Wednesday, January 30, 2008
Housekeeping: What to do with those losers? part iv
RIMH (1997)
This series is running like a journal now. I must have been cursed!
I suggested this share last Aug at $2 but now it's down by half to $1. At one time it was as low as 80 cents only! It's the biggest money loser in this blog and among my personal holdings too.
What happened was one day out of the blue the CFO (also an executive director), the qualified accountant and company secretary (same person), and all independent non-executive directors walked away. You can't have a no-confidence vote stronger than that.
The official explanation was the CFO had some misunderstandings about his future in RIMH and the closing down of the HK office, the INEDs had some misunderstandings about the leaving of the CFO and the use of IPO proceeds, the qualified accountant/company secretary found no misunderstanding but a new job.
This sounded like a total mess and consequently the market awarded a valuation of the same.
BUT I think it may look messier than it actually is.
The most paramount concern is whether there's any indication of fraud involved. The ex-CFO is relatively young at 33 and only joined RIMH in 2006, mostly for the IPO I suspect. The ex-qualified accountant/company secretary was even younger at 29 and joined RIMH in 2007. I don't mean to discriminate either of them but it would seem to me that more (preparation) time and experience would be required to perpetuate any accounting fraud, especially with an IPO.
Looking at the business model of RIMH where substantially all business are conducted in China, the function of the HK accounting staff is likely only for liaison with the regulators, accountants, and lawyers. They probably get busy during the reporting season but otherwise should be pretty free. So it's not a surprise that the chairman/owner of RIMH would want to keep the HK overhead as low as possible, barely enough to satisfy the HKSE requirements.
So I think the story is as it's told. The chairman asked the CFO to be transferred to the international sales department. He didn't like it and quited. There may have been some disagreement about salary increment too but I'm only guessing. The replacement CFO is even younger at only 30.
The counter argument is that all accounting fraud is masterminded in the China offices and hence minimum competency is preferred for the accounting staff in HK. It's valid argument but I doubt whether the E&Y auditors can be held in the same regard.
The INEDs didn't really know what's going on, got scared, and quited together. There's mentioning about the actual usage of IPO proceeds being lesser than that written in the prospectus. But there may be legitimate reasons for the change, a slowdown of sales for example. One can't draw conclusion from this lone fact. I think the INEDs might also be upset by the special dividend paid in Q3, which I agree is unusual (but i've seen another new listed company did the same). The chairman of RIMH might want to cheer up the share price a bit but this act showed his lack of consideration and understanding of the HK capital market. I agree this is a question mark area which requires further explanation. My suggeston is RIMH should really retain some quality advisers if its wants to regain market confidence.
RIMH for its fundamentals was a good investment at $2. Now its status has been downgraded to a speculation, but a good one at $1.
DISCLOSURE: I hold 1997 at time of writing.
This series is running like a journal now. I must have been cursed!
I suggested this share last Aug at $2 but now it's down by half to $1. At one time it was as low as 80 cents only! It's the biggest money loser in this blog and among my personal holdings too.
What happened was one day out of the blue the CFO (also an executive director), the qualified accountant and company secretary (same person), and all independent non-executive directors walked away. You can't have a no-confidence vote stronger than that.
The official explanation was the CFO had some misunderstandings about his future in RIMH and the closing down of the HK office, the INEDs had some misunderstandings about the leaving of the CFO and the use of IPO proceeds, the qualified accountant/company secretary found no misunderstanding but a new job.
This sounded like a total mess and consequently the market awarded a valuation of the same.
BUT I think it may look messier than it actually is.
The most paramount concern is whether there's any indication of fraud involved. The ex-CFO is relatively young at 33 and only joined RIMH in 2006, mostly for the IPO I suspect. The ex-qualified accountant/company secretary was even younger at 29 and joined RIMH in 2007. I don't mean to discriminate either of them but it would seem to me that more (preparation) time and experience would be required to perpetuate any accounting fraud, especially with an IPO.
Looking at the business model of RIMH where substantially all business are conducted in China, the function of the HK accounting staff is likely only for liaison with the regulators, accountants, and lawyers. They probably get busy during the reporting season but otherwise should be pretty free. So it's not a surprise that the chairman/owner of RIMH would want to keep the HK overhead as low as possible, barely enough to satisfy the HKSE requirements.
So I think the story is as it's told. The chairman asked the CFO to be transferred to the international sales department. He didn't like it and quited. There may have been some disagreement about salary increment too but I'm only guessing. The replacement CFO is even younger at only 30.
The counter argument is that all accounting fraud is masterminded in the China offices and hence minimum competency is preferred for the accounting staff in HK. It's valid argument but I doubt whether the E&Y auditors can be held in the same regard.
The INEDs didn't really know what's going on, got scared, and quited together. There's mentioning about the actual usage of IPO proceeds being lesser than that written in the prospectus. But there may be legitimate reasons for the change, a slowdown of sales for example. One can't draw conclusion from this lone fact. I think the INEDs might also be upset by the special dividend paid in Q3, which I agree is unusual (but i've seen another new listed company did the same). The chairman of RIMH might want to cheer up the share price a bit but this act showed his lack of consideration and understanding of the HK capital market. I agree this is a question mark area which requires further explanation. My suggeston is RIMH should really retain some quality advisers if its wants to regain market confidence.
