Cheap Stocks Investigation: China Haida

This post is made in reference to an earlier blog post. Basically, it is a list of stocks that has last closed prices at a significant discount to its tangible book value.

The first item on the list is China Haida, which is an S-Chip. Reputation wise, s-chips get a really bad name. But I believe in keeping an open and critical mind when investigating value stocks. Can this s-chip, penny stock be worth the risk?

Apparently SGX has been monitoring and the key concern is Interested Party Transactions. One of the easiest way to move capital out from a company is to write off account receivables, and hence buying a stock like China Haida is a risky venture.

I shall pass.

Investigating Cheap Stock by Book Value

This list of stocks is unlikely to appeal to many people. Some of these are s-chips, and all if not most of them are experiencing problems, usually no profits at all. As you can see, most of them have next to no debt, and are selling at lower than its tangible assets per share.

More importantly, some of them are value traps, which refers to stocks that look cheap but isn't because of a variety of reasons-- management could be one of them.

I find this list of stocks intriguing and will be working to go through all of them. Diversification is the key, and over a long period of time, it will work to my favor.

A Small Sum of Money

With a small sum of savings generating next to nothing interest in banks, my mum and I decided to close the account and invest this in some stocks. Since this money isn't really mine, I take on a much more prudent approach.

I diversified the capital in 4 stock at the moment and is disappointed not to be able to get to the 5th today, but I will wait
1) Hong Kong Lands- This company is the only one in the list that has a moat and is probably also the riskiest due to currency risk. However capital protection is assured and looking at charts, we are not at the high side/resistance. With its record of growing its NAV and also its properties, which are not easily replaceable in good times, it is pretty safe.

Dividend Yield is not fantastic at 3% but I imagine with its pretty low debt and brand name (most of its debt are unsecured, that is how much banks trust them).... I think it is safe.

2) Capitaland Retail China Trust
I believe in the management in overcoming its current problems. At 1.37, the book value of it being 1.55 and gearing at 36%, I think it is not the safest security but it is fine.

3) Chuan Hup
Low debt and good record increasing its book value. At the moment its subsidiary Finbar isn't doing too well but I believe sooner or later, in 4 years, things will change. Dividends at 4% will pay off.

4) Frasers Centrepoint Trust
Selling at book value and low gearing (28.3%). Good yield at 6%. I believe that malls serves as valuable meeting point for heartlanders as the city gets crowded.

I was looking at adding Nam Lee Metal but the stock rose too quickly today. I estimate that this company has a safe book value of 0.42 and we are looking at a 6 percent increase today. Nam Lee Metal is another company with little debt.

I am also monitoring the price of Mapletree Industrial Trust and will add if there is significant discounting.

A Short Look at ISOTeam

ISOteam is a stock that has done very well. From about 15cents in 2013, it has since went up to 38.5 cents today. Fundamentally, any company can be solid, but just as likely expensive. The charts indicate that 'investors' are adopting a wait and see attitude most of the time.

Interestingly enough, the management decided to buy back some shares today. For the uninitiated, buying back shares mathematically increase Earnings Per Share (EPS), since there are less shares to go around. However, the amount bought back, 55000 shares, represent a small drop in its ocean of 280++ million shares!

Share buybacks could be used for stock options. I do not think that the stock prices are cheap and there is a pessimistic air about its stock (yet!), hence I question the timing of buying it now.

Reading the annual report, the Myanmar growth story so far yields only a $110,000 project, which is also a drop in the ocean of its 9million or so revenue the entire last year. The annual report mentioned that it has yet to get any new projects locally. This is another warning sign.

Let's take a look at my calculations of its ROIC for the last 4 years. I believe in ROIC-- it prevents me from being blind by exciting revenue growth.
2012- 18.11%
2013- 32.05% <-- mighty good year, but probably abnormal. Should discount for statistical use.
2014- 20.98%
2015- 16.77%

I think ISOTeam definitely needs new projects locally and more importantly overseas, since I believe it isn't cheap on cashflow. Another thing that worries me is the unbalance of power in its Board, since all 3 of the co-founders are in it, and for some reason, they are always around during board meetings that does not require their presence ("by invitation," haha).

The last thing that one should take note of is its acquisitions-- it seems to have overpaid in goodwill for one of them-- but that is my opinion...

In short:

• fair average board with no political links to harness.
• not too convinced of its growth story overseas, and it is possibly running into heavy competition locally.
• dropping ROIC.
• possibly overpaying in acquisitions (acquiring companies is bad enough).

