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.
CORPORATE DIGEST | 06 APRIL 2010
China Sports – Laying The Footprints To Success
By Ernest Lim
Pursuant to China Sports’ (CSPORT) placement of 120m new shares and its weak 4Q09 results, investors have expressed their displeasure by driving CSPORT share price down 23%, from S$0.175 to S$0.135 since my coverage 2 months ago.
With reference to my previous article (1 Feb 10: China Sports Taps Investors For Cash Twice Within Half A Year – Is It A Buy?), I have pointed out that it is crucial for investors to differentiate between short term (now to 3QFY10) and medium term horizon (4QFY10-FY11) for CSPORT where the growth rates for its top and bottom lines are different. Thus, it did not come as a surprise to me that its 4Q09 results and forward guidance are soft.
In this article, I will first discuss its results and subsequently whether it is still worth a “Buy”.
FY09 – Key takeaways
Based on Table 1 below, 4QFY09 sales and net profit were weaker than 4QFY08 due to weak demand, high distributors’ inventories level and naturally, lower average selling prices (ASP) for its products.
Table 1: Key information at a glance (Source: Company)
*No of shares refer to the actual number of shares as at that period under review and do not refer to weighted average of shares for that period
**SGD / RMB fixed at 4.86.
FY09 revenue increased 2.4% from RMB1.86b to RMB1.90b due mainly to:
a) the upgrade and opening of more of the specialty stores as per Table 2 below.
Table 2: Points of sales for FY08 and FY09 (Source: Company)
*The points of sales were compiled by aggregating the number of sales outlets given by CSPORT distributors. This include YELI specialty stores
b) an 11% increase in sales of YELI apparel and
c) the successful launch of YELI accessories in Aug 08. Accessories’ sales have soared 66% since FY08.
Although CSPORT FY09 results are soft (in line with my expectations), investors have punished the stock severely. Is this still worth a medium term buy? Let’s take a look.
What has not changed?
Inventories – still high
Firstly, the inventories which distributors are carrying are relatively high and according to my estimates, this should resolve by around 4QFY10 amid the large discounts that they are promoting to consumers.
Retail sales continue to improve
China retail sales continue to be strong. Retail sales jumped 17.9% in the first two months as compared to a year earlier. According to China National Commercial Information Center, retail sales are expected to rise to about 19% this year, with urban retail sales increasing at 19.5%. This should provide some support to demand for CSPORT products.
Pro-consumer climate to continue
China’s legislation is likely to place higher priorities to improvements to social security and promotion to more equitable economic development this year. Among other measures, there would likely be a stronger safety net of pension, health care and unemployment benefits. With these measures, consumers would arguably have more disposable income to spend on sportswear.
Increasing awareness in sports
There is no lack of sports activities to increase the PRC consumers’ awareness in sports. Examples of such sports activities include the 2010 Asian Games in Guangzhou and the 2011 World University Games in Shenzhen. Besides these events, there are other big international sports events, such as the FIFA World Cup in South Africa to be held this year. All these activities should spur interest in sports and sportswear.
FIFA world cup event stores – to raise the profile of YELI brand
According to management, CSPORT would be gradually rolling out the FIFA World Cup Event Stores from the middle of April. Although this is unlikely to have significant contribution in the short term, the presence of these stores should raise consumers’ awareness and profile of YELI brand as they are located near or inside YELI stores.
What has deteriorated? - Intense competition ahead
According to management, the issue on inventories is not as problematic as rising competition in the sportswear industry. Competition is increasingly intense as some Chinese sports companies such as Peak Sports were just listed in Hong Kong last year. Flyke International Holdings Ltd has also just listed in Hong Kong last month, raising HKD363.9m. Besides those competitors which went to Hong Kong for listing, there are other peers such as Xidelang which went to list in Malaysia. Thus, there is an influx of competitors which are cash rich. These companies would be eager to put their funds into use by expanding aggressively in China and carrying out large price discounts to gain market share. This would undoubtedly pose competition to CSPORT.
To avoid direct competition with Tier 1 brands which are mostly positioned as performance brands, CSPORT’s management has shrewdly positioned its YELI brand as sports casual wear. Furthermore, management would be conserving cash so as to better compete with them through its on-going efforts in advertising and promotion, improving product design, expanding its distribution network, as well as, collaborating with FIFA to raise YELI profile in China. However, management cautioned that the fruits of such measures take time to materialize. To this aspect, CSPORT has increased its cash buffer over the last half year by raising cash through rights issue and share placement.
