For whom the bells toll

Come 1st January 2007, the bells will toll for the pockets of motorists who use Malaysia highways frequently. This is because fares on five highways are set to rise from 1st January 2007. The Malaysian Works Minister was quoted in the local media as saying that the government will withdraw subsidies paid to concession holders running the highways. One of the affected highways is the Karak Highway operated by MTD InfraPerdana of the MTD Capital Berhad (KUL:9032).

MTD Capital was featured in April this year when we felt that the Singapore market featured few opportunities. MTD Capital was then trading at a steep discount to its three listed subsidaries. Over the space of the seven months, this discount has since narrowed as MTD Capital has rallied by about 14% from RM1.88 to RM2.14.

Sweet Symphony

China Lifestyle Food And Beverages Group (SIN:E69) has entered into a share placement arrangement with broker-dealer UOB Kay Hian. The latter will help place up to 70 million shares at S$0.38 each on a best endeavours basis. This placement price is about 9% lower than the current market price of S$0.415. The placement is of a fairly large size; representing about 16% of its current share capital. As a result, the new share capital will be enlarged to 495 million shares (from 425 million).

The net proceeds raised, approximately S$25.8 mil, will be used for three purposes. They are for (a) developing a production facility in Tianjin, (b)purchasing new product lines and (c) working capital for their joint venture with Super Coffeemix.

With this placement, China Lifestyle hopes to embark on expansion plans to strengthen its market position. In view of this, investors can look forward to accelerated earnings growth in the near future. This may also bring sweet dividend payouts as China Lifestyle are committed to paying out 20% of its net profit as dividends from FY2006 to FY2008. Does this sound like sweet music to your ears?

Perfect Timing

Sincere Watch (Hong Kong) Ltd (HKG:0444) ("Sincere HK") was first featured on Margin of Safety about two weeks ago on 7 November. This HKEx listed counter has since surged 21% from HKD 0.57 to HKD 0.69. The CFA Institute does not permit annualizing of performance numbers if the review period is less than a year. Given this sharp pop in a fortnight, we can understand why. For those who are curious, such a movement would actually be equivalent to an annualized rate of return in excess of 10,000%.

Don’t we deserve a pat for our immaculate timing? Sincere HK has since reported its 2Q07 earnings. As expected, its EPS showed a marked improvement compared to the 1Q07 numbers. Its EPS for the quarter was HKD0.032 vs. HKD0.0028 earlier.

Management has reported that consumer sentiment continue to be strong in Hong Kong and other North Asian economies. In this light, Sincere HK intends to step up its brand management activities for all its luxury brands, namely Franck MULLER, de Grisogono, European Watch Company, Pierre Kunz and Cvstos. Sincere HK will also be enlarging its flagship Franck MULLER boutique in Hong Kong island and a new one will be opened in Ocean Terminal Mall in Kowloon before year end. In addition, a Franck MULLER boutique has been established at the Landmark Hotel Macau to tap on the booming gaming and hospitality sector in Macau.

Looking further north, Sincere HK is stepping up its market presence in the PRC by relocating its Franck MULLER boutique in Shanghai and seeking new locations in Beijing.

Traditionally, Sincere HK's earnings exhibit a seasonality pattern. Hence, we expect its 3Q07 earnings to be even stronger, barring unrealized exchange rate losses. Earnings should also be given a shot in the arm when the expansion and market plans outlined above bear fruit. In view of the foregoing, our full year EPS target of HKD 0.10 remains on track.

BIL, don't you lose my number

BIL International Limited (SIN:B16) has been in the news on both sides of the Causeway of late. Its KLSE listed holding company, Camerlin has surged following reports of a possible in specie distribution of BIL shares to Camerlin shareholders.

Over in Singapore, market sentiment is also warm towards BIL after a series of announcements regarding its foray into the UK gaming industry. In this connection, it has indicated that it wants to spend 31 million pounds to buy Rank Group’s Clermont Club. It has also applied for licenses to operate casinos within their Thistle hotels in UK. As a result, BIL's share price has chalked up a gain of 20% since we featured it in June 29.

Then, we had also alluded to the potential of the redevelopment of Molokai. Since then, news about this matter has been mixed. There are activists who resist development on what is known as Hawaii's last undeveloped island. In fact, in September, about 30 of them occupied La'au point on Southwestern Molokai at Shipwreck Cove to make their point that the island's development plans will have a negative impact on the island. However, Molokai Properties Limited, a fully owned subsidiary of BIL, proceeded to file a special management area permit to make a significant first step towards the re-opening of the abandoned 152 room Kaluakoi Hotel last week. The hotel is part of Kaluakoi Resort which Molokai Properties Limited purchased in 2001. The other part of the resort is a 18-hole course which has since been re-opened for play in 2004. The next step in the application process is for Maui County to review the application and seek comments from other stakeholders. More certainty on the outcome of the application should come through in the first quarter of 2007.

The title is a play on the Phil Collins top five smash hit, "Billy, Don't you lose my number". It was released in 1985 in the album, "No Jacket Required".

"Hotung baby!" shortlisted in Festival of Stocks

Our post published on 6th November titled Hotung baby! on Hotung Investment Holdings Ltd has made the cut for the Festival of Stocks #10. The festival is currently hosted by Gannon on Investing, a value investing blog and podcast influenced by Mr Benjamin Graham, Mr Joel Greenblatt and Mr Warren Buffett's value investing model. Geoff Gannon, who runs the blog, has indicated that whilst the current festival lacks quantity, "it more than makes up for in quality". So immerse yourself in the festivities and may you enrich yourself in the process.

