Singapore Stock Market News

I just finished reading the Warren Buffett Way by Robert G. Hagstrom. Not particularly a good read for me, so I'll rather not review it. Sometimes I do wonder if the sequence of the readings will affect the satisfaction of reading a book. I think so, to a huge extent. When I didn't know better, I suppose I'll have thought that the Warren Buffett way will be a good reading. But for me now, it seems a little diluted and leaves me craving for more.

In addition to that book, I also borrowed another tome by Ken Fisher, son of Phil Fisher. The book is titled "100 Minds that made the market". I mean it when I said that it's a tome. Specifically, it's a 390 over pages thick tome about 100 individuals who made contributions (either good or bad) to the investment sphere that we know today.



The reason why I borrowed it is because (in order of importance)

1. It's a brand new book - I'm such a sucker for new books because I loved the smell of it. Nothing excites me more than reading a brand new book for the first time :)

2. I love reading the past. There are 100 individuals listing in the book, detailing in 2-3 pages their autobiography and their impact. I think I'll be wonderful to trace the history of all these people.

However, given my time constraints, I'm afraid I'll have to forego reading that book. It's unfortunate but necessary. I still have a list of readings that are more urgent than the history. These are:

1. The Intelligent Investor - I've not finished reading it despite having it for some time. It wasn't a good read for me the last time I tried reading, since I'm more inclined towards trading. Hopefully my dozens of investment related books will prep me for this blockbuster of a book. Problem about this book is that it's too heavy to carry it around everywhere I go, which makes it hard for me to pursue reading. I read during nonsense waiting time like in the trains.

2. Security analysis - Same as above.

3. Berkshire's annual report - this is the worst of it. I HATE reading from the internet and that is my main inhibition. I'll see if there are print versions of it in the library...that will really really make it more conducive for me.

I'm excited yet fearful of what my holdings will be like in the future. To quote biblical text, let me work out my own salvation with fear and trembling.

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

Chairman for bullythebear is going to write a half year report statement coming end of may. Watch out for it!

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

I still can't stop browsing the 100 minds that made the market. As Ken Fisher said, he wrote the book for fun, which I think it's true. I read about a few luminaries of the investment sphere, Rothschild, Morgan, John Law, Benjamin Graham, Rowe Price, Charles Ponzi, William Hamilton, John Maynard Keynes, Jesse L. Livermore and Hetty Green. Hetty green is by far the most interesting of them all, also known as the "Witch of Wall street". Perhaps one day I'll just blog about her :)

Seems like it's one disaster after another. Myanmar had barely finished with its cyclone and China is struck with a 7.8 magnitude earthquake.

A couple of china companies listed here came forth to offer help and aid to survivors - something which I found touching. There's a lot of announcements today regarding whether any of them got hit by earthquakes.

1. China Sports - not affected. Only 4% of assets are held around the region but no points of sale in affected region.

2. Synear - production plant is in Chengdu. Plant did not suffer material damage, neither are the staff hurt, but for safety precaution, plant is shut down on 13th May. Unable to touch base with about 8 distributors in the worst-hit areas. Synear will contribute 1 million RMB to Red cross for victims.

3. Hi-P - has a small operation near Chengdu. Has to be shut down due to no power supply until power supply resume. Expected to be minimum impact.

4. CentraLand - had two current development projects located in Zhengzhou, Henan province, located 1050 km from epicentre. Group's operation not affected.

5. China xlx - Plants is located at Henan, 1000 km from Sichuan. Expected to have no impact on operations.

6. Ferrochina - not affected.

7. Sino-env - not affected. Sends condolences to victims and is currently looking for ways to aid survivors of the disaster.

Seems like most are not affected. Synear is the most affected of them it seems. Money isn't everything, you only have 1 small fragile life.

Management

Three of the founders of Hongguo, Chen Yixi, Li Wei and Miao Bingwen are serving in the board as directors. Chen Yixi is the executive chairman, Li Wei is the Managing director and Miao Bingwen served as the executive director until 1st March 2007, where he became a non-executive director.

