Complete Divestment of Perfect Shape/Medical

I have just divested my entire Perfect Shape/Perfect Medical (PS) holdings today. 

Popular financial blogs usually do a very detailed write up on their equity ideas. Some of them could be very sound, while others opinionated. However, many failed to disclose divestments in an open and timely manner. For some, disclosing a sale could be an embarrassment, such as when an idea failed to work out.

Mine is not one of these blogs. I will try my best to avoid being self-serving and hope to educate my readers (whatever few it might be) on my investment ideas.

***

Let's get the figures out of the way first.

Returns from this investment started in March 2020 and ended today (July 2021). It is nowhere my longest holding, and it wasn't the biggest (at cost). Total returns, with brokerage costs accounted, should be in the region of 230%.

Profits from this stock alone account for 50% of all my returns since 2016. For that I am very grateful.

***

My first investment in PS began in 2018, and the thesis was explained here. It was divested in a matter of months due to problems noticed in receivables. I began buying in 2020, and then gift it to my mum. It was subsequently accumulated as the story get better, and there were no longer any better ideas at that point of time.

Why did the stock increase in such a rapid fashion? It has got to do with a management that is (I feel) overly involved in cheering up its stock prices, usually through operational updates that started after the first wave of COVID-19 control is loosen.

It began with better and better sales figures and then subsequently towards diversification of health services, which leads to it renaming itself to Perfect Medical to better reflect the diverse offerings (which are in the works for the future).

During the outbreak of COVID-19, the stock went from 2.0 to as high as 10. I was holding out since March 2021 for its financial results to be disclosed, which explained my patience of not selling all of my holdings since it returned me 100%.

While the stock has went up as much as 400%, the earnings did not follow suit. The good news was that its China operations did spruce up 24%. There is a slightly higher dividend compared to the last, where no interim dividend was distributed so as to conserve cash for expansion.

What caught my eye was a huge increase in about 200m of investment securities into its non-current assets I have no idea what the holdings are. A slight majority of them belong to listed equities within the HKEX. I have some idea what its 30m or so holdings in USA are, as they were disclosed in earlier reports.

The 2nd half of 2021 did better than 2020's. The 2nd half seems to be the poorer performing period for PS.

Overall, the results look lacklustre compared to the amount of bright and cheery disclosures since then.

***

As the day begins, the stock open at 9.2, which is a minor 2% drop from the previous close. But the plunge was fast and furious. 

It fell to a day low of 7.87, which is probably down 16% from previous day.

One of the things I taught about selling when you are undecided is: if your spouse had accidentally sold a stock (that you are sitting on the fence about), would be be a) furious and bought it back OR b) be fine with it?

If you were feeling (b), you probably should sell the stock. I felt so two days ago, and I feel even more so as the stock goes on a free fall. I was ... frightened. The negative feelings I had for the cheerleading management intensifies. They even had an announcement, which I felt was too coincidental, about its unaudited operational updates in Q1.

Before noon, I have sold my parent's share to lock in the gains. 

Say anything you would against fund managers-- while we retailers could beat their performance pretty easily (due to a lot of factors), the ones managing funds deserve some respect when they act in a fiduciary manner. 

I input my final lot of holdings into the sell queue and went for lunch. At that price, I didn't think it would get filled. But it did. As I type this entry, I realized that the company has bought back another 1 million of shares between the price of 8.1-8.7. I sold my last stock at 8.7.

***

At a market capitalisation of 10.68B, Perfect Medical has about 500m of free cash flow, along with a cash hoard of 490m, along with 309m investment securities. Assuming a 20% mark down (since markets are so favourable now) in the latter, that would be about 250m. That brings down the market cap to just under 10B.

A free cash flow of 500m is about 20 times. It was a bargain back then... but right now, it isn't cheap, and it isn't dear. But something within me says that all is not well with the cheerleader-like management. I could be right or wrong in equal parts.

***

This concludes my farewell letter to the stock that has rewarded me the most, ever. TBH, I was going through some of my older entries and they brought a smile to my face. I know I would be looking back at this one day, and hope I learn important lessons about investing.

Certain things can only be learnt from experience.

June 2021 Portfolio Review

Straits Times Index Fund: +11.07%
Hong Kong Tracker Fund: +8.61%
S&P 500 Index Fund: +15.34%

My Portfolio Returns: +41.57% 

Transactions:
-Sold off a petty amount of Perfect Shape at 9.2$
PS still weighs at 28.4% of the entire portfolio. Results would be release on 30-June. Another announcement made, just this evening, is the reduction of board lot size from 4000 to 1000. This would no doubt increase liquidity (and speculation). The other action that would fuel further recklessness would be to split the shares 1-to-4.

