Portfolio Commentary: April 2019

STI (ES3) returns: 3.087-> 3.4150,10.63%
HSI (2800) returns: 25.25-> 29.85, 18.23%
S&P Index returns: 2447.89 -> 2945.83, 20.34%
Current Portfolio return: 30.65%

Portfolio return includes only stocks. With bonds included, the return is about 22%.

Transactions made:
-complete divestment of Innotek, at $0.565 and $0.585
-partial divestment of Xinghua Port Holdings, at $1.62
-small amount of Singapore Savings Bonds.

Innotek is now fairly valued at about $0.60 this week. With a low dividend return in mind, it is fair to divest. To be fair, at the price I got, the dividend rate is 4.46%. I believe the dividend would be raise in the future (better profitability and because management has skin in the game). At about 70% capital return, it is fine to sell, I guess.

Xinghua Port is partially divested for a strange but good reason: madness. The price surged from $0.90 to $2.1 at one point. By the time I managed to access my trading website, it was about 1.6-7. Made a mistake in keying in the order (as I was at work, heh) and sold it at $1.62 instead of $1.72. On hind sight, it was a good choice as the price plunged back to 1.2-3 in short order. Estimated capital return was about 55%, and I sold about 2/3 of the stock I had in XHP.

The daily, technical chart explains how crazy it was.

April was an extraordinary month. Never expected it and probably won't not be repeated.

***

Attended the Or Kim Peow (OKP, SGX:5CF) annual general meeting recently. It was a very small affair with less than 20 investors in attendance. A pretty ballsy investor was asking tough questions and the directors did not respond in an overly-defensive manner. Overall, I did not find anything that I have to be worried about.

***

I was surprised to read that S&P has hit an all time, historic high. With the number of worrying news at bay, it was a climb that eluded me. I remember one of my instructors in the past commented that "there is always something to worry about." A proper value investor should never be bothered by the market and just grind away, looking for deals. Some folks at GMO would not subscribe to that, but I do.

Until then..

March Update: PC Partner Plunges; Reflection on Investing

March Portfolio Updates
STI (ES3) returns: 3.087-> 3.331, 7.9%
HSI (2800) returns: 25.25-> 30.1, 19.2%
S&P Index returns: 2447.89 -> 2899.45, 18.4%
Current Portfolio return: 16.41%

The reason why the portfolio returns has "become" better (compared to earlier posts this year) is merely because it is telling a lie: I have removed my SSB holdings from the portfolio to look at how well I am doing in the equities side. HSI and S&P remains very difficult to beat. I don't believe I can beat it this year unless there is a surprise.

Recent purchase: SUTL, first tranche. Stock is on a downtrend and balance sheet makes adjusted earnings very attractive as a private owner. Is it cheap? Yes, but dirt cheap? Not really. There are still possible downsides, but when it goes lower, I will not hesitate to add.

***
(The following was written some time back and I hesitate to publish it for certain reasons. 
Please read it with that in mind.)

Just last month, I wrote about divesting PC Partners. They released results last Friday, and I wasn't aware of it (I don't track stocks that closely, much less those that I no longer hold).

And so I was pretty shocked that it fell 30% today at close, largely due to the abscence of a dividend, as well as pretty shocking numbers... inventory within the balance sheet did not reduce, and increased debt and provision means the equity had become smaller. I felt quite sick to the stomach because one of my mates have it.

I take time to pause and reflect on events like these.

What exactly is investing?

Is it the buying of quality stocks at fair prices (or even better, cheap prices)
Or purchasing dirt cheap, unpopular, troubled companies at fire sale prices, preferably way lesser than its adjusted net current assets?
Or concentrating on special situations, such as spin-offs, restructuring, arbitraging?

Maybe it is a bit of everything. Investing is all about capitalizing on the discrepancy of price and value. Price changes, and so does value. Buying a quality company is very much like cycling with the wind behind your back. But such opportunities seldom come by.

The most difficult thing about investing is that one is never certain that he is
a) right, and
b) the question of when the market rewards him. The only exception I can think of is special situation investing.

