Quarterly Financial Reporting - Pros and Cons

Dr Lee Kin Wai, associate professor in Nanyang Business School, presented his findings in an article in Singapore Accountant Jan 2007. I have summarised his conclusions as follows.

Advantages

• Stock prices do react to quarterly earnings announcement.


• He then investigated and concluded on the effect of voluntary disclosure in quarterly financial reporting. He defined "voluntary disclosure" as disclosure released by management over and above the mandatory requirement in the quarterly reporting.


• The more information presented in its voluntary disclosures, the lower its cost of equity capital and debt capital.

Disadvantages

• Investors, market and consequently the management of these companies are geared towards short term focus. For those with some experience in doing business, we are aware of the great difficulties in producing results in 3-month quarterly windows but yet investors and market will measure their performance as such.


• Management may be encouraged to "manage" ie. spread their earnings over the various quarters to generate "quarter-to-quarter growth" and "beat analysts' estimates".


• Dr Lee observed incremental costs to comply in terms of human hours to prepare and approve the accounts.


• The stronger a company's internal controls, the shorter the time to close the accounts. Case for corporate governance to be strengthened.

Ban Joo's woes continue

seeking direction to a better life...

Textile firm Ban Joo & Co, whose financial year-end has been changed to September from June, reported a loss of $15.1 million for the 15 months ended Sept 30, 2007 on Friday last (as compared to net loss of $35.2 million for the 12 months ended June 30, 2006).

The loss was due mainly to provision for impairment of trade debts and losses associated with the discontinuation of operations.

The management of Ban Joo has had a really difficult and busy year given the following series of actions in attempting to improve its fortune.

• A controversial share placement exercise completed in the middle of the year saw an injection of $3.6 million and has boosted the company's cash holdings. [refer to my earlier posting http://investingwithedgar.blogspot.com/2007/06/placement-of-shares-at-discount.html] Cash and cash equivalents stood at $6 million at the end of the period. [With the company incurring a loss of about a million dollars a month, the $6million will not last very long.]
• Somehow the management managed to reduce its bank borrowings and other current liabilities by $5.7 million [ I wonder how much is the total liabilities.]
• The company announced in October that it had completed a debt restructuring agreement with various financial institutions. [I wonder how were the various financial institutions convinced of its viability.]
• Lastly, the management has also changed its year end from June to Sep. [Again I wonder why. Did I miss its explanation for the change in year end date?]

Dear Labroy and SembCorp, may I know which banks advised you on hedging?

Background - Sembcorp Marine

When the news first broke on SembCorp Marine on Oct 23, 2007, it was reported that Jurong Shipyard paid US$83m and facing unrealised loss of another US$165m.

Of course, the figure has balloned way beyond US$300m.

Background - Labroy

Labroy is the other company who caught the forex superbug. It reported forex losses of $167m in its third quarter, but it also disclosed that it had entered into forex contracts running into billions of dollars.

At the time, Labroy said that it had entered into derivative financial transactions to sell euros and purchase US dollars 'for the purpose of hedging against currency exposures in relation to anticipated euro monies coming in the next three years'. These future receipts arise from the contracts for the construction of two heavy lift jack-up vessels that Labroy secured in March 2007, for a total combined contract value of 283.6 million euros (S$567 million).

Is there a severe mismatch in the size of hedging against what Labroy is receiving. So is the company really hedging against a forex exposure or are they involved in currency speculation?

When I was a rookie in the private banking many years ago, we were constantly reminded of "no surprise culture". If we had made a mistake in effecting a client's instruction or when a client's investment has gone awry, we are to inform our superiors as soon as possible. Time is the essence. We should attempt to cut the position asap to limit further exposure.

In reality, there could be people who attempt to sit on a mistake and pray that the market should reverse and move in his favour. The losses would keep piling up and snowball into an avalanche!!!

In summary, solve the problem first when a problem arises. Witch hunting can come later.

Value investing OR Growth investing?

Can you tell the difference between the two?

Value investing is the art of looking for "out of favour" companies with discounts in price-earning (PE) multiples. Looking for established companies with proven earning records but relatively "cheap" now.

Growth investing is the "science" of looking for fast earnings growth, probably relatively young companies with possibly cutting edge, new age products seeking to change market paradigm. Such companies are usually trading at high PEs. Why? Got not much earnings to show now.

So who am I? Can I say I am both a value investor and growth investor.

In a recent presentation by Mr Jimmy Pang, a senior portfolio manager at Alliance Bernstein recently, he said,

• Forecasts for exciting companies tend to be too exciting ie. optimistic.


• On the other hand, investors are too pessimistic with value companies.

His themes were that

• "reversion to the mean is good for value stocks but bad for growth stocks" under the current investment climate.


• "there is very little value to wring out of value companies but there is a lot of value to be found in growth companies"

What is the reward of correctly identifying the "right" growth company to invest in?

Well, if you had invested $10,000 in Cosco five years ago, you would be a millionaire today!!!! (worth $1.1m today)

Mr Oei has made another $14mio.

What is the deal?

On Nov 13, 2007, Mr Oei is selling the 55,000 sq ft freehold site to Mr Freddie Tan (the former publisher of Magazines Incorporated) for about $52 million - realising a gain of almost $14 million or 37 per cent since Feb 2007.

I highlighted the property purchases in my earlier posting in the share swapping exercises.

http://investingwithedgar.blogspot.com/2007/02/what-is-happening-with-mr-oei-novena.html

The two properties, at 98 and 100 Pasir Panjang Road, were acquired from Novena Holdings for some $29.8 million. His total cost, is said to be around $38 million.

Another deal in the bag for Mr Oei. The next question still awaiting an answer would be - Where will Mr Oei house the 10,000 Buddhas? One thing for sure, it will be a very nice place.

SPH is more than fixed deposit

Would you consider investing in a company that gives you the following?

Company's last closing share price - $4.48.

