One of the four instances or the best example on this : http://illdoitmyself.wordpress.com/2008/04/16/four-instances-where-increase-in-price-lead-to-increase-in-volume/

But well, if they are not careful, becoming too powerful in most visible measureable stuffs like high ROIC and huge market share, regulation may hurt them.

The Card Game

How Visa, Using Card Fees, Dominates a Market

By ANDREW MARTIN

Published: January 4, 2010

Every day, millions of Americans stand at store checkout counters and make a seemingly random decision: after swiping their debit card, they choose whether to punch in a code, or to sign their name.

It is a pointless distinction to most consumers, since the price is the same either way. But behind the scenes, billions of dollars are at stake.

When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.

The difference is so large that Costco will not allow you to sign for your debit purchase in its checkout lines. Wal-Mart and Home Depot steer customers to use a PIN, the debit card norm outside the United States.

Despite all this, signature debit cards dominate debit use in this country, accounting for 61 percent of all such transactions, even though PIN debit cards are less expensive and less vulnerable to fraud.

How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers.

Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Visa has managed to dominate the debit landscape despite more than a decade of litigation and antitrust investigations into high fees and anticompetitive behavior, including a settlement in 2003 in which Visa paid $2 billion that some predicted would inject more competition into the debit industry.

Yet today, Visa has a commanding lead in signature debit in the United States, with a 73 percent share. Its share of the domestic PIN debit market is smaller but growing, at 42 percent, making Visa the biggest PIN network, according to The Nilson Report, an industry newsletter.

The Risk of Refusing

Critics complain that Visa does not fight fair, and that it used its market power to force merchants to accept higher costs for debit cards. Merchants say they cannot refuse Visa cards because it would result in lower sales.

“A dollar is no longer a dollar in this country,” said Mallory Duncan, senior vice president of the National Retail Federation, a trade association. “It’s a Visa dollar. It’s only worth 99 cents because they take a piece of every one.”

Visa officials say its critics are griping about debit products that have transformed the nation’s payment system, adding convenience for consumers and higher sales for merchants, while cutting the hassle and expense of dealing with cash and checks. In recent years, New York cabbies and McDonald’s restaurants are among those reporting higher sales as a result of accepting plastic.

“At times we have a perspective problem,” said William M. Sheedy, Visa’s president for the Americas. “Debit has become so mainstream, some of the people who have benefited have lost sight of what their business model was, what their cost structure was.”

Visa officials said the costs of debit for merchants had not gone down because the cards now provided greater value than they did five or 10 years ago. The costs must not be too onerous, they say, because merchant acceptance has doubled in the last decade.

The fees are “not a cost-based calculation, but a value-based calculation,” said Elizabeth Buse, Visa’s global head of product.

As for Visa’s market share, company officials maintain that it is rather small when considered within the larger context of all payments, where, for now at least, cash remains king.

While Visa may be among the best-known brands in the world, how it operates is a mystery to many consumers.

Visa does not distribute credit or debit cards, nor does it provide credit so consumers can buy flat-screen televisions or a Starbucks latte. Those tasks are left to the banks, which owned Visa until it went public in 2008.

Instead, Visa provides an electronic network that acts like a tollbooth, processing the transaction between merchants and banks and collecting a fee that averages 5 or 6 cents every time. For the financial year ended in June, Visa handled 40 billion transactions. Banks that issue Visa cards also pay a separate licensing fee, based on payment volume. MasterCard, which is roughly half the size of Visa, uses a similar model.

“It’s a penny here or there,” said Moshe Katri, an analyst who tracks the payments industry for Cowen and Company. “But when you have a billion transactions or more, it adds up.”

With debit transactions forecast to overtake cash purchases by 2012, the model has investors swooning: Visa’s stock traded at $88.14 on Monday, near a 52-week high, while shares of MasterCard, at $256.84 each, have soared by more than 450 percent since the company went public in 2006.

While there is little controversy about the fees that Visa collects, some merchants are infuriated by a separate, larger fee, called interchange, that Visa makes them pay each time a debit or credit card is swiped. The fees, roughly 1 to 3 percent of each purchase, are forwarded to the cardholder’s bank to cover costs and promote the issuance of more Visa cards.

The banks have used interchange fees as a growing profit center and to pay for cardholder perks like rewards programs. Interchange revenue has increased to $45 billion today, from $20 billion in 2002, driven in part by the surge in debit card use.

Some merchants say there should be no interchange fees on debit purchases, because the money comes directly out of a checking account and does not include the risks and losses associated with credit cards. Regardless, merchants say they inevitably pass on that cost to consumers; the National Retail Federation says the interchange fees cost households an average of $427 in 2008.

While the cost per transaction may seem small, at Best Buy, the biggest stand-alone electronics chain, “these skyrocketing fees add up to hundreds of millions of dollars every year,” said Dee O’Malley, director of financial services. “Every additional dollar we are forced to pay credit card companies is another dollar we can’t use to hire employees, or pass along to our customers in the form of savings.”

Weighing Rules on Merchants

The Justice Department is investigating if rules imposed by payment networks, including Visa, on merchants regarding “various payment forms” are anticompetitive, a spokeswoman said. Several bills have been introduced in Congress seeking to give merchants more ability to negotiate interchange, which is largely unregulated.

While interchange remains legal despite repeated challenges, a group of merchants is pursuing yet another class-action suit, this time in federal court in Brooklyn, against Visa and MasterCard that seeks to upend the system for setting fees.

“Visa and MasterCard have morphed into a giant cookie jar for banks at the expense of consumers,” said Mitch Goldstone, a plaintiff in the case.

Fees were not an issue when debit cards first gained traction in the 1980s. The small networks that operated automated teller machines, like STAR, Pulse, MAC and NYCE, issued debit cards that required a PIN. MasterCard had its own PIN debit network, called Maestro.

Merchants were not charged a fee for accepting PIN debit cards, and sometimes they even got a small payment because it saved banks the cost of processing a paper check.

