I believe this is what many property development companies like or wish to do. But that is not easy and many might just do the opposite of buy at condo price and sell at HDB price. Wheelock properties is well known for their luxury developer with floot prints at Ardmore and Orchard areas. Their records are impressive. In Year Ended March 2002, Shareholder Equity stood at $1.026 billion, after paying $0.188billion in dividends over the years and raising zero in capital, Shareholder Equity at 31st March 2009 was at $2.063 billion. Actually long term shareholder gained more during the period because all its section 44 tax credits were given to shareholder in a special dividend and right issue exercise during 2005.

How should I value Wheelock Properties? Taking the common and easy approach of buying at or below Book value(or revised book value throw out by property analysts) for property company is ok but that does not justify or differentiate good or bad management. And at least for Wheelock Properties, while their book value show no assets being “hidden” in the numbers, assets are not being tied up by loans and contract that is not unbreakable . This is significant because property is a good way to get cheap loans and almost every player is doing that and by doing little, Wheelock Properties is putting itself at disadvantage compare to its peers when generating incomes.

And what are recorded in the book? Investment properties, Wheelock Place and retail portion of Scotts Square. Scotts Square will only come online in another 1 to 2 years. Given a yield of 5%, these properties can easily worth at around $0.6 to 0.8 billion. Then its interests in HPL and SC Global can easily worth from $0.15billion to $0.5 billion. These investments, totally $0.75 to $1.3billion are not in “direct control” of the Wheelock Place Management. The properties are valuable even if lousily ran as they are right at the heart of Orchard Road. SC Global and HPL are being managed by their own respective management. Then there are other assets such as Cash, development properties and receivables, netting off all liabilities will give a net current asset of $1.027billion. With this I am leaving out all future profit from sold and unsold development properties already in the pipeline and assuming the loan taken using Scotts Square and development properties can be easily repaid. Adding them up, I can easily get a so call revised book value of $1.8 to $2.325 billion.

But what is missing? The ability to buy at swamp price and sell at condo price or doing just the opposite. If this is a lousy management, I don’t even want to pay at book value, I might even want a big discount to compensate the lousy management. Perhaps just for the investments. But for a management with a record of buying swamp and selling condos and with lot of cash plus good properties for cheap leverage. It value become a big unknown from at least book value to much upside. That is a problem because it depends on the abilities. But if I can pay for just the investment, it will be a home run. Surprising it did happen recently but I am unaware of it. Wheelock Properties was selling at below $1 for a period quite sometime back. If only I have do the homework and money.

A list of their investments.

1) Oakwood Residence Azabujuban, Japan on 29/09/04 for $85 million. Sold in FY2006-2007 for $123.1 million net.

2) Ground and 1st floor premises of 32 Grosvenor Square in London for $11.3million in FY2005-2006. Sold in FY2008 for $19.5 million

3) Purchase 66.6% of Hampton Group for $75.6 million making it a wholly owned subsidiary in FY2005-2006. Sold in FY2006-2007 for $230million.

4) Making gains from buying and selling investments over the years plus, Kim Reality – Did Wheelock Properties made gain from this ex-associate company? Hard to tell but I guess not as it was sold to their parent company. The amount is not material as it was below $10 million if what recorded was not artificially depressed. Sold in FY 2004-2005

5) Property developments. This is the place where Wheelock properties made it name with Ardmore Park. But there were properties where Wheelock Properties take in low margins like Grange Residences. But overall, Wheelock Properties made alot from Ardmore Park, Grange Residences, Ardmore view, The Seaview, The Cosmopolitan, Ardmore 2 and Scotts Square

6) The unknown – Orchard View, Ardmore 3, HPL and SC global.

Taking UOL as a standalone entity, which mean largely leaving out Other Wee’s related empire will spell — complicated or spider-web? Not too sure but with much document being available through the 4 listed companies UOL, Pan Pacific Group, UIC and SingLand, I only see lot and lot of documents to read rather than opaque. In fact, I believe the information is so good that a formal evaluation of the UOL can be done which also mean getting the valuation is not out of the question for investor good in property. The problem is it is labour intensive, not many will try to go through that pile of documents.

Companies like WBL and Noble Group are more complicated in my own opinion. For WBL, there are many non cash generating assets lying there, I believe accounted for cheaply, only clear to someone who able to know what assets WBL own and their likely market price. And Noble Group, which has been always view as a focus, single business company(some might complain that they are unable to know what Noble is doing — the defective is on investor side) where the key is to know how much profit Noble is generating yearly or perhaps quarterly. But is it the case? Noble has reached a point where only significant subsidiaries are included in the annual report, “others” are being left out. Other than that, there are huge piles of assets, mine properties, agricultural assets, interests in joint controlled entities, associates and long term investment can easily add up in excess of USD$1 billion. Most of them are being funded by borrowing and equity, doesn’t anyone want to know what are they, where are they or at least some breakdown?

UOL group with its main 4 listed entities consist of

1) UOL with market Cap of 2.587 billion, shareholder equity of 3.835 billion. Ignore recent share-buyback.

2) Pan Pacific Group with market Cap of 0.624 billion, shareholder equity of 0.767 billion

3) UIC with market Cap of 2.479 billion, shareholder equity of 3.298 billion

4) Singland with market Cap of 2.174 billion, shareholder equity of 3.973 billion

UOL owned 81.57% of Pan Pacific and 31.58% of UIC. As UIC own 72% of SingLand, UOL own 22.74% of SingLand. Add in share investment in UOB, UIS and Haw Par, UOL become “complicated” and being valued by many in a way that is adding up all interest in Pan Pacific, UIC, investments and development properties but with a discount. Simple but not logical. As in a situation where everything is being valued at depressed price, it will work wonderfully but in another situation where the environment is good, valuation is rich, adding them up without a discount or even a premium is a straight road to hell. Discount after discounted is sweet, premium after premium is insane.

