Posted by: donmihaihai | August 24, 2008

In good companies

It is a certainty that the market can goes crazy in both direction — upside and downside. It is, in my view that while catching a falling knife, I must always keep an eye on the upside. This also means that I must keep looking down when the bull is running. Getting the timing right, exactly when the market turn is so hard that I don’t even think about it but buying into good or decent companies with low debts and a cheap price while unable to protect the volatilizes of the share price is the way. With this I will know that 1) Companies will enter and exist a recession(if any) being equally or if not stronger than before. 2) Buying cheap can do wonder when combine with 1).

I think it will be a disappointment before I went to Invest Fair 08. I was almost exactly right. Unlike Invest Fair 07, this year the Fair was like a total all out salesmanship and the number of companies taking part in this far reduce to only Karin, CapitaLand Group(include all it REITs) and ThaiBev compare to 10 to 20 companies in the previous year. I was totally disappointed with CapitaLand group of REITs because what they were trying to do is to showcase their “success” in REIT. Their Investment relationship personnel are young and reproduce data that are being feed to them from the top. Nevertheless, I still pull out some critical information that is the reason that they are having lower debt level as compare to the rest is not just having better management but they are unable to do so. All CapitaLand REITs and CapitaLand are view as one family by bank(or MAS). One downside of this linkage is any huge increment of debt in CapitaLand can and will affect the spread of interest payment of any REIT even if they are just an associates of CapitaLand. If it is true, it will be necessary to look at CapitaLand and its group of REIT when studying any single REIT.

I have spent almost half an hrs with the IR lady from ThaiBev. I must say I was in good company. Despite her age(she look young) she can tell me at ease why more regulation is good for ThaiBev. Transportation expenses, the power of distribution, what ThaiBev has and their competitors have and ThaiBev is looking for distribution more than anything in overseas acquisition(emerging). Why Singhai and other unable to muscle into ThaiBev sprite business which is much profitable than beer in the past and harder in the future. The amount of advertising, the percentage of tax ThaiBev and the industry paying for total gov. tax income. The main reason for non alcoholic push. ThaiBev is trading at a cheap valuation, it is instantly recognisable from their businesses, scale, competitive advantage and huge free cashflow. Those Singaporean IR personnel from CapitaLand need to learn more from her. Is she buying her company stock?

Beauty China

Beauty China 1H2008 results is mind blowing. Revenues grew another 30-something % despite having done that for last 7 years. And it is this clock-like growth of 30-something % yearly that made me worry when receivable keep edging upward and reach a high point of 3 mth at end Dec 2007. Despite being in a favourable industry and place, anything that becomes clock-like cans potentially becoming dangerous. While reading 1H2008 results, the main question keep popping up is how are manufacturing margin being accounted for in the results. I have no idea but well, I can wait for the 2008 annual report to dig out more information on this and ask if I am unable to dig out any.

A little surprise is that Beauty China gives an interim dividend of 2 HK cents. The amount is little but thinking about it, I think it is about time that Beauty China give out more dividend as compare to the past not because I think so but because they are able to especially with their manufacturing factory. Looking forward for high dividend payout in the coming future.

Beauty China operates in a favourable industry of China where the runway looks endless. With the past effort put in by the management, I think the fruits are growing as Colour Zone is getting higher market share from brand recognition. Let see what the future like is for Charming lady as Beauty China keep pumping in money to build up the brand.

Jaya

Another year operating in one of the currently most favourable industry and giving out an increase dividend of 13 cents compare to 10.5 cents in 2007. With it share price keep moving lower, is Affinity Group getting impatient? For FY2008, Jaya for the 1st time throw out a presentation to showcase their success, which as I look at it, they are saying why Jaya is better than other locally listed offshore vessel building and charter companies. I think it is true. If Offshore support vessel industry is kind of nudist beach, Jaya will be one of the nudist, swimming right at the front of the wave. While there is little news from Jaya about new contracts for ship building or being pushing and marketing about deepsea vessel, it is the kind of ROE Jaya generating that separate Jaya from the rest.

