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Saturday, 23 August 2008

Buy high, sell low --- the most common strategy?

I chanced upon a the following chart depicting the common problem plaguing the herd mentality amongst most retail investors:


Looking at the chart made me recall the mistakes I've made when I started out, being toyed by Mr. Market and yet don't know why. Chasing the surging volume and ever pricier stock price was easy money until the correction came. Instead of buying high and hope to sell higher, most of the time, its buying high and liquidating at a lost at a much lower price, whatever price. Even though it is common sense to buy low sell high, but the most common strategy became buy high sell low.

New insight

I had already put that behind me long ago after discovering value investing. Fortunately I only took up the buy high sell low strategy for a few months. Otherwise, I could have burnt myself severely enough not to touch investment at all.

Test of resolve

The subprime crisis in the US (brought about by the bursting of US housing bubble) led to massive write down in assets by many gigantic banks across US to Europe who held CDO (collateralized debt obligations) containing sub quality bank loans. The ensuing liquidity crunch these banks cut back on their loans spark a global credit crunch.

The threat of credit crunch had already impacted both consumers and firms, especially those depending heavily on leverage (i.e. US consumers and many 'growing' firms). The eventual result is a plummeting demand from US and Europe in general. Unless domestic demand in huge emerging markets like China and India could keep up, their export oriented economy will take a beating.

(The only region spared from this trouble is the Middle East. The torrent flow of oil money is driving the local inflation sky high and their economies continue to steam ahead in break neck pace. Even when current oil price had came down from $140++ to $120--, its still more than double compared to just a few years ago)

The global slow down is beginning to take shape. After hitting record profits quarter after quarter in 2007 last year, many firms are beginning to report lower profits this year, (some even went into the red).

In Singapore, my portfolio is not spared. This year, 2008, only 3 out of 13 reported growing profits. 2 even reported loss. Not only is the market going through a sentimental bear, the business fundamentals are also going through a bear. However, according to the boom-bust model, if my portfolio can survive this storm, they will emerge stronger to make me proud.

Opportunities amongst crisis

With each boom-bust cycle, economies generates excesses. i.e. over supply, growing at sustainable pace on leverage etc. It is during the crunch time, the ensuing recession that excesses are trimmed, cut back and removed from the system. Most of the time, the cutting is overdone and supply again falls short of demand. Production began and supply picks up, eventually exceeding demand. The cycle repeats.

At the onset of recession or its vicinity, trimming of economic excesses resulted in exiting of less competitive businesses and consolidation of those that remains. The resultant is businesses that can rise from the ash emerge stronger and better.

Almost all businesses' share price are affected by any recession or similar crisis. Purchasing those with storm weathering credentials during the crisis and holding them until the sun comes out again (the next boom) should yield lucrative returns.

The key question then centered on how to identify any business with storm weathering credentials. I have no answer to this, but one good place to start looking is management, balance sheet and their core business.


While the business fundamentals are clearly deteriorating, their market price are punished more than the drop in their fundamentals. In value investment's context, it still make sense for me to average into them.

However, as the spectre of recession looms ahead, more opportunities in other firms could arise at a price almost impossible to find during 'normal' times. Unfortunately, resource is not something I had readily available and going forward, decision is tough. Walking through a durian plantation with only one small basket and so many to pick from, so many seemingly good... it is really difficult to make a choice.


Recession brings both troubles and opportunities. I once heard (can't find the source) one need to go through a few recessions to become rich, I might start to believe it. But that' only provided one can keep his/her job during such difficult times.

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Monday, 11 August 2008

China Sky Chemical Fibre - Disproportional receivables, a point of concern?

First glance

A friend came upon a buy call on China Sky by CIMB in TODAYonline and ask me to take a look. The target price is SGD $2.25, a three-fold increase from today's close price of 74 cents. Thus, there's enough margin safety? Another undervalue counter, a product of current market tumoil?

Closer look

The bad- disproportional receivables

Comparing 2Q 2008 and 2Q 2007, revenue rose 11.5% from RMB 569.4m to 634.8m. Comparing 2Q 2008 with last quarter, 1Q 2008, revenue rose a meagre 4%. However, receivables (uncollected cash from sales) shot up 69% (YOY) year-on-year from 231.2m to 390.7m. Comparing with last quarter, receivables was also up 68% from 232.7m.