1. The company is earning 32cts per share for you.
2. It is paying out 26cts per share as dividend. This is equivalent to a gross yield of 5.8% per annum (against share price). Compare that with how much are you getting from your fixed deposit or saving accounts?
3. The company is in a business of selling necessities ie. information and entertainment distributed over various channels ie. newspapers, magazines, internet etc etc etc.
4. Generating positive cash flow of $40mio.
5. Topline grew by 13.6%.
6. Profit attributable to shareholders grew by 18.1% to $506mio.

P/S - I have some CPF monies in SPH trying to beat the current 2.5% interest rate for the ordinary account.

Merrill Lynch recommends SC Global

Yesterday Merrill Lynch initiated coverage of property firm SC Global Developments with a 'buy' rating and set a price target of $9.50. (closed at $6.45, up 45cts on Oct 4, 2007)

Merrill Lynch said the stock was undervalued and could appreciate further when SC Global launches two of its residential projects in the coming six months.

I am sorry I am unable to agree with that recommendation on the simple basis that I don't think Simon Cheong will sell himself short.

Back in June 2007, Wheelock Properties bought and Simon sold a 10% stake in SC Global Developments at @$6 for a total value of $112.1mio.

Check out my posting on that transaction.
http://investingwithedgar.blogspot.com/2007/06/young-simon-and-old-wheelock.html

It was only so recently that both buyer and seller (who are veterans in the property business) valued SC Global at $6 per share. I am sure Simon knows the value of its assets and would have present-valued certain percentage of future value.

Nothing much has changed since Jun 2007. I will be glad to lay my hand on the details of Merrill Lynch's recommendation. Please pass me a copy if you have it!!!

Till then, I am with Simon's valuation.

It doesn't pay to save

He also works in Shenton Way.

Huh? Well at least for next few years where we should be experiencing negative real interest rates.



What is negative REAL interest rate?
Real interest rate = Nominal rate less inflation rate


So a negative real interest rate is when the gross interest interest rates that you are getting from your Bank for your saving account and fixed deposit are generally lower than the inflation rate.



The inflation rate is expected to be 1% to 2%.



If you let your monies sits in your saving account, your monies would buy less less things as any interest earned is outstripped by climb in consumer prices.



For example, DBS Bank offers to pay 1.8% per annum for $50,000 - $99,999 24-month fixed deposit.



I am not discouraging the age old good habit of saving.



But I am highlighting the need for you to aggressively manage your monies ie. to seek out investment opportunities which could yield higher than inflation rate at a risk level acceptable to you.



Bottomline - It doesn't pay to save amid rising inflation, low bank rates. Ask your money to work harder.

CPF interest rate increase

Toward the beginning of the month, we were told that the first $60,000 in the various accounts will be given an additional 1%.


This is to help grow our retirement fund. I cheer to that.


A couple of weeks later, today, I heard it on radio that the inflation rate is now at 1-2% and it is expected to go up in the second half of the year.


From this piece of news, it dawned upon me the importance of the 1% increase in interest rate announced earlier.


Without this increase in CPF rate, our funds in the CPF Ordinary account would be accumulating at close to inflation rate. Bottomline - No real increase in purchasing power.


Bottomline - We need to ensure that our monies work even harder to ensure sufficient funds for retirement.

Mr Oei is selling down his Centillion shares

On Friday alone, it is estimated that he made $26mio from selling the 300,000,000 million shares that he has.

That effectively reduced his holdings from 26.47% to 19.72%...

HUH!!!! He still got 19.72%%%%%

40.6% was the highest level he held.

Mr Oei, I will pay good attention to your next purchase decision. Really hope to learn from you.

What is "share buyback"?

my sunday jog

Who is buying?

It is the public listed company buying back its own shares from the open market using company's fund. Shareholders' approval must be secured to use company's funds for this purpose.

Under the old rule, the shares would be cancelled. Current rule allows such shares to be placed in a Treasury Account ie. a holding account.

What are the possible reasons for such action?

• to enhance Return on Equity
• to tighten control over the company by the majority shareholders' using company's fund
• to discourage any takeover attempt by restricting supply of free floating shares
• to return excess capital back to shareholders
• to buyback and give the shares to employees as reward under its various incentive schemes
• to support the company's share price

When is it an appropriate time for the company to do it?

It is usually done during periods in which the respective company thinks its share price is undervalued.

It is reported in BT yesterday that the total value of share buybacks rose from $53.47mio in July to $174.6mio in Aug to date.

UOB Bank alone accounted for $143.32mio ie. an amazing 63% of total value of share buybacks over the these 2 months. Haw Par Corp, another company related to Wee family, bought back $40mio worth of shares.

So is the Wee family signalling to us to buy too???

Holding period for shares

I just been informed by Ms Teh Hooi Ling in her article in yesterday's BT that there is a formula used to measure average holding period.

What is the formula?

It is calculated based on the annualised value of stocks traded in a month divided by the entire market cap of the stock exchange and multiplied by 365 days.

Last month ie. July 2007, the number of days a stock is held by investors in Singapore last month hit 353 days. It is the second lowest level in the last 17 years since the dotcom bubble in June 1999.

For the record, it was 309 days in June 1999.

So is it good or bad to have "a low holding period"?

Back in 1994 and 2000, average holding periods during thes 2 years dropped to the lowest level during their respective peak of the stock market.

And two months back, holding periods for stocks in Asia was at its briefest, shorter than even in 1994 and 2000.

Thus on hindsight, the correction should have been seen to be coming.

Lesson learnt - Set up the formula in your Excel spreadsheet and monitor it for the next stock market crash!!!

360 day-year or 365 day-year - What is the big deal?

I have just been informed by my DBS Credit Card Statement that:-

"the basis of interest calculation will be revised FROM existing 360 day-year TO 365/366 day-year (in a leap year)"

I couldn't believe my eyes!!!!

That for once in my life, I am looking at an unilateral amendment to a service agreement that is in favour of customers.

So what is the big deal?

