Accounting Scandal on JEL Corporation (J16.SG)

I got to know about this company JEL Corporation (J16.SG) after one of my readers dropped me an email asking for help. This company has been halted for trading since 28-Sep-2007, due to accounting irregularities found by KPMG Forensic. As such, many are still holding on to their stocks and are unable to sell their holdings after 4 months.

This is one of the worst nightmares for long-term investors. So what exactly went wrong? Can retail investors anticipate such events and avoid buying into them? I ploughed through all their previous SGX announcements back-dated to year 2006 and concluded the following observations:

1. Year 2006 proves to be very promising as JEL captures more deals with prominent brands and directors have been purchasing the shares in the open market. In addition, Executive Chairman placed out his own shares to institutions.

2. However, things start to look cloudy during the start of Year 2007. New shares at $0.22 were placed out to investors Mr. Goh and Mr. Koh, raising about SGD 6.5 mil. There are no concrete plans as to how these proceeds are to be used, management highlighted that the proceeds will be used for working capital purposes.

3. Full earnings report for FY2006 was published on 26-Feb-2007. Though bottom-line seemed to improve by a good 18%, but it is a far cry from the 65% surge in revenue. The drastic difference in net margins raises a red flag. Some might argue we ought to exclude the one-time gain in operating income in FY2005 to compare the net profit improvement. Nevertheless, even by looking at the FY2006 figures, net margin is only 2.2%. A company with very low margins should be examined more carefully to ascertain the future profitability.

4. In FY2006 report, a dividend of SGD 5.8 mil is announced, which comes up to almost 75% of the 8 mil profit. This raises another question. Why did the company decide to give out such a high percentage of dividends? Why did the management make such a decision when the company is in a growing stage, with debt-to-equity ratio of more than 1, and it just raised working capital from share placements a month ago? Shouldn't the company retain more of its profits to assist in its growth? It seems to me the new placement investors are transferring their money to the major shareholders.

5. After looking at the cashflow statements of FY2006 and FY2005, it seems that net operating cash flow is always less than net profit, which raises another red flag. Net operating cashflow (OCF) tends to be higher than net profit since net profits include depreciation and amortization charges. Net profit in FY06 seems to be higher than FY05, but OCF still remains quite stagnant at SGD 4+ mil.

6. On 14-Jun-2007, management again intends to raise working capital by share placements of 20 mil shares at $0.33. First 10 mil shares were placed out successfully on 09-Jul-2007.

7. FY07H1 results were announced on 13-Aug-2007. Net profit were up 5.2% from the previous period to SGD 4.3 mil, but on closer look, other income made up SGD 5 mil, so the company actually made a loss in reality. OCF gets worse, though it might be due to the seasonality. OCF came in negative. It also shows that the company is a cash burner as the proceeds from the Jan 2007 placements have already been fully utilised in a short span of 6 months.

8. On 17-Aug-2007, Almaq Investment Group Limited decided not to subscribe for the 10 mil new shares. Caution must always be exercised whenever institutions decide not to go ahead with the share subscription. They probably have access to some information which retail investors do not have. This is the last red flag, which eventually triggered the trading halt of the company a month later.

I believe the above are clues, which question the management's capability and their propensity towards flawed reporting. In addition, it is advisable to avoid companies with market capitalisation less than SGD 100 mil, as depicted in JEL case. Such companies probably do not have a reliably long operating history and they might not be able to weather an economic downturn.

Even though we can scrutinise the figures reported in the earnings report and put in our best possible efforts to detect any creativity, we can never outsmart the management if they intend to cook their books. So in order to protect our capital, please bear in mind to invest only up to 20% of your assets in a single company.

Please note that my objective is to educate the public on identifying red flags in companies and exiting them timely. This post is definitely not to gloat over others' misfortunes in this JEL scandal. I sincerely wish that the truth be uncovered in the earliest time to redress the grievances of all JEL shareholders. Last but not least, I urge all retail investors to help one another by highlighting companies with possible traits of accounting frauds, thereby reducing the recurrence of such dire situations.

