China Hongxing store in JB Bukit Indah

I have been to AEON Bukit Indah JB yesterday. To my big surprise, I saw the following store:



Hongxing Erke store in JB! This is truly amazing. I wonder some malaysian business man has actually set up the store there?

Merry christmas & happy new year

To all readers,

Merry christmas and a happy new year.

2008 is not a good year for investors. Let's hope for the best in the coming year.

MIDAS secured Euro contract

The stock market is in endless turmoil now. Market is really sentiment driven now, rather than fundamental driven. We keep hearing contradicting comment from different analyst, fund manager and experts. So, do be clear of your investment objective and game plan, before dive into any purchase or sale.

MIDAS share price has fallen a lot. From the chairman incident to current credit crisis, it just keep falling. However, I do believe the fundamental is still improving. The new contract might come slower now, but as long as the company show distinct competency, investor should be still alright.

In recent announcement,

Contract awarded by Alstom Transport (“Alstom”) to supply 140 Tram Sets for the RS-Citadis Project

The company has tie up with Siemens and this new contract further show the quality of its product. Base in low cost location like China and with the European quality, I really see a great future for the company.

Within China, the various tie up and joint venture should enable the group to get more government contract. China is planing for big spending on railway, the future is going to be brighter. Outside China, the group is slowly penetrating into Euro market. This should serve as diversification.

I don't have figure and figure at the current climate seems mean nothing. New contract might be slowing, loan might be harder to get. The only comforting part for investor is the company is still making progress of supplying product for more and more companies.

Oil hit new low

Oil price dive below USD59 now. It is really a good news for everybody, since the transport cost is a big component on everyone's spending. The food price is also related to transport cost.

From 140 to 59, what has actually changed?

- Economy outlook
- Reduced demand

Actually these are the trigger point for speculative fund to exit the market. The actual demand does not reduce overnight. That's how the bubble burst. When the bubble is growing, everyone just keep pumping air. When it burst, everything suddenly is not true anymore.

Investor should not blindly chase the bubble.

Massive China $600 bil stimulus package

China just announced the $600 billion economy stimulus package. This is quite a big surprise to everyone, I think. Not long ago, they are still trying to control the inflation, now it is a really massive stimulus package.

The purpose is to increase the domestic demand, in order to offset the slow down export sector. The aim of the package is quite clear, but the details are not. It is really a massive amount of money. If used at the right place, it is possible to really spur the internal demand.

Spending on infrastructure and rural area has a long lasting effect on the overall demand. But, whether it is too late to prop up the demand remain to be seem.

Of course, this is good for China stock. Especially the infrastructure stock like MIDAS, property stock. Consumer stocks were also get the benefit. Avoid the export oriented stock.

FerroChina trigger cashflow concern – Part 3: MIDAS, Hongwei

MIDAS
In the last half year result.

Asset:
Cash and equivalent 64mil
Trade and receivable 44mil

Amount repayable in a year 18mil (secured)

Cash before working capital 11mil
Cash after working capital and others 10mil
Net increase in cash for half year 6mil

The company has little debt and sufficient cashflow. No cause for concern.

Hongwei

This is another harshly battered down fiber stock. In the past half year.

Cash and deposit 66mil
Trade receivable 97mil

Amount repayable in a year 48mil

Cash before working capital change 36mil
Cash after working capital and others -17mil (cash outflow, because increase of trade receivable by 38mil)

Just by using the cash on hand, it is more than enough to pay off the debt. The negative cashflow is because of the increase of trade receivable as a result of sales increase. Looking at current environment, there might be impact on collection. We have to see the impact on next quarter announcement. The significant drop in oil price is a good news to fiber stock, but if the customer sales is geared towards export, there would be impact on the sales order.

FerroChina trigger cashflow concern – Part 2: Hongguo, Synear, Celestial

Hongguo

In the latest second half result.

Asset:
Cash and equivalent 66mil
Trade receivable 128mil
FD 16mil

Current liabilities 144mil
Amount payable in one year 16mil (secured by FD)

Operating cashflow before working capital 81mil
Net cash from operating activities 10mil

Assume the trade receivable is easily collectable, the company should have sufficient cash to cover the liabilities. After the working capital change, the net cashflow is only 10mil. The cash are converted into form of inventories. Retail consumption might slow, but there shouldn't be a sharp drop till the company cannot convert the inventories into cash. Looks alright.

Synear

In the latest half year result.

Asset:
Trade receivable 261mil
Cash bank balance 1335mil

Current liabilities 285mil
Amount payable in one year 20mil

Cash from operation 162mil
Cash used in investing 652mil
Cash used in financing 150mil

The negative cashflow is the result of aggressive capacity expansion. The operating cashflow remain healthy, but negative consumer sentiment might affect sales. Earning might come down but loss is unexpected. The cash balance should last the company quite a while. Once the new factory is running and consumption recover, we might see a substantial surge of earning. The cashflow is not a concern to me.

Celestial

The company has two major business – industrial soy product and consumer product. In the last half year result.

Asset:
Cash and equivalent 1651mil
Trade and other receivable 488mil

Current liabilities 1690mil (Borrowing of 1277mil)
Amount repayable in one year 1257mil (Convertible bond)

Operating cashflow before working capital 352mil
Cash from operation 173mil
Cash used in financing activities 140mil

Looking at the convertible bond, it is possible for holder to do early redempt at June 2009. The holders are unlikely to convert them to share now given the market condition. Worst case if the bond is redempted after a year, the current cash should be sufficient to buffer it. Given the business is cash generating, this shall not be a big concern.

FerroChina trigger cashflow concern – Part 1: FerroChina, China Hongxing

China stock suffered another hit after Ferro China announced that the company is unable to repay working capital loan of 706 million and could default on another 4.52 billion of debt. Obviously, the company is unable to generate cash fast enough to repay debt dued. Give the economic condition and credit crunch, this became a big issue.

Looking at the company last half year result. (Figures in RMB)
Revenue rose to 6,516mil (+206%)
Net profit rose to 418.9mil (+186%)
EPS is 50.52 cents (+43%)

Selling and distribution expenses 25.6mil (+40%)
Administrative expense 64.2mil (+94%)
Finance expense 158.7mil (+174%)
Income tax expense 41mil (+327%)
Net debt/equity 55.7%

The usual numbers show a strong growth. However, the increase of expenses also quite staggering. If you just focus on the profit growth, you might thing the company is doing quite well. Let's look at the liabilities and cashflow.

Current liabilities 6,223mil
Non current liabilities 2,437mil
Amount payable in a year 2,336mil

Operating cashflow before working capital 611mil
Net cash from operating actitivites 198mil
Cash used in investing activities 948mil
Cash from financing activities 709mil
Cash at end of period 125mil
Fixed deposit 915mil

I didn't drill down further to their funding approach and timeline. But if you look at the figures above, you shall be alerted the company might have funding problem. The current cash, FD and operating cashflow is not enough to meet the payable within a year.

Looking at the profit figure is not enough, investor should also study the company cashflow. I am usually not comfortable investing in company with fair amount of debt. The use of debt would enhance the shareholder return, but at the same time increase the risk of default. As a result, I am more favourable to consumer stock which generate strong cashflow.

Questions were raising against other China companies whether they might hit the liquidity problem. Let's take a look at the companies inside my portfolio.

China Hongxing

I have done the Q2 review two months back. This round only focus on the liabilities and cashflow.

Current asset (all figures in RMB)
Bank and cash balance 2,201mil

Current liabilities 227mil
Amount payable in a year 18mil

Operating profit before working capital (6 months) 280mil
Cash used in operating activities (263mil)

The company have negative cashflow due to significant increase in prepayment, deposit and other receivable 592mil. The money was advanced to distributors to set up 219 new stores for six months ended June 2008. Taking into consideration of investing and financian activities, company has 392mil negative cashflow.

As the company complete the store expansion this year, the cash advancement amount should reduce. Together with distributors paying back the amount. Next year, the company should turn cashflow positive. Furthermore, there is cash balance of 2,201mil. No big concern.

Others in part 2 and 3...

Reflection on the financial turmoil

For the past 1 year, the global financial market was in turmoil. Now, it is still very unstable. It started as an US problem and later the contagious effect spread to the whole world.

It started long way back when US housing market was booming. The bank packaged many creative product like subprime loan. Financial institution lend to those without good credit record, package the loan into securities and sell to investor. When the subprime borrower default, it cause ripple effect on financial market.

Bank bought those subprime product suffered big loss and need to recapitalise. Housing market slump and cause more borrower to default. Credit become precious and banks became careful in lending to each other. The lack of credit would choke the economy and this became a very serious problem. When the banks are not functioning, the economy is not functioning.

The main problems are credit crunch and mortgage base asset losses. Housing market suffered and economy outlook looks dark. Therefore stock market keep plunging, in sync with the outlook. It is like a vicious cycle, the falling asset price cause more loss and in turn cause asset price to fall further. We are at the so called de-leveraging cycle. It is very painful to unwind all the credit in such a short frame of time. Because of the weak outlook, the commodity price - hard or soft is coming down. As the investors turn risk adversed, attention is on gold and this is the only asset where price is going up.

The cyclical industry turns down first – properties, shipping etc. When property was hot and money is easy, when the foreigner are buying high end property like no tomorrow, analyst keep adjusting their forecast and target price. The ever surging commodity price – oil, palm oil, soya bean, corn, iron ore cause port congestion, analyst foresee a long time boom, thus shipping stock flying high. Look at what happen to them? Analyst forecast is usually too reactive.