Allow me to illustrate with an example. Let us say I have a personal loan of $10,000 at 14% p.a. What is my interest expense for the month of August (a 31-day month) based on:-

a) 365 day-year and;

b) 360 day-year?

Answer

For a 365 day-year, my Aug's interest expense,

$10,000 x 14% x 31/365 = $118.90

For a 360 day-year, my Aug's interest expense,

$10,000 x 14% x 31/360 = $120.56

Based on DBS Bank's revision of its basis year, it has implicitly given me a discount of $1.65 per $10,000 loan per month (estimated).

If you multiply this by the billions of personal loans, credit card loans, car loans, property loans, travel loans, renovation loans etc etc etc, this would be (as I am not sure whether this is applicable to all DBS loans) a significant move by a leading bank in Singapore in the right direction ie. a fair deal to both the bank and its customers.

Cheers to DBS Bank!

P/S - Refer to http://anythingwithedgar.blogspot.com/2007/05/how-to-increase-your-companys.html for my earlier expression of displeasure.

Have you got a call from your broker?

It is definitely BAD news if I had received a MARGIN call from my broker in the last 2 weeks.

What is a margin call?

Situation arises when I have borrowed money from stockbroking firm to partially pay for my share purchases AND the share price of that counter fell significantly.

Example

I have purchased 100 lots (ie. 100,000 shares) of Company X at $1 per share. At 80% financing, I paid $20,000 from my own pocket and the remaining $80,000 borrowed from the firm.

When the share price dropped to 70 cents, the firm would recalculate the loan amount ie. 80% of 70 cents x 100,000 shares = $56,000.

The firm would call me to top up the difference of $24,000 (ie. $80,000 less $56,000)!

If I got the money, I would pay the $24,000.
If I got no money, I would be forced to sell my shares at a loss of $30,000!!!

Moral of the story - You must consider the downside for any upside that you are expecting.

Do you have a CDP account?

No? What is that?

CDP is the Central Depository account where your scripless (share certificateless) shares are held.

Many people have opened their CDP account in recent months (eg. in July 2007, 6,200 accounts were opened). Many are only entering the stock market from Jan 2007.

There are about 250,000 accounts that are active (active is defined by at least one buy or sell in the last 3 months). If we assume that Singapore has 3.4 million adults over the age of 20 years old, this would mean that only 7.4% of adult population have an exposure in the stock market.

So if you don't have a CDP account, you belong to the majority. But is this good for you?

Basically I don't think staying away from investing in shares is good for your retirement. Why? As equity investment consistently outperform bonds in the past, it is advisable to allocate some of your monies in the stock market.

Reference - "Not many benefit from bull run", Teh Hooi Ling, BT, Aug 4, 2007.

Things people do not care

The following are things people do not care about when the market is red hot!!! The following are quotes from today's papers after the blood bath yesterday.

"People are not investing BUT trading."
[(red face) Edgar was trading on IPOs. He didn't read the prospectus.]

"It went from unbelievably bullish to unbelievably bearish in just hours."
[Edgar was searching for news to explain the suddent turn in sentiment. I thought a bomb went off somewhere in the world.]

"Traders were unnerved by a sharp sell-down..."
[Edgar has been mentally prepared for this type of occurrence. He was actually looking to buy.]

"Many heavily traded stocks are those belonging to financially strapped companies with poor earnings records."
[Edgar is fully aware of this and has been advising caveat emptor. See past posting.]

"Reverse takeovers can take as long as a year."
[Edgar understands the difficulty of doing business. A simple deal may take weeks or months to negotiate. Imagine a reverse takeover between 2 entitites under 2 different legal, accounting, financial and sovereign jurisdictions. The deal may even break down.]

"Can a company with poor earnings record be valued at close to a billion dollars?"
[Edgar cannot believe it is happening. But apparently there are many who give such valuation to those companies.]

Mr Oei again with Equation and Centillion

Who are the investors?

• Mr Oei Hong Leong
• Mr Eddie Chng, Equation (ex-HeShe)

What is the target company?
- Centillion Environment & Recycling (ex-Citiraya)



Background

• In 2005, Mr Oei and Equation bailed out Centillion by investing $8.05mio each for 37.5% share each of company.


• Centillion also gave both investors the right to buy more shares. Each may buy another 950mio shares for $8.05mio.

On the Tuesday, 17 July 2007,
Both gave notice to exercise that right. Expected settlement on Friday.
Each would then control 42.86% of Centillion.



Looking forward to Friday, 20 July 2007
Assuming Centillion share price hold steady at 20cts, both Mr Oei and Equation are sitting on a paper gain of $364mio each!!!!! (computation as per BT's article)

$8.05mio for $364mio over 2 years!


My sincere respect to you, Mr Oei and Mr Eddie Chng.

Another Mr Oei's sale and profit

Just over a week after he sold off his shares in Super Coffeemix for an estimated profit of $40mio, he sold off the entire 29.98% stake in China Healthcare.

Estimated profit - about $13mio.

Didn't know China Healthcare was Econ Healthcare until yesterday. Since most of the Chinese counters are in fashion, I wonder whether I can change my company name to China XXXX Pte Ltd.

May we speculate why he sold China Healthcare or why he is in the mood of selling or are these two transactions totally unrelated but coincident?

China Healthcare and Super Coffeemix are ripe for profit taking given the recent run in share prices. Just like hundred of other counters on SGX?

IPO Strategy

Hi friends,

In the middle of a night of a day last week, I chanced upon the opportunity to apply for IPO for China Sunsine using the massively convenient internet banking. The IPO price was 39cts and I decided then to apply for 20 lots.

The next day after the closing date, I was informed that I have been successfully alloted 3 lots.

On trading day, I sold at 57.5cts. A nimble profit of 18.5cts per share or $500 over a few days.

Given the small success, I started to give IPO a little more attention. I applied to a few but was unsuccessful in all of them. The opportunities missed are as follows.

• RH Energy - IPO at 32cts and closed the trading day at 87cts.
• China Angel - IPO at 35cts. Traded as high as 80cts.

