Sunday, 22 January 2017

How to be a millionaire through Stock Investing in 2017

Dear Readers & Fellow Bloggers,

I am neither hallucinating nor suffering from permanent brain damage as I write this post. I have stumbled across a company on the SGX where you can indeed earn a million ( if you believe the management & auditors). Introducing China Sports International

About China Sports International

A China Company which sells Sports & Apparel products in China under the brand name "Yeli". The company's current market capitalization on the SGX is s$9.228 million. Its current auditor is RT LLP.

How To Make a Million

Before you guys get too excited , lets analyse its latest Balance Sheet:


China Sport's Balance Sheet as of 3QFY16

If you notice the company has RMB 133 mil cash & equivalent and a total liabilities of only RMB 66 Million. 

The Plan

Step 1: Go to any (dumb) bank, tell them you wish to takeover China Sports International and need a s$12 million loan to launch the takeover. Take the money and announce the s$12 million takeover (at a 30% premium).

Step 2; Takeover the company and use its cash to pay off all the liabilities; you will be left with cash of  RMB 67.41 Million (approx s$13.9 million). 

Step 3: Repay your s$12 million loan and you will  be left with s$1.9 million cash; what's more you get a  factory in China and an inventory loads of "Yeli" Shoes and Apparel.

Be a Millionaire!

Let me reiterate my disclaimer that I accept no liability whatsoever for any loss or damage of any kind arising out from the use of any or part of this post.

If you are gungho/naive to adjudge the numbers reported by the management as true, this is truly your chance to become a millionaire in 2017.

Sunday, 15 January 2017

Portfolio Update and New update of Ellipsiz

Since the last update of my portfolio, I have made a few more purchases: 23,000 shares of silverlake shares at the price range of 52-52.5 cents and 10,000 shares of ARA at s$1.685.

The rationale for ARA is straightforward. The company is undergoing a takeover offer at 1.78. With the takeover targeting for completion by 1H2017, I am expecting a return of about 5% over the holding period of half a year. The downside is of course the failure of the takeover. However, ARA is a relatively strong company; given that it is dishing out annual divided of 4 cents and is in the business of a portfolio manager, I am inclined to continue holding the stock for its dividend.

Ellipsiz

I am more interested in my latest addition and that is Ellipsiz. To summarize, the company main's business is the production of probe card for the semiconductor and electronics manufacturing industry and distribution of service solutions for the electronics manufacturing chain.

Good Free Cash flow

This is one of the main thesis for investing into Ellipsiz.

Ellipsiz Operating Cashflow

From its cash flow statement for the past few years, Ellipsiz's has been generating an increasing operating cash flow before WC changes. Given that the semiconductor industry it is serving is still going strong due to the demand of electronic goods, my opinion its current cashflow generation will be constant. 

At current cash flow generation of about 13 mil, then deducting taxes, interest and its maintenance CAPEX of approx 2.7 mil, Ellipsiz free cash flow is about s$8.5 million.

At current share price of 0.375, Ellipsiz market capitalization is s$62.6mil. This means it is selling at a 13.5% FCF yield.

Strong Balance Sheet

At a debt ratio position of 19%, the company is relatively lowly geared. The company too has been paying down its bank borrowings which it had utilized due to the acquisition of a Japanese company in the past. Soon, the company will have negligible borrowings and that is definitely a positive sign.

With the recent disposal of an associate company, Kita, the company is in a net cash position of 78%.

<Vested 20,000 shares at 0.375>

Saturday, 7 January 2017

When Reality does not Meet Expectations

Read a US news article which argued how dining expenses will increase if President Trump's policy were set in place. You can read it here.

What got pique my interest was this particular paragraph:


"A stark example of the need for immigrant labor was apparent in 2011, when the North Carolina Growers Association had 6,500 farm jobs available, all of them in or next to counties with unemployment rates greater than 10 %. Only 268 of the approximately 500,000 unemployed North Carolinians applied for a position. Ninety percent of them were hired, but only 163 showed up to work on the first day, and only seven workers — of the 6,500 required — completed the growing season"

This reminded me of Certis CISCO recruitment failure in Singapore where they were not able to obtain enough locals to fill its manpower vacancies and had to seek foreign manpower to fill this gap. Article can be read here.

What surprised me was that despite offering about $2,575 monthly salary to "O" level graduates after their training period (and a higher starting salary to those who join with a higher educational level), many of the local workforce are still not inclined to join. To get a sense of how much is a $2,575 starting salary; this starting pay is much higher than the average starting pay of any polytechnic graduate in MOE's survey

To add icing to the cake, Singapore's labour situation is not rosy at all - Our economy is experiencing a problem where there are more job seekers than job vacancies. As the situation narrated in the US article, it bears resemblance to what we are experiencing here. 

