Monday, 1 January 2018

World Precision Machinery - Undervalued Gem or another "S-cheat"?

Shareholders of World Precision Machinery (WPM) have suffered a torrid time owning this company. Since 2013, shares of WPM have tumbled from a price of $0.40 to $0.196. That’s a decline of 51% (before accounting for dividends).
What it does
In one sentence: WPM makes metal stamping machines for hundreds of customers in China ranging from automotive plants to household appliances brands. Stamping machines are machines which bends/folds/presses metal sheets into the desired form required by the user. There are two types of machines manufactured by WPM – i) Conventional stamping machines and ii) High end stamping machines.
Decline of business
So what contributed to WPM’s decline in share price? Well the answer is because of a deterioration in orders for its stamping machines. While China is “growing”, it seems the manufacturing side of China is in contraction mode. Many stamping plants including WPM have experienced a decline in orders for their stamping machines.

From its Annual Report 2016, we can see that demand for WPM conventional machines are declining, fortunately, its high end machines demand has been fairly constant. Table 1 and 2 are extracts of WPM's revenue and the demand for its conventional and high end stamping machines.
Table 1: World Precision Revenue/Profits and Conventional Machine Demand

Table 2: World Precision High End Machines Order and Dividend payout
Based on its AR16, we can see that the fall in WPM's revenue and profits is due to the a decline in demand for its conventional stamping machines.
Has the decline stopped?
This is a question which I posed. Based on WPM’s revenue and profit for the first 9 months of FY17, WPM’s revenue has grown by 16% as compared against the same period while it net profits has grown by 13.8%. It signals that the decline in profitability for WPM has stopped and perhaps one can start valuing WPM based on its current financial results.
I do not think WPM will continue to experience a drop in demand for its conventional stamping machines.
Strengthening Balance Sheet
One thing which attracted me to WPM is how the company has reduced its debts even during tough times. From a FY13 debt level of RMB 300mil, the company has reduced its debts to only RMB 38 million. The company’s cash level has reduced by about RMB 30 mil during this time (35mil to 5mil).
This was largely due to the cash flow generating ability of the company:
Period
Operating Cash flow (RMB)
Investing (RMB)
Free Cash Flow
FY13
273.6 mil
(125 mil)
148.6 mil
FY14
210 mil
(47.2mil)
162.8 mil
FY15
194 mil
(56 mil)
138 mil
FY16
150.8 mil
(38.6 mil)
112.2 mil

The strong cash generating ability of the company has been used to pare down debts and as dividends r shareholders.
Current results
As of now, WPM has RMB 38 mil of debts. In the current 9 months, WPM has already generated RMB 124 Mil in CAPEX with a cash outflow of RMB 44mil.
Extrapolating its current 9 month cash flow results, one can expect WPM to generate about RMB 100mil in free cash flow for this financial year. Translated to Singapore dollars, this means WPM’s business is generating about 5.1 Singapore cents per share. With such a strong cash flow generation ability, I am quite optimistic that WPM will be debt free by the end of FY2018.

Valuation
As of Q3FY17, the net asset value of WPM is 54 Singapore cents; this means it is selling at a rather low book value of 0.36. What is more tantalizing is the cash flow yield one can get now from acquiring this company. At a share price of 0.196, the cash flow yield for owning a share of WPM’s business is 26%.
Liquidity of WPM shares
WPM is a fairly illiquid shares on the company with 87.43% of the shares are held by the major shareholders. This makes purchase of the shares rather difficult. For me, I had to patiently monitor the buy/sell bids of the shares before purchasing it. Fortunately for me, I was able to obtain some at 0.196.
Dividends
While it is an S-chip, what surprised me was the amount of dividends WPM has been returning to shareholders. From Table 2, it can be seen that WPM has been constantly giving out dividends on shareholders since 2010. FY16 was the anomaly where dividends were stopped. Since it's listing in 2006, WPM has returned more dividends than the cash amount it raised during its IPO. This is a good sign for a Chinese Listed Company.

