Singapore Stock Market News

This day is a special day. For those whose age are multiples of 4 on this very day should know the significance of today. Today is the extra day that we added to February to correct the 365.25 days in a Earth year.

Thirty days have September,
April, June and November.
All the rest have thirty-one,
Except February the only one
Which Leap Years change
each fourth time
From twenty-eight to twenty-nine.
Century 100s don’t always leap,
each 400 years that leap we keep

The above poem actually describes which months of the year have 31 days and which have 30 days. February is the one that has either 28 or 29 days, depending on whether the year in question is a leap or common year. To determine if a year is a leap year or a common one, we carry out the following algorithm:

Let A = Year in question

EITHER A is divisible by 4
-------AND A is not divisible by 100 => leap year

OR A is divisible by 400 => leap year

ELSE, A => common year

To summarise, a leap year is a year which is divisible by 4 and not divisible by 100, or a year which is divisible by 400. A leap year would mean that the month of February will have 29 days instead of the usual 28.

Had this company for a while, but this is the first time I did a closer look at their financial statements. From the press release, it seems that Yongnam had a good result. A closer look should be able to see if this is really true.

----------------------------------------------2006------------------2007--------
Cost of goods (% to revenue)------------85.0%-----------------82.3%-------
Gross margin------------------------------15.0%-----------------17.7%--------
Net margins (include one off gains)---------3.5%------------------14.2%--------
Net margins (exclude one off gains)---------3.5%------------------6.9%---------

EPS (cents, fully diluted)-------------------0.65--------------------2.03---------
ROE---------------------------------------72.3%-----------------22.8%---------

First thing I noticed is that the gross margin is rather low. I guess that’s the kind of margin one will get from a construction firm. I need to do a comparative study between players in the industry to get a clearer view of this. Yongnam had a write-back of impairment in respet of an investment property, resulting in a one-of gain of $12,774,000. Discounting that, net margins improved from 3.5% in FY06 to 6.9% in FY07.

Second thing I noticed is that the ROE varies wildly from year to year. Some years is NA (as there are negative earnings), some years have 400% over. Inherently unstable business, due to the cyclical nature of the industry, I suppose.

Another surprise for me…I didn’t know that Yongnam is still having accumulated losses. Losses had been reduced from $26.7 mil to $1.89 mil in FY07. This reminds me of Aztech since they also had been reducing their accumulated losses over the years. Something bad must have happened in the past to make Yongnam like that. If I’ve known earlier, this would be a minus point for me.

From the balance sheet, I noticed that yongnam’s short term borrowings had dropped from 35 mil to 15.7 mil in FY07, while long term loans increased from 43.9 mil to 75 mil in FY07. According to the management, this is due to them securing a syndicated loan which was used to refinance existing borrowings, as well as to further working capital.

Yongnam listed a few points could grow their revenue and margins in the future:

1. A $14 billion plan in Singapore to improve the country’s road infrastructure in the coming years, including the construction of the marina coastal expressway, Thomson MRT and the Eastern Region MRT line. These major infrastructure works will surely need steel structures. All the underground structures will need such steel struts that Yongnam provides, if I still remember my engineering foundation.

2. Looking for growth opportunities in Middle east, especially Dubai since Yongnam has established a strong foothold in there with the Dubai Metro Rail project. Looking for more growth opportunities in India too.

3. Yongnam’s order book as at 31 Dec 2007 amounted to $162 million compared to $147 million as at 31 Dec 2006. Without counting the writeback impairment of 12.8 million, Yongnam’s FY07 net profit is $12.0 million. Assuming a net margin in FY08 of 6% (compared to 6.9% margins in FY07), this $162 million order will translate into a net earnings of $9.72 million. An excess of another 2.28 million (12 - 9.72 = 2.28), or an equivalent total contract size of $38 million will make the net earings equal to FY07 (without the write back of 12.8 million)

If we are to include the write back, net earnings for FY07 is $24.8 million. Again, based on a net margin of 6%, Yongnam need to cover up a shortfall of $15.1 million in net earnings or an equivalent contract size of $251 million in order to rival FY07 net earnings.

4. Their steel fabrication plant in M’sia is scheduled to commence operation by the first half of FY2008. By then, I should expect their margins to improve. A more comforting thought will be that their steel strutting business will grow even more, which is exactly what the management had planned. It’s good that Yongnam identified their strengths and work on leveraging it to exert a competitive advantage in this cutthroat business. Setting a steel fabrication plant should lower down the cost (I hope!).

