Brief 2018 Review + Brief 2019 Ideas

My Performance in 2018: -9.20%
Performance of ES3(STI ETF): -6.87%
Performance of Tracker Fund 2800(Tracker Fund of Hong Kong): -11.48%
Performance of Tracker Fund 2828(Hang Seng H-shares ETF): -11.76%
Performance of Tracker Fund 2822(CSOP FTSE China A50 ETF): -24.29%
Performance of Tracker Fund 2823(I Shares A50): -23.68%

The poor performance should not be unexpected as majority of my portfolio is in Hong Kong and i have made a few poor decisions this year as well.

The last 3 months of 2018 has seen little buying as i slowly shifted to focus on other aspects of life.

Nevertheless total assets(cash+ equity) amounted to a high 5 digit sum which i felt i was lucky to end with such amount.  I could have done much much worse if not for a great deal of luck.













Moving into 2019,  I foresee myself slowing the pace of investing and probably focus more on other aspects of life.

However, i would still likely be blogging about my investing thoughts.

Brief Investing Ideas for 2019 (Singapore)

1) SBS Transit (Sgx: S61)

Yay Factors
-Rail Ridership higher than 2017 by about 8%
-Bus Contracting Model should benefit operators more
-Approval of 4.3% increase in fares.

Nah Factors
-Rail Operations still loss making
-Possible loss of Bus Packages in future(Next would be in 2020)
-For a company that trades at around 11 to 12 Forward PE, the possible expiry of bus packages from 2020-2026 do not seem to reflect a good price

Food for thought
-Despite a 0.21% increase in average daily ridership from Q1 to Q2, revenue increased by 16.8 million or 5.36%  quarter on quarter and segment profitability of public transport improved by 30%. This could be due to the new bus contracting model for SBS's Seletar Bus package coming into play. The bus package started from 11 March 2018.
- With Bukit Merah Bus package coming into play at a similar tender price to Seletar's, would we see another modest improvement in Public Transport Sector?

2) City Developments (Sgx: C09)

Yay Factors
-Low Gearing ratio of 23% before Fair value adjustments and 17% after fair value adjustments
-Investment Properties held at cost, implied Price to Book Value of roughly 0.526 if fair value is used.
-Share buyback since August 2018 at price of 9.54

Nah Factors
-Inventory of unsold properties in SG one of the highest among the various companies
-M&C Hotels PLC seems to have struggled this year.

Food for thought
-Seems to be a proxy for any Singapore Property Policy reactions.
-Bulk of profits still comes from Property development in Singapore
-There seem to be no new sales of New Futura from Oct to December, which could imply that vacancy rates remain same at 19% and imply poor sales of current ongoing projects.

Uni-Asia Group 3Q2018 results briefing

Recently had the chance to attend the 3Q2018 results briefing for Uni-Asia Group

Will jot down my observations and thoughts here. This is an add-on to the previous post found here

Hong Kong Property Projects

- 2nd project will still have gains to be recognized in 2019 as there are 2 floors left not sold (2nd and 3rd floor retail related) and  some money is still with the consortium the group invested in.

- The current aim would be to invest in more projects but at a lesser amount than their 2nd project which they invested USD 10.4M.

-This way the income would be more recurrent as the projects are slated to complete in 2019,2020,2021 and etc if more projects are invested into

Japan Property Projects (Alero Series)

-IRR of each project is minimum 20% so far, the invested amount is roughly 3 to 5 million USD.

- Aiming for 6-8 projects a year. (This could imply perhaps around 3 million USD profits per year?)

- Would only focus on having projects in Tokyo as that is where population is increasing.

Japan Vista Hotel Management

- Operates on a 'management' basis hence they take into account the revenue and expenses of each hotel. Expenses do include paying to owners of the hotel a fixed or variable cost.

