Saturday, May 26, 2007

Horology Culture

Sincere Watch (Hong Kong) Ltd (HKG:0444) reported its full year results for the period ending 31 March 2007 in the middle of this week. First, some pertinent numbers:

  • Revenue increased 26% from HK$373 mil to HK$470 mil.
  • Gross profit increased 40.2% from HK$108 mil to HK$151 mil.
  • Hence, the gross profit margin inched up from 29% to 32%.
  • The net profit, however, dropped from HK$49 mil to HK$43 mil. This was because last year's figures were boosted by an exchange rate gains. Net margin however, remain a respectable 9%.
  • Hence, if the exchange differences were excluded, the operating profit before tax would have increased from HK$37 mil to HK$71 mil.
  • The operating margin has also swelled to about 15% while ROA and ROE were 8% and 20% respectively.

The final EPS figure, as MOS had expected, was lesser than that of 2006's HK13.2 cents. However, it exceeded our full year forecast of HK10 cents by 0.7 cents. MOS singled out Sincere HK on 7 Nov 06 when it was trading at HK$0.56. We had wondered aloud whether it was "Time to Buy?". Then, we were of the view that the PER (even before adjusting for its cash horde) was trading at an attractive 5.6x forward earnings. Its management did not disappoint and also managed to swell NAV to HK$0.52 per share by FYE. Hence, we were able to initiate a position at utterly un-demanding valuations. Please thank Mr. Graham for introducing the term "margin of safety" to investing.

Sincere has also expanded its distributor-ships in the region by adding 7 retail outlets and 4 independent watch dealers. As at end Mar 07, the Group has 41 retail outlets and 23 independent watch dealers in North Asia. Sincere had also open a total of 3 Franck Muller outlets in the last FY - one on HK island, one on Kowloon's Ocean Terminal Mall and one in Macau's Landmark Hotel.

Next year's earnings are likely to be boosted by the Group’s first Franck Muller store in Beijing. It also plans to re-open the boutique in Shanghai's Plaza 66 Nanjing Xi Lu, the classy luxury mall in the booming city. Another outlet is likely to sprout out in the Venetian Macao in Aug 2007. These new shops make Sincere well positioned to capitalize on the growing affluence in Greater China. Furthermore, the up coming Beijing Olympics should translate to a tourism boom and possibly higher sales for the Group.

To reward shareholders for sticking out with management in a year when the stock price sank, a final dividend of HK$0.06 per share has been proposed. This is a cent less than last year's payout but it still represents a 10.7% yield on the price at our time of initial call.

The counter soared to around HK$0.92 cents after the results announcement. It, however, lost some ground to HK$0.87 amidst poor market sentiment. At the latter closing price, the return over the approximately half year holding period is about 55%.

For readers who may want more brain food, swing by to MOS' partner site to get your weekend dose of value investing news. The site features several new articles, including one describing how Bill Miller is lagging the S&P 500 returns in this calender year so far.


Thursday, May 24, 2007

In Cruise Control

Singapore Shipping Corporation has released its FY2007 results. MOS last discussed this security about a month ago (11 Apr 07) after noticing that its adjusted PER was actually less than 1x. Despite its net profits sinking by nearly 85% for the last financial year, management has declared a hefty net dividend payout of 12 cents. This far exceeds our expectations but it verifies what we discussed earlier - Mr Ow has a track record of rewarding shareholders.

Based on the 11 Apr 07 entry price of S$0.40, the payout translates to a bumper dividend yield of 30%.


Wednesday, May 23, 2007

Sincere dividends

Sincere HK reported its full year results after the close of market yesterday. The results were very encouraging. In particular, we note that its top line growth increased by 26%. Investors who track this stock will note that the price of the counter surged today. One of the reason is because Sincere has recommended a dividend of HKD 6 cents per share.

MOS will be reviewing the results of Sincere HK with interest in the days ahead and may provide some thoughts. We may also share our views of the recent 3Q07 results of Micro Mechanics. Whilst the numbers were weak, we did not consider it to be unexpected given the poor state of affairs in the entire semiconductor industry in the last quarter.

In the meanwhile, readers may wish to visit our partner site to view an interview of Mr Warren Buffett.


