Tuesday, 19 June 2018

Thoughts on the scalability of online gaming/platform companies




This post came as a very random thought after i have been hooked on watching this competition show online called Produce 101. Which is a product of Tencent , a company listed in hkex

Which sparked me to pen down some thoughts including the difference between online gaming/platform companies vs a traditional company that produces goods.


Cost

The fixed cost for traditional companies would usually be a factory, vehicles, machinery. Whereas these software companies would usually be electricity, the places where it houses it servers as well as the cost of running and maintaining these servers. The extra consumption of 1 person using an online game or service is definitely far lesser than a person purchasing goods from a traditional company. This is because the goods are likely to have far larger variable cost (example raw materials cost, cost of transporting the goods and storing them). Over more demand, there is definitely more cost savings to be found in the online companies.

This means that it is likely that these online based companies can have enhanced margins compared to a company that produces goods.

The downside to this risk will be that there is high set up cost involved and there will be needs for huge marketing to entice people to play the game and spend on it.

An example can be seen from the 2017 annual results of Ourgame (Hkex: 6899)





A quick computation of the gross profit margins indicated that surprisingly 2017 had better gross margins of 53.3% compared to 53% in 2016. However the huge decrease in revenue meant that this small improvement did not seem to matter at all and resulted in huge losses. Also we can see that the company is able to maintain solid margins despite a higher revenue(the point above)

Another point worth noting in this company will be the increase in selling and marketing expense. While it did not result in results improving this year, it will be interesting to see if this will result in the company's revenue to recover.


Fallen Legacy

Not sure if most of you remember the online games you played during your school days. For me it has to be Maplestory, i would always remember the loading screen displaying Asiasoft before it goes into the log in screen



Well do i play the game still? Nope
Does many people still play it? I guess the numbers have long ago peaked and ran into sharp decline ever since
Is the South East Asia game distributor still around? Yes, Asiasoft is still around
How has it been performing?


At the IPO Price of $12 in 2008, the company has paid out a total of 4.258 Baht worth of dividends
If one has held the shares since ipo and believe in the power of maplestory and friends, he would have lost roughly 50% of his investment.

Well Asiasoft has been unprofitable in 2014,2015,2016( was unable to read thai well and unable to sieve out previous years results). Its last dividend payment is also in November 2013, which adds up to the unprofitable story all together.

While i am not entirely sure what has led to the decline, a part of me would believe that people are switching to other games and the company as a whole has failed to retain current players and attract more.
Something beyond that will be they are unable to entice these players to spend on their games as well as the older days. These could have been all due to the advancement in technology and communications network. I remember broadband was such a privilege in the 2000s and Dota was still a game not well monetized. Now it has been monetized so well and definitely would have played some part in attracting people to play Dota 2 instead of Maplestory.

The food for thoughts i gathered here would be that 'Would this game be able to grow and attract more players?' 'Would the company be able to have new games to attract more players?' 'What is the method used to entice players to spend on it? Has it worked?'
I believe if one plays the game he would have a slight advantage over those that do not. But he will still have to answer the thoughts above as well.

Produce 101

Alright back to Produce 101, this competition allows for voting from viewers to decide 11 girls which will end up debuting as a girl group. Viewers can vote 1 time per day and purchase additional VIP Cards to increase the votes of those they support. A normal voting period for each round is probably about 10 days.




As you can see from the 1st pictures you can get 121 votes for buying 1 vip card and the person who receives ur vip card can vote 11 times as well

In the second picture you can see one of the girls(currently ranked 2nd) having 2.1 million votes in just 53 minutes of a day as the daily votes reset at 12am.

Given that 1 card of 121 votes is 18 yuan. About 17000 cards are purchased. Thats 64 000 dollars earned in just 53 minutes. The variable cost of these votes is possibly 0 or close to 0 as these are virtual items that do not have 'raw materials'. You just have fixed cost in running these servers.

Initially when the competition started i was really sceptical about whether the show will get people to vote and spend. However as the days gone on i realised that this show has pretty much turned out to be a success in generating revenue despite the huge cost involved in running the show. The 1st place had 40 million votes over a span of a week in one of the rounds.
At a conservative estimate if 30 million votes are obtained via purchasing of cards, roughly $930 000 Sgd is spent.

With regards to how this competition has brought in the revenue, i am very very amazed and impressed.