A closer look at the cash flow statement shows that from the reported earnings (accounting earnings), receivables was up 157.9m from 23.3m last year. This made up 71% of reported earnings and are all clocked in 2Q 2008 alone. i.e. For each dollar of reported earnings, 70 cents are not collected ... yet.

The quarter announcement offer a few clues (quoted directly):

The volatility in oil prices will have a ripple effect on our raw material prices. The PRC government’s counter inflationary measures and the general tightening of credit in the PRC will have an impact on our customers. Their capacities to react to these measures could affect the extent of our ability to pass on dramatic increases in our raw materials costs to them and our need to extend longer credit periods to them.

The (significantly) longer credit periods could account for the 677.7% increase in receivables compared to the 11.5% increase in sales. Thus there could be a great risk for bad debt.

The good- gross margin maintained

Across the pass few quarters, gross margin had maintained at around 34%. This meant that China Sky is able to pass on the rising raw material price to consumers. However, as noted above, their profitability in the near future depends on whether they can continue to sustain their gross margin.

Share options expenses contributes significantly to administrative expenses up to 4Q 2007. Going forward, bearing any substantial slow down in sales, net profit should enjoy a double digit growth if and only if the current gross margin can be maintained.

However, management already warned of a possible bad quarter in 3Q 2008 due to the closure of certain industries in China for the duration of the Olympics, hurting demand in the process. If 3Q 2008 is the only bad quarter ahead as predicted, there should be no adverse effect on general prospects of the company in the long run.


I could not find the actual report on issued by CIMB on China Sky and hence have no idea how they arrived at $2.25. I have also not done a thorough, detail analysis on China Sky to arrive at any valuation but using rough estimation on the information at hand, $2.25 seems high.

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Sunday, 10 August 2008

Tsit Wing's 2Q 2008 results - a worrying disappointment

At first glance

While sales improved by 8.1%, or HKD 7.3m, this is more then offset by:
  • a huge jump in cost of sales: -10.8m
  • other operating income (loss): -2.7m
  • distribution costs: 2.0m
This resulted in Q2's profit to plunge by 7.9m or 83.7% to 1.5m from 9.4m a year ago.

Worrying signs

Poor performance in China

While sales in first half of 2008 rose by 77%, operating profit dropped by 50%, a result of high material and operating costs. Looks like the expansion into China is far from successful yet. Ever since Tsit Wing ventured into China, the segment had been loss making and they had successful narrowed their loss year after year. This segment finally posted a marginal gain in 2007. But now, the marginal gain could easily be eroded and a segmental loss could be posted this year.

Closing down of small independent tea bistros

With high inflation, rising cost in both materials, labour, rental etc, small bistros are struggling to survive. Tsit Wing anticipated many to close down and hence impacting their sales even further.

Piling inventory

Inventories shot up significantly from 74.9m from 55.5m in 1Q 2008. Thus there is a sudden built up of 19.4m. This stockpiling could be management's answer to the rising cost of raw materials. Like any other commodities, the prices of tea and coffee had been very volatile lately. Such stock piling (locking-in at current prices) could back fire if the cost of commodities are to plunge in near future.

To manage the cost of raw materials, the management reported that they had engaged in hedging and trading activities. While rising demand due to growing global economies and population in the long term could lead to increase prices, however, commodity prices could be subjected to short term irrational, unpredictable forces depicted by Mr Market. The following tables illustrated how volatile the prices can be:
Thus, in my opinion, such hedging and trading actions is very dangerous. Indeed, Tsit Wing had incurred a marked-to-market loss of 2.2m since 30th June 2008. Fortunately, 1.7m is unrealized and are reversed in July.

Encouraging developments

Strengthening USD

Raw material cost is not a one way street. Commodity prices are ultimately subjected to supply and demand changes. With rising cost, demand will have to go down ultimately, resulted in over supply and a resultant drop in prices. The cycle repeats.

Part of the reason of the rising inflation and cost had to do with the weakening HKD. Hong Kong dollar is pegged to USD, about 7.75-7.85 HKD to a USD and the recent depreciating USD takes a toll on the inflation of Hong Kong in general where most items are imported.

I had already highlighted the reversal in fundamental for USD in my earlier post in May 2008 that the strengthening of USD is expected in the horizon, just that I don't know when. Thus the recent jump in USD against major currencies is not surprising.

A strengthening USD, and hence HKD, will bring a much needed respite to the inflation problem to HKD. Hopefully for Tsit Wing, the 20% increase in cost of sales (mainly due to raw materials) in the past quarters could be reduced in the coming quarters.