There are still some contracts for the IR which is not awarded yet. What is the contract amount that is still up for grabs? If we know the amount, we can roughly see if Yongnam net earnings will be more or less than FY07 based on IR contracts alone. It’ll be excellent if Yongnam can derive more earnings from overseas then from Singapore. Let’s take a look at their segmented results:

For FY06
---------------------------------Singapore---------Dubai-----------M’sia-----------
Revenue (% to total)----------83.5%------------2.9%------------11.3%----------
Margin --------------------------9.5%-------------26.7%----------NA(neg earnings)-

For FY07
Revenue (% to total)-------------62.3%------------37.6%------------0%------------
Margin ----------------------------61.7%-----------18.6%------------0%-------------

As can be seen, there is a huge range of margins derived from the same place at different periods. Construction is really a hard business to place a value on, since their business variables are volatile and numerous. Thus order book really doesn’t mean anything as the margins can change drastically, depending on the conditions of the actual site to work on. There doesn’t seem to be a consistent pattern to base the revenue and the margins from, and hence I shall refrain from doing so too. If I ever do a valuation of construction firm, I must bear this in mind – the inherent instability of the industry will require a huge margin of safety and an equally conservative estimate of all the business variables.

Horror of horrors. I did a conservative estimate of Yongnam based on its net tangible assets (net assets – inventories – intangibles), and found that its NTA is only 8.09 cts. Okay, maybe steel materials can still sell for some value. Let’s give Yongnam a break and value the steel materials that it’s holding at book value, so its NAV will be 8.93 cts. If I assume that Yongam’s forward looking earnings in FY08 is the same as the FY07 (I take it as $24.8 million, including the writeback), applying a net margin of 7% will give me a forward EPS of 0.143 cts.

Adding together gives me a value of 9.1 cts of $0.090. Even if I double FY08 earnings, my value will be slightly north of $0.092. How about 10 times earnings for FY08 from FY07? I get around $0.104 – still a far cry from the present price of $0.245. How the hell did Yongnam go up to 50 cts in the past? My goodness…and I bought at 34.5 cts and 43.5 cts pre-warrants issue. Atlas, the dangers of not knowing the value of what you’re buying.

Yong said,

I spotted a few errors in your analysis and inaccurate statements. Allow me to correct them one by one.

1)"From hence on, there will be higher expenses from the rental of the building in which they sold and leased back. "

Ans: This is not true at all. Ossia is the master lessee of the building now. They pay a fixed sum of money for the rent of the building to MI REIT. Should they sub let out the units in the building to other parties and collect cash in excess of what they are require to pay, they would have a profit. And Ossia has confirmed that they are already doing that. They have also negotiated for a very competitive rent from MI REIT.

2) "Isn't Hong Kong part of Asia pacific? Why the disposal then? Money losing subsidiaries?"

Ans: Your analysis is inaccurate as you failed to consider the principle buisness activity of their HK subsidiary. Their HK subsidiary is involved in the selling of Millie's Lady shoes in China, Malaysia, SIngapore, HK, Taiwan and US. They only invested $10million for the business and opened up numerous outlets in China. Most of the earnings were in RMB and NOT HKD.

Results wasnt really fantastic at first, but they have mentioned many times they wanted to fight head on with Belle International-their biggest competitor. However, Belle International decided to buy them out at a bombshell price. Since the profit is in excess of 80million, why not take the money and invest in somethingelse?

SHareholders certainly enjoyed the 15cents a share special dividend arising from the disposal of the buisness.

And profit was eroding due to higher expansion and distribution cost, not becos of an increaisng HKD. In fact, its the SGD that has risen against the HKD that resulted in a forex loss. This loss was not possible to be hedged as the management didnt know the exact date as to when the money was coming in.

By the way, included on their balance sheets are results from Pertama holdings which ossia has a 50% stake in it. Do remember to factor that in.

Going forward, Ossia will focus on the retail industry, with possible selective acquisitions of other retailing buisness.

Perhaps you would like to meet the management over a cup of tea? I assure you that the Goh Brothers are very kind people who will look after the interest of Minority shareholders. If you look at the past announcements, the Goh Brother have been buying back Ossia's share at 15cents-26cents, and they are doing it because its severely undervalued.

-----------------------------------------------------------------------------------------------

First of all, a very grateful thank you for having read through the piece that I wrote for Ossia. I admit I didn't read a full picture of the Ossia business (in fact, I read only the latest full year report and base my article from there...anything that isn't in there, I wouldn't have known). I really appreciate your insightful comments and I thank you for your time and effort to give a qualified commentary of my post :) I shall proceed to give a qualified reply too.

A. The issue of the "Put and Call option" agreement for the sale of Ossia building along Changi Road with Macarthur Cook property investment Pte Ltd (MCK).

I did some background following your comments, so this is what I've dug up.