Quick Conclusion of my thoughts

-How online game/platform attract more players to play and pay as well as viewers to watch and pay is important and to me is 1 of the ways to see how well a company is run
- Games that used to be famous can lose popularity and result in the companies to be badly affected if they are unable to come up with new products that can replace these lost in revenue
- Good content is very important, just like how someone would not buy a rotten apple on display at the supermarket, one will not be willing to pay for the content/ spend money in the game or to support their idol (in the case of produce 101) if the content of the show/game is very bad and does not appeal to the potential spenders.

Monday, 4 June 2018

My thoughts on astrea IV bond

*Disclaimer- Do note that the content in this blog are my views and analysis in this post and they could be inaccurate.



In case you have not read the prospectus, you can find it here.

According to the article, the retail bonds of class A1 could be offered at 4.625%. These retail bonds will be allowed to trade in the market.

From the prospectus, most of its Private equity investment comes from buyouts(86.1% of NAV).

Buyouts are usually leveraged (which means they take on huge debts) to buy out companies and run these companies as a private entity. Usually with the huge use of manageable debt and frequent board meetings since they are private entities, the company is able to bring in the returns for the private equity funds in the form of  IRR (Internal rate of return)

Investors are investing into these private equity companies' future cash flows. The cash flows would flow in tranches to Class A-1, then Class A-2 then Class B then to the Equity tranche. There would be 36 private equity funds involved in 596 Investee Companies with each company's Nav no larger than 3%.

Pros of the bond

1. Ownership
The equity tranche of the bond is held by the sponsor.  The highest risk tranche is held by the sponsor and not sold off which could be a show of faith in the assets of the private equity fund. Being the equity tranche, it would only receive the distributions last after all other classes have received what they ought to get as stated in the books. The equity tranche would also get their repayments last.

2. Major holding's performance
Performance of its 3 major fund has been encouraging. According to CalPERS, as of 30 September 2017 its fund performance are as follows.




All funds have been positive in returns and have a Net IRR of  >10% which i do think that its impressive. Furthermore, Silver Lake is in its initial stage as its vintage year is in 2013. This means that there could be further growth coming out from it.



Cons of the bond

1. Possible dead-weight private equity funds
A private equity fund has a rough timeline of around 10 years before exiting its investments and returning the cash to its investors. Which is why u see I II III IV V VI in its names. It is a representation of the 1st 2nd 3rd 4th 5th 6th 7th of the private equity funds.
One method of exit for Private equity funds will be to IPO these companies. However, in the portfolio, 25.9% of it actually have been around for 10 years and above. With 8.4% of the portfolio being 12 or more years. It seems like these funds could be a 'dead-weight' where an exit strategy could not be found and would be a worry.

2. Fees
As the portfolio consist of 36 private equity funds, effectively we are paying 36 times of management fee to these funds to manage these assets and the cash flow that we would get would actually be a residual of the profits subtracted by these fees. One might wonder what are the fees involved in a private equity fund, some clue can be located here.
On top of these fees charged by the private equity, there would be a management fee of  0.175% of Portfolio NAV per 6 months by Azalea. This fee along with other fees like liquidity facility payments are deducted from the cash flows by the private equity funds and the remainder would be given to the tranches. The exact structure can be found in page 120/306 of the prospectus.

3. Lack of Disclosure of its Investments
As the name private suggest, investors have little idea what are the funds investing in. This makes it difficult for investors to track the returns of such funds. This information asymmetry might not aid them well in making decisions should there be a sudden change in the traded price of its bonds.

4. Are companies mature?
In its prospectus its stated that the weighted average of fund age is 7 years. Mature funds exposure are more cash flow generative. However the initial stage of a PE fund could take 2-5+ years depending on which website u look for definitions. From Calpers it would be 2013 and later. In this portfolio, most of its fund's vintage years are in 2011,2012,2013,2014. With 2013 and 2014 accounting for 33.4% of NAV.
The weighted average of funds can be a double edged sword. Too early and we might not see any cash flows coming from the funds. Too late we could be seeing repayments faster which might affect future cash flows. The good thing for A-1 bond holders will be that there will be no redemption of the bond before the scheduled call date in 2023.(Page  52/306)



Conclusion
Personally I do think that if issued at par, the yield of 4.625% is actually pretty decent for the next 5 years. The track record of the top 3 funds are also pretty encouraging alongside sponsor holding the most risky tranche.
However, the thought of the many fees involved does not seem to entice me and although this might trade better than some retail bonds like Frasers 3.65% bond, investors are betting on the PE funds being successful and able to replicate the performance they have done while being unable to track the investments on their own, unlike Frasers Property Limited for example which is listed and has a balance sheet that investors can refer to. Investors are unable to assess the debt of these companies owned by the private equity funds
This lack of information could be seen as one of the few reasons why this astrea IV bond would be priced at a yield much higher than some listed company's bonds.