There is no employee stock options plan, hence no issues of the shareholder’s stake in Hongguo diluted. Furthermore, there is no stock buyback by Hongguo. There are no employees who are immediate family members of a director and whose renumeration exceeded S$150,000 since FY03.

Here is the breakdown of the founder’s salary indirect plus direct interest held:



We can see that the founders hold a substantial stake of their personal wealth being a stakeholder of the very own company which that set up. The executive chairman, Chen Yixi, alone holds 25.8% (direct and deemed interest combined) of the shares outstanding of Hongguo. Based on a market capitalization of SGD 204 million, that’s a cool SGD 53 million just by Chen Yixi alone. As a whole, the founders hold a 46% stake in their own company – a sure sign of confidence in their own baby.

There is ample planning and disclosure of the management’s plan for Hongguo, all stated clearly in their annual reports. It’s important to check this against what had been done over the years. Below shows the plans laid out and the check if the plans are carried out in the future:



I think the management did a very good job informing shareholders what they intend to do, so that they are no surprises. Their plans for expansion of their POS are very close to the actual POS set up in the future. Furthermore, all their design output targets and annual production targets that are set way in advance had been met uncannily.

A final look at the ROE and ROA will wrap up my analysis of the management of Hongguo. ROE is consistenly around 21-22% range, averaging 22.2% over 5 years since listing in 2003. ROA is improving from 13.66% in FY03 to 16.26% in FY07. Both of these figures show a certain level of competence in their business and management skills.

I find it very interesting that Prime Success and Belle are eagerly pursuing the sportswear segment and cited that the coming Olympics are going to ignite this sports fever in China. However, Hongguo did not once mention about going into the sportswear segment despite the show of confidence by their competitors. Doing business within their own circle of competence or too slow to respond to changing competitive landscape? Time shall tell.

What needs to be done is to attend their AGM.

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

It took me some effort to get the IPO prospectus of Hongguo, since the prospectus was dated 23 May 2003. I like to look at the IPO prospectus because with the benefit of hindsight, we can see if the ‘future plans’ listed by the management in the prospectus are fulfilled. Tracking management’s plan is one thing, checking to see if there is a major shift in their plans is another, so these are the 2 areas in which I’ll be looking for.

This is their plans stated in the prospectus:

1. Expansion of retail network and consumer base
a. Expand distribution network of department store outlets in major PRC cities to capture consumers with higher purchasing power

b. Launch customer loyalty privilege card program to develop customer database and to inform customers of new designs and promotions

2. Introduction of new brands and product lines
a. Expand stable of brands

b. Acquire established brands, and possibly production facilities and distribution network that come with acquired brands

c. Develop other brands

d. Introduce new product lines such as men’s fashion shoes to target different market segments

3. Expansion of manufacturing facilities
a. Acquire new equipment to increase production capacity

b. Carry out planned expansion where there is sufficient market demand

4. Contract manufacturing
a. Increase contract manufacturing operations

5. Trading and manufacturing operations in Jordan
a. Set up production facilities in Jordan to manufacture shoes for customers in USA when conditions are favourable

Comments on:

1. Basically their game plan for growth is still the same. They did expand their retail network from 280 POS in 2002 to 840 in 2007 and they also acquired Jiangsu Unity corporation (JUC), a chain of 63 boutiques carrying mainly foreign brands. As for launching of customer loyalty privilege card, it was not mentioned in previous annual reports. However, it was stated here that repeat customers are rewarded with gold and silver privilege cards to receive a 10-20% discounts on future purchases. Not sure if it’s still valid though, as it’s dated back in July 2003.

2. They did expand their holdings of brand, especially after acquiring JUC. The brand holdings under JUC include Byford, Hugo Boss, MaxMara, Bodyline, Ermenegildo Zegna and Tommy Hilfeger. The more recent brand in which Hongguo hold exclusive distribution rights include Naughty Monkey. Naturalizer and Via Spiga rights are accorded to them via a joint venture with US-based Brown Shoe Company in 2nd half of 2007. Besides acquiring established brands under JUC, they developed another house brand called E.Blan. As for men’s shoes, Hongguo distributes Lumberjack brand of casual shoes for men and women which Hongguo had an exclusive distribution rights in China. Besides that, they plan to have urban business/casual men’s shoes brand, as stated in their FY06 slides.

