Why the rush of placement and right issue?

The sentiment has improved dramatically. Many people buy into the green shoot theory or just not wanting to miss the boat. But is recovery clearly in sight? I viewed the worst is over, the credit market has unfreeze, but the recovery is not clearly in sight. US consumer spending still weak and unemployment is high.

As more people has higher risk appetite, this is a perfect time for company to raise money by placement or right issue. Why? Simply because, if we are going to trend down in next 6 to 12 months, at least the company won't run out of money. Some even plan for expansion, using the current low asset price to buy growth in the future.

The market has peaked, any bad news which dash the hope of green shoot might cause the institution to start selling and lock in the profit.

Xingquan International Sports to list on Bursa Malaysia

Xingquan is another China sports shoe maker to seek a share listing, not in China, Hong Kong or Singapore, but in Malaysia.

China has many domestic shoe maker, which operate at different city tier. The competition is intense, even in the second or third tier city. To complete efficiently, many have gone the road of China Hongxing, that is to raise capital from the stock market.

The big shoe maker like Anta would go Hong Kong to list. The medium to smaller one came to Singapore. Xingquan took a different road to list in Malaysia, maybe to get more attention. Because it is among the very few China companies listed on the bourse.

Celestial, no more in heaven

The eventual has happened. The bond holder is calling for redemption and the group issued the statement that they are unlikely to be able to meet the obligation.

It is quite unfortunate that a company with a well known and growing brand, ended up in this kind of situation. The problem started when a small company is trying to expand rapidly and borrow aggressively. The convertible bond was issued with early redemption option, when people don't expect the bond holder would ever call for early redemption. You never know, when crisis strike.

This highlight the risk with small cap stock. The company is small, so you can afford to grow quickly. But, at the same time, the more leverage you have, it is increase the risk. Compare a company with little borrow, you know which one is more stable. Therefore, never bet big on one single small cap. You never know what would happen next.

There could be three outcomes

i) a white knight is willing to acquire shares in the company and the proceed can be used to pay the bond holder
ii) the bond holder is willing to receive the share in the company
iii) the company has to wind up

i & ii should be more likely. But that would dilute the existing shareholder's stake. iii is the unthinkable, you can kiss goodbye to your share.

At the cross road

Recently, the market has ran up quite a fair bit and set to correct soon. The optimism comes from the fact that some indicator is turning up and investor who is itchy for some actions all jump into the bandwagon. The million question now is whether this is a bear rally or sustainable recovery?

I read a lot recently, about the various expert's view and research report. Just like the expert didn't forecast the severe downturn we are having now, the opinion now is also divided. Some say we are poised for recovery, some say beware.

I recognised that the "very worst" might be behind us now, because the credit is flowing again, albeit slowly. We saw many S-chip belly up, due to the worsening credit condition. Share being forced sold and growth went into negative territory.

It might be a good time to slowly adding some risk into the equity portfolio. We should buy when market correct each time. Avoid chasing the rally. Because I don't think the confidence is fully recover and everybody is ready to jump into equity. Mark Mobius said we would start to see another bull run, government is printing money which would cause inflation, stock is going to do well. This is true in certain aspect. But, there are many variables could delay the recovery.

Jim Roger said buy commodity and china share. Maybe I would add some exposure to commodity linked stock and my usual favourite, the china share. There is a commodity ETF on SGX also which can be considered.

Finally, nobody has the crystal ball. You can have your opinion, but the risk abound. Play carefully. Stick to big cap, more stable and the first to rally when recovery materialised.

Stock market set to be more volatile ahead of swine flu

Seriously I have never heard of swine flu before, but now it is a buzz word. Getting more attention than the Geylang Serai food poisoning incident.

What we are facing now is like a combo hit. While the market is still haven't recover from the credit crisis, the flu pandemic would wreck havoc in the world again. Potentially the stock is going to drop a lot once it become wide spread. The strategy now is still sitting at the sideline.

S-chip in a mess

I was quite busy these few months, didn't finish the company result analysis. I guess it is still alright, since the economy would only get worse, not getting better. So be it, what have been stuck is already stuck.

The recent news on Sino Env and Celestial just highlight to us again, the corporate governance issue of SGX listed China company. I think investors have doubts on the China company partly because we didn't really see the real business and we didn't really know how they do their business.

Sino Env went down because of the Chairman problem which could potential create a share over hang. Time is bad, if you are over leverage personally, it is a risk. Celestial wise, if I read correctly, is the convertible bond come calling. Actually I never expect them would be in this stage. Since the company is government supported entity, I guess it should run "correctly". But never say never. Figures I don't have. I just hope it can pull through the refinancing.

What has been taught in tex book is correct.
1. When you use debt, you enhance the shareholder return, but you also increase the risk
2. Small cap is more volatile, since there is limited resource available to them

Don't put all your money in small cap only. A certain level of diversification is needed, no matter how good the company is.

Hongguo FY08 financial result review

Hongguo just release the FY08 financial result. Let's look at whether the consumer spending is slowing down and what are the challenges ahead.