On 28th Feb, 2007, Ossia entered a put and call option agreement with MCK for the sale of Ossia building. Under the option agreement, and on the exercise of the option theron, Ossia will sell and MCK wil purchase the property for a consideration of S$33.8 million. The lease agreement is for a term of 7 years, payable on a monthly basis for a total of S$2.4 million per annum and subjected to rent review on lease year 3 and year 5. Subject to the rent review, the rent can be increased by 3.25% on lease year 3 and/or lease year 5 onwards.

I wanted to find out the present value of all the rent paid out for the 7 years of lease on the property, based on two scenarios and on an annual basis instead of monthly basis (which is the actual rental pay period)

Scenario 1: Increment of rent on year 3 and increment of rent again on year 5 (worst case)
Scenario 2: No increment of rent (best case)

I just set the discount rate as 0% to see what's the best price I can get for the two scenarios listed. The company's own evaluation of the net book value of the property is at S$30.4 million. MCK and their valuators valued it at S$33.8 million (which is the price that are paying). I really do not know how MCK valued the property, so perhaps you can shed some light on this.

For scenario one, I get a present value of S$16.8 million. For scenario two, I get a present value of S$17.4 million. Both are so way below the price that MCK paid out to Ossia. As you mentioned, Ossia really negotiated a very cheap rent from MCK. However, the question is what happens after the 7 years of lease is over. From my calculation, they can lease around 15 years if everything else remains the same, to 'break even' MCK's paid price of S$33.8 million.

Where did you get the information that Ossia is the main lessee of the building? Are there other tenants in the building? Where did Ossia confirmed that they are leasing out to earn rental profit?

B. On the issue of HK subsidiaries and Millie's shoes.

I did some background again.

Ossia marketing (HK) Co Ltd is involved in the trading and retailing of leather products and fashion, with cost of investment as $2,164,000. Osim International (HK) ltd is involved in wholesaling and retailing of footwear and apparel, with cost of investment is $555,000. Based on this, the total cost of investment is actually $2.719 million. How did you get the $10 million for the investment? Am I missing some things out?

I noticed that Ossia also have separate subsidiaries for trading for Millie's shoes in PRC, namely Millie's Shoes (Foshan) Co. ltd (they held 64% of effective interest) and another Millie's shoes (Shenzhen) Co. Ltd (they held 100% effective interest), both are trading in the business of footwear in PRC. While it is stated that Ossia marketing and Ossia international are principally engaged in the distribution and retail sales of footwear products in PRC, HK and macau. They're also the registered and owner of trademarks including "Millie's".

Does your extra S$7.281 million (10 - 2.719 = 7.281) come from the combination of the investment in these subsidiaries that are subsumed under Ossia international and Ossia marketing?

Having read more about Millie's shoes in their annual report for FY06, I realised that this brand and their products are quite well known in the region that they are selling. But what happened in FY 07...it's like HK segment isn't doing well. In just 1-2 years time, business turned around?

It's of utmost importance to be able to valuate this business as accurately as possible. By selling the two HK subsidiaries, am I right to say that they are in fact selling Millie's trademark to their competitor? I wonder if their sale of 80 odd million is worth the money, and how do you know it's a bombshell price? To me, it could be like buying a cow for $10 and selling it for $80, but forgoing the big business of milking the cow constantly for cash.

But thanks, really, for telling me about the real cause of the foreign exchange loss. I admit my mistake of not checking which currency is depreciating (never really good at currency stuff).

I'm also not vested in Ossia, so can't talk to the management. However, I do like to dispute that buying back shares need not mean that the shares are undervalued. I mean there are many reasons for that. Perhaps they are really cash rich and are obliged to increase shareholders's value (and ultimately their coffers as they own 60% of the shares).

I also do not read more about the Pertama holdings investment. Am i right to say that they own 50% of harvey norman? I do hope that my reply give justice to the effort you put in to comment on my post :)

I saw a few interesting reports today, but I chose old chang kee :) Oh, before that, Swiber won some projects worth US$20 million in M'sia and Indonesia. Keep it coming, swiber!

Okay, let's get down to Old chang kee. It's just out of sheer curiosity that I'm interested in their full year financial results. I liked their curry puffs in the past and I always see long queues of people buying their stuff, so naturally I'm interested to see if popular products equates to good business. Old Chang Kee (OCK) recently IPO.

Revenue increased 20% from FY06 to FY07
COGS increased correspondingly by 21.6%
Gross profit rises 19%

The rising prices of flour and other raw materials which OCK used to produce their products must be the culprit here. Does this remind one eerily of Synear, the company that sells dumpling that recently got whacked real hard? Synear also have to cope with rising pork and flour prices that affects that COGS and consequently their margins. Revenue, as the management said, rose due to an addition of 13 more outlets in Singapore. Does it mean that if OCK opens more outlets, their revenue will go up? That's interesting...as it means their products is so popular (which I agree to a certain extent. Just go to OCK outlets and watch the queue during the evening rush hour).