Mystical Warren Buffett

NetJets, the incontestable leader in the private jet business is flying higher these days. It leases planes to customers, and allows corporates or individuals to buy fractions of time to fly in private jets. The rental fees are not cheap, but they are definitely affordable as compared to the purchase of an entire aircraft.

10 years ago in 1998, Warren Buffett bought this company. Honestly, we might not even know of such businesses a decade ago. So why did the Sage buy into NetJets then? Might it be for his own convenience of flying with privacy, or did he foresee that global trade will extend to most parts of the world now in 2008? I reckon that it is the latter, as the Sage had always been able to anticipate the major events and invest much earlier than the rest of the herd. In modern days, higher managements of corporates need to have the ability to travel from country to country efficiently, timely and safely. These conditions are fully satisfied by NetJets, which explains their booming business.

I am ceaselessly impressed with Warren Buffett, and he never stops giving surprises to the investing community. Following this article, perhaps we should start thinking about how the world looks like in another ten years' time. Will we able to screen out a gem before everybody else? This should be the ultimatum for all the Sage followers.

Long Term Investing

I hope to educate more readers on the importance of long-term investing, as I realised many around me are still very new to this term. Some are afraid of it, and others are avoiding it. If we continue to put our savings in the bank, we eventually end up losing more money due to inflation, and this will definitely jeopardise our journey to financial freedom.

Please help to spread the investing habit to your loved ones. Thank you to all my readers for staying with me, given the infancy stages of my site. Rest assured that I will keep writing to provide good information.

In order to expedite the education process, I will be providing links to good investing blogs to share more knowledge to our community. I have added a new link under 'Good Reads', which demonstrates good value investing by Musicwhiz.

I really hope to bring more like-minded individuals into the investing community in the years to come. Cheers!

China Hongxing Sports (BR9.SG)

One of my reader has requested me to comment on China Hongxing Sports (BR9.SG) and its short-term and long-term prospects. Please note that the following should be purely used as reference purposes. I am only going to touch on the key pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities.

Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.

Background:

The Group is principally engaged in the design, manufacture and sale of sports shoes, sports apparel and sports accessories in China. It principally targets the youth market and the mid-range market segment of the sporting goods industry in China.

The Group manufactures its sports footwear at its production facilities in Quanzhou City, China and has a current annual production capacity of approximately 17.9 million pairs of sports footwear. It has plans to boost total capacity to 23.9 million pairs. The manufacture of sports apparel, sports accessories and a portion of its sports footwear are subcontracted to selected contract manufacturers who meet the quality and design requirements of the Group.

Pros:

1. Definitely a growth stock with a compelling story. Rides on the Olympic 2008 consumer sports frenzy. IPO price of $0.40 on Nov 2005 and it is at least a 5-bagger now if stock is held since then.

2. One of the leading consumer sports brand with growing market share trailing that of big boys like Li Ning and Anta.

3. Rising net margins from 9 months ended FY06 of 12.75% to 9 months ended FY07 of 18.85%, as a result of more footwear manufactured in-house.

4. Very low interest-bearing loans. Loans stood at 10 rmb mil as of FY07Q3.

5. Management has been delivering their promises till date and have been utilising the shareholders' funds efficiently. With the recent share placements, management has put forth many future plans which adds visibility to shareholders. They intend to further expand the sales and distribution network, advertise more aggressively, renovate and relocate older stores, establish 4 logistics centres and expand in-house production capacity.

Cons:

1. Noticed that the operating cashflow is always lagging behind the net profits by quite a gap. Not too sure why is this so, is this a trait of sports companies? If operating cashflow continues to deteriorate from net profit, it might signal that the company might not be reporting its profits reliably.

2. Branding is a very crucial asset to the company. Due to the short operating history, if negative news break out regarding the quality of the brand, stock prices will plummet. Advertising expenses will continue to climb in order to build brand recognition, though management assures to keep the expenses under 20% of revenue.

