Wednesday, 26 September 2018

Taking a basic view: Is Keppel T&T Offer price of $1.91 a fair deal?



Keppel T&T has been a subject of takeover at the price of $1.91 by Keppel Corp. The announcement was made on 27 September and lets take a look to try to assess if the deal is fair.

Psychological Valuation

From a psychological point of view, the offer price seems to be a win for anybody who has bought the shares since 10 October 2018 as the highest price ever since then would have been $1.88.


Economic Valuation

As of  30 July 2018, Keppel T&T had a net asset value of $1.54.

However, both its M1 investments (19.33%) and Keppel DC Reit ( 25.196%) are recorded at carrying amount. Had both been accounted for by market value,



Keppel DC Reit valued at $1.37 per share

Valuing M1 @ $1.63, We would add EPS $0.41 to the NAV which gives us $1.93
Valuing M1 @ $2.06, the takeover price ie, we will add EPS $0.54 to the NAV which gives us $2.08

Another valuation unknown part will be its strategic review of its China Assets. As of 31/12/17, the assets in China amounted to $233,359,000 (Page 119 of Keppel T&T 2017 Annual Report) or $ 0.41 of its assets. It is unsure if disposal gains or losses will amount from it.

Conclusion

Personally, I do think that should the M1 deal go through, the takeover price of $1.91 seems lackluster as the full market valuation of M1 at $2.06 is not flown through to minority holders of Keppel T&T. However, if the M1 deal does not go through, $1.91 would look like a much more attractive takeover offer.

However, the offer has been priced decently that most if not all shareholders since October 2008 would walk away with a smile knowing that they at least broke even while some would record good gains. The same however cannot be said for M1 Shareholders.



Monday, 17 September 2018

Portfolio Review Mid September





Will do a write-up to the results of my holdings that has released their results over the past 3 months 


Tat Seng Packaging- Results has been good with a 35.8% yoy increase in results. Moving into September, the price of paper packaging seems to have held stable around the 4000 mark which could indicate a stable gross margins moving forward. The 2 main worries would be 1) yuan depreciation as it might affect the comprehensive income moving forward. 2) Trade wars (effectively most companies can have this as a reason)

Uni-Asia Group- Having covered the results in the previous post, i would continue to be positive on this given its Hong Kong investments have been largely positive and more of its Japan residential projects are to be recognized in 2H. Nevertheless the main worries moving forward will be 1) Natural Events affecting Japan for prolonged periods affecting the hotel business. 2) Dry Bulk Rates heading southwards.

Mainland Holdings- Results has been fine, with a single digit % fall in profits. The trading division turned around a profit in 1H 2018 compared to a loss in 2H 2017 but its profit is way lower than 1H 2017. Looking forward, it seems to be a work in progress with its factories undergoing expansion in Bangladesh and consolidation of operations of 1 of its trading companies under a single building.

Wai Kee Holdings- Results has been good, thanks to Road King, which has turned in a very high gross profit margins. Personally the purchase has been due to the fact that the market cap of Road King and Build King exceeds Wai Kee itself. Build King has seen growth in its 1H 2018 which is encouraging. The worries going forward will be 1) 'Yuan Depreciation' affecting profits. 2) Weak domestic consumption leading to property slowdown. 3) Dwindling construction books in Build King due to Significant delays in the award of Government Contract 

Dongyue Group- The profit increase has been in line with industry average. I would continue to monitor the industry competitors to assess if the company would continue growing its profits. Personally i do think that the 2H18 profits will be similar to 2H17. This gives it an attractive yield and very low PE. However, the company operates in a cyclical industry and it is very likely to be affected by macro growth in China.

PC Partners- The results showed strong growth in its own brand products. This has in turn improved its gross and net profits. However it has guided weaker demand in the 3Q 2018 and demand will likely only pick up in 4Q 2018 alongside the release of the new Nvidia rtx graphics card. Accordingly, its taiwan competitors has indeed recorded lower sales in the first 2 months which seems in line with the guidance given. The sales of Nvidia's new graphics cards alongside the sales of its taiwan competitors will be something to monitor in the upcoming months. 


