Monday, 1 April 2019

Is OUC Holdings (Oriental University City Holdings, Hkex: 8067) worth a purchase?



A friend(Domodaddy) suggested to me that I should get my back into doing research following the booking of a heavy loss in my previous post. I have decided to heed his friendly advice(i guess?)

Today's focus will be on OUC Holdings  (Hkex: 8067)

What's the company about?
The company owns a plot of land at Langfang Development Zone with a medium term lease expiring in 2049 (30 years time). The company has educational facilities on this plot of land which has site area of 487,270 sqm. That's about 68 football fields.     
It then leases education facilities to college, schools and universities. Examples of types of facilities include teaching, dormitory and retail.
To give lay man examples
Teaching = Classrooms, Dormitory = Onsite campus places to stay , Retail = Supermarkets
According to its prospectus, education facilities leasing fees are received based on estimated student enrollment for upcoming academic years. 
Student enrollments are not disclosed in annual results nor annual reports.


Who are its Shareholders?
People might be familiar with Raffles Education, a stock listed on SGX. It holds 25% of OUC Holdings. Overall Mr Chew Hua Seng the Chairman and CEO of Raffles Education owns 75% of OUC Holdings.


Financials (Company first listed on Jan 2015, with financial year ending June 30)

(In RMB'000)
2014
2015
2016
2017
2018
1H 2019
Revenue
59,643
61,588
68,619
60,336
67,311
37,754
Profit before tax
43,958
58,247
71,782
35,348
220,148
20,019
Profit before tax (PBT) without revaluation
34,397
23,492
42,178
12,352
49,742
20,019
PBT excluding revaluation and associate
34,397
23,492
41,258
7280
40,734
20,922
PBT excluding above and govt grant
25,749
23,492
36,258
28,295
40,734
20,722
Margin
43.17%
38.14%
52.84%
46.7%
60.52%
54.88%
Dividend
NIL
8 cents HKD
8 cents HKD
8 cents HKD
12 cents HKD
5 cents HKD
Equity/ Liability Ratio
24.09
12.43
10.48
7.94
7.67
6.59

What I like about the company
- At a trading price of 2.02, its trading at a historical PE of 9 if before tax figures are used. The price to book value is also at 0.3135. Considering there is 30 years to the lease expiry, this valuation is undemanding.

-Revenue has been slowly trending up across the years, this has been accompanied by an increase in profit margins. With 1H 2019 recording a 13.4% increase in revenue compared to 1H 2018, could we foresee a revenue breaking year?

- Dividend has been increasing and consistent in prior years. In fact cash generated from operations has been consistent around 30 million for 2017,2018. A 12 cents dividend would require only roughly 18-19 million.

My concerns for the company

-Customer risk, the largest customer accounted for 64% of the group's revenue.

-Credit risk, 1H 2019 had good results but it came along with a 18 million increase in trade receivables and prepayment. With 16 million coming from trade receivables and 15.6 million is 3-6 months due. A pretty alarming situation considering this has not happened in previous years.

-Acquisition of  Zhuyun Education Land from Raffles Education. This acquisition has the word 'wrong' on all aspects.

1) The price was arrived at a 'willing seller, willing buyer basis'. As mentioned earlier on its shareholding, this sounds like left hand and the right hand doing a puppet show. Although a valuation report is done.

2) Funding of the purchase is largely done by a conversion note(176 million at rate of 2.48%) which entitles the note holder to convert at a price of 2.30 hkd per share. A maximum of 88,565,306 shares can be converted which is a dilution of 49.20% of current shareholdings.

3) The properties generated a net loss of S$251,000 in FY 2018. Anyone in the right frame of mind would probably not acquire something that is loss making unless they are confident in turning around the business although OUC holdings in theory is under Raffles Education?

Conclusion

Q: Would this be the company that sets me in the right foot towards recouping my losses?
A:Maybe

Q: Would this company pass my valuations?
A: It does pass my valuations, though I am not a fan of actions of the company as well as its recent balance sheet concerns in trade receivables.

Q: Would I buy the shares of the company?
A: No, having been through last year, I am more skeptical of taking a 20-80 or 10-90 chance. I would buy the company if trade receivables convert into cash in the next quarterly report and the acquisition does not happen. The big draw is that the price: book value is well below the current rate and the profits have been decent. But it is likely to change should the acquisition happen and it would put a ceiling on the share price as well. 