That changed after Visa entered the debit market. In the 1990s, Visa promoted a debit card that let consumers access their checking account on the same network that processed its credit cards, which required a signature.

To persuade the banks to issue more of its debit cards, Visa charged merchants for these transactions and passed the money to the issuing banks. By 1999, Visa was setting fees of $1.35 on a $100 purchase, while Maestro and other regional PIN networks charged less than a dime, Federal Reserve data shows. Visa says the fee was justified because signature debit was so much more useful than PIN debit; at the time, roughly 15 percent of merchants had keypads for entering a PIN.

Merchants said they had no choice but to continue taking the debit cards, despite the higher fees, because Visa’s rules required them to honor its debit cards if they chose to accept Visa’s credit cards.

A Seven-Year Battle

Wal-Mart, Circuit City, Sears and a number of major merchants eventually sued. After seven years of litigation, Visa and MasterCard agreed to end the “honor all cards” rule between credit and debit and to pay the retailers a settlement of around $3 billion, one of the largest in American corporate history. Visa paid $2 billion, and MasterCard the remainder.

Since then, only a handful of retailers have stopped accepting Visa debit cards, an indication that the crux of the lawsuit was “much ado about nothing,” Mr. Sheedy says.

And while some merchants said they thought the lawsuit would pave the way to a new era of competition, a curious thing happened instead: while Visa temporarily lowered its fees for signature debit, it raised the price on PIN debit transactions and passed the funds on to card-issuing banks, and its competitors soon followed.

The current class-action lawsuit joined by Mr. Goldstone contends that Visa’s PIN debit network, called Interlink, is offering banks higher fees as an incentive to issue debit cards that are exclusively routed over this network. Interlink, which has raised its PIN debit fees for small merchants to 90 cents for each $100 transaction, from 20 cents in 2002, is often the most expensive, especially for small merchants, Fed data shows.

One large retailer, who requested anonymity to preserve its relationship with Visa, provided data that showed Interlink’s share of PIN purchases rose to 47 percent in 2009, from 20 percent in 2002, even as its fees steadily increased ahead of most other networks — to 49 cents per $100 transaction in 2009, from 38 cents in 2006.

Visa officials say its PIN debit network is taking off despite rising costs because it offers merchants, banks and consumers a level of efficiency and security that regional networks cannot match. “We are motivated as a company to try to drive value to each one of those participants so that they accept the card, issue more cards, use the card,” Mr. Sheedy said.

At checkout counters, meanwhile, consumers are quietly tugged in one direction or the other.

Safeway, 7-Eleven and CVS drugstores automatically prompt consumers to do a less costly PIN debit transaction. The banks, however, still steer consumers toward the more expensive form of signature debit. Wells Fargo and Chase are among those that offer bonus points only on debit purchases completed with a signature.

Visa says it does not care how consumers use their debit card, as long as it is a Visa. But for now at least, the company says the only way to ensure that a purchase is routed over the Visa network is to sign.

“When you use your Visa card, you have a chance to win a trip to the Olympic Winter Games,” a new Visa commercial promises.

The commercial does not explain the rules, but the fine print on Visa’s Web site does: nearly all Visa purchases are eligible — as long as the cardholder does not enter a PIN.

http://www.nytimes.com/2010/01/05/your-money/credit-and-debit-cards/05visa.html?pagewanted=1&ref=business

Time to take stocks despite lack of interests in writing on purchases made in 2009.

Common sense

 

Having little excess income makes 2009 a lousy year for buying stocks and I don’t expect it to change in 2010. Someone once told me, “Having money and knowledge can do wonder in stock market.” I think having no money is better than lack of knowledge. And then there is common sense…..

I do not know since when, I have developed mindset, a dislike of buying in a rally, especially a board base one. I can buy all the way down but my mental block makes me not buying on its way up regardless of the valuation. In 2009, it happened again and at the “right” timing. During May, rally already has started and money comes in. So I wait and wait for a good 4 months. And then I asked myself, “Where is my common sense?” With the right stocks and right price, I started buying. But somehow, I have thrown away my common sense for a good 4 months.

Pfood

This is an old stock that I have been following and “trading” since day one. Buying at below a dollar and selling between a dollar to two and collecting dividends along the years. This year is another buying year at $0.50 and below. Operational wise, Pfood is not having a good time. In fact, it has gone from great to good to bad. From here on, will it go to be like Ufood? Hard to say but as I see it, last few years of lousy return in this industry is likely to path a way for a more stable environment with lesser competition. That mean the future should be brighter. Even if the future does not turn out to be what I think, there is still valuation for me to fall back.

Trading at around 0.5X NBV made it easy for me to buy. Especially when all liabilities make up just about 10% of total Assets with no off balance sheet stuffs to worry about. Add in public available financial statements that go all the way back to 1997 that show a company generating good free cashflow after Capex makes the decision easier.

Celestial

I couldn’t control myself of not adding more when it was trading at below $0.20 simply because the valuation made no sense to me and that was before Celestial declared defaulted on their convertible bond. On cashflow, debt to equity and even ability to borrow in PRC should not be a problem for Celestial too. Now it becomes a bigger mystery of why Celestial used the funds while knowing that these funds are required for repayment soon. Now it looks like this issue is hurting their operation. Going forward I don’t know what will happen but as long as their operation side can drag along, Celestial should worth more.

Micro Mechanics

Another old stock that I have been buying on and off since 2003. This year, I almost doubled my holding with purchases at below $0.30. Businesses wise, MMH is one company that being hit the hard both on their semiconductor tooling business and especially CMA. This is not surprisingly considered that semicon industry goes through cycle but even at their worse quarter, its still went along nicely. The bigger question mark is actually the CMA division. One that they do not have a strong hold, niche that required lot of time to create. Still if there is someone can do it, the team at MMH is likely to be one but it will take years. In CMA, it is going to be bigger field but potentially lower return as compared to semiconductor tooling business.