All amount in RMB ,000

Revenue + 19.6%
Cost of sales +21.9%
Selling and distribution expense +35.6%
Loss in joint venture +595% (6,247)
Profit of the year -3.39%

Cash and equivalent 115,376
FD 24,793
Inventories 343,805 (quite a lot)
Amount repayable in a year 65,801 (cash on hand should be able to service this)

Profit before income tax 126,099 (Cashflow quite flat)
Operating cashflow before working capital 156,575
Net cash from operating activities 33,589 (less than last FY)
Cash after adjust investing and financing 115,376

EPS 26.82 RMB cts (a drop compare to last year 27.76)

The revenue continue to grow, as the group open more store. However, the cost is running ahead of the sales. Gross profit margin drop from 40.6% to 39.4%, reverse the past year trend. The reality bites now, as consumer cut back spending, and more promotion activities is being carried out. If not the JV loss, the group might post slight profit growth. Quarter 4 figure got hit after more tax provision is provided. Cashflow wise, the group is generating enough cash for the debt repayment, this should not be a cause of concern.

As highlighted in the financial statement, China retail sector suffered as a result of financial crisis. The group would continue the outlet expansion to drive growth. No dividend is being declared. This seems to be a common practice now among small cap, since they want to conserve the cash for uncertainties ahead.

The result has broken the previous multi year growth trend. The group is not doing too bad, consider the current economy climate, they only suffered a small reduction in profit. I think the retail segment is still quite resilient. But prepare for another year of negative growth. If the EPS decline by 10% for FY09, it would be 24 RMB cts (5.4 SGD cts). At last done price of 0.16, the stock is selling at PE 2.96 which is really amazing.

However, don't forget, the earning now is uncertain. So, the conventional valuation technique like PE is not really working in this kind of environment. It also shows sign of time, when in bear market, cheap would go cheaper. Keep a close watch on it, whether earning would deteriorate more?

The China stimuli package should drive up the demand in coming year. Let's wait and see.

Fish & Co Express and Starbucks selling instant coffee

In the tough time likes this, when consumer scale back the spending, business has to adapt and change. The traditional food and beverage sector is also affected, because people refrain from eating outside often.

Fish & Co Express was launched for the company to go into fast food business. This is a different business segment where most dominated by establish by fast food brand like Mac and KFC. Fish & Co guess its brand and taste would make it an attractive proposition for consumer to try its burger. Therefore, the Fish & Co Express was established at Downtown East. It is expected to draw the young crowd who fancy fast food and might not frequent the restaurant.

If Fish & Co can maintain the quality of the offering, this can be another way of bringing in more revenue. Time would tell whether this venture would succeed. I think the critical success factor of any business is whether do consumer get value for money.

On global front, we know Starbucks is running into trouble. Many outlets were closed in the rationalisation exercise. Those losing money or under performing outlets are closed and they urgently looking ways to boost the business. People used to believe that Starbucks is an affordable daily luxury that people cannot live without. The recession proves this belief is wrong.

The new product Starbucks wants to launch now is actually instant coffee. If you look at the market of instant coffee, it is growing. More people having the cup of instant coffee whether at home or office. Maybe because of the slowing business, they are trying to target this new market segment. Won't it be great if you can enjoy a cup of affordable premium coffee at home? Brand consultant questioned this move, whether it would erode the brand. It is a double edged sword, you could be gaining new customer but losing existing customer who sit in the cafe.

Business change everyday and a good management is out to act prudently to keep the company afloat and try to grow the profit. I am still an equity person and believe in stock investing.

FJ Benjamin FY09 Q2 result

FJ Benjamin just announced the Q2 result for FY09.

Turnover -10%
Gross profit -14%
Other income -66%
Rental +10%
Operating profit -53%

>> Retailer seems to be caught in situation where there is plunge of sales but rental keep going up.

Forex loss of 2,345,000
Net profit -93% to 611,000 only

>> The luxury sector really get hit when economy turns bad.

Current liabilities (in '000)
Trade and other creditors 74,183
Bank borrowing 58,358

Debt repayable within one year 58,389
Minus cash on hand, outstanding debt 37,392

Cash before working capital 3,500
Cash used in operation 13,332
Cash at end of period 11,150

>> Cash are locked out in two items - increase in debtors and stocks. The negative cashflow is really a cause of concern.

EPS for Q2 0.11

According to explanation, profit -53% plus unrealised non-cash forex loss of 2.3mil for trade payable and other balance. At current economic situation, the forex fluctuation is going to be constant issue. Margin decreased slightly as promotional activities increased. The group business affected by the downturn, as consumer cut back spending, and promotional activities increased. Revenue in China -35%.

It is really not time for retailer, many thought that luxury sector should be less affected, but it is not. The negative cashflow is really a big concern to me, especially time is bad now. Assume EPS remain same across quarter, full year EPS would be 0.44. But this figure is not so meaningful, since the business would keep deterior affected by consumer willingness to spend.