Personally I am not a bond investor hence it is highly unlikely i would subscribe to the retail offering.

Friday, 25 May 2018

Comparison between Tat Seng Packaging (Sgx: T12) and Hop Fung Group (Hkex: 2320)



Decided to do a comparison review between 2 companies that i feel are very similar in terms of businesses.

Both companies operate in the corrugated packaging business.



From the table we can see that Hop Fung Group seems to have better operating metrics than Tat Seng.

The only 5 metrics Tat Seng stood out were lower payout ratio, lower PE and lower Staff cost per dollar generated, return on assets(Roa) and return on equity(Roe)

From this we can see that Tat Seng has been able to extract more profits from their machines while Hop Fung has been more capable in cost management.

In addition, there has been purchase of shares by the owners of Hop Fung Group
The addition entries are plenty and can be seen from here
Whereas, this is not seen in Tat Seng Packaging

Conclusion:
Both Companies has its pros and cons.
Tat Seng would be attractive to people who like higher Roa and Roe, being listed in Sgx means Singapore Investors would be able to attend its Agm.
I like Hop Fung Group more with regards to the operational context. However the full year results seems to not be well liked by Investors trading its stock in the Hong Kong Exchange. Following the results release after trading hours on 28 March, the stock is now $1.24, which is trading 12.67% below the price($1.42) on 28 March while it is still Cum-Dividend. Whereas this is not seen in Tat Seng which is trading at the same price($0.81) before results released if dividends($0.02) has been accounted as the company has went Ex-Dividend(Current Price $0.79).




Saturday, 19 May 2018

Some thoughts on reits after reit symposium(OUE H-Reit and OUE C-Reit)

Attended the 1st half (before lunch break) of Reit Symposium and decided to jot down some thoughts i have after attending it.

*Do note that these are just some of my thoughts and there could be inaccuracy in my information.


OUE Hospitality Trust

  • Refinancing has allowed for 2-3 million in interest savings
  • Crown Plaza (Airport) is forecasted to receive minimum rental this year as RevPar still below the level of minimum rental
  • Income support of 7.5 million has been drawn down
  • Mandarin Gallery's negative rental reversion for FY 2017, -12% for 28% of Net Lettable Area (NLA) is starting to be reflected in its results as income from retail decreased
  • Mandarin Orchard continues to grow in NPI when compared to same quarter in previous year.
I got curious with regards to its gearings and decided to view the other hospitality reits that i can think of back of my head and do a very layman analysis.


In an increasing interest rate environment, one would look out for fixed loans as well as longer weighted average and lower cost of debt.

It seems like OUE H-Trust has not done so bad compared to its peers with the only 'red' mark being its gearing ratio being the highest among the other reits.

Its hard to understand why their gearing is much higher but they do have significantly lesser properties compared to their listed peers. It could be that they do think that their few assets are pretty prime and are unlikely to see a revaluation downwards that would make gearing ratios hit 45%.
A rough estimate will be that given debt levels remain constant it would need about 337 million (might not be accurate) reduction in asset value to hit 45%

Conclusion: Their Airport Hotel and Mandarin Gallery seems to be under-performing but they have done well in managing debt with a longer maturity weighted average and improved Mandarin Orchard performance to soften the impact of its under-performance of the 2 reits.


