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