Contrarian Approach On China Sunsine Chemical

Ms Market’s Irrational Behaviour – An Opportunity And Threat

Been active in the stock market for more than 10 years, I had witnessed Ms Market’s illogically behaviour frequently. Sometime, you will find her dumping a stock and depressed its price for no apparent reason. You search through the website and company’s announcement but you just can’t find anything. And sometimes a stock’s price will skyrocket also without any sensible reason. Take recent incident on Uni-Asia as an example. This newly-listed company’s IPO was not really that hot at the beginning. A few weeks later the company’s share price went straight up rallied for a few weeks. From its IPO price of $0.55, Uni-Asia’s share price surged above $2.70 before it came crashing down. It was last traded at $1.40 this evening. Nobody is able to explain such phenomenon. The company’s management had clarified to the public that they are not aware of any information that could possibly explain the abnormal volatility. If you look at the company’s recent announcement including its interim report, there is nothing unusual. So the only explanation is – market speculation.

Whenever Ms Market behaves illogically, she presents to us great opportunity and threat. When she depresses a company’s share price, this is an opportunity for us and vice versa. So usually, I tend to take a closer look on company whose share price plunged for no apparent reason. As for skyrocketed share price, I tend to avoid it in fear that I might be the “last man”.

China Sunsine Chemical

China Sunsine Chemical (CSC) was listed on the SGX in Jul 2007 at $0.39 a share. Its IPO subscription rate was impressive and its price reached a high of $0.53 on its debut. Along the way, somehow it started to cool down. It seems that Ms Market had switched her attention away from this company. In September this year, I noticed that the company’s share price fell below water. I ran through the company interim report and its business and then I got interested with this company.

Firstly, the company claimed that it is one of the largest rubber accelerator manufacturers in the world and in China in terms of production capacity. In fact, in its recent corporate presentation, the management reported that they have approximately 14% of China market and 6% of global market. Although it is not something that will make me shout, but personally I find that kind of market share rather attractive. Next, the company has many renowned customers such Bridgestone, Goodyear, Michelin and the chemicals they are selling make up of a very small percentage of tyre production cost. The three chemicals that CSC is selling constitute approximately 6% of tyre production. What this means is that in bad times when customers are cutting cost, CSC is not likely to be on top of the list. So exactly what chemicals are CSC selling? From their presentation, the company explained that synthetic rubber needs to go through certain chemical process before it can be harden to produce tyre, rubber hose, boots etc.

On its interim report, CSC’s revenue and PBT grew by around 24%. What I really like is that its profit margin is around 15%. From my years of investment experience, personally, I tend to select company with above 10% profit margin, although there are many other important factors to consider. Generally, I will avoid investing in a low margin business such as distribution business. As for the balance sheet, it is as usual – reasonable liquidity, some cash, and no long-term debt. I will skip the ratio analysis here.

So in September, I decided to buy a little bit to see how the management materialize their growth target.

Deep Plunge On 29 Oct 2007

On 29 Oct evening, after I finished my dinner and sat comfortably in front of my computer to look at my portfolio, I was shocked to discover that CSC’s share price plunge to intra-day low of $0.295 and closed at $0.305. I quickly browse through the company’s corporate announcement and guess what – there is NO news that can explain sufficiently on the sharp fall in share price. The latest updates from CSC are:

1) Company received trial orders from Pirelli Tyre’s manufacturing plant in Brazil and turkey.
2) CSC released 3rd quarter report. From the report, Q3 operating profit dropped marginally by 4.6% which I have no problem with that. PBT dropped by 51.1% due to IPO issue cost. Again I have no problem with that since the correct focus should be on the operating profit. For the nine month ended 30 Sep 2007, operating profit actually improved by 14.2% to Rmb61 million. That is a satisfactory result.
3) CSC management clarified to the SGX that they are not aware of any information that could explain the plunge in their share price.

Back to the fundamental question – why does CSC’s share price fell by 5.5 cents? The answer is – there is no answer. I tried to check with some friends on any news that I missed out but unfortunately, none of them is able to offer a fundamental answer.

The Challenge

Now here is the challenge. In my opinion, there are two likely outcomes:

1) Insider trading and therefore, the management will be releasing adverse news very soon.
2) Ms Market’s illogical behaviour.

For the first possible outcome, it cannot be analysed. It is totally impossible to analyse the financial report or searching internet for insider information such as financial director wasted company’s money in casino or using company money to speculate in forex etc. In a sense, it is a question of luck (and that’s why we diversified) and we have no control. For second possible outcome, that is good news; that is an opportunity. That is what Warren Buffett did when people were selling Washington Post, Coke, or Amex. The more they sell, the more he buys (until he sits in the board). The end result is that the whole market was wrong; he was correct. Warren Buffett took advantage of Ms Market’s illogical emotion.

Fortunately for me, while searching the web, I found an article written by a research house on CSC. The report was generally positive providing better insight on the business and growth. Finally, I decided to ignore Ms Market and any other people’s speculative remarks and to trust my own research. I immediately share my finding with some friends and colleagues and recommended a buy at $0.31 while I average down my purchase price. CSC’s share closed at $0.32 this evening.

Conclusion

I always love to uncover such unexplainable incident, where a share price plunge/rally without any logical explanation. As a value investor, we should conduct our due diligence thoroughly and disregard Ms Market’s weird behaviour. We should never be influence by speculative remarks and believe in our own research. Even if we made a mistake, there is something to learn. But there is nothing to learn by following others blindly. As for CSC, we will take this as a learning example and I will update on it subsequently.

Lastly, as I had highlighted many times, quantitative analysis alone is insufficient for investment decision. It’s like a frog in the well. But unlike fund managers and Warren Buffett, we can’t simply get the listed company’s investment managers to bring us around and give us a Q&A session. Even if we are given the chance, as a retail investor, we just can’t afford buy an air ticket to China or Australia for such purpose. Fortunately, besides research reports available on the SGX, I also found another research house producing good report. I am currently seeking the company’s permission to allow me to publish their research report on my blog.

Game Of Interest Rates

Fixed Deposit Rates

One of my colleagues told me that May Bank offers a high fixed deposit rate (nearly 2% p.a.) compare to any commercial bank in Singapore. I didn't believe. So this weekend, I decided to get the facts correct. From their websites, I had put together a few bank's FD rate for your reference.

Assuming an initial investment of S$10,000, no bank offer a rate above 1% for 24 months deposit. Of course, if you have a few hundred thousands to save, then the rate will be slightly higher. Unfortunately for "commoner" like us (including my colleagues), we don't have a few hundred thousands to spare. While collating data, I accidentally discovers that Finatiq.com offers at very high FD rate. It's unbelievable but is stated on its website.

Be A Champion In The World Of Interest Rate

So that's how the bankers become so rich. They offer peanut rates when you parked your money with them. Generally, saving deposit fetched around 0.3% p.a., way below Singapore inflation rate. You actually buy lesser amount of rice (unconsciously) everytime you draw money from your deposit account to spend. I know people will tell me that they don't feel it. That is because they are ignorant; but the fact still exist. And if you borrow from bank for housing, renovation, education, car etc, they charge you very high interest rate. The worst is credit card charges. Remember - ALWAYS PAY YOUR CREDIT CARD BILL IN FULL. In essence, with the pool of deposits, bank lends it out to the mass (business or personal) again at high rate. So one of the basic wealth creation knowledge that everyone should have is this - for spare cash, don't park it in any bank deposit. Spare cash here refers to money that you don't need it for the near future. This is mainly cash put aside for raining days. You are better off buying Singapore Government Bonds, which I will touch on it soon. Make sure your money work hard for you; let the banks feel the margin squeeze.

Foreign Currency Deposit

Protecting Your Earnings

So after you made some money from the equity, and the bubble looks like it’s going to burst, what would you do? For most retail investors and people lacking investment knowledge, they will probably do what they have been doing – continue buying and selling stocks. But for the smarter ones, and those who had learnt their lesson (including myself), we know that protecting your earnings is more important than worrying that you might miss the continuous bull.

And if you are a newbie in stock market, I need to let you know on that the most important mission after making money from the stock market – DON’T RETURN BACK YOUR EARNINGS. It is not easy, considers that we are human of greed. And it needs profound knowledge and strategy to protect your earnings. Many years ago, I was searching for methods/strategy to protect earnings during an economic downturn. I am not worry at all of short-term correction; I am worried of economic downturn. And I believe that I had found the answer. In 2006, I attended a few seminars conducted by the SGX not because I am new to stock market, but because I wanted to know if there is anything I don’t know. I also wanted to take the opportunity to ask the speaker on “how to ride over an economic crisis”. I already have the answer in my heart but I like to have a confirmation from the experts.