Anyway I am more interested to write about what are those stuffs that UOL own.

Property – retail, commercial offices, hotel and residential

Under UOL

1) Faber House(exclude 1st storey) – 100% interest

2) Odeon Tower – 100% interest

3) United Square – 100% interest

3) 2 units in Eunos Warehouse complex – 100% interest

4) Pan Pacific Serviced Suites – 100% interest

5) Pan Pacific Orchard – 100% interest

6) Novena Square – 60% interest

7) One Residency(KL – under development) – 60% interest.

8 ) Sofitel Plaza Xiamen(China) – 100% interest

9) Hai He Huang Guan(China – under development) – 90% interest

10) Marina Mandarin Singapore – 25% interest

11) Pan Pacific Singapore – 22.67% interest

12) OUB Centre – 4.67% interest(?)

Under Pan Pacific Hotels Group

1) Parkroyal on Beach Road – 100% interest (P), 81.57% interest(UOL)

2) Parkroyal on Kitchener Road – 100% interest(P), 81.57% interest(UOL)

3) Upper Picker Street Site(under development) – 100% interest(P), 81.57% interest(UOL)

4) The Plaza(retained interest) – 100% interest(P), 81.57% interest(UOL)

5) Sheration Perth Hotel(Australia) – 100% interest(P), 81.57% interest(UOL)

6) Crowne Plaza Darling Harbour(Australia) – 60% interest(P), 48.94% interest(UOL)

7) Crowne Plaza Parramatta(Australia) – 60% interest(P), 48.94% interest(UOL)

8 ) Sheration Suzhou Hotel & Tower(China) – 100% interest(P), 81.57% interest(UOL)

9) Parkroyal Kuala Lumpur(Malaysia) – 100% interest(P), 81.57% interest (UOL)

10) Parkroyal Penang(Malaysia) – 100% interest(P), 81.57% interest(UOL)

11) Parkroyal Saigon(Vietnam)- 100% interest(P), 81.57% interest(UOL)

12) Hotel Sofitel Plaza Hanoi(Vietnam)- 75% interest(P), 61.18% interest(UOL)

13) Hotel Sofitel Plaza Saigon and Centre Plaza(Vietnam) – 26% interest(P), 21.21% interest(UOL)

14) Parkroyal Yangon(Myanmar) – 95% interest(P), 77.49%(UOL)

Under UIC

1) UIC building – 100% interest(UIC), 31.58% interest (UOL)

2) Stamford Court – 100% interest(UIC), 31.58% interest(UOL)

3) West Mall – 86% interest(UIC), 27.16%(UOL)

4) Sheraton Tianjin Hotel(China) – 36%(UIC), 11.37%(UOL)

5) Tianjin Jun Long Square(China – under development) – 51%(UIC), 16.11%(UOL)

Under SingLand

1) Singapore Land Tower – 100% interest(S), 22.74% interest(UOL)

2) SGX Centre 2 – 100% interest(S), 22.74% interest( UOL)

3) Clifford Centre – 100% interest(S), 22.74% interest(UOL)

4) The Gateway – 100% interest(S), 22.74% interest (UOL)

5) ABACUS Plaza and Tampines Plaza – 100% interest(S), 22.74% interest (UOL)

6) Marine Square – 53.1% interest(S), 12.07% interest(UOL)

7) West Mall – 50% interest(S), 27.16% interest(UOL)

8 ) Novena Square – 20% interest(S), 64.55% interest(UOL)

9) Pan Pacific Singapore – 53.1% interest(S), 34.74% interest(UOL)

10) Marina Mandarin Singapore – 26.5% interest(S), 31.03% interest(UOL)

11) Mandarin Oriental Singapore – 26.5% interest(S), 6.03% interest (UOL)

12) Beijing Landmark Towers(China) – 19.95% interest(S), 4.54% interest (UOL)

Is this a complete list? I don’t know but if there are few that slip pass, it will be most likely “hide” under the unquote equity investments and some overseas interests like “Success City”. And this list pretty much confirmed with Wee UOL interests in Marina Area where its interests as a whole greater than SingLand commercial offices. And with the interests disperse around, it will be interesting to know who own the rest of Marine Shopping Centre and 3 hotels. Interestingly, OUE own another 1/4 interests in Marina Mandarin and 50% interest in OUB Centre.

Investment – quoted and unquoted

UOL : UOB – 2.2%, UIS, Haw Par and others – 364.65 million as at 31/03/09

Pan Pacific Hotel Group : Unknown – 11.86 million as at 31/03/09

SingLand : Unknown – 12 million as at 31/03/09

Property development

The easy way to look at it is UOL has 1.347 billion of development properties as at 31/03/09 where it ownership crossed 50%. So it excluded a sustainable amount being accounted for under associated companies interests.

That is the same for UIC and SingLand where 1.052 billion of development properties as at 31/03/09 which also exclude a sustainable amount being accounted for under associated companies interests. Interestingly, UOL, UIC and Singland team up and develop properties, if consolidated under one company, the amount in development properties will increased but at current status, the way to look for earnings from these development will be return on investment through dividend payback from associated companies.

I guess this pretty much add up all the main points.

 

 

Long term contracts? Increasing market share? lucrative deep sea segment?

Demand > supply in the Offshore support industry is well known for years( Since 2001/02, 2009 is the no. 7th year since I heard of it ) but that doesn’t mean it is time for fairy tale.

