed to meet targets used to value them. Thus Armarda amortized these intangibles every quarter (resulting in net loss of each quarter). As of 31st Dec 2010, only about HK $11m of intangibles remain on its balance sheet. Its NAV is now 2.3 cts and the company is trading at 7.5 cts. I discarded the remainder my Armarda.


Not all cash generating assets are tangibles and ignoring these is a gross error in valuating a company. However, one must be cautious and mindful of their presense in the balance sheet, especially if the intangibles form a very significant portion.


Saturday, 15 January 2011

STI vs SGS bond yield

Just being curious

One of the common finance wisdom states when the economy is booming, funds shift from bonds to stock market for better returns (surging stock market and rising yields in bond market). During a recession, the opposite occurs where money exits stock market to seek refuge in the bond market, further depressing the meager yields.

Thus I was curious to find out whether this relationship actually holds true over a long run. If so, will there be a relatively reliable yield to serve as an indicator to enter or exit the market? i.e. going into the stock market when bond yields drop below a certain threshold and exiting when yield surge beyond another value? Even before I look further, I already knew things shouldn't be so simple, so its more for fun rather than a serious exercise to change my current investment strategy which already worked well for me.


Anyway, let's see how the graph will look like:

The above graph is made by plotting monthly STI closing value versus monthly average of SGS (Singapore Government Securities) 3 month T-Bills' yield. The STI closing values can be downloaded from yahoo finance while the T-Bills yield can be obtained from SGS website.


If the theory above holds true, the bond yield curve should track the STI index. i.e. when times are good, funds exit bond market to chase higher return in stock market, pushing up stock index and causing bond prices to drop and yields to rise, and vice versa. Looking at the chart, it seems to me this is only somewhat true during 1999 to 2009 and about 1% yield might be the indicator to enter the stock market while 2.5 to 3% yield could signal the exit. However, for both instances, one will either enter or exit the market too early, by as much as 2 years.

While no clear pattern between bonds and stocks seems to occur prior to 1999, what is surprising to me, is the divergent trend after 2009. Though the stock market continue to surge, the bond yield continue to stay severally depressed. This 'abnormally' can be dismissed as the consistent trend mirroring the current global low interest environment brought about by the quantitative easing in USA to stimulate growth and recovery from recent economic recession. It can also imply that with all the hot funds flooding the region from overseas, substantial amount flows to both stocks and bonds. So does that means the there is still much more funds being amassed in the bond market that can be liberated to push the stock market much further into a bubble bigger than the last? Only time can tell. Meanwhile, I doubt I'll be pumping in any more money as most of my businesses are quite favorably acquired at reasonable price. So its more of sit back, relax and accumulate profits and parked them away for the next burst.


Saturday, 18 December 2010

Portfolio update for Q4 2010

The past 3 to 4 months is a rather rewarding period for me. I had been busy restructuring portfolio and at times, havesting the sweet returns from the seedlings planted during the recent global financial crisis.

Switched from Food Junction to Food Empire on 16 August 2010

While Food Junction continue to struggle in its food court and F&B segments (~2% drop in revenue and 20+% drop in profit), Food Empire's business surprisingly rebounded with a spectular recovery of 60% increase in revenue and nearly 70 fold increase in profits. Fortunately, food junction is very thinly traded all these while that I've invested so that I didn't really suffer material loss on the sale. Even more furtunate that no one seemingly cared how well Food Empire recovered so that I can buy more of its shares cheaply. If I can trust their opinions about their business outlook, I'd rather bet on Food Empire for a continued sustainable recovery, well ahead of Food Junction.

Selling coffee for cash, took profit on Super Group and bought Matex on 14 September 2010

This is the 2nd time I made hefty gain on Super Group (formerly known as Supercoffeemix Manufacturing). I was lucky to buy this again during the financial crisis and just slightly over a year, the stock price doubled. While I still think its business fundamentals are still strong and there is still potential for further growth, I doubt the share price had equal amount of potential. So as my usual habit, I sold halve to recoup my principal.

With new funds, I turned my attention on one business waiting on my watchlist, Matex. Normally I shunned manufacturing companies due to their poor margin, i.e. high expenses and pricing pressure. But Matex is different. It got cash. It is another typical cash rich cigar butt that I just can't ignore. When I bought it, it was trading at slightly below its cash and equivalent less term loan per share. Business wise, though the company is still making loss, it has narrowed significantly. Together with the disclosure that the company is looking at other emerging markets (South America, Middle East and India) besides overinvested China, I am quite optimistic of a recovery in the near future.