At about 1 X NBV, I believe this will be one of my best buy or if not the best since I started stock investing. At $0.30 one can still get a dividend yield of almost 7% for FY2009. That was when MMH was barely profitable. When economy stable and normalised, at $0.30, even without growth, dividend yield can in excess of 15% and earning yield of 25%. MMH is not a company that can’t grow. But it will be bumpy along the way.

Wheelock Properties

I do not know the true value of Wheelock Properties because I do not know how to value a property developer. It is not hard to estimate the value of an investment property but for a developer, there is one big unknown. Timing that determine the spread between their cost and selling price, how long they need to hold on to the properties and timing of new properties. As they go through cycle, timing can change the profit by a wide margin.

So I use history records as a guide, tiptoe into property stock and made a small purchase of Wheelock Properties at around 0.9X NBV. Wheelock Properties is a rarity in this industry as most of the time it is operating at minimum debts or at net cash position. If Wheelock Properties can produce anything near to their historical record, I will be reward.

Before I move on, it is interesting to note on Wheelock Properties lack of land banks and holdings minority stakes in Hotel Properties and SC Global. Lack of Landbank is a concern but joining in the fun with load of competitors constantly bidding a higher price for land doesn’t look good either. Sometime in environment like this, waiting may be better. While its CEO did openly admitted that he made a mistake in buying SC Global, he did that just in case property market keep moving upward. So he hedges the lack of land with SC Global stake? It is also possible that HPL was purchased with an eye on their properties in Orchard area — Wheelock Properties homeground.

I won’t be surprise if something comes out because of these small stakes especially with HPL. At one end, leveraged, to redevelop, need capital. At the other end, sitting on cash and waiting.

Banyan Tree

2009 is a year where debts are exchanged for equities. Banyan Tree is what almost everything one want to avoid in 2009 —- ultra luxury exotic resorts, Thailand and debts. So buying Banyan Tree is contrarian.

I like this business. Searching around the globe, looking for nice place, buy it at swamp price, build a resort with their brand on it, maintain the services, charge high price, sustain the environment around, take care of the peoples around and wait. If the country is stable, the world continue to move forward, the rate for the resort will move up, the land value move upward as well, with that Banyan Tree can do wonder with the land beside it. It is a simple idea but doing it won’t be easy. Banyan Tree seem to know how to do it well especially with the rehabilitation of Bang Tao Bay, an abandoned tin mine in Phuket. My understanding is, that was not an easy job.

Because of that, valuation move up, B/S fatten up and making debts level look better. But can these valuations stood the test of time? I don’t know. But there are reasons why peoples are going to these kinds of exotic getaway resorts.

While BV doesn’t really count in my opinion, paying at around BV mean less than 10X past peaked operating earnings.

YHI International

Main businesses are tyre distribution and alloy wheels manufacturer. On my watch list since 2007 due to Stamford Tyre. Back then I like their tyre distribution business but not the manufacturing part. I dislike the management because they only give out the good news and hide the bad one. I thought it is hard to buy this stock with this type of management.

But in 2009, I changed. I still like their tyre distribution business and dislike the manufacturing part. The management still gives out good news and hides the bad one. But this company is swift and quick in their operation — all are in the number. I was so impressed that after reading 3rd quarter results, I check their share price. A rarity, I don’t usually do that. Sometime later, I poured through 3 annual reports made a purchased at just below 0.7X BV.

Their businesses are hurt by this downturn, automobile, and raw materials price for both tyres and aluminum prices. But it is still doing pretty ok with manufacturing segment having more headwinds. That is good, as it will stop YHI from pouring more resources into this area. At this current period, YHI will be earnings return of high single digit to low teens on their equity. I see no reason why it cannot earn more when head winds are removed.

A cigar butt…. but potentially worth more.

More can be learnt by reading EZRA annual report 2009 than reading other reports. Reminding myself — remember to read 2010 annual report.

Intangible Assets

 

Various companies do it differently. Sarin capitalised “R&D development cost” for products that are commercial viable, HTL capitalised “computer softwares licenses and development costs”, Qian Hu has “Trademarks/customer acquisition costs” & “Product listing costs” and REC has “student acquisition cost”. Not to be outdone, EZRA has “Customer contract and relationships” which come together with the acquisition of Telemark Limited.

That is a small amount(USD1.8million, amortised over 1 to 5 years), no big deal but it seems like more and more companies are keen to put down all kinds of intangible assets other than goodwill. Nevertheless, it is interesting to know that EZRA revised FY2008 financial statement for this transaction in the latest Annual report. If I am doing their accounts, I will put these into goodwill, as goodwill is subjected to impairment while amortisation is required for this intangible asset. But I may be naive…

Lastly, it is also interesting to note that:

1) According to the notes, EZRA paid almost 5X NBV for Telemark Limited if Goodwill and intangible assets are taken away.

2) This transaction took place in Apr 2008 but I believe it was revised in FY2009. The best part is Telemark is being paid in 5 payments spanning 4 years with EOC shares. While Telemark was consolidated as 67% subsidiary in FY2008, it was being treated as wholly owned subsidiary in FY2009 despite as far as I can see, EZRA does not totally owned it yet. So the tricky parts are —– did EZRA overstated earnings? What percent was being accounted for EOC when using equity method? How profits being share?

3) This is a beautiful transactions/acquisition with profits inflow with no cash outflow as EZRA use their associated company shares as currency.

4) What business is Telemark Limited in? I don’t know. Never said, can’t be trace. It is being stated as “investment holding company”. But I can’t find any subsidiary under this holding…. which mean all activities are at holding level?

Charter contracts

 

EZRA total lease agreements for charter of their vessels dropped from USD92 million in 2008 to USD23 million in 2009. While their OSV earned income of USD177 million and USD192 million in FY2008 and FY2009 respectively. Well these lease agreements are those charter contracts that being put out by EZRA through their announcements and loved by analysts or investors. BUT there is one main difference that is the number, USD23 million recorded in 2009 annual report is being “non cancellable leases” while those “lovely announcements” with multi-hundreds millions charter contracts are consisted of “renewable charter options for a number of years”.