3. Company keeps increasing ASP to maintain/improve margins, which might result in smaller competitors producing counterfeit products and thereby losing sales.

4. Aggressive future plans, which gives rise to execution risks. But recent management share purchases in the public re-affirms management confidence in the company's prospects.

China Hongxing has been falling due to the recent correction and is currently trading around 68 cents. I will classify this company as a high-risk & high-return company. It has high volatility from a short-term perspective and this should be on the list of many traders.

I have previously profited from this company, though I am not vested at the moment. From a long-term perspective, this company is a viable purchase. This counter is definitely not for the faint-hearted.

Watchlist Updated

I have added a new company to my watchlist. You may view it by clicking on the right sidebar link.

Sunshine Holdings (Y34.SG) is currently priced at SGD 0.170 and I have calculated its fair value to be SGD 0.550. The company is principally engaged in the development of residential and commercial properties for both retail and office developments in selected cities in Henan Province, China. The company sells all the residential units and most of the commercial units, as well as provide property management services for its completed properties. It also leases out some of its commercial properties to retailers and companies.

Please be reminded that the companies listed on my watchlist are intended for long-term investing, so please do not expect instant gratification on the prices.

For my Readers

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A big thank you for those who keep supporting this site!

Think Like Warren Buffett

I chanced upon a good article from Glenn Curtis on how Warren Buffett thinks. Hopefully readers can change their mindsets and think like the greatest investor to improve their stock selections.

Following are excerpts by Glenn Curtis:

Many years back, Robert G. Hagstrom wrote a book about the legendary investor Warren Buffett, entitled "The Warren Buffett Portfolio". This book offers the reader valuable insight into how Buffett actually thinks about investments. In other words, the book delves into the psychological mindset that has made Buffett so fabulously wealthy.

1. Think of Stocks as a Business
Many investors think of stocks and the stock market in general as nothing more than little pieces of paper being traded back and forth among investors, which might help prevent investors from becoming too emotional over a given position but it doesn't necessarily allow them to make the best possible investment decisions.

2. Increase the Size of Your Investment
While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

3. Reduce Portfolio Turnover
Rapidly trading in and out of stocks can potentially make an individual a lot of money, but according to Buffett this trader is actually hampering his or her investment returns. That's because portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission dollars that must be paid in a given year.

4. Develop Alternative Benchmarks
While stock prices may be the ultimate barometer of the success or failure of a given investment choice, Buffett does not focus on this metric. Instead, he analyzes and pores over the underlying economics of a given business or group of businesses. If a company is doing what it takes to grow itself on a profitable basis, then the share price will ultimately take care of itself.

5. Learn to Think in Probabilities
Bridge is a card game in which the most successful players are able to judge mathematical probabilities to beat their opponents. Perhaps not surprisingly, Buffett loves and actively plays the game, and he takes the strategies beyond the game into the investing world.

Buffett suggests that investors focus on the economics of the companies they own (in other words the underlying businesses), and then try to weigh the probability that certain events will or will not transpire, much like a Bridge player checking the probabilities of his opponents' hands. He adds that by focusing on the economic aspect of the equation and not the stock price, an investor will be more accurate in his or her ability to judge probability.

6. Recognize the Psychological Aspects of Investing
Very simply, this means that individuals must understand that there is a psychological mindset that the successful investor tends to have. More specifically, the successful investor will focus on probabilities and economic issues and let decisions be ruled by rational, as opposed to emotional, thinking.

More than anything, investors' own emotions can be their worst enemy. Buffett contends that the key to overcoming emotions is being able to "retain your belief in the real fundamentals of the business and to not get too concerned about the stock market."

7. Ignore Market Forecasts
There is an old saying that the Dow "climbs a wall of worry". In other words, in spite of the negativity in the marketplace, and those who perpetually contend that a recession is "just around the corner", the markets have fared quite well over time. Therefore, doomsayers should be ignored.

