QDII come or no come?

In general, market rebounded following US interest cut news and from the oversold position. One bright spot is China share. Follow by the news of allowing China bank to invest in Singapore as QDII fund, market player take this opportunity to push up the china stock.

CIMB's top picks are China Energy, China Hongxing, China Sky, China Sports,
Ferrochina and Synear.

It is an old news already. We know they are coming, and it is just a matter of time. The dangerous thing now is to act on this small piece of news. Imagine I bought synear at 2+ just a few months ago. As long as the general market direction is down and the bad news is not exhausted yet, the rally could be short lived. Be in mind that, the US reporting season is not over yet.

Having said that, I feel maybe there is no better time to buy stock than the current one. Buy in different batch and continue to hold for long term are key to do well in this kind of environment.

In recent time, the REIT good run has ended by the global credit crisis. I was amazed by how REIT has kept growing in the recent years. Investors forgot they are primary for yield purpose, and keep chasing it for its expansion strategy. Since the easy funding era has ended or temporary paused, it is no surprise that REIT took a beating. But, good time would return, we just need patience.

Beside that.

Sino Env has secured the desulphurisation contract, CIMB has an outperform rating and target price of 2.62. This is sort of providing a level of comfort to the existing share holder that the expansion is still on track.

Asia stock market big drop

Ugly. When I open up the watch list, it is all red and double digit loss (paper loss).

Investors are nervous, and this is how fear start to spread. My friend is sitting on 50k paper loss and we heard of 100k of loss. Too bad, if you can't sleep well base on this, and I can't think of anyway that could help.

Basically, the discussion now is the fearful consequence of US recession. Although, it become really real this time, we have no way to tell whether it would materialise. So, for the risk adverse, stop. Continue to hold on and don't get tempted to buy again.

For the brave, continue to selectively buy those attractive priced counter. However, bear in mind that there is a wide spread fear and pessimism, which even recession won't come, the market has capacity to fall further.

Some highlights on my watch list. Some are my continuous favourite. Only time would tell whether our judgement is wise or foolish.

Some stock idea for 2008

At the time of writing, the stock market outlook has never been so bleak compare to the past few years. I remain calm. Be it a short bear or long bear, it is better for fundamental investor to pick up strong company at discount. I re read some of the research document published by broker from Dec to Jan and compile the following list.

Sino Env

The core VOC business remains intact and the desulphurization business would take sometime to take off/mature. Dust elimination business also started to contribute to the bottom line. Once the desulphurization takes off, then the earning growth could be accelerated. Forecast EPS by CIMB for 2008 is 16.2 cts.

Sino Techfibre

The stock has fallen quite a bit following the announcement for the delay of PMP equipment again. Obviously some confidence has been shaken. The PMP contribution would come late in 2H of 2008. Currently, China import all the PMP (pattern molding paper) from outside. Once the production line is on stream, the contribution could be quite significant. At the forecast 2008 EPS of 14.4 cts, the stock is unreasonably cheap.

The two beaten Sino

Coincidentally, the two companies with name of Sino had a bad run. From the excess optimism, market has turned to excess pessimisms. Depends on your risk tolerance level, I would say they are very good buy.

China Hongxing

Key expansion strategies are to increase the outlet, production capacity tremendously and increase the brand visibility. Forecast EPS by CIMB for 2008 is 4.7 cts. As the strong growth is expected to continue, the current valuation is relatively low compare to historical standard.

China Sports International

Their targeted market is low to mid end segment. The key expansion plans are increasing the A&P to increase brand visibility and doubling production capacity. The YELI brand is positioned as fashion sports brand. This is a good strategy as to avoid direct competition with other players. Forecast 2008 EPS by CIMB is 12.4 cts. As mentioned in CIMB report,

“YELI trails listed peers in China. There are six listed sports companies with a retail
presence in China: Hongxing (Erke), Li Ning (LI-NING), Anta (ANTA), China Sports
(YELI), Belle (multi-brand) and Yue Yuen (YY Sports). Among the six, we consider
Hongxing, Li Ning, Anta and China Sports to be competing in the same space, given
that: 1) retailing sports shoes is their main business; 2) they are all brand owners; and
3) their target market is middle-class consumers in second and third-tier cities.
However, Li Ning, Hongxing and Anta appear to be a step ahead of China Sports, in
terms of brand visibility and product pricing. We consider Belle and Yue Yuen to
compete in a different space as they retail mostly foreign brands like Puma, Kappa
and Mizuno (Belle) and Nike, Reebok and Adidas (Yue Yuen), respectively.”