RIMH for its fundamentals was a good investment at $2. Now its status has been downgraded to a speculation, but a good one at $1.
DISCLOSURE: I hold 1997 at time of writing.
Monday, January 28, 2008
A Comparision Between 2 Headphone Makers - part ii
Today I'll finish the series off with Fujikon (927).
1st difference of Fujikon from AAC is it makes earphones connected to a phone, not built-in, e.g. blue tooth hand-free ear pieces that cling to your ear, and audio-grade stereo head phones that can be used for music as well. Some has radio built in and some can be used to control a phone and an ipod simultaneously. These are lower value-added products and hence have a lower margin. But I suspect there's replacement demand since some people lose their headphones, some will keep one in their cars, some buy for improved audio quality when new model becomes available. Fujikon is also a supplier to Nokia for earphones and hence its business has been prospering while Motorola is losing market share.
Fujikon also makes premium audio-grade headphones for home audio and hand-held electronics. Other than the organic growth of the market helped by popularity of mp3 music, new headphones with wireless and noise-cancelling ability creates new demand and increases unit price. Fujikon actually has a much higher margin (20% vs. 8.5%) in its audio products than mobile phone products. In absolute term audio products also contribute more to the gross profit.
Besides Fujikon makes headphones for Microsoft's Xbox 360 consoles but that's not a lot of contribution by comparison. Audio and electronic parts, mostly volume business with low margin, make up the rest of the business.
Contribution wise, according to the latest interim report, the proportion is audio 44%, mobile 25%, Xbox 8%, and parts 23%. Historically there's some variation but still it's clear Fujikon is less reliant on the mobile phone sector for business. However because of its small size Fujikon does have its fate hinged on a few of its major customers (Nokia took up 1/3 of its turnover in 2006).
Fujikon is an efficiently run manufacturer with some technological content in its products to differentiate itself from its competitors. ROE has been close to or over 20% for the past 3 financial years with no use of debt. This was impressive as the past few years were bad years for manufacturing and especially exporters. Fujikon seemed to have its breakthrough in FY2006 after signing a few big accounts - Nokia, a U.S. audio brand (maybe Shure), and Microsoft. I hope this good trend will continue.
Profit was $160m in FY06 and it was about 1/3 of AAC's FY07 profit of $500m. Interim profit was up 48% so it's likely that full year profit will be higher than that of last year, 3rd year in a row. That closes the gap between Fujikon and AAC further.
Fujikon is now only trading at 5.4x FY06 p/e and has a capitalization of only 1/10 of AAC. I think there's a lot of scope for the price to catch up.
DISCLOSURE: I hold 927 and no 2018 at time of writing.
1st difference of Fujikon from AAC is it makes earphones connected to a phone, not built-in, e.g. blue tooth hand-free ear pieces that cling to your ear, and audio-grade stereo head phones that can be used for music as well. Some has radio built in and some can be used to control a phone and an ipod simultaneously. These are lower value-added products and hence have a lower margin. But I suspect there's replacement demand since some people lose their headphones, some will keep one in their cars, some buy for improved audio quality when new model becomes available. Fujikon is also a supplier to Nokia for earphones and hence its business has been prospering while Motorola is losing market share.
Fujikon also makes premium audio-grade headphones for home audio and hand-held electronics. Other than the organic growth of the market helped by popularity of mp3 music, new headphones with wireless and noise-cancelling ability creates new demand and increases unit price. Fujikon actually has a much higher margin (20% vs. 8.5%) in its audio products than mobile phone products. In absolute term audio products also contribute more to the gross profit.
Besides Fujikon makes headphones for Microsoft's Xbox 360 consoles but that's not a lot of contribution by comparison. Audio and electronic parts, mostly volume business with low margin, make up the rest of the business.
Contribution wise, according to the latest interim report, the proportion is audio 44%, mobile 25%, Xbox 8%, and parts 23%. Historically there's some variation but still it's clear Fujikon is less reliant on the mobile phone sector for business. However because of its small size Fujikon does have its fate hinged on a few of its major customers (Nokia took up 1/3 of its turnover in 2006).
Fujikon is an efficiently run manufacturer with some technological content in its products to differentiate itself from its competitors. ROE has been close to or over 20% for the past 3 financial years with no use of debt. This was impressive as the past few years were bad years for manufacturing and especially exporters. Fujikon seemed to have its breakthrough in FY2006 after signing a few big accounts - Nokia, a U.S. audio brand (maybe Shure), and Microsoft. I hope this good trend will continue.
Profit was $160m in FY06 and it was about 1/3 of AAC's FY07 profit of $500m. Interim profit was up 48% so it's likely that full year profit will be higher than that of last year, 3rd year in a row. That closes the gap between Fujikon and AAC further.
Fujikon is now only trading at 5.4x FY06 p/e and has a capitalization of only 1/10 of AAC. I think there's a lot of scope for the price to catch up.
DISCLOSURE: I hold 927 and no 2018 at time of writing.
Friday, January 25, 2008
A Comparision Between 2 Headphone Makers
Today I want to write down some comparison between AAC (2018) and Fujikon (927) which I did earlier this month. I won't repeat the basic investment theme as that's been unchanged, and readers can always go back to my previous post on industrials one year ago for that.