So isn’t it amazing that a company that “try” it very best to has income backed by long term contracts has only less than 2 months of non cancellable charter contracts?

It is even more amazing that this company has charter contracts liabilities for 13 vessels on long term contracts thru sale and lease back of USD$269 million. This is a ratio of almost 1: 12. What if those renewable charter options doesn’t materialise or materialised at charter rate way lower? In a simple way of saying, EZRA has no choice but to keep paying those contracts no matter what happened in the future but their customers has a choice on whether they want to continue or not.

Lastly, on those contracts won(not just EZRA, nowadays almost every company love to announce contract won), before trying to analysing those contracts to dead on margins, earnings growth and ROE. There is one thing call proportion. For a company like EZRA with charter income of USD192 million and total revenues of USD$331 million, it must at least win USD192 million worth of contracts per year to stay even. If it wins a USD1 billion of non cancellable contract, then I will be interested because that is 5 years of revenues.

A permit to explore drilling activities in the territorial water of New Zealand

 

The value of this permit is unknown but stated clearly that it is valuable as in excess of USD75 million. But why it is not being openly communicated out to investors and only to be hidden at a small side note? That is because EZRA can only get that permit if their customer in New Zealand unable to pay EZRA the balance of USD75 million. So is this permit still valuable? I don’t know but the below number tell a different story.

Revenues : Offshore Support Services – 2008 – USD177Million, 2009 – USD 192 Million.

: Marine Services – 2008 – USD 64 Million, 2009 – USD 93 Million.

: Deepwater Subsea Services( Energy Services) – 2008 – USD 29 Million, 2009 – USD 46 Million.

Receivables : Offshore Support Services – 2008 – USD44Million, 2009 – USD 58 Million.

: Marine Services – 2008 – USD 21 Million, 2009 – USD 52 Million.

: Deepwater Subsea Services( Energy Services) – 2008 – USD 29 Million, 2009 – USD 75 Million.

EZRA receivables problem is already well known. I don’t know why their external auditor does not express an opinion of concern on this matter. As from the number, EZRA has never collect any significant amount from the Energy Services segment which now called Deepwater Subsea Services since it started about 2 years back. In fact, from the number, EZRA has only one customer (or few customers holding on to one permit) in this segment operating in the territorial water of New Zealand. 40% of total receivables belong to this customer. Since this is a new segment, I don’t see how it fitted into historical collections experience.

The Group deals with customers who are mainly creditworthy oil majors or their preferred service providers. Based on historical collections experience, the Group believes that no further allowance for doubtful debts is necessary in respect of certain trade receivables which are not past due as well as certain trade receivables which are past due but not impaired. Additional credit risk assessment has been disclosed in Note 40.

 

Included in the Group’s trade receivables of more than 120 days is a balance amounting to US$75,077,000 (2008: US$29,534,000), where the Group has the right to a permit held by the debtor to explore drilling activities in the territorial waters of New Zealand. The proceeds arising from realisation of this permit is expected to be in excess of the balance receivable.

There are many questions on this segment, this customer and these receivables. Even if they are being repaid, the sour taste will still last for a long time.

Off the Charts

From Leader to Laggard in Just over a Decade

By FLOYD NORRIS

Published: November 20, 2009

THE American stock market has soared 64 percent since it hit bottom eight months ago.

And that leaves it just where it was more than 11 years ago.

The United States stock market was the world leader in the great bull market of the late 1990s, but more recently it has been a laggard, in large part because of the weakness of the dollar. As the accompanying charts show, a stock investor looking for a part of the world to invest in back in 1998 — and to hold onto until now — could not have done worse than to choose the United States.

The charts show the movement of the Standard &Poor’s 500 and the S.& P. International 700 in the period since the American index first reached 1,100 on March 24, 1998. The International 700, which encompasses the non-American stocks in the S.& P. Global 1,200, rose much faster in the middle of this decade, then fell faster in the global recession. But since prices bottomed, it has leaped more than 80 percent.

For the entire period, an investor was better off in emerging markets than in the developed world. The segments of the global index representing Latin America, Australia and emerging Asian countries have soared. The Canadian index also more than doubled, thanks largely to natural resources stocks.

But prices, as measured in local currencies, are lower now than in 1998 for both the S.& P. Europe 350 and the S.& P./Topix 150, covering Japan. Measured in American dollars, as shown in the charts, those markets posted gains of 20 percent and 7 percent, respectively, because of currency movements.

On a sector basis, the best place to be over that period, both in the United States and globally, was in energy stocks. Oil prices fell to just above $10 a barrel in late 1998, and few investors saw value in the area. More recently, oil company profits set records as crude soared well above $100 a barrel, and even after the global downturn the price is more than $70.

Financial stocks have suffered more in the United States than in the rest of the world, but the credit crisis brought down many banks in other regions as well.

The charts also show 15 well-known companies from around the globe whose share prices are at least 300 percent higher than they were in 1998, and 15 such companies whose prices are less than half what they were then.

Those lists show that performances can vary wildly within an industry. While British Airways and All Nippon Airways make the losers list, Ryanair of Ireland was a big winner. Fiat and Ford were losers, while Hyundai shares leaped. Makers of communication equipment include Research in Motion, the producer of BlackBerry phones, which is up more than 8,000 percent, and Alcatel-Lucent, which is down almost 90 percent.

Floyd Norris comments on finance and economics in his blog at norris.blogs.nytimes.com.

http://www.nytimes.com/2009/11/21/business/economy/21charts.html?_r=2&ref=business

Daylight Robbery! That was my immediate reaction when I saw the announcement from Full Apex that the management is seeking delisting of Full Apex at the price of $0.18. No, I am not going to sell at $0.18. But what about the other? This is a hard call, or even guess. Since my holding is almost non-existent, I try to see if the 2nd largest shareholder and independent director Mr Chng Hee Kok are going side on the management or sell. My initial assessment was no. I seriously doubt Mr Chng will agree and sell his shares since all his shares were purchased way above the offer price and anyone who is not drunk, with some understanding of business and valuation will come with the same conclusion of not selling. The spotlight fall on Pope Asset management who hold 5.56% of Full Apex at the time of announcement.