Food for Thought

Raffles Education has attempted to issue rights in December 2018 to raise 27 million SGD which has been cancelled in March 2019 as the trading price of the share( 9 cents) is below rights price of 10 cents. This rights 'action' would align to why they would sell the properties to OUC Holdings. 

Though i would wonder why did they not want to divest the whole OUC Holdings as its net assets are recorded on balance sheet to be 1,159,632,000 RMB or roughly 234 million SGD. OUC Holdings recorded a 170 million RMB revaluation which is already above the rights amount to be raised.

That concludes the first stock I decided to share. Would try to put up more when I have the time to do more research and writing. 
Currently more busy with watching shows and listening to k-pop........yup you guessed it right, the write-up is done while listening to k-pop as well.



Sunday, 24 March 2019

Investing Mistakes and Making a Loss: PC Partners Group (Hkex: 1263)

Its not very often you see blogs talking about making mistakes and losing money. So here's one post of such.

PC Partners released an undesirable full year results on friday. The result definitely missed my estimates.

Key Highlights
-Revenue came in at 9122.3 million for Full year. 2H was 3583.9 million, 35.8% lower than 2H of previous year.
-Gross margin came in at 6.4% for 2H, one of its lowest margins ever since its ipo. Included was 120m provision for inventories(Due to markdown of value and obsolete inventory provisions)
-2H recorded a loss of roughly 70m hkd or 10 hk cents per share
-As a result, no dividends has been declared for 2H results.

Personal estimates
-Revenue to come in at 20-30% lower than last year 2H however this has missed as revenue came in at 35.8% lower. This estimation was made after looking at other graphic card manufacturer's sales.
-Gross profit margins to come in at roughly 8%. This was a miss as well as gross margins came in at 6.4%. The estimation was made after observing a sharp 30% drop yoy in gross margins of fellow graphic card manufacturers.
-All in all i had expected the company to record roughly 20 hkd cents of profit.

Had the provision and exchange loss been not accounted for, profit before tax for 2H would have came in at 70 million or 19 cents per share. Though that's not how investments research and assumptions should be done.

Personal thoughts
-My inability to account for such provisions and estimate earnings accurately has definitely result in a costly investment decision.
-I have decided to exit the investment at an average price of 2.467 hkd per share. Having made small gains from 'buying and selling' this counter back in 2017 and early 2018, this results in an overall loss of 27104 hkd from this investment. With most of losses already recorded prior to the sale, the impact of the sale is a decrease of networth by 12474 hkd
-Its easy to say these losses are only worth a few thousand sgd but from the perspective of mr working adhoc earning 1k a month, its safe to say this is one mistake i will remember for a long long while.
-One saving grace was that the value of the counter has already tanked so much that it only stood 12.88% of the portfolio and 9% of total net-worth. Which means if it was 0 value, it would mean that i would only lose 9% of my money.
-The decision of selling was a result of 2 causes. 1) Inaccurate estimations meant that the current method i have used for researching on this stock is useless and therefore it would be really pointless to continue researching. 2) This would allow me to take my mind off things and focus on other stuffs.

Thoughts on PC Partners moving forward
-Moving forward i believe the company will still have to clear the inventory of old graphic cards (finished goods is double of last year's numbers)
-The first 2 months of revenue in 2019 of a fellow manufacturer has been 34% of its 2H 2018, which seems to indicate that similar trend is very likely to continue.
-A profit warning will likely occur given how high the barriers have been set in 1H 2018.
It remains to be seen how the leasing servers joint venture will turn out.

Personal actions to take
-Safe to say estimating earnings has been more of a bane than a boon for myself. Producing more undesirable results than desirable ones. I would be better to stick to other methods such as special cases and book value investing more.
-Probably use whatever is left from the 'cut loss' to enjoy life more (e.g watch concerts or buy k-pop merchandise that i really wanted to buy but on many occasions i have been holding back to build up money to invest)

In life there would be times you hit and times you miss. Times you smooth sail and times you crash hard. There could be 101 other reasons that resulted in a crash or just simply one is incapable which resulted in the crash. 
My own takeaway would be how i approach my next venture out again and what i would do to prevent similar mistakes from happening again.

Friday, 8 March 2019

Uni-Asia Group Limited (SGX:CHJ) Results Briefing



Uni-Asia Group held its results briefing on 8 May. The turnout this time is surprisingly high, in my previous 2 times the number was around 10-20 but there were roughly 40 people this time round.

Key Takeaways from the briefing (Do note that i could have misheard some parts somewhere and noted down wrongly so do not take everything i say as 100% accurate)

These should be read in tandem with the results presentation and my previous write-up on it.