On the other side of the coin, there are just as many eternal optimists who argue that the stock market is headed perpetually higher. These should be ignored as well.

In all this confusion, Buffett suggests that investors should focus their efforts of isolating and investing in shares that are not currently being accurately valued by the market. The logic here is that as the stock market begins to realize the company's intrinsic value (through higher prices and greater demand), the investor will stand to make a lot of money.

8. Wait for the Fat Pitch
Hagstrom's book uses the model of legendary baseball player Ted Williams as an example of a wise investor. Williams would wait for a specific pitch (in an area of the plate where he knew he had a high probability of making contact with the ball) before swinging. It is said that this discipline enabled Williams to have a higher lifetime batting average than the average player.

Buffett, in the same way, suggests that all investors act as if they owned a lifetime decision card with only 20 investment choice punches in it. The logic is that this should prevent them from making mediocre investment choices and hopefully, by extension, enhance the overall returns of their respective portfolios.

Believe Your Own Eyes

The Singapore market has been trending down since the start of this year. When you switch on your machine these days, more often than not, you will see a sea of red numbers. Companies are selling at cheaper prices day after day, but how cheap is considered cheap? And when do we know if the prices have bottomed?

Honestly, nobody knows when the prices have bottomed, so do not waste your time trying to locate the lowest price. Time will be better spent to look at the fundamentals of the companies, instead of looking at the daily price fluctuations. Till date, many people around me are not vested in the market yet, but the replies from them are always 'I will invest only after the market crashed!'. What puzzles me is that even after the market crashed, how do they know which company to invest in? There are 700+ companies listed in Singapore, so is it really so easy to reap the returns by throwing your money into any company? Some of you might rebuff that we can just invest in blue-chips like DBS, Singtel, etc. when the market crashes. You are right that eventually these blue chips will do fine when the market recovers. But again, why do you want to waste such a golden opportunity of gaining multi-folds (as opposed to a few folds) during a market recovery? Time waits for nobody, so please be prepared to grab the opportunity when it comes knocking.

The stock market is a human game. Different individuals react to the market differently. It does not matter the initial capital of the investment. I started off my investing journey with a mere SGD$ 1,000. The amount of the initial capital is not the key; what is precious is the learning process, the discovery of your investing traits as the years go by. You can only know more about your inner character when you are vested in the market, and the fine-tuning along the way will make you a better investor. Investing is a life-long education, so I strongly urge everybody to start investing early.

So in turbulent times like these, who can we turn to? For those who have prepared themselves well, this will be an opportunity for them. But for those who have just started investing, worries start settling in their minds. Honestly, nobody can predict if the market will go lower or spike up. You can rely on no one except yourself.

Do you believe what you see? I do, I believe my own eyes more than anything else in this world. So I trust the figures and information reported on the company/industry, instead of getting myself affected by others. It is based on these information that I derive the intrinsic value of the company. So did the company operate differently few weeks ago as compared today? I doubt, but it seems that some stock prices differ 50% in just a span of weeks. I have made more purchases recently, with the expectations that they will rise to my calculated value in years to come. Having said this, please do not be enticed to follow and purchase blindly. Even after purchases, please always ensure that you are at least 20% in cash and only invest up to 20% of your portfolio in one company. Your 20% cash will come in helpful to shoot flying elephants and in the event of fraud or insolvency, the exposure is capped at 20%.

S-shares have been hit pretty badly these days and some are really worth looking at. The market can go either way this year, but I am still on the optimistic side as I see many good companies at good prices. Everybody makes mistakes, but remember to learn from them and not to repeat them again.

Last reminder: Believe Your Own Eyes!

Cheers!