The reality is all listed players here are tiny back then(exclude KeppelFel and SembMarine). That include Jaya and 2 local players bought by DryDock World. Other are not listed or yet to join in the fun.

Anytime, there will be another “Ezion” popping up — just like the latest Bee Mar LLC with its state of art new-build vessels. And wonder why biggest players like Tidewater and Seacor had a fleet of vessel with average age at over 20 years in 2006(from 2006 wrap up by marcon.com)?

Ponder why… the answer is obvious.

Lastly with every segment of shipping in over supply situation, the where is the honey pot?

Published June 10, 2009

In search of the happy median in oil price

The oil price is not the equilibrium between oil supply and demand, says Shell CEO

By RONNIE LIM
ENERGY EDITOR

IS THERE a Goldilocks oil price – not too hot, not too cold, but just right – to help global economies through the downturn?

True to form, Shell chief executive Jeroen van der Veer – who participated in a media dialogue on the sidelines of the Asian Oil and Gas conference in Kuala Lumpur this week – shied away from commenting directly on this. ‘We are very lousy at predicting prices,’ he has often said.

The current recession, he cautioned, masks various hard truths, especially that when the economic recovery comes it will be very difficult for the oil industry to supply all that extra energy needed. This doesn’t include the rising greenhouse gas emissions problem then.

The International Energy Agency (IEA) has said that investment in the upstream exploration and production (E&P) sector will fall by more than 20 per cent this year. And investments in renewables are falling even faster – by almost 40 per cent compared to last year.

‘All this points to new price spikes and volatility further down the road,’ warned Mr van der Veer.

Asked if he thought last week’s run-up in oil prices to US$70 a barrel denoted a market which had run ahead of itself, he said: ‘Shell’s key message is regardless of whether the oil price is high or low, or volatile, we simply monitor it to see if we can do a better job than the competition. If you know that, then you take the oil price as it is . . . so we see ourselves as a price taker.’

‘But having said that, in the long term the world will find difficulty securing supplies, so the oil price will not be really cheap. Short-term we don’t really have a clue on how oil prices will develop,’ he said. Just as the IEA has indicated, ‘it’s hard to forecast when the next oil price hike will come, as we don’t know exactly when the recession will end, and whether it’s U-shaped or V-shaped, and we don’t know what Opec will do, and what’s going to happen with energy efficiency, and whether the habits of consumers will change. Will people buy smaller cars, or the Chinese use Hummers?’

Mr van der Veer said that his short answer to the question of ‘What is a fair oil price?’ posed by Malaysian Prime Minister Najib Razak at the Kuala Lumpur conference was: ‘We don’t know.’

The oil price is not the equilibrium between oil supply and demand, he said. ‘I’ve learnt in life that that’s not correct, as the oil price is basically expected demand compared to expected supply and we’ve seen a lot of that in the derivatives market.’

‘The reason it is (the equilibrium between) expected demand and expected supply, is because both sides have huge uncertainties. That’s one of the reasons why you have a lot of volatility to come and that gives opportunity to derivatives markets, which thrive on this,’ he said.

Asked if he thought the recent rise in oil prices was indeed indicative of economic ‘green shoots’, the Shell chief said: ‘We follow it. We think that towards end-2008, when oil prices fell to US$35, it had to do with people closing positions in the paper market then.’

‘At this moment, when we look at the world, there’s still a lot of floating storage around, again it’s about expected demand and expected supply, and maybe people are being optimistic about economies turning. But I’m just a simple businessman and not a macro-economist.’

Be that as it may, what would Shell consider a ‘comfortable’ oil price to stimulate E&P again? Rival BP CEO Tony Hayward had indicated earlier this year that US$60-US$80 oil could do the trick.

On this, Mr van der Veer said that Shell is spending a net US$31 billion to US$32 billion on capital expenditures this year, adding that ‘indeed we screen all the projects from the viewpoint of relatively low oil and gas prices, otherwise we wouldn’t do it’.

The oil giant, he said, had delayed an extension of a very large oil sands project in Canada – but this was not because the low oil prices could not support the oil sands project, he explained, but because the project market (costs of construction and materials) was overheated last year.

‘So the point is you have to balance oil prices with construction and material costs, and at this moment you get more from lower (project) costs than outguessing the oil market.’

But doesn’t this still beg the question of how the oil industry is to reconcile the dilemma of low prices depressing investments and the need to do more to gear up for increased energy demand in future?

Responding, Mr van der Veer said that ‘first of all, we’re very glad we made our final investment decisions (on various big projects) before construction costs went up, so we could avoid the top of the market, for example like offshore rigs three to four years ago before prices shot through the roof. We still benefit from that today.’

‘For the next expected oil price spike, we expect that construction prices, while down now, may go up again, so it makes a lot of sense to continue to be a high investor at this time so as to benefit from lower construction costs. Besides, if you are a constant investor, then you have constant staff and engineers, and you do a better-quality job.’

Besides, the days of easy oil are over, and that huge investments and long lead times are needed to extract oil.

Shell’s Sakhalin LNG project – expected to produce four billion barrels of oil and gas – cost just a total investment of US$20 billion, or about US$5 a barrel in costs. This was because it started work on the project way back in 1977, and it is only now that the project is starting to produce, he said.

On the role of speculators pushing up oil prices, Mr van der Veer said he was more ambivalent today about them playing a major in this than he did previously.

‘Shell did a lot of studies on this last year, and compared to two years ago when I said that the extent of open positions in the market played a major role in pushing up oil prices, now we say: We don’t know.’

‘It’s a more complex phenomena. It’s chicken-and-egg but what’s the chicken and what’s the egg? What is psychology and undercapacity and overcapacity?’