Now, the construction is not doing well. Financial stocks which are tied to the health of economy are coming down. Consumer stock is also expected to be affected because of the spending slow down. However, China didn't show sign of slowing down. I read today's chinese newspaper, the China consumer is much insulated from the external shock and is still spending. The China consumer stock might be more resilient than what we think. The defensive sector are telco, consumer staple, transport and monopoly. Since no matter which cycle you are in, you still have to use their service or products.

• Watch out for real bargain. Company with unique competitive strength and brand, is able to survive the bad time should come back stronger.

• Avoid cyclical company, especially those with analyst downgrade. It is hard to swim against the current. Only exception is you have strong belief in your stock picking skill

• Avoid the company with high gearing. This is usually my key stock selection criteria and it save you during the bad time.

• Avoid buying too soon and too much. Wait for the sky to be clearer and the financial market has really stabilized.

• Think independently, but don't lose sight on the economy implication and what others are doing.

Market thoughts @ 09 Oct 08

After a few days of selling, STI finally staged a rebound of 69.10 to 2,102.71. This is after the rate cut from several central bank. Although the rate cut is good news, but in the developed market, the market selling continues. The financial and credit crisis is serious, but the real problem is seems to be fear or lack of confidence. If US fall into a deep recession, the stock price is going to fall a lot. Some analyst cautious the use of forward PE at the time when the growth prospect is not clear.

When people are selling, Warren Buffett started buying aggressively. He bought General Electric and Goldman Sachs. His principal is simple, invest in the business he can understand and significantly undervalued for a long term. When the cycle turns up, the investment could be worth much much more. Crisis mean buying time for him. To the others, this principle seems simple yet difficult to apply. The human nature of risk aversion prevent you to participate in bargain hunting, you would cut loss instead.

The growth picture is not going to improve anytime soon, some advocate to wait and see until 2Q 09. I tend to agree with this view point. Even though the market seems to be cheap now, before the sanity returns, most probably we would see more sell off rather than big gain. So, no worry here, waiting for more opportunities. The only question now is whether what to buy, what would give a significant upside when the cycle turns? I am still searching. The strategy is to concentrate on a few best idea and hope for the best in 3 years time.

By the way, there are few interesting events in the market recently.

Guangzhao IFB - Trading suspended now for the company. This is after the company defaulted on one of the convertible note issued. They are waiting for the fresh money to come in to support the bond redemption. This highlights the potential risk of investing in small and unproven company. The business model is very interesting, but the cashflow is negative. Before the real money comes in, they run out of fund and need to pay back debt. Yet to see if anybody come to rescue.

SGX - It is like the barometer of Singapore stock market. So many analysts are calling for a sell now, since the trading volume is going to reduce amid the bear market. This is true without considering the potential of the company on the long run. It is like you sell, I sell situation now. Watch out for it, when the tide turns, analyst is going to come out and call for strong buy again.

Celestial Nutrifood - The tainted milk scandal in China is supposed to boost the soya bean sales. Even starbucks also start using soya milk as a replacement. The other good news is the falling of commodity price. The two factors seem favourable but the stock cannot escape the broad base sell off we are having now. The inevitable down turn might hurt consumer sentiment and reduce consumption. Although the company is poised to do well in the long run.

High note 5 - Know what you have invested

Recently, the hottest news in the press is about High Note 5 saga. As a result of bankruptcy of Lehman Brothers, the investors suddenly discover that the investment they thought was safe is actually not. Worse still, some lost their life long saving.

It is not exactly clear on the terms and condition of the product. But in a nut shell, these are the facts gathered on the web:
- The structured product is linked to a basket of banks and when the credit event trigger, investor is likely to lose money.
- If everything is fine, we get the 5% interest from this product.
- It is supposed to be a credit default swap(CDS) in disguise

A structured product is a combination of financial instrument to be sold as a package. They can package a lot of different instrument together and sell to investors. The key selling point is enhanced yield. This is the result of the income that some underlying instrument generates.

CDS is a form of insurance. The seller act as the insurance company, gives the buyer protection in return of a premium. If nothing happen on the protected asset, seller get to keep the premium.

The auntie uncle who bought the product was sold on the promise of 5% interest return. It is quite a high return consider the bank deposit interest rate in Singapore. Maybe the relationship manager did explain about the product features. However, how do you expect the man on street to understand CDS and credit event? Furthermore, the reference entities are all big names, which unlikely to fail.

The sales person often highlight more on upside rather than downside. Beside this, getting the customer to understand the product is also a tough job. More than often, if you cannot convice them, confuse them. Many investor claims that they are not aware that they could lose all the investment amount. It is either a form of ignorance or the risk is being down played. From another perspective, it is like putting all money into one basket. This basket was thought to be very safe, but is actually not.

Not an easy problem to solve.
- Bank has to refrain selling complicated product to people who cannot appreciate the product risk.
- There has to be constant education program for people to recognise that high risk high return.

When the sales person trying to sell you product, ask yourself, do you really understand the product. What I always believe is if it is too good to be truth, then it most probably is.

The current US financial system problem

Yesterday I read a news article from WSJ, it gives a great explanation on what happened recently in US and the seriousness of the problem. A good read: http://online.wsj.com/article/SB122169431617549947.html

We seems to have gone from over leveraging to aggressive de-leveraging. The new FED measure actually aims at clean up all the toxic asset and let bank back to conventional lending-borrowing. Then, the credit crisis that choke the economy could be over.

Super panic about AIG

Look at the queue outside the AIA tower, we know that many of them are in panic mode regarding their insurance policy and the cash value of their insurance. Many took the redeem first, think later approach when fear and panic set in. It is kind of human instinct to do that, just like stock market.

Of course, people who hold on to the AIA policy would be afraid, including me. But, we have to analyse the situation. AIA as a company itself, under the MAS regulation, should have operate within the guideline. From their statement, they have adequate fund to cover all the policy holder.

On a separate note, AIG is such an american icon, the FED won't allow a sudden collapse. This is hard to articulate, but it is a logical step for them. So, I am not that worried with my AIA policy.

This is human behaviour which could explain the current market rout. Now, it is driven by news and not really by valuation. We are just at one extreme end of the market cycle. But buying in now, means you have to endure the volatility and your nature fear. Unless you have mind of steel, you better stay sideline for now. Give it another 3 months and see how is the situation. Market is not likely to just recover suddenly, expecting more "collapse" maybe. Sit tight...

Lehman and Merrill Lynch in trouble

The shocking news today is Lehman to file for bankruptcy and Merrill Lynch to be bought over by Bank of America. The wall street fear has became a reality and financial market keep tumbling. It looks like the credit crisis would deepen before it gets any better. Before the light at the end of tunnel is sighted, stock market is going to fall whenever there is bad news. It looks like a knee jerk reaction now. The Asia market is reacting to US market news more violently than US itself.

At this juncture, the market direction is unclear. We are at the unique situation now, which Greenspan said is a serious crisis. As we don't know how worse it could go, holding back any buying decision seems to be the only wise thing to do now. Cheap could become cheaper, remember. There are still things you can do. Brush up your investment skill by reading more books and perform some reflection on your investment decision. This would aid the future adventure.

There are many short sellers out there who short on any bad news that come out from the US. I met an ex Uni friend who does regular trading. He mainly doing shorting now. That could explain the increased volatility we have witnessed. The problem with trading is not a few times of continuous win. It is the challenge of doing it right most of the time. One big bet that goes wrong could bring you back to ground.

I am also taking my time to go through my existing holding to eliminate the weak performer and search for future strong performer. The good part about bear market is you can take your own sweet time to do research and you are buying on cheap, if not, super cheap.

Trapped in bear trend

The US financial sector is in serious turmoil, because of the excess built up over the years and the creative bankers. When sub prime issue first came into picture, nobody expects this bad, or at least not the man on street. Now, it seems like the sub prime is only the trigger of the bear. We are not economist or expert(even the expert not always right), nobody could predict when it would end, earning downgrade is the in thing now.

The stock is now on fire sales, which is rare over past few years. The valuation is so depressed now, in my view, the risk of holding equity for a period of 3 to 5 years is significantly reduced. In fact, you have a high chance to make big profit (of course, not immediately). Financial market is a reflection of human instinct which tends to overshoot on both side - top and bottom. People still expect the equity price to fall, therefore there is no interest in stock. Hence, the forever falling price. Maybe 3 years later, when you look back, you would regret that you missed such a great opportunity to accumulate stock.

However, not all the stocks are equal, at this tough time, it is a real test to separate the boys and men. Look at the company competitive position, market leadership and future plan, to give a clear idea of whether this is a gem being indiscriminately sold down. Buy on cheap and wait.

The equity price won't stay at this depressed level forever, someday when the confidence return, the rebound could be significant. Although economy goes through up and down cycle, in the long run, economy is set to grow. Because the human population keep growing. Good company would earn more profit and stock price would follow.

Bargain is everywhere now. Of course, everybody is waiting to buy it even cheaper when it fall further. I am a long term China consumer bull, the consumer stock looks very attractive now. Even the blue chips are also selling at reasonable price!

China Sports International 2008 Q2 result

It is interesting to evaluate other sports player result also. Following is the China Sports International result for Q2.