Options Trading

I had just attended a seminar in Novotel earlier this evening at 7pm. The seminar was conducted by Wealth Mentors and it is on Options Trading. There were two speakers for the entire session. The first speaker was Mirriam MacWilliams. She is the Chief Options Trader of Wealth Mentors and is a self-made millionaire. She trades for a living and she made over US$2 million in less than two years in the stock market with a starting capital of US$10,000. The second speaker was Aaron Sim. He is the CEO of Wealth Mentors and he has grown his business from zero to over $10 million a year in just 4 years.

Some of you might question why will I attend such a seminar when I am always promoting long-term investing? Do I have intentions to switch to a short-term professional trader instead? The answer is NO. My objective of attending the seminar is to gain more knowledge on the different financial instruments available in the market (and best of all, the seminar is FOC). I always feel that to be a good investor, we must always be open to new knowledge and information. Only with such an attitude can we keep improving ourselves to be better investors.

Basically, options trading is a method of leveraging your capital to generate high returns. So by having a 10% increase on a stock, it can result in an increase of 100% in options. I shall not dwell on the rewards/risks of options over stocks, interested readers can google it or read more via Investopedia.com.

There are many good points highlighted, but let me just share a few key points which is brought up during the session. Some of you might already realised them, but others might ponder about it:

1. Do you know how big the US market is? All the various US markets combined have a market cap. in excess of US$15 trillion. By comparison, Microsoft has a market cap of US$300+ billion, which is about 3 times as much as Singapore's GDP US$100+ billion. Having the largest market cap in the world, US market has the best liquidity and there are so many free sites providing information on US Markets. This makes investing/trading a lot easier, but why are there so many Singaporeans who rather trade in our local market and ignore the world biggest market?

2. The first key to a successful trade is the preservation of capital. This really surprises me when I heard it from the speaker. I have always thought traders are not as concerned about this rule. My perception on professional traders are very wrong and I am glad that I attended the class. I found out that there are actually many similarities between an investor and a trader.

3. Remain cautious after early successes. Many of us rake in huge profits but fail to protect them. Earlier gains are wiped out once complacency and arrogance seep in.

4. Create balance in your life. Even though investing/trading can bring you to the financial freedom which you seek, remember to enjoy the process with your loved ones. Get away from the market at least once a year to spend a holiday with your family. The Market will always be there for you, but the ones around you will not be always there.

I find the contents of the seminar pretty interesting, but the entire 4-day course costs more than SGD$6k, which puts me off. The objective of this course is to teach the 'trading rules' of Mirriam and allow any individual to profit consistently through options trading. Any of you care to share if such courses are really beneficial?

China Auto Electronics (T42.SG)

One of my reader has requested me to comment on China Auto Electronics (T42.SG).

Please note that the following should be purely used as reference purposes. I am only going to touch on the key pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities. Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.

Background:

The Company was formerly known as Snowcity International Holdings Limited and changed its name to China Transcom Technologies Limited in 2005. The Company changed its name from China Transcom Technologies Limited to China Auto Electronics Group Limited on 3 October 2007 following the completion of the merger with Tianhai Electric (Group) Corporation.

The Group previously is primarily engaged in the design and manufacture of a wide range of telecommunication, data network and transportation communication products in the PRC. The Tianhai Group designs, assembles, and manufactures wire harnesses, connectors, moulds, crimping machines, and electronic modules for the automobile industry. After the merger, the Company decides to focus fully on its core automobile parts and divest from the telecommunication business.

Pros:

1. The Company has a very high market share of 10% as a provider of wire harness to the automobile industry in China. Believed to be the top 4 in China.

2. The PRC automobile industry has been identified as a growth pillar. The Chinese government intends to push China as an viable player in the global automobile sector by 2010, and is willing to provide grants to boost efficiency and product improvements.

3. There are high barriers to entry to the automobile industry, as the qualification period for a component supplier to a automobile manufacturer can take up to three years. Being qualified to supply to 18 China automakers, it has many advantages to the rest of the players in the fragmented wire harness industry.