Listed below is a company that i might want to take a deeper look across the next few months.

Lam Soon Hong Kong Limited (0411 Hkex)
-Consumer Staples producer
-Knife Brand Oil 
-Axe and Labour dish washing detergent
-Trading at around 9 PE and debtless
-Urbanization in China making it a long term play



Friday, 10 August 2018

Taking a closer look at Uni-Asia 1H 2018 results



Uni-Asia released its 1H 2018 Results on 10 August (after trading hours)

Being one of the retail investors invested in it, taking a closer look is a must.

1H 2018 Financial Statements

1H 2018 Slides


Lets talk about some obvious findings that stood out

1) Profit for the period is down 11% for 2Q
2) Profit to owners of the parent is down 27% for 2Q
3) Operating expenses increased at a higher % than income in 2Q
4) If not for the reversal of impairment in 1H 2018, results would be much worse

From the above it does seem like all is bad. Is it?

Uni-Asia Shipping Segment



In terms of shipping charter, income were flat when compared by 6 months but 2Q 2018 was weaker than 2Q 2017. This could be attributed to the much lower operating days(in Q2) despite higher average charter hire rate as well as disposal of a ship in April 2018 The good thing would be that the average rates are on an uptrend.


Maritime Asset Management


  In terms of Maritime Asset Management segment, 'Investment Returns' became the main drag of the results alongside lower fee income. The investment returns should be the fair valuation losses incurred by the company on the containership and product tanker.
As the tanker has been sold in July 2018 after the 1H reporting period, it remains to be seen if any more fair value losses have to be taken upon the sale or if any could be reversed.
1 encouraging statistic is that charter income has increased 68% in 2Q 2018 compared to 2Q 2017
As a half year comparison, the charter rates have held steady in both 1Q 2018 and 2Q 2018. Also it has represented a 57% increase compared to 1H 2017


Hong Kong Properties

In terms of Hong Kong Properties,
CSW650 is fully sold apart from 1F and 2F has been given the certificate of completion and this means that we should see their share of the  total sum of money being transferred back to Uni-Asia after the money is fully collected from the sales of the building units. There has been some fair value gains of about 3 million USD upon receiving the certificate and it remains to be seen if there could be any more surprises in Q3 and Q4

K83 is almost fully sold and is slated to complete next year. It should receive a revaluation gain in Q4 of the year when management reviews the investment in the building again.

Japan Hotel Operations


























On first glance, the results seemed to indicate that the hotel operations are loss making in 2Q 18. However this seems to be due to pre-opening expenses incurred.
In 2Q 2018, Hotel Income did increase and these pre-opening expenses can be considered as one-off.
What i think is good is that the maximum income the hotels can achieve had occupancy been 100% is now higher, there is higher potential for more revenue gains. It seems like for now the break even rate could be around 78% and revenue in 3Q and 4Q of 2017 has been pretty stable around 13.8 million USD.
With 2 more hotels opening in 3Q 2018, i have hopes that the results would turnaround in 3Q and 4Q.


Conclusion: While the results has not been kind, the catalyst should still be in 3Q and 4Q with the hong kong properties providing some support and stable charter income from maritime asset management. If the Uni-Asia shipping segment can get higher rates and more days it would be good, although my own calculation says that they should be about 95-96% utilized.

The downside risk would be more fair value losses in ships, tourism in Japan being affected and shipping rates being affected downwards.

In-lieu of the bad results, i am somewhat tempted to add more. Lets see how it pans out

Thursday, 19 July 2018

Simple Attempt At Estimating Koufu's 6 months Results



Koufu (SGX:VL6) Was listed on 18 July

The Prospectus can be found here

Personally i had taken a look at the prospectus and was pretty keen on applying for the IPO as it seems to be relatively well priced when compared to Kimly Limited.