1. Results release for 1Q 2019 results will be on 15 May 2019

2. 1Q 2019 results will be the first time it incorporates IFRS 16 Leases into its balance sheet and income statement.
It will be interesting to see the impact it has on the overall income statement as well as on the hotel management segment (which has the most changes due to IFRS 16).
This is coupled by the seasonal factor of a lower occupancy rate in hotels in 1st quarter usually.  Management reiterated that it should be seen on a full year basis instead
The hotel numbers will 'unlikely be nice'

3. Fair value of containerships are 0 and management will  be looking to dispose them off at the right time.
Fair value for the rest of the portfolio which are dry bulk ships amounted to US$5.8 million.

4. Onerous contract for sale and leaseback was due to paying price for lease is higher than current charter rates. Management could have waited till towards end of contract to impair but decided to do so in end 2018.

5. The 3rd HK Property Project has finished constructing and there will be gains to be recognized this year but it is unsure how much as of now. The project is being inspected by government now and waiting for approval. Currently a rough estimation would be 2nd or 3rd quarter for the proceeds to flow in,

6. Hotel listed on balance sheet to be sold is the Hotel Vista Nagoya Nishiki, has been sold in Feb 2019 and according to management there should not be any impairments as the hotel has been money making.
Hotels are poised to ride the trend of increasing tourism in Japan. A forecast found on the Japan Tourism Board estimates that there would be a 13.8% year on year increase in tourist numbers as 2018 numbers were affected by natural disasters. Furthermore tailwinds such as Rugby World Cup are likely to contribute to the increase.

7. Company was awarded the first negotiation right of PFI Project in Wako City. Management explained that they have been trying to get such projects for quite some time hence it is a milestone to be awarded such project. The cost of construction will be borne by the government so the risk is close to no risk. The company will be paid a recurrent fee as a construction manager and asset manager upon completion. The sum is likely to be not significant but this opens up to more of such opportunities for the company to be involved in.

Conclusion

All in all i believe the fair value losses are likely a matter of the past and the maximum fair value losses to be recorded would be 5.8 million from the dry bulks but this would be compensated from the leases cost as a result of new accounting measures.
Hence it is difficult to assess whether the profit would improve as much in 1Q 2019.
Given past track record of the 1st hk and 2nd hk property investments, the 3rd hk property investments should come out with a investment multiple of 2 to 3 times hopefully.

Friday, 1 March 2019

Uni-Asia Group (SGX: CHJ) 4Q/ FY 2018 result write up


Uni-Asia released its financial statements and results presentation slides today. 
On the plain view, results do seem to be dire with q3 and q4 in losses.......but are they truly bad?

It is highly recommended to read the slides alongside this write-up. 

Details off the surface
Dividend declared of SGD 7 cents (6.25 ordinary dividend and 0.75 special dividend for its 2nd HK property gains). 
This gives a yield of 5.83% based on the closing price of S$1.20 on 1 March 2019.
Q4 was loss-making, mainly due to impairment of ships and provisions. 
This has resulted in NAV of 2.84 usd, a decrease of 0.05 usd from previous year. 
Against closing price of S$1.20, the price to book ratio stands at 0.3125.

Key observations
-Provision for onerous contract of $3m made for its Uni-Asia shipping which does chartering of dry bulks. If that was not included, Profit before tax would come in at $935 000, a 29% drop quarter on quarter but a 297% improvement over Q4 2017. As such, if the provision is not included, profit would have increased by 32.7%

-Daily Dry Bulk Chartering rates improved to 10500 in Q4, however operating days did decrease. While my own estimates are not as accurate, the uptrend in estimates and daily rates is still seen. For Q1 of 2019, March will be a crucial month as daily rates have rebounded close to 10000 in March 2018.
In  USD
1H 2018
Q3 2018
Q4 2018
Full Year 2018
Total Charter Income
15 078 000
7 515 000
7 684 000
30 277 000
Operating Days
1527
736
731
2994
Daily Rates
9875
10202
10500
10113
zzxbzz estimates from sources on the net
9220
10060
10323
9705

-Carrying value of containership in its fair value portfolio is 0, in Q4 the remaining  fair value($3.3m) has been valued down in Q4. Alongside is an impairment of $3m for its only containership held on balance sheet as ppe(which means that there would be depreciation and impairment losses only). 
As of the analyst briefing back in December, the book value of the ship was 14m while market value was 12-15m. While it was said that it was not at impairment levels then, it seems like it has reached impairment levels later that month. 
Following the impairment on its 1 containership held as ppe, the fair value loss on its 3 containerships held under the joint investment portfolio would not come as a surprise given that it has been recording fair value loss all along(refer to previous post)

-Despite borrowings falling from $216m to $180m(roughly 16%), finance cost has increased by 9%.