I am not vested, and this isn't a stock I will purchase during a bear market.

Volatility and Dangerous Opportunities

While the votes were counted for the US Presidential Elections, the singapore stock market experienced frightening declines. Banks stocks were sold down heavily, and gold and companies dealing with the precious commodity got bid up a little too quickly.

The obvious opportunity is to buy gold or these companies as a hedge against a downturn. I refuse to subscript to this theory because of some well-known arguments, such as:
1) You can't analyze the value of gold. It is entirely speculative.
2) Even if the value of gold is ascertainable, you are not paid to wait (no dividends) while the market corrects itself.
3) Prices of gold mining company stocks move along with these gold prices and even if they are deem cheap by book value or discounted cash flow, it is not worth it due to (2), as these companies usually will not pay a dividend.

That said, it came as a shock to me that equities "recovered" (I loathe to use this term because only stock prices moved, companies function normally during this event), the prices of gold plunged very quickly and so was the prices for these gold-related companies. I do have a friend right now which is stuck with a gold mining stock. Personally, I think the fair value of this company is 0.510, and that is the case right now. However, I subscript to view (3) and (2) and think that Singtel is a better bet.

***
I am blessed to be consuming bit and pieces of wisdom from John Templeton's book, Investing the Templeton Way. Hopefully I will finish the book and write a review of it.

Does M1 Deserves it Current Predicament?

Many months ago, I calculated the book value per share and debt-to-equity, as well as ROE of the three telcos, and surmised that the balance sheet of Singtel is the strongest of them all. It was also the cheapest company based on book value per share.

I shared this little piece of information to a forum and was pointed out, by a rather senior member of the forum, that Starhub was trading at a huge price over its book value because most of its assets had been written down to zero. Part of them could be the cable business.

As such, I shelved my interest in all telcos, but recognize the attractive dividends that Starhub and M1 paid to their shareholders. However, Singapore is a small market for a mature industry.

Recently M1 announced a dramatically decrease in revenues compared to its quarter last year. I think perhaps a comparison over the Return of Invested Capital (ROIC) over a period of 10 years would be a fairer means of checking which is a better telco, since their balance sheet composition are, possibly, vastly different.

My method of calculating ROIC would be

taking Net Operating Profit after Tax (NOPAT), without taking into account interest charges,
and taking this sum,
divide by Invested Capital, which is all Debts + Equity

M1's annual reports are available at
https://www.m1.com.sg/aboutm1/investors/annualreports

and the figures used would be from 2006 to 2015, in thousands unless specified.

2006
NOPAT = 174839
Invested Capital (IC) = 631968
ROIC = 27.67%

2007
NOPAT = 171801+ 9472 = 181273
Invested Capital = 201,911 + 250,000 + 35,000 = 486911
ROIC = 37.23%

2008
NOPAT = 157687
IC = 473232
ROIC = 33.32%

2009
NOPAT = 156764
IC = 525113
ROIC = 29.85%

2010
NOPAT = 162901
IC = 618894
ROIC = 26.32%

2011
NOPAT = 170021
IC = 625847
ROIC = 27.17%

2012
NOPAT = 151991
IC = 619914
ROIC = 24.51%

2013
NOPAT = 164665
IC = 645096
ROIC = 25.53%

2014
NOPAT = 179821
IC = 696570
ROIC = 25.82%

2015
NOPAT = 183400
IC = 767013
ROIC = 23.91%

2016 (3 quarters announced so far.)
NOPAT = 117.9M + 4.7M = 122.6M
IC = 772.4M
In order for M1 to maintain last year ROIC,
Assuming it maintains its debts and equity,
it must post 62.08M of profits in the last quarter this year...

One would take note that it was performing well in 2006-7, and dip dramatically from 2008-10, didn't perform too badly between 2010-4, but started sliding down for the last two years.

In summary, this year's ROIC could well be the worst performing year for M1 in a decade. Perhaps, in the next post, I will look at Starhub's.

Recommended Book List (as of 23-Oct-2016)

A year had passed since I bought my very first stock.
I attributed whatever profits and desire to learn from my losses in the stock market. Since then, I read a few books and think that they wouldn't hurt any investors.