However on a closer look of the 402 page prospectus, something caught my eye


















Shareholder's Equity from Page 101/402
30 April 2018 Shareholder's Equity from Page 73/402

Since Retained Earnings is from Profits, we can infer that Koufu has earned
37924-30600= 7324 ('000) 
Or if you would use the unaudited pro forma found on page 327/402, which is 29,861
37924-29861= 8063 ('000)

In 4 months it has earned the above amount, so a rough gauge of 6 months and 12 months results will be
6 Months  1098600/12094500
12 Months 21972000/24189000

6 Months EPS 1.98 cents/ 2.18 cents
12 Months EPS 3.96 cents/ 4.36 cents

For reference, Profits in 2017 amounted to 26819000 or EPS 4.83 cents
In the worse case scenario, core earnings would have plunged 18%
In the better case scenario, core earnings would have plunged 9.73%

Not forgetting that they will have to pay off the IPO Expense which amounts to 2.5 million


Conclusion

I do feel that Koufu will have to do quite a bit to improve their earnings given how it has done in the current 4 months.


Tuesday, 26 June 2018

The curious case of Kin Yat Holdings (Hkex: 638)



Kin Yat Holdings released its full year results on 26 June 18. It can be found here

Prior the results, i was pretty bullish of its ability to generate growth this full year. That is because their biggest customer iRobot Corporation(IRBT) displayed huge increase in cost of goods sold (COGS).



While the implied increase in revenue is definitely not 40% as i know that Kin Yat is not the only supplier of IRobot, i took reference of Kin Yat's FY 2016 AR to have a rough gauge.

As such i estimated that the growth rate coming from electronics would be roughly (0.4173*0.53) = 0.22 or 22%

When the results came out, i was pretty pleased on its revenue front for electronics.

36% was far beyond my expectations and probably showed that they have been used by iRobot even more.

However that was all that was 'in line'. The rest of the results were pretty bad.

As you can see colored in red, the 2nd half of both Electronics and Motors segment core margins were pretty atrocious.
In fact, the company received 69.8 million of subsidy from the local government authorities compared to 14.8 million the previous year. This resulted in better segment margins although they are still much lower than previous half and full financial years.
The fall in margins is so alarming that totally outweighed any increase in revenue.

The company attributed to this margins to moderated manufacturing margins and appreciation of Renminbi(RMB).

However what was puzzling was that the company says that motors had improved operating results. This is true if compared to FY 2016 but if 1H is to be compared to 2H, it would be totally untrue.

In terms of RMB appreciation,


Despite depreciation in 2H FY 2016, core margins failed to improve for its electronics segment
Even though there is a 6% appreciation in RMB, it seems that the fall is not proportionate considering that there is only a 1.75% fall in core margins when Yuan appreciated 3.535% in 1H FY 2017.

Its hard to tell whats the full extent of the moderation of margins. My calculations indicates that its segment margins fell by 1.926% due to this 'moderation' if currency impact is as implied above(Which i know its a rough gauge and very likely to be inaccurate)

As for motors segment which was attributed to copper price increase according to the results released,

Copper had a large price spike from 2017 May to 2018 Jan. With the largest increase being around 25%



Given that the inventory is stored for at least 3.5 months before it is sold, we can assume that they are produced a minimum of 3 months earlier. Therefore the results in this case would have reflected copper prices from 2017 June to 2018 Jan. Which resulted in really poor core margins.

However, copper prices have fell by about 7% from the peak. Whats the extent this improvements in margins will depict remains to be seen. One thing notable is that capex in motors segment has doubled to 112 million in FY 2017. Which is 1.46 times of the segment profit of motors(Roughly 76 million)

That's some hefty investments and it remains to be seen if this increase in capex will bring in an increase in profits.

*One potential inaccuracy in this result will be that the inventory is a mix of motors and electronics product so its unable to ascertain the turnover for each segment which affects the analysis.

Conclusion
-Revenue Impressed
-However margins were depressed, leading to an overall profit drop
-Company recorded gains in exchange translation reserve on the back on appreciating yuan against Hkd in the period. Resulting in a much better Total Comprehensive Income year on year.
-Company could have been much worse without government support( Something they have been frequently getting)
-New orders from another customer in VR will diversify some revenue but likely to be still reliant on IRBT
-Yuan has depreciated since the end of financial year (31 March 18), Copper price has came down since start of year as well though still at a relatively high position.
-It is likely margins will improve(at the cost of loss in exchange translation reserve) but it remains to see the amount of improvements in margin.

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.