Checking back the movement of Full Apex Share price and the date where Pope Asset Management holding crossed 5%, their average cost must be over $0.18. So this provides the 1st dis-incentive for them to sell. Next From their website, it shows that Pope Asset Management is a fund using value approach. And from their two investment in “S – Chip”(it’s happened that I followed these two companies), I easily concluded that they buy stock at dirt cheap level but it is the selling that I concerned. So when the filling on 23/11/09 appeared, I know the fight is on because they increased their holdings from 5.56% to 6.39% at around delisting price.

A side notes on Pope Asset Management other investment. That stock is United Food. One of my ex-holdings, I had made a loss on this one and up to today, it is still my biggest losses when I cut and sell everything away at over twenty-something cents few years back. United Food continues to be badly managed and left with a commodity business of crushing soya bean. But the beauty of buying below $0.10 is that it is below 0.3X of the Book Value. If the share price doubled and trade at say $0.20, investor will get 100% return while it is still trading at around 0.6X Book Value. As long as the management doesn’t make big mistake, destroying huge amount of value at one go, the chances of double or triple the share price is actually very good. What more, this is in a commodity business where profit will swing and with years of public available information show that despite being badly managed, it doesn’t use leverage and their financial statement is actually being drawn up prudently. Ex-shareholders selling at this level (or to Pope Asset Management) ignored one of the most important aspect of investing — “price”.

Full Apex is not United Food in a way that while its profitability has been decline since listed, shareholder value actually being created and of its three businesses, the biggest two operate in industry where competition is low. The businesses of selling PET bottle and PET chip are like leeches, more so for the former. Once a PET bottle plant installed in or beside their customer facilities, competitor will find it hard to supply to the same facilities- think about low price per unit and the cost of transportation. It is also leeches-like in the sense that this business suck up the capital intensive part of the whole soft drink value-chain or rather the part where the two giant soft drink sellers doesn’t want to appear in the balance. Over a long period of time, this businesses of manufacturing PET chip and bottle must be reasonable profitable because giant soft drink sellers are not going to be suck on by walking dead.

The profitability of Full Apex since listed strongly supports my assumption. If Full Apex operate in a competitive environment and with soft drink giants as their end customers, the rise of crude oil from 20s to 150 then slumped to 40s to the current 75 to 80 bucks will basically crashed this company and the double of NBV since listed will not happened. And it is achieved through the old fashion way — earned it. After spending hundred of million of RMB building PET plants and PET chip plant, Full Apex has been doing what is most sensible and with the support of their cashflow by reducing debts. And it is not a wild guess that going forward, debts will be easily repay so either cash goes up or dividend increase or another huge Capex is coming soon.

For a company like Full Apex, the minimum fair value should be at least at BV and how much higher depend on how well the company is being managed. So with this alone, exit price of $0.18 is just 0.6X of what I think is the minimum. And at this current moment, after spending massive amount of capital expenditure for the last few years, their plants should be operating at best 60% utilisation. Utilisation will increase when China keep growing which means that earnings will keep growing even without expansion as long as China keep growing.

That mean I think Full Apex NBV is realisable in the sense money will pour out from operation. How much will flow into shareholder hand is another issue but it is not like “some company” where shareholders demand delisting at NBV or using revised NBV by comparing other property in the area. The biggest flaw in using NBV in that case is that operating cashflow doesn’t support it so the only way to realise its “value” is through addition infusion of capital to transform the property or sell it. Whatever it is, it is a losing battle if the assumption is wrong in the first place.

With Pope Asset Management clearly understand theirs business and I believe many other minority investors like me understood it too, the offeror will not get > 90% of the shares( I hope).

Something is wrong with Raffles Education Corp(REC). But what’s wrong?

1) Because 1Q2010 NPAT dropped by 56%?

While the percentage dropped was scarcely, it is hardly a surprise as REC last year profits were never as good as the NPAT suggested. Their FY2009 profits were supported by disposal of land in OUC. Beside, OUC is not the same material like REC other segments. It is a low yielding business/Asset. REC might turn around, into schools like the other by pushing up the yield but at this moment, it is not happening yet. It takes time.

And of course REC is investing for the future in new emerging countries/places. But are they the same as their current operating places? One must realised that REC model work better in more developed countries or where a portion of the population reached a certain level of income. Their new places don’t seem can be the next growth driver. That says I do not believe that the increased in operating expenses belong to planting seeds in these places for the future. I would rather think that these belong to their old schools.

2) Because of trade receivables?

Trade receivables stood at $162 million and $180 million on 30/06/09 and 30/09/09 respectively as compare to Revenues of $202 million in FY2009 and $52 million for 1Q2010. That was a big jump from receivables of $77million and revenues of $190 million in FY2008. So that was scarcely? No and yes. Trade receivables were pretty stable and actually went down at 30/06/09 as shown in the AR reflecting the drop 4Q2009 revenues. Unless REC started to create fake revenues, trade receivables shouldn’t jump. Education business usually has good cashflow with short receivables. Which is why it is hard to believe that REC has collection problem where their advance collection jumped to $62 million in 1Q2010? Not logicable. But the next question is what causes the jump? If revenues don’t follow then, I believe REC is making their customers and students putting more cash upfront. This by itself is not going to be good.

And the “yes”? The main reasons for the jump in receivables belong to recoverable from previous owners of $14 millions and timing different of $58 million for sale of lands in OUC. Without questioning those recoverable, let ask why REC take so long and yet unable to collect money from sale that has been recorded in the book. Not just booked but with huge gain to shout about. How long? Why and who? I don’t know but it does point out that all players in the OUC are possible very weak, holding each other hands trying to figure a way out. Or it is just plain aggressive accounting on REC part.

Well 1) and 2) look serious but they are hardly as serious as 3)

3) Trying to cheat and do it very openly.