- The invested equity is roughly 3 million and hence the returns on equity is good although on a revenue basis the returns look mediocre (48.9 million revenue in 9 months of 2018 but 171'000 profits)

-5 Hotels opened this year and accounted for 1146'000 pre opening fees. There would be no pre-opening expenses in 4Q as the next hotel opens in end 2019.

- Current year of operations is not in a stable stage which the company hopes to achieve and aim for 2.5m USD profits in a year.

-However with IFRS 16 to be implemented in January 2019, this will result in higher upfront cost and affect P&L of hotel operations. This is due to incorporation of assets on the balance sheet along with lease liability which results in right of use depreciation +    Interest expense

Shipping Operations

- Group aims to focus on dry bulks in the long run and move away from containerships

-Currently has 4 containerships. 1 is on the balance sheet as cost-impairment basis. Book value estimated to be 14 million. Market value slightly lower at the moment but has not hit impairment levels. The current market for containers does not seem to bode well and further impairment losses would likely occur across 2018 and 2019.

-As for the dry bulks, the ships are on a mix of spot+ long term charter basis.

-As IMO 2020 approaches, ships will have to use low sulphur oil or install scrubbers. On handymax vessels which account for all but 2 of Uni-Asia's dry bulks(which are supramax), installer scrubbers are impossible due to size of ship being too small. Hence low sulphur oil has to be used and the cost is likely to be shared among various parties despite Uni-Asia being an owner.

-1 of the supramax ships will be installed with scrubbers which is requested by the current charterer of the ship. A scrubber is estimated to cost 2-3 million dollars. There is likely not much financial impacts arising from this as the increase in charter income would likely be offset by depreciation arising from the installation.

 Final words

The Positives

Currently 4Q 2018 dry bulk charter rates are still higher than 4Q 2017.

2nd HK Project and 3rd HK Project will still have gains recorded.

Hotels likely to see a 4th quarter of earnings not impacted by opening cost

The Negatives

Containerships might see impairment/ fair value losses

IFRS 16 to affect balance sheet ratios as well as P&L negatively.

My thoughts on Bajaj Auto

Recently had a round in a job interview where i was told to write my thoughts on the
company Bajaj Auto.

Unfortunately my write-up was unable to allow me to progress to the next round, nevertheless i have decided to attach my write-up on the blog while biding my time to write some other articles.

*Personally i do feel that my write-up was pretty bad but if given another chance to re-write it, i am not sure if i would have wrote it much different. I guess i still need more practice and advice.

Introduction

Bajaj Auto is an Indian automobile manufacturer company. The company mainly focuses on 2 wheelers, 3 wheelers as well as 4 wheelers .

In the 2 Wheelers segment which is segregated into Scooters and Motorcycles, Bajaj Auto Limited focuses on motorcycles only unlike some of its competitors. The company believes that it is unable for the company to focus on all segments and hence decides to not go into scooters. In the Motorcycles segment, the bikes are segregated into few segments namely Entry-Level(represented by its bikes such as Platina, CT 100 and Discover 100/110), Commuter and Commuter Deluxe Segment (Discover 125 and V), Sports(Pulsar and Avenger) as well as Super Sports Segment (Dominar 400, Pulsar RS200 and KTM). Its main competitors in the 2 wheelers segment include Hero Motocorp, TVS Motor and Honda. According to SIAM, in 2017-2018, 2 wheelers accounted for 69.67% of automobile  exports by India as well as 80.85% of automobile domestic sales in India. Bajaj Auto is currently the 2nd largest company in the Motorcycle Segment in terms of Market Share.

In the 3 Wheelers segment, Bajaj Auto is the world's largest manufacturer as well as largest exporter in India. ITs main competitors in the 3 wheelers segment include Atul Auto, Piaggio, Mahindra and Mahindra, Scooters India Limited, TVS Motors . According to SIAM, in 2017 to 2018 , 3 wheelers accounted for 9.43% of automobile  exports by India as well as 2.54% of automobile domestic sales in India.

