Singapore Stock Market News

I had a few thoughts in my mind today.

It had been raining profusely these couple of days. The rain comes with high intensity and long duration - the type of rain that carrying an umbrella will still get you 30-40% drenched. Since I had to travel on foot often, I thank god for my wonderful high cut boots (had a low cut shoe but haven't dry when I had to 'wade' through the rain on Tues). It is while having dinner in this wet weather that suddenly I thought of straits asia.

I had this company once but had sold it long before it reaches the price that it is trading at now. Today, I was thinking about its business and wondering if it had strong sustainable earnings. Not too long ago, Straits asia was badly hit due to a force majeure on their coal mines in Indonesia, resulting from the extremely heavy rain. Looking at the local weather these few days, it's hard for me not to think of their coal mines back in Indonesia.

I didn't do my due diligence, but I suspected that straits asia are held by forces beyond their control. And they can't do much about it. These are the 2 forces:

1. Bad weather condition affecting coal mining condition. If la nina strikes, the effect of a prolonged wet condition can last 3-5 years, then el nino will strike. Since they mine coal and sell them, their revenue had to be dependent on weather condition, resulting in a cyclical business wholly dependent upon weather conditions. Since no one can predict the weather ever since man start doing it, one can extrapolate this result and say that Straits asia revenue is also unpredictable.

2. Commodity prices will control the price that they can sell their coal. They should fix their selling price in advance, so at least in this aspect, they can control the price of their commodity for a short period of time. However, company's A coal is the same as company's B coal (let's not worry about the different types of coal and which type is more suitable for which purpose), as such straits asia cannot have pricing power over their coal. If they choose to charge a more expensive price, then customers can buy it from others who can do it cheaper.

Of course this is a simplistic situation. Straits asia can acquire a lot of mines so as to monopolise the coal supply at least in their immediate region, forcing customers to buy from them (since logistical support to transport the coal plays a part too) - thus creating an economic moat around them. This moat is obviously short lived since a mine can be productive for a limited number of years - beyond which, it'll be too costly to mine 1 tonne of coal than before. How long can a mine last? I didn't research on that.

To improve their margins, they have to control their costs. I believe mining is a high capital intensive operation with high operational costs too. I wonder how much cost they can cut on these grounds.

Based on my thought experiment, I find that straits asia isn't the kind of business that I would like to own. Care to know my valuation of it? In an idea world, it should be someway around the vicinity of 0.745, not the current 2.930 that it closed today. Based on FY07 earnings, straits asia is now trading at PE multiple of 81 times. This is considered not too bad, cos just a few weeks ago, it is trading at 120 PE. Crazy world huh?

Another thought I had today occurred when I was reading a book in the library. Now, it wasn't the first time I heard of Mr.Market and his maniac depressive mood swings. But when I was reading it again, suddenly the proverbial light bulb in my mind lit up. I started to think about a world where business are valued at their proper prices in the market. Then I started to think about what might happen in such a situation

1. If business are valued properly, it will be an efficient market. In an efficient market, there is no chance to achieve above market returns. In such a situation, one just have to invests in as many stocks available as there is possible, so as to reduce the risks of having any 'dud' stocks that can go busts. The more diversification one has, the less risk. ETF is a good low cost option.

2. The stock quotes will only move significantly every time the company releases results. If the price move before the release of results, there can only be two outcomes. If it moves up, it's good news. Down - it's bad news. No ifs, no buts.

The above is ridiculous isn't it? So much about efficient market hypothesis and the idea of diversification so widely advised by financial planners. The market isn't efficient - at most I'll settle for fairly efficient. To acknowledge that fact is to agree that present economic principles are theories and ideal, and hence are at most a model to appreciate the forces at work here. To treat it seriously as a certainty is a folly.

I've always asked my students this: Newton's 1st law states that a body at rest will remain at rest, and a body moving at constant speed in a straight line will always move in that motion, unless acted upon by a resultant force. How does one know it's true? A body will never be at rest and a body is always acted upon by a resultant force. Just imagine a book resting on a table, it's not moving. Then earth is rotating, so the table found on earth is also rotating, which means the books rotates too. Earth rotates around the sun, the solar system rotates around the centre of the galaxy and so on. Nothing in this universe is truly 'at rest' and they are always acted upon by a resultant force.

Relativity overrides Newton's law. Why call it a law?

My overly active neurons are firing up so much these days :)

Yongnam announced a contract stating that they won a S$70 million structural steel contract in Delphi. The contract is to build Delphi international airport terminal building and is expected to have favourable material impact on FY2008 earnings.

This contract is significant not only because of its size, but more because of the significance of breaking into a new market - India.

I mentioned in my last post on Yongnam that its 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, an equivalent total contract size of $38 million will make the net earnings equal to FY07. It's a rough figure, because I realised that not all the earnings from the contract will be realized in FY08. But having won S$70 million, I can look forward to a better FY08 results at this early start to Yongnam's FY08.

This brings the total order book for Yongnam on 11th March to be S$232 million.

With another S$181 million contracts, Yongnam can possibly beat FY07 earnings even with the write-back included. Let's see how it all works out.

When I go the the hawker centre to eat, I never fail to notice that when a 'hot' stall is there, there are similar stalls selling the same thing near it. One particular stall is selling this chicken curry noodle.