Moral of story - It confirms again - There is no sure thing. Caveat Emptor always.

P/S - Financial One - IPO'd at $1.15 and closed the day at $1.15.

HG Metal Chairman sells 1.1mio shares

The point - Whenever an insider make a buy/sell activity or a series of buy/sell activities, we should pay attention.

We need to evaluate that action/s in perspective ie.

• How insider is this person? Key/majority/very executive shareholder?
  
• no. of shares bought/sold against his existing holding
  
• any reason given for the buy/sell - Sometime, the person may sell to pay for the bungalow he is buying etc etc.
  
• pattern based on past activities of this person

Let us take a look at what is reported in Straits Times today on the sale of 1.1mio made by HG Metal Chairman.

• Who is he? The Chairman of the company.
  
• 1.1mio shares sold --> reduced his total shareholding position from 6.06% to 5.65%.
  
• no reason given
  
• pattern of activity - I did not check.

My view - He sold when the share price broke new high yesterday. I think he could be cashing in on some of the gains.

PE ratio

What is PE ratio?
The formula = market price of share / Earnings per share (EPS)

It is how much you are willing to pay for the earnings being generated by the company. This is a tool to value the company under consideration.

Interpretations - example - SIA's PE as of 10 July - 11.3x

• It would mean that an investor is willing to pay $11.30 for every $1 earned by SIA.
• It would also mean that the same investor is happy with a return of 8.85% return on investment (ie. invest $11.30 to get a return of $1)
• It would also mean that you are willing to wait 11.3 years to "get back" your money. (assuming SIA pays out the full $1 it earns as dividend)

The PE ratios for all listed companies are provided in our main newspapers on the following:-

• price - as per last trading day's share price
• EPS - as per the lastest actual audited earnings available

Example - If a company's last financial year end was 31 Mar 2007, the PE ratio reflected in today's papers would yesterday's last traded share price divided by EPS as per 31 Mar 2007.

What are the current PEs of some of bluest stocks on Singapore Exchange?
To give you an idea of market valuation,

• UOB Bank - 14x
• Keppel Corp - 26x
• F&N - 26x
• SPH - 16.7x

So what is/are the PE of the companies that you have invested in?

In search of next stocks to buy

On Jul 7, 2007's Weekend edition of Business Times, Ms Teh Hooi Ling gave us the following clues to find our next winners.

"Go for stocks with high return on equity but low price-to-book ratio"

What are those ratios?

• Return on equity (ROE) - We have several versions of the formula to ROE. Basically "return" could profit before tax or profit after tax and "equity" would be the summation of paid up capital plus all the reserves. Ms Teh is telling us to look for companies with high ROE.

Take for example - If most businesses in Singapore are able to generate a return of 10% on its resources, that 10% becomes the normal rate of return. Then look for companies making above the normal rate.

• Price to book (PTB) ratio - What price? Share price of that company. What "Book"? It refers to the net assets value as reflected in the accounts. PTB ratio will give an indication of how much we are paying in excess of the book value per share of the target company. Thus Ms Teh rightfully told us to look for companies with LOW PTBs.

Take for example - If the book value is $1 and the share price is trading at $2.40, PTB is 2.4x.

So where to find those ratios?
Sadly, such information is not easily found and nicely presented somewhere for us to see. Ms Teh had downloaded the ROEs and PTBs of all the companies listed on the Singapore Exchange from 1990 until 2007 from Thomson Financial Datastream. She had done a lot of secondary analysis to do the article.

As retail investor, we can do calculations on the few target companies. But market or industry figures would be the value added of institutional investors.

But if you actually do your homework, you will be well rewarded as per historical data. Ms Teh found out that the top 10 per cent of companies with the highest ROE/PTB would have turned your $100 into $34,048 in 17 years ie. average growth of 41% per annum.

Buying Hope?

I hope you are not buying shares of a company based on HOPE that a particular deal will go through.

A good company's fortune should not be dependent on just one deal!!

But if you had bought into these companies as mentioned below, your pocket would have been lighter with your hope dashed (at least for now).

• Carats Ltd (formerly known as Daka Designs) is continuing the search for reverse takeover (RTO) opportunities, after a memorandum of intent for a potential RTO fell through.

• The share price of YNH Property, a Malaysian property company has tumbled by 13% after the company failed to go through with a planned development with CapitaLand. Both companies had been hoping to develop a block of grade A commercial offices on a three-acre plot of freehold land along Jalan Sultan Ismail in the centre of Kuala Lumpur.

To buy on hope, I might as well go buy 4D. Cheaper and simpler.

The Lexicon Group

This public listed company has experienced a few rounds of changes of its majority shareholders, name of company, a lot of acquisitions and disposals and I still don't know what it is trying to achieve.

The name has changed from Panpac Media to Sun Business Network (SBN) (2005) to The Lexicon Grp (2007).

The company has reported a whopping loss of $102mio for year ended 31 March 2007. SBN's grand plan involving Greater China, NASDAQ and London's AIM failed miserably.

I definitely do not have shares in the company.

But I am just curious for the sake of minority shareholders, will there be light at the end of the tunnel under the new ownership?

Mr Oei exits Super Coffeemix

Mr Oei bought into Super at 34cts and 45cts per share about 2 years ago.

Yesterday he sold his total holdings at $1 per share Yeo Hiap Seng to reap an estimated profit of $46mio!!!

Amazing!

Did Edgar mirror Mr Oei's moves?

Edgar didn't. He was tracking the share price for months. The share price just exploded upwards from 40 plus cents level. He didn't follow. He regrets his inaction.

Should the market celebrate his departure by bidding the counter higher?

Sadly, I don't think so. We should take his cue.

Young Simon and Old Wheelock

Still can see Wheelock from here.

What is the transaction?
Wheelock Properties bought a 10% stake in SC Global Developments. Simon Cheong (SC) sold his shares at @$6 for a total value of $112.1mio.