Sweet Tidings

China Lifestyle Food And Beverages Group (SIN:E69) is a fast moving consumer goods company that holds the second largest market share for PRC jelly desserts retailing under its brand "LaBiXiaoXin". Margin of Safety first featured this company in March 2006 when it was trading at S$0.235. It closed for this weekend at S$0.425. Investors over this period who placed their faith in the counter will be licking up sweet returns in excess of 80% over the space of eight months.

China Lifestyle reported its financials for the first nine months of FY2006 over the weekend. Compared to the previous period for FY2005, its net profit soared 20% to RMB64 million, underpinned by robust top line growth of 32% to RMB404 million. Its net profit margin was roughly steady at 15%.

Going forward, China Lifestyle intends to build on its brand recognition further by airing a series of commercials on CCTV. It also intends to launch at least 10 new products, including the "Labixiaoxin" brand of potatos chips in FY2007. The potato chips is the first product introduced after the group's tieup with another SGX listed company, Super Coffeemix Manufacturing Ltd (SIN:S10) in August 2006.

Event Horizon

Mr Warren Buffett is known as a value investor who attempts to purchase, when possible, an entire business at an attractive price. However, before Berkshire Hathaway (BRKa) was synoymous with this approach, Buffett had put on trades in a manner known today in the hedge fund industry as "merger arbitrage".

The blog features a present opportunity available in the Singapore market. Aircraft equipment and avionics specialist, A-Sonic Aerospace Limited (SIN:A53) (ASON SP) has launched a takeover bid for logistics firm, Airocean Group Limited (SIN:A21) (AIR SP). A-Sonic has proposed to swap one A-Sonic share for every 2.63 Airocean shares in their bid to delist the latter. At the time of this writing, Airocean exchanged hands at $0.090 a share. This implies that shareholders in Airocean who bought in at this price are, upon successful closing of the deal, effectively purchasing A-Sonic stock at $0.24 a share. Since A-Sonic is trading at $0.28, these investors are effectively getting exposure to A-Sonic at a 17% discount.

Obviously, the trade is not a risk free one. For example, the deal may not close if insufficient shareholders vote in its favor. This may lead to a divergence in the stock prices instead. Interested investors should also study the shareholding structures of both companies to ascertain which way substantial shareholders will vote on November 13th.

Time to Buy?

Dear Reader,

Sincere Watch (Hong Kong) Ltd (HKG:0444) ("Sincere HK") is principally engaged in brand management and wholesale distribution of watches in Hong Kong, Macau and the PRC. The brands in Sincere HK's stable include Franck MULLER, de Grisogono, European Company Watch and Pierre Kunz.

As a result of largely unrealised FX losses affecting 1Q07 earnings, Sincere HK’s price has plummeted by nearly 50% in the past year from its IPO price of HK$1.08. The FX losses are due to the sharp appreciation of the CHF vs USD during the reporting period. However, we consider short term FX changes to be random and should cancel out in the longer run.

In terms of financial ratios, Sincere HK generally is able to command respectable net margins of 9% and an ROE in excess of 20%. Additionally, it must be emphasized that the ROE was achieved with no gearing.

With the FX movement squaring out over the longer term, full year earnings are expected to come in at around HKD 0.10 for FY2007. At the current market price of HKD 0.57, this imputes an inexpensive PER of 5.7.

Whilst there are risks such as its dependence on Groupe Franck Muller for the exclusive distributorship which aren’t expounded here, the current market price may merit more investigation than merely putting Sincere HK on your watch-list.


Yours Sincerely,
Mr Market

Hotung baby!

Hotung Investment Holdings Ltd (HIH SP) (SIN: H34) is a Taiwanese venture capitalist listed on the Singapore Exchange which the blog first featured on November 2005. The price has since gained 50%. Is there any opportunities left? We re-visit and update our notes on its prospects in this post.

As of December 31, 2005, Hotung had invested in 228 companies. Hotung's fortunes are very much intertwined with the buoyancy of the Taiwanese stock market. As most of its investments are in technology related companies, it is no surprise that Hotung reported losses in the years following the deflating of the technology bubble.

Things are, however, looking up for Hotung. The net profit for the second quarter of this fiscal year was a record NT$275 million vs. a loss of NT$333 million in the same quarter last year. The results are a third consecutive quarter of profits. This consecutive string of black figures suggests that the company turning around.

Hotung's balance sheet remain rock solid. About 50% is cash and cash equivalent. While we do not expect Hotung to declare any sizeable dividends, its management has sensibly used its cash horde to engage in a stock buyback program.

The market is offering a slice of Hotung at about US$0.13. This represents about a 35% off its book value of US$0.20. Other than trading under book value, it has already chalked up net earnings of NT$440 million at the half year mark. Doing a conservative projection for its full year earnings, Hotung is expected to turn in an EPS of NT$0.55 (US$0.125). This translates to a reasonable P/E of 7.5.

It is noteworthy that Third Avenue Fund Management, led by the venerable Mr. Martin Whitman has increased their stake in Hotung. It now holds a 10.12% stake. The most recent purchase was in 31 October 2006; probably at around US$0.12-0.13. But this is a case of averaging up as Third Avenue has accumulated when the price was languishing at around US$0.08.

Oh yes, in case you are wondering about the significance of the title of this post, it is a play on U2's best selling and most critically acclaimed album, Achtung baby. Achtung Baby topped the Billboard 200 chart soon after its release in November 1991. Will our Hotung baby go on to the apex of the top gainers' chart anytime soon? Your guess is as good as mine.