AAC manufactures mostly headphones 'inside' a mobile phone, in other words mini speakers. These mini speakers also find application in computers and appliances. I assume that's not generating a lot of turnover now (because no segmental breakdown is disclosed) but AAC is trying to diversify out of the mobile phones so future sales should increase.
Apparently AAC is very good at making these mini headphones as it has kept its net margin at over 30% for the last 4 years (03-06). 07 margin has come down to 26%, still very respectable for an industrial. This high margin reflects the strong growth in the mobile phone market and the higher technology content of AAC's product (i.e. fewer competitors), and of course the migration of manufacturing to the low-cost China (this last one has become such a cliche, although true, that I won't repeat in my future posts).
Profits have been growing nicely from $138m in 2003 to $570m in 2006. It's 4 times in 3 years! So AAC was trading between 15x-20x p/e for most of 2007 even the attention wasn't on export companies. There's a lawsuit about IP right which might have dampened the share price, but since that was settled last month I didn't look into the details.
The share price weakness was actually the result of weak 07 interim figures (AAC adopts quarterly reporting), in which profit declined by half in 1st half of 07. Q3 reporting showed substantial improvement but YOY profit was still down 25%. The slowdown was caused by weak order of its major customer Motorola. AAC may have foreseen this already for some time and it started shipping to Nokia in the Q3 (after the lengthy certification process). The business seems to be well run by its Singaporean management.
Judging from the strong Q3 turnaround, I expect full year result to be around $500m (assuming AAC makes similar profit in Q4 as in Q3), slightly down from $570m of 06. It could be lower if Motorola orders decreased further in Q4. 07 p/e is about 18-20x p/e, about fair but definitely not cheap.
The business is sizable. Financial position is healthy as AAC is in net cash position. Customer base has gotten stronger with Nokia, though I prefer AAC to be less reliant on the mobile phone market. The U.S. economy slowdown may continue to affect Motorola and hence AAC. AAC is trading at a 'growth' premium which one has to keep a keen eye on.
AAC manufactures mostly headphones 'inside' a mobile phone, in other words mini speakers. These mini speakers also find application in computers and appliances. I assume that's not generating a lot of turnover now (because no segmental breakdown is disclosed) but AAC is trying to diversify out of the mobile phones so future sales should increase.
Apparently AAC is very good at making these mini headphones as it has kept its net margin at over 30% for the last 4 years (03-06). 07 margin has come down to 26%, still very respectable for an industrial. This high margin reflects the strong growth in the mobile phone market and the higher technology content of AAC's product (i.e. fewer competitors), and of course the migration of manufacturing to the low-cost China (this last one has become such a cliche, although true, that I won't repeat in my future posts).
Profits have been growing nicely from $138m in 2003 to $570m in 2006. It's 4 times in 3 years! So AAC was trading between 15x-20x p/e for most of 2007 even the attention wasn't on export companies. There's a lawsuit about IP right which might have dampened the share price, but since that was settled last month I didn't look into the details.
The share price weakness was actually the result of weak 07 interim figures (AAC adopts quarterly reporting), in which profit declined by half in 1st half of 07. Q3 reporting showed substantial improvement but YOY profit was still down 25%. The slowdown was caused by weak order of its major customer Motorola. AAC may have foreseen this already for some time and it started shipping to Nokia in the Q3 (after the lengthy certification process). The business seems to be well run by its Singaporean management.
Judging from the strong Q3 turnaround, I expect full year result to be around $500m (assuming AAC makes similar profit in Q4 as in Q3), slightly down from $570m of 06. It could be lower if Motorola orders decreased further in Q4. 07 p/e is about 18-20x p/e, about fair but definitely not cheap.
The business is sizable. Financial position is healthy as AAC is in net cash position. Customer base has gotten stronger with Nokia, though I prefer AAC to be less reliant on the mobile phone market. The U.S. economy slowdown may continue to affect Motorola and hence AAC. AAC is trading at a 'growth' premium which one has to keep a keen eye on.
Thursday, January 17, 2008
Why Sub-prime sucks but its Culprits don't?
Imagine you are running a restaurant and you keep fouling up your business, your dishes taste awful and once in a while you get heavy fines from the health authority, you've run into heavy losses, about to go belly up, but yet people are lining up at your door, not for food but bringing cash to invest into your restaurant. Are we in Alice the Wonderland!
This wonderland now exists in U.S. financial sector.
You may wonder why the name of Buffett hasn't appeared on the buyer's list, for he is famous for buying great companies in distressed times. Aren't Citibank and Merrill great names to hold? In case you don't know Buffett has once bought a stake in Salomon Brothers, the then famous investment bank / bond traders and now part of Citigroup. So he already knew too well.
He invested at that time because he personally knew the then Chairman of Salomon, whom in his eyes was an honorable business person (but the business was corrupt). Well of course he also found the price attractive enough. The end result was bitter however and at one time when Salomon was investigated by the SEC and the government about it allegedly cornering the U.S. treasury bill market, Buffett had to step in as the interim chairman and got involved in day-to-day management in order to save the company (also his investment) from being banned from business. Along the way he discovered more about the inner workings of an investment bank which led to his decision to get out eventually.