The company currently operates both domestically and via exports. Exports accounted for 39.3% of revenue in FY18. The percentage has largely fluctuated over the past 5 years due to currency devaluation but has grown to be a higher proportion when compared across 10 years.

Rajiv Bajaj is the Managing Director of Bajaj Auto since 2005. He has been widely accredited with introducing the Pulsar range of motorcycles and spearheaded the turnaround of the company. The Pulsar is known for its bikes being value for mileage, cool looks, easy availability of repair centres as well as value for money.

In an interview published in 2011, he said that 'brands have pricing power and a brand is actually a product that creates a new category'. The Pulsar succeeded and became a brand that created new category which included other bike products like the Platina. Another interview in 2018 by Businessworld revealed that Bajaj’s current priority is the application of the scientific principles of Homoeopathy to the task of building a brand centred strategy at Bajaj Auto to make it one of the world’s leading motorcycle manufacturers. The company also practises total productive maintenance to improve the quality and productivity of its products, processes and employees. It also extends such practises to its vendors.

Financials

Positives

-Healthy Financial Ratios. The financial health at Bajaj Auto is healthy. The company has pared down its debts since FY 2017 and remained above 1 in both quick and current ratios. The fall in current and quick ratios in 1H 2019 is largely due to a shift in investments from current assets  to non-current assets. Equity to Asset ratio has increased over the years, reflecting lesser % of liabilities in the balance sheet.

Year	FY 2014	FY 2015	FY 2016	FY 2017	FY 2018	1H 2019
Current Ratio	1.18	2.12	1.56	2.92	2.24	1.44
Quick Ratio	1.05	1.94	1.15	2.69	2.06	1.32
Debt: Asset Ratio	0.401%	0.72%	1.03%	0%	0%	0%
Equity: Asset     Ratio	65.14%	68.70%	78.42%	81.83%	80.2%	76.72%

-Free Cash Flow generation. The company's net cash from operating activities has been positive since 2014. However, in some years such as 2017, the company has not been able to have a positive net change in cash and cash equivalents. This is largely due to the purchase of investments.

Concerns

-Investments form bulk of the balance sheet. For a company that mainly does automobile manufacturing, it is indeed surprising that a large part of the balance sheet is made up of Investments. The Investments stood 68.7% of Assets in FY2018 which is a increase from 57.97% in FY 2014. These investments include investments in subsidiaries and goodwill on above investment as well as others which include fixed maturity plans, short term mutual funds, bonds & debentures. The others segment has increased over the years, forming 86.61% of investments and 68.70% of Assets in FY2018 as compared to 85.59% of investments and 49.24% of Assets in FY2014.  The company has an investment policy which allows them to only invest in products with credit rating equal to or above AA+ and P1+. Even though the company is allowed to invest in high ratings product,  these products are not capital guaranteed and the company is susceptible to credit quality and default risk of various underlying securities.

- Falling EBITDA Margins. The company's EBITDA Margins have been on a downwards trend. In 1H 2019 it has hit 18.2%. In its analyst briefing for 1H FY19, Management has said that the lower margins is due to its entry level segment's margins being largely lower. The Platina model is in single digit range while CT Model is loss making. This is in lieu with the business strategy of its entry price segments where Bajaj Auto has cut its selling prices in the entry level segment to gain market share. This strategy seemed to be contradictive as in an interview with Mint in 2010, Rajiv Bajaj has said that 'The numbers game is not important, but profitability is'. Currently the company has shown increased in profits but it remains a worry should further price cuts occur in a rising raw materials environment as this would hurt EBITDA Margins even further.