‘The only thing we can say is that the size of the paper market compared to the physical or real market has now decreased. Yes, derivatives and open positions played a role in driving up oil prices, but we feel less sure they say they were the culprits,’ concedes the Shell chief.

“If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.” –Warren Buffett

For Celestial Nutrifoods, I guess I am the patsy. Despite having mapped out worse outcome, I have always assumed that they are not going to have much problem with refinancing. I guess I will be save by valuation and strong B/S. It is hard to associate having refinancing problem with strong B/S but strong B/S is not just about having load of cash but also how these cash come about. If I want to bet on someone on his whole life income, I don’t want to just know how much cash he has in his bank but how he gets those cash in 1st place which will also say about how he will earn his cash in the future. Strike Toto, 4D or having rich dad can fill bank account fast but usually it is easy come, easy go.

“I violated the Noah rule: Predicting rain doesn’t count; building arks does.” — Warren Buffett

Taking half the medicine doesn’t count too. I have seemed it coming for Beauty China, the mindless expansion and increasing trade receivables. I was worried and sold half of my current holdings and left with less than 1/4 of my original holding. But despite having receivables issues, Beauty China has lot of stuffs in their favour — years of brand buildings, scale, right market segment and strong B/S. But panic bankers and publicity kill this business. Basically when a company is being doomed in the way like Beauty China is currently going through, the only way to avoid it is no debt and lot of cash or cash lot more than debts. Big investors are doing the right job of trying to inject capital but it may be too late or if it drag too long, their brands can just die off as goods is not infront of consumer for buying due to lack of resources and unwillingness to carry more Beauty China brands.

While Celestial is in better position than Beauty China, worse case situation is the same for both as there is no stopping of Celestial for cutting off their healthy PRC subsidiaries away from BVI holding and subsidiaries. If that happened, shareholders will be cut off too.

Other Celestial and Beauty China, my other holdings are still healthy and still avoiding orgies of capital pumping at the wrong time. Even with the recent run up in equities, in most cases, equity is still very expensive, debt is much much cheaper and they are available. But lemming behavior is ruling the days whether it is run by owner or not. The current lemming behavior is to take advantage of the current depressed situation but wait everyone seem to be doing so, so who is taking advantage of whom? It will be interesting to look back 2 to 3 years later to see what kind of advantages have been taken.

Other than Sarin, TPV and maybe ARA Asset Management, the other has basically zero need to raise capital. Actually beside TPV, all other companies are being run in a way so that they don’t need the pumping of more capital. In a simple word, the need of capital can be foresee except bad luck so there is no excuse for the current wave of capital pumping.

What about Jaya? Debt to equity ratio of about 1X, not much different from Ezra and Swiber which raise massive amount and diluting existing shareholder of 10 to 20%. Of course they won’t come out and say they are rising capital because they are desperate for it, being in the crowd and say to take advantage of the situation is the safest way. But I won’t be surprise that they are being forced by their customer or potential customer to has a stronger B/S in order to take on bigger and longer duration projects. They lack the flexibility and going downstream, integrating model may not help to create competitive advantage but push the capital consumption even more.

Jaya has the flexibility. I have no doubt that Jaya has being “manipulating” their results every quarter because they have the flexibility to show what kind of results by controlling when to sell their vessels. Same thing here, if Jaya think that leverage is too high, they can de-leverage by reduction in scale and earn lesser. Reduction in scale may be unthinkable to other, this should not be something of alien to rental company. As long as the market value of the equipment, vessel in this case is not in a slump(equipment being dump somewhere with no interests), Jaya can always sell their vessels until debt level reduce to a level that they are comfortable. Earning lesser is not forever but dilution is.

Lastly, value creation or shareholder value in long term is being measured by per share basis. That says if a company is growing at 10% pa. But after share dilution, the growth becomes 5% pa. Now this is not much better than another company that grows by 5%pa with increase in number of shares. In fact, the 2nd company is actually creating more value as they are using less capital(assuming the starting capital is the same). The growth of many company like REL, Ezra, Swiber and REITs are impressive but when measure by per share basis, that growth lose some shine. In some case, ROE is unimpressive after all the growth and increased in capital.

Our long term economic goal (subject to some qualifications mentioned later) is to maximise berkshire’s average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance of Bershire by its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish in the future — a greatly enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that of the average large American corporation. (Berkshire Hathaway owner related principles no 3)

We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As over net worth grows, it is more difficult to use retained earnings wisely.(Berkshire Hathaway owner related principles no 9)

It is easy to understand that in the situation of revenues below expenses, company will be making losses. But there is a trick in it, if this situation arises because revenues is falling fast together with sizeable working capital and sizeable depreciation/amortisation, then it is entirely possible that the company is still generating operating profits for low margin companies. As long as huge Capex and gearing up of working capital not in sight, these companies can be seem as “profitable”. On the other hand, companies with huge margin, low level of working capital, once revenues dropped below expenses, there is no need to second guess. They are burning cash. So it is very important for them to have sizeable cash ready to keep them alive, by burning them daily, weekly, monthly or even yearly. Borrowings will not going to be easy during this situation as the reasons for their high margin and low working capital is not longer there which also mean there are not much assets to be use for borrowing. Since earnings are not available, door for borrowing is basically closed.

ARA Asset Management and Sarin belong to the top of the 2nd group and Micro Mechanics follow not too far behind. Their B/S over the years show that they are keeping cash in the bank rather than passing cash to shareholder with minimum debts. These 3 companies can be separately categories into another 2 group.