I spoke to one of the speaker Mr Teong, a private fund manager. He shared with me on how he managed to survive the Asian Financial Crisis. In essence, as a private fund manager, he has the power and flexibility to switch to different asset class to maximize returns and to shun away from risky assets. Unlike those registered/regulated funds, he switched to fixed income instrument when Asia markets collapse in 1997. He successfully protected his investors’ money. But for a MAS registered fund (or unit trust), it cannot change its investment objective and policy as it likes. This means that if you bought technology fund in 2000, the fund will continued to invest 80% (if so stated) of it in technology stocks. Whether the technology stock will clash or the economy entering a downturn is irrelevant. So as least now you know that when there is an economic crisis, or you think that it is coming, you should be ready to get out of equity fund. Otherwise you will see your fund plunged together with the economy until it reached the bottom.

But note that it is also in the investors’ interest that the fund manager follows closely to the stated objective and policy. You certainly don’t want your fund manager to suddenly switch your money to some schemes (such as MLM) because it promise high return.

Foreign Currency Deposit

When the economy is shaky, one way to protect your earnings is to place them in a secured asset that provides reasonable returns. This asset should preferably have a negative correlation or at least uncorrelated to the economy. A fixed income instrument is one such asset. Recently, one of my friends told me that he took out his money from a NZD deposit and would like to put it somewhere else other than the stock market and local saving deposit. I recommended him to study Singapore Government Bonds. I will share with you more on bonds some other day.

And so now I am interested to know what kind of returns can we expect from a foreign currency deposit. I checked the DBS bank’s website for their rates and computed the expected returns from these foreign deposits that the bank is offering.

Firstly, I created a (formulated) spreadsheet so that by keying those numbers, the spreadsheet will calculated the annualized returns. Then I put together the result of all the foreign currency deposits. Take note that Japanese Yen is not included as the interest rate is a wonderful 0%. For Malaysia Ringgit and Chinese’s Rmb, is not tradable outside its territory. Actually I was more interested in Chinese’s Rmb but unfortunately. From the table, we can make some conclusion:

1) Bank charges high commission (through the bid and offer gap) and very high for some currency. If you open a Swiss Franc or Hong Kong Dollar deposit, you make a loss instantly.
2) Only a few foreign currency deposits offer a return that is higher than our local fixed deposit. Others offer unattractive returns (or losses) plus exchange risk.
3) The best deposit comes from the Sterling Pound with annualized returns of 3.8%. The next best is the New Zealand dollar. It seems that my friend was lucky after all.
4) The returns is also the threshold to the investor on exchange risk. If the exchange rate turned against you more than the annualized return, you made a loss.

Take note that:

1) The bid and offer is based on current quote. I can also project the exchange movement one year down the road and put in the figure to do sensitivity analysis.
2) The bank only charge (exchange rate) commission two times; when you buy and sell. So if you keep the deposit rolling, then your returns will be better. But on the other hand, if you keep it for too long, your exchange risk will be greater.

Conclusion

So as you can see, no matter what happen to you, the bank still earns a lucrative commission whenever you buy or sell. And this commission is even higher than local fixed deposit rate. That’s why I always scrutinize my investment whenever a bank is involved. I will do my best to ensure that bank does not earn an extra cent from me unless it is absolutely necessary.

In my opinion, most of the foreign currency deposits are unattractive. This is because you get exchange risk for the returns that can’t even match our CPF Special Account (CPFSA). And that is exactly why I frequently advised my friends not to touch their CPFSA. Personally, I use CPFSA rate as a ‘risk-free’ rate instead of Treasury Bills to evaluate potential investment. However, if there is a chance to invest in China's Yuan or Malaysia's Ringgit, I would not hesitate. Basically these two economy's currency is undervalued. So you better watch out for that chance. Lastly, if you like to have my spreadsheet or you found fundamental error, drop me a message please.

Mr. Market

Who is Mr. Market?

Who is Mr. Market? I guess you have seen me using this term (with title cap) frequently in my articles. I wasn’t the creator of this term; neither is Warren Buffet but his teacher Professor Benjamin Graham. Benjamin Graham was also known as the “Father of Security Analysis” and he created a legend – an investment legend that is the second richest man on earth and a philanthropist. In 1934, Graham and David Dodd together wrote a book titled “Security Analysis” that introduced a whole new way of investment approach. In Security Analysis, he proposed a clear definition of investment that was distinguished from speculation. It read, "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

Graham described the whole market as a single entity known as Mr. Market. According to him, Mr. Market has emotional problem. When Mr. Market is in the mood, he will name a very high price for fear that you may snap up his interest and rob him of his gain. When he is depressed, he will quote an extremely low price for fear that you might unload your interest to him.

And as a follower of Warren Buffet, I also adopted the idea of managing “Mr. Market” so as to invest successfully. And it makes all sense by treating the whole market as a single entity. Whenever people ask me about how to beat numerous stocks experts, I told them not to look at it in terms of the number of investors, but as one single entity. It is almost impossible for you to beat millions of investors and experts but when you look at it as a single entity, it’s easier.

After investing for many years, I decided to describe this entity as “Ms Market” instead.

About Ms Market

Ms Market is a beautiful lady who is available and always available. Ms Market is highly attractive to many men, and women too. Just like any other woman, Ms Market is sentimental, emotional and temperamental. Guys would know that when your girl is not in the mood, she would be unreasonable and irrational. Similarly, when Ms Market is not in the mood, she will depress the price no matter what. When she is in the mood, she will push the price up so that you have no chance to compete with her.

So how most investors behave? Some experts try to forecast Ms. Market’s mood by doing some trend analysis. And then they come up with moving average, candlestick etc. Sometime they predicted correctly and make big money out of it. Other times they were wrong and Ms Market wipes them out. Nobody can be bigger and richer than Ms Market. Another group simply follow Ms Market’s mood. When Ms Market pressed down prices, they sold it to Ms Market at even lower price and vice versa. This is the worst and hopeless lot and most of them won’t make it. The remaining group will totally disregard Ms Market’s mood and make independent decision. The value investors are this remaining lot.

How is Ms Market Lately?

How is Ms Market lately? The obvious answer is that she is emotionally unstable. Nowadays it is more difficult to predict her mood than before. One of my friend’s colleagues wanted to know my opinion on the stock market as a whole, i.e. the mood of Ms Market. I refused to provide any opinion. Then they kept asking and wanted just two words from me. Finally I gave in and gave them my two words, “don’t know”. Basically I really don’t know and I don’t need to know.

Should We Hold An Investment For Very Long-term?

If you have been reading books or articles on Warren Buffet’s investment horizon, it will definitely tell you of investing in a company perpetually. I had friends who asked me if we should really invest for “as long as possible” and disregard the business cycle. Following Warren Buffet’s investment approach the answer is definitely yes. But we faced one problem – we are not Warren Buffet. We must understand that as a retail investor, we will never become or even come close to Warren Buffett. This is because Warren Buffett doesn’t buy 10 lots or even hundred lots in a company; he buys a controlling stake. This means that Berkshire Hathaway will be able to consolidate or recognise the profit from these investment regardless of stock price movement. In fact, Warren Buffett decides who becomes the CEO of a takeover company. Obviously as a retail investor we can’t.

We know that Ms Market always disintegrate a company’s intrinsic value with its share price. In bad times such as recession, while Berkshire Hathaway continue to report good profit from these investments (through consolidation), retail investors had endure with their portfolio losses and hoping that the Ms Market will recover soon. And during good times, the investing public, following the mood of Ms Market, push up share prices. Many will make money while the bubble is expanding. But still, Warren Buffett is indifferent; he had already recognised profits from his good investments for many years and many more years to come. When finally the bubble burst, you will get burnt but still, Warren Buffett is consolidating good profit from his wonderful investments.

“So follow Ms Market also cannot, follow Warren Buffett’s investment horizon also cannot, what should I do?”

In my opinion, which you may disagree, this is what we (retail investors) should do. Firstly, we definitely never follow the mood of Ms Market especially when she is throwing tantrum without considering the economic fundamental. When she is depressed, we will buy from her wonderful companies at deep discount. When she is in the mood and pushing up price, we should sell it to her and locked in our profits. But when the economic fundamental collapse, we will divorce Ms Market totally as she will be depressed for a period of time.

“So in normal time, we should take opposite direction against Ms Market, but how to know whether the economic fundamental is collapsing?”

Finally you asked an extremely difficult question. Unfortunately, nobody has a definite answer otherwise he would probably be richer than Warren Buffett. I mean only God know if US is entering into a recession this year or next year, or not at all. The best thing that any investor should do and can do is to be updated on local and global economic report. Find a group of friends with same interest and skills and share opinion freely. From there, it is easier to form certain objective conclusion. This will help you to determine your investment horizon.