3. Manufacturing facilities expanded to 4.1 million shoes per annum. Expansion of design facilities in Guangzhou enabled them to design 6000 shoes per season in 2007, compared to only 600 designs per season back in 2003.

4. Revenue coming from contract manufacturing segment increases from 10% in 2003 to around 20% in 2007, representing an increasing proportion of Hongguo’s business. Management wanted a retail to OEM ratio of 80:20 mix, which is what we see in 2007. Besides Nine west, their contract manufacturing business include other notable brands like Kenneth Cole, Guess and Colorado.

5. I do not know much about their Jordan business as not much is mentioned.

I think the management did a fine job stating in advance what they had in store of Hongguo and they had the track record to prove it. Moving forward, the managements stated in FY06 slides that their plans forward is as follows:

1. Going to propel Hongguo as a fashion goods and branding company driven mainly by footwear distribution

2. Retail vs OEM maintained at 80% : 20% mix

3. Develop a comprehensive industrial chain to build up a leading status in the market to enjoy long term competitive advantage against other players

4. Construct a brand portfolio and product portfolio
a. E.Blan – transformation from a shoes brand to a multi-brand footwear store chain brand

b. To include a series of ladies’ fashion brands covering medium to high end market, including shoes, handbags and accessories

c. Urban business/casual men’s shoes brand

5. Maintain 8% to 10% annual same store sales growth
a. Open 100-150 new stores annually from 2008 to 2010

6. Enhance logistics and information system
a. Enhance sales system and update POS system

b. Streamline logistic process

7. Form alliance with outstanding companies internationally

If all goes according to plan, we can see a greater net margins and slightly slower POS increment in the years to come. I see that the management has no plans to venture into the sportswear segment and is cutting their niche into exclusively ladies fashion wear. No institutional imperative, it seems.

Financial health of Hongguo

In the midst of analyzing the ROE, I’ve calculated the financial leverage ratio. Financial leverage ratio gives a good feel of the amount of leverage used. The figures are as shown:

Financial leverage---------Year
1.44--------------------------2003
1.43--------------------------2004
1.46--------------------------2005
1.38--------------------------2006
1.37--------------------------2007

Judging from the ratios, we can see that Hongguo isn’t overly extending itself. In fact, it should be less leveraged as the years go by. Let’s take a closer look to see if the financial status of Hongguo is as shown by the financial leverage ratio shown above.



Debt to Equity (total liabilities/share holder’s equity)

Debt to equity of Hongguo decreases steadily from 2002 to 2007, which is what is suggested by the financial leverage ratio. Looking at the balance sheet, there are only two years, 2003 and 2004, in which Hongguo had long term liabilities in the form of term loans. After that, there are no more long term liabilities.

On the other hand, Prime has a higher Debt/equity ratio (about twice as much) than Hongguo. This can also be seen by their higher financial leverage ratio shown in earlier post. Belle is harder to tell, since there is only one year since listing to compare.

On the whole, I’m very satisfied with the debt/equity that Hongguo has. It’s the second lowest among the three. A debt/equity averaging 0.43 since listing in 2003 is definitely not a sign to worry about.

Current and Quick ratio

Current ratio of Hongguo shows a slight downtrend. Considering that in FY07, its current assets are more than enough to pay off its current liabilities 2.77 times, I’m hardly worried. Even a more conservative quick ratio suggest that in the same year, the current assets without taking into account Hongguo’s inventories can pay off its current liabilities 1.46 times. Since Hongguo only has current liabilities, I think we can safely give Hongguo a clean bill of financial health.

Prime has a lower current ratio and quick ratio, with quick ratio less than 1 throughout the years. While I don’t think it is having any insolvency issues near term, I dare say that Hongguo has a stronger balance sheet than Prime. Belle has a rather strange current and quick ratio, but let’s not bother too much into it for now.