Given the cash generating ability of the company and low debt, I believe WPM will resume its dividends soon.
Is it an S-Cheat?
This to me is another issue. Being a Chinese company and the terrible reputation Chinese listed entities have here, one does not know if its financial accounts are real. However, given that the modus operandi of "S-cheats" is to raise money on the SGX and run away with the money, it does not make much sense that WPM has paid more dividends than it had raised nor the large shareholdings of its owners unlike the other frauds whose owners had a less than 50% stake.

In my opinion, it may be worth staking a small percentage of your portfolio; Sometimes you have to take a leap of faith first, the trust part comes later.

<The author is vested in World Precision Machinery>

Wednesday, 27 December 2017

Portfolio- Year end update

It has been a while since I last updated my portfolio; in fact I have made many transactions but was lazy to cover them.

Short Term Punts

Bought Sarine Tech at 0.94. Initially, I thought Sarine would be a good deal at 0.94 because it was a low leveraged company with strong cash flow. However, it seems its business condition is deteriorating and I was lucky to offload it at 0.95.

DISA- A penny stock which I noticed trades in the range of 0.012-0.016. Purely speculative, bought 0.013 sold at 0.015.

IPOs- This year I had been fairly lucky as I was allocated shares for the all 2 IPOs i applied- RE&S and No signboard. Following from Mr IPO ratings, they were a hit & run for me in the first day of trading.

Hyflux 6% CPS- Bought it again at 94.70 on the punt that Hyflux will redeem it in April 2018

Diversification

The blood of a value investor still runs in me! Fortunately during the past 3 months, I was able to locate one small gem besides accumulating more First Ship Lease Trust - Miyoshi. It is a precision engineering company, which was producing a free cash flow yield of 7+% when I bought it at 0.072. Not very great but I am running out of options in searching for value Gems on the SGX.

I have added Dutech at 0.335. Dutech is in the business of manufacturing ATM machines and safes globally. Recently, its profits has been hampered by the increase in China steel price. I am hoping the company's margins for its product will improve.

Sunday, 24 December 2017

Lesson on the Gift of Compounding: Save Young and Be Rich Sooner

Interest Compounding has a wonderful effect on our savings. When you start young and let compounding work its magic, achieving your retirement goal is very easy. This is why many financial bloggers including, yours truly, espouse on the importance of starting to save in the early stages of working life.

Using Mathematics

Regular readers of this blog will know of my penchant of relying on boring Mathematics to convince, so here comes the maths :)

Two individuals, Alan and John, enters the workforce at 25. 

Knowing the effects of compounding by saving when young, Alan decides to set aside $10,000 yearly from age 25 to 60. John, on the other hand, being a millennial with a YOLO life, only realizes during his mid-career the need to plan for retirement. John immediately starts to set aside $20,000 yearly from age 40 to 60. Both Alan and John invests in the same investment which yields a 5% return per year. Instead of copying and pasting an entire Excel Worksheet, let me spare readers the agony. 

At age 60, Alan would have a retirement saving of $1,006,281 while John would have a retirement saving of $750,104.

To summarize, while Alan saved half the quantum of John's, the fact that Alan had started 15 years earlier than John, places Alan on a better retirement footing financially.

The Story of the Tortoise and the Hare

During our school days, we have been taught of the idiom "slow and steady wins the race", financial freedom is exactly like this. Be the tortoise who starts the race early and run slowly; Not the hare who slept at the start and had to run doubly hard because he had fallen too far behind. 

Saturday, 21 October 2017

3 Things People Forget to Consider when Investing in a Condominium Property

Recently, Channelnewsasia covered a topic asking whether Singapore's private housing market is in a bubble. In it, a certain property firm’s "expert" was interviewed. One fact which made me interested is how annual rental yields of Condominiums in Singapore are now between 2.8% - 3.2%.