Business Outlook

-2 Wheel segment market share falling. Bajaj Auto's motorcycle segment has been falling over the years. According to Bloombergquint, the market share has fallen from 24% in FY 2013 to 16% in FY2018. Bajaj Auto had released 6 variants of its Discover Models but it seems like it failed to differentiate itself well. This is echoed by Rajiv Bajaj which said that 'Discover was his biggest blunder and it became a 'me too' product which is bad in life and marketing'. However a silver lining would be that the sports and super-sports segment has seen growth. KTM's India Sales recorded a growth in volume of 32% from FY17 to FY18 as well as showing a CAGR of 44% over last 5 years. KTM's profits has also grown 9.49% from FY17 to FY 18 and a CAGR of 15.43% over last 5 years

-3 Wheel segment subjected to permit requirements. In 2017, the governments of Maharashtra had scrapped permit requirements which allowed a quota of 3 wheelers. This has been a positive for 3 wheel demand in India but many other states such as Delhi still do have permits and local demand will be largely affected by authority's decisions.

-4 Wheel segment getting approval from India Authorities. Qute, Bajaj Auto's quadricycle which has sold in countries in Asia, Europe as well as Latin America is not allowed in India. However this could soon change as in June 2018, quadricycles were approved as a new vehicle category in India. In its analyst briefing for 1H FY19, management has guided it expects to sell significant volume in 2020 and has obtained 18 states approved .

-Automotive Mission Plan 2016-26 (AMP 2026) by Indian Automotive Industry and Govenment of India . AMP 2026 aims to increase the net exports of the Indian Automotive industry by several folds. Possible Plans include improving business climates as well as infrastructures to boost the productivity and attractiveness of the Indian Automotive industry.

Corporate Governance/ CSR Concerns

-Gender Unbalance. Only 1 female on the board of directors(currently 16). Only 3.73% of workforce is female

- Long Tenure of Independent Direcors. 3 Independent Directors seem to have over 10 years tenure in the company. Namely D.S Metha(Since 1998), P Murari(Since September 2006) and Niraj R. Bajaj(Since September 2006). In addition, P Murari has only attended 3 out of 8 meetings in from 2017-18 and 2014-2015

Peer Analysis

EBITDA Margin	FY2014-15	FY2015-16	FY2016-17	FY2017-18	1H 2019
Bajaj Auto	21.2%	22.2%	21.7%	20.2%	19.7%
Hero Motocorp	12.84%	14.51%	16.26%	16.38%	15.4%
Atul Auto	11.82%	14.45%	12.68%	13.51%	13.49%

Despite a falling trend in margins from FY 14-15, Bajaj Auto has still managed to maintain higher margins compared to its 2 wheel rival (Hero Motocorp) and 3 wheel rival (Atul Auto). Hero Motorcorp is the market leader in 2 wheels and would be an appropriate comparison. In the 3 wheel space, the 2nd and 3rd in market share are Piaggio and Mahindra and Mahindra Limited but both companies are not used in the peer analysis as Piaggio has derives more than half its revenue(53.68%in FY17) from Western Countries while Mahindra and Mahindra Limited derives revenue(roughly 32% in FY18) from farm equipments as well.

Conclusion

In Bajaj Auto Limited, I have seen a leader(Rajiv Bahaj) who has been able to turn around its company and create superior margins over its competitors for the past years. He has also been candid in admitting his mistakes such as having too many variants of Discover which lead to a decrease in the company's market share. The company has prided itself on its R&D(which Rajiv Bahaj started in 1996 with 4 young engineers then) and with its high cash position is primed to carry out more R&D in the near future and explore innovations in its automobile products and processes to drive further value in the bottom line.

However, my concerns would be in its balance sheet where it has a huge amount of investments in mutual funds, bonds and debentures. Should there be a large currency depreciation, the company's asset value would decline sharply and largely affect foreign investors who are invested in it.

Similarly, an increase in credit risk of companies in India which could lead to higher default among companies would affect the company's investments negatively  and impact its operations and valuations.

Some thoughts on MediNex IPO

MediNex IPO (Private Placement only)

Introduction

-The company engages in professional support services to medical clinics. Some services includes overseeing the setting up of clinics, facilitating applications for relevant clinic licences and providing business support services such as accounting and tax agent services, human resource management services and corporate secretarial services.

