Singapore Banking Stocks - DBS & UOB (Part 1)

DBS Group Holdings

DBS will be releasing its Q3 Results on 26 Oct 07 before market opens for trading.

On Sept 19 07, DBS announched a S$400 million share buy-back programme. Share buy-back tends to give a lift to the stock price, due to a decrease in the Shares Outstanding. As this buy-back has not been effected yet, we will not see the upward movement in the stock price in the short term due to the buy-back.

On 27 Sept 07, DBS announced that DBS Vickers Securities Online is now fully owned by its subsidiary. Given the current trading volume of the Singapore Stock market, and DBS Vickers' market share of online brokerage, this should have a positive contribution to DBS's bottomline, even after accounting for the cash consideration of $6.5 million. However, we should see this contributing to the Q4 results and not Q3.

On Oct 8 07, DBS China launched its RMB products - Although this has no material impact to its upcoming results, it should nonetheless have a positive contribution to its Q4 results.

From the above, I think my recommendation is kinda obvious by now. Hold DBS stocks/warrants till the release of its Q4 (FY) results.

Price target: $24 by year end.

Investment: The Top 10 Trading Rules - Part 2

This is continued from my earlier post.

(6) Adapt your style to the market
At various junctures, different investment approaches are warranted and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.

(7) Maximize your reward relative to your risk
If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue. (aC: This is very true in a sense; I realised that my Contra trades will never do better than the stocks that I hold even for just a few months)

(8) Perception is reality in the marketplace
Identifying the prevalent psychology is a necessary process when trading. It's not "what is," it's what's perceived to be that dictates supply and demand. (aC: On the philosophical side, isn't "Reality" itself just a matter of one's perception? One person's reality may be completely different or even opposite from another person's)

(9) When unsure, trade "in between"
Your risk profile should always be an extension of your thought process. If you're unsure, trade smaller--or paper trade--until your identify your comfort zone. (aC: THIS is the time to do that - during times of great volatility and extreme price fluctuations.)

(10) Don't let your bad trades turn into investments
Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk of win, lose or draw. (aC: Alright, hands up! I'm guilty of this too, but there ARE times when bad investments can be turned into good ones; That's a strategy I will leave till another time.)

There are obviously many more rules but I've found these to be my common threads through the years. Each of you has a unique risk profile and time horizon, so some of these commandments may not apply.

As always, I share these thoughts with hopes that they add value to your process. Find a style that works for you and always allow for a margin of error. No approach is failsafe and any trader worth his or her salt has endured periods of pain.

Good traders know how to make money but great traders know how to take a loss. For if there wasn't risk in this profession, it would be called "winning" rather than "trading."

Source: CNN Money.com

Investment: The Top 10 Trading Rules - Part 1

By Todd Harrison

I remember why I wanted to be a trader. I figured that the easiest way to make money was to stand near the cash register. Of course, as I discovered through my 17-year career, there's a reason why consistent producers get paid the big bucks. Flashy bets and big swings sometimes connect but, in the end, a disciplined approach pays the bills.

I've tripped plenty through the years, the types of missteps that almost cost me my livelihood. But I persevered, climbed the ladder and morphed those mistakes into valuable lessons.
I evolved and matured as a vice-president at Morgan Stanley (MS), a Managing Director at the Galleon Group and as the President of Cramer Berkowitz, a $400 million hedge fund. My approach wasn't always constant but, in the end, certain rules allowed me to stay in the game.

These are those rules.

(1) Respect the price action but never defer to it
The action (or "eyes") is a valuable tool when trading but if you defer to the flickering ticks, stocks would be "better" up and "worse" down and that's a losing proposition.

(2) Discipline trumps conviction
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always attempt to define your risk and never believe that you're smarter than the market.

(3) Opportunities are made up easier than losses
It's not necessary to play every day, it's only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability. (aC: Oh man, this is so true! The tempation to make a quick buck is always there, so one of the top trader's discipline is to resist temptation.)

(4) Emotion is the enemy when trading
Emotional decisions always have a way of coming back to haunt you. If you're personally attached to a position, your decision making process will be flawed. Always take a deep breath before risking your hard earned coin.

