Prospecting from the "Dustbin"

One popular way of searching for value is to sleeve through the "dustbin"... namely the 52-weeks low stocks.

I have such a readily made screener in www.stocks.cafe. Parameters used are illustrated below:

I would explain some of the terms above for users unfamiliar to the stocks.cafe platform. "Close% from 52-weeks Low" is expressed as a percentage. Any stock's last closing price that is within 3% from the lowest in the last 52 weeks will appears in the results.

"Price/ Tangible Book" refers to the closing price divided by the book value, minus any "soft" items like goodwill, land rights, etc. It isn't that they do not have value... it is just hard to determine. The prudent value investors tend to ascribe a value of 0 to it. Now I will say this screener might not work too well on this, so you need to double check the annual reports for the prospect. I don't have any hard and fast rules about book value, but anything within 3 or so is still reasonable. I intend to write  another post regarding the book value investing approach later.

Debt/Equity is expressed as a number. If the figure is 0.3, it means that for every 1 dollar of assets, there is 30 cents worth of debt. Ideally this should be interest-bearing debt-- trade payables are usually not interest-bearing and should not be accounted as debt.

"Last Close > 0.1" is a personal choice-- I do not want to look at any penny stocks in SGX. These stocks are prompt to consolidation in the future. For the uninitiated, SGX has this weird rule that stock prices must meet the Minimum Trading Price of > 0.20 in X amount of years; stocks are traded in 100 units minimum in Singapore.

Since my capital is small, I will gladly forfeit some quality penny stocks.

EV/ EBIT_operating_income > 0 is a funny one. It basically means Enterprise Value (EV), which is Market Cap (all stocks multiply by market price) + Debt - Cash.

There are a couple of ways this can be negative. First, the company might have more cash than debt and market cap combined. These are the ultimate value stocks. Since I forced the screener for give me a positive value, this means I would miss such stocks. There is nothing to stop me from creating another screener to look for these value stocks The other reason why it will be a negative number, is that EBIT is negative (company is making a loss).

EBIT_operating_income is not a choice I preferred, but the only one that is available. For the uninitiated, this refers to profit that is available after all costs, except tax and finance cost (which is interest charges from borrowing), is levied. The whole idea is to evaluate companies from an equal footing.

Current Yield > 0 is the current dividend yield in percentage. A dividend must be present. You will need to wait for dustbin stocks to recover and I want to be paid for it.

***

 Running this screener for just SGX this week, I have the following:

The data is copied and pasted into Microsoft Excel for easier viewing. I added a column call Price/FCF. A company which has unsteady cash flows will have a very high or low number... this is just for my viewing pleasure.

The next step is to cut away all stocks that:
Do not offer a dividend consistently for years. Capitaland has been offering increasing dividends over the years, which is delightful.

Large debts; a very high D/E (debt/equity) number-- unless this is a relatively big company. As silly as this sounds, banks do give institutions a bigger leeway. For the smaller companies, they are removed. This is not to say that they aren't good stocks-- I just want to sleep better at night.

The next step is to look at each and individual companies from stocks.cafe. There is an advantage here presented by Stock.Cafe, an extract of the Profile tab of YZJ Shipbuilding as follows:

First of all, the book value must improve over the years. Book value has increased 0.698 to 1.389. Whether this book value is reliable... let's just say we will check that later.

More of an interest to me is the earnings, and free cash flow per share diluted. I want to see positive numbers in free cash flows. Most companies are capital intensive, which means for every dollar earned, a large amount of it is re-invested into the company for both maintenance and growth.

I want to say something about growth-- a growth in earnings per share is not necessary a sign of growth. It is merely a hint of growth, and the company's ROIC should be investigated. An EPS growth of 10% that results from a substantial increase in invested capital is not growth. 

I have digressed-- let's get back to screening stocks.

Companies that have less than desired reputation are also removed.The net result is 7 companies for further investigation, out of a starting of 26. This is just the first step. I would not be surprised if none of them make the cut at the end of the day.

If you do dustbin-picking very frequently, you will recognize names that appear time and again. Reputed value investors (like John Neff) advocate paying more attention to new stocks that appear in the list. My personal opinion is that the market is usually efficient-- so long term, they can't be that wrong.

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*

A Statistical Look at Our Big Three Telcos

Using very simple statistics, I have a few opinions about the current predicament of telcos. Stats are compared with closing market prices on 22-June.

Without considering into the qualitative aspects of our three listed entities:
(a) M1 has a cash yield of about the 7.12%. This means as a business owner, can look forward to a cash return of 7% after buying over the company as whole. This is simply cash flow from last reported year over market cap.

On an average of 10 years, this cash yield is 8.77%. Unlike Starhub, M1 management did not indicate a dividend payout in absolute or percentage terms (correct me if I am wrong, I am not a keen follower). So M1 has a distinct advantage.