Monday, May 21, 2007

Partner Site to MOS

Dear readers, as the market soared to new highs, the number of readers of this blog has increased markedly as well. Some have also requested more frequent commentary and ideas. Unfortunately, we are not full time journalists. However, we are pleased to inform you of a partner site which serves as an aggregation tool for pertinent market news for the Asian value investor. As the site will be updated very frequently, do use it to get a pulse of Asian markets!


Saturday, May 19, 2007

Canaries in the Chinese Coal Mine

In MOS' last post, we spoke about the possibility of how this global exuberance may all come tumbling down when China's searing run stops. In today's column, MOS explains why we now net sellers of holdings after evaluating the Chinese environment.

Bubbles usually come to an end when the common man gets overly involved in the stock markets. In the local Chinese press, a cleaning lady was actually feted as a "Stock market Wizard" after managing to double her money in recent months (And we know that tomorrow's weekend papers in Singapore will carry an article about a gentleman who made S$100,000 in the last few months). Stories of rapid and large gains are abound in Asia today. As such, the public without trading accounts have rushed to open one, eager to partake in the strongest bull-run since 2000. Figures we have seen suggest that the number of A share accounts opened in Apr 2007 have more than doubled that of Feb 07.

"Liquidity" was certainly awash in the markets for the average Chinese household has one of the highest savings rates in the world. Hence, another milestone was brushed aside with ease last week. The turnover of the Chinese domestic markets hit US$50 bil, more than the rest of Asia combined. Its mind boggling for the latter pool includes the more established financial centers of Hong Kong and Singapore. The measure of trading mentality also shows that participants' trading horizon has also shortened considerably. The turnover velocity measured by the annualized daily market turnover as a percentage of free float market capitalization, has been rising steadily; underlining the extent of churning in the Chinese market.

Older investors blessed with elephant memories will recall how the Taiwanese stock market staged a similar rally in the early to mid 1980s. Tellingly, before the Taiwanese bubble cracked, everyone was dead certain that the "liquidity" will keep the party going. As a result, the turnover of a single Taiwanese market had also exceeded that of other Asian exchanges as everyone had to jump onto the back of the raging bull. We run the risk of performing "mental data mining" but doesn't this remind you of state of affairs in the mainland market today?

The Chinese stocks have come a long way since bottoming in the summer of 2005. In 2006, the Shanghai index was up 130%. We believe, from memory, that it has turned in another sterling 50% in this year to date. Simple valuation measures, if anyone is still looking at them, such as the PER indicates that over 1000 Shanghai A shares are trading at close to 50x last year's earnings. Simply put, a investor today will recoup his investment only in half a century’s time unless earnings surge by leaps and bounds. The typical retort when we raise the foregoing is that earnings growth can justify such valuations. But in a country where data availability can be slow and unreliable, it is difficult for us to conclusively put a finger on earnings momentum. It is also MOS' belief that if one searches hard enough, one would stumble upon a valuation yardstick which justifies today's price. If all else fails, try eyeballs or cash burn rate.

Since we are in this light hearted vein, it is worth pointing out the exercises which some undertake to support today's prices. The latest we have read is in a prominent Hong Kong newspaper. The author moved the Shanghai index back by almost two decades to illustrate its parallels with the Taipei bull-run in the 1980s. The result? The former potentially have room to quadruple (yes, quadruple isn’t a typo) in the next year. Despite proffering some economic similarities between the two markets, we cannot help but wonder if this is a case of data mining. However, it is to the author's credit that the article ended with an ominous warning - that the resultant crash in Taiwan was so hard that today's prices are barely half of the peak then.

The other must be the prevailing "market wisdom" about the Chinese market. That the Chinese government cannot let the euphoria vanish abruptly because the 17th Chinese Communist Party Congress meeting and the Beijing Olympics which will be held at the end of this year and in 2008 respectively. We have not been able to fathom the economic reasoning behind this but financial history is littered with examples of how "wisdom" came unstuck. Or how the "January calendar effect" disappeared after investors engaged in one-up-man-ship and started buying in the prior December.