How is the industry look like in the future? Bad. This is a sunset industry unless there are alot of other use for OSV other than oil industry. Vessel of smaller size will be the 1st to go and the size will keep growing as oil drilling goes deeper and deeper into the sea. But that is the future and it will happen slowly, now this is the sexist industry with extraordinary vessel price and charter rate. FY2009 and FY2010, Jaya will be pumping out vessel at record high number and this will propel the profit higher. The only problem is according to industry report, there will be 250 to 300 OSV coming online in the next 3 quarter end mar 09. Even thought they question whether how many of them will be delayed but one must not forget the impact on rate and vessel price.

Currently, the only worry I have is Jaya being push deeper and deeper into debt by increasing dividend payments and higher vessel building program. Because if I am unable to get out in time before the wave crash, low debt will keep the company in good shape even if ROE dropped from >30% to <15%.

Pfood

Pfood is still recovering from the impact by supply shortage. Operating profit increase by about 15% q-o-q, and it seem like Pfood will able to generate ROE of 10 to 15% for this year. What will be Pfood ROE when it is fully recovered? It will be interesting to know because it is possible that I can get information on what will happen to other companies like China Lifestyle, Celestial and Synear if raw material really double or triple in a short period. There was no question on the survival of Pfood even during the darkest of time because of its bullet proof B/S.

Pine Agritech is having a hard time when its venture into retail failed and the reality of price taker in intermediate product work it way back as SPI margin keep narrowing. But it B/S is strong too even when all convertible bonds are pay. Pine Agritech is a stayer as long as it does not make the same mistake of SOS too often.

The future of Pfood? It is extraordinary, almost endless runway as China grows and industry consolidation. Beside that, with it size and cashflow, Pfood can buy over other food related companies which are smaller and generating higher ROE in the future.

Sarin

Sarin results look good on paper, especially 2Q2008 if I follow what usually use by many — the increased in NPAT as Sarin reported an increased of 43% for 2Q2008 compare to 2Q2007. Without tax benefits, Sarin can easily report a drop of 20% for NPAT even as revenues increased by 18% for 1H2008. I know Sarin is operating in a tough environment as US, the major market for diamond is undergoing slowdown but as shown by the increased in revenues of Sarin, that is do not read too much from what the papers and expert saying about the slowdown of consumers spending in US and link it to Sarin. Diamond sale will not slump too much unless it is a deep and long recession. Now if you as a man are rich enough for a diamond ring, try telling your loving wife to be “sorry dear, no diamond ring for our wedding ok?”

While I am not happy with 1H2008 results but it happened to be in this way because the main reason is Sarin is destroying or does not care about reported profit as they are managing for long term. The increased in R&D is for the future, same as the increased in distribution, marketing and personal expenses. This whole industry in moving in the direction that is very favourable to Sarin that it is almost becoming impossible that Sarin will not benefit from it. Sarin future is the future of the industry.

Finite supply of diamond, increasing rich of the emerging countries causing the long term price to move upward. This make the polishing industry trying their best optimising yield per diamond as that can determine between making profit or loss for them. Sarin acquisition of Galatea which is said to be the holy grail in the industry by the board of director, is able to “see” the inside of the diamond so that planning can be done to get the highest yield per diamond. As they said, so far, no one has the technology that is able to “see” or what already in the market require to open a window(reducing yield) before any possibility of seeing and even with that it is still not prefect as compare to Galatea. Everyone in this industry is racing for the holy grail of seeing into the diamond, Guys from Galatea did it and Sarin, the strongest in the industry bought it. Now, if it is true and why should they lie, this will cause wonder to Sarin both in profit and competitiveness. Next, it seems like the polishing disc in finally on it way out of R&D. This is also another “help” to polishing industry as it reduce cost. These two new equipments, while not the only R&D Sarin is doing, they can change Sarin into a totally different animal. If nothing goes wrong, FY2009 will be the year where results come in.

Micro Mechanics

Finally, the result for FY2008 pour in, with Revenues up 10% while NPAT up 6.7%. In fact, if there is no change in depreciation rate, NPAT is flat. So no growth and dividend remain the same as FY2007 with 5 cents. MMH took a hit in 4Q2008 with lower profit with their new US factory. With increasing cost, depreciating US dollar, slowing down in semicon industry and maybe consumer spending, I see MMH focusing on building on their competitiveness, waiting and fighting their problems and like a depressed spring coil, the rebound will be high. But in the future, I think i have to accept a lower GP margin.

The future of MMH is small and by developing tool in the nanotechnology direction, MMH is in the right direction and with momentum, the future is bright.

I am in good companies.

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