OUE Commercial Reit
  • Occupancy Rates of its 3 properties above average of its comparisons
      • Both Shanghai and Singapore Office market rental seems to be on the up-trend after a very prolonged downtrend. For Singapore Office market, rental rates was downtrend from Q1 2015 to Q1 2017. While the Shanghai Puxi Office market was downtrend from Q3 2016 to Q3 2017
  • In 1Q 2018, the average expired rents were much higher than market rental as well as much higher for passing rents for its Singapore Properties. These expired rentals seem to be on the higher end of its committed rents, which means that there is a higher chance that there is more negative rental revisions. For its China Property, the passing rent is higher than its average expired rent and the average expired rent is on the downside of the committed rents.
  • Gearing ratio of 40.5%, with 35.3% of loans set to mature in second half of 2018. It would be interesting to see the rates which OUE C-Reit is able to refinance at. According to its 2017 annual report, the nominal interest rate of its bank loans which matures from 2018-2022 is 0.8% to 2.62%.
  • Another point worth noting will be that aggregate leverage(gearing) increased from 37.3% in Q4 2017 to 40.5% in Q1 2018. This is due to redemption of some its convertible perpetuals issued in October 2015. These perpetuals which are roughly 360 million dollars on its books as of Q1 2018 are considered as equity. The distribution is 1% per annum of issue price (which is 1 dollar) and can only be converted after 4 years (October 2019) at a price of  $0.841. From a purely financial standpoint, unless the cost of debt is below 1% it really does not make much sense to convert these perpetuals. Furthermore with the stock trading at 71 cents (18 May 18). There is not much value in converting these perpetuals other than getting a higher dividend yield at the cost of current equity holders.
Conclusion: The properties seem to be well-managed although the expired rents seem to be on the higher end of the range of committed rents which could point to future downside in rental income. On the financing side, its quite boggling to see the redemption of its perpetuals before its refinancing its done as this has increased the gearing ratio which might increase the interest rate it refinances at.


Friday, 11 May 2018

Thoughts on Qingling Motors (HKEX:1122)


Financial and Company Details
Stock Name: Qingling Motors
Stock Ticker: HKEX:1122 (H-Share)

Business Model: Selling of Trucks, Van, Suvs under Isuzu brand in China. Trucks types include light, medium, heavy duty, pick up.
Business Sales: 0.05% of FY 2017 is exported to Japan, the rest of sale is done in China.
Shareholding Structure: Qingling Motors (Group) Company Limited 50.1%, Isuzu Motors Limited 20%. Allianz SE 4.11%, Edgbaston Investment 2.77%.

Price as of 11 May: 2.60 HKD
Issued Shares: 2,482,268,268
PE Ratio: 12.99
PB Ratio: 0.67
Cash on Hand: 2.64
Dividend Yield: 7.63%. After Dividend withholding tax = 6.86%


What I like about this Company


  • Cash on Hand > Market Cap. Effectively buying the company is buying over the portion of cash it has.
  • Shareholding Structure. Ensures there is interest on both sides to work towards making this company a success
  • Good Dividends despite a cash rich company.
  • Niche Focus. Instead of targeting luxury segment, Qingling Motors focus more on the industrial side of the automobile segment. Which means luxury car makers like Geekly, Dongfeng, Byd etc are not their close rivals.
  • Interest Income increased  by 45.83% yoy. Contributing to 29.79% of Profit Before Tax
  • Venturing into Wealth Management via the use of their excess cash. To invest in capital protected products, could signal higher interest income.
  • Preferential Tax Treatment of 15%
  • No debt
  • A good company to ride the logistics and property boom as these vehicles are needed for such industries and growth in these industries would inevitably contribute to the 'industrial vehicle demand'. Coupled with One Belt One Road Policy, the demand might increase.

Some Concerns about the Company
  • The company's product might be subjected to obsolete by tight government polices over emissions.
  • Qingling Motors sells diesel and petrol engines, which might be less environmental friendly compared to natural gas, hydro and solar etc.
  • High R and D Expense,  FY 17's spending is 117% higher than FY 16
  • Macro Factor: Government to open up automobile sector might pose increased competition to Qingling

Conclusion
I do think that this is a good company to buy and hold for its dividends. The dividends currently are sustainable and the current price reflects owning the profitable business for free. However, investors out of China will have to take note of the 10% dividend withholding tax H-shares have.

Will look to be vested if my financial circumstances allow (student not much funds to rotate around...)

Thursday, 5 April 2018

Thoughts on Investing in Wai Kee Holdings(HKEX: 610)


Company Overview

Company's Business includes Construction, Property Development, Toll Road, Quarrying, Construction Materials and Asset Management

Holds 41.53% in Road King Infrastructure (HKEX: 1098) and 55.60% in Build King Infrastructure (HKEX: 0240) as of 31 December 2017.

 Profit Mix

- Most of its profits comes from its contribution of its associate (Road King).
- Wai Kee's share of profits from Road King accounted for 78% of Profit Before Tax
- The rest of the profits comes from Construction, Construction Materials and Property Fund segments.
-However the quarrying segment is loss making but according to management has synergies with its construction segment.