4. Interesting business model: Wire harness only makes up to two percent of the total car manufacturing cost, but being a critical component, automakers have to purchase them for every production. And once the automaker makes use of these customised wire harness for a particular model, it will be not practical to switch to other wire harness as it might run into design complications. Such recurring profit is a plus.

5. Net margin of 15% based on FY07 9M.

Cons:

1. Dependent on a few major customers, more than 50% of revenue came from 3 key customers. If any of these customers suffer a slowdown or switch suppliers, it will have a major adverse impact.

2. RMB appreciating and USD falling. This will have an impact on its bottomline since 20% or more of revenue was from export sales, which is in USD.

3. No track history as a public listed company for its core automobile business. I will try to avoid such companies as running a public listed firm is different from a private-held one, so will rather wait for management to prove its capability.

4. Unable to find out any future plans of this company, any readers care to share?

Actually, I received the coverage request on 7-Jan-2008 and the stock was trading at $0.595. In just a week's difference, it is now trading at $0.295, a 50% drop. It seems that the sharp fall was due to a price downgrade by DBSV.

Although there are many good points listed above, but I am still skeptical on the track history of this company. I suggest we continue to observe the company's results for the next few quarters before vesting into it. Nevertheless, for those investors who have been tracking this company for some time, perhaps you all feel that it is really a good time to enter. At the end of the day, you have to make your own decision. Remember, nobody cares as much as YOU on your own money.

DCF Valuation on Ouhua (AJ2.SG)

There have been queries from my readers regarding the usage of the DCF worksheet which I have put up previously. I did a brief calculation on a sample company Ouhua (AJ2.SG) and you may download it here. I have added some comments to aid all who are interested in using the worksheet. Any comments are welcomed and I am glad to answer any of your queries.

Peer Comparison

Peer Comparison is always on my list when it comes to determining if a company is a good buy. When all conditions specific to a company are satisfied, you can then proceed to compare this company with respect to other firms operating in the same industry/environment. Attached is a link from Investopedia.com which discusses about the importance of such analysis methods. Enjoy!

http://www.investopedia.com/articles/stocks/07/peer-comparison.asp?partner=basics

Daily Routine

Ever since my interest in investing grew, there have always been 2 sites which I visit every single day. They can be found on the sidebar under the header 'Daily Routine'. I can never go to bed without looking through all the SGX announcements and the research reports which are published by the various research houses. Reading of such information has became a habit of mine and it is through these exposures that my knowledge grew day by day.

I urge all who are interested in Fundamental Analysis to begin reading them too.

Readers are also welcomed to share good sites so that I can place them under my daily routine.

Watchlist Created

I have put up a watchlist for the companies which are worth taking note of. You may view it by clicking here. I will be updating it as I discover more gems. However, due to time constraints, I might include companies in the watchlist even before publishing its research report. Reason being I do not wish to see my readers miss any good opportunities due to the time delayed in my report publishing. Rest assured that I will put up detailed reports eventually.

Just a note, today's newly added company is China Fishery. It is a global integrated industrial fishing specialist with operations across the world's Oceans. Over the last few years, it has rapidly risen to become one of the fastest-growing companies in the fishing industry.

Subscribe to Posts Feed

To all my readers, if you find my site useful and providing good investing information, you may subscribe to this feed so that you get alerts whenever new articles are posted by me. Click here to subscribe.

Ouhua Energy Holdings (AJ2.SG)

One of my reader has requested me to comment on Ouhua Energy Holdings (AJ2) as he/she is vested. Following is some parts of the request:

"My reasons for not selling :
1. Oil has shoot up > US$100 but this counter has yet to move, shipping and logistic stocks like Cosco, keppel and Sembawang Marine seem to be taking a ride.
2. Ouhua is researching on adding Dimethyl-Ether (DME) to LPG, if successful, expected profits to move up substantially (a growth stock more?)
3.Venturing into emerging market - vietnam."

Firstly, I will like to thank this reader for the help she given me by sending me all related links and documents to this company. It is because of this help that I am able to give my two cents' worth in an hour. I hereby urge all other readers to do the same if they are in need of my comments urgently.