-Hotel of $22.7m has been classified as an asset for sale as it is marked for disposal in 2019. It will be interesting to see how this disposal pans out in 2019.

-Only $1.9m of fair value recognised for the 3rd HK project(K83 office building), alongside with gains still to flow in 2019 for the 2nd project, the property division ex japan should do well in 2019 since 95% of GFA of the 3rd HK project have been sold.

-Hotels operation in Japan have been proven to be profitable even at around 82% occupancy rate. Without opening expenses incurred, hotels generated $356 000, on a full year basis this would equate to roughly 1.4m or 3 cents per share. However with new accounting leases kicking in, it would likely see a worse off result in 2019 while cash flow is not affected.

Buy? Hold? Sell?
The considerations for sell would be 'anticipating a shipping downturn in 2019, leading to unprofitability and impairment loss of containership as well as dry bulks.' A slowdown in the japan economy is likely to affect business hotel usage and in turn result in a poorer performance.
Coupled with an increase in finance cost, this could be dire.

The considerations for hold would be 'increased dividends, ability to give a higher payout despite lower earnings coupled with lower borrowings and good cash flow (proceeds from 2nd hk project). This alongside huge fair value losses recorded already this year sums up the reasons to adopt a wait and see approach

The considerations for buy would be 'impairment loss would mean lower depreciation value and higher profits, with fair value at much lower.' Also with proceeds from the 2nd and 3rd project yet to fully be accounted for, it could provide a catalyst. Lastly, Tokyo Olympics in 2020 still remains relevant to its hotel play which has seen occupancy rates pick up to 82% a level that is profitable as of 2018 as new leases accounting are not yet in play.
Personally I am inclined to hold and perhaps add some if my circumstances and the price both align.
A thought in mind would be that continuous adding would likely be exposing more of the portfolio towards shipping which is a cyclical itself. On the other hand, the company does have other business segments to diversify income stream but would still leave itself to key risk of impairment and fair value losses from the shipping sector.

Sunday, 17 February 2019

Singpost (SGX: S08) - A jagged acquisition of Jagged Peak?


On 15 Feb 2019, Singpost announced acquisition of remainder of 21.1% shares in Jagged Peak as the owners have decided to activate their put option. The consideration to be paid for the shares are   US $10.59 million + US $1.75 million (only if a customer debt is recovered).


Stake
Amount Paid in USD
Book Value
Net Tangible Asset Value
Price paid per % of Jagged Peak in USD
First Acquisition by Singpost (9 October 15)
71.1%
15.8 million
2.9 million (26 June 2015)
-0.7 million (26 June 2015)
0.22 million
Second Acquisition by Singpost (15 Feb 19)
28.9%
10.59+1.75
-0.6 million (31 December 2018)
-3.8 million ( 31 December 2018)
0.3664 to 0.4270 million

              
Key Takeaways
1. Jagged Peak has become a company with negative book value over the time span (Increased liabilities more than Equity)

2. The acquisition of 28.9% of shares in Jagged Peak is more costly than the initial acquisition of 71.1%.

Food for thought
In the Annual Report 2017/2018 it is stated that 'The consideration for the 28.9% under option is dependent on the audited average earnings before interest, tax, depreciation and amortisation (“EBITDA”) of JP for the 3 consecutive financial years ending 31 December 2015 to 31 December 2017. The fair value of the consideration at the acquisition date was estimated at S$13,809,000 based on a multiple of forecasted average EBITDA for the relevant financial years and estimated net debt of S$6,731,000, discounted at 2.9% per annum. The maximum amount that the Group is expected to pay to the key stockholders of Jagged Peak will be S$33,163,000 if the above mentioned criteria are met.'

However in the acquisition the maximum amount to be paid is only USD 12.34 million or SGD 16.74 million (US $1 to SG $1.36 )


While it would be difficult to run the numbers as the exact method of deriving is not told, it can be said that the amount paid is close to half of the maximum. I won't think that the performance is ideal. If it was the put options might not have been exercised as well.