The easiest thing to do is to look at a company and say it is cheap. I pretty sure OKP is pretty cheap. But when will things work out? I won't pretend to be a genius here. Nobody knows. Maybe something disastrous can happen and my investment will not work out. But I think my odds are good. That is all it is to investing I feel...what are the odds?

Speaking of (a) right price and (b) time element, consider the case of Cowell. The stock was unpopular at the start of the year, trading at 0.91. It has adjusted current assets of at least 1.2 imo. Yet the news was bad: the main customer, Apple, was not doing so well. Cowell had also report a loss for the first half of its financial year. Yet, it can endure 4 years of cash burn in its books. A decent investor can look at a discrepancy of maybe 10% and probably not act. But we are looking at a discrepancy of probably 33%.

Even if one opt to take profit earlier, a 20-25% profit isn't too shabby. Achieving (a) is easy enough. (b) makes Cowell a great investment.

It is a typical example of bad prospects in earnings, but cheap according to assets. The stock market always love a good earnings story. Betting on earnings, and winning the bet, rewards the investor very directly. But it is a hard game to play.

So a typical value investor will look at its balance sheet and think: cool, it has about 50% of upside on adjusted current assets alone. Maybe I buy some. Hence, the investor fulfills (a), right price, but will have no idea when (b) will turn out.

As luck has it, it is trading at 1.41 today. 55% returns in 3 months. What a terrific investment. But...

Let's be honest here. This isn't something that one can foresee with intellect. The best one could do is to determine the gap between value and price and bet on it. The wider the gap, the better. The investment has to be safe-- in terms of the business as a going concern and the downside of the price. The amount of cash-burn per year shouldn't be too frightening that it will deplete the company within a couple of years. The debt and interest payment shouldn't be crushing.

The time value of money is something most investors are familiar with. The time return of investment is very equally relatable yet it would be hypocritical to assume one can foresee with intellect. Buying and selling with 10% gains and pretending to be a value investor is disdainful.

So how should one approach investing? My personal take is to go for the easy ones. But make sure the gap between value and price is large. It makes the "time return of investment" easier.

Let me shamelessly quote an example from my own portfolio.

About two years ago, I invested a small sum in Innotek. Today the total returns stands at 60%. It was a simple book value play, yet I felt the insider's decision to acquire huge amount of stock, and its well-fortified balance sheet makes the investment pretty low risk. So I added a bit more one year later.

So two years of investment, 30% a year, pretty decent. Is it a result of my intelligence? Not really. But I thought the odds are good.

***
Buying a company with a good earnings story, and hoping that it continues to do so, takes courage. Such an act usually borders on naivety.

Buying a company with problems, but accompanied with a strong balance sheet, takes patience.

I think it is easier to have patience.

Recap: Investing by Numbers

A few months ago, I wrote a post regarding investing by book value, and wonder if this portfolio will be able to beat the Hang Seng Index.

6 months has passed. How time flies!

The returns of this portfolio is a mere 0.79% without accounting for dividends. My calculation told me that HSI returned 1.94%.

As expected, there isn't a significant difference. I wouldn't expect dividends to make much a difference in 6 months.What are the advantages of investing in this manner (by book value)? I believe if one were to invest by index, there are probably frothy years where there isn't a huge Equity Risk Premium (difference between returns by index and bonds). But there will always be companies with temporarily problems. If one is to be more selective, e.g. by investing with a special emphasis in net-current-assets or even sustainable dividends, the rewards are there for the taking.

***

Little Portfolio Returns, YTD: 11.9%
Tracker Fund of Hong Kong: 14.8%
SPDR Straits Times Index ETF: 4.24%

The Hong Kong index is proving to be hard to beat. No significant purchase is made since Feb.

Jan-Feb 2019 Portfolio Updates and Light Reflections on Investing

My little portfolio got a little smaller after divestment of PC Partners at almost break-even price. In our field, we call it "break-even-titis," and I cannot disagree with it after looking at the price.