Investment banking is really about reckless business management using OPM. During good times 50% of profit goes to the employees (in order to retain them), but in bad times, the employees go (because they shouldn't be retained) and owners have to bear 100% of the loss. It's not hard to imagine what the management would do under this payoff structure. This is plain stupid business proposition.
I'm not saying those funds buying now will lose money, they may win big too but only because this is a special situation play. Look at the losses of all the other shareholders. Investment bank as a category can never be classified as an investment.
This wonderland now exists in U.S. financial sector.
You may wonder why the name of Buffett hasn't appeared on the buyer's list, for he is famous for buying great companies in distressed times. Aren't Citibank and Merrill great names to hold? In case you don't know Buffett has once bought a stake in Salomon Brothers, the then famous investment bank / bond traders and now part of Citigroup. So he already knew too well.
He invested at that time because he personally knew the then Chairman of Salomon, whom in his eyes was an honorable business person (but the business was corrupt). Well of course he also found the price attractive enough. The end result was bitter however and at one time when Salomon was investigated by the SEC and the government about it allegedly cornering the U.S. treasury bill market, Buffett had to step in as the interim chairman and got involved in day-to-day management in order to save the company (also his investment) from being banned from business. Along the way he discovered more about the inner workings of an investment bank which led to his decision to get out eventually.
Investment banking is really about reckless business management using OPM. During good times 50% of profit goes to the employees (in order to retain them), but in bad times, the employees go (because they shouldn't be retained) and owners have to bear 100% of the loss. It's not hard to imagine what the management would do under this payoff structure. This is plain stupid business proposition.
I'm not saying those funds buying now will lose money, they may win big too but only because this is a special situation play. Look at the losses of all the other shareholders. Investment bank as a category can never be classified as an investment.
Anniversary Look at the Shipping Companies - part ii
COSCO (1919)
COSCO has transformed into a dry bulk shipper. Its old business of container shipping and port operation (via COSCO Pacific) now contributes maybe only 15% to the bottom line. A better benchmark for comparison is China Shipping Development (1138).
Business wise the two differ slightly. CSD has 2/3 of its turnover from shipping crude oil and 1/3 from dry bulk (mostly coal). Its routes are 60% domestic and 40% international. COSCO on the other hand ships mostly iron ore (40%), coal (30%), and grain (10%) from overseas to China. COSCO's parent operates an oil tanker fleet which has yet to be injected into COSCO.
Oil and dry bulk shipping is more defensive than container shipping as China demand for resources is much more robust than consumer demand of the US and Europe whose economies are slowing down. Specifically all the infrastructure China has to build in the next few years will require a lot of steel and hence iron ore. Coal is mother of all energy and China doesn't have enough either and has become a net importer. Grain shortage is fast becoming a problem as well and so demand should also grow strong. Oil requires no explanation and so much for the broad picture.
CSD is trading at 15x 07 earnings (25x 06 earnings). I've included 06 p/e as well because looking at the freight index it seems 07 is an extraordinary year and no one is quite sure performance like that can be repeated. The index has dropped by more than 30% since peaking last October. Actually if you look at the movement of the Baltic dry index over the last few years, then the recent rise and fall of HSI is really nothing in comparison.
COSCO is trading at a lower 9x 07 proforma earnings. Apparently the market perceives demand for oil tankers will be stable even under economic downturn, and that CSD's less international exposure is safer. But a large premium in share price has done away much of the attraction so I'll pass. I also remember CSD once (I think in 2005) was trading at only 5x historical p/e and many researchers (including Quam) were suggesting a sell. Of course they were then embarrassed but my point is market can be very wrong, far more than you can imagine and you may not survive the interim loss.
COSCO's dry bulk fleet had earnings of more or less $6-8b in 2004-06. Then 2007 interim earnings shot up by nearly 100% to $6b and management last estimated only 2 days ago full year proforma earnings to be well over $18b (incl. container shipping and port operation). I assume non-dry-bulk business to contributed about $3-4b and hence dry bulk business should earn about $14b or more last year, as it's hard say what "well over" really means and I don't know if there's any non-recurring items.
Looking forward, what earnings should I use? 7b or 14b or somewhere in between? This gives a total group earnings ranging from $10b to $18b, or p/e of 8.6-15.5x against a capitalization of ~$155b. If I cut it in the middle then p/e is about 12x, still considerably cheaper than CSD historical p/e of 15x.
One concern is the age of the fleet as I read from the acquisition that dry bulk fleet worldwide is quite old due to lack of investment in the past and many ships are near retirement age. These ships are only hanging there because demand is so strong. If you look at this positively, then if demand does slow down these ships can retire and won't drag down earnings of everyone as much. If you look at this negatively, then replacement ships will carry much higher current cost and depreciation charge.
For COSCO, it owns ships for 40% of its capacity while charters for the remaining 60%. It seems a safe position to me, neither too aggressive nor conservative. If things turn really bad COSCO can always charter fewer ships.
I think the current price is tempting for speculation but only fair for investment.
Note: On a more difficult note, since merger accounting was used to account for the dry bulk fleet acquisition, there's no mark up of asset value and depreciation going forward will definitely be understated. So the p/e should be adjusted higher.
DISCLOSURE: I hold 316 and no 1919 at time of writing.
