Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Regarding Hing Yiap, I know that from previous posting that you are keeping track but not buying this stock as it is not in your circle of competence. Anyway, some info I wish to share on Hing Yiap.I look at their financials a few months back, I find one thing that turn me off, their directors compensation which is a husband and wife team. Their compensation I believe is excessive (around 25% of net profit if I am not mistaken) and are ripping the company shareholders off. They are also going into F&B which is not their within their core competency and that operations have been losing money.
Hing Yiap's husband and wife team of total remuneration of about RM 2 million is certainly a lot of money to me but more importantly is it in accordance to the norm of corporate remuneration? (Actually as two of them hold most of the shares of HY, their return on their investments are many folds of that.) I tend to differ from Snowball's opinion as they are the only two executive directors who are actively managing the business. We know that there are so many CEOs (with many other executive directors in the same company) in Malaysian public listed companies earning tens and hundred's of million ringgit a year in total remuneration, not to mentioned the equal value of employee's share option scheme (HY has none). Many of them did not even enhance any shareholder value at all. On the other hand, despite the financial crisis in 2008/2009, HY provides investors, mainly through cost control and efficiency, an internal rate of return (IRR) of 20% if they have bought HY at about 65 sen 5 years ago (Padini IRR of 37%) which I am quite sure beat the market by a considerable margin. In percentage wise, the remuneration may appear to be high but not in absolute term. More important, are minority shareholders also rewarded with the success of the business. In my opinion as an investor, yes.
Actually I want to write all this in a blogpost a few months back but too lazy to write, I might as well write it here..haha.
Yes. $2mil is a small in absolute terms but it is still a significant portion relative to their earnings. I have actually made a comparison between Hing Yiap and Padini a while back on their compensation. If I remember correctly, Padini pays their team of 5-6 exec directors for a total of RM2.75mil-Rm3mil. This works out to around 500-600k per person. This is a company that is much more bigger and much more profitable, but, the people are being paid less.
Well, one good thing about Hing Yiap is that they disclose a lot of stuff in their annual report. But, disclosure do not equals good corporate governance. Please take a look at the activities they attend, a lot, I feel is them abusing the companies funds to attend some events. For example, the Bill Clinton talk, we know how much Bill gets paid for the talk. They attend using companies fund. What insight do they gain on managing Hing Yiap when Bill talks about racism?
Another thing to look at is their reason to justify their compensation. I believe it states that the reason to pay them such a high compensation is to retain talent and remain competitive. I thought it was a joke. Are they saying that they are going to dump the company that they own 40% and work for Padini if Padini pay them more?
Then, they is this retirement fund that baffles me. They actually have a plan to retire at the age of 56. I rarely seen any family own business that retire at such a young age. What about succession planning as both the husband and wife retire quite close to each other?
KC, I understand that you make money in the stock. Yes. But, you could have make more than that. I have explain this quite a few times to many people, the fact that you make money does not mean the management is good. The key is that you make the same amount of money or more than the management, then, the management do really put the shareholders first.
One thing that people look at Hing Yiap is their dividend yield, although it is high, I believe it is high because of the low share price. The low share price in turn is caused by the management understating earnings through paying themselves a huge salary.
Well, this is conspiracy theory, but, I have a reason to suspect that the husband and wife team are planning to take the company private when they retire. They do this by continuously channeling funds out of the company by paying a relatively healthy dividend but not healthy enough to push up the price. In addition, they are paying themselves a high salary and a use the company fund to invest in a relatively famous fund manager, Teoh Kok Lin, for their retirement fund. I believe they have sufficient cash to do an MBO. They will continue their current strategy to depress the share price so that the company is not out of their reach.
One final thought they I like to share, "If a management is ripping you off during the good times, what do you think they will do during the bad times?"
Hi Snowball,Thanks for the information and comments provided by you. You really based all these on facts which I was not aware of before. These comments are positive in curbing my could-be overconfident in my investments in Hing Yiap. The compensations taken by the directors are indeed higher than their peers in Padini and even for Cheetah. Even though Padini's directors' compensation is much lower, their performance beat HY in every respect by a wide margin and that is no doubt about it, although it is not the same case as Cheetah. I wished I have bought Padini 5 years ago instead of HY. This is only an after event and no point regret about it I guess. However, I am still happy with the annual 20% return from HY which I am quite sure beat the market with a wide margin too. I am looking at the expected return in the future. Considering the followings: Padini Vs HY Vs Cheetah 5-yr-CAGR revenue: 18% Vs 1% Vs 14% 5-yr-CAGR profit: 24% Vs 77% Vs 11% Price : 3.60 Vs 1.05 Vs 0.56 Price-to-sales: 0.9 Vs 0.3 Vs 0.5 PER: 7.2 Vs 3.1 Vs 4.7 Price-to-book: 2.0:0.5:0.7 Dividend yield: 4% Vs 10% Vs 5% Except for the low growth in revenue which the company needs to invest in marketing seriously, it is easy to see that HY does provide the best value as an investment for the future. The compensation of HY's directors is high, I agree but I do not look at it as a rip-off, since the company is transparent about it. I am interested only in my bottom line, free riding the success of the business, as long as you do not cheat me, for example squandering off the cash instead of paying me high dividends. With regards to taking the company private, I am happy if HY pays me for the fair value of the worth of its share, and the fair value, I think should be much higher than the present share price.