Can The Empire Strikes Back?

I talked about this company known as Sunshine Empire previously in my blog. For a recap, Sunshine Empire (located at Toa Poyoh Hub) invites investors to buy their investment scheme promising exceptionally high returns. You join them by buying a "partnership" status and three are 3 types - Gold, Silver and Bronze Partnership. I don't really know the exact investment amount but I heard from my subordinates that it cost more than $10,000 a unit for Gold Partnership. And also the unit price can appreciate.

Anyway, this Sunshine Empire's scheme is hot at my work place and a few chaps even resigned and become "financially free" after investing in Sunshine Empire. One of them threw in huge amount of retirement savings. And other chap tried to talk to me on this scheme but I was never interested. I never invest in anything that I don't understand. To understand means that I know and have confidence about the business or trade. I am able to conduct due diligence independently and sufficiently. I am certain that the investment is genuine, legal and meet my needs so on and so forth. For Sunshine Empire, I was interested to dig out more information from those who joined. So this guy (let's call him Mr. S) had probably misconstrued that I might be interested in the investment. And if I join and become his "downline", he will be awarded with certain profit out of my investment amount.

This afternoon while having lunch with a colleague, an uncle approached me to give me a quick update on Sunshine Empire. According to him, the Empire appears on the paper and seems that MAS is watching it closely, or something like that. Unfortunately, he doesn't know the whole story. After my lunch, I went to canteen again to buy a cup of coffee (feeling sleepy). And I bump into Mr. S again. He is more aggressive now and paid for my coffee while the coffee girl was pouring it for me. I rejected his offer immediately telling him that I'll never accept "coffee" from any subordinate. That's my principal. Then Mr. S asked if we could meet some other time outside. I asked him where to and what for? He replied that he has no ill motive and perhaps...KTV.

Apparently, Mr. S had made three big mistakes. Firstly, I wasn't interested in the scheme; I am only interested in revealing the truth. Secondly, I am always informative and knew that this scheme appeared on the paper recently. Thirdly, he seriously under estimate my investment knoweldge and integrity.

Right here I will not jump to conclusion. We will see if the Empire is able to strike back and prove to its investors that it is serious about business. Frankly speaking, I really hope that it is genuine otherwise...... In case you missed this article, I found it on the net and paste below for your reading pleasure.

20th Anniversary of Black Monday

Correction Triggered, Finally

Let’s see what we have last week.

1) US home construction starts fell in September to their lowest level in more than 14 years.
2) Consumer prices (inflation) rose at the sharpest rate in four months.
3) Turkey likely to be at war with Kurdish.
4) Oil price surged passed US$90 a barrel before it retreated slightly.
5) On Friday night (19 Oct 2007), DJIA plunged 366 points to 13,522.02 while the City (Singapore) was sleeping. The S&P 500 plunged 39.45 points to 1,500.63, and the Nasdaq Composite plunged 74.15 points to 2,725.16 in "celebration" of the notorious Black Monday 20 years ago.

Today, 22 Oct 2007, Monday, STI plunged 105.34 to 3,642.64 following the sharp correction in US market on last Friday. Twenty years ago, on 19 Oct 1987, DJIA crashed by more than 500 points for no apparent reasons, if I remember correctly. Subsequently, many theorists and economists offered their explanations; most of it doesn’t sounds like “English” to me. But what’s really amusing is that these people just can’t get over it. This is something that occurred 20 years ago. Anyway, whatever the reasons, I had long expected this correction to be triggered and I had gave many warnings to my friends and colleagues. The indexes everywhere are simply too hot and a correction is needed to cool it down.

What Should We Do?

If you ask me, the first thing you should do is don’t run! Do not follow the crowd; they are always on the wrong direction, unless you had bought some nonsense stocks. You run when you are sure of a recession. If it is just a correction, you should wait patiently for your turn to strike. Control yourself and don’t let Ms. Market affects you. I assured you that Warren Buffet didn’t dump his listed companies last Friday and not even today. I am willing to bet with you with my last cent. My advice is that you should stop looking at the stock market as this correction may go on for a while. But in my opinion, it will settle down soon. As far as Singapore is concern, our economic fundamental is strong, with forecasted more than 8% GDP growth this year. And then our IR project, I don’t remember that the billion dollar contracts had been awarded to anyone. Some small contracts yes but that’s about all.

Najeeb Jarhom, head of retail investment research at Fraser Securities, said (in Business Times) that the anniversary of the US market crash may have affected investor sentiment but it had no fundamental significance to the Singapore market. He said that “Monday's heavy falls on the local bourse should not be cause for alarm. Instead, they provide a good opportunity for bargain-hunters”. I share the same opinion.

However, rising oil price is really a big concern. Take note that if oil price rise above US$90, it has reached historical high in “REAL” terms. This means that if we take into consideration the inflation rate, the highest oil price during previous oil-triggered recession was approximately US$90. Recently, I had highlighted to some friends and colleagues that with rising oil price, we should buy company that sells oil or in oil-industry related business. We should sell those who are drinking it. Citi economist Chua Hak Bin said (in Business Times) that “the economy remains supported by the financial industry as well as the construction and property sectors, where projects will continue regardless of high oil prices”. We share the same opinion.

OuHua Energy

One listed LPG company that I invested in plunged back to my purchase price. This is a China company - OuHua Energy. I could have locked in my profit recently but I did not. I intended to invest in OuHua for long-term. I believe LPG as a cleaner energy will have sustainable demand in the big China market. Current correction presented a good buying opportunity for those who have not invested in it. Certainly, if OuHua's price continue to fall, I'll average it down not because I need to, but I believe that it is a good investment. I'll put up my full analysis on OuHua subsequently.

Share Consolidation - Other Analysts' View

If you have been following my write-ups, you would have realised that I had been rather critical about share consolidation action by some listed companies. I had talked about it previously. Basically I take that kind of announcement negatively based on the mindset and investment principles I acquired from Warren Buffett plus my little past experience.

Usually I try to avoid posting other writers or newspaper reports totally on my blog. But today, I like to make an exception, again. On 20 Oct 2007, my highly-recommended and all time favourite analyst, BT Senior Correspondence, CFA Charterholder Ms Teh Hooi Ling posted an article on this topic in Business Times.

In her article, she mentioned that many other analysts around the world, which I am not familiar with, formed negative opinion. Based on Hooi Ling’s own research work, she also came to the same conclusion. No doubt there are exceptions. But take note that these “exceptions” have some other exceptional stories behind that push up their share prices. So in this case, it is not really an apple-to-apple comparison.

To sum up my opinion again before we look into Hooi Ling’s article, company management should focus on improving bottomline. They should leave the share prices to us. If a company proposed to consolidate its share in hope that it can be transformed from a penny stock to a mid-cap, it got it all wrong. The fundamental factor that decide whether a company’s share will be priced like a penny stock or blue-chip lies in SUSTAINABLE PROFIT GROWTH. So the management shouldn’t waste investors’ time and should just focus on the three big words I highlighted.

Here’s the article. Enjoy.

=========================================
Business Times - 20 Oct 2007

Reverse stock splits: boon or bane?

By TEH HOOI LING
SENIOR CORRESPONDENT

At least seven Singapore-listed companies have carried out share consolidation so far this year.

Share consolidation - also known as a reverse stock split - is a corporate action through which a number of shares are consolidated into one.

Various reasons are given by companies for deciding to implement a reverse stock split.

For example, one company said in a statement that prior to consolidation, small movements in its share price represented large percentage movements that resulted in volatility.

'It is anticipated the consolidation will benefit the company and its shareholders by reducing the volatility in the share price,' the company said.

On the Singapore Exchange, the minimum bid for a stock below $1 is half a cent. So a stock trading at one cent can move up or down by half of its value - a 50 per cent swing.

In January this year, Time Watch, after completing a reverse takeover, consolidated 50 shares into one. The company said in a statement: 'Time Watch believes the share consolidation may reduce the fluctuation in magnitude of the company's market capitalisation, lower trading costs for investors and also renew market and investors' interest in the shares.'

In the trading-range hypothesis, it is suggested that stock splits regroup share prices to a preferred price range. An optimal price range is when prices attract investors big and small. Smaller investors may be unable or unwilling to buy shares if the unit price is too high. So companies do a stock split or bonus issue.

If a share price is too low, it is an indication of poor performance and the stock is also viewed as a speculative stock. Institutions tend to avoid such shares. So companies that are willing to court small investors and large institutional ones try to have a stock price that is acceptable to both sets of investors.

Meanwhile, according to the signalling theory, management sends messages to investors via its financial decisions. A bonus share issue or stock split is generally associated with management's confidence in future performance. And so a reverse stock split sends the reverse signal, according to some studies.