Valuations – price downgrade to S$0.185
With reference to Table 3 below, CSPORT, with its medium term growth drivers, is trading at a substantial discount to its peers. I believe CSPORT should be able to trade to around 8.1x FY11F earnings which should translate to a target price of S$0.185. This was lowered from the initial target price of S$0.285 as I have concerns on the possible aggressive expansions and price cuts from CSPORT’s competitors, especially those companies that are armed with cash from initial public offerings. This competition is likely to filter into 2011 where growth may be adversely affected.
View Full-sized Image Table 3: A comparison of CSPORT and its peers (Source: Bloomberg)
Potential upside risks
Upside risks include: a) faster than expected recovery in ASP; b) earlier than expected contribution from FIFA and c) Pro consumer government policies which may cause a re-rating in consumer stocks.
Conclusion – Medium term buy based on current price
Based on the close of S$0.135 on last Monday, there is a 37% upside which warrants a medium term buy (i.e. up to 2 years). For investors who have bought CSPORT at S$0.175 on the day that my first article was published, they should consider holding CSPORT till at least above their cost price, unless they have better alternative uses of their funds.
China Sports International Limited. The Group's principal activities are designing, manufacturing and selling sports fashion footwear and sports fashion apparel under the brand name Yeli. The Group also produces shoes for OEM customers under international labels such as Kappa. The products are sold throughout the PRC and exported through exporters to countries in Europe, the Middle East, South America, Asia and South Africa. The Group operates in the People's Republic of China.
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Business Description:
Tong Herr Resources Berhad. The Group's principal activities are manufacturing and selling stainless steel fasteners. Products include nuts, bolts and screws and all other threaded items. It also operates as an investment holding company. Operations are carried out in Malaysia and Thailand. The Group distributes its products to Asia, Europe, North America and other countries.
This is a cyclical stock. Its industry is down with the poor economy. However, its balance sheet is strong. It has turned in profits for the last 2 quarters. It has cash equivalent of RM 155.331 million and this equates to cash of RM 1.22 per share.
Shares Outstanding: 127.43 million
Closely Held Shares: 77.320 million
With so many shares closely held, this company is little different from a private limited company. No wonder it is traded at a steep discount.
Why does this company keep so much cash unproductively employed?
Business Description:
Boustead Holdings Berhad. The Group's principal activities are warehousing and distributing fast moving consumer products for selected clients. Other activities include designing, constructing, upgrading, repairing and maintaining naval and merchant ships; planting and processing oil palm, as well as forestry and oil bulking installations; manufacturing cellulose fibre cement boards used for wide ranging ceiling and cladding applications; provision of commercial, Islamic and investment banking services, money broking, fund management, underwriting of general and life insurance business, and property investment and development. It is also involved in investment holding. Operations are carried out in Malaysia.
Boustead to sell land in Sumatra for US$50m
By DANNY YAP
danny@thestar.com.my
KUALA LUMPUR: Diversified group Boustead Holdings Bhd, which is targeting to sell off its 17,000ha of plantation land in south-west Sumatra before year-end, hopes to raise about US$50mil from the sale. (=US 2,941 per ha) Deputy chairman and group managing director Tan Sri Lodin Wok Kamaruddin said over 50% of the land was currently planted with oil palm.
“We are on the lookout for buyers. If we get a good price we will sell,” he said told reporters after Boustead’s AGM and EGM yesterday.
On reasons for selling, Lodin said as it was a stand-alone plantation, there were logistics problems, and the company had no plans to expand it.
Lodin said Boustead would continue to hive off its non-core and non-performing assets to improve efficiency and also reduce bank borrowings.
He said Boustead had managed to dispose of its non-profitable businesses and non-core assets over the years which had helped to reduce its gearing. “Our gearing is currently 0.8 times, compared with 1.2 times in 2009.”
On dividends, Lodin said Boustead would continue with its quarterly dividend payout although it was not a written company policy. The payout was on condition it remained profitable.
For the financial year ended Dec 31, 2009 (FY09), Boustead paid out dividends net-of-tax amounting to 22.1 sen per share.
The total dividend payout of RM184mil represents 54% of its attributable profit and a 27% increase from the payout from FY08.
“This increase in dividend payout is sizeable given the enlarged share capital as a result of the rights issue undertaken during the third quarter last year to increase shareholder base,” he noted.
On Boustead’s performance, Lodin said despite a tough year in 2009, the company managed to post a respectable pretax profit of RM502mil, compared with RM679mil in 2008.