Revenue +50%
Cost of sales +49.9% (in sync with revenue)
Selling and distribution expense +281.5%
Administrative expense +387.3%
Profit before tax increased only 25.7% as a result of high expenses incurred. The group is probably trying to put resource to grow faster.
Group has no debt

Look at cashflow statement, profit before tax +25.7%
Net cash generated from operation 123,932k RMB.
Minimum cash used in investing and financing activities
Cash at end of period 535,293k RMB. Strong cash position would allow them to grow aggresively.
Q2 EPS number fall from 9.92cts to 8.7cts. But this should not be a cause of concern, since company is newly listed and this is calculated using pre-invitation shares.

Revenue increase is evident. The cash raised during IPO was put into work and allow faster growth. The widen distribution network also contribute to the significant increase of operating expenses. This is normal. The rise of average selling price is a good sign the brand is gaining traction. OEM business seems to be getting the margin squeeze. Building own brand is the way to go.

The group believe that the Beijing Olympic would raise the sports awareness and contribute to long term growth of sports sector. This might be true, but we are not sure whether there is olympics overhang. Since the group was doing OEM for Kappa, they are into the fashion sports segment currently. I once read few reports about the fashion sports niche which Kappa is doing really well. People treat sports shoe as part of the fashion. The group is focusing on this niche but is really a small player in this aspect, although story looks promising. The tie up with sohu and CCTV might further raise the brand awareness. In overall, the prospect looks bright, but bear in mind of their size.

Looking at current market condition, everything is cheap. Investor can afford to cherry pick good deal. Let's assume this quarter of EPS 8.7cts is consistent across all quarters – 34.8cts RMB. This translate to 7.15cts SGD. At today closing of 0.32, it selling at PE of 4.47 only! What a steal. However, keep in mind the current market sentiment, china share situation and the inflation environment, one might choose to go in or wait for a while.

Not all is lost

It is kind of scary to look at the share price nowadays. If you bother to look at your share holding everyday, it is emotional challenging to look at the paper lost that you have right now. The stock once being a darling is fallen hard everyday.

But not all is lost, if you still hold till now, there is no strong reason for you to let go. Unless you found a better opportunity. The bear is surprisingly long, but bear in mind that on long term, the economy is growing. Stock price would trend upwards. Now is only the speed bump. Once we get over the crisis, market should stage a great rebound.

We saw many earning downgrade and true enough, some companies did suffer from the credit crunch and high inflation. But without going through the bear to correct the excess, we risk another dot com bubble burst. So, just hang on.

What can be done now is
(1) Hold on tight
(2) Identify great stock selling at fire sales price

Even you are not a great stock picker, go for the big cap/blue chip. The reward should compensate for the nights of sleep that you lost. Look at the company factor and invest with a long term view, as the great stock investors have done, it should be alright.

Celestial Nutrifood 2008 Q2 result

Soy bean price has risen a lot together with other commodity price. Let's look at how Celestial is doing.

Sales +37.1%
Cost of sales +46.5%
Gross profit +22.2% (cost increase faster than sales)
Distribution and Administrative expenses +53.8% and +44.3% respectively
Income tax +50%
Net profit +11.7% (clearly the high cost and tax weight the profit down)
Cashflow before working capital change +14.7% (the business is generating strong cash)
EPS increase slightly to 0.17 RMB

When we look at the sales mix, the industrial product sales grow faster. Gross profit margin dropped because of the higher raw material price and change of sales mix. Group has put in measure to mitigate the cost pressure. Selling price of most health food and beverage increased more than 20%, yet it still achieve growth, this might signal better pricing power.

There is increased plant utilisation of industrial protein business. Biochemical feedstuff and lecithin business also achieved strong growth. The component of cost increase include advertising and promotion, transportation and other distribution expense. The intense competition could be another reason. The administrative expense include donation to Sichuan earthquake, otherwise it would be lower. Increase in income tax also erode the earning.

The directors believed high raw material cost continue be a concern. The group is to launch four new health food and beverage in 2008.

The group continue to grow despite rising raw material cost. They also managed to increase price without affect the sales severely. Overall, it is a good result. Since the price of commodity is on down trend now, there is high change Celestial would do even better in the coming quarter. It does look interesting at this level.

China Hongxing 2008 Q2 result

The quarterly reporting season is back. It is number crunching time.

Revenue +53.1%
Gross profit +53.8
Selling and distribution expense +83% (so high)
Income tax +108%
Profit for shareholder +31% (obviously the cost and tax weight the profit down)

Bank balance 2,201,588k RMB vs current liabilities 227,954k RMB (more than enough to cover the liabilities)
There is an increasing cashflow to 150,676k RMB. But after adjusting receivables, there is net cash outflow from operating activities. Not a big problem, since company has so much cash.
EPS increased to 4.37 RMB cent, growth of 8.7%

Apparel and accessories sales is catching up. There is a decrease of gross margin. Expenses increased in line with outlet expansion and promotion activities. The environment is still favourable for sporting goods, but the group is mindful of the inflation situation which could affect the raw material price.

The growth is still on track, strong growth is still expected. I am assuming they would continue to growth at the 30% rate per year. However, inflation has indeed caught up with many China companies now. I still prefer company with strong brand like hongxing. There is the only way to mitigate the cost pressure. They are having some Olympic advertising, hopefully it would raise further awareness on the group's product. The sporting good bull seems to still going strong.

Consider the quarterly earning of 4.37 cents. Full year EPS should be 17.48 cents, which is 3.51 SGD cents. At today's closing of 0.49, it is selling at forecast PE of 13.9. If the earning accelerated, we are looking at even lower PE. I think it is quite reasonable for a company with high growth. If we compare the expected growth rate of 30% against this PE, it is really cheap. Of course, the market is going through the PE compression. To invest or not, depends on whether you are taking long term view of the business.

Hongguo 2008 Q2 result

Hongguo just released the Q2 result of the year.

Revenue +13% to 188,128k RMB
Cost of sales only increased 6%
Gross profit +23%
But the selling and distribution cost +34% and administrative expense +18%
As the result, profit for quarter only +4%
Cashflow remain healthy but after consider the working capital, cashflow is negative
EPS only increased 4% to 7.03 RMB cents

Gross margin improved from 41.6% to 45.2% implying stronger brand value. Due to the expansion and hiring of staff, the cost escalated. The result is quite a disappointment from me, since the EPS growth is only 4%. Although this looks like one off expense resultant from the expansion strategy. But the high inflation in China might have already caught many companies in surprise.

Company is to continue with the retail expansion and might introduce a new brand. Assuming the cost would stable in the second half of the year. Assume quarterly earning does not grow much, full year EPS is 4 x 7.03 cents = RMB 28 cents = SGD 5.6 cents. Currently, it is selling at 0.36, which means PE of 6. Still a buy. When the market recover, the stock you bought at this kind of depressed level should give a good return.

Oceanus, first glance

Oceanus released the 1st half result of 2008.

Sales surged 349% to RMB 181.4m
Profit before tax and goodwill up 303% to RMB180.4m
Plan to triple production capacity to 40,000 tanks in next 18 months

The group is specialised in producing premium Japanse Abalone in China. Accordingly, the cost is under control and group has cost advantage against the competitors. The group recorded a goodwill write off due to the RTO it has undertaken. This is an accounting item and does not affect cashflow.

The outlook remain robust and due to the shortage of wild abalone, the group is ramping up the production capacity quickly. The plan is to grow the capacity quickly and move into downstream processing to improve the margin.

The group looks interesting to me right from the beginning. These are the interesting points:
Chinese consumption of abalone is set to grow strongly
The group is one of the top producer and plan to grow capacity rapidly
Plan to move to downstream to capture even higher market share

Things look rosy for the group in the coming years. But the risk with agri stock remained. Comparing the current valuation against the projected growth, it does look attractive. More research needs to be done to uncover the competitive advantage and more facts.

Thoughts on China Angel profit guidance

I read the recent China Angel profit guidance document with interest. The following points were quoted:

Following the preliminary assessment, group expect a net loss in 2Q2008 compared to profit in the same period last year. With their expansion plan, higher operating overhead and operating cost is incurred. There is rising raw material and labour cost.

It looks like the inflation has indeed taken its toll on the consumer company. The rising raw material and labour cost is eroding the profit margin. There is a limit to how fast the company can raise the selling price, especially in a very competitive environment.

Then, what should those people with China consumer stock do? Do nothing. We know the cost is rising, that's why the stocks were battered down. But, I don't expect further escalation of cost. I feel we already reach the peak of current cycle. So, the cost should at least come down in the next year or so. Selling at this juncture won't be a wise decision. We are waiting for the rebound now.

Crude oil price retreated

The market is showing sign of life again when crude oil price retreated significantly and couple with some other positive news. I guess we can be grateful that it doesn't add to the inflationary pressure further. So our transport cost and bread don't go up again.

But, the worse is not over yet, at least majority of the people believe so. US economy and the banking system is still in uncertain stage. Inflation pressure and credit crunch still hurting growth. No sign we are out of bear yet and doing nothing might be the best strategy. Take this time to read some more books to enhance your stock picking skill or your mindset might be a better option.

No hurry to pick up cheap stock, with the fear that it might go cheaper. Anyway, if you whole heartedly believe in your judgment and don't bother with the short term volatility, please go ahead. I believe by 3rd quarter or end of the year, the situation might be clearer.

Is commodity fund a good investment now?

I chatted with a friend a couple of weeks ago. He was asking whether did I buy the commodity fund? I said no. Nowadays, I try not to go into exotic products, which I can't really predict the cycle. Maybe if you went in 1 year back, you are laughing non stop now.

But for the new investor, refrain from going into commodity fund should be the strategy. "What goes up must come down", everyone should remember this. Maybe we are really in the commodity super bull cycle. However, buying at the current time, the risk out weight the potential gain.

