Tuesday, April 22, 2008

Results Brief

Tomson (258)

There was some progress in the selling of a smaller luxury housing project in Pudong. Proceeds were $1 billion or thereabout and delivery should happen in 2008. This should bring in some decent profit but overall valuation of Tomson still hinges on Tomson Riviera, which takes up at least 2/3 of the company valuation, with the remaining 1/3 composing of smaller developments, commercial buildings, and a golf club.

2 out of the 4 towers of TR have been labeled rental properties and that mark-to-market adjustment increased the company NAV to $7b, more than double of the market capitalization of $3.3b. The remaining 2 towers should push the NAV to over $9b.

The biggest risks remain to be the timing of sale, the application of the Land Appreciation Tax, and how the proceeds are to be used.

Treat it like holding the property itself should make one comfortable. I would rather invest in completed properties with discount to market price than in a landbank with massive premium to NAV, or 'adjusted' NAV which one can never be sure how those adjustments came about.

RIMH (1997)

Results were slightly ahead of my expectation, earning $312m with a net margin of 9.3%. Turnover and net profit was up 57% and 70% respectively. ROE was 25% and there was no debt. Whether this momentum can be sustained is to be seen, as this account was the 1st one post listing.

I hope any impact from the resignation of independent directors and accounting staff will be left behind after say the next interim report. But looking at the pay scale of RIMH I do think the last debacle might have to do with compensation.

On fundamentals, RIMH seems vulnerable as it's single product/process company. SMT processing is also a single step in the LCD display manufacturing process. Its good fortune relies to a large extent on its relationship with fellow Taiwanese LCD manufacturers. But at least RIMH is slightly better positioned than pure LCD display assemblers. The growth of flat TV market worldwide should continue.

However, I wouldn't count on RIMH getting a very high p/e ratio, perhaps a max of 8x is already very generous at today's market. Deducting from this, the current p/e of 4.6x puts RIMH as a speculation but not a very compelling one.

RIMH will be reporting its quarter results on the 28th and there was speculation of a special dividend. But I certainly won't want one if the reason is a slowdown in business.

Meadville (3313)

Results were expectedly good. Turnover went up by 43% to $4.5b and net profit (after adjusting for share award expense) went up by 61% to $700m. Net margin was 15%, also up slightly and ROE was 25%. Capital account i.e. fixed assets doubled up last year while net gearing increased to 80%.

The 1st report after listing is usually good for most companies so let's not get too carried away. But I do like Meadville focuses its PCB business on telecom infrastructure which makes it a beneficiary of the huge capax program of the telecom companies. These higher count PCBs and HDIs required also make Meadville more resilient to margin erosion. I also like it generates 2/3 of turnover within China making it less vulnerable than other export based manufacturers.

Another bright point is the acquisition of Aspocomp's shares and plants in China last year. The giving up of manufacturing capability by a Norwegian company in the business is good proof that higher-tech manufacturing outsourcing is continuing and that Meadville has reached a certain plateau to satisfy even the toughest customer.

Talking so much about tech, it's also good to know PCB manufacturing is a lot less technologically evolving than other sectors like for example LCD modules, where manufacturers seem always one generation behind the latest products on market.

Business is expanding fast but if the consumer electronics sector slows down then Meadville will be affected nonetheless. But the higher technological content of its products should provide ample cushion (for there's fewer competitors on that level). The telecom side of the business looks promising as well.

At p/e of about 5x Meadville is a more solid bet than RIMH.

DISCLOSURE: I hold 258, 1997, and 3313 at time of writing.

Wednesday, April 09, 2008

A Look at the Power Companies - final

Things happened so fast during the last few weeks that I ended up holding some Datang before I looked at the final results, atypical for me but it wasn't a typical March either.

Huaneng's results came up slightly ahead of my estimate while Datang was slightly below, both by about 10%. So it seemed the coal factor had gotten bigger since the 4th quarter, for my estimate was based on 3 quarters of results.

SIZE

Datang vs Huaneng (YOY growth in bracket)
Asset size: $122b (34%) vs 124b (9%)
Power generated: 118b kwh (27%) vs 174b kwh (13%)
Revenue: $32.8b (32%) vs $49.8b (12%)
Commitment: not available yet

As noted before, Datang has been growing at a much faster pace and is now as big as Huaneng in terms of assets. One reader pointed out the apparently lower depreciation rate of Datang (which led to a higher margin), but I think there should be little scope for maneuver in this area as the generators used should be homogeneous. The lower rate is more likely due to the higher growth, i.e. more generators put in use each year which inflated the fixed assets account.