In FY2009 results presentation, REC come up with “core” profit. I have no problem with any “core” profit they put up as long as it is reasonable and consistent even if I may not agree with what should be “core”. And for FY2009 “core” profit, I certainly don’t agree that sales of land in OUC belong to core profit. Then I almost throw out when I saw REC do an about turn and shown that sale of land in OUC shouldn’t belong to “core” profit. REC was busying selling land in FY2009 but in 1Q2010,there was no sale of land. So by changing what is core, profit figures in FY2009 and 1Q2010 presentations become much better.

When thing is down, we will know the management better. For REC, the management is bending way too much and their true faces started to show up.

Of the three statements ie Profit and loss statement, Balance sheet statement and cashflow statement, I find that cashflow statement is the easiest to read among all. Or rather as compare to B/S and P&L, step 1 interpretation can be easily done. Example how much cash went to the taxman or what was the Capex compare to why this amount of expenses or that amount of receivables.

Unless the company expenses away, it doesn’t matter where the company record their journal entries(as someone pointed it out earlier), almost all cash movement is being shown by the cashflow statement, at different section. In fact, cashflow statement is just a reconciliation of mostly b/s movement and if cashflow statement is not being provided, which I believe that was the case last time, reader of financial statement can easily computed by their own.

But reading the financial statement of Ezra is a strange affair. While it ended exacting what I has been expecting, I still keep wondering why it happened. Anyway, I have not done with it and I will be expecting surprise when the Audited statements are out with supporting notes. 4th quarter results is just the beginning. And I am referring to Ezra unaudited 1Q, 2Q, 3Q and 4Q results. Unaudited is bolded because it is common sense that if someone want to game the system, do it while you are not closely watched. Being skeptical when reading unaudited statement is a must.

31st Aug 08, 30th Nov 08(1Q), 28 Feb 09(2Q), 31 May 09(3Q), 31st Aug 09(4Q)(‘000)

Bill payables to bank – 25,753, 59,691, 91,606, 81,096, 50,376

This numbers are taken from B/S. reconciliation can be done with respect to Ezra presentation will be

Repayment of bill payables, net(3mths, 6mths, 9mths and 12 mths) – 1Q +33,938, 2Q +65,853, 3Q +56,153, 4Q + 24,623

But the company came out with total diff changes for 1Q to 3Q with an acceptable 4Q changes.

Repayment of bill payables, net(3mths, 6mths, 9mths and 12 mths) – 1Q – net, 2Q +3,775, 3Q +27,196, 4Q + 24,719

This is a fairly easy movement in cash flow where increase in bill payables mean cash inflow while decrease mean cash outflow. The diff in 4Q is acceptable but for 1Q to 3Q is unexplainable especially with 2Q huge diff of 60,000k. Someone please tell me that I am wrong……..

Now let look at other movements. This time it is more complicated especially without the help of notes to accounting.

31st Aug 08, 30th Nov 08(1Q), 28 Feb 09(2Q), 31 May 09(3Q), 31st Aug 09(4Q)(‘000)

1) Fixed Assets – 185,598, 257,361, 290,276, 252,711, 298,874

2) Depreciation(3mths, 6mths, 9mths and 12 mths) – 1,294, 2,615, 3,943, 5,374

3) Purchase of fixed Assets(3mths, 6mths, 9mths and 12 mths) – 48,788, 58,216, 87,864, 176,717

4) Proceed from termination of shipbuilding contracts- 3Q @ 28,452, 4Q @ 27,575.

5) Loss on termination of shipbuilding contracts – 3Q @7,142, 4Q@ 10,006

6) Assets held for sale @ 31st Aug 08, 37,197 & 31st Aug 09 @ 16,433.

7) Gain plus proceed from sale of fixed assets at 31st Aug 09 – 37,838.

That should be about all except for number accounted in prepayment and post-payment which is not significant in this case as I went thru them. FA at 31st Aug 08 plus 1Q movement from 2) to 7) will roughly get me the amount of FA in 1Q2009. But that is not the case except 4Q2009 which like bill payables beautifully align back. If nothing else, just the movement from 3Q2009 to 4Q2009 is enough to blow my head. Purchase of FA increased by 88,853K while FA increased by 46,163K.

The differences in this case can be trace back to bill payables so no big deal right? If that is the case, then why account them into the book for? Why follow FRS? Why not you use yours standards, I use mine. Maybe I am wrong.. someone please tell me so……

With these and others, FY09 annual report will be a good read, it will tell the story of how aggressive their accounting and watch out for things like movement in FA, interests movement and capitalisation and related to the flow of debts plus bill payables. Of course and not forget about receivables and payables. Spend time wondering why it move in these ways. For example, just by looking at the amount of depreciation, working assets, new builds and operating leases tell a big story of this company.

Since I am writing about Ezra, there is no harm to talk abit more on their results. I believe the increased in profit excluding exceptional items, GP and revenues will be the talking point rather than the increased in trade receivables. But these 3 are interlocked that in any situation receivables increased significantly more than the increased in revenues and higher GP, one might want to ask if those increment for real, especially for GP margins. Working capital is investments that suck up cash and may or may not reflected in the P&L and it can have many consequences. As for Ezra? I would say for revenues and margins, its fluctuate. While I have not done a horizontal analysis on a spreadsheet, anyone do it will come up with the same conclusion.

Next do a horizontal analysis for receivables, the surge (main reason for negative cashflow) started way about 2 years back. Ezra investment in this area is really huge. Then payables tell another story. Ezra has been very promptly in paying their vendors, being an even better pay master when they are slow at collecting receivables. This is another contributing factor for the negative cashflow but unlikely going forward as it is down to very low level. There are many little tricks to show better cashflow. Drag and pay creditors when the date turned 1st Sep 09 is one of those simple trick. These promptly payments may tell a bigger story than just being a good pay master.

Back to receivables, increased from 87,004K to 182,722K, 110% while revenues increased by 23%. It doesn’t matter how one compute the number of days outstanding, it is a straight forward > 6 mths. So it is the norm for the industry receivables to be outstanding of > 6 mths? Well, Jaya a company having trouble with creditors has outstanding days of just over 1 mth….. Now the management blames it on new segments. While no one will know the exact situation but a quick look into segment revenues tells a different story.