My sad little pathetic excuse on why I sold the stock was because I think the earnings, adjusted for "cyclical-ness," isn't dirt cheap. The idea wasn't mine to begin with, and so I sold. So I lost out on about 21% gains. From what was published, I didn't think a lot of inventories will be sold. The joint venture sounds a little speculative. But that is my own opinion, and clearly not the market's.

So I guess that is my sad, little, pathetic excuse for selling. On hindsight, the little amount of courage I had in buying the stock as it plunges, prevented me from making huge losses in the end. Investing is very much about luck at times.

For what it is worth, investing has been taking a back seat as other money-reducing hobbies take priority. For a while, I was tempted to buy a little bit of cowell at 80+ cents. I firmly believe this company is worth about 1.2 purely on net working capital, and had about 4 years of cash burn to endure a business down-turn. The only reason why I decided against buying, was the turnover in senior management/directors.

So I decided against it because I do not believe in investing in small amount of money in stocks unless I am dead certain of an idea. Quantitative investing, imo, works, but the minuscule gains over index returns is not worth it.

And so I missed out on about 60% of gains in Cowell as well.
I remember repeatedly buying AA batteries for a very cheap wall clock at my living room, and it became an activity which I must perform every 3 weeks. Eventually, I replaced the clock with a quality, Ikea clock and it has run uninterrupted for maybe a year or more. Buying quality stuff works.

I guess I still looking for the next "Perfect Shape" without the budging trade receivables.

***

STI (ES3) returns: 3.087-> 3.237, +4.86%
HSI (2800) returns: 25.25-> 28.7, +13.67%
Current Portfolio return: 7.99%

Current portfolio, in value, is 63.8% in SGX, and the rest in HKEX.
So the portfolio under-perform as a whole against the indices. This is extremely disappointing.

Transactions made:
a) sale of Samudera Shipping to token sizing due to a shift towards quality
b) purchase of more TTJ due to lowered market prices
c) purchase of more Xinghua Port Holdings due to lowered market prices.
d) sale of PC Partners as described above.

As market swings upwards from depression, I remain amused by how it can influence business valuation. It gets depressing for me as certain companies swing from high-end of the fair value to even pricier levels.

***

I apologize for this low quality post as I do not have any quality ideas or principles to talk about. Until next time...

2018 Year End Review

This lengthy and final post of 2018 consist of the following sections:

a)      A summary of my returns versus the indices

b)      A review of my investing strategy and what can be improved on

c)      Observation of the market

d)      A short summary of the “bad news” this year and my opinions on it.

Looking Back at the Numbers
Vanguard S&P 500 ETF
Start of Year: 247.09
Today: 227.76
Dividends: 8.062
Returns: (227.76+8.062)/247.09 = -4.56%

SPDR STI Index Fund
Start of Year: 3.48
Today: 3.1
Dividends: 0.113
Returns: (3.1+0.113)/3.48 = -7.67%

Tracker Fund of HK
Start of Year: 30.05
Today:  25.65
Dividends: 0.95
Total return: (25.65+0.95)/30.05 = -11.48%

Personal: 4.15%

Compared YOY, dividend payments increased slightly due to increased capital injection. Yield has increased slightly, but at this stage, dividend investing is not my main concern.

I glad to have 4.15%; it feels a tad disappointing to have lost a 20+% lead over the indices to 11%-15%. Looking forward, if I could seriously have a 10% lead over the indices, I probably make so much money that I wouldn’t care. But there is no way to tell. 

Investing Strategy

My approach is to look for easy deals, i.e. no brainers. A simple idea takes no more than a paragraph or two to describe.

***

A word about “easy.” What exactly is easy? Let me illustrate:

Imagine a hypothetical company that makes toilet brushes. Revenue and bottom line has been stalling or suffering slight dips for the past four years. Net margins has never dip below 30% for the last 9 years. Every year, its net operating cashflow has been over 100m, and capital expenditure has been only 3 to 5 million for the last ten years.

Insiders has been buying stock. But the market, in all its collective wisdom values it at 7.7 price to earnings (PE). Market capitalization stands at 1.14B.