-The company engages in procuring of medical and pharmaceutical products as well.

-Lastly, it provides Business Support Services to companies outside of healthcare industry

-The gross proceeds will be $6.5m as 26m shares placed are new shares at 25 cents each. The net proceed will be $5.32 million.

-The main use of proceeds will be for acquisition of a company called Ark Leadership which will cost $4m according to the prospectus

Key Highlights

- Good Revenue growth. Company has grown its revenue very well in recent years.
Half year of FY18's unaudited pro forma revenue is 4.941m which is 90.2% of revenue in FY17.

-Profit growth encouraging. The profits for the company has growth from 487,000 in FY 15 to 946,000 in FY 17, Thats about 39.3% compounded growth over 2 years. The unaudited HY 2018 profits stood at $1.057 million which has exceeded FY 17 figures.

- Company's cash flow from operations are decent. Cash flow from operations has been pretty on par with net income. Its Cash flow from operating activities came in at $643,391 and $1.128m in FY 16 and 17 which is in line with Net income of $745,000 and $946,000 in the same time frame.

-Steady balance sheet. At 30 June 2018, total liabilities stood at $1.155m,.Company has roughly $3.376m worth of cash with $0.4m in fixed deposits. The company definitely has enough money to maintain operations and pay off its liabilities

Key concerns

-High amount of goodwill. The company has gone on an acquisition spree in recent time. As a result this has made goodwill an astonishing amount of $2.741m as of 30 June 2018. This is roughly 38.96% of the company's balance sheet.

-Nex's acquisition questionable? The acquisition cost was $3,569,235. However the earnings in 2017 was roughly 168,004. This meant that the company was paid at roughly 21x PE and $2.39m of goodwill was recorded.

-Restructuring exercise and acquisitions questionable? The company conducted a restructuring exercise prior to placement which resulted in Medinex being the holding company of the group.

It initially acquired 50% of AccTax at $375,000  at which the vendor provided a guarantee of Profit After Tax of $450,000 for a 3 year period if not it would pay five third of the shortfall. This translates to an acquisition guarantee PE of roughly 5 (taking into account 150 000 each year and 100% is at 750,000). It does look like a very good acquisition on paper but on 5 November 2018 it acquired the rest of the 50% for $750,000 (Yup double of its initial purchase). With that i am unsure if the initial profit guarantee still holds. From the picture below it seems like AccTax is still lost making in 2017.

It also acquired 60% of interest in Patceljon Professional Services Pte Ltd and  Jo-L Consultus Pte. Ltd for an amount of $1.0791m in June 18. It comes with a profit gurantee of $360,000 per year for 2018 and 2019. Once again this translates to an acquisiton gurantee PE of roughly 5 and looks very good on paper yet again! Then it proceeds to acquire 40% of the company on 5 November at $1.440m. It paid $ 17,985 for 1% of its stake earlier on in June 18 and then subsequently pays $36,000 for 1% of its stake in November 18.
Encouragingly, it seems that the company earned roughly $294'666 in Profit before Tax in 2017








-Growth revenue from own shareholder's entities.
Revenue increased from 1.1m HY 2017 to 4.459m HY 2018. This could be due to an increase in largest customer's contribution from 20.05% in FY 2017 to 41.79% in HY 2018. However a deeper look revealed some details.

While its definitely good to have some shareholders as your customer since it is likely they will continue using your services, its hard to estimate what the impact to margins will be in such cases. Furthermore a large increase has been due to these group of shareholders and it poses an interesting question to profitability of these increased revenues.

- 3Q 18 (July to September 2018) results bad.


HC Surgical held 35.8% of MediNex as of 1Q 2019 and it contributed $ 46,000 to its results.