I am still eagerly waiting for the results although I am leaning towards divestment. More on that later. 

-Modest increase of OKP at 0.187-0.189
As I see no other opportunities in the market, coupled with the growing amount of unused cash for my parent's portfolio, I made a modest amount of purchase in this engineering company. 

OKP is my second biggest position, standing at 22.9%

Days Sales Receivables Watch - Perfect Shape

While I am more than grateful for the capital gains (both unrealized and realized) brought about by this company, I am carefully watching the Day Sales Receivable (DSO) for this stock.

DSO refers to the amount of days it takes, with respect to the revenue, to turnover the receivables. A company can increase its revenue unfairly by booking more sales (charging customers on credit). Unpaid sales are classify as receivables.

If a company has 10m in revenue, and 2m in receivables in 2019, and have 50m in revenue (an astonishingly leap in growth), one should look at the corresponding growth in receivables. 

If receivable total to 10m in 2020, it doesn't raise much eyebrows. But should the receivable be 20m?

2019's DSO = Receivables / Revenue * 365 days = 2/10 * 365 = 73 days.

2020's DSO = 20/50 * 365 days = 146 days.

Perfect Shape's DSO is outlined below:

When I first purchased the stock in 2018, I was pretty concern in the jump in DSO. Looking at capital gains of 41% in a matter of 3 months, perhaps I could be forgiven for selling out.

Figures in 2019 abate slightly, and 2020's first half interim report suggest a healthy drop in DSO as well. But I am constantly on my toes for possible financial fraud in this company, especially when the board tends to act like cheerleaders.

But I bought stock on a quantitative basis and was rewarded more than I am deserved. I am very grateful.

Who doesn't wish to hold on to a stock that yields double digit dividends? It is every value investors' dream to buy and never have to sell. I do wish this to be so for Perfect Shape, but at times, the fiduciary pressure of handling my parents money compels me to become a seller.

A short note about banks

Since I have a token amount of OCBC shares, I was able to request for a hard copy of its annual report. Reading off paper allow me to take notes, scribbling comparisons between the local banks. While the reputation across all 3 of our local banks is stellar, they are also remarkably safe based on Basel III. Its CET1 scores hover at 15%, a figure hard pressed to find elsewhere.

No wonder it is common wisdom among local investors, to simply buy the banks during a trough. 

There were unique differences between the banks. OCBC seems to have just a little more income off non-interest income. It has a well known insurance arm in Great Eastern, and also increasing presence in Greater China. 

I had some free time recently and was looking at the big 4 Chinese banks. In terms of ROE figures, ICBC and CCB did best. They, too, held the lowest cost-to-income ratios (about 25%). ABC was the worst at 29%, and BOC did slightly better.  Interestingly, all of them have about same amount of Non-Performing Loans. ABC's CET1 was 11.04%, ICBC 13.18%, CCB 13.62, and BOC 11.28%

Hence the market could be right in marking down the share prices of ABC and BOC, as compared to the other two banks. The former two yields at 8+% in dividend, whereas the latter, 6+%.

All of them are better bets than Credit Suisse, whose CET1 is about 6+%. Or could the figures be trusted? I have no real chance in assessing the quality of a bank's books. Any bets would be modest.

May 2021 Portfolio Review

(re-updated on 26-May)

Straits Times Index Fund: +11.56%

Hong Kong Tracker Fund: +7.01%

S&P 500 Index Fund: +12.44%

My Portfolio Returns: +33.99% (I triggered a recalculation from Stock.cafe end and it went from 41% to 33.99 -_-" no idea what happened)

Transactions:

-Return of capital of I.T. risk arbitrage position

-Increase of Mapletree NAC Trust

-Sold a modest amount of Perfect Shape

While I might have omit to write about the I.T Ltd position, the stock was pretty volatile on voting day itself, falling as much as 8-10% before shareholders accepted the privatisation.

This net a return of 8% within 6 month, which annualised to a 16% return. It is also one of the luckiest one yet, given how little work I put into buying the stock.

At a very unfortunate timing of 1pm two Fridays ago, the Singapore government announced a list of curbs in an effort to calm down COVID infection. This sent the market on a free fall, particularly retail REITs. At one point of time, Lendlease REIT was down by 8 percent, and Mapletree NAC Trust went down by almost 5%.

Lendlease REIT was particularly interesting since about 1/3 of its return is from its Sky Italia rental, and Mapletree NAC even more so, given that its main revenue is from overseas, particular Hong Kong.

Unfortunately, I bid pretty much close to intraday low and did not fill my orders for Lendlease.