Given that it has a cash hoard of over 271m and no debts, the company is actually selling for 869m.  That means the company is priced at less than 9 times free cash flow.

A casual market observer will point out that we are in volatile times. Tariffs are imposed between two of the world’s superpowers. Nobody is certain what would happen in the near future. But this company does not derive a sizeable revenue overseas.

The overseas opportunities for this company looks uncertain, but the risk in terms of valuation is low.

Would you be buying more stock if the market decides to slash its asking price by 20%? I certainly will!

***

The best companies to buy are companies with problems, but possessed a wonderful track record, with decent management and dividends to boot. 

The former boost your chances of recovery, the latter pays you for waiting. The lovely thing about problems is that usually companies will overcome it, and an investor might be able to assess the probability of that success with some experience. With problems come uncertainty and risk. I cannot account for uncertainty, but accounting for risk, as defined by difference in value versus market pricing, is my job.

Since market is usually efficient, good deals are usually scarce. I aim to avoid over diversification; having more than 8 or 9 stocks is a crowd. 

What I could improved on, was the amount of transactions made. Transaction cost is reduced from 0.65% to 0.55% this year, but the number of transactions is 59 vs 54 and 58 the previous two years. I hope to do better than this next year. The interesting figures are how many buys vs sells executed in each of those years.

Year	Buys	Sells	Market Returns*
2018	39	20	-7.14%
2017	31	23	21.11%
2016	44	14	5.03%

* SPDR Straits Times ETF (es3) figures from Stocks.Cafe.

In terms of absolute dollars, I was a net buyer in 2018 and 2016, and a net seller in 2017. On hindsight, maybe it is a good thing since the indices are returning negative this year, where one should be a buyer?

The other lacking effort on my part this year is the absence of quality special situations investing this year. The Religare Health Trust (RHT) sale to Fortis wasn’t very well researched, and even with the information I knew that time, the deal felt like a “50-50,” where the odds were simply not great. I was lucky to exit the position with small profits. TBH, I have never seen a deal with so many twist and turns like RHT. It takes a lot of courage to hold on.

A lack of discipline was also invested in other “50-50” deals which was subsequently sold at a small loss/profits. This is disappointing as the lack of discipline will only result in a huge losses in the long run. Lesson learnt—only initiate a position when I am willing to put in 10% or more of my net worth into it.

Observations about the market

The number of going-private deals declined since the start of this year. I believe that a rising number of going-private deals indicate a cheap market. I will be keenly reading the news on any trends of such. The dearth of IPOs is another murky indicator too, although the quality of IPOs coming to SGX is usually poor..

The idea of buying the dips was popular earlier this year… but all it took was December to vanquish it. Quick rebounds returns simply halted.

Just for the sake of entertainment, I reviewed the chart of 2018, Vanguard S&P 500 ETF, and counted the amount of dips and peaks in which an incredible trader could participate in.

An impossible 51% gain awaits any trader who, unrealistically I must add, is able to participate in every dips and recovery. Such a miraculous operation is quite impossible, since it requires god-like timing. The above trades did not include the deadly December correction.

What happens if this trader refuse to stop and carried on till December? 

He would have exited 33.9% richer have he sold on Christmas Eve, and 41.8% if sold just 3 trading days later. Huge difference.

Trading, such an exciting game.

These small, single-digit gains were no results of intelligence but out of bravado. How can such a method be reliably used? Nobody has an idea what tomorrow brings. The only endearing fact, which decades of financial academia has proved, is that equities will return more than bonds in the long run. The long run is 10-20 years and not 10-20 days periods that buying on the dip entails. 

The market is a tough, mean bastard and there must be a source which participants obtain their mental fortitude from.

Buying the Bad News

There were plenty this year. Some that I could recall:

• Comfortdelgro “recovering” after the Grab/Uber deal and its decline after the arrival of Go-Jek
• SingTel and its troubles in Indonesia and India
• Kimly-Asian Story-Pokka deal which got the latter’s CEO suspended and Kimly directors’ passports impounded.
• Lippo Group-Meikarta senior executives arrest and the subsequent sell-down of all its listed subsidiaries before and after the news
• Litigation in Top Glove following an acquisition
• Malaysia “Freak” Election results
• The loss of a major customer for Serial Systems (almost a 50% sell down)
• The Datapulse Tech fiasco

Personally, I love bad news. But I have my own opinions on this. 