Gross Margin has fallen in the last 10 years, from 23.94% to 15.97% (CAGR: -3.96%)
Net Margin has fallen from 18.75% to 12.78% (CAGR: -3.76%)

(b) Starhub has a cash yield of 7.79% based on last year's return.Given its precipitous fall over the last few weeks (and surprising 2% uptick on Friday), perhaps market is tagging it as a bargain.

The cash yield over 10 years average data is 11.79%.
However, Starhub has pledged to give 16 cents a share last year... I don't have any idea if the management will comes to their senses soon.

Gross Margin has fallen in the last 10 years from 19.24% to 15.12%. (CAGR: -2.38%).
Net Margin has fallen from 14.63% to 9.87% (CAGR: -3.86%)

(c) Big brother Singtel has a cash yield of 7.08% (from 2018 AR figures). While this sounds attractive given the dividend strength (in terms of cash flow), Singtel would probably struggle to pay if free cash flow falls below 2.857B. The average over the last 11 years is 2899B or so.

On an average of 11 years, Singtel's cash yield is 6.72%.

Gross Margin has fallen (less drastically so) from 29.99% to 27.55%.
Net Margin from 26.68% to 16.19% (CAGR:  -4.44%). This net margin drop looks drastic because I excluded the divestment from Netlink Trust, which is non-recurring. With it, the net margin is 27.25% (CAGR: 0.19%).

My opinions
(i) If Starhub have a more sensible dividend payout, it is a better buy given the cash yield of 7.79%. Unfortunately, a downward adjustment of dividends is likely to be succeeded by a downward adjustment in prices... this makes market timing close to impossible.

While it is the cheapest, it isn't that much cheaper. Take note: Starhub have the worst gross margin drop, as well as the worst net margin.

(ii) Singtel's gross margin over the years suggest they have the most capable management among the three. The lack of special dividends from divestment is understandable, and not because it was stingy. Stop wishing for the special dividends.

(iii) There is little difference between Singtel and M1's cash yield, meaning they are almost as cheap as each other! But it is only for the past year.

*****

Trade carefully, and do note that there are...... more than just these 3 companies in SGX, and there are more than just SGX in the world.

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.

Commentary on the market (1-June-2018)

It would be fair to say that the Singapore stock market has taken a fair amount of beating recently. While stocks are generally less riskier when the prices are lower, I do observe a handful of practices adopted by the investing populace that will do them no good, no matter how the general market is behaving.

Purchase of securities with high dividend yields
With price falling, dividend yields naturally goes up. However, the popular saying that "yield is a proxy for risk" holds. Consider the curious case of Starhub. A long-time favourite among income investors, management reduced yearly dividends from 20 cents to 16 cents. This might seem prudent until one dished out his trusty calculator (or excel) and pored through financial statements in its recent history.

The issue wasn't that Starhub had a huge amount of debt-- it simply did not have free cash flow to pay off 16 cents of dividend yearly _even if it maintains its profitability_. In other words, in a business environment that had become more challenging, Starhub has to grow its earnings to meet dividend payouts. What are the odds?

I would agree with some value hunters that Starhub could become a value play since a) it might cut dividend again, this time to a sustainable amount, and b) falling out of index means a lot of indiscriminate selling without regards to its value. I would suggest that we wait until the management cuts the dividend drastically. But in my humble opinion, now may not be the time to make speculative investments. The Singapore market is a lot more efficient in pricing.

Catalyst Stocks
The other popular operation is to bet on stocks where there might be a catalyst or event in play. For instance, Duty Free International (DFI), a business that has been running duty-free shops around Malaysia. The company is now contesting a legal claim that it has to pay duties of about 41m to the state of Perak. DFI has about 370m cash in its books. On the surface, this looks like a pretty risk-free operation.

One might note that earnings from this company has been on a steady decline, and its high dividend payout is unsustainable from its cash flow. Records shown that it had been paying over 100% of its earnings for the last six years. While the company had bought back some shares late last year, one notes in its latest un-audited year-end report that over 100m new shares were created via placements since 2016. Its share buyback of 10.4m shares while commendable, has some way to go. Ultimately you are betting that business operations will improve since it isn't cheap compared to its assets.

Either that, you are an expert in legal matters... but there are too much timing involved.


Large, unpopular companies
Lastly,  steep price declines of blue-chips. Investing in such operations is actually recommended by Graham in The Intelligent Investor. One such example is Yangzijiang (YZJ). YZJ had fell a stupeflying 40% since Jan this year (1.60 to 0.96 as I write).