The two sprinting players

For the only two sports player listed on SGX, both have embarked on aggressive expansion strategy to capitalize on the future sports good demand. The recent measure announced by china government might have cool the interest and cause investor concern on the sector outlook. But I still believe in the theme. I would pick China Hongxing as it is the stronger brand of two.

Swiber

Contract extension from Brunei Shell should be a strong vote of confidence, everything still going according to plan. Following the aggressive expansion strategy and continuous high oil price, this is another stock to watch in coming years. Analyst forecast that even oil price is at $50 per barrel, the new investment by oil company would still be viable. Forecast 2008 EPS by DBS is 24.6 cts.

Oil & Gas sector

DBS vicker mentioned that the outlook remains positive with strong contract flow. The mid tier oil and gas stock is expected to outperform peers. The picks are Cosco, Keppel Corp, Ezra Holdings, KS Energy, Jaya Holdings, and Swiber Holdings. As it is mentioned in the report –

“We believe that the impending strong orders for floating production units and FPSOs and high capex for fixed platforms are harbingers of more offshore EPIC projects, as oil majors increasingly move into the development phase of offshore oil fields for production and delivery of oil to the market. The beneficiaries of this trend are Swiber, Ezra, Keppel Corp, SembCorp Marine, and See Hup Seng.”

I remain confident that the FPSO story would continue this year.

“Three potential risks may emerge to dampen the optimism. We believe that there exist three potential risks in 2008 that may dampen an otherwise overwhelming bullish outlook for the oil and gas sector; namely unsustainably high oil prices, potential currency hedging issues, and rising equity market risk premium.”

I think the rising of risk premium or de-rating would be the biggest risk this year. Since the exploration activities would still have to continue despite any fall of the oil price.

DBS Vicker small cap pick

Hsu Fu Chi, China Sky, The Hour Glass, Boustead, Ferro China, Raffles Medical

I am more convinced on the first four. The steel business is hard for me to understand and the defensive medical sector is not for me at this stage.

Kim Eng 2008 Market outlook

In Kim Eng 2008 Market outlook, construction, tourism and retail are key investment theme this year.

The recommended portfolio is

Lian Beng
LC Development
FJ Benjamin
Kingsmen
Breaktalk
Cosco
Venture
Singapore Press Holding

I like FJ Benjamin and Kingsmen, because they are the key beneficiaries to the upcoming IR and the future Singapore tourism boom.

Stock market de-rating

Economy go through cycle. So does the stock market. When the economy is bad, the company profit shrink together with the share price. At this time, there's no investor interest and that contribute to the cheap stock price. A single digit PE is not uncommon.

When the economy begin the turn around and go into boom time, company profit would increase. This would attract investor to come in and buy the stock. At the same time, profit also grow accordingly. As the profit increases, investor would bid up the share price. Then, we have the valuation re-rating, because investor is willing to take more risk to exchange for return.

If we understand the economy and market cycle, the logical thing to do while in the recession is to load up fundamental strong stock. Everyone has their own preference. Generally, a company with good brand name, stable business and strong cashflow can be purchased at a discounted price. Once the economy is back on fire again, the share price would zoom north. Although the principal seems simple, many investor failed to do so.

Therefore, a strong investment framework has to be established. One should access the individual risk taking appetite, financial situation and investment goal to decide which style is best for himself/herself.

During the financial market turmoil or weaker economy outlook, fear overtake investor's greed. The general market would experience de-rating. This can be judged from the PE contraction. Individual stock PE could fall from double digit to single digit. This coupled with the panic selling would make the process happen very fast.