(5) Zig when others Zag
(aC: This is otherwise known as the Contrarian rule; Contrarians believe that the general investing public is usually wrong in its trading strategy, so the smart thing to do is to do the opposite) Sell hope, buy despair and take the other side of emotional disconnects (in the context of controlled risk). If you can't find the sheep in the herd, chances are that you're it.

Read Part 2 of this Post here...

IPO Review - MAP Technology (Part 2)

(1) Business of the 3 main subsidiaries (revised):

(a) Min Aik Precision
Principal Activity - Precision Stamping - VCM Plates (main product)
Operations - China
Main Customers - Maxtor (20%) and Western Digital (80%) for FY06
Revenue Contribution - 22%

(b) M&J Technologies
Principal Activity - EMS Solutions - EHDD (main product)
Operations - Thailand
Main Customers - Western Digital and Latronix (in Nov 06; Reputable customer but too new to determine sustainability and significance)
Revenue Contribution - 66%

(c) Art Craft
Principal Activity - Die-cut components
Operations - Singapore
Main Customers - BMS Tech, Metalform, etc whose end customer is Western Digital
Revenue Contribution - 6%

Conclusion: Company is highly dependent on Western Digital for its Revenue; If for whatever reasons it loses WD as customer, its revenue will be adversely affected.

(2) EMS Solutions
The Company employs 696 full time production operators and 530 subcontract workers - Is this normal?

(3) Utilisation Rates (FY06)

(a) Precision stamping - 44.7%
Q: What are the Company's plans for the under-utilised maunfacturing facilities since the focus moving forward is clearly EMS solutions

(b) EMS - 49%
Q: Why does the company still need to spend $8.2 million (of net proceeds) on expansion when it is under-utilized?

(c) Die-cut - 98.9%
Efficient!; But sadly, this is a low revenue contributor.

(4) R&D
The company mentions that R&D is an essential part of the precision stamping business - So why is none of the proceeds spent on R&D?

(5) Credit policy
Allowance for doubtful receivables increased from $17K in FY05 to $63K in FY06, but no bad debts have been written off in FY06; The company gives bad estimates for doubtful receivables

(6) Customers
Min Aik Technology (a controlling shareholder) contributes 76% and 45% to FY04 and FY05 Revenue respectively. This decreased to 22.3% in FY06 with Western Digital accounting for the Company's FY06 Revenue.
Q: What do the revenue figures become if we remove Min Aik Tech's contribution?

(7) Strategic M&A
Form the Prospectus, it does not seem that the Company is certain of any JVs or M&As, so why is $7.8M (of the net proceeds) being set aside for it?

IPO Review - MAP Technology (Part 1)

Prospectus Fundamental Analysis

You can get a copy of the Prospectus here.

(1) Issue Price: $0.32

Issue Size: 76.5M New Shares comprising only 3M Public tranche (representing only 3.9%) - I suspect this is going to be heavily subscribed again.

(2) Business: 3 Principal activities:

(a) EMS Solutions (66% of FY06 Revenue)
- Main product: Data storage devices (such as EHDDs)
- Main operations: Thailand

(b) Precision Stamping Products (25% of FY06 Revenue)
- Main product: VCM plates of HDDs
- Main operations: ROC

(c) Die-cut Components (9% of FY06 Revenue)
- Main product: Acoustic Damper
- Main operations: S'pore

(3) Historical EPS: 2.4 US cents = ~3.6 Sing cents (Therefore 15X EPS gives S$0.54)

P/E Ratio: 8.7 X

(4) Use of Net Proceeds (S$21.1M)

(a) 38.9% - Expand EMS solution operations

(b) 35.5% - Expand business through M&As, JVs, etc. (Vague)

(c) 25.6% - General Working Capital

(5) Capitalisation & Indebtedness

Actual Cash + FD = US$6M

Actual Total shareholder's equity = US$26.6M

Both more than offsets Actual Total Debt of US$2.7M

(6) Dilution
Directors and Substantial shareholders holding stock at only ~S$0.13
Min Aik Tech holds 50.7% of total shareholdings

(7) Main Customers
(a) Western Digital - EMS Solutions
(b) Min Aik Tech - Precision Stamping Products (They are also substantial shareholders - check IPT/Conflict of Interest)

(8) COGS
Raw material costs constitute 82.2%; Raw materials maintained for only 7-14 days because of JIT system; Prices not subjected to seasonlity.

