Cityspring, is there value?

Though normally I had no interest in IPOs or post IPOs, the recent eye-popping news that a fund actually made a lost due to after factoring management fee while operations is profitable grabbed by attention. I can't helped but investigate further, just for fun.

After going throught the financial data, either from its website or its published financial statement on SGX, I note that citysprng's annual profit (including management fee) actually steadily receded from:

• 4.9 in 2005 to
• 1.87M (annualised from a 9 mth figure of 1.4M) in 2006 to
• -224M (annualised from a 3 mth figure of -56M) in 2007

and management fee went from

• 3.5M in 2005 to
• 2.3M (annualised from a 9 mth figure of 1.75M) in 2006 to
• 253.6M (annualised from a 3 mth figure of 63.4M) in 2007

Cityspring disclosed in its results announcement that the calculation of management fee is based on

1. base fee (to cover operating cost
2. payable if they outperform MSCI Asia Pacific (ex Japan Utility Index)

Given its hot recent IPO, it should far, no doubt, outperform any utility index in the world. So component 2 above would have contributed to the
astronomical management fee that outstrip any gain in operating profit. But there again, if, as a result of the hefty managment fee results in the subsequent plunge in share price (which surprisingly did not happen), the management in the next quarter should plunge too.

On a separte note, it is interesting to know that on responding to a Business Times dated 16 May 2007 - Is there value in Cityspring forecast, after its mind-boggling management fees, Cityspring actually stated that "Group net profit before mangement fee and income tax for the period at $10.5 million is better than the projected loss of $1.6 million in the prospectus". "... in the prospectus...", hmm if people already knew prior to IPO that it will make a loss (though not as much as 56M), then why did they (and many others after the launch) invest so enthusiastically in Cityspring? Or did they did so just because of Temasek? The latter can afford to diversify aggressively over astronomical number of investment to spread the risk that one or two bloops does not hurt them as much as a drop of ink in pail of water. But to small retail investors buying whatever Temasek had a signature, it just doesn't make sense.

Food Empire 1Q 2007 results on 14th May 2007, keep up the good work

Though on profit attributable to shareholders was a mere 6.8%, this came as a result of a increased number of issued shares. Profit after taxation actually rose 9.7% YOY despite a good year last year.

I am confident that with the successful acquisition of Naturant Systems Inc (Naturant)- Naturant owns the Petrovskaya Sloboda brand of
popular instant coffee mixes in Russia and Ukraine, as well as manufacturing operations in Russia, Food Empire's position in its core markets of Ukraine and Russia will be further strengthen.

Profit from Naturant should contribute positively to Food Empire's income statement coming quarters. Keep up the good work, Food Empire!

Tsit Wing 1Q 2007 results on 14th May 2007, pleasant surprise

Tsit Wing's first half in 2006 was good. When the 2nd half took a beating, I thought its 1Q 2007 will follow the downward trend due to intense competition in the food and beverage market in Hong Kong and PRC. Hence the profit growth in 1Q 2007 (a negligible increase of 2.2%, better than negative) came as a pleasant surprise.

However, this came amid a dramatic increase in sales by 63.5% in PRC. But why did the profit only edge up 2.2%? Two things came to my mind:

1. Hong Kong accounted profit dropped dramatically?
2. PRC sales involved mainly high volume low profit margin sales?

These questions can only be answered either at the AGM, or taken from its Annual Report's segmental breakdown next year.

On a separate note, the general erosion of profit margin came as no surprise due to the diversification in business into groceries.

One interesting point to note in the results statement was the line, quoted here: "...Some of the coffee and tea bistros who had switched to cheaper suppliers in 2006 began to revert to us as the use of lower quality products were hurting their business...". The question I had was then, how many of them amonst the those lost and is that sustainable? Only time will tell and I'm prepared to give Tsit Wing more time (for now).

Multi-Chem‘s Joint Venture in India, 11th May 2007

Multi-chem's IT distribution arm, M.Tech is its only hope for Multi-chem when its other dominant business segment, PCB drilling, is struggling due the current electronics slump.

I am thus delighted to see that it managed to form a deal to venture into India via a new Joint Venture between Multi-Chem's wholly-owned subsidiary, SecureOneAsia Pte. Ltd. ("SOA") and Virtual Netcomm Pvt Ltd ("VNPL"), the sole distributor of Blue Coat (www.bluecoat.com) products in India. VNPL, wholly owned by Mr Rajendra Shah ("RS") is headquartered in Ahmadabad and has offices in Bangalore, Delhi and Mumbai.