The high inflation, high commodity price should led to reduce demand. The growth is also slowing. There isn't a favourable factor to consider going into commodity now.

Random thoughts on market 13 July

The stock market went from bad to worse. Dow dropped another 100 points and looks to break the 11,000 level. This was caused by IndyMac incident, a name you and I not familiar with. Could more write down on the way? Yeah, if the situation does get worsen, then it might just go a bit lower.

The valuation now has gone from overvalued to undervalued. People seems to have build a high level of risk premium in the equity price. You just find your stocks keep dropping day by day. But my gut feel is if we are not at the bottom, we should be near there. Valuation is at rock bottom and the Asia growth story is not going to taper off just like that. It is bargain time and refrain from buying too aggressively, because you might be caught off guard by more bad news. What I would do is just to wait patiently, and if it really get ridiculous, I might be going in again to grab some. Just make sure you are not going to use the money you want to buy stock in 3 years time.

The growth outlook just got a little bit dimmer. How much the earning would fall is anyone's guess. I have seen quite a fair bit of earning downgrade already happened. The once high flying stock was brought back to earth, follow by the market condition and analyst downgrade. The problem with analyst is they tend to magnify the stock price swing. However, that is their job.

Investors are not going to assign high valuation to even the great stock. So, tread with care. You look at Sino Env and Swiber, the earning outlook still look pretty robust, but the valuation has come down really a lot. Would the environmental concern in China goes away when US economy is down? Not likely. Would the oil major stop their exploration work around the Asia Pacific if oil price down at $100? Not likely. Having said that, high beta stock is not for the faint hearted.

Water shortage, invest in water treatment stock?

Today, I read two analyst reports about the Hyflux and Epure from different broker. The timing is quite coincident that they feature the water stock on the same day. Water related stock has been quite a hot sector, on and off. Since year 2004 till now, I think. But if you bother to check on their performance, think one should be disappointed.

When the sector is hot(a usual stock market behaviour), the valuation get a little bit out of hand. At the current market condition, every stock is back on ground again. Often we hear, the world is short of water etc etc. It is logical to think the water related stock would do well.

Think again. If you are hoping for consistent earning growth, maybe this is not your cup of tea. Water treatment company operate on projects and the earning could fluctuate from quarter to quarter. Many wants to go into operating treatment plant and receiving recurrent cashflow. However, that also means they have to invest heavily upfront. It is a capital intensive business.

One should really think long term to do well. Having said that, the two companies mentioned seem to be the strongest on SGX right now.

Stock market roundup 29 June 08

Last Friday, Dow drop another 100 points. I am not Oracle, so not possible to predict the future trend and whether any turn around is inside. But, what I do believe is, we are in another cycle of pessimism. Meaning? It means stock is likely to drift lower further. Sentiment is very powerful in stock market. No matter how great is the stock, when the feel is not right, it would just go together with the general market.

Sentiment aside, the outlook has indeed turned dimmer. They are couple of reasons. Credit crunch (more financial write down?), fallen US dollar, rising inflation (commodity, oil). Maybe so much excess has been built up over the years, and we need a recession to correct all these? Hopefully the China oil price hike would help to trim the demand. Possible for them to curb the speculative oil trading? This is one of the suggestion they quoted, but difficult to implement in this free market. Everybody should cut down consumption, in order to control this.

I shall watch on the sideline, until things are clear. It is impossible to catch the bottom. But I do believe, the more it fall, it is good for long term investor. But, you really need to work hard, to pick the right stock.

China oil price hike is good for the economy

China decided to hike the oil price last week, finally. It was a good move.

Usually, when the fuel price increases, the inflation would follow. Because the logistic cost would go up and that's not good for the general economy. But this time round, the situation is a bit different.

The current oil price is driven by speculative interest, geo political uncertainties and strong demand. If the government does not do something, the oil price might just keep increasing and hurt the world economy. After adjusting for the oil price, there would be a short term inflation spike, but it should help to curb the oil price increase in long run. Hopefully, the price would return to sanity soon.

In the short term, continuous financial market volatility seems to be the best bet.

The fallen rice price

It was in the news. After a few months of surge, the rice price has started to go down now. Actually, there was no shortage of supply. But because of the kiasu-ism of some countries which wants to stock up the rice, it cause the temporary demand surge. Once they have stocked up enough rice and new season harvest going into market, those restrictions have been removed slowly. We shall see the continuous fall of the rice price, which is a good news to the investor. Because we need Asia to remain socially stable.

Day would come for commodities. There would be an end to the commodity bull, the only million dollar question is when? If the following factors which driving up the price start to wane, then we shall see rationale return to the market.

1. Speculative buying by hedge fund and investor
2. Increase demand all over the world
3. The bio fuel madness
4. Shortage of farm land

All these could be summarized to only one factor - demand. If the inflation goes out of hand, there won't be long when demand would reduce drastically.

China New Town unappreciated

Last Friday, Dow closed at the positive region, the coming week should see some rebound. After that, the bad news might get investor nervous again.

The only transaction I did last month was to buy China New Town share. After watching it plunging from 80 cents to near 20 cents, I think it is a good buy. My buying time also coincide with major shareholder purchase.

As highlighted in the listing prospectus before, one of the risk is investor don't understand the business and don't know how to value it. It looks like that is the case right now. Surprisingly no analyst has started coverage on the stock.

When the company decided to list in Singapore, obviously it did not aim to fail. It has an ambitious plan and unique business model. The institution demand was huge and they count the major fund manager as investor. But it was a bad timing, the subprime crisis erupted and the lumpy earning disappoint the investor. Maybe those are just excuses, since if you really understand what they are doing, then you should be aware that they have funding risk and have to wait for land sales for revenue.

I bought at 0.21 which I think is relatively cheap. However, I didn't really go and calculate how much the company worth. The usual way for property stock valuation is to take the RNAV. But, since they get the money after land sales, is there a proper valuation of the current land? I have no answer, but buying a small stake for the future. Key reasons:

- After fallen more than 75%, I think the downside is limited. If the fortune turns, it should perform strongly
- Major shareholder purchase.
- Once the town they developed maturing in years to come, the land they hold would rise in value

It is a long term play. I think patience would pay off, we have to watch out for future development.

China Taisan IPO

China Taisan Technology IPO comprises of
- 8,000,000 Offer Shares at S$0.24 each by way of public offer; and
- 225,000,000 Placement Shares at S$0.24 each by way of placement

China Taisan Technology Group Holdings Limited (”China Taisan”) is one of the leading manufacturers in the PRC of knitted fabrics used for sports and leisure apparel. Knitted fabrics are stretchable and mostly used in sports and leisure apparel.

They are approved suppliers of fabrics used in the manufacturing of apparel for reputable international and local sports and leisure apparel brands such as Umbro, Nike, Puma, Anta (安踏), Kappa, Lotto, Wanjielong(万杰隆) and E•Land.

Competitive strength
- approved suppliers for reputable international and local apparel brands
- strong R&D capabilities
- established track record and reputation
- experienced management team
- strategically located in Jinjiang City
- advanced technologies and equipment in our production process
- able to manufacture products that conform to various international standards

Risk
- may be affected by major disruptions and accidents at our production facility
- vulnerable to fluctuations in polyester yarn prices
- dependent on the protection of our proprietary technical know-how
- dependent on the apparel industry
- R&D efforts may not lead to successful development and/or commercialisation of new products
- lack of long-term purchase orders or commitments from customers could adversely affect our Group’s business if demand is reduced
- dependent on certain key personnel for our continued success

Facts

NAV after post invitation 927,900,000 shares : 10.75cts
Historical EPS for 704,700,000 Shares : 5.11cts
Historical PE : 4.69
EPS for 927,900,000 shares : 3.88cts
PE base on above : 6.19
Market capitalization base on offer price : 222.7 million

Base on market cap, it is bigger than C&G Industrial Holdings which is trading at PE of 3.6 and smaller than China Sky which trade at PE of 6.0. I can say 6.19 is not very expensive, but not cheap either compare to the peers. Business wise, they are not direct comparable, since China Taisan operate in performance fabric segment.

Textile and fiber stocks have not received favourable response on SGX. Unless you have long investment horizon, oil price increase would make you nervous.

Best performing unit trust could be your worst investment

I read in the news last week. The worst may not be over for Vietnam’s stock market. Morgan Stanley said Vietnam was heading for a “currency crisis” and Fitch Ratings cut its outlook on the country’s debt rating. The country is experiencing strong inflation and maybe overheating. The once best performing stock index has fallen 55% this year.

I remember that when the market was best performing among the region, the market keep going up and the foreign investor money keep pouring in. It was similar with India, when the valuation is no longer cheap, the money inflow keep the market up.

If we back track a few years more, we can remember the year 2000 bubble. The higher the market went, the more money people pour in until the tipping point. I think at that time, banks were aggressively pushing technology related unit trust and result in many investors losing money. That might explain the poor reputation of unit trust as an investment approach in the local market.

Investor who bought the Vietnam fund might be sitting on loses now. As the over valuation unwind continues, it has more downside to go. That brings an interesting questions: Why did fund house launch fund at the peak of the cycle? Many times, we can see the peak of the market when there are many new fund launch. I remember we had properties fund, infrastructure fund, climate change fund etc etc.

We can look at it using common sense. The business of fund management is to get as many people as possible to invest in the fund. As the asset under management grow, the annual management fee also grow. So, it is in the fund manager interest to attract new investment and to grow the portfolio.