When Reality does not Meet Expectations

So why does such a disparity exist. Another paragraph from the US article will shed some light:

"Some may argue that these laborer positions could, and should, be filled by American workers. But the reality is that these positions are not considered desirable due to the physical demands and the need to work outside in inclement weather."

So as one may guess, the answer is because those job vacancies do not match what job seekers are expecting; in psychology, we learn that when one's expectations are not met, it leads to a drop in dopamine in the brain, resulting in the feeling of disappointment. Perhaps our local workforce are disappointed with these available jobs and are bidding their time to seek employment.

Singapore is going through an interesting period and therefore I am curious - Given the current scenario where reality is not matching the expectations of the workforce: will businesses here pack up due to the stringent labor compliance cost (eg. local to foreigner ratio/high cost of labor) or will the hunger of the people eventually succumb to the acceptance of jobs below their expectations.

This reminds me of another viewpoint article written by a local journalist. Is the lack of hunger something which will hinder our economy navigating through these tough times?


Monday, 19 December 2016

Portfolio Update: Dec 16

Given the price weakness of my core (only) 2 holdings, I have decided to accumulate Hyflux Preference shares (avg weighted 93.50) and Penguin Holdings (21.1 lots at 0.23 cents). It will be interesting to see how it goes, my thinking or Hyflux is that redemption is likely, while for Penguin, it's P/B ratio is rather low despite negative earnings. This allows a huge margin of error and upside in the event of liquidation.

What I am eyeing

One of my old favorites, Silverlake Axis, has fallen back to levels which I had purchased at in 2015. You can read my old coverage on the company. 

Only one event has changed for SIlverlake post 2015 - 1) Disposal of GlobalTech shares. It is definitely a positive event but to me, I will like to know how much is intended for repayment of Silverlake''s growing debt and the ability of Silverlake to repatriate the money back from China to Malaysia/Singapore due to China's capital controls. 

On a cash flow basis, Silverlake has consistently generated RM 210 mil. Netting off CAPEX of about RM 60 mil, Silverlake produces about RM140 mil. Doing the maths, Silverlake is able to dish out dividednds of 1.8 sg cents per share, barring any deterioration in its business industry.  


Sunday, 18 December 2016

Pitfalls of relying only on P/E ratios

P/E (price earnings ratio) is a measure often used and cited for stock analysis. Commentators will often appeal to the masses by quoting lines of: "Buy this stock now! It is selling at such a low P/E ratio" 

But is it a reliable measure? Let's use the complete past 3 year financial results (excluding one-offs) of Ezion Holdings and Penguin and the share price these companies were selling for slightly after the announcement of their full year financial results on the SGX.

FY end    Ezion EPSShare price (start Mar)P/E ratio
201316.06163.510.2
201416.5397.65.9
20152.3362.526.8

FY end  Penguin EPSShare price (start Mar)P/E ratio
20132.4915.26.10
20144.5621.54.71
20151.41139.29
 *All figures above are in cents. Share price data is from yahoo and has been adjusted for Ezion rights

If one notices, the P/E ratio had little correlation with how well the company did over the next financial year. In fact, if one had followed strictly by P/E ratio, we would all have bought in at the start of March 2014 and burnt a massive holes in our pockets. Since the start of March 2014 to now, Ezion and Penguin share prices have fallen 61.5% and 62.8% respectively.

The Missing Link

Using the power of hindsight, there is one important factor all investors should have noticed - business cycle

Both companies above belonged to the oil & gas industry and post March 2014, their earnings were hit by declining profits due to the down cycle of the O&G sector. Reputable financial institutions covering Ezion in March 2014 were touting it as a "buy", an "undervalued company" and unappreciated by the market. Penguin too was well covered in forums along the same line that it was an undervalued gem.

So are there any measurements to gauge the business cycle of any industry? Unfortunately, the answer is no.

To compound the misery, gauging the business cycle is a complete art. One has to walk the ground (surf the net) to understand the situation and draw your conclusions from it. And even then, one's conclusion could be faulty, leading to investment mistakes.

So before using the P/E ratio as our basis of analysis for a stock buy, it is perhaps good to pause and ask if its current P/E is justified by the impending developments of the industry it is in.



Sunday, 20 November 2016

KrisEnergy Bondholder Woes

Came across a Straits Time Article about Krisenergy seeking bondholder's consent to accept a new bond and the bondholder's unhappiness. The article is linked here.