COSCO has transformed into a dry bulk shipper. Its old business of container shipping and port operation (via COSCO Pacific) now contributes maybe only 15% to the bottom line. A better benchmark for comparison is China Shipping Development (1138).
Business wise the two differ slightly. CSD has 2/3 of its turnover from shipping crude oil and 1/3 from dry bulk (mostly coal). Its routes are 60% domestic and 40% international. COSCO on the other hand ships mostly iron ore (40%), coal (30%), and grain (10%) from overseas to China. COSCO's parent operates an oil tanker fleet which has yet to be injected into COSCO.
Oil and dry bulk shipping is more defensive than container shipping as China demand for resources is much more robust than consumer demand of the US and Europe whose economies are slowing down. Specifically all the infrastructure China has to build in the next few years will require a lot of steel and hence iron ore. Coal is mother of all energy and China doesn't have enough either and has become a net importer. Grain shortage is fast becoming a problem as well and so demand should also grow strong. Oil requires no explanation and so much for the broad picture.
CSD is trading at 15x 07 earnings (25x 06 earnings). I've included 06 p/e as well because looking at the freight index it seems 07 is an extraordinary year and no one is quite sure performance like that can be repeated. The index has dropped by more than 30% since peaking last October. Actually if you look at the movement of the Baltic dry index over the last few years, then the recent rise and fall of HSI is really nothing in comparison.
COSCO is trading at a lower 9x 07 proforma earnings. Apparently the market perceives demand for oil tankers will be stable even under economic downturn, and that CSD's less international exposure is safer. But a large premium in share price has done away much of the attraction so I'll pass. I also remember CSD once (I think in 2005) was trading at only 5x historical p/e and many researchers (including Quam) were suggesting a sell. Of course they were then embarrassed but my point is market can be very wrong, far more than you can imagine and you may not survive the interim loss.
COSCO's dry bulk fleet had earnings of more or less $6-8b in 2004-06. Then 2007 interim earnings shot up by nearly 100% to $6b and management last estimated only 2 days ago full year proforma earnings to be well over $18b (incl. container shipping and port operation). I assume non-dry-bulk business to contributed about $3-4b and hence dry bulk business should earn about $14b or more last year, as it's hard say what "well over" really means and I don't know if there's any non-recurring items.
Looking forward, what earnings should I use? 7b or 14b or somewhere in between? This gives a total group earnings ranging from $10b to $18b, or p/e of 8.6-15.5x against a capitalization of ~$155b. If I cut it in the middle then p/e is about 12x, still considerably cheaper than CSD historical p/e of 15x.
One concern is the age of the fleet as I read from the acquisition that dry bulk fleet worldwide is quite old due to lack of investment in the past and many ships are near retirement age. These ships are only hanging there because demand is so strong. If you look at this positively, then if demand does slow down these ships can retire and won't drag down earnings of everyone as much. If you look at this negatively, then replacement ships will carry much higher current cost and depreciation charge.
For COSCO, it owns ships for 40% of its capacity while charters for the remaining 60%. It seems a safe position to me, neither too aggressive nor conservative. If things turn really bad COSCO can always charter fewer ships.
I think the current price is tempting for speculation but only fair for investment.
Note: On a more difficult note, since merger accounting was used to account for the dry bulk fleet acquisition, there's no mark up of asset value and depreciation going forward will definitely be understated. So the p/e should be adjusted higher.
DISCLOSURE: I hold 316 and no 1919 at time of writing.
Wednesday, January 16, 2008
Anniversary Look at the Shipping Companies
It's been a little more than one year since I first covered the container shippers. Their prices started out slowly during the 1st half of last year, then skyrocketed until October, and since then have been dropping like a rocket running out of fuel. The price movement has been much wilder than I've anticipated (even though I've seen OOIL rising from $4 to $40 in 2004 I'm still surprised this time around), and I've taken profit much too soon. But I took comfort that I could've made a huge loss as well if I bought them at the wrong time of the year.
Cyclical stocks are all about timing which is very difficult to catch, even shipping companies can get grossly wrong when predicting customer demand. So the only safe entry is to buy at beaten down prices when the need for guessing is reduced to minimum. Like last time I've avoided the analysis of the shipping industry overall because that will be too darn imprecise that even I won't rely on myself. However you can refer to my previous post in Dec 06 for background info and my very basic look at the industry.
A better time to do this review should be April after the full year results have been announced. But since we have earnings forecast from both CSCL and COSCO, there should be reasonable accuracy. And the recent massive sell off should provide additional safety for compensation.
CSCL (2866)
Capitalisation is $37.3b. 07 interim earnings were $1.15b and management forecasted FY earnings to be $3.2b.
P/E is about 11.7x, nothing spectacular. It should've been adjusted lower as the A-share issue was completed toward the end of the year while its effect on earnings (from expansion with the use of the proceeds) will only be seen next year. Still it looks pretty pricey for a cyclical as 07 isn't an average year but a relatively good one. There continues to be a premium for possible injection by the parent company.
OOIL (316)
Capitalization is $28b. 07 interim earnings (recurring) were $1.6b. 07 earnings will probably be higher than $3b but I'd rather be conservative as interim dividend was cut back. So I'd stick to my previous estimate that OOIL should earn $3b in an average year.