FYI - SC Global closed at $6.45 on Jun 22, 2007.

My objective here is to attempt to understand why the buyer bought and why the seller sold.

Why did Wheelock buy?
David Lawrence, its Chairman and CEO, explained in today's BT ie. 23 Jun.

They think they are buying into good, well-managed companies with a sense of style, and a good brand name.

• It allows Wheelock to buy into property firms that can hold on to land for longer term. Wheelock, though listed in Singapore, is considered a foreign company and thus faces restrictions.
  
• Wheelock has a track record of such investment in the past when it bought 20% of Hotel Properties (HPL) @$1.80 for a sum of $171.4mio. Today, HPL's last traded at $6.15 per share.

My view

Should we tap on the homework done by David Lawrence and its able team of directors and management, in deciding whether we should place our savings with SC Global?

Based on HPL and other successes that Wheelock have logged in todate, I think it is valid to follow albeit for medium to long term view. It will take for SC to fully unlock the full value of the landbank acquired to date. And I really don't think young Simon is in a hurry to do so.

Why did Simon Cheong sell?
No official words from him yet. Thus I hereby speculate.

• To Simon, maybe it is good to bring another brand name shareholder to its stable.
  
• Wheelock's database of buyers could be tapped upon in his attempt to sell SC's projects at $3,000 or more per sq. ft.
  
• Maybe young Simon thinks it is a good time to take some monies off the table given that SC Global's share price has gone up so much. Is he saying that in the near term, $6 plus per share is about right?

My view

Upside could be limited in the near term.

But there will be upside as old Wheelock wanted to buy more but young Simon said 10% divestment is enough.

Penny Stock Email Spam

Are you receiving emails that tell you to buy some stocks immediately as they expect the price to explode upward in the near future? Promising you quick and huge profit.

Most people either ignore or delete such emails. But inevitably there will be some people who will take the bait and buy that recommended counter.

These fraudsters send out billions of emails worldwide. But before they broadcast, they would have bought some shares @3cts for example. Assuming a small group of people respond by buying that counter and bid up the price to 4cts. These fraudsters would then unload their holdings to the buyers. They would make a tidy profit!

Their cost of this exercise - email broadcast costs.

Simple method indeed.

Irrational Craziness in Ban Joo's share price

"Irrational exuberance," he said.

Here is the continuing episode on Ban Joo based on published information. [P/S - I got no Ban Joo shares.]

Jun 30, 2006 - As at that date, it owed bankers almost $68 million.

Oct 2006 - Auditors expressed doubt about the company's ability to continue as a going concern.

Nov 5, 2006 - Company made announcement on the placement of shares at 2.5cts to secure $3.57mio cash injection. Share price then was 4cts.

Early Feb 2007 - Ban Joo announced an intention to buy into various private property-related companies via the issue of 109 million new shares. [Who were the intended sellers? Were these deals an issue to SGX giving the approval?]

Mar 27, 2007 - It announced that these purchases were off because certain commercial issues could not be resolved.

Jun 21, 2007 - Sivanithy's article in BT. Should the placement go through on Jun 25, 2007, will the difference of $30-odd million be considered an expense to shareholders and therefore the company? If it were to account for it, will the company sink?

Jun 22, 2007 - The counter closed at 24cts with about 30 mio shares transacted.

My view
Going concern is an issue with the company since last year.

Company promptly went and look for white knights for quick cash to keep company going. Company also tried to look for some new businesses to be injected into the company. These deals went belly up in Mar 2007.

The company is in a precarious position.

• Be damn if it gets the $3.57mio and;


• be damn if the shareholders reject the proposal on Monday.

If it gets the $3.57mio, how long will $3.57mio last with the possibility of $30mio "expense" to be charged to its P&L with no new business deals?

If it didnt get the $3.57mio, how to solve going concern issue with no money and no new business?

Thus I wish to know how one justify the last traded share price of 24cts.

Is it irrational exuberance that has got into all our heads?

Buyers beware!!!

Ban Joo - Placement of shares at a discount

my gifts

On June 21, 2007, R. Sivanithy of BT wrote this article entitled "Ban Joo placement: why the SGX delay?".

This is how the story started.

Nov 5, 2006 - Ban Joo & Co proposed the placement of 145 million new shares @2.5 cents to two private investors. The net amount to be raised is $3.57 million, which the firm will use for acquisitions and investment in new businesses.

Two regulatory procedures to clear for the fund raising exercise to go through.

1. As the placement price is more than 10% discount to the prevailing market price of 4 cents at that time, SGX's approval is thus needed.


2. A special meeting for shareholders to give approval to it.

So what went wrong?

1. In his article, Sivanithy wished to know the reason for the delay between application date of Nov 5, 2006 and approval date of May 18, 2007.


2. The share price has risen to 24cts as of Jun 22, 2007. The intended buyers at the proposed price of 2.5 cts, would stand to make 21.5cts per share. A whalloping $30mio profit!!!! So existing shareholders are obviously not happy with the deal.


3. There is no "lock-up" clause in the proposal ie. the new shareholders would be free to sell the whole 145mio shares if they so wish.

FYI - The Extra General Meeting (EGM) will convene on Monday Jun 25, 2007, for the shareholders to decide on the proposal.

SGX responded promptly on Jun 22, 2007 as follows:-

• SGX received the application for listing and quotation of the placement shares on Mar 19, 2007 and NOT Nov 5, 2007 as alleged by Sivanithy.


• The proposal could not be accepted earlier as the company did not have any independent directors on its board. SGX had to remind the company of its continuing listing obligations. After which, the company appointed two new independent directors. [What type of company is this when it can't handle listing requirements?]


• The company confirmed that the issue price remained at $0.025 for each new share despite being reminded by SGX of the BIG discount.


• The proposal was approved on May 18, 2007.

SGX is thus in the clear on this.

What is "placement of shares"? The company is selling new shares at a price agreed to some buyers payable in cash or with assets. It is different from a rights issue where the new shares are issued to ALL shareholders at a certain ratio eg. 1:5 ie. 1 new share for every 5 shares you are holding.