Spudeck and Moyer (1985), among others, argue that reverse splits seem to be taken by the market as a strong signal of management's lack of confidence in the future stock prices.

Woolridge and Chambers (1983) even suggest that when a reverse split is impending, investors should sell their shares.

SGX-listed stocks

I've decided to look at the share performance of those stocks on SGX that have been consolidated in the past three years. Of these, only seven have had six or more months of performance since consolidation.

The companies are Integra2000, Lankom, Digiland, Wilmar (formerly Ezyhealth), Hup Soon Global (formerly Twinwood), Delong (formerly Teamsphere) and Time Watch (formerly Wee Poh).

Of these seven companies, four saw their share price underperform the SES All Shares Index by 35 to 86 percentage points in the 12 months leading up to their share consolidation. The exceptions were Ezyhealth, Twinwood and Teamsphere, which saw their share prices shoot up sharply after news of their reverse takeover deals was announced.

In general, reverse stock-split companies did not see their performance improve subsequent to consolidation.

Six months after consolidation, the median excess return of these companies relative to the SES All Shares Index was 45 per cent. The average was -27 per cent.

And 12 months subsequent to reverse stock splits, the median underperformance widened to -58 per cent. The average was -28 per cent.

Based on the limited sample size, it does appear that share consolidation is generally not good news for investors.

Indeed, investors have had an inkling of that. Radcliffe and Gillespie (1979), Woolridge and Chambers, Spudeck and Moyer and Peterson and Peterson (1992) document that significantly negative abnormal returns surround reverse split announcements.

Ho, Nelling and Chen (2005) studied US companies listed on the New York Stock Exchange and Nasdaq that conducted reverse stock splits between 1980 and 2000. They also found that companies that carried out reverse stock splits significantly underperformed the various market benchmarks and stocks with similar characteristics one to three years later.

They said the results suggest that 'reverse-splitting firms are unable to change the pattern of post-split underperformance ... since the reverse stock splitting firms are relatively pessimistic about future prospects'.

There are, of course, exceptions. And a notable exception in Singapore is Wilmar. The stock has performed spectacularly since its reverse takeover of Ezyhealth.

It has been helped by several factors, among them the injections of assets by the Kuok family into the Singapore company, and the interest in biodiesel as a alternative fuel source.

So, for companies that did a reverse-split after a reverse takeover, ultimately, what happens depends on the quality of assets injected into the company.

The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg

How To Read Financial Report (Part II)

b) Consolidated income statement, balance sheet, changes in equity and cashflow statements.

The word “consolidated” means that the Group (集团) consolidates all its subsidiaries financial statements. The next thing to do is to determine whether the Group is worth an investment. I will not go through how to read and use the financial data here because to do that, you need to know how to conduct ratio analysis. Fortunately for you, a copy of the ratio is in my archive. You have to read and practice those ratios. But I’ll just show you the more common and important figures and ratios that I always use. The following analysis was done on Breadtalk peviously.

Do take note that for earnings per share, you can get the figure right below the consolidated income statement. For accumulated profit or reserve, you need to refer to the consolidated statement of changes in equity. You must also study the cashflow statement to see how much cash the company generates from its operations. Cash is the most reliable figure because it is extremely difficult to manipulate cash figure and escape the eyes of the auditors. Also, “cash = king”. After the analysis, and you are still interested in the company, then you shall continue your study.

c) Notes to financial statements

Skip all these except the segment information. These are all about accounting issues which you may not survive especially if you are not in accounting field. You should keep flipping the pages and before the end this session, you will find segment information. You need that. The Group will report their revenue and profit in terms of geographical segment and individual product/service. This will give you a good understanding of the growth of each product/service and of different geographical location. This will helps you a lot together with your knowledge in general economic and industrial development.

d) Statistics of shareholdings

Here you can get the number of shares issued. This is needed in your ratio analysis. Also, you can see who has the highest shareholding on the company.

e) Notice of AGM and Proxy Form

Here you will know whether the Board recommends dividends. If the Board so recommended dividend payout, it will be in the agenda. Throw away the proxy form as small fish like us couldn’t be bothered.

f) Chairman and/or CEO’s Statement

I see you are shocked. The big bosses statements are the last to read. Yes, and you have to read it with a pinch of salt. This is because nobody will or wants to reveal bad news to the public. Make sense? Even if there is, by human nature, you will want to tone it down. Therefore, it is pointless to read these reports at the beginning. The objective of reading it now is to have better understanding on the top management:

- Work and achievement so far.
- Future plan. Take note on all negative reports such as rising material prices, intense competition, price erosion etc.

Anyway, even if you skip this whole session, there is no harm.

g) Corporate Governance Report

This report is required by the Council on Corporate Disclosure and Governance and is mandatory to all listed companies. By “corporate governance”, we are talking about a company making decision in the best interest of its stakeholders. The Code aims to promote transparency. There are lots of information provided in this session includes top management’s pay (in band, not in absolute value), composition of their remuneration package etc. Again, as a small investor, you may skip whole part of it except that you should take note of the employees’ share options scheme, if any.

Personally, I always take note of a company share options scheme. Under normal circumstances, it usually does not affect my investment decision. In fact, sometime, it becomes an added motivation for me to invest in that company. What is an employees share options scheme (ESOS)? The ESOS serves to reward employees for improving company’s bottomline. It is a scheme that gives the employees (usually applies to people of management position) an option to buy the companies shares at the exercise price a year later but before the expiry date. The exercise price is usually, and should be, higher than prevailing market share price. The logic is simple. If the employees work hard and generate profits which add to shareholders value, the share price will rise above the exercise price. And the employees shall reward himself by exercising the option (buy the shares from the company) and sell it in the open market for a profit.

This should be the way ESOS is used under normal circumstances. But sometime, some company do it differently such as PSC (refer to my archive article on PSC) which in that case, I dump its share. ESOS can also be an incentive for me to buy the company’s share although it should not be the primary reason. For example, GP Industry has been generating high revenue and profit for years. It is quite a conglomerate with a few really big subsidiaries, a few of them used to be listed. The only problem is that the Group is dragged by GP Batteries although they are still earning a profit. Among other things, one of the motivations for me to invest long-term in GP Industries was because its ESOSs are much higher than current market price. This gives me a comfort that unless the management work hard to produce higher profit, none of them will never get a chance to exercise the options. So, I bought the share at a price lower than the options ESOS price. Heehee!

Again, I repeat, this factor is only a motivation, it alone cannot be use to make investment decision.

Conclusion

So that’s it. I have given you that few hundred buck for free; free only before the traffic in my blog exploded. We have gone through the annual report but only on those that are critical to your investment analysis. Any other things, you can throw it away. My advice is that as a beginner, you should take it one step at a time. Learn how to use the ratio analysis first. This is the most important skill that you must acquire. But again, financial report alone is insufficient to make an investment decision. It only gives you the quantitative factors. Do not forget about qualitative factors such as brand (e.g. MacDonald), location (e.g. prime land), industrial growth (oil exploration), global economy (e.g. US recession) etc.

How To Read Financial Report (Part I)

Today is Your Lucky day

If you have been visiting my blog, and that you are happy with my sharing so far, I am going to reward you with few hundred bucks. As a value investor, you need to analysis a company performance both on quantitative and qualitative factors. On quantitative factor, you must be able to study and analyse a company’s financial report. This is one of the important and basic skills that a value investor must acquire. I mean if you don’t even know about a company’s performance and health, what value investment are you talking?

If you attend a training or workshop on “how to read financial report”, it’s going to cost you a few hundred bucks. You don’t believe? Our SGX conducts such workshop too. Go to their website and see how much they charge you.

But today, I’ll teach you for free. Like I said earlier, “I am going to reward you with few hundred bucks”. This will be very useful especially for non-accounting students or a beginner. Otherwise, you will fall asleep within 1 minute after you start reading an annual report. I’ll break the whole session into various parts with detail explanation in each for your easy reading.

1) What is a financial report

The first question is what is a financial report. A financial report, whether it is a quarterly, interim or annual report contains, among others, a profit and loss statement (also known as income statement), balance sheet, statement of changes in equity, cashflow statement etc. A quarterly or interim report would be much simpler in its format than an annual report. Under the SGX’s listing manual, a listed company must observes the following listing requirements:

- Generally, to release audited annual report not more than 60 days after its financial period.
- Generally, if market capitalization exceeds $75 million, must issue three quarterly reports. Otherwise, quarterly reports are not required.

I used the word “generally” above because there are other clauses but I am not suppose to make it more complex otherwise you might as well read the full listing manual. It is important to highlight here that a listed company’s annual report must be AUDITED by an EXTERNAL auditor. But the quarterly reports and interim report need not to be audited. Interim report refers to first half-year report. And certainly, an audited report is more reliable. While the external auditors add pain to a listed company, they are our friends and “policemen”.