Both stock recovered pretty a little so far, demonstrating how jittery markets could be on abrupt announcements. 

***

Portfolio returns is now a staggering 33.9%, surpassing my own expectations and highest ever return in a year. It was bitter-sweet considering that my mum's health dipped a bit during recent weeks, and I wasn't really paying much attention. Needless to say, returns are lead by Perfect Shape. 

TBH, I do not believe I deserve such a high return, and I attribute this to luck on a single holding. The way I pick my stocks, based on value; and my own expectations are that I attain modest, market-beating % which will meaningfully compound over time.

Since I am a strong believer of mean reversion, I expect bad times to come one day. So I am very grateful for what I am getting.

I don't feel encouraged by the rapid rise of Perfect Shape stock prices, which are often accompanied or preceded by "business updates", usually optimistic in nature, of business expansions. The market rewards the risk-taking behaviour of the company by bolstering its stock price to record highs. I sold off a little at 7.4x, and remains a bit undecided with the rest, now that the price is 8.x.

Should I sell? There are 3 sell rules. First is to sell if you need the money, which I don't. I don't have a better idea to allocate the capital to. I do not belong to the "cash-is-trash" camp, and is more liberal with the idea of holding cash than most. I believe that buying a bad stock is going to hurt far more than inflation. 

Secondly, I could sell when it is overpriced, but how do I know for sure? The latest figures are not out. I do see a few flashing, warning signs regarding its Day-Sales-Outstanding ratios, and I want to verify that with the upcoming FY2020 results.

Thirdly, one should sell if he makes a mistake. This is not applicable to my Perfect Shape thesis so far.

A large part of my motivation to hold on to some of the stock is that I simply have no other ideas.

***

I am still waiting for OKP (which was fined a very paltry sum of a million, when you compared that to what it has in its books) to revert to value. It is still very much weigh down by COVID-19-related labour concerns as well as a lack of projects. I would imagine that, in view of rising interest rates, a depressed price, and clarity to its legal woes, the company could take advantage and privatised itself.

I believe that investing as a private business owner would never go out of fashion. But I am still waiting patiently, in a world where tech and growth stock flourishes; and old, dumb, simple companies are disregarded. 

***

As of now, in terms of market value, Perfect Shape is 32%, OKP is 20%, and Centurion is 9.6%. My top 5 positions constitute 76% of my capital so far. 

I am cautiously monitoring the balance sheet of Centurion Corp. The COVID control measures seems to be adequate across the nation so far, which I attribute this to very strict mandates from MOM. Management's tone seems pretty levelled so far, so I am not too worried.

***

My opinion of crypto-currencies does not change: I have no idea how to value these stuff and therefore I shall refrain from them, no matter how tempting it gets. Before I put a single cent in an idea, I ask myself if I would put in more capital if it falls by 20%? Is the idea, "easy"?  The only people getting rich are the ones selling shovels (crypto-mining rigs, GPU card sellers, coin exchanges, etc) and not the prospectors.

Do stocks like Tesla deserve their sky high valuation? I don't think so... but I am no Burry and I won't touch anything related to them. All I could see is that the market is very generous in their valuation of far too many tech companies these days. That generosity doesn't last.

Just avoid stuff that you have no idea of; I am not responsible for the foolishness of others.

-end

Perfect Shape: Unaudited Full Year Earnings Released

Perfect Shape (1830, HKEX) full year results were signed off and released hours ago. Do refer to my  earlier post on buying Perfect Shape,

Actual revenue turns out to be 900+m, an increase of about 150m. The cost of goods sold did not increase much as accordingly. This trickled down to an increase of net profit to 194.187m over 91.356m last year. Perhaps this business is really as efficient as it looks.

Net margin, without considering non-business-operations gain, is now 21.4%. This leapfrogs last year's 12%. However, trade receivables remain worrying. One can only take the words of the management, which I quote:

"There  is  no  concentration  of  credit  risk  with  respect  to  trade  receivables  as  there  are  a  dispersed number  of  financial  institutions  with  high  individual  credit  ratings  through  which  the  credit  card and  installment (sic)  sales  arrangements  are  entered  into."

The company decided to distribute 15.1 cents of dividend, in view of the company's 15th anniversary. I did not foresee this. The yield would be about 10% given today's closing price.

Diluted EPS is 17.9 cents. Given a PE of 10, the company is worth about 1.79 HKD. This is roughly inline with my estimate.

***

Cash and equivalents is 395.761m
Market Cap is now 1.63B, or specifically, 1635.607200m
Enterprise Value is 1239.8462m
Net Profit is 194,187.
Adjusted Earnings Per Share is  6.4 times and the (conservative) acquirer multiple is 6.384 times. If we were to use EBIT instead, it will be 4.86 times. This company is really, really cheap.