Under the terms of the JV agreement, a new company, to be known as M.Tech-Virtual India Pvt Ltd ("MTIN"), with SOA and RS owning 51% and 49% respectively.

Most importantly, to carry the business strategy that made M.Tech a success, MTIN will also be principally engaged in the distribution of IT products, primarily the best-of-breed IT security products other than Blue Coat. Interesting to note, to avoid any conflict of interest, RS has undertaken that first right of refusal of any products VNPL wishes to take up has to be given to MTIN. I presume this last statement to mean that MTIN can choose to carry products while denying VNPL the right to do so. I will raise this question again in the next AGM or Q & N after the full year results, both scheduled for next year, first quarter 2008.

The joint venture thus extends the reach of M.Tech westwards into India and once fully operational, M.Tech will have a network of 15 offices in 9 countries across Asia. From Singapore, M.Tech extended its market penetration to other parts of Southeast Asia, e.g Indonesia, Malaysia, Thailand, then to China and now into India.

Though the management stated the joint venture will not impact this year's financial results, I believe it will positively lift up the earnings once the MTIN goes into operations and profit can be recognised. I will find out the estimated schedule in the next AGM or Q & N after the full year results too.

Fortunately the expected poor performance of the PCB drilling segment had been clouding the good prospects of IT security product distribution segment to result in low share price (last traded at 22.5 SGD cents at 18th May 2007). Thus I could snap up more of Multi-chem with my combined retirement fund I just setup with my wife (wholly managed by me).

Armarda 1Q 2007 results on 11th May 2007, mixed results

At first glance, I am delighted to see profit edge up by about 33% compared to Q1 2006 despite a drop in revenue.

However, at closer look, a few warning signs appears.

Core Business
1) Compared to the previous quarter, Q4 2006, profit actually went down by about 65% from HKD 3.3m to 1.5m. This is due to a dip in core business by 47% from HKD 2.2 to 1.2m. Profit had been plunging quarter after quarter in since IPO. I had thought the surge in Q4 profit signifies a long awaited U-turn in poor core business performance. The current Q1 dip may just implies that all is not well ... yet.

Share of profit from Brilliant Time Limited (BTL)
2) Ever since profit from BTL had been recognised since Q3 2006, the 25% share of profit from BTL had flucluated around 1.1m HKD. This quarter plunge of 75% to 0.285m HKD came as a rude shock to me. Is this another baby Armarda in the making? (It listed in 2004 with a backing of strong (non-recurring) IT services contracts from large banks).

Looking forward
1) Until the profit from the joint venture between Armarda and PRC Fesco Group can be recognised, Armarda's profit is still far from being stabilised.

2) Quoted from the published financial statements, "... The Group foresees some orders in the area of Core Banking, Risk Management and Oracle Financials from the 2nd and the 3rd tier banks in the PRC will be captured in the remaining quarters of FY2007." Much need to be seen whether I can believe in these words. They had blamed their poor performance since IPOs about difficulty in securing new contracts from 1st tier banks in PRC because the latter cut down IT spending due to IPO activities. However, post IPOs, Armarda had yet clinched anymore (management had since admitted near impossibility now given current fierce competition) deals from these 1st tier banks.

United Food Holdings 1Q 2007 released result on 30th April 2007, worst is not over

Net profit in 1Q 2007 tumbled by nearly 50% compared to same quarter last year to 29.5 million RMB. However, this is an improvement of nearly 12% over 4Q 2006.

Performance for all segments, except Soybean Processing, deteriorated as compared to same quarter last year or the previous quarter. Health-care supplement did the worst by going into the red. This segment faces stiff competition, rising cost from raw materials and additional cost due to stringent quality control, inspection and testing imposed by US pharmaceutical companies. The inability to fight its competitors and inability to pass on the rising cost to its clients destined this segment for even poorer performance ahead unless there is a genuine viable strategy to turn this segment around.

The only star amongst the various segments is the soybean processing business. Though this segment perform better compared to last quarter or the quarter last year, much of it was due to the festive season. There aren't many festive season ahead and hence much remain to be seen whether they can keep up the good performance for the quarters ahead.