One must note that YZJ has about 14b worth of "financial assets," representing a considerable amount of its total assets of 42b. Understanding these assets are beyond me. If one were to consider that there are 27b worth of liabilities on its book, the stated book value of YZJ at 1.4 SGD may provide a lower margin of safety than it suggests. At the risk of being perceived as overly prudent, one should wait for a further discount instead of being suckered into buying... especially from the attention YZJ gets from the media for its share buy-backs.

In short, one should consider the odds without the influence of news or recent price decline. Is this company cheap? Are the problems temporary? Is this uncertainty or is it risk? Losing the opportunity does not equals to losing money.

Charges involved with CPF investing

https://www.cpf.gov.sg/Assets/members/Documents/INV_AnnexD.pdf

According to the documentation above, it would appear that the charges for investing with CPF is pretty hefty.

Assuming that I am investing 1000 units of Singapore (Z74), trading at 3.3$ a share.

That would be a cost of $3300 PLUS the following charges

One Time Fees
-brokerage fee $25
-CDP clearing, SGX Trading Access Fee which is 0.04% of trade amount (in this case, $1.32)
-CDP settlement fee of $0.5
-Up to $2.50 per 1,000 shares/units, with  maximum  charge  of  $25  per transaction   (for   shares,   REITs, corporate bonds, ETFs and statutory board bonds) which means it will be $2.50

suppose you are buying a $0.30 a share stock, this can be potentially expensive

So for the Singtel example, we are looking at $29.32 total for one-time charges. Since when we sell it, it will be another round of cost, which is $58.64 in total.


Recurring Fees
-$2 per counter per quarter, minimum of $5 per quarter.

let's assume we are holding for a period of 3 years, that would be  $60

Total charges after 3 years is $118.64

Assuming we get a 2016-era dividend yield for the next three years with zero capital gains, you would have received $525 in dividends.

Net profit after three years is $525-118.64-60= 346.36
For an investment of $3300, your net gain is 10.5% after 3 years. which works out to be actually a 3.5% yield.

The odds are, if you are careless with your valuation work, you are likely to lose money investing small amounts with CPF, as compare to the 2.5% yield (as of writing) in CPF-OA. This is more so if you are investing in stocks less than a dollar per share.

Hence, the motivation to buy high yielding, >5 dollars per share stock is high with CPF.

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.

Are you really an investor?

There are numerous "investors" out there who had blogs and a huge following (the reputation system in InvestingNote is a joke). They often rationalized their ideas in excruciating details. I am extremely amused because I think the shorter you can explain an idea, the better it is.

Nevertheless, these "investors" liquidate their positions as soon as they have a 10% gain or so. This is pure nonsense. Let me explain:

Assume I buying a stock because I think the book value is worth $1, and the market is trading at 90 cents. I would be extremely reluctant to buy it. I would love to buy a stock if it is 60 cents or below on very promising stats.

So I bought this stock at 60 cents, I would never sell it at 70 cents. I might be tempted to sell at 85 cents. But never at 70. You can get to 70 based on market fluctuations alone.

Neither would I sell a stock if it fell from 60 to 45 cents-- I will definitely buy more because I usually don't allocate all my capital at one go right from the bat.

Nobody buys a stock on a 10-15% discount to their value. This is nuts. How can 10-15% be an adequate margin of safety? I only consider myself moderately right on an idea when I get a 20% gain.

You can pick two person with fairly similar investing knowledge, perceived value on the same stock, but the temperament will set them apart. When a stock goes down 20%, one is a seller and the other buys more. Psychology plays a major part in investing and it is your actions that tells you what kind of investor you are. I have been on both sides of the boat.

Listen to the rationale of the investor and not his (or her) reputation. Some guys just have a big portfolio but they are unlikely to get their net worth from investing. This is pretty obvious from their investing ideas and reactions to the stock market movements. You can spot the real investors only when the market disagrees with them. Nothing is more sexy and inspiring than conviction.

Portfolio Transaction Q2 (comments on Asset Play and Good Companies)

Since end of March which I release results for my Q1, there have only been 3 transactions done. Without elaborating, I am currently leading STI by 4%. The market has been pretty kind to me.

Reduced half of Xinghua Port Holdings
Sold half of Xinghua Port holdings due to likely poorer results from Stop Work Orders by the government. I perceived the problems to be temporary but this small loss is necessary to control unforeseeable risk.

As of now, one of its ports has resume operations but the insider buying has ceased as well. I will adopt a wait-and-see attitude and resume buying when there is a huge discount from what I feel is its intrinsic value. I will assess if the problem is likely short term. Expected results release for Q1 is late July, if any. HKEx companies usually only announce results twice a year, so it may be October before I get any news.

I do not expect myself to lose too much money from this stock on a 3-5 years basis.

Initiated a small stake in Hanwell; and my opinion on "asset plays"
Hanwell is a company that has a terrible consumer business but is cheap due to it trading at just below its net current asset.

