Happie New Year 2009!

Wishing everybody a great new year 2009 ahead! May all your wishes come true; and great wealth and longevity coming your way! Cheers!

Watchlist Updated

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

China Sky Chemical Fibre (E90.SG) is currently priced at SGD 1.500 and I have calculated its fair value to be SGD 2.030. The company is a leading manufacturer in China, and is engaged in the sale of chemical fibres, mainly high-end nylon fibres, with a wide and diverse range of commercial applications ranging from high-end sportswear and casual wear to other consumer products like curtains, tablecloth, upholstery and decorative materials, shoes, bags, luggages, umbrellas, tents, ribbons and nylon webbings.

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.

In addition, SP Chemicals had released its full FY07 results, so I will be reviewing the intrinsic value.

Happy Lunar New Year 2008

I wish all my readers a Happy Lunar New Year. May everybody be blessed with great wealth and blissful health for the Year of the Rat.

New year brings new beginnings and I shall work hard towards my dreams! I feel so good this new year! Every new year seemed to be better than the previous one. Having your loved ones by your side during such festive seasons is one of the great joys in life. Enjoy and treasure all these moments. Cheers!

New link added to Daily Routine

I have been looking at the companies listed in the Hong Kong Stock Exchange more frequently these days. As such, I have added a new link 'Daily HKSE Announcements' to the side-bar section 'Daily Routine'. Interested readers can take a look at it.

After looking through a few companies listed in HKSE, I discovered that the valuations of companies listed in SGX are really cheaper compared to that in HKSE. Really makes me wonder why is this so? Can it be the liquidity and exposure differences between the two exchanges? It is quite depressing to see two companies with similar earning power to be trading at different prices solely because they are listed in different exchanges. But again, the same applies to individuals as well, they are able to price themselves differently in different countries, drawing vast differences in wages.

Guess the most important thing is to invest to our advantages, be it in the stock market or in the employee market. May everybody find their own path to success!

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.