Everyone is making $ from the stock market?

True or False?
To many, it is very true.

You will hear everyone talking about "which counter is going to go up tomorrow" or "you make how much hah?" all the time everywhere ie. in coffee shops, hawker centres etc etc.

If everyone is making money, who is losing money?
It can't be nobody is losing money.

So who?????
Answer - The last person/people holding the baby (ie. the shares) is/are the losers.

How could it be true?
Mr A buys at $2 and sells to Ms B at $3.
Ms B sells to Mr C at $4.
Mr C sells to Ms D at $5.
Ms D sells to Mr Edgar at $6.
The market crashes. Share price drops to $2.
Mr Edgar held on the $6 share and after five years, he is praying for the share price to recover.

Creative is delisting from Nasdaq

Creative Technology announced that it intends to delist its shares from Nasdaq to help it reduce costs - the second time it has sought to do so.

It would save about USD$1-2mio for a company whose financial predicament is well documented.

Well you can only do so much to your middle line. For the bottomline, we still need the creativity (no pun intended) to invigorate the top line.

Where and when is it before Creative runs out of time?

Do you read the prospectus of IPOs?

Dear friend,

Frankly speaking, I couldn't.

I could not read every page but I do attempt to read sections of prospectus for info on the following areas:-

• What business/industry are they in? What is their business model? How do they make money? Thus is it defensible to some extent?
• What is the price am I buying in into the company? I will look for price-earning (PE) ratio as my first rule of the thumb.
• What are the declared risks of the business by management of the company? Many years ago, there was this IPO in the palm oil business which has declared that some of their plantations are sitting on land with ownership under dispute. Of course upon reading that, we should review for possible impact.

Gems TV - Learning Points

Hi friends,

Back in Nov last year, I wrote about the handsome profit made by Hour Glass for being a 5%-seed investor in Gems TV. It was listed at $1.08 and went to a high at $1.80. Today it is in the region of $0.70.

What is Gems TV's business?
It sells coloured gemstone jewellery, made in Thailand, on TV in UK.

What happened?
The company went from a loss of US$200,000 in 2004 to a profit of US$28.8mio in 2006.

On Feb 12, 2007, Jason Choo, the Chief Executive, gave a conference call interview and painted a very rosy picture for the business.
Share price went up 17cts to $1.45.

On Feb 22, 2007, Credit Suisse reinforced the positive aura of Gems TV by recommending a buy call with a target price of $1.94.
Share price went up by 5cts to $1.54.

On Mar 27, 2007, DBS-Vickers raised their buy call from $2 to $2.60 on the basis that the company will grow at a compounded rate of 60% for next few years. Share price went up 14cts to $1.80.

On May 14, 2007, Gems TV reported a 12% drop in 3rd Qtr sales and a whalloping 88%-drop in profit. The business's expectation for the next 2 Qtrs will be DIFFICULT.

Moral of the story
It is not easy to do business and make money. A business is not built over night.

Stock analysts from big and small broking and finance houses are prone to mistakes too. You must know who are these people doing their analysis. Do they do site visits planned by prospective companies? Or do they just do desktop evaluation of a business by someone who has not run a business before in their life?

Couple of years back, a journalist asked me why I didn't sell my China Aviation Oil shares when SIAS changed their recommendation to SELL. My response then was how do you know who is right and who is wrong at THAT point in time.

My last learning point as highlighted by R. Sivanithy is whether investors do their own homework. Or we rely on entities like Credit Suisse or DBS-Vickers to do that for us?

I will continue my comment on this in my next posting.

Caveat emptor, my friends.

Back-door Listings

P/S - Are you here?

Rowsley Limited
On May 2, 2007, Rowsley announced the acquisition of $2.7bio Chinese solar firm which will lead to a reverse takeover.

A few weeks later, the company presented a massive loss of $21.5mio the financial results for year ended Mar 31, 2007.

Eng Wah Organisation
Last week, Eng Wah announced it would be bought out by a Japanese biotechnology firm for $675mio which will lead to a reverse takeover.

In today's paper, Eng Wah and its Crazy Horse escapade reported a net loss of $10.6mio.

What is a reverse takeover?
On paper, I am buying you but actually you are cleaning me out. [Remember - substance over form.]

Did the losses in the respective company mentioned above signal to its management that their existing business is deep trouble? I guess Eng Wah had tried to do something about with Crazy Horse. I suspect that there is a huge sigh of relief (after months of emotional torture) when they finally decided to let the Crazy Horse go. An amazing $9.4mio of the $10.6mio loss reported is due to Crazy Horse.

Consequently, both companies are selling out of the final remaining asset ie. "Singapore-listed company status" to the Chinese and Japanese buyers.

P/S - I got no shares in both companies.

Two headlines on Chinese markets - Severe concerns

"Investors should pare China holdings, analysts warn" and "China funds' values slide as foreigners flee" were the two headlines in Business Times about two weekends ago on Chinese stock markets.

Last week, Alan Greenspan, the RETIRED (but still talking alot openly)FED Chairman, warned the audience in a conference in Europe of the same issue. The markets have been in a negative mode hence.

How overvalued are domestically listed Chinese shares in the eyes of foreigners? As much as 16 per cent, based on two China equity funds for foreigners that trade at discounts to their underlying stocks.

Exchange-traded funds seldom trade at steep discounts except during times of turmoil as per experts.

As foreign investors increasingly question whether China's roaring stock market is heading for a crash, overseas-traded China funds which have more than doubled in value in the last year are now steeply discounted.

At the start of the year, the same funds traded at premiums of as much as 20 per cent above the value of their underlying stocks.

So what is the impact, if any, on regional bourses?
If there were any severe correction on the Chinese markets, we should expect knee-jerk reaction. But another report has highlighted that the Chinese meltdown, if any, should be viewed as limited to the Chinese markets or deemed as an internal affair.