On the key performance indicator this year, he said Boustead targeted a return-on-equity of 10%, pre-tax return-on-asset of 7% and net dividend of 18 sen.
On its disposal of the 80% stake in BH Insurance (M) Bhd to AXA Affin General Insurance Bhd, Lodin said the company would gain RM363mil from the sale. In addition, Boustead would also rake in RM75mil profit from BH Insurance’s business prior to the stake sale.
“It was a good investment,” he said, adding that after the disposal of BH Insurance, it still maintained a 20% stake in Affin Bank.
On its business outlook, Lodin said all divisions looked good taking account of the improved global economic conditions. “We anticipate a better year,” he said, adding that Boustead would continue to focus on its six core business divisions - heavy industry, plantation, property, trading, finance and investment as well as manufacturing and services.
Lodin said the heavy industry division, especially shipbuilding, would continue to be the key driver of growth for the company.
He said the division now contributed about 30% to revenue, adding that the finance and investment division contributed about 20%, property 20%, plantation 15%, trading 10% and manufacturing 5%.
“We believe our plantation division can do better this year with crude palm oil prices on the uptrend. Another division that can perform better include finance and investment.”
In general terms,it (intrinsic value) is understood to be that value which is justified by the facts, e.g., the assets, earnings, dividends, definite prospects, as distinct, let us say, from market quotations established by artificial manipulations or distorted by psychological excesses.
- Benjamin Graham and David Dodd
Before you risk your hard-earned money on a stock, you probably want to know the value you can expect to get in return. The value you assign to a stock, or that stock's intrinsic value, is the maximum amount that you are willing to pay now for future benefits, which could come from dividends or the potential sale of the stock at a realistic future price. It makes no sense to buy a stock when its intrinsic value is smaller than the current price.
Buffett cautions: "The calculation of intrinsic value, though, is not so simple ... intrinsic value is an estimate rather than a precise figure."
Nazir says SC proposal would severely hit M&As
By ELAINE ANG
elaine@thestar.com.my
PETALING JAYA: The Securities Commission’s (SC) proposed rule change on the assets and liabilities method of buying listed companies will result in a severe drop in merger and acquisition (M&A) activities in the country, said CIMB Group Holdings Bhd group chief executive Datuk Seri Nazir Razak.
“(The SC proposal) in its present form, absolutely, will cause a drop especially in mergers, not so much takeovers. Value is created by mergers,” he told a press conference to announce the group’s plans to set up a research institute to promote Asean integration yesterday.
The press conference was held on the sidelines of the 7th Asean Leadership Forum.
To recap, the SC had recently issued a consultative paper which proposed to raise the shareholder approval level in an acquisition via assets and liabilities from the current simple majority to 75% shareholder approval.
It also suggested an additional requirement that not more than 10% of shareholders present can object to the deal.
Under Section 132 (c) of the Companies Act, a buyer only needs a simple majority to take out the assets of the listed company.
This allows the buyer to circumvent the Takeover Code, where the threshold to take over a company and de-list it is higher at 90% acceptance of shares outstanding that are not owned by the offeror.
This is aimed at protecting the interests of minority shareholders by requiring a higher threshold of shareholder approval before a deal is done.
Nazir said if the bar was set too high there would be no deals.
“What we want is a framework to protect minorities but enables transactions to be done. In its present form, it is so prohibitive that you will see a very sharp drop in M&As.
“Is that good for the country and capital market?” he said.
Nazir highlighted the need to strike the right balance between the interests of the majority and minority shareholders.
“Minorities also profit a great deal from M&A activities. We have to be very sensible in evaluating the new proposals.
“I have heard comments that the higher the takeover threshold the better, especially for minorities. It is not true that the more power to minorities the better it is.
“Minorities also need deals, mergers and takeovers,” he said.
Simply put, the essence of value investing lies in buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value was what Benjamin Graham, father of value investing and Warren Buffett’s mentor, referred to as the ‘margin of safety’.
Just like Buffett and Graham, Ken Chee and Clive Tan, co-founders and trainers of the increasingly popular Millionaire Investor Program, strongly believes in the beauty of value investing. More importantly, it was this common passion that brought them together on their value investing journey when they met at an entrepreneur program 4 years ago.
“Back then, we used to form a mastermind group of 8 and meet up once a month to study chapters after chapters of various investment books and subsequently put what we have learnt to use by analysing different companies,” Ken reminisced during an interview with Shares Investment (Singapore).