1st group belong to ARA Asset Management. Profit is predictable and this makes company willingly to use more cash and willingness of lending by bank. But if revenues dropped by huge amount due says — being kicked out as Suntec REIT manager, then it is quite straight forward that revenues will not goes back easily. If the reasons for that dropped in revenues are too negative, revenues will never recovered and even being kicked out of this business. In another word, while size do play a part in assets management industry, it is very hard to see what the future like in medium to long term for any specify company. That includes ARA Assets Management.

Sarin and Micro Mechanics belong to the other group. Profit is less predictable and they are even less willing to borrow(bank won’t likely to lend them much too). Micro Mechanics B/S is rock solid and while B/S of Sarin is still good, is not as solid as before. Revenues can drop, like what is happening now but it won’t be permanent. This is a transition period for the level of demand and it will drop. But once it stabilise, back to normal, revenues will recovered to a level reflective of the demand. Since they does not compete on price, profitability will move back as well. Even if the level of profitability is unable to reach the earlier period, it won’t be much lower.

Can Sarin earn US$15 million this year?

Would anyone ask this question before Sarin 1Q2009 results? Revenues for FY2007 and FY2008 were US$37 million and US$33 million respectively but Revenues for 4Q2008 and 1Q2009 were US$2.5 million andUS$1 million respectively. What happened? Because there is no demand and it doesn’t matter if the quarter consists of 90 days or 60 days, if customers are not buying, sale won’t be coming in. For Sarin products, demand can be effectively zero in any given period. So Sarin was burning cash in an uneasy fast speed.

And the management is cutting expenses fast and in sizeable amount. In AR2008, projected expenses for FY2009 is US$9 million so it is actually reasonable to say Sarin need US$15 million to break even. Any amount lesser than US$15 million, cash on B/S will be burning. And if US$1 million sales per quarter continue for another few quarters, I will bet that R&D expenses will cut away and Sarin will be in surviving mode. Expect Cash call from shareholder or even selling of shares to other.

At this moment Sarin is still in the mode of waiting, cutting expenses and positioning for recovery. While revenues of US$2.5 million or US$1 million is unsustainable and unlikely to last for a long period, road to recovery can be a long and sub-profitable if the actual demand for diamond is way lower than before recession. This is why R&D is important. Which is why I think there are probabilities while Sarin will become an even more wonderful business after this, current shareholders may not able to ripe the full benefits.

Full benefits in sight

Micro Mech pushed into red and starts to burn cash in last quarter too. In fact, CMA segment pull the whole business down as Semi-con segment is still profitable. So much for the calls and logic for diversification. But stragy wise, it make sense to goes into CMA. And while cash was burning, it is unlikely to last a long period. With enough cash, low maintenance and team largely intact, road to recovery will be sweet or even better. It won’t be a long wait as Micro Mech profit can recover even in a recession.

The chances are after recovery, as long as Micro Mech continues what they are doing, it is unlikely to be value at below $40 million again. I let my actions do the talking.

From bear market rallies to “green shoots” and now “wait for the correction, the market is supercharged”, I must give market timers the highest respect for coming out with lot of “theories and convictions” as they spent lot of time doing the incredible job of timing the market. On the other hand, I have a hard time chasing stock price as the overall market is moving upward forcefully. Why can’t this bull wait for another week? I am doing some portfolio movement!!! The stock I am going to buy is still ultra cheap but I just hate to buy stock that is moving up… or as the overall market is moving up strongly. This create a disincentive for sellers to sell lower.

At this incredible bullish movement, there are talks that STI has reached bottom in March and a new bull market is formed. I think, chances are, yes STI reached bottom at just below 1,500 mark and any future bottom if the current rally become a sucker rally would not be too far from 1,500. But from a secular bull/bear market point of view, this is not a new bull market! For market timers, secular or not, it doesn’t matter, they want to get every turn RIGHT. And it doesn’t matter to investor who constantly buying when stock is cheap. But from those who are interested in market cycle as a whole or has a good study of market cycle which is cyclical, a secular bull or bear market is where maximum money can be make or loss over a period of 10 to 20 years.

US is still in their secular bear market that started in year 2000 and the current bottom may likely to be a major market bottom where stock is cheap and despair rule since the 1st peak in 2000. But like all secular bear market, bear will drag and bottom will be revisited, more rallies will suck in speculators and throw them out along the way until everyone want out. Just like the “death of equities” in early 1979 and “bond for investment and stock for speculating” before 1950. Secular bull market is formed not just by the depressed valuation but when memories of the old leave and memories of the new entered. It will be the new generation to carry the market into new heights. At this moment, US market is still washing out speculator, a good indicator here is no one is talking about buying US stocks or funds. This is a different environment compare to the bottom in 2003 where many are still holding on to Tech funds and buying on dips. Currently, I would be surprise if financial planner recommend holding of at least 30 to 50% for their client portfolio in US market. I mean why not? Every week, speculators are looking at US market for direction, and it is still the biggest market in the world with lot of world class companies trading there. I won’t be surprise that for the next 5 to 10 yrs or at least until after the start of new secular bull market we won’t be looking to buy US stocks and companies. Maybe at that time, it will be like “death of US and rise of emerging” it will be time to bet in US again. Or from now onward, every big market downward movement will be a good buying opportunity for US market. But before that, secular bull markets around the world haven’t run it course or at least in Singapore.

One of the reason why I do not believe current bull is a new one is that it does not smell like one. Everyone is so quick to get back or wanting to get back if I get the signal correctly, it is as if they are missing out the surge. So it is either like US, another sucker rally as secular bear market drag its tail or market recovering from setback and continue the bull market that started in 2003. I believe it is the second case.