I have looked at the accounts of Padini and Hing Yiap casually and form the following opinions.
Padini Revenue growth: Excellent Profit margins: high and maintained (this is good.) Earnings growth: Excellent Cash: Large amount Dividends: growing
Hing Yiap Revenue growth: Anaemic Profit margins: Erratic, but improving Earnings growth: propelled by improving profit margins, rather than top line revenue growth. Cash: Good amount Dividends: growing
Take the dividend out of your assessment. The high dividend yield of Hing Yiap, probably clouded the assessment of the quality of these companies. Concentrate on earnings and earnings growth. As earnings grow and more free cash flows are generated, dividends will grow too (hopefully).
It is without doubt that Padini is a higher quality company (my assessment, both objectively and subjectively.) Moreover, Padini can grow further through SSS and new stores in the future. It can also grow by expanding into overseas market, which it has already undertaken.
Hing Yiap was in dire business situation in recent years. Its management has done very well to turn it around. It now outsources its manufacturing of its inventories and also markets products under the franchise of others (which it bought). This has allowed it to grow its profit margin significantly. However, revenue growth remains anaemic when compared year to year. Therefore, there is little top line growth in revenue.
Hing Yiap probably felt the need to expand its business into another new area to grow its earnings. Therefore, it acquires the franchise to expand into the beverage business which in its embryonic stage is still not profitable yet.
I think the earnings and earnings growth of Padini are sustainable long term. Hing Yiap's earnings and earnings growth are more erratic; during the recent economic downturn, it reported a loss in one of the quarters.
Let us be reminded of these dictums. It is alright to buy a good company at fair price or a bargain price. Never buy a lousy company at any price. Never buy a company at high price.
Confident of the quality of Padini, it is now a matter of assessing its price and intrinsic value.
As for Hing Yiap, at its present price, is it undervalued, fair value or overvalued? Its share price has rebounded in tandem with its improving profitability. Those who invested in this company has profited from the rebound in its share price. Those who remain invested in this stock are either hoping that Hing Yiap will (continue to) grow its earnings presumably at a high rate or that Hing Yiap is grossly undervalued at its present price relative to its growth potential. There are still a lot of business and other risks facing Hing Yiap in the coming years.
Which company will grow its earnings at a higher rate in the next few years - Padini or Hing Yiap?
Which company will deliver a higher total shareholder return to its investor - Padini or Hing Yiap?
bb, your comments on HY and Padini is well written. I would like to reiterate that Padini's total return in the last 5 years with IRR of 37% way outperformed HY's 20%. That was because Padini has done extremely well for the last 5 years and Mr Market has given a much better valuation with a PER of 7.2 compared with about 3 for HY. Of course Padini well deserved the higher rating. I will think that overall, Padini will continue outperform HY in the next 5 years in revenue growth and management efficiency, ie higher margin, ROA, ROE, ROIC etc. But if you study carefully, you will find that the earning growth of HY in the last 4 years of 50%(Proj.), 21%, 74%, 216%, or CAGR of 77% is better than Padini's 34%(Proj.), 19%, 33%, 13% and 24% respectively. I also prefer Padini,s growth which is from is top line sales growth whereas HY,s growth is highly unsustainable if the revenue growth is not improved in a big way. But the more important thing is the future. Try doing some discount cash flow analyses with sensitivity analysis by using present prices of shares, using historical earnings and dividend and their growth rates, PERs etc as a guide and other assumptions such as discount rates. A company's value depends on all the expected future cash flows, not only dividends, or price appreciation alone (price appreciation also depend on initial price). Padini is a great company. HY is by no means, a lousy company if one looks at its return to shareholders in the last 5 years. My answers to your 2 questions, bb, is clearly for HY if my assessment is correct. Again, this is not because HY is a better company than Padini, but because its present valuation is too low which it does not deserve.