*I have liquidated my current positions at 1.79 HKD, in view of the mounting trade receivables. I was unable to get a response from Investor Relations despite sending emails*

Portfolio Updates, 2nd Quarter 2018

The Singapore market nose-dived since 11-June, from 3.2% to -1.15%. The HSI returned -1.51% year-to-date. It was pretty merciless.

Investors who said hello to Valuetronics, AEM and other popular tech sectors recently would see their eggs royally smashed.

The proposed tariffs brought about by Trump on China and the latter's counter-measures sunk the HKEX market pretty bad yesterday. HSI closed at -2.7%.

Two of my stocks, Perfect Shape (PS) and Xing Hua Port Holdings (XHP), were down by almost 5% and 7% intra-day respectively. It was a pretty sad sight but I am not affected because it wasn't because my stock picking has failed me.

There were no issues with the companies behind the stock.

Current returns stayed at 9.19%, which means I am about 10% better than both markets, which is highly satisfactory given my limited ability.

PS remains the biggest position in my little portfolio. Earnings will be released next week. I expect the market to price this company in pretty volatile fashion.

RHT Health Trust's fate is intertwined with Fortis, which is still in the midst of getting its financial statements and buy-out (of RHT) sorted. Eventually the deal should be realized. In view of the risk, this arbitrage is my second biggest position. Usually I would put in quite a bit of money in merger deals, but there is a slight risk here. As long as there is value in RHT, there shouldn't be cause to worry. Sure, the price will plunge should the deal falls through, but the value will still be there.

XHP is pure bad news but I do not believe the odds are poor for the next 3 years. Meanwhile the wait is compensated by a decent 4% dividend.I am currently looking at a -8% loss and will average down when it hits 15-20%.

XHP is a bit of a shame since I was staring at a 60% return, just like Innotek (currently at 16% or so). I guess that is the price to pay when you do not want to listen to the market.

There are a handful other stocks which has not hit its potential yet. The portfolio is currently diversified across 10 companies. No radical approach will be adopted-- I shall stick to picking stocks on value.

Buying Good Companies- Perfect Shape (HKEX:1830)

From my list of "Super Companies" earlier, I dived into a couple of them and found this company called "Perfect Shape."

I also blogged about this earlier ; earlier on, I did not reveal the name of this company as I still wish to accumulate my holdings.

Unfortunately, the company probably attract more than a few attention today with its profit guidance last night and a 14% or so surge in share price. Perhaps for the sake of education (and profits, since I am vested). I shall go through why purchasing this stock is a little compelling.

A) Consistent return in assets with little leverage
Looking at its profile in Stocks.cafe here , the returns on asset (asset light company) is pretty consistent over the years. I am keen to know why they are able to achieve this. After reading a few years of annual report, the strategy is to make headway into cities that are affluent. The key to this company is the branding.

This moat is likely to persist unless the company loses its reputation (which I would say is pretty easy and permanent once it does).

B) Most important reason: Adjusted Price to Earnings based on assets.

 

The highlighted items are highly reliable assets.
Reproducing the items below (with adjustments for ball park figure)
AFS financial assets (mainly stocks of tencent tech) - 50m
Deposits and pre-payment- 28
Trade Recv- 80
Other Recv. deposits - 38
Term Deposits (no discount needed) - 70.206
Pledged bank deposits - 29.117
Cash and eq - 226.199

Total reliable assets :  521.522m

Total liabilities: 323.757m
Net reliable assets: 197.765m

Market cap is now, as I write: 1.46b or 1460 m

Taking market cap of 1460 - 197.765 = 1262.235

Assuming earnings is not improved: 96m in profits last year
This works out to be a price-earnings of 13.1 (1262.235 / 96).

Since there is a large increase of about 100% in operating profit (to be subjected to a tax of 22% thereabouts), we talking about 140.4m in post-tax earnings.

At the current market cap of 1.46 billion (closing stock price 1.33), The PE of this company, without considering its high-reliable assets, is about 10. There are still avenues for growth for this company.

This company was trading at about 15 PE yesterday. That means this company should be trading at, at least, 2.1B market cap. This presents a price discrepancy of just over 40 percent. Of course, there is a tendency for the market to be "forward-looking."

 A good idea without possible pitfalls is a bad idea
There are things to look out for: a possible dividend cut due to declining business, and a damage to reputation that will be harder to control with more branches.

There are also trade receivables that one should look out for, along with the usual checks on cashflow.

Good luck.