If it is the second case and I wish for that as well, then our own secular bull market will has many more years to run and I wish to heard it, feel it and see it myself that valuation, fundamental doesn’t matter. This time is different. A whole new market. Stock trading at at least 40 to 50X earnings. Speculators who beat the market/ pro in group and value investor throw in and ride along. Yes Manias! I want to experience it myself, see the excess and that follow. Many of my friends will be in riding the manias and won’t get out in time but that does not stop me from wanting to experience a manias.

Many see stock investment equal to money no matter whether they invest or speculate. I treat it 1st a game that I want to win, a peak I want to reach knowing that money will of course follow. If I can’t conquer the mountain peak, I want to go as high as possible. Money or even reputation does not has the same satisfactionon as standing at the top of the peak.

It is a whole new generation which include myself are “playing stock”. Most of us entered stock market after year 2000. And it will be a rare case where there is someone who experience the early 1990s secular bull market that reached it 1st peak in around 1994 still around and buying stock as I am. But they are around, many are buying and keeping stock for dividends but they are not out at the front line, looking at the all the sexiest stocks.

The situation at 2003 if I get it correctly is the start of new secular bull market. And it took about 3 years to convince that this bull is for real so it was at 2005 or 2006 that the bull learn how to run. Running at increasing speed but stop short of manias in 2007/2008. Perhaps the bull is about to fly but springboard was chipped by US. But seeds already sowed, players already come onstage as the bull its setback. Climbing in as the bull continue to run.

Show has started and at half time, actors are having their break. as they come back, the drama will continue with lot of new actors and it will reach the ultimate climate. Actors that going to play significant roles at are….

1) Individual investor. Mostly 1st time buyers starting after 2000 and our profiles will show that we are at the age currently from teens to early 40s, most likely in the twenty-somethings to thirty-somethings.

2) Financial planner. An unlikely role it seem but they are going to be the one that put out interesting chart and data telling individual that you will never save enough, your CPF is not enough, you need to save and invest. This make the push to the stock market.

3) Local website like Next Insight and forum. Forum is the easy one to get while website like Next Insight is harder to grab. But for a place where the incentive is to paint a bright picture, it is a prefect place to lay rhythm.

4) Local investment blog like mine. This is another prefect place because it will encourge new comer that you can do it. Stock market is not just for the pro.

5) Analysts and all it related peers. They are always around but if the bull does reach late stage, Star analysts like Henry Blodget and Abby Joesph Cohen may appear.

6) Media. BT, Pluse,  The Edge Singapore, CNA, etc. Their role will help to push the market as the bull ride and point fingers to other as it bust. Never expect them to do what Allan Sloan did when he received his Leob Prize in 2001 and say, “Hey we are responsible too.” Just read BT recent commentary on pointing out  stock “Qain Hu“. It is a lousy written article with almost zero important facts being put out but that article mark a turn around as they have been bearish for so long. Article of same quality will keep appearing and as they don’t count failure, it may be a prefect place to breed star financial journlist

While it is not as serious as 1980s, charterers are slow in paying their bills.

Vessels and barges laid up at Bollinger’s “Safe Harbor” in Larose, Louisiana have doubled to approx. 45 vessels since December 2008. Inland drilling rigs, AHTSs, OSVs, tugs, deck barges, tank barges and inland tugs dominate the landscape. Although equipment is being stacked in the Gulf, it nowhere near approaches the vessels cold-stacked in the bayous twenty and thirty deep in the mid-80s when owners, finance companies and the U.S. Maritime Administration laid up fleets. Only a small percentage of today’s idle equipment is starting to show up for sale, and not at bargain prices.

 

Crosby Tugs

of Galliano reports their present fall-off in work is worse than what they suffered during the mid-80s, but I note that their fleet is also substantially larger than the mid-80s after acquiring 14 offshore tugs from Tidewater three years ago. Like many operators, they are coming off a high. Another Gulf Coast owner who requested anonymity plans to move out of the domestic “shallow-water” market so as to concentrate further offshore and in international waters where he feels there may be more stability. One operator went for thirteen days straight without even an inquiry. Some companies report that while their boats are working, many charterers are slow in paying their bills.

 

 

Lemming!!

Marcon still has on its bookshelves copies of Fleet Data Service’s “Offshore Service Vessels” and “Offshore Tugs” from 1985 covering the U.S. market. There were 173 tug companies and 94 owners / operators of large offshore service vessels listed. 101 (58.4%) of the offshore tug companies and 78 (83%) of owners/operators of the large OSVs (at that time anything over 150’ was considered  “large” ) no longer exist. Some just faded away. Others were acquired by very familiar corporate names who themselves may no longer exist as they also were acquired by yet another familiar name. Fourteen creditors were also listed as Owners. Much of the equipment though continued working somewhere in the world experiencing the up and down cycles of earning revenues or lying idle. It is all part of the marine industry that we need to be prepared for. 

I don’t like to quote what I read elsewhere, but at least someone is sensible enough.. the cost of vessel is part of ”the cost of providing the service”. Like investing, the time to get cheap vessel is when “investors” are fleeing, while it is hard to know when is the best time to buy, at least avoid being a Lemming!! For Jaya while it is hard for them to escape unhurt, at least it is pretty clear that they are selling to Lemmings..