Having been in the real estate and investing on my own, my perception is that these figures do not reflect the reality for investors buying a private property to rent out for investment purposes. In my opinion, it seems 3 significant expenses may have been forgotten/ignored by property investors when computing the rental yield:

1. Property Tax

This is the biggest factor which many seem to have forgotten. In Singapore, the property tax is determined by the annual value of your property and for properties renting out, it is based on the annual rental income of the rented property. The base tax rate is 10% and moves up to a max tier of 20%. E.g., if your monthly rental to a tenant is $3,000, the annual value of your home is $36,000 and will incur a tax expense of $3,720. You can find the link to property tax here.

Cost relative to monthly rental income: 1.20 - 1.40 months (Variable cost)

2. Monthly Fees for Maintenance

Unlike HDB flats where our town council helps maintain the amenities, Condominiums have their own MCST that is in charge of maintaining the condo’s compound and amenities. Each owner pays a monthly fee (proportional to their housing unit’s size). For many, the monthly fee to the MCST is about $250-$300.

Cost relative to monthly rental income: Approx 1.10 -1.25 months (Fixed Cost)

3. Commission to Agent

Commission is about 0.5 months per rental year of lease.

Cost relative to monthly rental income: 0.5 months

With these 3 main factors and small items such as Insurance etc., a landlord (owner) will incur a cost equivalent to 3 months’ rental income for every 1 year of rent secured. And this is under the assumption that the condo is always rented out (in fact, our country is now facing a 10+% vacancy rate).

To summarize, if a Condo is touted to give a 3% yield, its true yield to the owner is about 2.25% (factoring the above mentioned costs).

Afterthoughts

This got me wondering if people investing in private properties now are fully aware of how low the yields they are getting and the financial perils associated with such a low yield. 

It is true current interest rates for a private housing loan is low, ranging from 1.6% -2.0%. But a simple hike in interest rates of 0.75% (3 rate hikes equivalent in the federal reserve context) will mean the housing loan interest rate exceeds that of the condo’s yield. 10 years ago, Singapore’s housing loan interest was in the region of 4% p.a and if we were to look further into history, the rates were higher than 4%. A reversion to the mean of about 4% p.a is a likely scenario based on history.

It may end up a situation where investing in a private property eats into your cash flow or that instead of becoming an investment for retirement, it becomes a liability to you; serving only the bank's bottom line or as taxes contributing to the nation building of Singapore.

Saturday, 16 September 2017

How Much is ComfortDelgro Worth?



Challenged by Grab/Uber in the taxi segment, ComforDelgro (CDG) taxi's segment has been hit hard and its taxi division has been suffering with declining profits. While others will focus heavily on CDG's Taxi business, it is worth noting CDG is quite diversified across many sectors.

So lets analysis CDG's sector by sector and try to find the valuation of the group on a whole based on its projected profits.

Public Transport Segment

Almost everyone is familiar with this segment which involves SBS Transit running bus and train operations. Due to the industry overhaul by LTA, SBS transit is moving towards an asset light structure, becoming an operator with no ownership of the assets. The profit segment is relatively stable and one can reasonably expect this segment to generate s$170 million per year.


Profit: s$170 million

Taxi Segment

This is the most contentious segment right now. While the taxi segment has been generating close to s$150 million yearly, the increasing competition from Private Hire Vehicles is pushing the fleet utilization and rental rates of CDG taxis down. To make matters worse, CDG had paid high prices for the COEs of its taxis in the recent few years. This makes its fixed cost high and it does not help that fleet's utilization rates are falling as well as rentals.


Hiring private rental cars cost about s$70/day and drivers enjoy rental rebates when driving for Grab/Uber, while renting from CDG starts from $90/day. If CDG is to reduce its rental rates by 20% to match competition, it is likely to lose all its profits. Hence, I do not expect CDG to slash its rental rates by 20% but instead 10+% to retain its profitability.

In its recent past two quarters report, CDG reporting results has shown a slow decline in taxi profits (1H: $72.3mil). In my opinion, on a long term basis, it is likely its Singapore taxi division will show the true extent of competition from Grab and Uber during its next financial year's results. I estimate CDG local taxis will make 40-45 million in profits annually, while 5-10 Million will come from its oversea taxi businesses.