The interim report showed OOIL had cash and bonds of $21.5b, with debt of about $16.7b. OOIL's common practice is to have its fleet 80% financed by loans and 20% by equity. The fleet had a book value (net of operational debt) of $23.4b, meaning the entire cash and bonds isn't tied up and could be distributed! Of course part of it would be needed for buying new ships and daily operation. I'd assume $15b is idle cash and distributable.
Properties in U.S. and China had a book value of $5.7b and my assessed value is unchanged at $10b.
Taking out the cash and properties, we have a fleet that's valued at only $3b. And it earns $3b a year! Even if I use book value for properties, the fleet is still insanely cheap at $7.3b! At this valuation, I won't be worried even if earnings drop all the way to $1b.
I think OOIL's share price is approaching liquidation value, except it's far from liquidation and in net cash position.
I'll continue with COSCO in my next post, separately, as its business has changed to largely dry bulk shipping.
Cyclical stocks are all about timing which is very difficult to catch, even shipping companies can get grossly wrong when predicting customer demand. So the only safe entry is to buy at beaten down prices when the need for guessing is reduced to minimum. Like last time I've avoided the analysis of the shipping industry overall because that will be too darn imprecise that even I won't rely on myself. However you can refer to my previous post in Dec 06 for background info and my very basic look at the industry.
A better time to do this review should be April after the full year results have been announced. But since we have earnings forecast from both CSCL and COSCO, there should be reasonable accuracy. And the recent massive sell off should provide additional safety for compensation.
CSCL (2866)
Capitalisation is $37.3b. 07 interim earnings were $1.15b and management forecasted FY earnings to be $3.2b.
P/E is about 11.7x, nothing spectacular. It should've been adjusted lower as the A-share issue was completed toward the end of the year while its effect on earnings (from expansion with the use of the proceeds) will only be seen next year. Still it looks pretty pricey for a cyclical as 07 isn't an average year but a relatively good one. There continues to be a premium for possible injection by the parent company.
OOIL (316)
Capitalization is $28b. 07 interim earnings (recurring) were $1.6b. 07 earnings will probably be higher than $3b but I'd rather be conservative as interim dividend was cut back. So I'd stick to my previous estimate that OOIL should earn $3b in an average year.
The interim report showed OOIL had cash and bonds of $21.5b, with debt of about $16.7b. OOIL's common practice is to have its fleet 80% financed by loans and 20% by equity. The fleet had a book value (net of operational debt) of $23.4b, meaning the entire cash and bonds isn't tied up and could be distributed! Of course part of it would be needed for buying new ships and daily operation. I'd assume $15b is idle cash and distributable.
Properties in U.S. and China had a book value of $5.7b and my assessed value is unchanged at $10b.
Taking out the cash and properties, we have a fleet that's valued at only $3b. And it earns $3b a year! Even if I use book value for properties, the fleet is still insanely cheap at $7.3b! At this valuation, I won't be worried even if earnings drop all the way to $1b.
I think OOIL's share price is approaching liquidation value, except it's far from liquidation and in net cash position.
I'll continue with COSCO in my next post, separately, as its business has changed to largely dry bulk shipping.
Tuesday, January 15, 2008
Don't sell all you want and all you can!
I think this week is probably the Armageddon as everyone is selling in anticipation of the worst possible results of the U.S. financials to be released, and its ramifications over the economy and everyone else. And as normally we tend to over-exaggerate bad things, the end of the tunnel should be near, share price wise.
I was going to suggest we start looking for bargains, but then I figured most of us (including myself) are probably out of cash and as convinced to be a long term investor as ever. So the next best course of action is to do nothing and wait for the storm to pass, which it certainly will, just as certain as it will come back one day. Like Warren Buffet once said people have this weird logic that they should shy away from the market when there's uncertainty or bad news, thinking however that once that's cleared the good times will last forever.
If you are a fund manager then you lose this option, as redemption demand can come anytime and you need to have the cash ready. Even if you have solid investor backing you will still need to sell down fast, because you know your weaker competitors are selling and that's driving down the prices of many over-valued shares which you all helped build up in the good times. Even selling below value isn't a concern as long as you sell faster, because relatively the fastest seller will still outperform in the end.
With large presence of indiscriminate sellers, that's why I believe good catches can still be made in difficult times.
I was going to suggest we start looking for bargains, but then I figured most of us (including myself) are probably out of cash and as convinced to be a long term investor as ever. So the next best course of action is to do nothing and wait for the storm to pass, which it certainly will, just as certain as it will come back one day. Like Warren Buffet once said people have this weird logic that they should shy away from the market when there's uncertainty or bad news, thinking however that once that's cleared the good times will last forever.
If you are a fund manager then you lose this option, as redemption demand can come anytime and you need to have the cash ready. Even if you have solid investor backing you will still need to sell down fast, because you know your weaker competitors are selling and that's driving down the prices of many over-valued shares which you all helped build up in the good times. Even selling below value isn't a concern as long as you sell faster, because relatively the fastest seller will still outperform in the end.
With large presence of indiscriminate sellers, that's why I believe good catches can still be made in difficult times.