So, when is the good time to attract new investment money? That's when the investor interest is the highest. For example, when properties market was hot, many people wants to get into properties investment. So, that's the good time to launch properties related fund and the brochure would tell you that it present a strong long term investment case. Most of the time, people get attracted by new fund launch and stuck with the under performing fund for many years.

Timing does matter in unit trust. Before buying, it is good to get some basic information about the region you are investing, whether it is cheap or expensive. As we don't usually buy/sell unit trust frequently, buying at low is safer than when the market has run up a lot. Some site actually offers information on market PE which could be an useful indicator.

Otherwise, better to invest in global diversified fund than special sector fund. From my experience, the sector or single country fund does not necessary offer superior return, but you have to bear extra risk. So, avoid chasing hot fund, that could be your worst investment.

Investment strategy for the second half of 2008

This is not meant to be a long analysis article. At the point of writing, Dow is down 134 for the Friday trading. If not surprise or bargain hunting, it would most likely ended the week at the lowest point. After the relief rally, the stock market is again focusing on the bad news. Credit crunch seems to be over but the inflation worry persist.

At this point, these are the most prominent worries:
- High inflation or stagflation which erode the spending power
- High oil price and commodities price which have cascading negative effect on the overall economy
- The falling US dollar which could magnify the effect of above two

This is definitely not the situation that we are hoping for. But, now is also one of the moment where you can pick stock bargain. Look at CMT, the largest REIT in Singapore, it has acquired the Atrium at Orchard to be linked with Plaza Singapura. This would certainly enhance the rental return even more.

So, don't worry too much, just focus on evaluating the company fundamental to pick winning stock. In my opinion, there aren't many more downside risks, and the reward is favorable for the long term investor. I am definitely looking at picking up stock in my watch list when they are on sale again.

In the second half of 2008, there is only 50% chance that market would start to recover strongly. We shall see better time into year 2009.

How to accumulate 1 million?

Do you ever have the dream to become a millionaire or you aspired to retire rich as a millionaire? That's not a dream. It is certainly achievable through good financial planning. But, you have to start early. As early as possible and let the magic of compounding does its work.

Let's say you are not that investment savvy. You can still invest in a global diversified equity portfolio. If you are more adventurous, investing in Asia equity portfolio might do the job faster.

How does it work? First, you need some patience. Second, start investing now at fixed amount regularly. The following example illustrates that a person with initial amount of $2,000, investing $500 per month, for a period of 35 years at the rate of return 8%(common to equity portfolio) would be able to get 1 million dollars. If you start at the age of 30, you should be able to retire rich at 65 years old. If you are lucky enough and picked a good fund, you might be able to achieve that way ahead of time.

Banyan Tree – The luxury tree

Banyan Tree posted 38% increase in Q1 net profit for FY08. Total revenue rose 34% because of strong growth in hotel investment and property sales. The company is expanding the resort and hotel business into new location.

The hotel business remain stable despite the cloudy global economic environment. They expect good response to the branded residence sales and property sales. In the result presentation, management has shown the planned expansion strategy. It looks pretty impressive. There should be a significant growth on the number of hotel they are going to manage.

The company has 3 business segment – hotel investment, hotel residence and property sales. The company first started as resort operator in Phuket and slowly diversify the business into related area. It is now trying to capitalize on the strong brand name it has built to expand and grow. I think the growth strategy is well articulated and with the strong management focus, it is more likely to succeed in the mid term. The key risks are funding issue and demand for the luxury resort and hotel.

I once owned a few lot from the IPO allocation. Unfortunately, I am not that familiar with the hotel and property business, so I sold off my position. It looks like a wrong decision now. I am considering to add it back to my portfolio base on the following points

• Strong luxury brand. As Asia people get richer, they would find way to indulge themselves. The luxury resort business should not be affect greatly by economic condition.

• Dedicated management who is focusing on growth. Look at the expansion plan, they have lots of work to do. If everything goes nicely, we shall see a different company 3 years later.

SIA, good company in a difficult industry

I just saw the analyst report on SIA result for FY08. The key points are

Operating profit up 62%
Net profit grew 40%
Turnover up 10%
Dividend of $1

I am not a fan of SIA or the aviation industry. That's because aviation industry has traditionally being a very difficult industry to earn money. Invest your money in the sector would prove to be a tough call, because you don't know when the tide could turn against you.

Purely from the result point of view, it reminds us something. A good company in a difficult industry would still perform and deliver shareholder value. So, the moral of the story? The management capability is up most important in stock picking. You pick a good company with great management, you would be taken care of in the long run.

Hold on, but how do we pick the company with great management? That's the million dollar question! Maybe try to flip the Philip Fisher book to see the clue. I would say it is through long term observation, we can gage what is the management capability.

How they make decision?
How they treat the minority shareholder?
How they present themselves in report, analyst meeting?

Of course, ultimately, they should deliver.

Market update 11 May 08

There were few notable events for the last week:

Oil price hit record high again. This doesn't sound like a big news as most of us has get used to the record price news. However, the higher it goes, the more threat it posed for the inflation situation.

AIG big loss. AIG suffered big losses due to credit derivative linked to mortgage. Although most of the people believed the worst is over. It looks like the problem needs a longer time to settle down. Even the subprime situation has stabilized, we still don't know the full impact to other area of the market.

The inflation situation is still worrying. Citigroup announced more asset sales. Last Friday, Dow fell another 120 points. I think the recent rebound could be short lived. The economic situation is far from clear and more bad news might be coming back to market.

I still don't think it is a good time to be aggressive buyer, but depends on company situation and valuation. From the start of the year till now, I only bought some shares in FJ Benjamin. The valuation has fallen to more attractive level, the major shareholders like Peter Lim and Frank Benjamin were buying and the business still looks good for 2010. I also like the in house brand RAOUL, it might be a wild card.

Still waiting and hopefully market would correct to a more attractive level. Then, the margin of safety would be bigger.

China Oilfield Tech FY08Q1 result

I do not own the share of China Oilfield, but I did study a little bit about the company during the IPO time. Basically, it has an interesting business. That is to use the tertiary oil recovery technique to extract more oil from the mature oil well and their main business is focusing on Daqing area.

Today I saw this research report regarding the company for FY08Q1. Main points:
- No revenue
- RMB15million loss, 10million for stock option grant expense
- 2H for 80% of full year turn over
- little earning visibility

The stock expense is more accounting related and does not affect the cashflow. That means you could loss money but there is no cash outflow incurred for the company. Likewise for company which report earning increase, but there is no cash coming into the company really.

Lumpy earning is too much to my liking. Investor has to ask himself how much he understand about the company business model and whether can make an educated and reliable forecast of the earning.

Avoid second tier consumer company

I like China consumer stock. Names like Hongguo, China Hongxing and Synear food are inside my portfolio. The emerging middle class and progressive increase in country wealth would increase the consumer spending power. These companies are good buy for long term, as they capitalize on their strong brand name to capture the market.

At the same time, I would avoid investing in second tier consumer stock. How do I classify them into second tier? I remember I read some analyst reports previously regarding company produces the intermediate goods for consumption. Analyst would claim there is a growing demand and bright industry outlook, hence a good buy. Sometime when you tell a story, you tend to emphasize more on the bright side. When time is gloomy, people tend to focus on the downside more.

As the demand soar, indeed they are getting good business, but don’t forget the supply side! For intermediate producer, you source the raw material and make into intermediate product. This good is sold to the end manufacturer which piece them together to produce the final good. The commodity bull cycle is squeezing the margin for these players. Very often, in the middle of value chain, there is a limit on how much you can pass on the cost. If you are really big player, you pass on all the cost increase, then your margin won’t be affected. What if you are not that strong?

For the first tier or end consumer company, I would think the situation is much more manageable. That is because you own the brand. If you are a big industry player, most of the time you can squeeze your supplier to lower the cost. If your brand is strong, you can pass on the cost to end consumer. There are also other ways of passing the cost on, like decrease the weight a little and repackaging. Of course, I sound too simplistic in these arguments. But I really think that they have better bargaining power. Go to the local supermarket to do a comparison. Price of same goods from different brand might vary a lot. However, the more expensive brand does not go out of business!

Companies like China Sun, Luzhou, Celestial didn’t have a good year because of the dramatic cost increase. Celestial does have its own strong brand, but it also has industry soy bean processing. The fiber player like China Sky and Fiberchem did amazing well to defray the oil price increase. Soft packaging companies also had a tough time because of the oil.

However, every company’s situation is different. It doesn’t mean by stereotyping the company, it is not worth the investment. We have to analyse the company on case by case basis to understand the growth driver and business prospect, in order to arrive at a conclusion.

Hongguo FY08 Q1 result

Figures are provided for Q1

Revenue +27.32%
Gross profit +34.38%
Selling and distribution cost +66.09%
Net profit +16.06% at 34m RMB

If not the substantial higher selling and distribution cost, this would be another good quarter. Compare to last full year result, it is showing sign of escalation. It is not discussed in the result announcement that what is the significant contributor to this cost increase. Are they promoting the brand more aggressively or the rising inflation in China significantly lift the cost?

Cashflow remain strong, but trade receivable increased. Gross margin increased to 41.61% which generally signal the brand position. The group expansion strategies have remained the same
1)Retail store expansion
2)Multi brand strategy

It is yet to see whether the cost would go out of control. Looking at the Q1 growth percentage of 16%, let's assume full year would be at the same rate. The forecast EPS would be 0.32 RMB. Today it closed at 0.52, which means trading at forward PE of 8. Still consider cheap, but I would rather wait to see the cost trend. However, if the general market improves, it might still fly.