To add the cake to the icing, let’s take a look at the amount of cash that each company holds as a percentage to their total assets.

Cash/Total assets (%)--------02--------03--------04-------05-------06-------07
Hongguo-----------------------4.9------35.9------14.5------10.3-----12.2-----10.3
Belle-----------------------------------------------------------------------6.8-------38.5
Prime Success----------------16.8------18.0------11.8-----10.2------8.7-------7.7

I’ve a feeling that Hongguo management wanted to grow, but at a sustainable pace backed by a series of successful points of sales (POS) and funded by their own internal cash flow generated. They can borrow from banks to really aggressively open up new stores, but they didn’t. In fact, they are sitting on around 10% cash out of their total assets. While this might hinder their growth somewhat by not aggressively pursuing an all out approach to expand, I believe this prudence will bring about a longer and more sustainable growth in their business over time.

Here’s Hongguo’s financial health report – a strong balance sheet with around 60% equities and 40% debts on average, no long term liabilities or bank borrowings in recent years and with enough assets to pay off their liabilities at least 1.5 times over. I’m more than satisfied with them.

What a prolific day today! I had one of the free-est saturday that I can recall from recent memories. I managed to finish Peter Lynch's One up on wall street today in the library.

One up on wall street is really a great reading! His style is more informal. Coupled with his wit and humor AND his enlightening advice, I think this is really a page turner for me. It mentioned on the front cover, "More than 1 million copies sold" - I think it is really that good to have sold a million copy.




There's so much information in this 300 page book that I do not know where to begin reflecting. I'm thinking of adding this book to my wish list of investment book that I would read again and again. Let's just start by reflecting on the points which lit up my proverbial light bulb.

1. I learnt the importance of placing the price of the chart against the earnings of the companies. This is not primarily to see how the market reacts to earnings, but to see how the earnings fluctuates. I 'practiced' this by Prime Success and Hongguo, but atlas, their earnings are too stable so it didn't show much. It'll be interesting to place a cyclical stock against the price.

2. Peter classifies stock into 6 general categories:

a. Slow growers

These are large and aging companies, with low earnings growth and usually large, regular dividends. I immediately think of yellow page. After thinking further, perhaps Singpost fall under here too.

b. Stalwarts

These are the 'blue-chip' quality stocks, with earnings around 10-12% growth. Risk is rather low for this type. Coca-cola, P&G from US side are quoted examples. I'm hard pressed to give an example in the local stock market. Help?

c. Fast growers

Smaller, aggressive companies growing 20-25% annually. Possibly a multi bagger, but with higher risk. Hongguo and China milk springs straight to mind.

d. Cyclicals

Companies whose sales and profits rise and fall in regular cycles. Construction plays come to mind. Tech stocks too.

e. Asset plays

Asset plays are companies that are sitting on a valuable asset but the rest of the crowd do not know. Hongfok (sitting on Concourse at Beach road), SPH (Paragon) are possible asset plays. Am I obsessed with singpost? Singpost might be possibly asset play too (sitting on Paya lebar site which they could dispose for a huge one-off gain).

f. Turnabouts

Those that have been depressed and battered, poised for a turnabout. Osim, creative comes to mind.


The book then goes on to list the pointers to look out when buying these 6 categories. There's even a section to tell you when to sell these 6 categories. All great stuff.

3. I think this is the most enlightening part. Peter's view on the growth of a stock and the PE struck me off as highly sensible. PE of any company that's fairly priced will equal to its earnings growth rate. That means that with a PE is 10x, then the earnings growth should be 10% growth. Some stocks are trading at breakneck 60x PE, so the question one needs to ask is that is the earnings growing at 60% too?

Peter suggests a more complicated formula to include dividends. Take the long term earnings growth rate, add the dividend yield, then divide by PE ratio.

If ratio < 1 ---- bad
If ratio around 1.5 ----okay
If ratio >= 2 ------- good

But if Company A grows at 10% with a PE of 10x is compared to Company B that grows at 30% with PE of 30x, even though both have a ratio of 1.0, Company B should be a better bet. Of course, this assumes all else being equal, which is ideal and never the case in practice.