Singapore Stock Market News

What's the difference between stubbornness and conviction? I was linked to this thread in Wallstraits by musicwhiz, but it was during one of those walks, with the pettering and pattering of the rain hitting my umbrella that I thought a little more deeply about this.

Let's give a scenario to this. I researched in company X and after months of research, I finally bought into company X at a price that I deemed attractive. The price of company X subsequently dropped to 50% of my buy price. If you've been in the stock market for some time, you'll realise that people always have opinions about the stock you're holding. It's good, it's dangerous, there's better buys, sell now, hold first, reaching support, touching resistance...those sort of opinions. Now what if some dear friend of mine told me to sell company X and I refused?

Am I stubborn or am I fully convinced of my investing prowess?




If there's a short answer, I'll say it depends. It depends on the timeframe that one is talking about and the outcome. In the short run, I might have lost 50% of my capital when the price sank 50% from my buying price, but who dares to say that the stock will never become a double or triple bagger in the future? Conversely, who dares to say that the stock will never go belly up and I'll lose 100% of my capital?

I think if the outcome of my investment goes in my favour, I'm not stubborn, I'm a person with strong views and conviction and not easily swayed by noises. But if the outcome goes against me, I'm just a stubborn fool and I could have cut losses when I could. Just think about Warren Buffett when he missed the whole bandwagon of dot.com and internet stocks. Nay-sayers are talking about him losing his 'midas' touch and is too conservative for his own good. Did you notice they said that when internet stocks went rocketing upwards while his berkshire hathaway went downwards? When the ensuing dot.com bubble burst, people started talking about Buffett as a person who knows what he is doing, and investing within his circle of competence. Blah blah.

If I learnt anything important in my 2 yrs of being in the market, it is this:

1. Don't be too quick to judge. Be careful when you say 'never', because never is a long time.

2. Don't try to rationalise too much. It's like seeing dark clouds in the sky and saying that it will rain. When it didn't, you say that the humidity isn't high enough to precipitate the water vapour, so it didn't rain. When it did rain, you say you're right because you saw the dark clouds and it always precedes rain. There are million reasons why something happens, so why choose a few to explain?

Hongguo released its 3Q08 results last Fri. It wasn't doing exceptionally well, but given the current state of matter, I think it's quite alright. Let's just do a quick one here.


Here's my thoughts on the statements:

1. Looking at the 3Q to 3Q results, revenue increased which is followed by an increase in both gross profit and net profit in absolute terms. However, gross and net margins fell slightly.

The increase in revenues comes from the increase in more stores (150 in total) selling both the main C.Banner brand and E.Blan. However, JUC outlets decreased by 10 in the 3Q. The Naturalizer brand also starting contributing a little to the revenue. Cost increases as there are more outlets opened, bringing down the net profits. It's good to know that the management decided to limit the expansion of more outlets in the midst of this financial crisis. It's a more prudent way of doing business.

2. A little worried about their net margins, which is declining for a few quarters. I believe their 2nd and 4th quarter is their better quarters in terms of revenue and profit. Take a look at their quarter to quarter figures.


One thing for sure is that their net margins are sliding down. SDA/revenue is getting higher too, which the management always attribute to the expansion in new outlets. So far, their expansion do not require taking any long term debts, which is safe in this kind of credit crisis. At least I know they are less likely to blow up!

3. Here's their current ratio, total debt/equity, ROE and EPS figures.


Current ratio is still alright, but there is an increase in the total debt/equity ratio. The increase in debt is due solely to an increase in short term liabilities. Two figures stand out strongly from the current liabilities section of the balance sheet : Short term loan of 40.9 mil RMB and increase in trade payables from 64 mil RMB to 104 mil RMB. Seems like they are squeezing their creditors more tightly by paying them slower. There are not increase in trade receivables though.

4. As for cash flow, there is a few things to take note of. There was around 20 mil RMB that others need to repay Hongguo. This is partly offset by the 30 mil RMB that Hongguo owed others. Overall, cash generation from operations is +ve, but after taking into account tax, it went to -ve but is generally in a better state than 3Q07. There is an increase in short term loans of 40.9 mil RMB which is mentioned earlier in the balance sheet - but there are no mention of what the loan is used for. It made up 16.7% of the total debt (they have no long term debts), so it's not a major problem. Cash flow should improve more as they plan to limit the expansion of their core retail outlets (I take it that they mean C.Banner and E.blan brands) to 150 by end of FY08. The management mentioned that they would be the productivity and the profitability of their outlets - which I think is a good move. Fight, consolidate THEN advance, that's the way of the infantry.