Summary 

Basically KrisEnergy is asking existing bondholders to accept a new bond which is of a 5 year tenure and at a lower interest than the existing bond. In addition, bondholders get to enjoy some increase in interest rate repayment if oil prices move above US$70 during these 5 year period.

In addition, KrisEnergy shareholders (mainly Keppel Corp) will inject $140 mil into the company by subscribing to zero coupon secured notes.

My Opinion

In my opinion, it is highly unlikely for oil to turn around within these 5 years. This is because there is already a production surplus where supply outstrips demand. There are many oil tankers out at sea holding inventory, it will take years for this surplus to be used up.. Furthermore, oil producing nations like Saudi, Iran, Russia are inclined to pump more oil if it goes back to 60+ to cover their budget deficit, given their very low cost of drilling oil. To add to that, we now have a US president who is promising an energy independent policy (more production). We should be planning for a scenario where oil is unlikely to recover past 70 due to such factors.

Hence, I think it is a very bad deal for KrisEnergy bondholders. This is because if they accept the new bond and the zero coupon secured notes offering were to happen, existing bondholders will be pushed further behind in the queue of priority if KrisEnergy's assets are liquidated. This is because senior note holders are ranked ahead of bondholders (unsecured note holders).

Based on Krisenergy's latest balance sheet (3QFy16), if existing bondholders vote "no" and KrisEnergy's oil/gas/exploration assets are liquidated at 50% of stated book value, existing bondholders will be able to get some of their principal. This is likely to be a better scenario than in 2022; where secured note holders get the proceeds first in the event of liquidation. 


Disclaimer: The above are only my views and not to be construed as a solicitation or financial advice as I am not a certified financial adviser. Analysis of Krisenergy balance sheet is based on its latest reported financial results released on 3 November 2016. They are not guaranteed as being accurate or reliable as of the time of this posting. Readers should not regard this post as a substitute for the exercise of their own judgment. Any opinions expressed are subject to change without notice and this blog is not under any obligation to update or keep current the information contained. The author accepts no liability whatsoever for any loss or damage of any kind arising out from the use of any or part of this post.

Tuesday, 15 November 2016

My Dividend Stock Purchase: Hyflux Preference Shares (N2H)

After holding  a large percentage of cash for a long while; I have decided to purchase shares in N2H, Hyflux Preference Shares. 

Hyflux's preference shares are bond like instruments which gives the holders a fixed dividend payout at each time period (6% for Hyflux's case). These dividends are paid on a pro-rated semi annual basis and cumulative, meaning to say if Hyflux defers on paying dividend this year, it will be rolled to next year. It can be for an indefinite period However, these preference shares has no maturity date to redeem, but Hyflux has to pay 8% dividend if they do not redeem on April 2018. I have written how preference shares work in a previous post.

Why did I invest?

To me, it seems the preference shares looks like a deal. This is because at its selling price of 93.30 and if Hyflux decides to redeem its preference shares on April 2018 (at face value of 100.00), it means I will obtain a return of about 0.065 (100- 93.30- comission) and 3 semi annual dividends of 0.03. That is about a total return of 16.6% for a 1.5 year holding period

That is the good side.

What is the downside?- Hyflux going bankrupt in the next 5 years with its assets only able to repay it lenders; leaving nothing to shareholders. However, I find such a scenario being remote. This is because I hold the view that in the event of liquidation, Hyflux has enough stated assets on the balance sheet such that preference shareholders will recover a significant amount of principal. 

As of now, equity shareholders hold 700 mil of the equity, which is about 20% of Hyflux's assets. Hence a loss of this magnitude is neccessary to have any impact on preference shareholders. That to me is an adequate margin of safety.

The other downside is that Hyflux decides not to redeem in April 2018. In such a scenario, I will be left with a stock which I had bought at 93.30 but yields 0.08 cents annually. That gives me an effective yield of 8.57% which is decent. Furthermore given that these dividends are cumulative, should Hyflux turn around and decide to redeem the preference shares; it will have to pay the face value and all the accurred dividends.

Are the Dividends Sustainable?

As of now, Hyflux's operating cash flow generated, nett of PPE acquisition and interests, is roughly equivalent to the distributions (dividends) it has been paying out. Furthermore with the opening of more plants, which means more revenue, its semi annual payouts are definitely sustainable.

Conclusion

I find that Hyflux Preference Share is now a decent prospect to park some money and bank on the possibility of a redemption in April 2018.

This is mainly because the cost of financing an 8% "debt" is significant to Hyflux's finance and Hyflux will be inclined to redeem them with a financial instrument which has a "lower cost of capital".  

Let's see how it goes.