Selling healthcare for water, took profit on Thomson Medical Centre and bought Darco on 4 October 2010

Similar to Super Group, I was fortunate to be able to buy TMC in the midst of the global financial crisis and since then, price also doubled. And like Super Group's case, I also sold halve of my stake. This turns out to be a good move as in just a few weeks later, Peter Lim, the legendary remisier king, offered to acquire TMC at $1.75 a share. I straight away sold my remaining stake without much hesitation. No matter how much business potential there is over the long term, I doubt the share price has significant upside after it hit $1.75. That's pricing it at 3.6 times book!

Looking at my watch list, I selected Darco. I am well aware of the fraud case that hit its Taiwanese subsidiary. But judging from the impact ($8m SGD) versus its cash and eqvialent of $20m SGD. I judge that its significant but not dangerous to threaten the company to function normally. With a huge discount to its net tangible assets and the slew of contracts the company manage to capture recently, I am optimistic the company can turn around in the very near future. Thus I used part of the TMC profit to acquire some Darco shares.

Increased stake in Manufacturing Integration Technology (MIT) on 11 October 2010

In the midst of the global recession brought about buy the financial crisis, orders for semiconductor equipment almost grind to a halt. This is when MIT show their resilience by translating that semiconductor know-how to produce laser scribers to make solar panels. Since then, semiconductor equipment orders started to improve and their expansion to renewable energy seemingly began to bear fruit with their first major order announced on 30 September. The future for MIT is never brighter.

Acquired Metro Holdings on 1 November 2010

This is one of the most controversial business I acquired. Metro is known for its retail business but its stellar business performance is actually attributed to its property business in China. Metro enjoyed strong cashflow from the rentals it derived from the properties currently under its management and from another perspective, it is basically a REIT but a very different beast, net cash and trading at nearly 50% book value.

Acquired Hour Glass on 24 November 2010

One thing that caught my eye about Hour Glass is its strong balance sheet (nil debt and trading at discount to book value) and good business recovery (~57% increase in yoy 2Q profit, ~38% in yoy 1H profit). With the increased well heeled gamblers the two integrated resorts bring to Singapore, I see that the luxury segments (including watches) should stand to benefit. Wish them good luck!


Friday, 26 November 2010

Subprime Crisis, Singapore's version?

The Year 2006

A few years ago, my wife and I are the 'fortunate' few to buy left over HDB flats under the walk-in scheme. As the flat came in standard condition, i.e. totally bare, we visited a few condominium showflat for renovation ideas. My wife was tasked to absorb as many ideas as possible while I entertain the agents as a prospective buyer. That was when I started to pay attention to the loan, interest rate etc.

Most mass market private property then was going around $600,000 for a 3 bedder of equivalent size to a 5 room HDB. Based on our combined income, the maximum loan the bank would grant us is sufficient to service the maximum 90% valuation of the property, as allowed then.

The Year 2010

With the economy out of recession with an expected double digit GDP growth for the full year, demand for private property surged strongly and continued to do so even with recent cooling measures. I am thus curious to find out more, especially from the perspective of not so deep pocket buyers on the street. We went to the Spottiswoode Residences near Tanjong Pagar to take a look. After the usual tour led by the agent, we found ourselves talking to a banker (I never met one in 2006) to assess our financial capability. My eye almost pop out when he worked out the maximum loan the bank will grant us. No, our combine income never shoot the roof. Though our income did increase, but definitely far far below the 300% jump in maximum loan allowed, in just 4 years. It never take too long to realise the key difference, 1.5% effective interest rate (not the initial year promotion interest rate). That's 40% lower than HDB's concession interest rate of 2.6%!! I can't remember what's the effective interest rate in 2006, but definitely higher than 2.6%. Using 50% of disposable income as a guide for maximum installment potential a month, no wonder we can take on such a huge loan!

Made in USA

First they lower their key interest rate to nearly zero, then they print money, then they printed some more. The net effect is the ultra low interest rate environment property buyers are 'enjoying' at the moment. Let's assume a typical couple with pockets of reasonable depth decided to buy a private property. Even if they are not crazy enough to take on the maximum loan that will shave off half their monthly income, they would still be forking out much higher monthly installments as they would like when the interest rate eventually recover to a more reasonable figure of 3-4%.