My china friend said he saw mainly Daphne stores in the cities he visited. Hongguo still has a lot of catch up to do.

***Updated 30 Apr 2008

Some comments from analyst.

DBS:

Maintain BUY, TP S$0.94 based on 12x FY09 PER.

DMG:

The Group’s strategy for growth is to continue expanding its sales network. Hongguo plans to set up 200 new outlets for C.Banner and E.Blan, and 40 new outlets for Naturalizer by 4Q08. Coupled with a stronger design capability and greater production capacity, revenue is expected to continue to grow. We maintain our BUY recommendation for a target price of S$0.60.

Westcomb:

Maintain BUY with target price of S$0.82 – HGUO is currently trading at S$0.52, a historical FY07 P/E of 9.6x. We consider HGUO to be relatively undervalued as compared to peers China Hongxing Sports Ltd (CHHS:SP; P/E of 16.7x) and Li Ning Co. Ltd (2331:HK; P/E of 45.3x).

Celestial Nutrifood vs Soy bean price

Saw the following section in CIMB report.

"China F&B Sector - No sight of near-term reprieve"

Stubbornly high commodity prices
The prices of agricultural commodities such as soybeans and corn continue to climb in 2008 despite the Chinese government’s export controls and ban on biofuel plants. Soybean prices have rebounded to Rmb5,322/tonne after briefly dipping below Rmb5,000/tonne in early April following the release of a US government forecast calling for an 18% increase in US soybean plantings in 2008.

Preferred picks are Celestial and China Fishery. Celestial (CENU SP, Outperform,
S$0.735, target S$1.20) is trading at undemanding valuations despite its intact growth
drivers. Management has cushioned the impact of margin compression by raising ASPs.

If I look at current Celestial share price of 0.72 vs PE 5.5x, it is very attractive. However, issues remained and market has persistently reluctant to give it a better valuation. Even though the business has actually grown a lot during these few years. They emerged from a pure consumer play to one with industrial product to cushion the earning. I think it is only for deep value patient investor to wait for the current commodity storm to be over.

Risk: Persistent high soya bean price which erode the earning
Catalyst: Raising ASP gradually, fall in soya bean price, rolling out of more product and higher factory utilisation.

China lower stamp duty for stock transaction

China just lower the stamp duty for stock transaction last week. As a result, the China stock market rally strongly. What is the rationale?

If you still remember, last year, they adjusted the stamp duty to curb the speculation. Immediately, the stock market plunged, because that signal the authority policy stance. It is puzzling to most of us here, that the small stamp duty amount would have a huge impact to the market. If you think rationally, it is really a very small percentage. However, we have to admit that it is a sentiment issue.

This time round, what happened was people get disillusioned about the Beijing Olympic story (that is stock market won't fall before the Olympic). More are calling for the authority to "save" them. Finally, they announced the lower stamp duty.

We have to admit that this is not a good solution. The role of market regulator is to regulate the market, to make sure it function as intended. Not to influence the market like what has happened. This would make people think that every time the authority would come to their rescue. This is no good to China market in the long term.

Bio-Treat bond default

Bio-Treat appeared in the headline again today, but for the wrong reason.

0200 GMT [Dow Jones] Bio-Treat Technology (B22.SG) down 6.5% at S$0.36 after company says it has received a notification of default on convertible bonds due 2013 from Merrill Lynch; adds Merrill has notified company that bonds that Merrill holds, which had an original face value of S$27.6 million, now immediately due and payable.

As explained in the company announcement, the bond comes with a put option. For most of us, it is sort of confusing, but I think it just simply means the bond holder has the right to request for bond termination and return of the borrowed money. The company also explained, it has no problem in servicing the bond, except the issue of remit the money out of China to repay the bond.

It depends on which angle you look at it. Technically, there may be nothing wrong with the operation and company strategy. But, at this poor sentiment market, any uncertainty could cause severe market reaction. From my observation around the forum, many still likes the counter. Be it for short term trading or for its long term fundamental.

I have long sold my position after found out that, most of the time, it has appeared in the headline for wrong reason. The key attribute to successful stock investing is certainty. It might be prudent to avoid at all cause.

Is foreign currency account a good deal?

Today I had a casual chat with one colleague. He mentioned that he intends to open a foreign currency account to earn a higher interest rate. I did a quick check on the interest rate of this type of account. Following is a quick summary(6 months rate):

Pound - 4.925%
Aussie - 7.045%
Kiwi - 8.145%

Sounds tempting right? The interest rate is so high. What if I convert my Sing dollar to Kiwi dollar and deposit for 6 months? Woh la, I got the high interest. But, what is the catch here? You are subjected to foreign exchange rate risk! What if Sing dollar strengthen further after 6 months? The interest you earn might not cover the exchange rate loss you suffer.

So, remember, everything has a price. Forex market is subject to high volatility.

China Zaino - the unappreciated backpack

China Zaino made the trading debut today, close at 0.48 down 0.12 from the IPO price of 0.60. If I say, at 0.60, it represent a good buy then it is now a better buy. Of course, on the subject of valuation, it is always subjective. Different people uses different metric and assumption to value the company. Especially, at a bearish time, the valuation tends to be conservative and negative. Using simple valuation technique, I think it is good buy. For who uses more complicated method, he/she has every kind of reason to suggest it is otherwise. It is up to individual.

Another aspect to this is regarding the market sentiment. It doesn't help that China shares were being sold off widely today following the China market. In a weak market, without strong investor interest, we know the fate of the issue. But, market is not always right, to make money, we have to think objectively and independently.

The success of China Eratat (for not going under) could be due to generic interest in the China sports market. In 3 to 6 months time, we are unlikely to see a strong interest, unless the company shows a sterling result and flawless execution. Beware of the upcoming IPO!

China Zaino IPO

China Zaino is offering shares at 0.60
i) 143,000,000 by placement
ii) 2,000,000 by public offer

Facts

No 1 backpack company in China with 35.8% market share in 2006
DAPAI(达派) brand named 2006 Top 12 Bag Brands in China, it also won Top 500 Asia Valuable Brand Award
Sponsor of China Gymnastics Team in coming Olympic

Competitive strength

Market leader in backpack industry
Strong brand name
Extensive distribution network
Strong product design capabilities
Commitment to quality control
Strategic location

Future plans

Increase advertising and promotion activities
Expand distribution network
Expand production capacity
Target to become top 10 luggage players in China by 2008
Increase product design and development effort and multi branding strategy

Prospects

Rising affluence of China market
Growth in demand in consumer goods
Tourism boom in China
Directors sound that the rapid growth is going to continue

Risks

Intense competition
Brand image might be affected by negative publicity
Susceptible to change in general economic condition
May not able to respond to fashion and market trend timely
Fluctuation of raw material cost
Infringement of trademark and counterfeit of DAPAI brand
Operation might be disrupted if Dabao production facilities is ordered to reallocate

Statistics

FY2006 profit growth was 130%
9 months growth of FY2007 was 66%
Gross profit margin 31.8% (increasing)
NTA 12.84 cents
Hist EPS pre IPO: 7.59 cents
Hist EPS post IPO: 6.39 cents
PE post IPO: 9.39
Market capitalization: 567 million
Dividend policy 20% of net profit.

As the FY07 has not ended, the prospectus uses FY2006 figures. However, it also provided the profit figure after 9 months into FY2007. The profit growth was 66%, I think we can safely assume that it might be able to achieve 40% profit growth in FY2007. The EPS would then become 8.95 cents and the PE base on offer price would become 6.7.

Base on the industry outlook presented in the prospectus, the company is piggy back on the rising consumption in China and the increase of household income. The rising disposable income is set to create domestic travel boom and drive the demand for backpack and luggage. According to Frost & Sullivan, bag consumption in China was estimated to be approximately USD2.4 billion in 2006. The China bag industry is expected to continue to grow at a rapid pace with a CAGR of 20.0% between 2007 and 2009.

The report also shows that DAPAI, the number 1 brand commands as much as 35.8% market share compare to number 2 's 4.3% market share. This shows that it is not only the number 1, but also the strongest player. They are new to luggage market and the brand is not found in the top 10 luggage player list.

Since the company is market leader, industry trend is favourable and with reasonable valuation, it is worthwhile to subscribe. The public offer size is small, chance of getting is low.

China Top Sports Shoe Brand

I search the web for more information on the top china sports shoe brand. The information is fragmented and there is no single reliable source.

Here is the list of top 10 brands (source):
1. Nike
2. Adidas
3. Converse
4. Reebok
5. Li-ning 李宁
6.Peak 匹克
7. 361 degree 361度
8. Anta 安踏
9. Jordan 乔丹
10. Xtep 特步

Depends on the website and time, some mentioned erke, some do not. Although hongxing compete in the same segment as Li-ning and Anta, but for the brand value, it still lack behind. However, some mentioned that erke is catching up fast. We shall see whether China Hongxing would catch up in the next few years. Generally, it is cited that they are expert in tennis shoe.

Following the successful listing of Li-ning, China Hongxing and Anta. More china shoe maker is seek to list to expand and compete in the domestic market. That's the reason we are seeing China Sports and now the China Eratat. The traditional strategy of Chinese sport brand is to engage brand ambassador to promote the brand. This might bring fast result, but for a brand to be long lasting, the core brand value and quality must remain consistent.

