Thursday, March 30, 2006

The Best Things in Life are Free

Despite the pro bono nature of the ideas put up for discussion, the last four ideas have performed admirably. The foregoing explains the basis for the title of today's column.

The most fruitful discussion centered on Thomson Medical which has rocketed up over 25% since our posting on 23 Feb. The market seems to have vindicated our post which highlighted its cheap valuation, on a relative basis to other medical counters. It is trading around S$0.365 today compared to S$0.29 then.

The next best performer of the lot is China Lifestyle. In a tongue in cheek remark, we called their CEO the Chinese Willy Wonka in a column on 14 March. But its returns have not been a joke. It's up 12.9% (from S$0.235 to S$0.27).

Of the four, Magnecomp is the most recent counter put up for discussion. It was featured when it was trading at S$1.37 on 16 March. Compared to the meteoric rises of the above two counters, Magnecomp's 3.7% gain is a tad sluggish (today: S$1.42). It is nonetheless a move in the right direction. We shall see if sentiment towards it improves in the days ahead.

Finally, the last one on the list is Tong Ren Tang. The HKEx listed counter was considered fully valued at HK$17.00. It is interesting to note that it is trading at HK$16.20 today.

Well, that's all for the wrap-up. It's always good to give oneself a pat on the back occasionally so long as we do not get carried away!


Thursday, March 16, 2006

Spinning the disc

Magnecomp International is listed on the Singapore Exchange in 1998 [today's close: S$1.37]. Its business consists of two major divisions: (a) Magnecomp Precision Technology (MPT) and (b) Mansfield Manufacturing Company (MSF).

Interestingly, MPT - the hard disk division of Magnecomp, is also listed on the Stock Exchange of Thailand. It last traded at about THB4.70 per share. Hence, Magnecomp's 74% stake in MPT is valued by the market to be about S$302 million. As Magnecomp's own market capitalisation on the Singapore Exchange is S$312 million, Mr. Market effectively prices MSF at S$10 million.

The perculiar thing is that MSF, alone as a division, is profitable through its provision of metal stamping and tooling services. Given that MSF may generate net earnings of about S$10 million, this segment of Magnecomp is only priced at an attractive P/E of 1x. Is Mr. Market's pricing accurate or was he confused by his Thai counterpart?

Other vital ratios of Magnecomp [approximate historical ratios]:
  • P/E: 11
  • P/B: 1.5
  • ROE: 16
  • ROA: 9
  • Debt/Equity: 0.3


Tuesday, March 14, 2006

The Chinese Willy Wonka

Anyone keen on having exposure to Chinese consumers who enjoy marshmallows, candy and jelly desserts? If you do, look no further than China Lifestyle. It is listed recently on the Singapore Exchange and it closed at S$0.235 today.

The company is based in Tianjin and Fujian where it manufactures products under its propriety brands "Labixiaoxin" and Sunshine City. It is noteworthy that China Lifestyle has been awarded the China Top Brand Certificate in 2005 in recognition for being the preferred choice amongst the discerning Chinese taste buds. In this connection, "Labixiaoxin" has the second largest market share in the Chinese jelly market.

Industry trends

Industry sources indicate that jelly desserts which China Lifestyle produce are one of the top three sweets in China, alongside more traditional chocolates and candies. The annual growth rate for jelly desserts is estimated to be 15-20%, far outstripping that for sweets which is expected to grow at 8%. In terms of world consumption of jelly, China ranks second.

The value proposition

China Lifestyle hopes to ride on the rising disposable income of the Chinese and their indulgence in sweet desserts. We understand that overseas demand for the company's products is rising from a small base of 4% of group sales, as can be seen by the growth in the number of foreign customers seeking OEM arrangements. Under existing arrangements, China Lifestyle already has exports to South East Asia, North America, Australia and Europe. Its OEM arrangements with Walmart and Tesco are also a step in right direction for more future collaborations.

In terms of distribution reach, China Lifestyle has sales network of over 300 distributors supplying its 1000 varieties of jelly products, 100 varieties of marshmallows and 100 varieties of candy products to over 13000 retail outlets. These outlets are in 30 provinces and cities throughout China and their products may be seen in supermarket chains such as Carrefour.

Investors concerned with the agency issue should be heartened that there is alignment of interest between management and investors. Alliance Holdings, controlled by the founding family still owns a large majority of China Lifestyle (72.4%). It is founded and continue to be run by three brothers (CEO Zheng Yu Long).

In sum, at the current price, China Lifestyle provides a cheap play for investors seeking long term exposure to the Chinese market. Its business model is scalable and the products scores well with Chinese consumers.


Friday, March 10, 2006

Buffett the Wordsmith

Much has been written about the Berkshire Hathaway's 2005 shareholder's letter. Plenty of newsprint have been devoted to analysing the profiles of possible successors to Mr. Buffett's legacy after it was announced that the replacement has been agreed upon unanimously. Reports covering his comments on managerial compensation and risks of derivatives have made the business pages too. With so much already written, there probably isn't much left to write about.

Instead, we choose to take a light hearted look at the shareholder's letter to pick up interesting analogies which Mr. Buffett loves to pepper his message with. At the end of this short exercise, we can only conclude that Mr. Buffett has scored a home-run with his choice of examples and words.

To describe not being able to do two things simultaneously. [pg 4 of shareholder's letter]
"...elderly couple who had been romantically challenged for some time. As they finished dinner on their 50th anniversary, however, the wife – stimulated by soft music, wine and candlelight – felt a long-absent tickle and demurely suggested to her husband that they go upstairs and make love. He agonized for a moment and then replied, “I can do one or the other, but not both.”

To describe over optimism [pg 8]
"...behave like the fellow in a switchblade fight who, after his opponent has taken a mighty swipe at his throat, exclaimed, “You never touched me.” His adversary’s reply: “Just wait until you try to shake your head.”"

To describe the importance of attitude of managers [pg 14]
the young man who married a tycoon’s only child, a decidedly homely and dull lass. Relieved, the father called in his new son-in-law after the wedding and began to discuss the future:
“Son, you’re the boy I always wanted and never had. Here’s a stock certificate for 50% of the company. You’re my equal partner from now on.”
“Thanks, dad.”
“Now, what would you like to run? How about sales?”
“I’m afraid I couldn’t sell water to a man crawling in the Sahara.”
“Well then, how about heading human relations?”
“I really don’t care for people.”
“No problem, we have lots of other spots in the business. What would you like to do?”
“Actually, nothing appeals to me. Why don’t you just buy me out?”