So my friends, whichever way the storm could come, please tread in a measured way.

STI ETF 100 - huh?????

On Apr 24, 2007, I bought my first lot of 100 shares of STI ETF 100 @$33.25.

Based on my memory, the market had experienced a correction of more than 100 points the day before. I took the opportunity to try out a new investment type ie an ETF.

As of May 18, 2007, the last traded price was $35.29. A $2 appreciation in less than a month. Good decision on the timing but not on the amount invested.

So what is an ETF?
ETF is an exchange-traded fund. For STI ETF, it invests in the component stocks of Straits Times Index according to the respective weightage.

What are the advantages?

• It allows me to participate in the equity market at theoretically lower risk.
• It spares me the need to comb through piles of brokers' recommendation.
• It allows me to participate in the growth of a group of 50 companies representative of the Singapore economy.
• My fortune is thus not tied to the fate and turbulence of a single company. Many of these companies are the bluest of the bluest chips counters.
• I will receive dividends on dividends received from these companies.
• Any fees payable to the fund manager? Nil. I only pay for the commission and fees as per buying and selling shares on the exchange. Thus in terms of costs against fund-manager-managed funds, ETF is definitely cheaper.

Are there any disadvantages?

• I might experience liquidity issue ie. there could be occassions where there are no buyers or sellers at prevailing price. But in recent weeks, I must say liquidity has improved. Not sure whether it was due to a letter written about the higher volume done on ST index in overseas exchanges.
• While I may have diversified away company-specific risks, I am still exposed to country-specific risk for STI ETF.

Unit trusts and Funds - What????

A reader said in a recent posting that shares are very volatile and thus asked me to write something about unit trusts.

Unit trusts or funds are financial vehicles where individuals can pool their monies to invest in certain sectors, themes, country etc at a specific risk profile.

Individuals essentially engaged fund managers to make investment decisions on their behalf.

For that, you have to pay them $$$. The annual fees are usually a percentage of funds under management, regardless whether the fund make money or not.

In addition to that annual fees, you may be required to pay a one-time marketing fee upfront when you first participate in the fund.

Volatility will still be around as it would depend on the type of unit trusts you have selected. Eg. you should have a higher appetite for risk for you to invest in technology funds as compared to investing in essential consumer product sector.

I lost money with AEM Holdings today

Dear fellow investors,

Today I am hit by another loss with my holding in AEM (my last big boo boo was China Aviation Oil).

Company requested for a trading halt this morning. Given last week's DBS Vickers' report earmarking AEM (among many others) as a potential target for acquisition, naturally I thought some deals would be announced along the same tune.

Guess what! The Company seeks a trading halt to announce that the Company is assisting with investigation by CPIB !

Upon resumption of trading, the counter dropped by about 20%. Edgar jumped off the cliff....

Why? Why? Why? Why?.................. and a big sigh....

Mr Richard Li of PCRD is at it again

What is the deal now?
On Mar 3, 2007, Pacific Century Regional Developments was reported to have sold its 47.06% stake in PCI, its Hong Kong-listed insurance arm for HK$3.14 billion to Fortis Insurance International.

What is Edgar not sure of?
Back in Nov 2006, PCRD's shareholders were asked to approve the sale of 22.64% stake in PCCW for HK$9.2 billion. That deal was rejected by the minority shareholders.

He is said to be selling off his "unloved" assets in PCRD. So far, we note that he doesn't like telecom and insurance businesses.
What other "unloved" assets will he sell?
What is his "loved" assets anyway?
What is the true value of PCRD?
Can someone do the sums please?

Or is he the Richard Gere's movie character in Pretty Woman, where he buys company and strips it apart and sells them in pieces for a profit?

The biggest winner of the deal is Mr Li himself, of course. But he would have to share the fruits with the minority shareholders of PCRD, right?

Congratulations to Mr Li.

P/S - I still got no position in PCRD.

Mr Oei has struck another deal again!

P/S - Appreciate what we have.

The main players
- Mr Oei Hong Leong in International Capital Investment Ltd (ICIL), (formerly Jurong Engineering Ltd)
- TT International, which makes and sells the Akira range of electronic appliances

For a complete picture of the sequence of events of Mr Oei to date, see my previous posting.

What is the deal?
TT announced on Mar 1, 2007 that it was injecting its Akira assets, business and undertakings which it valued at $90 million into ICIL.

Upon completion of deal, TT would own 77% of ICIL while Mr Oei's stake would be reduced from 76% to 17%.

Issues to be considered:-
- The two shareholders would jointly owned 94% of ICIL. As free float of 10% of company's shares is required, divestment of shares is necessary to maintain listing status.

- How to justify valuation of Akira's business at $90mio? Ms Julia Tong, exec director of TT, cited Interbrand, a branding consultant, who had attributed a value of $49 million to the Akira brand back in 2005. TT is said to have grown and now sells in more than 60 countries. Of course, Mr Oei must have checked and considered the valuation as fair for him to give away 77% of a cash-rich company in ICIL.

What does the deal mean to each player?
TT - By focusing a brand and its business into a single vehicle, it is giving prominence to it. Hopefully translating to more business at next level. Back door listing format. TT will probably get some cash from divesting a few percent of ICIL shares.

ICIL - May have found a business to continue its listing status. As no cash payout is mentioned in this deal, the cash hoarding will provide plenty of ammunation to fund Akira's growth.

Mr Oei - He has bought himself into a growing business that is scalable very quickly and can be part of his China's experience.

What is happening with Mr Oei, Novena and TT International?

The main players
- Mr Oei Hong Leong thru' its Foundation
- Novena Holdings - in the furniture business
- TT International - famous for its Akira branded electronics

Sequence of Events
11 Dec 2006 - Novena bought 98 Pasir Panjang for $13.5mio.
11 Jan 2007 - Novena bought 100 Pasir Panjang for $14mio.