This is 59.6% lower and working backwards, it seems like MediNex earned $232,600 in previous year's quarter compared to $128,491 in this year's quarter. This is roughly 44.75% fall in profits.


Conclusion

On initial glance, 1 Cent EPS for 1H 2018 and implying a layman 2 cents EPS for FY 18 results in a placement PE of 12.5 which seems to be very attractive if the company can continue its growth momentum in the following years.

However, the recent results seems to indicate a break on its growth engines for at least 1 quarter and implies that the PE will unlikely be 12.5

Furthermore the acquisitions has been weird in my view and the raising of $5.32m when the company has 2 million spare cash.

Lastly there has been no details about the P&L of Ark Leadership which investors can assess whether this acquisition is at a good PE. Interestingly Ark Leadership is owned by the sister of the CEO of MediNex.

This company (alongside HC Surgical) would unlikely be in my considerations for buying.....

4 things i learned from Dongyue Organosilicone Prospectus

On 16 November 2018, Dongyue Organosilicone Prospectus was lodged on the China Securities Regulatory Commission. The Prospectus (331 Pages in Chinese) can be found here


Will just quickly note down 4 things i noticed from the prospectus

1. Company's major source of revenue in the Organosilicone sector is the 107胶


As such any major change in margins of 107胶 would likely affect the company's profitability as a whole.

2. Organicsilicone cost is around 15 000 yuan

Using this as a gauge, the margins of the business can be gauged. Although Organosilicone has fallen to the 20 000 yuan level in October and November, the business should still be profitable

3. Dongyue Organosilicone is 8th in the world in terms of production volumes as of 2017


The market leader in the world would be Dow Chemical Company 

In its prospectus it aims to establish itself as a top 5 producer via the use of proceeds to expand volume. Expanding capacity from 118 thousand tons to 282 thousand tons

4. Uses of Organosillicone


Construction is the component that uses the most.
Coming in 2nd would be Electrical appliances
3rd would be energy uses. Example would be cables as well as Solar battery production. According to the prospectus, the lightweight and durability are few reasons why organosillicone is being used.

My thoughts on Uni-Asia Group (SGX: CHJ) 3Q Results

Uni-Asia Group released its results on Thursday 8 November.  On initial glance, results definitely isn't good as it has been a loss making quarter. After emailing the investor relations and taking some time with my thinking cap, the below are my thoughts.


The Negatives

-Fair value losses of US$3.5 million for Containerships. Under Uni-Asia's books they have 4 containerships while 3 of them are subjected to fair value losses. From my research, as of 5 November, it seems like containerships have appreciated in value by 5%. Nevertheless i would have to continue tracking my research and see if it turns out as panned.

- 3Q had lesser operating days for Uni-Asia dry bulks. In 3Q 2018, the number of operating days was
736 days. Compared to 3Q 2017 which had 762 days, this is a shortfall of 3.4% of 26 days. If we were to use its charter income as a reference, this would bring about 265 000 to its income.
Which would partially explain why its charter income(7.515 million) has failed to outperform 3Q 2017(7.738 million).
The other half of the explanation would be that there were only 8 Ships on the books in 3Q 2018
compared to 3Q 2017 where there were 9 Ships and therefore would generate higher income.

The Positives

-Increased average daily charter hire rates
Average Charter hire rate per day in 3Q has broken the 10,000 usd mark. As of 1H 2018 it was 9875 USD per day and in 9M 2018 it was 9984 USD per day. After some simple calculations it amounted to 10202 USD per day in 3Q 2018. I would say this is pretty in line with my research as seen below.