Please note that the following should be purely used as reference purposes. I am only going to touch on the pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities. Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.

Pros:

1. Prospects of the PRC LPG market remains bright with the government's strong initiative towards reducing pollution in the country. The PRC government has set the target of reducing pollution emissions by 10% to be achieved in the five-year period from 2006 to 2010, which is likely to promote the usage of LPG which is one of the cleaner and more efficient alternative energy sources.

2. 3rd largest importer of LPG in the PRC. Enjoys a significant market share being one of the few tier-one LPG distribution licence holder in the PRC.

Cons:

1. Low net margins of less than 5%. Not too sure what are the margins of its competitors, but personally do not favour such businesses as they tend not to be able to protect their profits when the economy goes on a downturn.

2. Income Tax of 50% will come into half effect by FY09, which will further squeeze margins.

3. From some websites, I gather that propane and butane prices are rising due to the rising crude oil. So with higher COGS, it is prominent that bottomline with be impacted.

4. During IPO, around 54% is allocated for general working capital, which is quite a high percentage. This flags out that not much future plans are in place.

5. In FY06, plans to increase production capacity from 900,000 tonnes to 1.2 million tonnes by end of FY07 (but this did not crystalise in actuality).

6. In FY07Q2, management informed that sales volume decreased as a result of road maintenance. Road maintenances should be known in advance and management should highlight this problem in advance to shareholders.

7. In FY07Q3, management highlighted road works only be completed by first half of 2008. Furthermore, the production capacity to 1.2 million tonnes can only be achieved by second half of 2008. Again, not much reasons are given.

8. Last but not least, there is an update on the utilisation of IPO proceeds in FY07Q3. Weirdly, no funds are utilised to expand the sales network till date, and all the general working capital is used up.

After looking through the announcements till date and weighing the pros/cons from the above, I will give it a pass to list more pros/cons and dig more into the financial details. The reader had actually asked for my advice whether cut loss should be done. However, as I have not cut loss on any of my holdings from my investing days, I am afraid I will not be competent to provide a good advice. But judging from my findings, I will stay away from this company as it will take at least a year for it to turn-around (if it ever turns).

Discounted Cash Flow Valuation

Some of my readers have requested me to share my worksheet on computing intrinsic value of companies. Basically, my primary way of computing a company's value is the forecasting of the amount of cash which is generated throughout the years. Using the discounted cash flow valuation, I will then derive the intrinsic value of the company.

There are actually many kinds of valuation tools out in the public, but till date, this have served me well. I have actually attached a copy of the computation worksheet here for my readers' peruse. This worksheet is created based on a 2-stage discounted cash flow model, i.e. it contains a first phase of growth which in this case spreads over 10 years and a second stage of terminal growth. Normally, I will not take into consideration the terminal growth as I will not be able to forecast the company's growth with certainty after 10 years. To sum it up, I will only invest when the current stock price is less than or equal to 75% of the intrinsic value.

Any readers who have any problems/queries pertaining to my worksheet can drop me a comment/email.

The toughest part of computing a company's fair value is not selecting the correct tool, but the ability to forecast the company's future earnings. As Warren Buffet quotes, "Its better to be approximately right rather than being precisely wrong."

Coverage Requests

There have been many requests from my great readers to express my opinions on specific companies. I am more than glad to help, but due to my limited time, it might take a while for me to make a comment.

To speed things up for everybody, I have thought of a way which all of you can help. On top of the company name which you indicated in the email, please attach all their present and past years' annual reports. Any available analysts' reports which you can get your hands on will also assist much in my research. And to be fair to all readers, kindly send me only one company name which you are interested in. Do wait till I commented on your company before sending me a new one.

Please note that my future opinions/recommendations on the companies should just be taken as reference. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities.

