Posted by: donmihaihai | December 31, 2009

Common sense and 2009 purchases

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.

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Responses

  1. Dear Donmihaihai,

    Wishing you a Happy and Prosperous New Year! May 2010 be a year filled with good luck and good health!

    Warm Regards,
    Musicwhiz

  2. Same to you MusicWhiz. Happy New Year!

  3. Thanks for the Banyan Tree business model. Enlightening.

    And I think that their debt is more or less at the level where the bankers have to hold their hands to prevent them from falling. Keep them coming.

    Notwithstanding, we still have unresolved lawsuits, political risk, “uninsurable” Tsunami and terrorist threats. Temporary to a certain extent but could well cripple them.

  4. Cif5000,

    I take the lawsuit at company face value as it is about exploiting minority shareholder. If the lawsuit goes the other way, valuation change according.

    While political risk, natural disaster and terrorist threats can cripple Banyan Tree, what they are doing at CSR take me in. What they are doing for CSR is not just good for mankinds and environment but in long term very good for businesses that Banyan operate. That will also minmise political risk, natural disaster and terrorist threats as well. Lastly, diversification do play a part.

    I think ARA face a higher terrorist threat than Banyan Tree. Their main income from main asset should be in Singapore the top 10 list( In fact I think is top 3 to 5). Beside that, their main office happen to be at the same place. A serious act can destory major income and management team.

    I have a diff view on their debt level. At current level, it is not going to kill. In fact, once current CAPEX ended, debt will reduce according. For hotel/resort business, if the company can take care of their debts when profitability hit low level then the company has no problem when profitability go up as expenses is pretty much fixed.


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