22 Jan 2007 - Mr Oei bought the 2 properties from Novena. Novena got $2.3mio pure cash and profit.

21 Jan 2007
- Mr Oei sold its 20mio shares in Tung Lok to Novena. Novena paid Mr Oei with 10.3mio new Novena shares.
- Mr Oei will further buy 27mio new Novena shares @30cts ie. $8.1mio cash.
- Based on my calculation, Mr Oei would be a substantial shareholder with about 25% stake in Novena.

21 Feb 2007
- About a month later, Novena announced the sale of some of its furniture business to TT International for $13.5mio cash.
- In the same breath, Novena will buy about 18.3mio of TT International shares @20cts. Novena would effectively return about $3.6mio of the $13.5mio back to TT.
- At the end of it, Novena would own about 14% of TT Intl.

What does the whole series of activities mean to each player?
- Mr Oei have purchased 2 properties (not sure whether they are adjacent to each other) for $29.8mio. He also got rid of Tung Lok shares for a stake in Novena and TT International.

- Novena made $2.3mio from the property deals. Novena got about $10mio cash from selling part of its furniture business. Total cash inflow - about $13mio.

- TT International paid about $10mio for Novena's retail assets. Could we see TT transforming itself into a Court or Harvey Norman by marrying furniture with Akira range?

Well all the players have been and will be very busy to make the deals work for ALL shareholders to come.

Useful info from today's ST

Friends,

The following is an illustration of how reading the newspaper can be an important and probably prosperous exercise everyday.

I will be referring to page S25, S28 and S29 of today's Straits Times.

1. "Singapore Land's profit rises 12%"
For the YE 31 Dec 2006, EPS is 24.3cts. (Thus PE ratio is 42x)
Group Net Asset Value (GNAV) - $7.50 against Friday's closing of $10.10.
Proposed dividend of 45cts.
This would give a gross dividend yield of 4.4% at current share price.

2. "TeckWah lifts net gain to $8m"
EPS - 3.65cts
Yesterday closing share price - 21cts.
Thus PE ratio - 5.7x
NAV - 37.9cts
My assessment - Relatively low PE with NAV > current share price ==> relatively attractive

3. "UIC's gain more than doubles to $492mio"
EPS - 35.7cts
Yesterday closing share price - $2.57
PE ratio - 7.2x
GNAV - $1.77
Proposed dividend - 9cts
My assessment - Attractive PE ratio against gross dividend yield of 3.5%. Negative - $2.57 share price > GNAV.

Disclaimer - My above assessment is purely from my simple reading of articles in the papers. This is to illustrate that precious info are available if you know where to look for them.

I have no position in all of the above counters.

HG Metal - Theoretical price after Ex-All

Hi investing friends,

HG Metal's offer on dividends and rights issue wil go ex-all on Monday.

Just want to present the calculation to arrive at the theoretical price after ex-all.

Based on Friday's closing of 54cts and 2-for-5 rights issue @20cts,

Cost of purchasing 5 shares @54cts - $2.70
Cost of 2 rights shares @20cts - $0.40
Total costs of getting 7 shares would be $3.10.
This would give you a theoretical ex-all price of 44cts.

P/S - Computation excludes brokerage costs.
P/S - Edgar does not have any HG Metal share.

Is something cooking in HG Metal?

On Aug 15, 2006,
HG Metal secured refinancing by entering into a $10,000,000 convertible loan arrangement with OCBC Bank @36.1cts. FYI the share price was 45cts on that day.

On 13 Dec 2006,
HG Metal's share price dropped to as low as 24cts.

On Jan 5, 2007,
OCBC converted $3,176,800 for 8,800,000 shares.

On Jan 8, 2007,
SGX gave its in principle approval for 2-for-5 rights issue at 20cts per share.

There is also a special dividend of 4cts per share to partially assist to pay for the rights issue.

On Jan 19, 2007,
Its share price closed the week at 51cts. The shares are trading on a cum-all basis till Feb 5, 2007.

I am curious with the following questions.

1. Why would OCBC be interested in HG Metal with 4.76% stake?
2. On what basis did HG Metal convince OCBC to accept the convertible deal?
3. While banks are encourage to diversify their non-core assets, are banks allow to take these relatively "tiny" equity positions?
4. In 4 months, OCBC's $10mio convertible loan is in the money with a return of 41%. Will OCBC be holding on to the shares from conversion? Any more conversion to be expected from OCBC before Feb 5, 2007?

Does anybody out there got any answer to the above?

Business Trust - What is that?

There is a bit of hype going on with Business Trusts as a new investment class. Hyflux is already a benefactor.

What is a Business Trust (BT)?
Essentially, BT is a vehicle that allows investors to collectively own an asset with the following features:-

• stable predictable growth in earnings,
• stable cashflows and;
• low capital expenditure requirement in the near future ie. a generally completed infrastructure.

The BTs are set up as trusts rather than traditional companies. BTs are subject to corporate income tax rates.

Some examples of such asset would be power plant, water production plant, refining facilities, a plane, a ship, an oil tanker, etc.

It is similar to REIT. REIT focuses on properties.

Investors should generally focus on income yield. Capital appreciation is limited to those with longer term perspective.

Tang Plaza is actually in different parts now!!!

Hi guys,

This is a follow up to my earlier story on CK Tang's 2nd offer to take the company private.

In BT dated Jan 8, 2007, Mr Wong Wei Kong has recommended that the minority shareholders should just take the monies and run. His basis was the gloom n doom about retail business, the track record of its management in the business, blah, blah, blah,...

But are we missing the point?
The sum of whole is worth more than in parts.

The freehold hotel/retail complex - known as Tang Plaza - is a strata titled property. CK Tang owns only its department store space, giving it only about 28 per cent of the total share value in Tang Plaza. The rest of the complex is a Tang family holding, as is Marriott Hotel.

Can you imagine the Tang brothers putting 28% of Tang heirloom at risk? Of course not. Thus the Tang brothers are trying to re-secure their control of that 28% with the 2nd offer.

The sum of whole is worth more than in parts. Think about it!!