Thursday, January 10, 2008
Something Else
The best thing our government has done for a long time. The anti-spam law was effective last Dec and now all we have to do is to call and register our fax/telephone/mobile # onto a registry. So there should be no more "computer repair" or "hello, have you done your medical check-up" kind of irritating stuff. But I've also heard spams from out of H.K. (including China) still roam free. Let's hope there's not a lot of those.
Instructions are in the file below. It's a bit cumbersome but well worth the effort. Just remember you need to make 2 calls, one to register and one to confirm, to complete the registration.
http://www.ofta.gov.hk/zh/uem/how_to_register.pdf
Instructions are in the file below. It's a bit cumbersome but well worth the effort. Just remember you need to make 2 calls, one to register and one to confirm, to complete the registration.
http://www.ofta.gov.hk/zh/uem/how_to_register.pdf
Friday, January 04, 2008
Report Card
This is the 2nd report card of this blog, mostly for record of my workdone.
For 2007 there have been more than 30,000 individual visits, 2/3 of which are returning meaning regular visits. This is a small group of readers but has gotten bigger. I thank you for your support.
Summarized below are the companies which I've covered so far and their share price performance since. The proper way to do this is to include the financial performance as well but that's too much work for one person. I have also put down which companies I hold shares in for better disclosure.
Please note this is NOT a recommended buy list. For example I disliked COSL (2882) at $6.1 last March but it closed at $17.8 last year!
(for simplicity dividends are not included except stated)
(* means present holding)
Dec 18 06
China COSCO (1919)
up 554% from $3.887
OOIL (316)*
up 48% from $48.5 (dividends added back)
Dec 20 06
Tomson (258)*
up 46% from $2.05
Dec 27 06
WKK (532)*
up 12% from $1.12
Jan 2 07
Dickson (113)*
down 9% from $7.91
Jan 8 07
Man Yue (894)*
up 15% from $2.03
Fujikon (927)*
up 89% from $1.80
Arts Optical (1120)*
up 19% from $2.58
Yip's Chemicals (408)*
up 47% from $3.82
VSC (1001)*
down 13% from $0.98
Jan 9 07
Chalco (2600)*
up 232% from $6.95
Jan 16 2007
SH Petrochemicals (338)
up 18% from $4.07
Jan 24 07
Meadville (3313)*
down 4% from $2.25
Jan 29 07
Xinyi Glass (868)
up 204% from $3.71
Jan 31 07
ZJ Glass (739)
up 438% from $1.68 (my 'miss' of the year)
Feb 2 07
LSH (238)
up 264% from $3.40
Feb 13 07
PCCW (8)
down 1% from $4.67
Feb 16 07
HKCG (3)
up 37% from $17.48
Mar 22 07
Sinopec (386)
up 94% from $6.07
Mar 27 07
COSL (2883)
up 291% from $6.11
Mar 28 07
Hendersen Investment (97)
up 50% from $15.52 (surprise of the year) (dividends added back)
April 3 07
Proactive Technologies (8089)
up as much as 270%, in the end down 45% from $7.27 (roller coaster of the year and 'death bed' of many)
April 12 07
China Glass (3300)
up 18% from $3.40
Apr 16 07
Shui On Construction (983)*
up 64% from $17.40
May 11 07
Belle (1880)
up 43% from $8.40 (opening price not IPO price)
May 22 07
Dong Fang Electric (1072)
up 75% from $37.5
July 5 07
H-share index fund (2828)
up 30% from $125.1
Aug 21 07
RIMH (1997)
down 19% from $2
Nov 1 07
SOHO China (410)
down 19% from $9.98
Shui On Land (272)*
down 15% from $10.7
DISCLOSURE: I hold those shares with * at time of writing.
For 2007 there have been more than 30,000 individual visits, 2/3 of which are returning meaning regular visits. This is a small group of readers but has gotten bigger. I thank you for your support.
Summarized below are the companies which I've covered so far and their share price performance since. The proper way to do this is to include the financial performance as well but that's too much work for one person. I have also put down which companies I hold shares in for better disclosure.
Please note this is NOT a recommended buy list. For example I disliked COSL (2882) at $6.1 last March but it closed at $17.8 last year!
(for simplicity dividends are not included except stated)
(* means present holding)
Dec 18 06
China COSCO (1919)
up 554% from $3.887
OOIL (316)*
up 48% from $48.5 (dividends added back)
Dec 20 06
Tomson (258)*
up 46% from $2.05
Dec 27 06
WKK (532)*
up 12% from $1.12
Jan 2 07
Dickson (113)*
down 9% from $7.91
Jan 8 07
Man Yue (894)*
up 15% from $2.03
Fujikon (927)*
up 89% from $1.80
Arts Optical (1120)*
up 19% from $2.58
Yip's Chemicals (408)*
up 47% from $3.82
VSC (1001)*
down 13% from $0.98
Jan 9 07
Chalco (2600)*
up 232% from $6.95
Jan 16 2007
SH Petrochemicals (338)
up 18% from $4.07
Jan 24 07
Meadville (3313)*
down 4% from $2.25
Jan 29 07
Xinyi Glass (868)
up 204% from $3.71
Jan 31 07
ZJ Glass (739)
up 438% from $1.68 (my 'miss' of the year)
Feb 2 07
LSH (238)
up 264% from $3.40
Feb 13 07
PCCW (8)
down 1% from $4.67
Feb 16 07
HKCG (3)
up 37% from $17.48
Mar 22 07
Sinopec (386)
up 94% from $6.07
Mar 27 07
COSL (2883)
up 291% from $6.11
Mar 28 07
Hendersen Investment (97)
up 50% from $15.52 (surprise of the year) (dividends added back)
April 3 07
Proactive Technologies (8089)
up as much as 270%, in the end down 45% from $7.27 (roller coaster of the year and 'death bed' of many)
April 12 07
China Glass (3300)
up 18% from $3.40
Apr 16 07
Shui On Construction (983)*
up 64% from $17.40
May 11 07
Belle (1880)
up 43% from $8.40 (opening price not IPO price)
May 22 07
Dong Fang Electric (1072)
up 75% from $37.5
July 5 07
H-share index fund (2828)
up 30% from $125.1
Aug 21 07
RIMH (1997)
down 19% from $2
Nov 1 07
SOHO China (410)
down 19% from $9.98
Shui On Land (272)*
down 15% from $10.7
DISCLOSURE: I hold those shares with * at time of writing.