6 comments:
Hi Bullbear,
Regarding Hing Yiap, I know that from previous posting that you are keeping track but not buying this stock as it is not in your circle of competence. Anyway, some info I wish to share on Hing Yiap.I look at their financials a few months back, I find one thing that turn me off, their directors compensation which is a husband and wife team. Their compensation I believe is excessive (around 25% of net profit if I am not mistaken) and are ripping the company shareholders off. They are also going into F&B which is not their within their core competency and that operations have been losing money.
Hing Yiap's husband and wife team of total remuneration of about RM 2 million is certainly a lot of money to me but more importantly is it in accordance to the norm of corporate remuneration? (Actually as two of them hold most of the shares of HY, their return on their investments are many folds of that.) I tend to differ from Snowball's opinion as they are the only two executive directors who are actively managing the business. We know that there are so many CEOs (with many other executive directors in the same company) in Malaysian public listed companies earning tens and hundred's of million ringgit a year in total remuneration, not to mentioned the equal value of employee's share option scheme (HY has none). Many of them did not even enhance any shareholder value at all. On the other hand, despite the financial crisis in 2008/2009, HY provides investors, mainly through cost control and efficiency, an internal rate of return (IRR) of 20% if they have bought HY at about 65 sen 5 years ago (Padini IRR of 37%) which I am quite sure beat the market by a considerable margin. In percentage wise, the remuneration may appear to be high but not in absolute term. More important, are minority shareholders also rewarded with the success of the business. In my opinion as an investor, yes.
Hi KC,
Actually I want to write all this in a blogpost a few months back but too lazy to write, I might as well write it here..haha.
Yes. $2mil is a small in absolute terms but it is still a significant portion relative to their earnings. I have actually made a comparison between Hing Yiap and Padini a while back on their compensation. If I remember correctly, Padini pays their team of 5-6 exec directors for a total of RM2.75mil-Rm3mil. This works out to around 500-600k per person. This is a company that is much more bigger and much more profitable, but, the people are being paid less.
Well, one good thing about Hing Yiap is that they disclose a lot of stuff in their annual report. But, disclosure do not equals good corporate governance. Please take a look at the activities they attend, a lot, I feel is them abusing the companies funds to attend some events. For example, the Bill Clinton talk, we know how much Bill gets paid for the talk. They attend using companies fund. What insight do they gain on managing Hing Yiap when Bill talks about racism?
Another thing to look at is their reason to justify their compensation. I believe it states that the reason to pay them such a high compensation is to retain talent and remain competitive. I thought it was a joke. Are they saying that they are going to dump the company that they own 40% and work for Padini if Padini pay them more?
Then, they is this retirement fund that baffles me. They actually have a plan to retire at the age of 56. I rarely seen any family own business that retire at such a young age. What about succession planning as both the husband and wife retire quite close to each other?
KC, I understand that you make money in the stock. Yes. But, you could have make more than that. I have explain this quite a few times to many people, the fact that you make money does not mean the management is good. The key is that you make the same amount of money or more than the management, then, the management do really put the shareholders first.
One thing that people look at Hing Yiap is their dividend yield, although it is high, I believe it is high because of the low share price. The low share price in turn is caused by the management understating earnings through paying themselves a huge salary.
Well, this is conspiracy theory, but, I have a reason to suspect that the husband and wife team are planning to take the company private when they retire. They do this by continuously channeling funds out of the company by paying a relatively healthy dividend but not healthy enough to push up the price. In addition, they are paying themselves a high salary and a use the company fund to invest in a relatively famous fund manager, Teoh Kok Lin, for their retirement fund. I believe they have sufficient cash to do an MBO. They will continue their current strategy to depress the share price so that the company is not out of their reach.
One final thought they I like to share, "If a management is ripping you off during the good times, what do you think they will do during the bad times?"
Hi Snowball,Thanks for the information and comments provided by you. You really based all these on facts which I was not aware of before. These comments are positive in curbing my could-be overconfident in my investments in Hing Yiap. The compensations taken by the directors are indeed higher than their peers in Padini and even for Cheetah. Even though Padini's directors' compensation is much lower, their performance beat HY in every respect by a wide margin and that is no doubt about it, although it is not the same case as Cheetah. I wished I have bought Padini 5 years ago instead of HY. This is only an after event and no point regret about it I guess. However, I am still happy with the annual 20% return from HY which I am quite sure beat the market with a wide margin too. I am looking at the expected return in the future. Considering the followings:
Padini Vs HY Vs Cheetah
5-yr-CAGR revenue: 18% Vs 1% Vs 14%
5-yr-CAGR profit: 24% Vs 77% Vs 11%
Price : 3.60 Vs 1.05 Vs 0.56
Price-to-sales: 0.9 Vs 0.3 Vs 0.5
PER: 7.2 Vs 3.1 Vs 4.7
Price-to-book: 2.0:0.5:0.7
Dividend yield: 4% Vs 10% Vs 5%
Except for the low growth in revenue which the company needs to invest in marketing seriously, it is easy to see that HY does provide the best value as an investment for the future.