Friday, 8 February 2019

A brief attempt at estimating Singpost (SGX: S08)


Introduction
This post would attempt to briefly value Singpost using the balance sheet and many assumptions.
Singpost is the dominant local mail provider in Singapore with its headquarters situated at Paya Lebar.
In recent years, it has gone on an acquisition spree with as many as 11 companies under its Goodwill.(Goodwill is the excess paid over book value for acquisition of a company)
This has allowed Singpost to expand its logistics and eCommerce business. 
It has also revamped a portion of its headquarters at Paya Lebar into a retail mall.
However, the results of logistics and eCommerce segments seems to be declining in recent years.

Valuing Singpost's discount rate
In determining the discount rate to be used, we would use the rate of return required on equity and debt. As Singpost has perpetual on its balance sheet, we would need to account for those as well.

Tax rate used will be 17% . Assume return of equity to be 15% as a personal target for investing via stock picking.


Rate of Return
% proportion of Debt + Equity
Total return
Debt
3.5% (Listed Notes)
14.6%
0.424%(0.0042413)
Equity
15%
67.9%
10.185% (0.10185)
Perps
4.25%
17.5%
0.0743%(0.0074375)
Company Discount rate(Sum of 3 above)


11.35% (0.1135)
           
We will be using 11.35% as our discount rate.

Postal Segment
Method of Estimation: Extrapolation of 9 months results and doing a Discounted Cash Flow (DCF) calculation

Bull Case: Assume revenue growth of 3%, Operating margins to be kept steady at 22% as per Q3 results.
Value per share = $0.7673

Normal Case
Assume revenue growth of 0%. Operating margins at 22%
Value per share = $0.5481

Bear case     
Assume revenue growth of -2%. Operating margins at 22%
Value per share = $0.4566

Property
(Lease of Singpost headquarters expires 30 August 2081)
Method of estimation, using discounted cash flow method till 2081 by extrapolating amount of profit at 9mths FY18/19 for full year.

Bull Case: Positive profit growth at 6%
Value per share = $0.3531

Base Case: Positive profit growth at 2%
Value per share = $0.1934

Bear Case: Negative profit growth of 1%
Value per share =$0.1605


Logistics
Method of estimation, using discounted cash flow for bull and base case.

Bull Case. Good turnaround in Q3 continues and profit margins hit 0.7%, 1 % growth
Value per share = $0.001438

Base Case. Assume profit margins of 0.46%(Q3 margins) with 0% growth
Value per share = $0.0009272

Bear Case. Unprofitable business, assume sale at 50% tangible book value(as of 2017 FY)
Value per share = $0.07676

E-Commerce
Segment has been unprofitable  since FY15/16
Method of estimation. Divestment as there is no profits since FY15/16
Bull Case. Divestment at 75% of book value
Value per share = $0.06114

Base Case. Divestment at 75% of tangible book value
Value per share = $0.03464

Bear Case. Unprofitable business, assume sale at 50% tangible book value
Value per share = $0.02310


Overall
Value per Share($)
Bull Case
Base Case
Bear Case
Postal
0.767340369

0.548076822

0.456648576

Property
0.353154134

0.193356617

0.160458906

Logistics
0.001437987

0.000927204

0.076760488

eCommerce
0.061139201

0.034649862

0.023099908

Total
1.183071691

0.777010504


0.716967877

% of scenario occurring
5%
60%
35%
Implied Value
Per Share
0.77



Key Concerns
Postal:  Business may not continue indefinitely as the license needs to be renewed periodically.

Property: Estimation of bull case profits increase of 6% could be overly optimistic

Logistics: Business estimation is definitely very difficult as profits for these 9 months of FY 18/19 are very low resulting in margins that are way lower than previous years.

eCommerce: Losses may continue and affect divestment price as these negative profits will reduce equity and in turn reduce assets. This would hurt the divestment value of the segment.


Food for thought
In FY18/19, the company has moved its self storage business (General Storage Company Limited) from Logistics segment to Property Segment. As such it becomes harder to estimate the commercial property rental.



As of Q3 FY18/19, Intangible assets accounted for 13.79% of total assets and 21.5% of net assets. It also amounted to value per share of $0.1677.

Conclusion

I would practice my patience and wait for a purchase price of $0.59 to occur. This would give me a 15% upside to my bear case estimations which is in line with my 15% return on equity set earlier. Any upside that will improve the valuations will have to come from a surge in margins of logistics business or a turnaround in the e-commerce business.

Alternatively, a good exit value of the acquisitions made will improve the net asset value of the company and improve its balance sheet by reducing intangibles.