At this time, investor is too fearful to buy stock, afraid that it would drop further. Ironically, if the valuation is not excessive, this could be a good opportunity to buy stock with reduced risk. All you need is the holding power till the good time comes back.

STI approaching 3200

It is another day of severe drop of stock. It is expected but investor would feel the emotional pain of it. Especially people like me who hold stocks. Cheap could go cheaper. At this moment, keep your emotion in check. Decide your course of action and game plan. Don't buy on impulse or sell on panic. Either way won't help you at all.

I remember the days where stock was very cheap. During the period of a few corporate scandal incidents, Hongguo was selling at 0.23, and during the last peak it hits 1.40. When fear takes place, investor forgot about valuation and only remember emotion. If the stock is really cheap, and it is not going to collapse in next 3 years, there is really little to lose.

If you want to buy, buy solid company selling on cheap valuation. You could be the next Buffett.

Market review Jan 11

STI 3200 is in sight now

STI close the week at 3,287.34. This is despite that Fed chairman has declared that they are willing to cut interest rate to boost the economy. The further write down speculation on Citigroup and Merrill Lynch has also resurfaced. I would say 3200 is a possible now. Sit tight and I think that's a good entry point to add a small position, but it depends on individual risk appetite. On the other hand, I think the best approach is to ignore the market and prepare for Chinese New Year.

The revamped STI

After the revamp, STI has became a blue chip index. It consists of 30 blue chips on the SGX board. If you are not good at stock picking, I think buying an ETF on the STI which base on these 30 companies would be a good idea. ETF is a low cost way to let stock compounding your wealth.

JEL Corp Scandal

After KPMG investigation, JEL corp is involved in account manipulation. The figures have been inflated. This is a timely reminder to all of us that no matter how great the company is, don't put all your money in it. I still can recall when they appear in the news, they project themselves as shareholder friendly and adopted good corporate governance.

We saw what happen at ACCS and CAO, now we see it again. It would definitely happen again! When people are high up there, they would try all means to maintain the social status and aim for more glory.

Technics Oil & Gas promotion to main board

The company has already obtained the approval to move from Catalist board to the main board. This proves that they managed to grow the business and profit to meet the target of main board. Although the recent project delay has some what dragged the company down. I am cautiously optimistic on the business outlook and would keen to take a position if they managed to engineer a turn around.

Old Chang Kee IPO

The first IPO of the year comes from Singapore local company Old Chang Kee. Key information taken from IPO prospectus.

Competitive strength

• Established household brand name

• Extensive network of retail outlet

• Diversified customer base

• Experience management team with local food industry

• High quality standard

Use of proceed

• Expand the overseas operation

• Increase and refurbish local outlet

• Expansion and working capital.

Key Risk

• Food disease outbreak

• Revoke of Halal cert to factory and outlet

• Increase of rental charge and lease

• Business is labour intensive

• Negative publicity which affect the brand name

• Change of consumer taste

IPO details

Price at 0.20 a share
Pre IPO share : 68,400,000
Post IPO share : 93,400,000
Historical EPS : 4.44 cts
Historical PE : 4.5
PE after dilution : 6.15
Market cap 18.7 million

They do not have fixed dividend policy.

My take

Old Change Kee is quite a well known food company in Singapore. Whenever I walked pass their store, there seems to be a good queue for their food. In recent years, they are selling more than just curry puff. The key draw to consumer is the deep fried food like sotong ball, fish fillet etc. I was never a fan of Old Chang Kee, because I dislike their curry puff skin thickness. It is like eating flour than curry puff. However, the business seems good all the time. So, the competitive strengths are valid.

I think the key risk to the business in coming years would be the rental cost and labour cost. Since most of the mall are already in REIT, they would want to increase the rental aggressively, thereby squeezing the players like the curry puff maker. Labour is also another big headache. However, I recalled that I saw their advertisement that they hire retiree for part time work. So, this risk could be mitigated.

