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!!

Isetan Singapore

Minority investors are working very hard now trying to get Isetan Singapore to pay $2 special dividend to take advantage of S44 tax credits.

It is reported that Isetan Tokyo would have to pay a higher tax in Japan on dividend received from Singapore. Thus Isetan Singapore, 61% subsidiary of Isetan Tokyo, has been very very nimble in paying less than 2% dividends over the year.

Discussion with Isetan management has not resolved conundrum.

It was noted that capital appreciation for this counter over 25 years is estimated at only 57%. Hmm .. has Isetan Singapore been listed in Singapore for so long? "1981", said Mr How Kok Kooi, now 70 years old.

By listing in Singapore, Isetan Tokyo must have obviously done so after considering its tax advisers. It is costly to receive foreign dividends.

Then how does Isetan Tokyo justify its involvement in Singapore?
Isetan Singapore pays royalty fees to Isetan Tokyo ie. a percentage of turnover (regardless of whether Isetan Singapore makes money or not).

The 61% shareholder gets paid a percentage of turnover every year (wonder how many percent), while the remaining 39% shareholders have been getting less than 2% (on par value or share price?) over the 25 years?

Is it really like that?

Next question - Now that Isetan Singapore has some accumulated profits over the year, what is the modus operandi of Japanese companies with foreign subsidiaries in dealing with cash cows given the tax structure in Japan?

P/S - I don't own any Isetan shares.
Share price as of 29 Dec 2006 - $5.20 at PE of 22.1

Merry Christmas!

Merry Christmas, my friends.

For me, it has to be a better investing year in 2007. Ha!

Thailand's U turn

Issue
Thailand's military government imposed foreign exchange controls the "hot monies" on Monday and then did a partial reversal of some measures on Tuesday.

What is "hot monies"?
They are monies moving around the world looking to maximise its yield and/or secure capital appreciation.

The measure that captured the headline is the need for banks in Thailand to hold 30% of any foreign currency above USD20,000 for a year without paying interest.

Why did Thai government contemplate the moves in the first place?
To stem flows of such monies into country which had caused appreciation of Thai baht. The appreciation in baht would cause Thai's tourism and exports to be more expensive.

Consequences
The moves have caused losses to the tune of millions of dollars in the equity and bond markets over various exchanges.

Investors' confidence in investing in Thailand and possibly in the regional markets is shaken. Malaysia is still digesting the negative implications of the exchange control measures they did many years ago.

C K Tang - Deja vu?

Proposal
Tang brothers are offering shareholders 65cts per share.
If acceptances > 90%, they will pay 70cts.

Background
This is the 2nd effort to privatise the company.
First time in Oct 2003 at the then offer price of 42cts was voted down.
There was an episode with UOB Bank on the financing extended to CK Tang. Based on my memory, CK Tang has secured re-financing from an alternative source after paying an early settlement fees to the tune of million of dollars.

Question
Is the current price a fair offer for a stake in a very very very prime real estate albeit in a competitive retail business and rapidly improving hotel business?

If the shareholders had accepted the offer in 2003, a shareholder would have missed on about 15% per annum rate of capital appreciation.

Minority shareholders, please do not be distracted by the poor health of Mr Tang Wee Sung. As a human, I am sorry to hear that.

But please justify the economic basis for the offer.

P/S - I have no C K Tang shares as of today.

Valuation for a company - A Method

The following is a method (among many) in attempting to estimate the valuation of a company.



Proposition



Value of company =
Book Value + NPV of future stream of abnormal earnings



where

• Book Value - ie. original capital invested to start the business
  
• Abnormal earnings - ie. earnings above the cost of capital

Consequently from the above proposition, you would have 3 possible scenarios.

1. when company's earnings > cost of capital


2. when company's earnings = cost of capital


3. when company's earnings < cost of capital
   

Investors would be willing to pay MORE than the book value of the company in scenario 1. Whereas, investors should pay a price equal to the book value of company for scenario 2. In scenario 3, investors should seek a discount on the book value to justify a normal return on investment.

My view

I would recommend the use of current networth (net assets) of the company instead of just the "original capital".

For a company that has been in business for many years, it would be using the original capital invested + any retained earnings + other reserves as the current capital involved in funding the business operations today.

The above formulation is a multi-year model ie. both the investors and owners of the business are required to look at future areas of business that would generate the abnormal returns.



We can use a single-year model to be used as "rough" valuation.

Example - ABC is company with the following profile:-
- a net assets of $100
- It generated a profit of $10 ie. 10% return on net assets.
- cost of capital for this businees is 7%.

The "rough" valuation should be around,
$10/7% = $142.86 (ie. > greater than net assets of $100)

Reference - "Abnormal earnings drive a firm's value", Business Times, Teh Hooi Ling, Dec 2-3, 2006.

Joseph D. Piotroski

Who is Joseph Piotroski?
He teaches accounting at the University of Chicago. He has developed a simple strategy that anyone can use to become a better investor.

His Proposition
Based on his accounting knowledge on fundamental analysis, he is able to provide an organised way to hunt for value stocks.

His Research
Between 1976 and 1996, He focused on the bottom 20% of the price/book universe at the end of each year.

He discovered the following:-
* one-year performance of these stocks beat the market by about six percentage points annually,
* but all the gains came from fewer than half of the companies.

Upon analysing the winners and losers, he is able to rank stocks on a 9-point scale based on accounting benchmarks.

His 9-point Scale
The Scale is sub-divided in 3 main areas ie. 4 points on Income Statement items, 3 points on Balance Sheet items and 2 points on efficiency factors respectively.

1. positive earnings,
2. positive cash flow,
3. year-to-year earnings growth
4. cash flow that exceeded earnings (a crude measure of accruals)
5. if the ratio of long-term debt to total assets declined over the past year,
6. if the current ratio improved (current assets divided by current liabilities)
7. if the company didn't issue shares
8. an improvement in gross margins
9. an improvement in asset turnover (revenue divided by total assets)

His Results after applying the 9-point Scale
* Companies near the top of Piotroski's rankings (eights and nines) beat the market by 13% over one year.
* Companies near the bottom (zeros and ones) trailed the market by 10% points.
* The gains continued for two, possibly three, years.

Summary
He has identified a set of criteria that can beat the market by up to 13% or avoid significant loss. The question now would be - Is the same scale applicable to our regional stock markets?

Reference - "Value or Growth", Paul Sturm, Smartmoney, May 2004

Should there be a "gang" in the Board of Directors?

I strongly agree that a director should step down if he thinks he can no longer be effective.

But is it appropriate for a director to step down for reason that he could no longer be effective in the absence of his "gang" in the board? Let me cite a recent occurrence of this "gang" thingy.

Prof Cham Tao Soon, who was elected to Robinson's board during AGM in mid Oct 2006, resigned in early Nov 2006. He said that he felt he could not carry on since his fellow independent directors - Ms Chew Gek Khim and Mr Winston Tan - were 'abandoning ship'.

Ms Chew, Mr Tan and Prof Cham had offered themselves for election. The shareholders had voted for them during the AGM. They were duly elected to the Robinson's Board. They must have assessed their individual ability to contribute prior to acceptance for nomination. The shareholders who voted for them must have agreed that each of them can contribute. There was no representation from Prof Cham prior to election that he could not be effective in the absence of the other two.

In Siow Li Sen's Business Times article dated 16 Nov 2006, some degree of "collegiate" atmosphere within a board is necessary to maximise their contribution to the business and shareholders.

What is appropriate?
The jury is still out in slowly maturing corporate governance scene in Singapore. As of now, it certainly leaves a sour taste in my mouth.