(9) Gross Profit Margin
Decreased from 29.6% in FY04 to 13.1% for FY06, mainly due to EMS Solutuions which typically command lower margins

(10) Inventory Management
Inventory Turnover = 25 days only due to JIT system (for FY06); No write off

IPO Review - RH Energy

To Subscribe or Not to Subscribe - That is the question.

And so here I present my fundamental analysis (based on Prospectus dated 2 July 07).

General Info:
Business: Full suite of integrated customised design, engineering, procurement, construction, installation and commissioning services to the oil and gas pipeline and oil companies.
3 Principal activities: (a) Equipment Integration services (contribute to 81% of Revenue)
(b) Manufacture & Procurement services
(c) Consultancy Services
Issue Price: S$0.32

(1) EPS Growth (based on SGD denomination) for past 3 years should be > 25%:
683% from FY2004 - FY2005; and
59.6% from FY2005 - FY2006

(2) Return-on-Equity should be > 30%:
ROE (FY2004): 11.5%;
ROE (FY2005): 47.5%;
ROE (FY2006): 55%
Increasing for the past 3 years.

(3) Current Assets to Current Liabilities Ratio should be > 2
CA/CL (FY2006): 2.15
Company should be able to meet its short term obligations.
Moreoever, there is positive working capital of US$7.9M

(4) Debt-to-Equity Ratio should be less than 1
D/E (FY2006): 0.43

(5) Price-to-Earnings Ratio
Current P/E (based on Issue Price): 10.7X
15X P/E: $0.45 (Target price)

(6) Net Asset Value
NAV (FY2006): 3.92 cents (SGD)
NAV Premium (based on Issue Price): 716%

Issues/Concerns:
(1) Dilution (Pg.43) - Substantial shareholders and Pre-IPO investors paid only 4.95 cents and 11.16 cents per share respectively, so they are sure to sell once the Shares are listed. They are however subjected to a moratorium of 6 months, so that gives us some time for retail investors like us to play around with.
(2) MD&A > FY2006 Revenue VS FY2005 Revenue (Pg.57) - As a result of a strategy change, the Company's contract size decreased in FY2006 while no. of projects more than doubled to 71 (from 33), and this subsequently produced a drop in overall Revenue of 30.8%. However, this also contributed to higher net profits (67% increase) in FY2006 due to higher margins (and lower costs). My concern is: Is this sustainable? The Company doubled its no. of contracts in FY2006, will the Company be able to increase its no. of contracts in FY2007 and beyond (esp. since this strategy is based on quantity rather than contract size per contract)?
(3) Being in the oil industry, RH stock price will undoubtly (but irrationally, to me at least) track the NYMEX sweet crude oil futures which current stands at US$72.81. My take is that as long as prices remain above $70 on its listing day, the stock price will rise.

Recommendation: Subscribe/Buy

Basics in Equities Investing

There are basically 2 schools of thought when it comes to investing in Equities - Technical Analysis & Fundamental Analysis. What are they?

Technical Analysis (TA) is the study of historical price movements through the use of charts. The 3 main charts that most Technical Analysts use are the Line chart, Bar chart and Candlesticks. Personally, I prefer the use of Candlesticks for its more descriptive visuals. Technical analysts look for patterns in the charts and using the basic assumption that "History repeats itself" to forecast future price movements. They look for signals or indicators within graphs to tell them if a stock will continue its upward/downward trend or is heading towards a reversal. Proponents of TA will tell you that it is simple to use, signals can be quickly detected and the investor psychology is incorporated within the analysis. Some arguments against TA are that the indicators/signals are highly subjective to the user and that the value of indicative values will change over time (since they are dependent on a large number of variables)

Fundamental Analysis (FA), on the other hand, is the determination of a company's underlying value by analysing the company's financial statements, business model, its future prospects, management team and internal controls. Fundamental Analysts invest on the assumption that "an undervalued stock will always catch up to its underlying value in the future". Proponents of FA will tell you that since financial ratios such as Net-Asset-Value (NAV), Earnings-per-Share (EPS) and Return-on-Equity (ROE) are rigorously calculated, estimate of a company's underlying value will not differ too far from such tangible quantifications. Criticisms of FA are that even if the undervalued stock will rise to its underlying value, investors will never know when this will happen (via TA).