I think one should avoid buying the “bad news” on two situations.

1)      When the integrity of the owner/managements is suspect. Who is responsible for producing the financial statements that we as investors rely on? There are hundred and one ways for management to profit, but only one way for small retail investors like us.

2)      Avoid companies who can’t compete with the low-cost competitor. Nobody could beat Nebraska Furniture Mall with a ferocious Mrs. B. As long as the low-cost competitor is profitable, this is going to be a long term problem. Likewise on a long-term basis, there can be no way a rationale consumer will choose something that cost more.

Graham has a point when big enterprises hit a bad patch, the odds of them overcoming it is good due to the resources (but human and capital) they have. However, I do feel that we had a huge bull run—most equities are priced on the high side. As such, these troubled, unpopular companies are unlikely to be priced at a bargain. There is no substitution for valuation.

Do not expect the market to be kind-- only wish that it will become sane in the long run. I wish everyone good health.

Portfolio Commentary: December

SPDR STI Index Fund
Start of Year: 3.48
Today: 3.095 (excluding dividend of  0.113)
Returns: -7.816%

Tracker Fund of HK
Start of Year: 30.05
Today:  25.85 (excluding dividend of 0.16)
Returns: -13.44%

My Little Portfolio: 3.6%

Transactions made: Large increase in PC Partner, which I will make some notes of later.

Size of portfolio has lightly increased since Nov, but extremely volatility brought portfolio value much, much lower.

Just one week ago, the overall time-weighted returns is 11.57%. Almost 8% has been shed in a matter of a week, 5.71% in 4 days. PC Partner is the main reason for this heavy decline. In a matter of a week, the price of PC Partner plunged from 2.57 to 1.76. This is a fall of 32% in one week.

PC Partner started off the year of 2018 at 3.67 HKD. It went as high up as 7.55 HKD (that is a 100% increase). The decline pretty much started on 18-July-2018, at 7.08 HKD. That is a plunge of 75.4% in a space of 5 months.

I was speechless as the stock was sold down in no less than 5% daily. The most disconcerting of this issue is that insiders did not make any purchases, and neither were any company-related announcements made. There are a few bright spots in this company, but I am well aware of its less-than-perfect balance sheet, and largely cyclical earnings over its 8 year of listed financial records. A court hearing will commence in early Feb, and earnings visibility of its product, taking up a huge space in its inventory, will be much clearer then.

Time will only tell if I made a huge mistake as PC Partner isn't my typical stock.

Just today, some idiot decided to sell TTJ at a 10% discount, although only 4000 shares is involved. I lost count of the number of times a stock in my portfolio has lost 10% this week.

Maybe this is why value investing is so hard? I wish there is some known problem with the company, but there wasn't any.

Portfolio Commentary: November

SPDR STI Index Fund
Start of Year: 3.48
Today: 3.125 (excluding dividend of  0.113)
Returns:-6.95%

Tracker Fund of HK
Start of Year: 30.05
Today:  26.3 (excluding dividend of 0.16)
Returns: -11.95%

My Little Portfolio:14.1%

Transactions made: Lightly increased holdings in TTJ after reviewing the last annual report. Lightly increased holdings in OKP. Both are cheap by book value, and OKP has the added advantage of having legal issues. I believe the issues to be temporary, not lasting over a period of 3 years.

Size of portfolio is more than doubled since start of the year. No significant divestment in the plans.

A Pretty Bad Day

Today is pretty dramatic and I would talk about a couple of things.

First off, my little portfolio suffered the heaviest single-day drop so far, a 3.1% drop.
This is attributed to a 9.8% decline in Xinghua Port Holdings, just over 10% in Samudera Shipping, a 6.8% in PC Partners, and a 3.8% decline in Thai Beverage.