The canaries in the coal mine have started chirping. In recent months, it has almost become an agenda item for Chinese officials to talk down the market. The latest to warn about this irrational exuberance was "Superman" Li Ka-shing, arguably Hong Kong's most shrewd businessman.

We are not full time journalists or bloggers. So thoughts for this piece were progressively jotted down since Thursday evening. But before this was fit for public consumption, we hear news of that the Chinese authorities have put in a "triple whammy" of measures to rein in the market. This includes widening the RMB's trading limits, upping the domestic interest rates and reserve requirements of banks. The latter two may cause a liquidity retrenchment and panicky retail investors who have not experienced a bad hair day may stampede for the doors.

We are also not fortune tellers with a crystal ball on markets. We are strictly "extreme value investors". Hence, we often have cakes in our faces when our macro calls go awfully wrong. But, to us, it’s better to be safe than sorry. Hence, we have raised substantially more cash than before by liquidating our non core positions. For we prefer to bypass the last few pennies on the financial highway rather than risk permanent capital impairment.



Sunday, May 13, 2007

This Time It's Different

Regular readers of MOS will know that we have turned bearish several months ago. The market may go up tomorrow and the day after but the probability of a huge crash simply increases. In fact, we have been issuing "warnings" about possibly how hyper-extended this market was. But, a complete correction never quite came. Yes, we were prescient in calling the February sell-off; but the massive bloodshed that would create enormous value on the Street never quite materialized.

So, is this time different? Absolutely. We are living in unprecedented times. Unprecedented to the extent that every conceivable asset class that we know of, from real estate to infrastructure to commodities to junk bonds, are trading at steep valuations. Look at the estimates in the list below. Simply put, there isn't any asset that is sufficiently cheap to entice loss averse guys like us.
Estimated cumulative performance of key asset classes (Mar 02 to Mar 07):
Equities -
  • S&P 500: 36%
  • Russell 2000: 68%
  • Energing Market equities: 221%
Bonds -
  • US government bonds: 28%
  • US junk bonds: 64%
  • Emerging markets debt: 87%

Many institutions still keep an eye on US numbers to serve as a barometer to the world economic growth. This is in line with the thoughts that "when Uncle Sam sneezes, the world/tiny Singapore catches a cold". But MOS thinks that this exercise is becoming increasingly meaningless. We should instead be looking to China. The rising superpower that is mopping up American debt. The "Joe Chink" that is working hard and lapping up assets of the "Stars and Stripes". It has kept the latter from imploding despite running a trillion dollar current account deficit. Indeed, one of the indicators investors buying into emerging countries watch is the current account deficit as a percentage of its GDP. 5% is usually the level institutional managers get nervous and when they would prepare to yank their monies out and sending its currency in a downward spiral. Is the US too big that it defys the laws of conventional macro-economics? Or will there be a time for payback?

Its true that Chinese companies are, likely to be at the behest of the government, making attempts to correct the deficit. PC maker, Lenovo, recently inked a deal to purchase operating systems from Microsoft. There will be more purchases to come. But we consider this to be just a signaling exercise which will not correct the root problem.

We are big fans of the Americans. A global policeman, friendly people, beautiful cities and of course, who can forget the American Dream. But unfortunately, trees do not grow to the sky. The Chinese have decided to set up a national agency to invest their assets into "solid"/hard assets. They will be cutting down on their purchases of American paper, to gradually stop funding the American debt. Isn't it almost like dishing out the cold turkey treatment?

Its almost like the leadership baton of this century will be passed from the Americans to the Chinese. Sure, the UK had its glory days, two centuries ago. The last one was America's time in the sun. This century, as it is increasingly suggesting, is going to be China's.

There is a huge construction boom, a housing boom, a stock market speculation fever. Folks on the Mainland are rushing to open security trading accounts. Admittedly the Chinese government has done a great job, in managing to keep affairs humming along. Selective curbs on infrastructure investment, small hikes to bank reserve requirements. Things have been kept on the slow boil. But there will surely be growing pains along the way. When? After the 2008 Beijing Summer Olympics did someone guess?

We do not know when and what will cause this bubble will pop. But the clock will strike twelve and turn much to mushy pumpkins, to many party goers' dismay. But if asked to venture a guess, we will put our money that this house of cards will start unraveling from China.