The expansion plan is simple by aiming both local and overseas market. There should be room to grow in the local market, however, the opportunities are limited. When you go to the shopping mall, the snack stall competition is so keen nowadays. Take a look at the basement of Bugis Junction, there are so many small store selling snack. Expanding in overseas market is also a tricky business, as new market might not like the taste of curry puff or deep fried food.

The IPO is priced at PE 6.15 after share dilution. I feel that it is cheap. But I think possible reason could be lack of investor interest. Therefore, they are willing to price at this level. It is your call whether to buy or not, since it is not expensive. Only 1000 lots up for grab for retail investor. Chance of getting it is extremely low. Want to waste the commission?

Beside that, I am not so convinced about the growth story. It won't be a smooth journey. Local F&B players were not doing well these few years. Just look at the share price of Thai Village, Tung Lok, Apex pal, Soup Restaurant. Sure, there is money to be made. But, F&B is not known for delivering strong growth. With the exception of BreakTalk. After going down soon after IPO, Quek is making a decent come back with diverse business and more outlet expansion.

Interview with Aberdeen fund manager

One two months ago, The Edge has conducted an interview with Aberdeen asset management fund manager Hugh Young. Under his management, Aberdeen Asia Pacific Fund has 28% annual return on average, over the past 5 years.

I am not clear whether this Asia Pacific fund is actually the same as their flagship Aberdeen Pacific Equity fund which also has an impressive track record. They are well known in managing Asia focus equity fund and a common characteristic on the funds they managed is lower volatility. Impressive return + low volatility, I think it is a dream characteristic of a fund.

These are the investment strategies.

• Buy and hold

• Low portfolio turn over

• Pick company we understand, can see business growing bigger in 5 to 10 years

• Management we can trust

• Valuation makes sense

Actually, simple principle do yield great return, provided you have the patience and independent thinking.

2008 stock market strategy

I would like to examine the key issues in coming year and try to formulate the strategy for 2008.

Key issues

• Sub prime problem. It is expected that more sub prime borrowers would default. The housing slump would continue and credit crunch would persist. Credit crunch because those financial institutions who might have potential more write down would be reluctant to lend money. Insufficient credit would hurt the economy. It might take another 6 months for the sky to be cleared.

• Slow US consumer demand. The rising inflation, high oil price and housing slump would surely hurt the consumer demand.

• Oil price. It might go up a little bit more, if tension at middle east escalated. However, I believe the downside probability is higher.

• Commodity price. The price should soften if the US demand slowed, which is a good thing for everybody.

• Direction of US economy. We have the sub prime problem, slow consumer demand. But, would the recession come? Analysts have different view. Some say US could avoid recession because Fed would keep cutting interest rate. Some fore casted a mild recession. I think the downside surprise risk is higher.

• More bank write down. Goldman Sachs mentioned more write down expected from Citi, Merrill Lynch and JPMorgan. Every piece of bad news could rattle the market for a short while.

Trend

• China QDII flow. It has been discussed for quite a while. I believe it is a sure thing, except the time line is unknown. When the time comes, we should see smile on everybody's face.

• Sovereign wealth fund. The SWF by Asia or middle east country would keep the investment momentum. Whenever there is trouble in US financial institutions, they would come and pump in the money.

Market characteristic

It is going to be a volatile year. For some of the key issues, the consequence/resolution is unknown. We don't know how things would pan out eventually. We should see market movement base on news flow. As a fundamental investor, consider to add small position in your favourite stock if valuation become attractive and you haven't hit the allocation quota. Don't trade if you have no time to monitor, because sudden news flow would cause the market to move in different direction.

Strategy

• We are unlikely to see a broad base rally, until the sky is clear. Focus on the key individual company development. Company that shows a sustainable earning growth should hold up well.

• Focus on stock which rely on domestic demand, not export.

• Focus on strong trend and have a longer investment horizon.

• Keep your stock exposure at 50-70%.

• Be patient and have discipline

• Get out of over valued country, where everything is expensive. (For example, if you are holding the India unit trust)

• Avoid catching commodity linked stock at high valuation. Stock like Wilmar would suffer if oil price drop which cause CPO demand to cool. It is a strong cycle, but we are not sure where we are.