Jan 2009

At a time when most companies are reluctant to spend on capital expenditures,

Scomi Marine Bhd plans to invest some USD 150m in the next three years to expand its fleet. There have been concerns that Scomi Marine, a 43% associate company of Scomi Group Bhd, had not been investing substantially to expand its fleet in the last two to three years to take advantage of the uptrend in activities in the oil and gas and logistics industries. The reason for this, according to president Mukhnizam Mahmud, was the view that prices of vessels were historically very high and not sustainable. “We were concerned that if the market weakened, it would be tough to ensure sufficient returns on investment from the assets. The intention was to ride out the ‘growth’ phase and once the market went into a downturn, prices would be attractive and at a more realistic level.” “We now see that situation occurring and asset prices have fallen,” he told StarBiz in a telephone interview. Mukhnizam said the global credit crunch had affected the shipping industry in terms of financing for shipyards and vessel owners as well as charter rates, which had fallen with the slowing economy, thus contributing to lower vessel prices. The Dry Baltic Index has dropped more than 92% to below 700 points from its all-time high in May. The price of Panamax-sized vessels has also dropped to USD 25m to USD 28m currently from about USD 80m six months ago. “We see the market being in this state at least until the end of 2009. Although prices have not come down much for the type of vessels we are looking at, there have been movements downward. Scomi Marine’s strategy is to take advantage of this opportunity to acquire vessels at lower prices.

 

Jan 2007

Business Edge reports that Scomi Marine Bhd in Malaysia, a leading regional player in the offshore support vessel sector, believes that there will be a continued strong requirement for what it called “high-powered vessels” in view of the high demand for energy globally.

“Vast growth opportunities lie ahead in the offshore support services industry. With the high demand for energy, there is an increase in exploration and production activities, especially deepwater activities,” Scomi Marine chief executive officer Shah Hakim Zain told reporters in Singapore on January 18th.

He said as a reflection of the high demand for offshore support vessels, the utilisation of the company’s vessels had soared to 95 per cent by December 2006 from 85 per cent a year ago.

However, he said the company, which has six new deep-water vessels on order, would not order new vessels due to the long “waiting list” at Japanese and Chinese shipyards and the high price of newbuilds.

“Building costs have risen by more than 40 per cent from 2004 and are expected to remain at current levels. At the same time, spot charter rates for marine support vessels have increased by 10-20 per cent,” he added.

Shah Hakim, who is also the chief executive officer of Scomi Group Bhd, said the seven high-powered anchor handling tugs and supplies (AHT) vessel it ordered in 2005 cost just under US$20 million each (RM70 million) but the same vessel would now cost US$32 million.

“If we were to sell it now, we could potentially get a premium price of US$38 million,” he said.

 

Receivable days, part of cash conversion cycle is of extreme important. Reading a company financial statement is never complete without a hard look at their receivable days, inventories and creditor days. Because this is one place where signs of aggressive accounting or operational problems show up.

From another angle, this is a place to look for strengths — operational strength and pricing power. That is to say, a company with well-oiled engine will keep their cash conversion cycle in check which mean not just account department but operation side, each having the same attitude of collect one time, pay on time and lean inventories. These type of company will has a beautiful cash conversion cycle period after period. A company whose products they sell which has a pricing power will has their receivable days in check as customers will pay on time or even earlier to get the products. For company with pricing power, it is actually quite hard to know if this is a well ran company in a short period as it may not show up easily. Perhaps inventories is the place to look for first sign of trouble.

So what is the normalise receivable days for shipping company? While I have some rough ideas, I am not sure. And why receivable days rather than the whole cash conversion cycle which include inventories and payables?

Different industry and different business model produces different cash conversion cycle. Shipping company has a different working capital requirement and the focus is going to be the “cost of providing the service” rather than things like cash conversion cycle. Basically, in general they have low risk for inventories and payable with little money stuck there. While higher attention must be pay to receivables, it is not a big deal as customers will always pay on time in order to has the vessel working for them. My basic is built on this so I am expecting to see low receivable days, usually less than one quarter of revenues and pay little or no attention to inventories and payables when reading their financial statements.

Something strike me today and I decided to take a look at some of the listed shipping companies receivable days. While I have not spend time doing more in depth reading, raw data say I was wrong. All companies except 1 showed that they have a shorter receivable days than what I was expecting. Perhaps due to cyclical natural of the industry and the number of days will start increasing as the cycle change. But I am not surprise with the exception because their receivables are “screaming” louding while I went through the financial statements for the past few quarters.

Time well spent I guess. My focus on shipping companies in the future will be “cost of providing the service”

Sale – S, Trade debtor – TD

# – period used for calculation is 3 months

^ – period used for calculation is 6 months

^^ – period used for calculation is 1 year

* – sales dropped by 50% or more

CH Offshore# : S -18, 245,  TD – 10,541. 52 days

Courage Marine#* : S – 7,457, TD – 2,678. 32 days

EZRA ^: S – 176,065, TD – 132,638. 136 days

Jaya#* : S – 37,764, TD – 26,976. 64 days

Marco Polo Marine# : S – 8,960, TD – 1,916. 19 days

Mercator# : S – 42,406, TD – 15,373. 33 days

NOL ^^ : S – 9,285,125, TD – 828,706. 33 days

Samudera ^^ : S – 443,252, TD – 49,683. 41 days

Swiber # : S – 102, 941, TD – 61,986. 54 days

Pfood 2008 annual report like AR2007 is not a joy to read. Their numbers are great and I have confident in them. The best thing about Pfood is that neither its business nor financial statements belong to hard to understand. But the management does not care much about reporting to external shareholders also with little comments out of the “standard format” which can get easily from their number.