31st Aug 08 : Offshore Support Services – 174,972K, Marine Services – 64,159K, Energy Services – 29,215K

31st Aug 19: Offshore Support Services – 190,509K, Marine Services – 92,703K, Energy Services – 46,225K

Interestingly, the comments on 1Q2009 was Energy segment contributed 39,9million to revenues, 2Q2009 was Energy services contributed 46.3million to revenues, 3Q2009 was Energy Services contributed 46.1 million to revenues and 4Q was Energy Segment contributed additional 17million to revenues.

If I take management words as true, then can I say all Energy segment revenues can be dump into bad debts since bulk of it came from 1Q2009. Even if that is the case, another 140 million of receivables are still outstanding where a big portion is likely come from Offshore support services. Talk about recurring revenues, good charter rate, long term contracts, steady cashflow, core business and usually a place where cash flow in on time. What if it core business is in trouble or heading toward one?

The timing is never better. Swiber announced that it is looking for 5 yrs convertible bonds that issue up to a total amount of US$100 million after I wrote “Do a Swiber”. Hmmm need to check where I bought my crystal ball. I can be in the business of selling crystal ball.

Let’s do a Ma Hou Pao.

Is Swiber fund raising exercises, 2 in total, back to back, raised US$49.8 million and US$100 million(if upsize) foreseeable? Yes!!! Timing and methods are unknown but there is no question on the need of capital. But the answer does not come from the management. The management painted a bright picture in 2008 AR by proudly said, “Despite the present banking crisis, Swiber’s capital expenditure for our new vessels is fully funded from sources that include sale and leaseback arrangements, secured bank loans and vessel disposals.” Did the management lie? I believe they believe in their belief.

2008 AR showed that Swiber is in massive capital expenditure mode with 17 vessels and barges to be delivered in FY2009 and 3 in FY2010. Total Capex unknown but 8 of these will be in sale and leaseback arrangements. But under commitments in Notes to financial statements, it stated that the committed Capex for FY2009 is US$309 million(it can be more). A quick check show that Swiber total equity stood at US$207 million and total assets at US$706 million. Since it is already highly leveraged with on-B/S items, don’t even need to look further for off-B/S stuffs. 

Here is the math. If Swiber is to generate all US$300 million through earnings, Swiber ROE in FY2009 will be 150% using starting equity. If US$150 million through Sale and leaseback, ROE will be at 72%, and ROE at 50% if Sale and leaseback at US$200 million. This is relatively easy, just flipping the number around, one can easily come up with any portion of equity and debt. Now the harder part, can Swiber generate return on equity of 50% in FY2009? One can look back to Swiber history and companies in the same industry. But the best option is to have a good understanding of this industry and what kind of ROE they are likely to earn in short period and on average moving forward. But whatever the number likes, it will be way lower than 50%. So logically, the answer is No Swiber can’t support it without new capital from outside.

At half time, 1H2009 results, Swiber total Capex for PPE spent was US$146 million with US$38 million on vessels for Sale and leaseback, about US$108 million on PPE. The next question is can generate another US$150 million in 2H2009 for Capex? And at this point of time, Swiber already raised US$49.8 million of capital.

The answer is simple. And this does not even take cashflow into consideration. Almost all players that I look into say situation is changing with collection being slowing, pressure in payment. This can be easily seemed by the shift in B/S.

So what next? If Swiber can get through FY2010, and with no new massive Capex, the pressure on this part will be lifted. But Swiber will face another new pressure, which is massive commitment to pay yearly thru their off-B/S items of which they got into in these few years — sale and leaseback contracts. These contracts doesn’t care how well Swiber is doing, Swiber has to keep pay and pay and pay. Chances are Swiber may unable to fulfill their financial covenants.

And the convertible bond, I think the Swiber is getting a good deal on this, better than Tat Hong. At anytime, I will sell Jaya at that valuation.

There is an article in The Edge Singapore noting that C2O Holdings is turning into an offshore play just like Ezion or Falcon Energy Group(WTF, I din even know Falcon Energy is another offshore play). What about C2O share price? From the look of it, it surge from around $0.1 to $0.535 before any movement of capital. Interesting, but this is just the right move, and I call it — “Do a Swiber”.

Company X ROE for FY2005, FY2006, FY2007, FY2008 and 1H2009 were 38%, 25%, 28%, 19% and 11% respectively. How do company X managed to grow it equity 42.5X from $6.8M to $289M in 4.5 years? Let do some math, company X equity will stood at $15.5M at 1H2009 if it retained all it earnings over 4.5 years. To increase from $15.5M to $289M in 4.5 years is what I call — Do a Swiber.

1) In FY2005, Company X earned $6.2M but equity increased by $9.6M from $6.8M to $16.4M. The other $2.8M? Company X rises $4.2M and paid dividends of US$1.2M.

2) FY2006, Company X earned $12.1M but equity increased by $32.6M to $49M. The other $20.5M was from issuing of equity.

3) FY2007, Company X earned $49.7M but equity increased by $128.5M. The other $78.8M was from issuing of equity.

4) FY2008, Company X earned $39.5M but equity increased by $29.5M to $207M. About $10M was knocked off from the equity due to movement in reserves and share buyback.

5) 1H2009, company X earned $31M but equity increased by $82M to $289M. Company X raising $51M in equity.

Beside FY2008, company X issued equity yearly and transform itself from a company with a net worth of “few millions” to over 1/4 billion of net worth. And Company X is Swiber. There is no secret here and it must be the common understanding among these players because the strategy being used by Swiber is not uquie, an old trick and is commonly being used by many OSV players here. So it is unfair to call it ” Do a Swiber” but I love it.

Before looking at the trick, one has to understand why it is common among OSV players.