Yeli (野力) seems to be a new brand created to capture the fashion+sports market. It is not an established brand yet. Eratat (鳄莱特) has a longer history, but remain as localised brand in certain cities only.

China Eratat Sports Fashion IPO

China Eratat Sports Fashion is offering new shares at 0.30
a) 8,000,000 shares to public
b) 155,000,000 shares by placement

The company is a branded sportswear enterprise based in Fujian Province, PRC, with a strong focus on brand management, product development and quality. They are principally engaged in the design, manufacture and distribution of sports footwear, and the design and distribution of sports apparel, which are mainly marketed under proprietary brand, ERATAT (鳄莱特 ).

The products are categorized under two segments – sports footwear and sports apparel. They have engaged Wong Lee Hom, a well-known international artiste as brand ambassador since 2002. They have also won some awards like 2006 China Best Public Image Brand and 2006 China Top 100 Footwear Producing Enterprise.

Competitive strength

(a) Established track record and reputable brand
(b) Extensive distribution network across the PRC
(c) Strong emphasis on quality products
(d) Strong product development capabilities
(e) Experienced, dynamic and committed management team

Industry prospect

(a) Increasing consumer consumption and sophistication in the PRC, particularly in the mass-market consumer segment
(b) Rising emphasis on sports and leisure-centred lifestyles in the PRC
(c) Strong growth potential of our ERATAT brand and products

Future plans

(a) Expand production facilities
(b) Expand market presence and distribution network
(c) Strengthen the brand through promotion and marketing
(d) Enhance product development
(e) Strategic tie up and investment

Key risks

(a) Highly competitive sports fashion footwear industry
(b) Reliant on the brand ERATAT
(c) Infringement of intellectual property
(d) Retailers of ERATA products face rising competition for retail space
(e) Dependent on PRC distributors
(f) Labor shortage and rising cost

Statistics

NAV after ipo : 13.51 cents
Hist EPS on 290,029,357 shares : 2.7 cts
Hist PE : 10.8
Hist PE base on post ipo 414,912,514 shares : 15.9
Market capitalization (ipo price 0.30) : 124.5 million
Gross profit margin for FY07 : 28.4
Dividend policy not less than 20% of net profit

1H2008 profit is 25% increase compare to 1H2007, assume EPS growth at 25%, forecast EPS is 0.024. The forecast PE is 12.7.

China Eratat Sports Fashion is a new comer that would join the growing list of china sport company listed on SGX. The current listed peers are China Hongxing and China Sports.

By its own right, the company has a reputable brand and is in a fast growing industry. However, if we look at the track record, the company has achieved significant growth on FY2007 only. It is unclear to me that how the future growth rate would be.

It is also fair for us to compare the company against China Hongxing and China Sports since they all operate in the same market segment. I should focus the discussion on 3 aspects – PE, margin and market cap.

China Hongxing: price 0.61, eps 0.035, PE 17.4x, gross margin 41.1%, market cap 1.8billion
China Sports: price 0.91, eps 0.106, PE 8.6x, gross margin 22%, market cap 306mil

Hongxing is in its own league in terms of PE, margin and market cap. ERATAT is much a smaller player compare to both, or maybe more appropriate to compare against China Sports. Even looking at forecast number, ERATAT 12.7 vs China Sport 8.6, I am hesitate to subscribe.

In the industry discussion, the prospectus cited that

Sportswear in China encompasses apparel, shoes and accessories. China’s sportswear market in 2006 is estimated to be worth between US$4.13 billion to US$5.69 billion. We estimate the Chinese sportswear market to grow by 18.6% to 23.6% between 2007 and 2010. The market size by 2010 is expected to be worth between US$8.16 billion to US$13.26 billion.

Nike, Adidas and Li-Ning are the top three players in the Chinese sportswear market. They collectively occupy between 28.0% and 37.0% of China’s fragmented sportswear market. The remainder comprises approximately 200 smaller players. These players produce sportswear as original equipment manufacturers and original brand manufacturers. There are more than 600 different brands of sportswear in the Chinese market.

This shows that the competition is very intense. I think only the strong brand would survive and thrill.

In the competition discussion, it was highlight that there are two market segments

1.Global brand market segment which brands like Nike, Adidas occupied and targeting top tier cities
2.PRC leading brand market segment which have Li-Ning, Anta, Kangwei, Hongxing Erke and XTEP which mainly targeting second to third tier city

It is interesting to evaluate the competition position and brand equity of each China sports brand and try to identify who is the rising star. Once I have time, I might do some research on this.

Cosco Corp - the great plunge

This is what I read from Kim Eng news today.

Its 51%-owned Cosco Shipyard Group (CSG) unit has secured about US$292.3m worth of offshore and tanker building deals.
The second contract secured is to build two 59,000 dwt shuttle tankers for a Danish owner valued at 101.2m euros ($220m).
The group also announced yesterday that it will not be proceeding with a US$202m project to build a GM5000 semi-submersible rig hull for Norwegian owner Red Flag AS as announced last May.

Although the new contract secured is more than enough to cover for the lost contract, however, that's not the market think obviously.

Cosco down 15% to 2.850. 4 of the Cosco call warrant also on the top volume list losing 30+%.

Cosco has many supporters in the market, both fund managers and retail investor. Especially many retail investors have been eyeing for a stake for a long time. However, time has changed, the once easy to go up stock upon any good news is not doing that anymore. Instead, the bad news have been magnifying and follow by relentless sell down.

I think one has to think carefully and re access own situation before taking the plunge. Key questions to ask

1. What is my holding period and exit strategy?
2. Is the valuation attractive vs the prospective cost increase and slow order?

Sudden surge in Sino Env and Technics Oil & Gas share price

Today, Sino Env and Technics Oil & Gas share price suddenly jumped.

Sino jumped 0.15 to 1.4
Technics Oil & Gas jumped 0.12 to 0.61

For Technics, in reply to SGX, there's no undisclosed information that can explain the trading pattern. But it does say that "The Company however wishes to point out that in the ordinary course of its business, it actively explores possible new investments and other business opportunities in line with its strategy to expand its business and improve shareholders’ returns."

For Sino Env, the company promptly requested for trading halt. In the reply to SGX, company said it would announce promptly.

Market does know something extra, sometime faster than the announcement. Some good news are brewing, that's why the sudden surge in share price. The listed company should spend extra effort to ensure that the insider information is not leaked out before the announcement. Those first movers have gained the unfair advantage against other market players.

A relieved rally - Fed action seems to work?

STI closed at 3171 today. This week continue to be a relieve rally week. After hitting the lowest point two weeks ago, market rebounded. Stocks that were unloved and unwanted, are back in favourite now.

Look at share price of Synear as follow. You would have made 38.7% of profit.
25 Mar 0.49
03 Apr 0.68

Ben Bernanke hinted the worst could be over, there is unlikely a second Bear Sterns. Is the worst really over? We can ask two questions.

1. Would there be further write down or huge losses?
No one is sure actually. We are entering Q1 reporting season and shall know shortly. I suspect the write down would even stretch to Q2

2. Economy is going to be good after next 6 months?
The outlook is still uncertain. As stock market is the forecasting machine, unless the outlook is bright, we are not able to see a big rally. Because there is really no reason to be optimistic.

The steep fall of share price should be contributed by temporary drying up of liquidity across the globe. Fund redemption and losses in developed market cause the fund manager to pull out from Asia market. As the survey has shown, fund manager has increased the cash holding. They are unlikely to return so fast and retail investor else where need sometime to cool down before putting fresh money back into equity.

So, now is time to be pessimistic and defensive? I think not. The only way to make big money is to buy when no one else wants to buy. When you bought it dirt cheap, your risk is limited but upside is huge. This is on the basis of buying strong and growing company that would ride through this storm. I am hoping it would drop again, so that I can start buying cheaply. I am planning to purchase slowly when the stock suffer significant drop.

The commodity madness

In this weekend news, the price of rice has increased substantially recently. The commodity madness finally hit the rice, the food staple of Asia people. The risk is high, because this is one of the basic item in people's life. Experts have warned that by converting food crop to fuel, we run the risk of further reduce of food supply which is already very tight. I guess we might be reaching the tipping point where everything should unwind accordingly.

High oil price -> Food price increase -> Hurt spending -> Reduce spending -> Correction

There are too much excess built up over the years, especially the liquidity and popularity of hedge fund these years. More derivative and more alternate investment were being sold to investor. Warren Buffett said derivatives are financial weapons of mass destruction.

Read this from The Edge, from the Bloomberg. Paul Touradji says a "buying orgy" in commodities had inflated prices and increased risks of a collapse. "Commodities have never been, are not now and will never be a 'safe haven'".

I think we just have to embrace the risk created by these excess.

Stock watch list Mar 08

It seems we are going to stay in the bear market for quite a while. There is really no reason to buy hastily, given that more bad news might be in the pipeline. Having said that, I would think at the current valuation, all are cheap. So, would use the index as a guide for the buying. Once index drop around 2700-2800 range, might buy some to keep. After that, pray for the next 3 years. Because the business environment change so fast. Today's hot sector might lose money in the next 6 months.

Counters in my watch list remained pretty the same.

Hongguo
China Hongxing
MIDAS
Sino Env
Guangzhao IFB
Swiber
FJ Benjamin

Synear temporary drop out of the list until the business is showing improvement. Sino techfibre is removed on oil price concern and weak apetitite towards fibre stock.

Tempted to add Ezra into the list, as it has fallen to quite attractive price. But, I have to spend sometime to think about it. China New Town has been beaten down so badly, which is attractive on the future outlook.