- Containership fair value loss of $3.5 million highly unlikely to happen again
From my understanding after emailing the investor relations, the current fair value of the 3 containerships stood at $3.3 million. As such, unless there have been further purchases of containerships, it is unlikely to see another $3.5 million loss again
To add on, the fair value are assessed by discounted cash flow technique with 'daily charter rates' being a component in deciding the fair value.
As such with each year being closer to the end of useful life for a ship, it is 'normal' that the ships will continue to suffer fair value losses as the present value reduces with lesser cash flow in future as each year progresses
Interestingly Q4 2017 , Q3 2017, Q1 2018, Q2 2018 all had containership fair valuation loss as well

-2nd HK Project gains not fully recognized
With $29.4 million received from its 2nd Hong Kong Property, it has said in its financial statements that the gains are only partial. Which means that there would likely be some more gains which is already very amazing considering the initial investment amount of around $10.4 million.



-Japan Property and Hotel making growth
Hotel Segments result has improved if pre-opening expenses are not accounted for.
The occupancy rate has improved year on year (from 81.3% to 82.8%) as well as quarter on quarter (from 77.4% to 82.8%). This is more impressive when accounting that more hotels are under operated this quarter(16) compared to previous year(11) and previous quarter(14).
Generally i would expect new hotels to reduce the occupancy rates instead
Revenue has also hit 20 million in the 3rd quarter, it was only 15.3 million in 2Q and 13.4 million in 1Q.
With only 1 hotel opening in 2019, I would expect pre-opening expenses to decline and we could see improvement in bottom line.

With regards to the ALERO projects, 2 completed projects has been sold and there is an additional project under lease. While lease projects might become sold overtime, a positive would be more projects under lease(could contribute rental income) and a project slated to complete in Jan 2019 has been sold.

The Obvious

-Largely Balance Sheet improvements.
Total borrowings reduced from 202.627 million to 186.596 million quarter on quarter (qoq)
Cash on hand increased from 38.861 million to 49.478 million qoq
Current ratio decreased from 1.283 to 1.196 qoq
Liabilities to Asset decreased from 0.607 to 0.597 qoq
Finance Cost(Interest Expense) decreased from 1.531 million to 1.46 million

-Cash flow improvements
Operating cash flow before change in working capital as well as net cash flow generated from operating activities are both positives in 3Q


Conclusion
The results are definitely not as terrible as it seems on first glance. With more gains from its property projects to be delivered, i do remain positive on the company.
Furthermore there are more pipelines for its Hong Kong properties underway as well.
However with 59.3% of its assets in maritime investments, there are definite opportunities for impairment losses and fair value losses to continue to occur if market sentiments are bad.
Having said that, it currently still trades at 0.31 book value.
While i have not done the math but it seems to indicate that the maritime assets are assumed to be of no value as 30.7% of net assets would amount to $1.58.
It is also worth noting that it is holding 1.05 usd per share of cash(as of 9 November it would be 1.45 sgd per share) compared to the trading price of 1.25 sgd


Note to Self
-An important lesson i learnt this time round will be to be more attentive in assessing how fair value are assessed (especially for the vessels that are under fair value through profit and loss). This was something that slipped off in my analysis in previous quarter's review.
- My self estimate of the assets left on that book as of 30 Sept 2018 would be roughly 11.6 million or 24.8 cents of its assets.

A simple fundamental view on Design Studios. Is it losing its competitive edge?

Design Studios released its profit guidance on Friday night.
This is its 2nd profit guidance in 2 years, having released one for Q4 of FY 2017 citing the 3 reasons as follows for it.

-Deterioration from forecast due to commercial judgements on revenue and cost for residential projects (Related to project cost overruns, prolongation on project construction durations)
-Write-downs made on inventories
-Impairment of doubtful receivables

The profit guidance for 3Q FY 2018 are for the following reasons
-Cost-overruns from delays and a provision made on a project in United Arab Emirates
-Provision made for restructuring costs associated with the manufacturing facilities in the Group


Having said that, it seems like project overruns are looking at a norm, which is definitely not a good thing for any order book company.

 Having changed their way of reporting in financial statements, the 2018 quarter results reveal much more details. A snippet of the 2Q 2018 results is seen below. Full file can be found here.