2) Where to get a financial report

Please take note that when a listed company announces its year-end result on the SGX, it is usually NOT audited. How to know? Well, for an audited report, it certainly cannot be just five or ten pages like those on the SGX’s announcement. But the announcement of unaudited report is equally important because it give us first hand guide before the auditors complete their job. Usually the final audited figures will be slightly different but not too far off. It cannot be that the company released a good profit at the end of the year but turned out to be a loss after the auditors’ checks and adjustments. If it happens, then both the company’s management and shareholders’ are in a “shit”.

If you are a shareholder of a company, you are entitled a hardcopy of (colourful) audited annual report. Alternatively, you may also download the report from the company’s website. You may also, as potential investor, email to the company’s investment relation officer for a free copy. I did once on Tan Chong International and they send a copy to me from Hong Kong. If you invest through CPF, you must give instruction to your agent bank.

Just to share my experience. DBS is my investment bank and preivously I had an argument with them for not sending a copy of annual report to me. They push the responsibility to the listed company itself and make me call here, there and everywhere including the CDP. I was pissed off. Finally, I confirmed that it should be the investment bank’s responsibility and wrote to their management a last warning letter - if they cannot resolve it by certain dateline, I’ll change to another bank. They investigated and resolved it. They explained that the root cause was because I did not check a particular box in my application for CPF Investment Account.

3) In the annual financial report

Firstly, in the audited financial report, you can find the following items:

- Chairman and/or CEO’s Statement
- Board of Directors
- Financial Review/Highlights
- Corporate Governance Report
- Information and Report of Directors and Management (including share options scheme)
- Auditors’ Report
- Consolidated Income Statement
- Balance Sheet
- Consolidated Statement of Changes in Equity
- Notes to Financial Statements
- Statistics of Shareholdings
- Notice of Annual General Meeting
- Proxy Form

Take note that for a very big company or company listed overseas, the content may be different. I’ll go through to explain each of them by orders of importance (according to me). Take note again that subsequent points should be read in conjunction with an audited financial report instead of a quarterly or full year result announcement made to the SGX.

a) Auditors’ report

The very first report that you should read is the auditors’ report. Like I said, the external auditors are our friends and policemen. They are independent and should be the first person to rely on. Why are they independent? These auditors are not paid by the company they audit but their very own bosses (the audit firm). The listed company will pay the audit firm for their service. But could there be some “connections” between the audit firm partners and their client? Well, the partners are fully and “personally” liable for any mistakes and wrongdoings. They signed on the report; they signed their reputation and business on the report. The partners can be sued for wrongdoings or even negligence. That’s why none of my friends want to set up an accounting/audit firm.

Now, if the auditor “qualified” the report, you can dump the annual report and move on to another potential company. Qualifying a report here is an accounting jargon. We don’t mean that the auditors give the company a certificate. By NOT qualifying a report means that everything is in order and nothing unusual was discovered from auditors’ random checks. In an unqualified report, the auditors will first explain their work and then form their opinion as such:

“In our opinion, the consolidated financial statements and balance sheet are properly drawn up according to the Act and Accounting Standards and give a true and fair view of the state of affairs…..”

“The accounting and other records required by the Act to be kept by the company…… have been properly kept……”

The first Para is telling you that the financial statements had been sufficiently prepared according to the Act and accounting standards. The second Para is telling you that the company has prepare and keep its accounting books properly. In sum, everything is OK! When the auditor qualified the report, they will say some other things like “we like to draw attention to….” or “we could not agree with a accounting practice by the company” etc. The worst opinion is when auditor “doubt that the company is still a going concern”. This means that company’s business may not go on for the next one year. In this case, you don’t have to continue reading the annual report anymore. In times of crisis or recession, this kind of opinion is more common than current bullish market.



To be continue……

Make Quick & Easy Money From Stock Market? Grow Up!

1999 Small Bull

How do you feel when many of your friends are making easy money in the stock market? Worst still, one of your colleagues just changed a car during current bull market, and you are sitting inside. You try to not to fall into the temptation but many of your friends keep making money with very little investments. One of them told you that he bought 50 lots based on somebody’s “insider news” and the next day, he contra off and make more than $1,000 with zero investment. Can you survive this?

No, you gave up and ask him your first deadly question – “how to contra/short huh”?

In early 1999, local stock market started to recover after couple of years of “bear sleep” (started from Jul 1997 Asia Financial Crisis). I call it a “small bull” because it didn’t last for more than half a year, unlike what we are seeing now (from 2006 – 2007). It was slow initially and then somewhere after Mar 2007, it was obvious that market started to pick up and speed up. I was then just another speculator, and helped my colleagues to set up CDP and trading account. Very soon, we were all earning easy money. By mid-99, a few of of us occasionally made about $1,000 a day. We were laughing at the back of our directors, that they couldn’t earn such an income. Our contra orders got bigger and bigger and one of them traded in 100 lots most of the time. We were gambling, and there is a price to pay. A horrible correction set in in early Jul 1999 and within three days......

While you may have heard on how people changed car through stock market trading, I’ll share with you on how people suffered when market turned against them.

Story 1: Last Man Standing And Then Die

In the 1999 small bull which lasted until end of June, one of my friends was making lots of easy money by trading stocks. Let’s call him Mr. T. Mr. T was the one and only lucky guy who got out of the market almost immediately and totally when the severe correction sets in. He was the “last man standing”. He kept all his prizes which worth about $50,000 to $100,000. Subsequently he stopped stock trading, got married and bought a four-room resale.

But I knew that he would come back. Basically that is human nature. When you found a quick and easy method to win money, and you have been successful, you will come back sooner or later.

After the dot.com burst, Mr. T came back as expected. Somewhere in 2003, a few counters were heavily traded with high volume. For those who had stayed in the market for long should remember BIL, an investment company in hotel and airline. As usual, Mr. T punted with huge orders with only one problem. The market had been hot with BIL for quite a while and Mr. T was, in a way, late and became one of the “last men”. Share price of BIL got weaken and didn’t move beyond his purchase price. As he traded in huge quantity, a drop in every cent means a lot for an average income-earner. I was told that he also got burnt in other counters too. Mr. T ended in huge debt between $10,000 to $100,000 which he could not pay off. The broking house blacklisted him and took action to claim back their money.

Mr. T start to borrow money everywhere, from friends, colleagues and even superiors. He wanted to sell his house to pay off his debt but he couldn’t do it. This is because the property market was very bad then. If he sells it, he will realise another big losses. He kept his secret from his company but was soon exposed. Disciplinary action was taken against him and he resigned from his comfort zone in the midst of global recession. Unemployment rate was high then and in order to keep his family, Mr. T worked as a nightclub “manager” after daytime’s job.

One more thing, from what I was told, Mr. T never return the money back to his ex-colleagues after his resignation. He just disappeared. So, remember that if you lend money to a gambler, the first thing you should do is to write-off the loan as bad debt. Chances are, you're not getting it back.

Story 2: From Stock Market To Commodity

I had another friend who is a handsome chap. I mean it. Let’s call him Mr. A. Mr. A is handsome and change “partners” frequently. I used to joke with him that someday, he would have to payback. He was also one of those who speculated heavily during 1999 small bull. Similarly, he got burnt but one of his girls settled the debt for him. Wow.

Thereafter he was posted out and we seldom keep in touch. A year later, I was invited to attend an “old buddies” gathering. The purpose of the gathering was actually because Mr. A got into severe financial problem, not with loan sharks but with SIMEX. He confided to us that his new girl was working in SIMEX. And then he was persuaded to trade commodity after he was convinced on how easy it is to make money from it. The end result was that he made a loss of approximately $60,000. He paid the debt through credit cards and then the banks were suing him for payment. By the way, last time you can have duplicated credit limit with many cards. You finished the limit with one card and you can go on to spend on another. Today you can’t do that. There is only one credit limit no matter how many cards you hold. A brilliant policy lay down by the MAS.

Mr. A tried to negotiate for easier payment scheme with the banks’ management but they referred him to their lawyers. And when he wanted to negotiate with these lawyers, they replied that they had to follow their clients’ instructions. So the banks reached my friend’s company and his pay was frozen. According to him, his pay was “re-structured” and a large part of it was used to pay bank debt and court/legal fees. And for that large part that was used to pay off the debt, a large portion of it was used to cover interest. For those who studies account or finance should understand amortising loan. And now we know how mean a bank can be when they want their money back. That’s probably why I am always sarcastic when bank salesmen “beg” me to use their loan. I always replied, “Why do I need a loan for out of nowhere? I’m so fortunate to be debt-free”.