According to Ken, who has attained financial freedom at a tender age of 34, one of the most important reasons for developing the Millionaire Investor Program was to help create as many enlightened millionaires as possible via the platform of value investing. “Also, we have discovered that in order to retire comfortably at the age of 65 in Singapore, one should have an average of $1 million in cash, and hence its name,” he added.
Highlighting the fact that the Millionaire Investor Program is no get-rich-quick scheme, Ken said while there is a certain group of people yearning to make quick bucks in the equity market, there is also another group of individuals wanting to learn the proper way of investing. He further mentioned that a lot of people could not differentiate between trading and investing.“Trading is for institutions. It is not meant for retail folks, as most of them just do not have the technology and temperament to succeed,” Ken commented.
Gaining popularity amongst the investing public
Focusing On Fundamentals
A 3-day course from 9am to 9pm, the Millionaire Investor Program allows participants to better understand and grasp the key concepts of value investing through interesting games and tools. More specifically, the Millionaire Investor Program teaches participants on how to analyse real companies through interpreting financial statements not from the point of view of an accountant or an employee but from the point of view of an investor or business owner. To find out more about the program, you can visit their website at www.millionaire-investor.com.
“Accountants will treat assets as assets. However, based on our experience in managing businesses, we realised that some assets may not necessarily be assets, while some liabilities may not be liabilities,” explained Clive, who was a former high school teacher. Apart from the Millionaire Investor Program, Ken and Clive also own a branding consultancy company and a childcare business respectively.
And things don’t just stop there after one completes the 3-day program. There will be quarterly networking sessions, where graduates come back for reviews and discussions. Occasionally, the management of the listed companies will be invited down to share about their businesses and investment merits. “We also have plans to organise plant visits in the near future,” Clive remarked.
As fittingly put across by Ken, the strength of the Millionaire Investor Program lies in its weakest link. That is to say, for someone who practically knows nothing about equity investing, he or she will be able to understand the true meaning behind financial jargons such as profit and loss, assets, liabilities and PE ratio, to name a few.
Gone are the boring and dry lessons
In The Pipeline
Having established a firm footing on local shores, Ken and Clive are looking to bring the Millionaire Investor Program into regional markets. Notably, they will be holding their maiden program in Ho Chi Minh around April or May. Jakarta is another city that they are currently exploring.
On whether he believes in technical analysis, Ken pointed out that although technical indicators do provide a glimpse of market sentiment, more often than not, one could get confusing signals from various indicators.
Preferring to stick to analysing the fundamentals as opposed to predicting future market directions, Ken personally likes VICOM, citing the company’s ability to generate sustainable cash, low capital expenditure and lack of competitors as key reasons. “Another company worth looking at is Asia Pacific Breweries. If you had bought its shares in 2001 at around $3, you would have gained an annual compounded return of 20%,” Ken exclaimed.
I guess for Ken and Clive, as well as other proponents of value investing, nothing beats buying into an undervalued company with a solid business model and watching its share price shoot through the roof. That, I suppose, is the beauty of value investing.
Dividends matter and they matter a lot! Had you bought Singapore Post at the start of 2005 and held it till the end of February this year, inclusive of dividends, it would have compounded at 9.4% over the 5 odd years, against the Straits Times Index’s 5.6%.
During that time frame, Singapore Post’s management had been very generous, rewarding a total $0.357 per share to its shareholders. Stripped of those distributions, Singapore Post would have lagged the market badly, compounding at only a paltry 3.4%.
This is not a case of cherry picking. In fact, a recent Citi Investment Research report noted that in the past 10 years, equities in Asia ex-Japan have generated a compounded total return of 5.9% per annum in US dollar terms, 46% of which came from dividends.
Dividend Matters
Some formulae are in order before proceeding further. Dividend yield, the most basic metric, is calculated by dividing total dividend per share paid out during a full financial year over the stock’s current market price.
Dividend payout ratio (DPR) is more instructive as yield tends to fluctuate depending on the time of the day. This is calculated by dividing total dividend per share paid out during a full financial year over that respective year’s earnings per share (EPS).
Singapore Post, for example, paid out a total of 6.25 cents in dividends per share, when EPS was 7.7 cents in FY09. Be sure to exclude special dividends as they are one-off. Dividend payout ratio works out to about 0.8, which means 80% of FY09 profits were returned to shareholders. The importance of the dividend payout ratio will be elaborated later.
There are companies, particularly those of blue chip pedigree, that have a formal dividend policy stating the percentage of operating or net profit to be paid out. This can be found under the CEO/Chairman’s statement section of the annual report.