Last but not least, I will like to take this opportunity to thank all of you for visiting my site. I am really delighted to see my viewership increasing day by day, recognising that this site is not even a month's old. Rest assured I will continue to work hard towards providing good research information to all.

Cheers!
(P.S. I will be creating a new label 'Coverage Requests' for such post topics in future.)

Companies venturing into New Products/Businesses

As I was monitoring the market today, the sight of Sino Techfibre (AD8.SG) caught my eyes. This company had hit a high of $1.77 in Oct 2007, but have been trending down since and it actually plunged to $0.90 today, resulting in an almost 50% loss.

I have taken notice of this stock since Nov 2007. Sino Techfibre is principally engaged in the production and sale of PU synthetic leather and microfibre synthetic leather in China. It sells mainly to manufacturers and trading companies operating in the fashion apparel, sports apparel and equipment, luggage and travel accessories and upholstery industries. In addition, the company is supplying clothing materials to certain China government departments. It surely sounds like a good business to me as having the government as your customer is like a diamond discovered.

As such, I spent more time digging into the company's financials and details. But to my dismay, my brief forecasting of the financials landed me an intrinsic value of $0.65 for 10 years of DCF. Interested readers who want to know more of my forecast can drop me a comment. A few reasons which saw such a low intrinsic value are as follow:
1. Visible future plans only up till year 2009, which comprises of only the new PMP (paper pattern moulding) production.
2. As PMP is a new product to be introduced, the forecasted profits can only be derived using public sources, which is not a very good indicator.
3. Income taxes will be climbing yoy as tax holidays expire and margins get eroded gradually.

The stock price was actually hovering around $1.20 during my research. The company has an appealing PE of 13x for FY07 with that price given that it has achieved more than 30% bottomline growth over the past few years. For most investors, this will look like a really good buy. But as I have promised myself to research into a company for every buy, I prevented myself from entering. This is one of my investing rule too. Never buy into a company until ample research is done.

On top of the intrinsic value which I derived, I decided not to purchase this counter because a lot of future plans are based on new products, i.e. the PMP business. Even though this is a niche business in China, there is no track history or evidences that the company can profit from it. Personally, I do not like uncertainties and I do not feel good holding companies which cannot be forecasted comfortably. I am a pretty boring person when it comes down to business as I like stable businesses. So for me, I rather miss out a chance of getting into a cheap niche business, than to risk losing money if the new business does not meet expectations. So another investing rule of mine. Avoid buying into companies which have bulk of its future plans in new products/businesses.

Again, I am glad that I have adhered to my investing rules. Today, Sino Techfibre announced again that the PMP production is delayed to the second half of FY08. Previously, it plans to start production by FY07, then it delays it to early FY08, now turns out to be second half of FY08. There is still uncertainty looming around. On the other hand, it also announced a piece of good news, which is a new production capability of TPU. I am not able to comment much of this new production as I do not have much knowledge on it, but does this sounds familiar to an earlier post by me titled 'Sell on Good News?' A good point to ponder upon?

Nevertheless, I am still impressed by this company's ability to have the China government as their customers. This company will still be on my watchlist, though I will just monitor by the side for now.

Sell on Good News? Yes, at times.

As I mentioned earlier, Investopedia.com provides good articles on those new to investing. Attached is a link which discusses about selling your holdings when your company reports a piece of good news. Ironical? It looks so on first sight, but I totally agree with Glenn Curtis. And it is true, if you read between the lines of some companies' announcements, you will observe that many tend to incorporate some good news in the event of some bad quarters' reporting. Such 'dressing' should be digested with caution. Enjoy and read more about it:

http://www.investopedia.com/articles/stocks/07/sell-on-news.asp?partner=NTU

Happie New Year 2008!

I wish all my readers a Happie New Year 2008! May this coming new year bring joy and happiness to all your loved ones. Let great health be bestowed upon them too!

This new year marks a great milestone to me. I look forward to the challenges ahead and will persevere come what may. A stronger self will emerge by end of this year. Cheers!