Housekeeping: What to do with those losers? part iii
I hope this series won't turn into a regular feature of this blog!
(3) VSC - down 13% from $0.98 in Jan 07
I suggested 5 industrial stocks one year ago in Jan 2007 and labelled them as underdogs. VSC turned out to be the real dog of the dogs, as it's the only money loser!
I knew VSC was the most speculative among the dogs and its performance, both share price wise and earnings wise, unfortunately lived up to its reputation. It rose from under 98 cents last Jan to over $1.8 in June, but by the end of the year it's retreated back to 85 cents. Earnings in FY07 showed substantial improvement at $71m (inclusive of one-time gain from selling a 40% stake of its coil business to Ryerson), but in FY2008 interim earnings deteriorated by 50% to $21m.
VSC's coil business in China and construction steel business in HK was both hit by negative policy change in China. But I won't bore you with the details. VSC as a pure commodity processor and distributor with no size advantage, has an inherently unstable business model because it has no control over the volatitivity of upstream pricing nor influence over its product pricing. Its past 5 years' results (2003-2007) were clear indication of this instability: 60m, 81m, 36m, 23m, 71m.
But VSC's attraction lies not on its own but with its joint venture with Ryerson, the #1 U.S. company in steel processing and distribution with annual sales of US$5.8 billion. I had expected Ryerson would bring forth new businesses and technical know-how to help VSC grow into a much bigger player. The effect has not been apparent yet after one year of integration and logically market enthusiasm faded.
What I didn't know (what a shame to me!) was that during this period Ryerson management was in a big fight, with a hedge fund who criticized them for lack of performance and wanted to overhaul the whole board. The management eventually found their way out by selling Ryerson to another private equity fund in July last year while taking the golden parachute themselves (i.e. getting handsome compensation from the buyer). Now there's a new CEO and Ryerson, as in usual after a takeover, is loaded with debt and in cost cutting mode. The fate of its China venture with VSC is unknown.
It's time to get out of VSC, it's valuation is still cheap, or even cheaper than one year ago, but for good reasons. I'll sell on rebound unless there's positive development from Ryerson side.
DISCLOSURE: I hold 1001 at time of writing.
(3) VSC - down 13% from $0.98 in Jan 07
I suggested 5 industrial stocks one year ago in Jan 2007 and labelled them as underdogs. VSC turned out to be the real dog of the dogs, as it's the only money loser!
I knew VSC was the most speculative among the dogs and its performance, both share price wise and earnings wise, unfortunately lived up to its reputation. It rose from under 98 cents last Jan to over $1.8 in June, but by the end of the year it's retreated back to 85 cents. Earnings in FY07 showed substantial improvement at $71m (inclusive of one-time gain from selling a 40% stake of its coil business to Ryerson), but in FY2008 interim earnings deteriorated by 50% to $21m.
VSC's coil business in China and construction steel business in HK was both hit by negative policy change in China. But I won't bore you with the details. VSC as a pure commodity processor and distributor with no size advantage, has an inherently unstable business model because it has no control over the volatitivity of upstream pricing nor influence over its product pricing. Its past 5 years' results (2003-2007) were clear indication of this instability: 60m, 81m, 36m, 23m, 71m.
But VSC's attraction lies not on its own but with its joint venture with Ryerson, the #1 U.S. company in steel processing and distribution with annual sales of US$5.8 billion. I had expected Ryerson would bring forth new businesses and technical know-how to help VSC grow into a much bigger player. The effect has not been apparent yet after one year of integration and logically market enthusiasm faded.
What I didn't know (what a shame to me!) was that during this period Ryerson management was in a big fight, with a hedge fund who criticized them for lack of performance and wanted to overhaul the whole board. The management eventually found their way out by selling Ryerson to another private equity fund in July last year while taking the golden parachute themselves (i.e. getting handsome compensation from the buyer). Now there's a new CEO and Ryerson, as in usual after a takeover, is loaded with debt and in cost cutting mode. The fate of its China venture with VSC is unknown.
It's time to get out of VSC, it's valuation is still cheap, or even cheaper than one year ago, but for good reasons. I'll sell on rebound unless there's positive development from Ryerson side.
DISCLOSURE: I hold 1001 at time of writing.
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