On first glance, the key takeaway would be subcontractor cost has increased tremendously when compared to revenue.

From 33.34% in 2Q 17 to 52.89% in 2Q 18, it seems like more of the work is being done externally, if more work are being done by others, profits can only increase IF their own staff are doing lesser.
Which is not the case as staff cost has increased 10% year on year.

Although it would be quick to jump to conclusions, I would say there could be a few reasons such things happened.

Do note that these are just pluck from the clouds idea and are from my own imaginations only. :)

1) Someone key left the company and the work needs to be outsourced as they can't do it internally. This could explain how revenue increased 30.1% but staff cost went up only 10.4%.

2) They have always been outsourcing but now face price pressure as the companies they outsource to demand for higher prices.

3) Outsourced companies did not do the job well, forced to employ more companies to do the job, leading to higher cost.

Either way, this outsourcing has seems to erode value of the company such that higher revenue resulted in much higher outsourcing cost.

Moving towards its 3Q 2018 results, i would want to take a closer look at its quarter on quarter outsourcing cost/ revenue which has been increasing year on year.

东岳集团 Dongyue Group (HKEX: 189) Spin off of Organic Silicone Segment

Dongyue Group announced spin off details of its Organic Silicone Segment(Dongyue Organosilicone) on 12 October 2018.

While there has been more specific details this time round, the announcement should not come as a surprise as there has been announcement with regards to a possible spin off since 29 March 2018.

Pre-Spin Off Details(Can be found in Link above)

Current Net Asset Value of Dongyue Organosilicone (As of 31/8/18): 1.98 Rmb per share
Shares Outstanding: 900 000 000
Dongyue Group Share of Dongyue Organosilicone = 77%

Number of maximum new shares to be issured on A-share market: 300 000 000
Maximum issue price per share = 4.5 billion Rmb or 15 Rmb per share
Minimum issue price per share = Nav Price (1.98 Rmb per share)

Dongyue Group estimated share of Dongyue Organosilicone if maximum issue occurs = 57.75%

Implied market capitalization of Dongyue Organosilicone at maximum issue = 18 billion Rmb
Dongyue Group's share = 0.5775*18 = 10.395 billion Rmb = Roughly 11.79 billion Hkd

Dongyue Group's current market capitalization(As of 16/10/18) =2.1 billion shares * 4.80(share price as of 16/10/18) = 10.08 billion Hkd
Dongyue Group current Net Asset Value (As of 31/6/18) = 4.02 Rmb
Implied Fair Value of Dongyue Group post spin off = 4.02-1.98+(10.395/2.1)
                                                                                   = 6.99 Rmb or 7.92 Hkd

Dongyue Organosilicone Profit

2017 Full Year: 285,348,000
2018 1H: 449,002,000

For the 1st 2 months of  2H 2018, the profit can be estimated as Net asset value is provided for as of 31 August 2018 and 31 June 2018

Net Asset value at 31 August 18 = 1.98 Rmb per share = 1,782,000,000
Net Asset value at 31 June 18 = 1,607,322,000
Estimated Profit = 174 678 000

The profit in the first 2 months is roughly 38.9% of 2018 1H, representing a decent mathematical chance that the profit will be stable in both halves of the year.
It also means that the profit will likely be higher than 2017 Full Year Profit

However, 107 胶  which accounted for 38.2% of Dongyue Organosilicone's revenue and 9.15% of Dongyue's revenue might be faced with price pressures having seen its price in October fall lower than its price last year. On the bright side, the first 9 months have had a higher price than it was in 2017 and it was around the same period last year that prices started a crazy rally.

Conclusion

The exact amount raised in the spin offs will likely determine the value of Dongyue Group as a whole. While the ideal scenario would result in a higher fair value, spin offs listings are still subjected to demands for IPO as a whole and in a pretty bearish year, there could be a few key risks and waiting for exact details of proceeds raised and IPO Price might not seem to be a bad move after all.

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.

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

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