Potential Problem(s)

For the best case scenario, the interest rate raises to the 3-4% eventually and these genuine non-deep pocket buyer-stayers are able to folk out the higher monthly installments. A worse scenario would be the eventual burst of the property bubble and valuation drops below the outstanding loan. Bank theoretically can only loan up to 70% of valuation, so if valuation drops, they can lend less, and the buyer has to pay up the difference. But according to the Banker, so long as the buyer promptly pay up the installments, banks don't normally execute such 'margin calls'. The worst case scenario would be the burst of the property bubble coinciding with the next recession. i.e. drop in property value and loss of income.


From the buyer's perspective, the risk is personal. But from the banks' perspective, it seems to me that even the maximum 70% valuation limit on the loan is not quite sufficient to limit the number and amount of potential bad loan if the unreasonably low interest rate is used to justify the maximum loan allowed in a growing property bubble.

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Sunday, 31 October 2010

The yearn for financial independence

Have you heard from Robert Kiyosaki, the author of Rich Dad Poor Dad?

"Have you heard from Robert Kiyosaki, the author of Rich Dad Poor Dad?.." I heard this many times and this has ALWAYS been the starting line to introduce some MLM (Multi-level marketing), land banking or other 'alternative' paths to financial independence quickly. I get to hear this again just a few days ago. My wife's friend offer to share with us, over breakfast, a business scheme that will bring us to financial Independence in 2-5 years. Her only prerequisite for participants who want to benefit from this business is to sacrifice several hours a week. My alarm bell went off immediately when she mention 2-5 years and rang even louder at the weekly effort required to succeed in the business. Anyway, it didn't take long before she got to the point, being a sales agent for Amway... and of course, nothing fruitful emerge at the end. Anyway, it seems to me that my wife had an affinity with acquaintances, friends or colleagues dealing with MLM business. Recently, while accompanying my wife to meet up with her piano blog reader on a premise for some discussion (she thought it has to do with piano or music in general) that turn out to be a presentation on e-spring water filter system, which also happen to be another product from, yes Amway again.

As far as MLM's business structure is concerned (quoted from wiki):

"Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of others they recruit, creating a downline of distributors and a hierarchy of multiple levels of compensation. "

Coupled with their products (few are wildly popular items), it seems to me that out of many who tried, probably a much smaller percentage will ever make it big. But the success of the latter is sufficient to entice people to try. Thus I am absolutely puzzled how one can generate sufficient sales (personal effort or combined downstream effort) to get enough commission to attain financial independence in 2-5 years.

Why not insurance or property?

If one has the sheer mental grit to persevere in such a low hit rate sales environment such as MLM, won't it be more rewarding to try being an insurance or property agent? It is almost no brainer Singaporeans are generally under insured (just taking an inaccurate empirical consensus amongst my friends), they want the payout when things happen but dreaded the costly premiums (especially the riders) that are 'wasted' if they don't claim. As for property, whether downgrading or upgrading, agents get to earn commission from each transaction.

Looking for a short cut

There is a common trait I observed amongst all of them who tried MLM, not only do they want success (financial independence), they want it safe and they want it fast. Working and saving is too slow. Venturing out to do business is too risky. Although it is simple logic that risks are inversely proportional to returns, many continue to believe logic-defying novelties. Take land banking for example, one of my wife's colleague got into this (yes, I also wonder why my wife got so many such lobangs). He's a sales agent from Walton International, a company involved in land-banking. The objective of land-banking is to purchase raw land and hold them until its profitable to sell. It is again sold as a low risk high return venture as raw land is cheap and once selected for development, the returns is huge. However, the problem here is how much do the investor know about the land they are buying? How do they assess their potential? How sure are they sure that they are getting a good deal? Even in land scarce Singapore and Hong Kong, there are reserve land to last many years.

The slow way to success

As the saying goes, anything that sounds too good to be true probably is. Unless we are extreme lucky to strike lottery, most of us either have to trade skill or time for money and ultimately hard work pays off. The more enterprising ones can take on more risk to venture into business and reap enviable rewards if they succeed. Lazy or risk-adverse people like me will prefer to reap what others sow by buying bits and pieces of listed businesses and make our money work harder. But whichever way we choose, it really takes much longer than 2-5 years to achieve financial independence, and I'm perfectly fine with delayed gratification.