Profit: s$50 million

Bus Station

A segment which I do not understand why LTA has left the assets to SBS Transit even though other assets of the public transport network has been bought. It could be a political decision to leave this cash cow in CDG's balance sheet to buffer it from competition because the segment is highly profitable (40% NPM).

Profit: s$12 million

Automotive Engineering

This segment supports vehicle maintenance and engineering for vehicles (including Comfort Cabs and SBS buses). Given that Comfort Taxis are piling the roads less often, expect a slight fall in this segment profit moving forward.

Profit: s$45 million 

Inspection & Testing

This segment relates mainly to analysis on Vicom's profitability. Given that Cars in the 8 to 10 years age range is now declining on Singapore's Road, this reduces the number of vehicle inspections overall and thus it is unlikely for Vicom to replicate its profit highs; a slight decline is expected.

Profit: s$30 million

Other Segments

Its Car rental is facing some competition and expect profits to decline, however given the monopoly CDG has in driving schools in Singapore and better reputation in China, CDG is able to command a premium (and force Singapore Driving Students to pay a sky high fee)

Profit: s$20 million

Total Profits before Taxes and Non Controlling Interest (Financial income is netted off Finance Expense)

Based on the above, CDG's new profits should be s$327 million. If we were to adjust for estimated Tax Expense of s$62 mil and non controlling interest of s$61 mil, the overall net profit attributable to CDG's shareholders is s$204 million annually over the next 5 to 7 years. This is because of the high fixed cost structure of its taxi business due to the high bidding for COE prices.

Are Current Valuations justified?

Based on its current market capitalization of s$5 billion, the expected P/E is 25 times. In my opinion, the current valuation is too optimistic and CDG should be valued lower. Based on its past price earnings ratio in the region of 16 times, we should expect CDG to be valued at s$1.36 share price or s$3.3 billion market capitalization. 

It is possible that Mr. Market is predicting the government may step in to protect Comfort Taxi and the rest, which means CDG's taxi business may not decline from s$150 million to s$50 million, but instead to s$100 mil profit level. This will make current valuations of CDG justifiable.

Assuming CDG's Taxi Business is not Profitable

In fact, my above analysis assumes that CDG's taxi business in Singapore remains profitable despite competition from Uber, Grab and Private Hire companies. If one had been utterly pessimistic and think that CDG's taxi business will break even (not even assuming loss making like Grab), the fair valuation of CDG has to be reduced by a further 20% to a price of s$1.10.

This is because Grab and Uber have been making losses and burning cash in their business. Furthermore, Grab has recently raised another round of funding from international investors, thus being able to up the ante against CDG.

As an investor seeking a margin of Safety, I may peg myself to the more pessimistic scenario before considering buying a stake in CDG.

<The author has no vested nor shorted interest in CDG> 

Thursday, 7 September 2017

Portfolio Update- Divestments and Seeking New Gems in a "Fairly Valued" Market

It has been a while since the last update of my stock portfolio. Th main reason is because I have made a few transactions over the months.


Divestments
Penguin Holdings – Sold all remaining 25,000 shares. This brought to the end of my infatuation with Penguin believing it was then riding on the oil boom in 2014 and being a low leverage company
Ezion - Sold 24,000 shares at 0.26 however my CPF portion was not sold and now I have to await the debt talks before deciding. The irony is that I had sold off my Ezion shares via CPF at 0.26 and bought it back at 0.22 as I sensed a trading opportunity (should have sold off and not bought back)
Silverlake Axis- Sold off at 0.620 before ex-dividends. This is because I believe the company is now fully valued and cash flow ability seems not to be as strong as before.
BBR holdings- Did a short term buy because BBR has been continuously doing share buybacks. Bought at 0.22, sold at 0.23
Ellipsiz- Sold it off today at 0.75


Accumulation
Over the past months, I had added on to FSL because of my belief that the fleet’s liquidation value, nett of debt, is above its market price of 7 cents plus. This were at various price points ranging from 7.5 cents to 8.2 cents. I do think there is value in the trust and I await the verdict to see if they have successfully rolled over their debts or otherwise.