Mr. A has problem even with his meals!!! Collectively, we lend him some money to tide over. He knew this blood-sucking arrangement cannot go on and so he applied for bankruptcy. Yet there was one very last problem. Mr. A’s company is likely to terminate his contract before expiry. But he was sponsored for further study before and he may have to payback this benefit for early termination. 一波未平一波又起.

What happen to his relationship with this SIMEX girl then? You will never believe me. Mr. A told us that this time, he really really fell in love with her and beg for her return. She didn't give a damn. Anyway, that is not my point here and is a bit out of scope.

Conclusion

I had numerous stories like this. I can go on for days but let’s don’t waste our time and come straight to the learning point. If you gamble in whatever forms – stock market, football, casino or commodity, high chances are someday, you may have to chop off both hands. Your life, career and business may be shattered and you will also implicate your whole family. When you gamble, the cruelest thing that can happen to you is that you make lots of money initially. This is because when you finally incurred a loss, usually it is like "one time finish all" scenario. One loss and you are finished. That's why whenever someone made small losses in stock investment, this is how I encourage him – “it is good that you fell down initially and learn and become successful later. Life would be cruel to you if it is the other way round”.

After the 1999 small bull, I started to (self) learn value investment through books written about Warren Buffet’s investment strategy. I grasped the idea easily with accounting background and experience in the stock market. Nowadays I seldom introduce friends to my remisier and I never teach or write article about stock speculation. To-date, I have many times recovered all my previous losses. Back in 90s, one of my ex-colleagues asked me if I was making money from stock market every year. I couldn’t answer that question. I was hoping that someone could ask the same question again. Because this time, I got a firm answer and records.

Xtra! Xtra! Oil Price At US$86

Oil Hits Record

On 13 Oct 2007, oil price was reported (in Business Times) to hit a record of above US$84 a barrel due to tensions between Turkey and Kurdistan Workers Party. Coincidence or what I don’t know. But this is certainly not a good news, at least not for me. But the stock market doesn’t seems to bother and they are still “frying the pan”. Some of my friends called me for my advise on next course of action. I don’t really like this kind of question but I offer them my opinion - their profit only becomes “real” when they transformed it into hot cash in the wallet (or bank). There is lots of uncertainty now than early 2007.

This morning (16 Oct 2007), I received another report that oil price had reached US$86 a barrel. Although last night DJIA plunged more than 100 points and STI down by twenty over points when market started, people are still (selectively) “frying the pan”. To me, this is a good news as I had been throwing more shares to them so that they can continue to enjoy their game. Last night, I keyed in my sell orders through the internet. I wanted to sell Courage Marine at $0.45 a share based on its last closing price. Guess what happened? When market re-opened, punters came in to buy at $0.475 opening price!!! As a result, the exchange adjusted my selling price to $0.475.

Like I said (in my previous post), “in a bull market, you can’t sell cheaply”.

To-date, I had almost halved my portfolio realizing a highest gain record since I adopted Warren Buffet’s methodology on investment in around 2002. My realised gain this year is expected to hit above 20%, a lovely record to call for a celebration. I should give my close friends/colleagues a treat to share my joy.

Further Update On PSC

Today PSC’s share price continued to head southward and closed at $0.455. Everything is according to my prediction based on my past experience. I am not God, please, but I have experience. Again I repeat, share consolidation, generally, does not add value. And when it was done in the midst of uncertain market, chances are that the long-term investors may suffer a loss value. Come to think of it, experience does carry a value. I should sell it! heehee

Tips On IPO Application – An Update

In my previous article, I had shared my little tips on IPO application. Let’s see if it is true. Today, China Oil Field announced its IPO balloting result.

As you can see, applying eleven lots allow you to jump to next higher balloting box. Your balloting ratio increased by one person (not a lot but at least something) and if you are successful, you will get 2 lots. This is better than those applying for nine lots or less. Of course at the end, it still depends on your luck. But let’s say you are always lucky, then you will prefer to get 2 lots instead of one, am I right? As you can see from the ratio, even if you are rich and are able to apply for four hundred lots, your probability is only 6% and you’ll only receive 3 lots if you are successful. If you are thinking about getting a private placement, it’s not going to be easy. Your broker may not entertain you because comparing to big institutions and syndicates, you are still a small fish (as a retail investor). But of course you can and should try.

So in this case, China Oil Field is a super hot IPO. When it start its first trading tomorrow, I guess the opening price will be above $1. By the way, in case you ask, my application was unsuccessful. ------ ("chey, after such long speech!")

PSC Corp Stock Consolidation & Tips On IPO Application

After Share Consolidation

On 15 Oct 2007, PSC Corp’s shares consolidated five into one and traded at an open price of $0.52. This is close to what I had calculated in my previous posting on PSC. Unfortunately, PSC share closed at $0.48 which is lower than the theoretical price after the consolidation and rights issue. Of course, one day’s trading is not conclusive. It will probably take a few weeks to know whether PSC’s share price can maintain or surge above (and maintain) the theoretical price after share consolidation. Otherwise long-term investors will be worst of. They would be better of by disposing the shares before the consolidation. In this case, history has predictably repeated.

Whatever the ultimate outcome, my opinion is still the same. Share consolidation, generally, do not add value to the shareholders. It is a waste of time and the management, if indeed capable, should divert all efforts in bringing in profits.

Tips On IPO Application

In a bullish market like now, IPO is one idiot-proof way to make money. Many people rush into it and good IPOs are always numerous times over subscribed. Here I like to share a little tips on IPO application. It’s nothing big deal but for a beginner and a retail investor, this should be useful. If you are rich enough to apply for 100 of thousands of shares, this article will be irrelevant to you. So here are the tips:

1) When applying for IPO, always apply one lot (1,000 shares) or 11 lots (11,000 shares). Never in between.
2) Always apply near the end of the closing date. Never be the first hero.

Based on my ten years of experience, in a normal market, most IPO will usually be a few times oversubscribed. Normal market here refers to anytime other than a crisis or recession. When it is many times oversubscribed, every applicant will not receive the full quantity he/she applied for.

Refers to the picture above which is one of the recent IPO balloting result. Generally, those who applied from 1 to 9 or 10 lots will be thrown into the same balloting box. Let’s call this as Cat A. So it doesn’t matter whether you apply for 1 lot or 9 lots. You get same balloting ratio, same allotment, same probability. What you should do is to apply for eleven lots so that you can “jump category”. The next category will be for those applying, say, eleven lots to thirty, forty or fifty lots. So again, if you are slightly rich, it doesn’t matter if you apply for eleven lots or thirty lots - same balloting ratio, same allotment, same probability. Then you might as well apply for eleven lots.

The benefit of jumping category (let’s call the next higher category as Cat B) is that you are likely to enjoy one or two things. Firstly, the balloting ratio may change. For example, in Cat A, 5 out 50 applicants will get it, and Cat B 10 out of 50, depending on how hot is the IPO. So in Cat B, your chance increases. It’s not much but at least something. The second likely benefit will be the number of shares allotted may be different. In Cat A, successful applicants usually get one lot. In Cat B, successful applicants may get two lots. Again, this depends on how hot is the IPO.

Next, never rush to the ATM (or send your application form) immediately after the IPO is open for application. The market sentiment may change anytime. Mr. Market is temperamental, remember? If you apply the IPO early and suddenly Dow Jones plunged, there is no chance to retract. And then many people may change their mind about the application (to play safe), and you had it. You may be fully allotted. I usually applied an IPO during the last day.

“But between the IPO closing date and the official listing date, there may be bad news also?”

Yes that’s right but everyone had applied for it. And as usual, you won’t be fully allotted. You may get one or two lots but it’s not that bad. In any case, usually, an IPO will be listed within two or three days (some may be more) after the close of its application.

So in conclusion, IPO application is a probability game. I am sure many people can afford to apply eleven lots and thus giving yourself a better chance of getting it and getting more. Alternatively, if the IPO is underwrite by the broking house you used, call your broker/remisier and pressure him/her for private placement.

Fu Yu - A Falling Star

Every Dog Has Its Day

I always tell all my friends that in stock market, nothing is impossible; nothing is for sure. There is always opportunity and threat. Yesterday’s penny stock may become today’s hot stock when the tide changes. Similarly, today’s hot stock may become tomorrow’s penny stock; some may even collapse. This phenomenon offers us both opportunity and threat at all times.

In mid-90s, Indonesia company Van Der Horst was a hot stock traded at around $5 or $6 a share. I was a beginner then without any knowledge of value investment. With limited cash, obviously I could not afford Van Der Horst. But sometime at the end of 90s, something happened to Van Der Horst, something very severe causing its share to plummet all the way to below $1. I remember that I tried to punt for quick bucks by buying it at around $0.60. Unfortunately the share price continued to head south and I had no choice but to cut my losses.