Financial Numbers

As of 3 April the stock trades at $4.60 HKD

PE: 4
P/BV: 0.52
Cash On hand - Borrowings: 0.52 HKD
Current Ratio: 1.16

Liabilities to Equity: 61.5%
Current Yield: 5.71% (3.8 cents interim + 22.5 cents final)



Key Risk/ Concerns
-Exposed to possible property measures taken by government amidst the rising property price in China.
-Toll Roads in China are highly competitive businesses with many other players listed as well.
- Construction and Property Development Sector known to by cyclical, with both Road King and Build King recording record profits, expectations could be high and failure to meet it could affect Wai Kee indirectly

My Case for Undervalued
- Trades at steep discount to market cap of its holdings.
In fact its share in Road King exceeds is current trading price. Which means purchasing Wai Kee gets a discounted Road King share, 'free' Build King and 'free' available for sale financial assets

-Build King Order Book has significantly improved. 
Secured over 12 billion HKD of projects and has outstanding value of work on hand of 18 billion HKD as of 31 December 2017 (31 December 2016: 12 billion) . 
Revenue of 6 billion HKD in 2017, Company should have enough work to get over the next 2-3 years. 

Furthermore gross margins held steady despite provision for losses of 2 projects. The lack of such provisions coupled with increased order book should signify growth in FY 2018

-Repeated Purchase of Build King and Road King in 2018
As of 3 April, Wai Kee has increased its holdings in Build King to 56.01% (previously 55.6%) and holdings in Road King to 42.09% (previously 41.53%) via on exchange transactions. This would have increased the steep discount of Wai Kee to market cap of its holdings as well as bring in additional profit contributions.

Conclusion
It is a known fact that parent companies listed on the HKEX has been trading at steep discount of its holding companies but few have the yield Wai Kee provides which makes it a worthwhile holding as a proxy to both Build king and Road King

Wai Kee has been purchasing shares in Build King and Road King since 2013 and this would definitely contribute more to the bottom line should both companies continue to grow.

Vested at 4.65 HKD



Tuesday, 3 April 2018

Thoughts on Investing in Mainland Holdings (HKEX:1100)



Company Overview

Mainland Head-wear Holding's business can be classified into 3 arms.

Manufacturing- Mainland produces for customers such as New Era(https://www.neweracap.com/) which sells caps through its rights in NFL, NBA, MLB and many others.

Trading- Distribution rights of headwear products from leading soccer teams in the English Premier League (EPL) as well as high end women head wear market through its 3 subsidiaries

Retail- Through its NOP outlets and Sanrio stores


Revenue Mix



Revenue and Profits are largely driven by Manufacturing arm, Top 2 customers coming from the manufacturing business as well. 
Compared to previous year,
Manufacturing Sector has improved by 20.64%
Trading Sector has performed badly compared to FY 2016, with profits falling over 77%.
Retail Sector continued its loss making trend, with losses gaining another 32.34%


Financial Numbers

As of 3 April 2018 the stock trades at 1.18 HKD. Using this as a reference.


PE: 6.32
P/BV: 0.71
Cash  On hand - Borrowings: 0.1832 HKD
Current Ratio: 2.1
Quick Ratio: 1.44

Key Risk/ Concerns

- US Trade Wars. This might result in tariffs imposed on imports into USA and Mainland's key revenue region is from USA.

-Deepening Retail Business Loss.

-Key Customer Risk. Top 2 Customers occupy 54.1% of total revenue and 68.66% of Manufacturing Revenue

- Currency Appreciation risk- 1% appreciation of Renminbi and Bangladesh Taka would reduce Manufacturing gross margins by 0.2% and 0.1%

My Cases for Bull

- Management has said that one of its trading subsidiaries H3 has seen double digit growth in orders from a US multinational retail enterprise customer and expects contribution to be seen in 2018.

- Increasing technical expertise at its Bangladesh Factory(Manufacturing arm) would allow for more high-end orders and increase profitability

-Plans for a new factory to double current productions in Bangladesh(Manufacturing arm) in place

-High Utilization rates (more than 90%  in general) of production capacity

-Growth in demand from 2 largest customers from 2016 to 2017

-New Era has about 9% shares in Mainland and this cross-holding could allow for future collaborations with current one scheduled to end in 31 December 2019.

-Management has around 66% of shares and has been adding at 1.43-1.5 HKD in October 2017

Conclusion
The recent mini panic in the markets has seen some selldown in small volumes for this counter and despite picking it at 1.36 2 weeks back, i have picked up again at 1.18 on 3 April and I would be interested to see how things pend out in the 1st 6 months when it releases its 6 months results in August.
Whether there will be a continued increase in Manufacturing profits and revenue and a turnaround result in the trading arm as stated by management.