The compensation of HY's directors is high, I agree but I do not look at it as a rip-off, since the company is transparent about it. I am interested only in my bottom line, free riding the success of the business, as long as you do not cheat me, for example squandering off the cash instead of paying me high dividends. With regards to taking the company private, I am happy if HY pays me for the fair value of the worth of its share, and the fair value, I think should be much higher than the present share price.
I have looked at the accounts of Padini and Hing Yiap casually and form the following opinions.
Padini
Revenue growth: Excellent
Profit margins: high and maintained (this is good.)
Earnings growth: Excellent
Cash: Large amount
Dividends: growing
Hing Yiap
Revenue growth: Anaemic
Profit margins: Erratic, but improving
Earnings growth: propelled by improving profit margins, rather than top line revenue growth.
Cash: Good amount
Dividends: growing
Take the dividend out of your assessment. The high dividend yield of Hing Yiap, probably clouded the assessment of the quality of these companies. Concentrate on earnings and earnings growth. As earnings grow and more free cash flows are generated, dividends will grow too (hopefully).
It is without doubt that Padini is a higher quality company (my assessment, both objectively and subjectively.) Moreover, Padini can grow further through SSS and new stores in the future. It can also grow by expanding into overseas market, which it has already undertaken.
Hing Yiap was in dire business situation in recent years. Its management has done very well to turn it around. It now outsources its manufacturing of its inventories and also markets products under the franchise of others (which it bought). This has allowed it to grow its profit margin significantly. However, revenue growth remains anaemic when compared year to year. Therefore, there is little top line growth in revenue.
Hing Yiap probably felt the need to expand its business into another new area to grow its earnings. Therefore, it acquires the franchise to expand into the beverage business which in its embryonic stage is still not profitable yet.
I think the earnings and earnings growth of Padini are sustainable long term. Hing Yiap's earnings and earnings growth are more erratic; during the recent economic downturn, it reported a loss in one of the quarters.
Let us be reminded of these dictums. It is alright to buy a good company at fair price or a bargain price. Never buy a lousy company at any price. Never buy a company at high price.
Confident of the quality of Padini, it is now a matter of assessing its price and intrinsic value.
As for Hing Yiap, at its present price, is it undervalued, fair value or overvalued? Its share price has rebounded in tandem with its improving profitability. Those who invested in this company has profited from the rebound in its share price. Those who remain invested in this stock are either hoping that Hing Yiap will (continue to) grow its earnings presumably at a high rate or that Hing Yiap is grossly undervalued at its present price relative to its growth potential. There are still a lot of business and other risks facing Hing Yiap in the coming years.
Which company will grow its earnings at a higher rate in the next few years - Padini or Hing Yiap?
Which company will deliver a higher total shareholder return to its investor - Padini or Hing Yiap?
bb, your comments on HY and Padini is well written. I would like to reiterate that Padini's total return in the last 5 years with IRR of 37% way outperformed HY's 20%. That was because Padini has done extremely well for the last 5 years and Mr Market has given a much better valuation with a PER of 7.2 compared with about 3 for HY. Of course Padini well deserved the higher rating. I will think that overall, Padini will continue outperform HY in the next 5 years in revenue growth and management efficiency, ie higher margin, ROA, ROE, ROIC etc. But if you study carefully, you will find that the earning growth of HY in the last 4 years of 50%(Proj.), 21%, 74%, 216%, or CAGR of 77% is better than Padini's 34%(Proj.), 19%, 33%, 13% and 24% respectively. I also prefer Padini,s growth which is from is top line sales growth whereas HY,s growth is highly unsustainable if the revenue growth is not improved in a big way. But the more important thing is the future. Try doing some discount cash flow analyses with sensitivity analysis by using present prices of shares, using historical earnings and dividend and their growth rates, PERs etc as a guide and other assumptions such as discount rates. A company's value depends on all the expected future cash flows, not only dividends, or price appreciation alone (price appreciation also depend on initial price). Padini is a great company. HY is by no means, a lousy company if one looks at its return to shareholders in the last 5 years. My answers to your 2 questions, bb, is clearly for HY if my assessment is correct. Again, this is not because HY is a better company than Padini, but because its present valuation is too low which it does not deserve.
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