China shoe maker sale

Today DBS Vicker issued the following report.

Attractive Value Emerging For SChip Shoe Brands

S-Chip Sports Shoes plays have slipped more than their HK counterparts. China Hongxing and China Sports International have lost 59% and 55% of their share value respectively from their respective peaks over the last 12 months. This is in contrast to HK peers such as Li Ning, Anta Sports and Dongxiang, which have seen their share price decline by between 29% and 50% from their peaks. In terms of valuations, China Hongxing and China Sports International are trading at 15x and 7x FY08 earnings respectively compared to HK peers that are trading at 18x – 30x FY08 PER.

Hongguo has performed relatively in-line with HK peers. Hongguo’s share price has fallen by about 64% from its peak, compared to 62% for Prime Success and 47% for Belle. In terms of valuations, Hongguo is trading at c. 8x FY08 PER, versus 13x FY08 for Prime Success and 23x for Belle.

Growth remains intact whilst valuations are now much more attractive for S-Chip Shoe Brands. We continue to be positive on the consumer goods sector in China, especially for companies with strong branding power, such as China Hongxing and Hongguo, which are able to raise their prices to pass on higher material and labour costs. Latest figures also show that retail sales in China in the month of February grew by 20.2% yoy, continuing the strong double-digit growth momentum over the last few years. In the meantime, valuations for the S-Chip shoe brands have become very attractive, trading at single digit to low teens current PERs, compared to more than double of that 6 months ago and relative to EPS CAGR of 20% or more for the sector

Target prices adjusted and BUY calls re-iterated. We maintain our BUY call for China Hongxing, with target price adjusted to S$0.90 based on 18x FY09 earnings. We have also included our Nanjing store visit notes in our update piece for China Hongxing. For China Sports, we have adjusted our target price to S$1.77, based on 10x FY09 PER and also maintain our BUY recommendation for this stock. For Hongguo, our target price is adjusted to S$0.94, based on 12x FY09 earnings and our update note also talks about a recent visit to their stores in
Nanjing.

>> For the past few years, the shoe makers have been growing pretty well. China Hongxing is expanding at a fast pace, Hongguo is slow and steady and China Sport is the new kid on the block. I am still very confident in the China consumer sector, especially the shoes. Unlikely the food sector, they seems to enjoy better pricing power and growth. I always like the lady shoe market, if you look at how many pairs of shoe a woman would buy a year. Surprisingly, sport shoe is even hotter.

It is yet to be seen the recent inflation would hit the consumer on shoe buying. But, consider long term, I would think they might be the best bet.

Company update – Creative, China Energy, Bio-Treat

Creative issued a profit warning cited reasons like weakening of US dollar. I suspect the MP3 business continue to weaken. The market is obviously saturated now as whoever wants to own a MP3 player would have got his/her by now. Almost all the new cell phone is playing MP3 very well. So, who needs a MP3 player? I have been long avoiding technology company, because of the volatile business and often supply demand mismatch.

China Energy said it engaged the PWC to conduct review on the additional payment for acquiring Jiutai Energy (Guangzhou) Co. Ltd. Where does the 190m RMB have gone? Management offered some explanation, but I don't think anybody is listening. When a third party is called into action, people assume the worst case, sell first. Especially at the current choppy time, there is no way to go but down.

Bio-Treat is on the news again. This time on the ability to redeem S$206 million of bonds. Merrill Lynch maintained the sell call on the counter as there are few issues hanging in the air. Since I sold off the counter, it did surge a bit, but to give back the gain now. I always think if there are issues with the management, it create uncertainty and it is best to sell.

Commodity boom – the party ended

The week ended with FED cutting target lending rate. As a result, US dollar gain against Euro dollar or Japanese Yen. The rate cut plus early measure to promote lending has resulted in dollar's strength. Currently, the key problems are credit crunch, write down and economy slowdown/recession. The main aim now is to restore market confidence.

On the other hand, commodities suffered big fall. All commodities – Oil, Gold, Soft commodities, all coming down. As gold is inversely correlated to US dollar, dollar advanced means gold falling. Generally, the falling commodities price could be due to

1.Hedge fund selling. Prudent to take profit as price is at historical high and pay back the borrowed money. The profit could be used to compensate other investment loss.
2.Global demand would soften due to the current crisis.

The recent equity market condition forced the speculators to switch attention to commodities. The higher commodities price, the higher chance of us heading into recession. As the outlook uncertainty increases, these people also start to unwind the position. I would think the recent high price is mainly due to speculation, than the real demand. Let's pray the price to drop further. Most people would suffer from this great run, except the speculators and farmer.

Although the portfolio strategist argued that commodity investment should/could be part of
a diversified investment portfolio. But, any party would come to an end. Buying at or near peak is not a wise thing to do. If it come down to a more logical level, might want to allocate some money in commodities sector.

At current time, maybe the bond should do well. As US bond is the safe heaven during uncertain time and the interest rate is going to come down.

The sweet tooth - China Lifestyle FY07 result

Sales +23.5%
Cost of sales +24.9%
Gross profit +21.2%
Profit before tax +10.5% (Significant increase of administrative and finance expense)
Profit after tax +3.5% (Income tax +32%)
Borrowing at 20,000K
ROE at 18.9% (86,741/458,589)

From cashflow statement (figure in '000),
Profit increased from 83,839 to 86,741, but operating cashflow increased from 125,314 to 145,217. This is due to a few adjustments. But the core profit cashflow didn't increase significantly. Where does the cash from adjustment came from?
Net cash go from 200,578 to 48,088 due to purchase of property, plant and equipment. Still able to cover the borrowing.

EPS decreased to 0.17 RMB from 0.19 RMB. Profit increased slightly but there is dilutive impact from the share option.

Although the sales increased significant, but the cost increase is even greater. Big increase at advertising and promotion expense and there are significant items like exchange loss and disposal on property, plant and equipment(quoted as one off item). Constraint on jelly dessert sales, and significant jump on candy sales. Gross profit margin 39.2% and the raw material price increase remain challenging.

FY07 probably is a consolidation year where they build the brand name, expand production capability and lay the foundation for future growth. Management expect new production facility to ease constraint and more product choice to drive more earning growth. I thought this is a disappointing result where cost increased faster than sales and I don't understand why the core profit cashflow only increased marginally. Given the continue rising of raw material price and uncertain advertising effect, best is to avoid for now.

Strong cotton - Hongwei Technologies FY07 result

Revenue +41.1%
Cost of sales +39.6%
Profit after tax +30.2% (+163.8% of income tax)
Bank loan 45,000K
Cash generated +21.3%
Cash at end of year 130,840K (should be enough to cover loan)
EPS RMB 0.2889 +14% (dilutive effect of share placement)

For FY07, they issued new share to fund the expansion. As the factory is still under construction, there is a dilutive impact to the EPS. Synthetic cotton was the star performer. Gross profit margin increased to 30% from 29%. This is remarkable since the oil price has increased substantially. The new factory for synthetic cotton would be ready in second quarter of 2008, they expect the gross margin to improve.

This is generally a good result as revenue rise strongly and they manage to keep the cost down. Since the new production capability is going to come online soon, it would enhance the profitability. What I afraid is the margin erosion as oil price keep charging ahead. I think this is the major reason for the share price to under perform for so long. All the fiber related stock is trading at great discount. Assume they are able to increase EPS by 10% next year, which in my opinion should be achievable, the EPS would be 0.3178 RMB. At current price of 0.28, it is only trading at forward PE of 4.4 which I think is cheap in any measure. However, consider on the company size and uncertain oil price, it is not clear where it would go. If you are a deep value investor, this is a buy, otherwise a hold.

Beat the CPF investment restriction deadline

1 April 2008 is coming very soon. After this date, the first 20k in CPF-OA and SA won't be available for investment purpose anymore. So, who ever interested to invest would have to act now before it is too late.

However, invest in this uncertain time needs some courage. Although we said it is better to buy when it is cheap than it is expensive. But the human psychology would make it a difficult task. On the investor mind, cheap could go cheaper. However, how often can you catch the bottom? Spread out the investment amount would be a good idea to prevent the difficult market timing job.

Online fund distributor fundsupermart is running a promotion now on some fixed income fund at zero sales charge. The message is if you are planning to invest CPF money in equity fund sometime later, you can park the money in fixed income fund now and switch later. Since they offer zero sales charge and free switching, so the only risk is fluctuation of the bond prices and interest rate. It is worth the risk if you think you are able to somehow catch “the bottom”.

One of the fund under promotion is AIGIF Singapore Bond Fund which has won some fund awards. The fund is down 4.36% on 3 months basis. This is quite unusual, consider other bond fund is holding up well. So, I did a further check. In the fund top 10 holdings, there are Capitalmall Trust and A-REIT. I think that might explain the loss, as REIT is being sold down in the recent market turmoil. Even fixed income fund is not without its own risk.

At the same time, DollarDex also highlighted 3 of their fixed income fund is on zero percent sales charge. I think they are trying to capture the business from people want to park the money in fixed income fund first.

Any rally should be short lived

It is still ugly, judging from the news flow.

More default
Unwinding of yen carry trade
Sliding US dollar
Surging gold and oil price
Inflation worry or stagflation worry

For the deep pocket, can still buy selectively. But for the already vested more than 50%, don't think it is good time to catch the bottom. Think would just wait and wait, till all the bad news are out (although nobody could tell exactly when). Have a time horizon of 2-3 years and prepare to hold the strong companies till then.