If you ask me, I suggest the use of both analysis - Use FA to identify which stocks to invest in, and use TA to determine when to do so (Timing).

Happy investing!

Super stock returns: ROE/PTB vs ROE vs PTB (Part 1)

The following article is a good read for all Fundamental Analysts out there!

By TEH HOOI LING SENIOR CORRESPONDENT (Source: Business Times)

LAST week's article - In Search Of Super Returns In Stocks - struck a chord with readers and investors out there, judging by the number of emails I received.
For those who missed it, basically I screened all the stocks listed on the Singapore Exchange from 1990 until 2006 based on their return on equity and price-to-book ratio.
I then grouped the stocks into 10 portfolios with equal numbers of stocks, starting from those with the highest ratio when we divided ROE by price-to-book, to the lowest. This screening process can help us identify some mispriced stocks.

A company that is able to generate a high return on equity - one that exceeds its cost of equity - should trade at a higher price than the book value of its equity. And vice versa. But if a company generates a relatively high ROE, yet is trading at a relatively low price-to-book ratio (PTB), careful analysis is warranted.

There could be legitimate reasons for the low valuation. For example, the earnings were due to exceptional items. If not, the stock may be under-priced.
But without any detailed analysis other than simply grouping stocks based on ROE/PTB, I found that investors can actually generate super returns.

By investing in the 10 per cent of stocks with the highest ROE/PTB every year between 1990 and 2006, and holding each portfolio for a year, one could have turned $100 into $34,000 over the past 17 years. That's a compounded return of 41 per cent a year. All the calculations exclude transaction costs.

If we assume that the investor had lost 10 per cent of the portfolio value to transaction costs every year, the return is still a respectable 27 per cent a year. But in absolute terms the portfolio value today, at $5,678, is significantly less than the $34,000 which excludes transaction costs.

From the above, we can see that ROE/PTB is a good screening tool.

Super stock returns: ROE/PTB vs ROE vs PTB (Part 2)

By TEH HOOI LING SENIOR CORRESPONDENT

Separate rankings

If we pick stocks just based on ROE or just based on PTB, do we get results that are as good?
I decided to test this based on the same set of data last week. This time around, I ranked stocks based purely on their ROEs first. Again, I grouped them into 10 portfolios, with the first 10 per cent or first decile being stocks with the lowest ROEs. The 10th decile was made up of stocks with the highest ROEs.

As can be seen from the above chart, screening stocks using just their ROE still yields good returns. $100 invested in the highest ROE portfolio every year would grow to $8,752 today. That's a compounded annual return of 30 per cent.

But it would lag the performance of the basket of stocks with high ROE yet low PTB.
For both the first and second screening, I excluded loss-making companies.
Next, I ranked the stocks based on their PTB ratios. For this, I did not remove loss-making companies. The first decile is made up of stocks with the lowest PTB ratios. Some could even have negative PTB ratios. And the 10th decile consists of stocks with high PTB ratios.
As you can see from the third chart, there is a clear distinction in performance as well. The lower the PTB, the higher the return. And conversely, the higher the PTB, the lower the return. The lowest PTB stocks generated about 15 per cent return a year, while the highest PTB stocks chalked up a 7.3 per cent loss a year.

However, the returns of portfolio ranked purely on PTB ratio lagged those screened by ROE/PTB or purely on ROE.
One of the reasons for the under-performance could be the continued poor performance of loss-making companies. Other studies previously have found PTB to be the best predictor stock performance. Particularly so when there is a turnaround in the economy. This is also evident in five portfolios that The Business Times tracks every Monday.
But it takes guts to go against the crowd and buy into downtrodden stocks.