There are 2 stalls selling this item, each of them claiming they are the original one. Both have the food shows 'mark of approval' upon them, signifying that perhaps under a certain programme shown on TV, the host had rated their stall among the better food stalls. One of them even have photographs of famous celebrities pasted on the wall.

This is how a healthy capitalistic system will work. Good money will chase good business. Let's say that Stall A which is selling chicken curry noodle is have a roaring business. Initially their customers will queue up and want to buy their food. Their returns will be very high since they are the only ones selling this particular item that everyone seems to want to eat at the same time. Their customers growth rate will also increase over time. And food is subjected to fashionable whims in Singapore (think bubble tea, donut, chicken floss bread). People won't mind queuing longer and paying a bit more to get it since Stall A is about the only store to sell it.

Here's where things get interesting. Competitors seeing that Stall A selling chicken curry noodle is doing such a good business, want to jump into the business too to cash in on the current craze. Stores starting copying this original store, all the way down to the most minute detail (I'm talking about where the cook stands, how the chicken are arranged, the font of the store, name of the store etc). Customers who didn't follow the chicken curry noodle story and wanted to try it out will get confused. All the stores sound similar, sell almost the same thing (until you eat them - but some people can't tell the difference either) and what's more...their price can be cheaper too. Now, why would anyone who wants to eat this want to queue a longer line at the original stall A? It's even hard to tell who is the original stall at this point in time.

Stall A start losing business to its competitors. Why?

1. Zero or narrow economic moat. To me, all the chicken curry noodle looks the same. If I come up with a duck curry noodle, I'm sure others will copy my innovation and I'll lose the edge over others in due time. Fickle customers have no brand loyalty in this business.

2. If all looks the same, customers will choose the one with the best perceived value. Perhaps Stall A presentation of the food is better, perhaps stall B has a shorter queue, perhaps stall C give more meat. I'm sure all the prices will be the same in equilibrium, since competition will force them to cut price if a particular stall sells at a dearer price.

3. There is no value added besides the food. There is little/no service involved, since this is a hawker setting. The taste of the food and the price is what counts. In a full fledged restaurant with waiting staff, perhaps other factors like ambience, decoration, accesibility etc counts. But not here. If you lose out in taste, the price better be cheap. If the taste is good, the price can be higher, but not much higher since there are so many substitute products within the same vicinity. Customers can always choose to eat others. I can eat laksa too if there are too many queuing for curry chicken noodle, or if the price is too steep.

So what can stall A do to maintain a certain moat to prevent competitors from eroding its profit? I came up with a few crazy ideas :)

1. Be such a good cost cutter that stall A can sell the chicken curry noodle at super cheap prices; prices that other competitors are unable to match. Source out the cheapest raw materials supplier, buy in bulk, open multiple stalls to have economies of scale. Try to cut cost so that the price charged can be cheaper. Though profit margin is reduced, revenue can still be high due to high volume turnover.

Feasibility: Next to impossible in a hawker stall setting.

2. Come up with innovative customer retaining schemes e.g. a card with 10 blanks for customers to fill up when they order a bowl of noodles, upon filling to 5 and 10, they can get an extra bowl free of charge. How about making the taste so addictive that customers are unable to find another substitute even among competitors? Secret recipes for their curry gravy perhaps? Special techniques to make the chicken more tender and juicier?

Feasibility: Highly likely, esp the part about making it so delicious that customers 'have' to come back for more to satisfy their craving.

3. Advertise aggressively to create perceived value in their products. A good example is Tian Tian steamboat. Having seen the advertisement countless times every few minutes in tv mobile in the past, the steamboat eatery had acquired the brand consciousness. But advertising must be consistent and repetitive, and can represent a certain cost to a single stall owner selling chicken curry noodle.

Feasibility: Possible but unlikely for Stall A.

4. Hire hot babes to serve. Ever been to hooters? Well, I've never but I've heard about it and seen them in action. Beer promoters work on this principle too. Pretty daughters might work too (yes, I've seen it before).

Feasibility: Interestingly possible. But have to see if this added cost will bring about any real improvements in business. It certainly won't affect me.

I'm sure there are more. I'll love to hear more from people who have something creative to contribute :)

Morale of the story: Next time you buy into a business, think about the competitive advantage that the business have over others. Discover the economic moat of the business, if there are any. This will uncover the long term survivability of the business.

It's becoming more and more apparent that we are entering a bear market. Volume starts to thin out, less buyers in the market, fall in prices more than rise in prices. I believe STI made a new low today...possibly going to find some reprieve around 2600 to 2700, as some had pointed out.

I think this is going to be a test on me. I am not confident of my investing, because my results do not show it. I'm still making quite a loss, due to my previous trading on longcheer and warrants. All these effort to reduce the magnitude of my error...it's not a feeling easy to swallow. It doesn't help that almost all my counters went down below their purchase price, underscoring my lack of knowledge on the intrinsic value of business. Yes, I admit that I didn't know valuation then and I'm paying literally for the mistakes now.

Such is the price I have to pay for such a grave mistake committed in the past.

But one should not live in the past, nor worry too far into the future. The moment is now; what can I do so that I won't repeat the mistakes again? As a proverbial phoenix, the older me had passed on and turned into ashes. A new phoenix shall then reborn from these very ashes and so a new life shall begin for me.