Still Seeking Gems
With the various divestment, my cash holding is now at a 37% level. Paring down of my FSL stake is expected especially if share prices move above 10 cents. This is because the concentration risk is getting too high; becoming a binary bet.
I have tried looking for value in other companies. However, none of their free cash flow yield relative to current share price are at attractive levels. The two in my monitoring now are CSE Global and Sarine Tech. Other than that, I am currently finding little value in Singapore’s market.

Monday, 4 September 2017

Saving $100,000 by 31

“How do I start to reach my financial goals?”

“What must I invest in?”

These are questions often asked as newcomers to the workforce embark on their goal to start saving for retirement. And the first steps to it is saving with a certain figure in mind. So how can one achieve this first financial milestone of saving, say their first $100,000? While many would think the ability to invest smartly is required to achieve this goal, the truth could not be any further.

Its more about Saving Habits than Smart Investing
In my view, if you have the goal of saving $100,000 before the age of 35 (or preferably 31), achieving your milestone depends more on how much you save than the ability to invest for wonderful returns.

Let’s use the example of “Ben” to illustrate. Following the path of most university graduates, Ben graduates and enters the workforce at the age of 25. There he attains a job with a monthly salary of $3,000 (After CPF: $2,400). Ben expects an annual 5% increment during the early stages of his career and intends to save a full 1 month of his bonus annually. In addition, being a new investor, Ben expects to invest in “safer” stocks which will yield him an annual investment returns of 4%.

Under $1,000 Monthly Expenses
As mentioned, Ben intends to keep his personal monthly expenditure to under $1,000 or about 40% of his take home pay. This is how his monthly expenditure will look like. Do note that while the insurance expense is low at $45, this is because term coverage of $200,000 and hospitalization insurance is utilized.

All in all, Table 2 shows how much Ben will save monthly. At the start of his working life, he is saving only about 30% of his monthly take home pay.
Table 2: Saving Table at age 26 & 30

Based on the calculations, Ben will save
$100,000 when he is 31 years old.

Analysis of how Ben achieved his $100,000
Based on Table 3, a significant portion of the $100,000 was due to Ben’s savings. In fact, only $8,910 was a result of his investment returns. To summarise, 91% of Ben’s financial milestone was due to his efforts of keeping monthly expenses low (below $1,000); enabling him to save 30-40% of his take home pay.

What if Ben had been Given Wrong Financial Advice or Spent More?
Let’s put additional thoughts to the above example. How would Ben’s milestone of $100,000 be affected if instead of spending $990 monthly, Ben spends $1,340 monthly. The reasons can vary such as instead of being advised to take Term insurance, Ben was offered Whole Life insurance (which will cost him $350 more monthly for the same coverage) or Ben simply decides to spend $350 more to pamper himself.

From a spending ratio of 30-40% of his take home pay, Ben’s spending ratio has now increased to the 43-55% range. Correspondingly, this will affect his savings ratio (a decline from an average of 39% to 26%).
Table 4: Saving Amount at reduced Saving Ratio

At age 31, Ben will only be able to save $73,991. Hence, just a decision to 'spend more' or 'an advice to choose Whole Life instead of Term' sets him back a difference of $26,000. Ben has been delayed by approximately 2 years in achieving his financial milestone of $100,000.

Conclusion
To summarise, the financial milestone of $100,000 depends greatly on what you spend and the amount you save. From Table 3, it shows just how little investment returns contributes. It is only if we take a longer term horizon, will the compounding of investment returns be substantial to contribute to our wealth building. However, for our investment returns to be significant, we need to build a large capital base and this boils down to an individual’s spending and savings habit.

Lastly, some individuals (particularly insurance agents) will dispute the later part of this post where I have “expense” the differential where Whole Life insurance is involved. It is worth noting for individuals who purchase such policy, they will never get to see their maturity sum, hence such a sum/differential should never count towards their retirement fund. Suggestions such as surrendering the policy when they are older (i.e. age 65) may then be offered; however, such a surrender comes at a penalty, and it reduces the returns of whole life insurance to the region of 2-3% per annum. If that is the case, investing the differential on your own is a much better option.