So perhaps, the ROE/PTB is a more comfortable approach for many. And as the results above indicated, it is rather rewarding as well.
It does, however, require a little more work. The use of ROE/PTB takes into consideration not only the underlying earnings capacity of a company, but also how much of that has been factored into its stock price.
So if a company can rake in good earnings and good growth and its share price has fully reflected that, it may not be a good stock to buy. What one wants is good earnings growth that is not recognised by the market.

Variations

A reader pointed out that with some simplifications, ROE is earnings per share (EPS) divided by net tangible assets (NTA). And PTB is price per share divided by NTA.
Dividing the former by the latter gives us EPS divided by price per share, which is earnings yield. So stocks with high ROE/PTB are also those with high earnings yield.
And we could go one step further. Earnings yield is the inverse of price-earnings (PE) ratio. So stocks with high earnings yield are also low PE stocks.

'Notwithstanding the mathematical accuracy, ROE relative to value is an interesting approach to investing,' he wrote. 'I have been using something similar for some time to good effect (ROE divided by PE coupled with some other criteria like minimum dividend payout and low debt to equity).

'A variation was also suggested in the book The Little Book That Beats The Market by Joel Greenblatt which uses ROE divided by return on invested capital (to correct for the use of excessive financial leverage). He even has a website www.magicformulainvesting.com to automatically select US stocks that meet the criteria.'

The reader added that the most comprehensive book he has come across on this is What Works On Wall Street by James P O'Shaughnessy.

So anyway, for the many who have asked, I have generated a table (above right) - using data from Bloomberg - showing 30 stocks with high ROE/PTB. Some of the numbers may be skewed by one-off items, so some analysis is advised before any action is taken.

Stock Review - YHI International

REVIEW OF Q107 FINANCIAL RESULTS

You can obtain the financial results here.

The Group’s turnover for Q1'07 (of S$96.0 mil) was S$0.2 mil or 0.2% higher than the S$95.8 mil recorded in Q1'06. Turnover from the manufacturing business increased by ~S$8.6 mil or 36.6% from S$23.5 mil in Q1'06 to S$32.1 mil in Q1'07. The increase was primarily due to increased output from additional production capacity in Suzhou, PRC.

Turnover from the distribution business decreased by approximately S$8.4 mil or 11.6% from S$72.3 mil in Q106 to S$63.9 million in Q107. The decrease was primarily due to exclusion of sales from Yokohama tyres in the PRC region as a result of formation of a joint venture entity in which the Group has a 49% stake. Distribution and administrative expenses were lower in Q1'07 as compared to Q1\'06 mainly due to lower advertising and promotional expenses and lower allowance for impairment of doubtful receivables.

Finance costs in Q1'07 were higher as compared to Q1'06 attributable to higher borrowing costs incurred.Total Group’s GPM Q1\'07 decreased by about 1.8% as compared to Q1'06 attributable to lower gross margin from manufacturing business which was mainly affected by the rising aluminum prices and also operating losses due to diseconomies of scale in the Malaysia plant which is currently operating on a single production line. The Group’s PBT increased by ~S$0.3 million or 3.7% from S$6.8 million in Q1'06 to S$7.1 mil in Q1'07. Total current assets increased by ~S$13.1 mil due to increase in receivables of ~S$12.5 million, and in inventories of ~S$4.4 mil together with a reduction of S$3.5 mil in cash. The increase in trade receivables was due to timing differences and this is in line with normal trading activities.

The increase in inventories was primarily due to higher stockholdings in view of price increases from suppliers. The reduction in cash was primarily due to working capital changes. The increase in available-for-sale financial assets of ~S$0.4 mil was due to additional investments in Hangzhou Yokohama Tire Co Ltd. The increase in investment in associated companies of ~S$0.9 mil was due to share of profits contributed by the associates in OZ S.p.A and Yokohoma Tire (Shanghai) Sales Co Ltd.

The increase in current liabilities of ~S$8.5 million was primarily due to increase in trade payables of ~S$2.6 million from higher trading activities and an increase of ~S$5.0 million in current bank borrowings. Our cash flow for the period showed a net decrease in cash of about S$4.2 million in Q1'07 as compared to a net decrease of ~S$8.0 mil in the same period last year primarily due to lower capital expenditure spendings.