And we have a whole list of this kind of story - Chartered Semi-Conductor, Creative Technology (they call it a “mid-cap” now), Informatics etc.

Sometime in 2003, I had a coffee session with my CFA coursemates. We were discussing whether Venturing Corp’s success story will repeat, i.e. any company displaying such potential. Venture started of as a Sesdaq stock, according to a friend. I was still in college then. Year-after-year, the company continues to deliver exceptional result and at its height, its share was traded above $20. Every year, Venture made a next profit of around S$200 million. So we are interested to know whether if there is any more such potential technology company. I opined that three companies may have such potential. They were – Beyonics Technology, Brilliant Manufacturing and Fu Yu Corp. And so I started of by investing in Beyonics and Brilliant. And a few years later, I bought Fu Yu.

Fu Yu Corp – An Update

For those who have been hanging around in the market for last ten years should know that Fu Yu was once a hot stock. The company was highly profitable and at its height, its share price was traded above $1. However, in 2006, something happened. Its China subsidiary suffers significant losses and dragged the group’s performance down. Its local business also faced intensive competition. In fact, for the year ended 31 Dec 2005, Fu Yu had reported a significant dropped in net profit to $12 million. I bought Fu Yu about a year ago despites the profit plunge. Unfortunately, Fu Yu releases bad news one after another. Then why would I still hold on to Fu Yu while others are running away? I “choose” to stay with this company as I have my own reasons. The answer lies in the general economy and Fu Yu’s financial strength.

Last year, global economy and that of Singapore’s was strong and many company including technology companies were making good monies. This is especially so for the mid-caps and blue chips. And a few of them were even taken over and/or delisted. I believe you still remember MMI which was traded above $1.50 before it was bought over by Precision Capital Pte Ltd and delisted in Jul 2007. MMI’s net assets value before delisting was worth around S$0.50 but the company was bought over at $1.65 a share! Jackpot for long-term shareholders. And what about Brilliant Manufacturing? The company reported profit plunge and one of its director was sue for some scandals and yet, the company was brought over and delisted in Aug 2007. The existing shareholders were offered S$0.418 a share while Brilliant’s net assets value then was around S$0.22.

All these goes to show that the global economy is good, confidence was high and many foreign MNCs were willing to buy over local companies. And what about Fu Yu? If anyone would asked me to summarise Fu Yu’s financial health, I’ll do it with two words – “fat meat”. Fu Yu has been making lots of money before it becomes a falling star. For many years, the company has not been generous in giving out dividends and as such, it has huge reserves. In its interim report (1H2007), you will see that Fu Yu has cash holdings of around S$50 million and reserves of around S$150 million.

FU YU REALLY HAS LOTS OF FAT MEAT!!!

The only problem is that it is making losses. But should Fu Yu be taken over, and with its net assets value of approximately $0.44 a share, the take over price would be much higher. No doubt a take over news would be good but what I was hoping was that Fu Yu could resolve/restructure its operations and back to profit again. Since other similar or related companies were making at least decent profit, I believe Fu Yu can do it too. Ok, fine, I agree that this would be speculative on my part since I don’t have evidence to support my views. Unfortunately for me again, lately Fu Yu suspended its trading and a few days later, it released another bad news – Letter of Demand by the BANKS!!!!!!!!

I am totally disappointed with such news; its worst than reporting loses. When banks throw in their towels, this is horrible for three reasons:

· Other creditors will follow suit to get back their money.
· Suppliers will be worried and may resort to cash payment.
· When banks throw in their towel, they must have done their homework very thoroughly and deemed that the company is shaky.

I had already made a loss when I invested in Fu Yu at around $0.325. Now with this news, Fu Yu’s share opened at $0.15 on 15 Oct 2007 after the company lifted its suspension. My loss compounded. Honestly, I really never thought that Fu Yu would become a falling star.

“So what are you going to do now?”

I will have to cut loss but not immediately. Since Fu Yu is not a “dying old man” but rather a “sick man”, I do hope that it can be a shooting star again. Certainly, no more further investment in this company and I would not recommend anyone to buy.

Conclusion

So, there are two things we (including myself) can learn here. Firstly, in stock market, there is always opportunity and threat. When tide change, a super star company can become a falling star and vice versa. Take a look at the construction companies. Many were worth less than 10 cents before the recovery of construction sector and the IR project. Secondly, I made mistakes. Yes I made mistakes too just like any human beings and I had been honest with my friends who learned value investment from me. I am sorry if any of my friends is disappointed because I am not. I could have, just like many speakers and writers, telling you only the success story so that you can keep paying for the seminars and books. They never tell you their mistakes. But that probably explain why they are rich and I am not. But yet the most important lesson to learn is actually not the success story but others’ failure so that you do not make the same mistake. Anyway, that’s my character - I’ll always reveal the truth, and the truth will set you free.

Foreign Currency Stocks

Exchange Recovery

On 10 Oct 2007, there was an article on Business Times that briefly highlighted NTU professor’s views on the exchange rate. I am not an economist and my understanding of complex economic theory is limited. But I do know what happened before and after 1997. But firstly, the following is an extract of the article:

“While South-east Asian nations are now better prepared for an exchange rate crisis, none of the original Asean 5 economies have regained their pre-crisis exchange rate parity, which suggests that their economies may not necessarily be more robust now…..

According to Prof Lim, an East Asian exchange rate crisis is unlikely in the foreseeable future as all the Asian nations affected during the crisis 10 years ago have good balance of payment surpluses and have accumulated a great deal of foreign exchange reserves.

Moreover, all - except for Hong Kong and some Gulf States - have adopted a floating exchange rate regime, which creates a cushioning effect on exchange rate movement. On top of that, the relevant regulatory authorities have more experience in regulating the exchange rate system now.

However, he cautioned, this does not necessarily mean South-east Asian nations are much more robust from all perspectives. 'None of the original Asean 5 economies, including Singapore, have regained their pre-crisis exchange rate parity. The Indonesian rupiah, at 9,143 rupiah to one US dollar, is still 275 per cent lower than the pre-crisis rate of 2,433 rupiah. Only the Singapore dollar has rebounded quite close to the pre-crisis level.'

Prof Lim also said that the US should consider a general devaluation of its currency. 'The US cannot continue to borrow money from abroad to finance domestic consumption and heavy external commitments indefinitely……”

Strong Currency - Risk & Rewards

You may be excited to know that right now, Singapore currency worth approximately S$1.47 against US$1. we had recovered our lost ground since 1997 Asia Financial Crisis. If this goes on, very soon, we are going to set new historical record and this will be on the headline. I remember that before the Asia Financial Crisis, I invested on a listed company known as CM Tel (Hong Kong telecom company). The stock was traded in board lot of 7,000 shares and in US dollar. Within a few weeks, the stock price rose and this was soon translated into both capital gain and currency gain. Not bad for an amateur.

Ten years later, history repeated again. Today, there are lesser US dollar-traded stocks on the SGX as many had converted into Sing$ or no longer listed. But investors must be careful when investing in stocks that trades in US dollar. This is because our exchange rate, although is free floating, is not 100% free float. The MAS, our central bank, allows the exchange rate to move within certain undisclosed band. In my opinion, it’s not a good sign that our currency continues to appreciate for the fact that Singapore is an export economy. Our growth depends heavily on foreign demand especially from Europe and US. Therefore, my best guess is that MAS will allow Sing$ to be weakened. Since there is greater uncertainly, I would really avoid investing in assets that transact in US dollar. This may includes stock, foreign currency bonds etc.

In his note, Professor Lim brought up an important issue which I have been asking that question for many years. Unfortunately, to-date, nobody can offer me a reasonable answer. Professor Lim mentioned that the US Government cannot continue its borrowing activities. We know that the US is the largest borrower and had reported budget deficit for many years. And I had been asking: “can US continue to enlarge its debt such that one day it becomes an astronomical figures”? I still couldn’t find an answer. But one of my friends in the Army shared with me his view. He said that the US is the most powerful and biggest market in the world. She is also the biggest borrower. To keep everything in tact, the world must support the US especially its currency. This is because if the US collapsed and bankrupted, she will pull down global economy (who knows may spark off a depression) and everyone will get nothing out of it. It’s like the quote (reverse) from the movie Titanic – “I jump you jump”. Or perhaps quote from billionaire Donald Trump – “if you owe bank a million, you are in trouble. But if you owe bank a billion, the bank is in trouble”.

Notwithstanding my view that we (retail investors, non-currency experts) should avoid investment in foreign currency, this is a good time to go for holiday. And that’s exactly what I am going to do in November with my strong Sing$.