Must reads: 
The Five Rules for Successful Stock Investing
The Intelligent Investor

Good to have:
F Wall Street
Introduces bond laddering, DCF with existing equity in mind, cash yield%, etc.
One Up on Wall Street
The Little Book on Big Safe Dividends
Common Stocks and Uncommon Profits
Michael Burry's posts on MSN Money (Brilliant value investor, do not let his reputation in "The Big Short" cloud your impression of him)

Wish I can understand, but couldn't:
Aswath Damodaran's books (Investment Valuation, Little Book of Valuation)
Security Analysis

There you go, perhaps one day I will add more.

An Arbitrage Trap of Sorts

Investors trying to profit from Twitter's possible buy-out deal are burnt badly twice just this month. With Disney, Verizon, Google (somehow I think they are best suited to buy Twitter) walking away, the news of Salesforce deciding not to "rescue" Twitter left Softbank as the only _rumoured_ entity to be interested.

Never ever get involve in an IPO; it was sold at 69/share at its height

I personally think there are a few reasons why this is a not an opportunity for an arbitrage
1) Twitter management did not show any interest to be acquired
2) There were no official talks announced, as such anything is speculative.
3) They are not in a dire situation yet; They have about 3B in cash and about 1.5B in debt, with a total of 2B in liabilities. The problem is profits are not coming, equity dilution, tons of stock-based compensation for employees.

As such, this isn't a distressed opportunity and neither is Twitter undervalued.

What I think about Insider Trading

Just today, I was alerted by the very useful SGX Mobile iPhone app that Sing Holdings (5IC) is likely to secure a land parcel for development from Urban Redevelopment Authority.

This wouldn't raise an eyebrow except that Sing Holdings recorded an extraordinary, unexplained increase of about 10 percent within a single day, with large volume.

There were no news released that day (at least officially), and this is probably attributed to some kind of insider trading.

I have already sold my shares in this company because I think I need to revise my idea of an asset play. Whether the market decided to act otherwise is not in my control nor my interest... I need to hold forth to my ideas stubbornly.

But I do have some views on insider trading.

Firstly, they are, definitely something we can do without, for it propagates the idea that in order to make a decent amount of money from the stock market, you need to have insider information. You can never eradicate insider trading with regulation...

Secondly, it takes some courage to act upon insider info. Let me explain.. for instance, an associate will advise me that company ABC is going to announce that they have secure a large project, and it is best to act upon it.

My first question will be: How big is this project? The second question will be: When will it happen?

It is also foolhardy to assume that the catalyst will happen within days. For instance, how would you felt if the price plunged by 1%, with a slightly larger than normal volume? Would you steadfastly held on? After all, technical analysis is about reading crowd emotion and by buying on insider information, you are influenced by a mere 1 person, how about more?


If a certain Mr Schloss could hide inside a small office, meet no management, and yet make plenty of money, why not?

And it falls...

After a couple of post about warning signs (as gleaned from William O'Neil's book about market topping off), the markets, without any warning, drop about 2.3-5 percent last night.

The book mentioned about market "stalling," which means neither having a clear up or down direction (in short, a doji), and increased volume over the previous day. This hints of institutional selling.

The market has already hit new heights since post-Brexit and investors should have taken care not to "pay a fair price for a good company," and insist on a good margin of safety.

Singtel

Singtel (SGX:Z74) shares declined to a price of 3.97 today, which somewhat brought attention to some investors. The man in the street might not know this but Singtel is the biggest company by market capitalization in Singapore. It is also generous with dividends.

I guess most investors are keen in Singtel for the dividends and not capital gains.

As you can see, Singtel's share price barely moves from 2009-2012 and then moves up another notch in 2013 and been such ever since.

That is the share price, let's take a look at earnings.
Year - Earnings Per Share (EPS) in cents
2016 - 24.26
2015 - 23.73
2014 - 22.87
2013 - 21.96
2012 - 24.97
2011 - 23.98
2010 - 24.46
2009 - 21.60
2008 - 24.76
2007 - 23.13
As you can see, EPS is largely the same over the last decade.

Singtel isn't the type of share that I will be interested in for a couple of good reasons
1) Largely no growth possibilities other than major M&A overseas.
2) No exciting new products.
3) A very large dividend payout ratio. It is paying out about 2.7 billion out of 3.8 billion of retained earnings in the last year. Below screen captured from Singtel's latest annual report...

 Out of 3.870B of earnings, it is paying out 2.789B, which translate to a 72% payout.

I think a growing dividend is not possible with this type of company... a growing dividend usually translate to a growing share price as well. If you are looking to acquire Singtel for dividends, it will be a better bet than Starhub, that is for sure, having a way better debt to equity ratio and lower dividend payout.