Strong balance sheet

They had little or no debt and huge cash horde of about 71m HKD. While the road ahead is challenging, at least they are in good financial shape to tackle the storm. Given the past boom in the Chinese markets in almost every sector, many companies had over expanded on increase leverage. During crunch times with falling demand, tight liquidity and rising interest, their eventual exit from the market should bode well for conservative and sound companies like Tsit Wing. However, until then, there is no foreseeable recovery for Tsit Wing in sight.

Going forward

The near future is dismal. Sales will definitely be hit and falling profits ahead is no longer surprising. Fortunately, they are in a strong financial shape to weather the storm ahead and hopefully, they can emerge stronger.


Saturday, 2 August 2008

Singapore Airlines' 36th AGM on 29th July 2008

Being a blue chip company, there is sufficient press coverage for their results and AGM. Having attended the AGM, I will just like to highlight a few things not covered by the press thus far.

Interesting questions raised

Organic growth vs Acquisitions

One shareholder quizzed the management why SIA seems to be more eager in expanding organically then via acquisitions, since the latter will eliminate competitors. The answer given was that regional airlines are heavily guarded and any purchase are normally not possible. The most interesting answer, came not from the management, but from a fellow shareholder. He brought up the failed bid by SIA on Ansett Austrialia . Its a painful but well learnt lesson for SIA. He cited this as a reason why it might be better for SIA to pursue growth organically rather than via acquisitions.

The rationale behind acquisitions is understandable. Besides eliminating competitors, acquisitions is one of the few available options to break into otherwise inaccessible markets. SIA had been eying the highly lucrative kangaroo route- (Australia - UK) for years. Attempts to enter this route directly had failed so far. Thus the only way it could do so is via acquisitions, hence the rationale for acquiring Ansett. However SIA did achieved limited success in carving out a pie from the kangaroo route via Virgin Alantic.

Turning to the lucrative Chinese market, SIA failed again at acquiring a 25% stake in Chinese Eastern Airline. While talks to sell a stake to SIA could resume after the olympics, there are just too many things that could prop up to scuttle the deal.

Labour issues

Besides the escalating fuel prices that constitutes 36.5% of total expenditure, staff cost came in 2nd at 16.6%. Labour issues with the aircrew union erupted once in a while and hence I queried the management on what strategy they had in tackling this problem and also about retaining their staff against poaching by other airlines.

On the labour issue, the strategy the management adopted is via communication, it is about letting the staff know how well (or badly) the airline is doing and I translates that to expectation management. On the staff retention, the chairman cited that not only are they facing competition from other airlines, they are facing pressure from the local service industry, particularly with the construction of the two integrated resorts. Politically correct answer of paying a competitive package is offered but I would think staff cost could escalate faster in the near future.

Fuel hedging

There was a significant jump in "other operating expenses" in 1Q 2008. The jump was about $130m SGD. Without this increase, 1Q's results would be comparable to that one year ago. From their CFO, these include various unclassified expenses such as forex losses.

Further on in the Q & A, it was reviewed that gains in fuel hedging (quite successfully done in SIA and which contributed significantly in containing the escalating fuel cost) was offset by forex losses.

If I assume that fuel contracts are paid in USD and since SGD appreciates against the USD, shouldn't the fuel contracts become cheaper than first contracted? How does the forex lost comes in? Maybe I can raised this in the next AGM? One bad thing about myself is I can't think on my feet (this is something I need to brush up). I tend to get smoked in AGM Q & A and I needed time to think, digest what they say... and by the time I realised I received a smoke bomb, it is too late to ask the question again.

Other interesting happenings at the AGM

Food and retirees

Comparing the sumptous standing buffet lunch that Food Empire offers at its recent AGM, that of SIA is a disappointment. It is a simple tea break with bee hoon, fried carrot cake etc. The fortunate thing the food is topped up in a timely manner... if not, most people who make it out of the function room will be greeted with empty trays.

Once the door opens at the end of the AGM, the retirees fanned out and rush to the trays like they had starved for several days and just pile the food onto their plates (these are smaller ones, for tea, not lunch). Can't they just exhibit some professionalism as a shareholder and take the food in a more graceful manner?

While I would not rule out buying into as many SGX listed companies so that I can have access to 'free' food from AGMs/EGMs the whole year round in my twilight years (who say there is no free lunch), but definitely it could be done with more professionalism and dignity.

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