I would be lying if I am not perturbed by it. But I guess if I aspire to hold less than 10 stocks, there will be more of this to come.

My reaction to that is to stay still. There are a few reasons for this:

1.  None of the companies are in the danger of going bankrupt.
2. All the companies are cheap based on simple valuation. PC Partner is largely a cyclical company and I might be wrong.
3. They pay a decent dividend, compared to risk-free rates.
4. There were no company announcements made prior or after today’s market close, and hence, as unpleasant and uncomfortable as it is, one has to treat it as market’s fluctuation. 
5. I want a 10-15% discount off my average price before I commit additional capital. The lower the price, the lower the risk.

Technical analysts would point out that charts tell the whole truth—believers of this trade does not suffer or endure any long term discomfort. Price movements tend to occur long before any formal announcements, and insider leakage is unavoidable. Even the most hard-core value guys will acknowledge this.

When I buy a stock, I tend to think about the probabilities of me making a decent return within 3-4 years. There are three advantages an investor can have. Intellect is one. Insider or industry knowledge is another. The last, is time. Having the patience (and stomach) to wait things out can be rewarding.

In view of the bond offerings by government-affiliated entities in recent months… I do think that if someone has an investment horizon of about 15-20 years ahead (before death become a statistically-high probability), bonds do not make sense, especially since they are not capital-guaranteed investments (like Singapore Saving Bonds). The financial statements of the entities selling the bonds are not disclosed, hence one needs to have faith (although I would say we are all in the same boat) that they are not in some kind of trouble.

I do believe there are studies made by the academia, measuring the performance of bonds vs stocks in 20 year period blocks, across various point in the last century. The probabilities of bond beating stocks is extremely low. If I am a 55-year-old man, or have some form of liabilities to pay for after 5 years, the bonds are a good idea.

I think if I work sufficiently hard for my ideas, 2.7% shouldn't be a tough target to overcome. Hence I am sticking with stocks.

Portfolio Commentary: October

SPDR STI Index Fund
Start of Year: 3.48
Today: 3.08 (excluding dividend of  0.113)
Returns: -8.25%

Tracker Fund of HK
Start of Year: 30.05
Today:  26.3 (excluding dividend of 0.16)
Returns: -11.95%

My Little Portfolio: 12.76%

Returns drastically plunged from 21.07%  at the start of October, together with the market.
Additional purchase made for the slow-grower which I intend to accumulate.
No divestment was executed during this period of volatility.

Top 3 positions are 18.73%, 18.43% and 15.46% for the top 3 positions. There are currently 11 stocks in my little portfolio and I intend to keep it to 8 and below in the future.

There were a couple of good companies that I am keen, though superficially informed, which price did not drop too drastically during this period of correction. As such, I have no spend a single cent in them. There isn't much to tell as nothing much was done, and shamefully, there were nothing much learnt during the last month. We can't stop growing but we cannot stop learning.

Portfolio Commentary: September

There were much transactions made on my little portfolio this month due to the extreme volatility in the Hong Kong market. For 10 days, the Hang Seng Index fell from a high of 28416 to 26345, a 7.8% decline. With the increased volatility, I increased capital injection. Some of the transactions include:

a) Divested Playmate Holdings after ex-dividend. Realized my mistake in valuation and move on until there is a larger, significant discount (40-50%). This means a price of $0.70 or so.

b) Divested Hop Fung Group on government regulation worries. The following screenshots off the quarterly report explains:

This brought about a 65% decline in net income, and the balance sheet was substantially weakened. Cash fell from 335 to 222m, and debt increased from 17m to 51m. The market subsequently sold the stock down 44% in a matter of three days.

This isn't a pretty picture and I disposed Tat Seng as well.

Cash from the divestment above, and additional capital, were deployed into the following
a) Increased TTJ after a 8-10% discount from my first purchase price

b) Initiated purchase of Thai Beverage; I do believe that the company will be able to turn the company around from its troubles, given the 10-year records. Meanwhile, I am expected to receive about a 4% dividend.

c) Increased position in Xinghua Port Holdings after the volatility provided the liquidity for this little-traded counter. After a few days, I received news that the Stop-Work Order on Xinghua Port's CCIP is lifted.

d) Initiated position in Qingling Motors, a net-nets stock with a pretty good dividend yield. It has fallen well over 20% in recent months.

e) Increased position in a slow-grower which identity I would keep mum since I am still in accumulation stage.