An interesting thing here is the rise of 111.4% of 'other operating income'. They stated that they started to sell their used oil which contributes to S$170,000 in FY2007, which is 0.4% of their total revenues. I think OCK should explore more about this incidental stream of revenue as used oil if thrown away is seriously a waste of money, considering how much oil they use each day for their total outlets.

Net profits dropped 2.5% though, despite having one-off gain from selling their wholly owned subsidiary named 1901 Singapore pte ltd, which operates five 1901 Hot dogs outlet (never heard before). Revenue from 1901 hot dogs contributed to 2.6% of total revenue in FY07, so it wasn't exactly a bad decision. I think OCK is trying to streamline their business, and doing what they do best - which is curry puffs. Again, my wish list for OCK - to provide a revenue data segmented according to products. I think that will be too much to ask for...it's not a wish list for nothing :)

-----------------------------2006-------------2007----------
COGS (% to sales)----------40.9%------------41.4%---------
Gross profit margin---------59.1%------------58.6%---------
Net margins-----------------9.0%-------------7.3%----------
ROE (i used total equity)----39.8%------------30.2%--------

Doesn't look good huh? Even with all the disposal of subsidiaries and hence one-off gains, net margins went down. This is not due to direct cost of goods, but rather something that happened between the gross profit and the net earnings. I'm not really interested to find out what at the moment. ROE isn't exactly encouraging, doesn't look stable.

What i'm really interested in are the red flags detected when I browsed through their financial statements:

1. Under pg 3 of 14, in the balance sheet, there is under 'current liabilities' this very interesting item, "Club membership - current", amounting to $15,000. There also a club membership payable - long term, under non-current liabilities, amounting to another $5000. Are you thinking of what I'm thinking. There's no mention of this in the report, so perhaps if one is interested, one can look for the IPO prospectus for more juicy details.

2. OCK is making quite a lot of short term and long term loans. Increment of 79% of short term loans (both secured and unsecured) and an increment of 222% of long term loans, as at 31st Dec, 2007. Any reasons for this big rise in loan amount? Expansion in PRC? Expansion in Singapore/M'sia?

Net gearing went up from 12.7% in 2006 to 19.2% in 2007.

**net gearing defined as (total liabilities - cash & equivalents) / (total assets - intangibles) x 100

3. Amount due to a related party makes up $2000 found in the balance sheet. In cash flow statements on page 5, there are bad debts written off from "loan from related party" amounting to $77,000 in FY06 and another "loan to an associated company" amounting to $13,000 in FY07. Did you hear my alarm bells ringing? There's more...."provision for doubtful debts - amount due from associated company" amounting to $116,000 in FY07. There's quite a number of these dubious items. Who are these 'associated companies' and 'related party'?

I saw in page 11 that there is a bad debt written off relating to a loan from a related party (an employee of the other shareholder) and investment written off in FY06 of $219,000. More light to shine on this issue please?

Funny isn't it, with all the club membership and related parties and associated companies. Didn't know that we can lend money to an employee just like that. Hmm, I thought curry puffs are simple business, but I think I'm so far from the truth. There's a lot of things hidden between the financial statements, and I wonder who will buy the business. At the current price of $0.200, I consider it very expensive. Why?

With poor earnings visibility, doubtful items in financial statements, overly optimistic outlook (management mentioned the food and beverage industry remains positive due to events and projects like Formula one and the successful bid for Youth olympics and the IR project.....I have to struggle not to scoff at such statements. They did mention rising cost, rental, oil prices and other raw materials to make the industry competitive), I think the valuation is short and sweet.

I'll just take net assets - inventories - intangible = $8,998,000
then find out the number of shares outstanding = 68,400,000
then do a division = $0.1316 per share

Revenue in 2007 is $40,548,000
CAGR revenue from 2006 to 2007 is 20%

Projected 2008 earnings (based on CAGR) = 1.20 x 40,548,000 = $48,657,000
Projected 2008 EPS = 4,8657,000/68,400,000 = $0.7114
Assuming net margins in 2008 to be 7.3% (same as 2007),
net EPS = 7.3/100 x 0.7114 = $0.052

Based on my newbish model of valuation = 0.1316 + 0.052 = $0.183 (this is totally unorthodox, so don't follow me)

Given the circumstances, the margin of safety is set at a high level of 50%.
50% x 0.183 = $0.090

Good for one more puff, if it ever reaches that price by FY08. The valuation is mainly for fun, don't treat it like it's a buy call at that price please :)