Rather than throwing them straight into poor corporate governance list, I don’t think it is a good idea to views all companies as homogeneous. One cannot dump companies like SingTel and SMRT together with UOL and HPL, neither are they can be put together with Pfood and Full Apex. In SingTel and SMRT, they are not run by owners, even if the management own shares of the companies either through exercising of option or purchase from open market, their primary concern beside running the companies well is to “market” them as well. Corporate governance is a tool for them, stock price is a tool for them as well to possible realise the management current and future earning power. For UOL and HPL, where the management/ directors belong to an inner group of owners. And these owners are competitors of other external shareholders in a way that they are constantly buying from the open market trying not to pay a high price for that. In situation like this, UOL and HPL work the opposite of SingTel and SMRT as they just do the bear minimum for “marketing” to reduce competition. They do not write colourful AR as well. But the test for UOL and HPL is whether they are treating minority shareholders as equal with access to same amount of information and benefits. The thing about UOL and HPL is that they can’t be run like Full Apex mostly company like Pfood because they need capital market either for purchasing of shares or rising new capital. UOL and HPL are doing a balancing act. For Full Apex and Pfood, which are owner-manager, and while they may be buying shares in the open market once a while, they doesn’t seem to be a competitor of external shareholders. No balancing acts here because they are not going to need the capital market for foreseeable future. I think it is pretty reasonable to call them private-listed company. Since the management does not need to pay lips service to media, analyst, bankers, potential investor or even shareholders, why care about corporate governance? The test should be how well it is being run and whether it is benefiting all shareholders. For corporate governance, which get so much attention lately, the basic question is always — what is corporate governance for?

On being well run and benefiting shareholders, Full Apex is of no comparison to Pfood. Not just that it is well managed, shareholders benefited greatly from it. From 2001 to 2008, not an easy period for pork industry with competition, SARS and pig disease, the amount of dividends received by shareholders since IPO is about the same as Pfood current stock price and just by dividends alone, it is more than IPO price of $0.45. And share price is pricing as if Pfood is dead like Ufood. Even without its associated, Pine Agritech, Pfood is trading at about 0.5X to 0.6X NBV. Pfood shareholders are getting generous dividends over the years because Pfood is generating huge amount of not just cashflow but free cashflow and a conservative estimate will show that Pfood is trading at 4 to 5X free cashflow with rock solid B/S and wonderful cash generating ability. Rock solid B/S and wonderful cash generating ability is something that is not an easy task even for SingTel, SMRT and UOL.

But Pfood is undergoing some kind of structural change as it is integrating backward into pig farming. Unlike its previous investment, this time the scale is big enough, important enough to change Pfood either for the better or worse. While I hope for the better especially seeing the management being extra careful, evaluating the project for a year, but going into pig farming just for their own needs not just doesn’t bring extra benefits but may consume increasing resources.

Pfood previous investment into Pine Agritech as it integrates backward is a success but it also provides a reality. RMB223 million was invested for a 36.75%(post IPO) stake in 2004 and in less than 5 years, Pfood received dividends of RMB133 million with their stake remain unchanged and Pfood bought RMB482 million of SPI from Pine last year. 1st Pfood needs SPI for processing pork but does it mean Pfoog need to own company like Pine? As long as SPI meet the requirements, it can be purchase from any company. Buying from Pine may stablise its supply but as what happened 2 to 3 years back where selling was one of the best business in the value chain, getting in Pine early, helping it to scale up ensure Pfood crawl back some of the benefits. But the reality is that selling SPI with no differentiation, a commodity intermediate product is unlikely to sustain the kind of return for long so with every players in the whole value chain having low profit, it is only time that Pine will follow and it did, the effects haven’t finish. In this value chain, the only part of the chain that will have some pricing power will be the one selling to consumer with their brand stick outside. That says it will be stupidity that Pfood will transfer benefit from itself to Pine and if that is the case, Pfood doesn’t fit to stay at its current position. Still, I heard about it sometime back when Pine was enjoying high profitability while Pfood profitability dropped. While Pfood profitability haven’t returned back to its past level but Pine slumped(excluding SOS), well this is the facts about value chain and competition. One cannot look at the company alone without whole value chain and competition nature

That lay a foundation for a look at pig farming. Pig farming is the start of the value chain but just like SPI, there is no differentiation, a commodity product. Beside the all kind of risks on farming, the biggest problem is they have no pricing power. Like SPI, their only way for some kind of competitive advantage is scale and control the market but that is a lousy kind of competitive advantage and provided that their customers, like Pfood or Yurun remain small and weak so a few huge pig suppliers with lot of small processors. It is great that I have never heard suppliers with this kind of scale yet but increasing powerful player like Pfood and Yurun.

So with over RMB 2 billion to be invested into pig farming for its own needs, the benefits may likely be lower cost as Pfood get the pig farming returns and possible intangible return like safe for consumption from clean and known source and more stable supply situation if things like what happened recently happened again. But there is no guarantee. There is also no straight forward answer that integration is the source for competitive advantage or synergy. I believe what Pfood and Yurun currently doing is already laying the foundation for competitive advantage with weak suppliers, products that meet the needs of consumers and sticking their brands onto the packages. Even with minimum advertising, competitive advantage can be built.

With commercial farming, it creates competition for resources. Going forward, Pfood will still need to expand and that required capital, depending on how fast Pfood want to grow. With the rate Pfood is growing, cashflow is not just available but in excess. Add in commercial farming if it proved to be successful, there are chances that cash, generated internally and borrowed may not be enough to sustain high rate of growing, which create the situation for competition for resources. That may not be a good sign unless management never lost sight of how what got them here, up to this point.

Is this going to be a transformation for Pfood? I don’t know. But at its current valuation, I don’t care. Neither do I really care much competitor China Yurun. A quick look at China Yurun suggest that it is not much bigger than Pfood despite growing faster, but that grow is likely to slow without help from raising new capital. financially it is not stronger than Pfood but I think it is being reasonable price at a valuation of about 3X richer than Pfood. Well, with Ufood getting out of the picture, I shouldn’t delay and should start reading Yurun after I finished looking at UOL, HPL, UIC and SingLand.

Investing is a never ending journey.