Most of my companies have some sort of problem weighing on them but I think they are temporary. I am a strong believer that markets are usually efficient and the ability to wait out problems is a major advantage of a retail investor. How long can problems last?

As the Hong Kong market recovered in the last two days, my little portfolio's year-to-date returns stands at +16%, leading the STI by 20% and HKEX by 27%. I am counting my blessings...

Speculative Profits: What is Investing?

If you invest in stocks with the mindset that cash is king, here is a company that has generated next to no cash, but yet brought unbelievable amount of profits to shareholders as its stock price climbs on stairs made of purely hopes. This company is mm2Asia ("mm2").

Shareholders who bought right on day 1 have little to complain about. It closed at $0.25 a share and gone through two, 1-to-2 splits in 2016. Today the share price is $0.37, which is $1.48 a share. That is a 592% increase.

On paper (accounting profits), the business generate salivating numbers:

The company has the right to boast, on its annual report in 2018, that its CAGR for revenue grow 85.8%, and net profit 77.0%. It has acquired and spun off companies, and including a large, well-known cinema operator in Cathay. Yet it has paid no dividends to its shareholder, who probably won't complain on the account of its stock price (and free entertainment tickets via balloting).

To me, if you were to insist on paper profits, the right metric is not net profit but returns on invested capital. A revenue growth and a net income that grew side by side is common. But if the growth in paper profits is slower than the growth needed for capital, it is actually detrimental.

The simplest way to measure ROIC is to take net income and divide it by the total of shareholder equity (without accounting for minority interest), and debt. ROIC calculation can be extremely subjective since the proper way to do it is to take cash generating assets minus interest-paying liabilities. What I am doing here is the blunt and lazy way.

Shareholder equity does not include minority shareholder's capital.

All debts include non-current and current debt.

From 2015 (first year since IPO)  to 2018, the share capital injected into the company is about 100m more. Returns on capital has been great in 2015, 26.09%. Today, the figure is a lot more modest at 10.81%. 

What about the cash?

 

If one were to take into account Operating Cash Flow (OCF) before working capital changes, this company is actually pretty good. But its net operating cash flow has been next to nothing. It is no surprise that the company is in a hurry to spun off subsidiaries in public listings (which will generate the highest pay off), paid zero dividends in the last 4 years, and had to acquire a large sum of debt to acquire Cathay.

I note that they have a severe increase in payables, from 46m to 274m this year. It is a sign of potential cash flow issues.

Investors in mm2 are still paying about 16 price to earnings, based on trailing twelve months basis.
The price is far from being depressed, despite a significant decline of 47% from this year's high.

But who cares right? 592% in paper profits for investors!

***

Just to illustrate how little do investors consider stocks as a form of business ownership, consider the story of TheHourGlass. It is far from being the most neglected company in SGX, listed for more than 20 years. Neither is this company the most profitable...

Based on figures since 2008, the company has never had a negative cash flow. It has an average of about 29m in free cash flow yearly, since 2008-2018. By the wisdom of the market, the whole company is worth 472m. This represent a cash yield of 6.1% as a business owner. As a minority shareholder, dividends were paid for the last 10 years, with a yield of about 3% currently.

For ten years, next to no additional share capital was injected in its books. This means there were no significant shareholder dilution.

Yet the price of this company move between $0.56 to $0.67 a share for the last 5 years.

***

So what is investing? It might be old fashion to think that stocks represents business ownership, as the market constantly ignore the essence of capitalism which is to generate cash profits, but chose to focus on potential instead.

I guess the market loves risk takers.

Is it easier, as an investor, to bet on the future of a company that has presently no cash generating abilities, or to bet on a consistent cash-generating company that is in some kind of temporary trouble?

I am a sucker for the latter.