Even though a dividend policy is a legally binding commitment, companies that have one loathe changing it, as a downward revision or omission of dividends generally signals financial woes.
Finding Dividend Plays
To be able to consistently return profits to shareholders requires disciplined management as well as strong cash flow on the company’s side.These companies tend to be larger and/or more mature and are found mainly in the banking and finance, consumer staples, utilities and energy sectors.
Those that do have consistent and high dividend payout ratios – so called dividend plays – are likely past their growth phase. The stability in their earnings is generally accompanied by lower levels of R&D and capital expenditures. This is where we return to the dividend payout ratio.
Take the company’s return-on-equity (ROE) and multiply it by the earnings retention rate, which is one less the dividend payout ratio, and you will get the sustainable growth rate(SGR).
Again using Singapore Post as an example, based on FY09’s ROE of 59.2% and earnings retention rate of 18.8%, its sustainable growth rate works out to around 11.1%.
The sustainable growth rate is helpful in gauging whether a company’s growth plan is realistic based on its profits but it will not tell you whether a company has the opportunity to grow.
In this instance, if the opportunity exists and should Singapore Post want to grow its FY09 earnings by more than 11%, it would have to increase its net profit margins (this increases ROE) or fund future investments with debt or the issuance of new stock.
Books To Read
Modestly named “The Ultimate Dividend Playbook” by Josh Peters and “The Future for Investors” by Jeremy Siegel are great books to read for ideas and strategies on investing in dividend plays.
Peters’ book is very comprehensive and provides a detailed explanation on how to select and formulate a portfolio comprising of dividend plays, and the underlying mechanics. Be forewarned “The Ultimate Dividend Playbook” might be too textbook-ish for some and that it is focused mainly on American companies.
Siegel’s more readable account is a must-read for investors worried about the how the impending demographic age wave in developed world would impact future asset returns. While repeating his argument that common stocks are the best asset class in the long run, he highlights the importance of dividends and stock valuations as well as including international stocks in your portfolio.
For non-bookworms, the table below lists a few companies with a history of consistent dividend payments as well as relatively high yields. As usual, more research on the reader’s part should be done before investing.
Time and time again, some investors have been forced to sell on the cheap when they read reports that there would be tightening in lending, plans to withdraw stimulus measures as well as valuations being overstretched.
Time and time again, some of them sell during a correction only to be caught flat-footed when a rebound occurs almost immediately. For example, they bought into a stock at $1, rode the bull market to $1.20 and sold at $1.10 when there was a correction. The share price immediately shot up to $1.15 before they even knew what happened and missed the next wave to $1.30. While some of them would have given up on this stock, there are others who jump back in at $1.30 only to sell it at $1.20 during the next correction.
They are scared, so they sell. This is human nature and there is nothing we can do about it unless we can stand firm and not sell if we are able to identify that we are in the midst of a Bull Run, so selling out for a small profit is never an option.
Yes, the Bull Run is still very much alive but has stalled after a spectacular rally from March.
Much of the easy money has been made and the investors are now treading in treacherous territory where the chances of a correction are high, especially when most people are sure that growth in 2010 will be sluggish.
Even US Federal Reserve Chairman Ben Bernanke has admitted that 2010 will not be a wonderful year. This has made investors sit up and rethink their strategy with some choosing to take profit or continue staying on the sideline until the clouds clear.
With several uncertainties still looming, it is no wonder that investors refuse to chase the rally preferring to sell every time the rally reaches a fresh recent high. However, they have to remember that they are still in a Bull Run that may continue for quite some time but has become more vulnerable to a correction - in particular a correction that has to be as deep as 10% - when economic fundamentals in the first quarter of 2010 cannot support the rally.
Business Description:
Integrax Berhad. The Group's principal activities are owning and operating 2 port facilities, Lumut Maritime Terminal (port facility for dry and liquid bulk, break bulk and containers) and Lekir Bulk Terminal (port facility for dry and liquid bulk) comprising Lumut Port. Other activities include providing tuggage services, and extracting and smelting mineral ore. Operations are carried out in Malaysia.
Wright Quality Rating: LAD0
A quick look at Integrax http://spreadsheets.google.com/pub?key=tpsmR43G59-htWV9PkRJUgQ&output=html
In the year 2008, the company took an impairment on investment in its associates amounting to RM 30.189 million. This is a non-cash item. The company's long term borrowings continue to shrink yearly.
Despite good positive FCF and the company having a large amount of idle cash, it did not pay a dividend last year. This dividend cut is certainly not minority investor friendly. Ouch!
