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.