1st of all, I don’t care whether it is a barge, AHTS, shallow water, deep water, subsea, construction vessel, drillship, rig or even an ECPIC as claimed by Swiber. Everything work in the same way, the company need to have the vessel either by owning it or chartered. And vessels are not cheap, they are capital intensive kind of business, capital must lay out 1^st. No one can change the logic behind this. No one will say, “here is the money, go and buy a few vessels and completed this project for me, repay me after that.”

Here is the trick.

Now, if C2O wants to enter into this industry, what it need 1st? Capital. Something that company like these empty shells does not have. But there is share price, these are nice currency if being used correctly and at the right time. The 1st time is ensuring news is out, speculator play and share price surge. The higher the share price, the better because the company can get more with less, get capital and buy vessels. With that, it become a growth company, plan for more expansion, more news, issue more shares. This is exactly what I call do a Swiber. It will work and continue to work as long as the share price is high and the unlying fundamental of offshore industry remain strong.

What happen if it stops working? Without new capital, growth will stalled, valuation will drop back to earth. Now the company must back to old fashion way of getting capital — earn it.

Before I end, here is one of the reasons why I call it “Do a Swiber”

How our world was created

On 8 Nov 06, after months of preparation and hard work, Swiber made a sparkling debut on the Main Board of the Singapore Stock Exchange. We successfully placed out 94 million shares at S$0.355 each, raising total net proceeds of approximately S$30.97 million for our future expansion. On our first day of trading, our shares opened at S$0.550, and closed at S$0.505, 42% above our issue price. Based on our closing price, market capitalisation of Swiber was approximately S$186.34 million.

I am delighted to note that, since Swiber’s debut, out shares continued to trade strongly between a premiums of 42% to 193% over our IPO issue price. This reflects the policy of this board, to continue enhance shareholder’s confidence and share value, in our Company.

By Mr Raymond Goh

Executive Chairman and Chief Executive Officer.

Just as I posted my lousy written “jumper post”, I am being tested on ARA Asset Management and Tat Hong. Convertible Bonds due 2016 issued by CapitaLand caught my interests and Tat Hong is a follow up.

Setting up Harmony fund by ARA to hold Suntec Convention and Exhibition Centre with Suntec REIT investing in 20% using debts. This is a small token for Suntec REIT and another small token for ARA Assets Management as its impact on earnings is likely to be under 10% on the long run. Still, it is going to be positive taken by many as ARA actually “tighten” its hold on Suntec City.

But does ARA willingly and eagerly trying to tightening its hold on Suntec City at this moment? Firstly, Suntec Convention and Exhibition Centre was an unwanted child during Suntec REIT IPO as it was being told as in a good way, that it does not have the cashflow to be include in the REIT, put it in another way is that owner does not want to sell it cheap. Actually if Suntec REIT holders notice, they are still paying the sellers years after it was being sold. Now from IPO till crisis hit, Suntec REIT had all the time and capacities to acquire this assets but it was not being done. Perhaps it was not available. But at this moment, it is not the right time for Suntec REIT to acquire it because in a way, debts are not available and equity is too expensive. Financially, Suntec REIT is not a willing buyer for the whole asset.

With ARA taking up part or all of the S$37 million mezzanine loan which stress it already stressed B/S, going round and round, to own this assets, its doesn’t look like a happy acquisition or expansion. Its look like they are being force to act with ARA taking the majority of the risk. The amount of risk is hard to quantify as it all depend on how much ARA is going to input into the mezzanine loan, the market and its intention on future Suntec REIT units received.

The question to ask is why risk — the B/S(whole?) of ARA now? When everything is over, this asset will likely be dump into Suntec REIT, but at this moment, it is worthwhile jumping around at seller camp.

Then there is Tat Hong. Rather than reading the happy, expansionist, blue sky(ocean) press release, it is worthwhile to jump and ask from the other shoe, which is raising capital shoe. From the structure of this convertible redeemable preference shares(CRPS), it looks like either Tat Hong is really desperate or the opportunities are abundant and juicy.

1) Firstly, Tat Hong has 50.7 million warrants that can be convert into share(1 : 1 ratio) at a price of $2.50, expiring at National day. If Tat Hong share price is over $2.50, it can bag >S$150 million, with dilution of 10%. It is impossible at the current share price, so here goes the S$150million.

2) 65 CRPS for S$65 million, dilution of 11.41 million. Unlike the carefree warrants, strategic investor AIF Capital has many demands (If I am AIF, I would love to has these demands)

- 10 annual return on compounded basis for AIF in case of breaches.

- Cost of investment is S$1 per share. Duration is 5 years. This is cheaper than Tat Hong current share price. Now if Tat Hong future is great and wonderful, who don’t want to buy it 5 years later at a price that is cheaper than current market price?

- Conversion only happen if Tat Hong share price crossed S$1.50 for 30 days. This will ensure that AIF in a winning situation as the cost of investment is just S$1.

- Shareholder got $0.05 dividend per share in FY2009 and $0.076 dividend per share FY2008. AIF will get what shareholder get. In that case, CRPS yield for FY2009 and FY2008 are 5% and 7.6% respectively if it was issued before year end FY2008. After 5th years, if the CRPS is not redeemed, preference dividend will be 25% of issue price, i.e $0.25 before any dividends can be declare to shareholder.

- Redeem at 115% in 5th year, 140% in 6th year(less any preference dividend received between 5th and 6th year) and 165% in 7th year(less any preference dividend received between 6th and 7th year)

- There are more but ultimately, the above are good enough for a simple look.

Because of the undertakings by control shareholders and structure of this CRPS, if Tat Hong future change and goes down hill, AIF is protected. Then, the preference dividend is so costly that it will effect how much dividends current shareholder will receive in this 5 years to 7 years. So Tat Hong is likely to declare little or no dividend going forward as long as CRPS is not converted or future is not that good. Even if the future is good, cashflow need to support additional CRPS.

If Tat Hong retained all future earnings, if Tat Hong next 5 years average ROE is 10%, NAV will reached $1.16 by 2014. and $1.45 if average ROE is $1.45.

Buying cheap anyone? Please be AIF Capital.