What Is A Stock Index? (Part II)

Nasdaq Index

On 8 Feb 1971, an automated quotation system called Nasdaq (National Association of Securities Dealers Automated Quotations) provided up-to-date bid and ask prices on 2,400 leading over-the-counter (OTC) stocks. Prior to Nasdaq, quotations for these unlisted stocks were submitted by the principal trader or by brokerage houses that carried an inventory. Now Nasdaq linked the terminals of more than 500 market makers nationwide to a centralized computer system. The Nasdaq Index is owned and operated by The Nasdaq Stock Market, which list mainly the technology stocks.

The Nasdaq Index, which is a value-weighted index of all stocks traded on the Nasdaq, was set at 100 on the first day of trading in 1971. It took almost 10 years to double to 200 and another 10 years to reach 500 in 1991. It hit a milestone of 1,000 in Jul 1995. As the interest in technology stocks grew, the rise in the Nasdaq Index accelerated, and it doubled its value to 2,000 in just 3 years. In the fall of 1999, the technology and Internet boom sent the Nasdaq Index into a frenzy, peaking at 5,048.62 on 10 Mar 2000.

Straits Times Index (STI)

Lastly, we come to Singapore’s Straits Times Index (STI), a value-weighted index. It was previously known as the Straits Times Industrial Index (STII). On 31 Aug 1998, the STII was renamed and ended at 885.26 points in the midst of Asia Financial Crisis. The STI is a value-weighted index constructed by the SPH, in conjunction with the SGX and a few other professionals.

Currently, there are 48 STI component stocks. In early Oct 2007, SGX announced that they are will revamp the component stocks again. Twenty-two current component stocks will be removed and four new stocks will be added in. To be eligible for entry to the new indices, a stock must have a free float - the proportion of shares available for trading by investors - of more than 15% and it must also pass a liquidity test.

Finally, have you ever think carefully what actually drives the index? If your answer is the investors, yes but what will affect these investors decision (whether they are speculators or value investors)? If you answer is corporate performance and/or market sentiment, yes but what will affect directly corporate performance and/or sentiments?

The Economy

Yes, the stock market performance, measured by various indexes is ultimately affected by the economic performance of a country or major developed countries. As such, we know that stock market is an indicator of future economic performance. When analysts, speculators and investors believe that an economic downturn is approaching, they will take one of the two actions – run or short. Either way, the stock market will clash. Therefore, as a value investor, we should study corporate performance and most importantly, the general economic performance.

“But I thought that as a true value investor, we should focus on a company long-term prospect and Warren Buffet does not dispose his stocks away during market downturn!”

Some of my friend had made such remarks to me before. If that is also your views, you are not wrong and I understand what you mean. But there is a different between Warren Buffett and a retail investor in investment management. But this is outside the scope of this article. I’ll talk about it in another article.

What Is A Stock Index? (Part I)

Many people know that we use index to measure stock market performance. So exactly what is an index? What’s the use of an index and how is an index calculated?

Firstly, an index is a basket of stocks that is use to represent broad market performance. These selected stocks are known as index component stocks. These stocks bear certain characteristics such that collectively, they can be used to measure the broad market or certain industry’s stock market performance (and sentiments).

Uses Of Indexes

1) Benchmarks portfolio performance. When you invest through a fund manager, i.e. buying a unit trust, how do you know or gauge the performance of your fund (or the fund manager)? Well, you measure it against certain related index. Therefore, if your fund manager can’t even match the index stocks, let alone talking about beating the index which is your expectation, then you might as well buy those index stocks rather than paying the fund manager.

2) Constructing index fund/portfolio. There are fund houses that introduce Index Fund to the market. This simply means that the fund manager will buy the index stock of a specific financial market and will hold on to it. This type fund is a passive fund as the fund managers do not need to manage or trade it actively. In fact, trading decision can be made through some computer model and little human decision is needed. The operation cost of an index fund is low compared to the usual actively managed funds. Comparatively, an index fund will charge a much lower commission. An Exchange-Traded Fund is also an index fund only that it is listed and traded actively by the investors. For more information on the ETF listed on the SGX, please click on the above link. The ETFs that are currently (Oct 2007) available on the SGX are:

Equities:

· CIMB FTSE ASEAN40 ETF
· iShares MSCI India ETF
· Lyxor ETF China Enterprise (HSCEI)
· Lyxor ETF Hong Kong (HSI)
· Lyxor ETF MSCI AC Asia-Pacific Ex Japan
· Lyxor ETF Japan (Topix)
· Lyxor ETF MSCI Korea
· Lyxor ETF MSCI Taiwan
· streetTRACKS® Straits Times Index Fund
· U.S. Cross-Listed ETFs (JV ETFs)

Fixed Income:

· ABF Singapore Bond Index Fund

Commodities / Precious Metals:

· Lyxor ETF Commodities CRB
· streetTRACKS® Gold Shares

3) Technical analysis. Obviously, speculators/punters/technical analysts uses index to predict stock movement. In this case, an index is simply a reflection of human beings’ current behaviour (i.e. stock market sentiments) and these analysts hope that through identifying certain pattern (that repeated over and over again), they could make profitable investment decisions that are usually short-termed. It is really about predicting investors’ behaviour. Or alternatively, if a person can read everyone’s mind, then technical analysis on indexes will not be needed.

4) Academic purpose – calculation of beta and portfolio theory studies.

Index Computation

1) Price-weighted index. In a price-weighted index such as the Dow Jones Industrial Average and the NYSE ARCA Tech 100 Index, the index is derived by summing up all the prices of the component stocks and divide by the number of component stocks. However, this divisor had to be adjusted over time to prevent jumps in the index when there is a change in the companies stocks and when there is a stock splits. A price-weighted index has the property that when a component stock splits, the split stock has a reduced impact on the average, and all the other stocks have a slightly increased impact. In a price-weighted index, proportional movements of high-priced component stocks have a much greater impact than movements of lower-priced stocks regardless of the size of the company.

2) Value-weighted (or capitalisation-weighted) index. In a price-weighted index, the size of the firm has no impact on the index. A market-value weighted or capitalization-weighted index such as the Hang Seng Index and Straits Times Index factors in the size of the company. The size of a company is measure by its market capitalisation (no. of shares issued x current share price). Thus, a relatively small shift in the price of a large company will heavily influence the value of the index.

Dow Jones Industrial Average

Charles Dow, one of the founders of Dow Jones & Co., created the famous Dow Jones Averages in the late 19th century. On 16 Feb 1885, he published a daily average of 12 stocks (10 railroads and 2 industrials) that represented active and highly capitalized stocks. Four years later, Dow published a daily average based on 20 stocks-- 18 railroads and 2 industrials. On 26 May 1896, the Dow Jones Industrial Average (DJIA) was created from the following stocks:

· American Cotton Oil
· American Sugar
· American Tobacco
· Chicago Gas
· Distilling & Cattle Feeding
· General Electric
· Laclede Gas
· National Lead
· North American
· Tennessee Coal & Iron
· U.S. Leather
· U.S. Rubber

Today, only GE survived through the centuries and retained its membership in the DJIA. Now, the DJIA 30 component stocks are:

· 3M (NYSE: MMM)
· Alcoa (NYSE: AA)
· Altria Group (NYSE: MO)
· American Express (NYSE: AXP)
· American International Group (NYSE: AIG)
· AT&T (NYSE: T)
· Boeing (NYSE: BA)
· Caterpillar (NYSE: CAT)
· Citigroup (NYSE: C)
· Coca-Cola (NYSE: KO)
· DuPont (NYSE: DD)
· ExxonMobil (NYSE: XOM)
· General Electric (NYSE: GE)
· General Motors (NYSE: GM)
· Hewlett-Packard (NYSE: HPQ)
· Home Depot (NYSE: HD)
· Honeywell (NYSE: HON)
· Intel (NASDAQ: INTC)
· IBM (NYSE: IBM)
· Johnson & Johnson (NYSE: JNJ)
· JPMorgan Chase (NYSE: JPM)
· McDonald's (NYSE: MCD)
· Merck (NYSE: MRK)
· Microsoft (NASDAQ: MSFT)
· Pfizer (NYSE: PFE)
· Procter & Gamble (NYSE: PG)
· United Technologies Corporation (NYSE: UTX)
· Verizon Communications (NYSE: VZ)
· Wal-Mart (NYSE: WMT)
· Walt Disney (NYSE: DIS)

Analysis of the Dow trend since 1885 shows an annual compounding gain of 1.85%, excluding inflation. The Dow Jones Industrial Average, like most other popular averages, does not include dividends, so the change in the index greatly understates the total return on Dow stocks. I do mean greatly-- as with about 4.6% annual dividends reinvested since 1896, the Dow would be somewhere around 700,000 today!

To be continue......