With companies like these, you are buying with the mindset that there the downside is limited. I like buying these type of companies but Hanwell's dividend is on the low side. More importantly, Hanwell is not alone in its cheap-to-asset situation. But it has some anchor investors within. The dividends is the main reason why I do not want to allocate too much capital. I do not intend to hold on to this stock forever (this is exactly what some value investors call, value trading). Cigar butts are not meant to be held forever.

LTC Corp is a good learning opportunity. While it brought some investors 30-60% gains, some folks who got on the bandwagon really early had pitiful annualized gains. It was priced really low to its understated book value.

I still believe diversifying widely on asset plays is the way to go. I had a simulated portfolio of 20-high-ROE-low-PB stocks that returns me a big fat 0 year to date. This experience also reminds me that pure quantitative stock picking techniques don't work too well.

There is an asset play opportunity in HKEx which I intend to invest on a small scale as well. Will talk about it in due time. However, I wasn't the person who discovered it (a clever mate of mine did). So this idea has to be kept secret until it comes to fruit.

Started buying "Good Companies"
The typical purchase of my portfolio in the past will include mainly stocks that are cheap by book value and had a good record of building its net-asset value. The weight of bad news is a major plus (such as Ascendas H-Trust quite some time ago; along with Chuan Hup). Debts must be minimal.

Nevertheless, when you are buying cheap companies, you are hoping that the market is wrong, and value reversion comes one day. However, time could really be the enemy of the mediocre-- the value of a company might slip due to macro conditions. I would confess that I never looked at macro when investing.

Hence with a bit of cash hoard on my side, it is timely to start investing a little on good companies.

I shall not reveal the name of this ..."good" company in question as I wish to accumulate more. This company is not trading at stupid cheap valuation (Xinghua Port is way cheaper at the moment) and have a risk that only myself would perceive as so (I am a strange man). I shall not describe this risk as it is pretty unique to this company.

This company has mathematically good returns on assets over quite a few years, no debt, good cash hoard and trades at a low adjusted PE. It is trading over 2x book value.

The business main source of revenue is from Hong Kong and the company is still working on the major cities of China, appealing to the population with stronger spending power. My hope is that the returns on assets came from the brand and perhaps sound management; this would be a long term play. Looking at the results from its first half earnings, there could be a slight mis-price based on its PE. The adjusted PE based on its cash is 6. I intend to allocate a higher than normal capital in this idea once the risk I saw is no longer there.

Super Companies-- First Cut

The following companies are what I see as “super companies.” They managed high returns on assets, on a 5 years or more basis. Their place in this list does not mean that they are priced right—which is the cornerstone of value investing, buying stocks are the right price. The other precaution is that returns mentioned here does not refer to cash returns. This should be used as the first cut.

Singapore

• Sheng Siong (OV8)
• SGX (S68)
• Micro-Mechanics (5DD)
• Riverstone (AP4)

Hong Kong

• HKEX:1382 - Pacific Textiles Holdings Limited - Declining business.
• HKEX:586 - China Conch Venture Holdings Limited - inconsistent FCF
• HKEX:8138 - Beijing Tong Ren Tang Chinese Medicine Company Limited - nice but too pricy at the moment.
• HKEX:303 - Vtech Holdings Limited - no growth in earnings
• HKEX:1126 - Dream International Limited - nice company.
• HKEX:1234 - China Lilang Limited
• HKEX:2283 - TK Group (Holdings) Limited
• HKEX:2020 - ANTA Sports Products Limited
• HKEX:1093 - CSPC Pharmaceutical Group Limited
• HKEX:837 - Carpenter Tan Holdings Limited
• HKEX:3918 - NagaCorp Ltd
• HKEX:1999 - Man Wah Holdings Limited - statistically good but not cheap
• HKEX:52 - FAIRWOOD HOLD
• HKEX:1830 - PERFECT SHAPE - vested.

Early promises (2-3 years of high ROA)

Singapore

• HG Surgical (1B1)
• MM2 Asia (1B0)
• TalkMed (5G3)

Hong Kong

• HKEX:6858 - Honma Golf Limited
• HKEX:520 - Xiabuxiabu Catering Management (China) Holdings Co., Ltd.
• HKEX:1523 - Plover Bay Technologies Limited
• HKEX:1345 - China Pioneer Pharma Holdings Limited
• HKEX:1500 - In Construction Holdings Limited
• HKEX:2138 - Union Medical Healthcare Limited
• HKEX:1572 - China Art Financial Holdings Limited
• HKEX:799 – IGG
• HKEX:6822 - Kings Flair International (Holdings) Limited
• HKEX:1513 - LIVZON PHARMA

Such companies definitely have attracted the eye balls of investors—whether the business is generating cash, or that it is priced right—is another matter.