5. Breakdown of revenue:

C.Banner --- 56.4%
E.Blan ---- 9.6%
Contract manufacturing --- 26.2%
JUC --- 6.1%
Naturalizer footwear --- 1.7%

There is more closure of JUC to the tune of 10 more outlets. I think they are slowly divesting out from that. Another point to take note is the huge increase in the contract manufacturing segment. Compare this to 2Q revenue breakdown:

C.Banner --- 62.2%
E.Blan ---- 9.2%
Contract manufacturing --- 17.0%
JUC --- 6.9%
Naturalizer footwear --- 1.7%

Contract manufacturing is of lower margins than their in-house shoe brand, so I would expect the net margins to drop further. No more plans to expand their production capacity for their contract manufacturing. Management had stated that they wanted a revenue mix of OEM : Retail of 80:20, so that's what we should be looking at.




Value to price comparison:

Annualised EPS for FY08 is SGD $0.0606. On last count, the EPS I calculated was $0.06252. Last close is SGD $0.180 per share. This represents a PE ratio of 3x. To hell with historical PE, haha! The lowest PE was around 5x, but I think it broke all record now.

Applying Graham's strict (current assets - total liabilties)/shares outstanding, we get SGD $0.223 per share. Using NAV [(total assets - total liabilites)/shares], we get SGD 0.307 per share. Based on FY07 dividend, divided yield is around 7.8%.

Long time ago, I mentioned about Vicom being a prime candidate for value at around $1.50, fully unaware that it will hit around $1.50 so soon this year. At the lowest, Vicom was trading at around $1.30 near end of Oct 2008. They just announced their 3Q results today.

Here are the main ratios for Vicom over the last 9 months:

--------------------------9M08------------9M07
Gross margins--------28.8%-----------29.3%
Net margins-----------23.0%-----------23.4%
ROE (annualized)-----25.6%-----------25.1%
Current ratio------------1.57-------------1.35
Total debt/equity-------34.5%----------30.4%

NAV for FY07 is $0.70, for 9M08 is $0.7532. This means that it’s trading at around 2x NAV at current price of $1.53 at last closing.

For the past 9 months in the FY08, Vicom earns a PATMI per share of 14.89 cts per share. In a non linear world, let’s just take a linear assumption that everything can be projected in a straight line to 4Q08 – that gives us a PATMI per share of 19.8 cts per share. Last closing price for Vicom is at $1.53 on 11th Nov, giving us a PE of 7.7x. Historical PE might not mean much in these extraordinary times, but I feel we have to put the 7.7x PE in perspective. Past PE of Vicom range from 6.8 times to 7.3 times from FY2004 to FY2007.

I did a valuation for Vicom before. It ranges from $2.2 to $2.8 over a period of 10 years. At 1.53, it gives us a paltry CAGR of 3.7% to 6.2%. But as I think the real attraction lies in the dividend. FY2007’s dividend is around 15.5 cts per share. Assuming no change in dividends over the next ten years, and without growth in dividends, we’ll get back $1.55 in ten years time, just based on dividends alone. This means a 0% growth in dividends over the next 10 years. Historical CAGR of dividends growth is 50%, with FY06 to FY07 increase in dividends per share (special dividends included) of 29 %.

You might want to check this out:

Per share data:

-----------Div without specials---------Div with specials
FY04----------4.6 cts-------------------------4.6 cts
FY05----------5.2 cts-------------------------6.8 cts
FY06-----------7.9 cts------------------------12.0 cts
FY07----------15.5 cts------------------------15.5 cts

15.5 cts per share at $1.53 means a dividend yield of 10.1% - a good rate anytime.

Business wise, their segmented breakdown of business as a % of revenue are as follows in 9M08:

Vehicle inspection business – 30.6%
Vehicle assessment business – 3.6%
Test / inspection services – 59.2%

This segmented breakdown of their business to their revenue is more or less the same as their FY07 results. Their main business is still the test / inspection service which makes up nearly 60% of their total revenue, which shows an increasing trend over the years. Vehicle assessment business will continue to drop as their monopoly status on this business is removed by regulation. Test/inspection services in SETSCO will thus continue to be their growth engine, followed by their vehicle inspection business.





Verdict:

Seems like quite a nice combination of factors that make Vicom attractive to me again. I like the high dividend yield of 10% - even if it cuts the dividend to FY06 level, it’ll be around 7-8%, which is pretty decent to me. What is more attractive to me is that this company got pretty good cash flow, decent margins, low debts and boring business – quite a cash cow in my opinion. If they only hold on to FY07’s dividend and continue paying at the same rate without any growth over the next ten years, I would have gotten the cost of the share for free – I thought that the downside is pretty much covered. And we haven’t talk about the likely capital gains. Or the likely growth in dividends given. If the wind is behind the sails of Vicom, we might be even getting back our cost of the shares much earlier than 10 years.

There might be some issues at buying or selling the shares. As the float is quite low, there is always a wide spread in the bid/sell queue. I think this is like singpost kind of company.

Is this the best use of my cash?

This is a chart that shows the market cap before and after the sub prime crisis about a year ago. I think in a snapshot, we can see plainly who's the survivor and who's not.