PROFITABILITY

Datang vs Huaneng
Recurring profit: $3.4b (up 22%) vs $5.6b (down 7.5%)
(2006 figure in bracket)
EBIT margin: 23.6% (24%) vs 15.9% (19.3%)
EBT margin: 17.8% (18.7%) vs 12.2%* (16%*)
ROE: 11.5% vs 12%
Gearing: 2x vs 1x

* excluding associates' contribution

Huaneng's margins really contracted and overall profit declined as well. This was surprising as Huaneng was better hedged for coal price, whose effect should be felt pretty evenly across the industry yet this difference in margins was too great to explain. I couldn't find any explanation or even mentioning of this by management.

The lower ROE of Datang was mostly the result of the A-share issue in 2006 (and to a lesses extent the higher MI payout). But its gearing is reaching the comfort limit of any reasonable investor.

COAL PRICE IMPACT

Datang
Tariff hike: $1.2b vs $2.4b*
Fuel cost hike*: $1.66b vs 2.26b

* according to my estimation as management of both were very elusive and didn't say much on this area. I hope more is disclosed in the final reports.

Again like last time, Huaneng seemed better at managing its fuel with it long term contracts. It generated almost 50% more power yet its incremental coal cost wasn't that much greater. The overall situation actually wasn't that dire for both last year and even Datang's net loss of $360m could be easily absorbed.

Going forward Huaneng gave indication of 18% increase in coal cost in 2008 whilst Datang's figure was 12%. I have no idea why Huaneng's figure is higher as it has contracts running until 2009 for 1/4 of its demand (based on 2006). Datang's figure was lower and some quoted management saying its coal mines will be meeting part of the demand this year. I'm really not sure about the accuracy of this.

Next I try to quantify the impact of further coal price increase.

Huaneng vs Datang
2007 generation: 173.7b kwh and 118.3b kwh
2008 growth*: 12% vs 25%
2007 avg fuel cost**: $0.16/kwh vs $0.129/kwh
2008 increase: 18% vs 12%

Incremental cost: $5.6b vs $2.3b (before tax and MI)

*very slightly lower than 2007
** fuel cost divided by total power generation

The result was dramatic to say the least. For reference last year earnings were $5.6b and $3.4b respectively. Although new capacities will bring in some contribution to partly offset the increases but risen interest cost (esp. for Datang) will be working in opposite direction.

If nothing happens between now and the end of the year, Datang will probably see a 1/2 to 2/3 decline in profit and Huaneng wlll be barely profitable. In fact, the news had it that the whole power generation industry had losses for the first 2 months of 2008; however I couldn't really reconcile the figures to that fact. But nevertheless the situation is bad like everyone knows.

CONCLUSION

How long will this tariff control remain in place is not a question I can answer. But there are believers in the market, like myself, as the prices of Datang and Huenang are far from distressed level. Huaneng is cheaper at 11x p/e vs Datang's 14x but with a higher yield of 5.6% vs 2.8%. I'd say the valuation is fair and there isn't bargain here. Calculating 2008 p/e is not meaningful as it won't be a normal year, and you don't need it to convince yourself not to buy anyway, i.e. if you are negative toward the power sector.

However if you believe the power industry should enjoy normal growth many years down the road, then I suggest you choose the higher grower.

DISCLOSURE: I hold 991 and no 902 at time of writing.

Wednesday, April 02, 2008

Something Else

I know I've been late in updating the final results of many companies. I've looked at most of them roughly but haven't really done any analysis in depth. Progress has been very slow as I've been bothered by neck/shoulder pain a lot lately, this has forbid me from spending too much time at the desk. In fact, for all this time I have visited a doctor, an acupuncturist, a bone-setter, and a physiotherapist, with chinese massages in between treatments. After nearly a month of intense treatment I'm feeling much better now and ready to start this blog again.

After this episode, I strongly advise you to get a desktop if you can, as using a notebook really causes posture problem, which like my case can develop into a longer term one. This is especially relevant if you already use a laptop at your daytime job, at which you have no choice. (FYI, before the incident, I used a desktop at daytime and a notebook at nighttime)

An imac looks really nice and can run windows too, this is if you are a fashion slave. Otherwise get a decent sized monitor and an ergonomic chair, don't use your dining chair and definitely not your sofa. Try a trackball if you can as it reduces shoulder stress, and learn to use it with both hands.

Beware, this thing really doesn't go from 1 to 10, it's more like 1,2,3,4, and then 10. You feel some stiffness on and off and then one morning you just can't turn your head no more. And that's too late already.

DISCLOSURE: I have neck and shoulder pain at time of writing.

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