Monday, February 28, 2011

Divested of Dapai International: Am I Paranoid?

I have just divested of Dapai International at a $200 loss.
While I do not deny that panic was a factor, I think I do have legitimate reasons to "panic sell".

Today, many small and mid cap S-shares are in the red.

On Friday and then Sunday, 2 small cap S chips applied for a trading suspention, China Hongxing Sports, a shoemaker, and subsequently Hongwei Technologies. Both have had audit issues regarding their financial positions.

Many S shares on SGX look undervalued, with large cash hoards and extremely low PE Ratio, and Dapai is one of them. Dapai sits on 13c cash per share and has low PE Ratio of 2+, and is trading at less than NAV.

Why did I divest of Dapai?

1.) Management during the IPO promised at least 20% of profits to be paid out as dividend a year. They did not fulfil this for FY2010, saying

"Our Board decides not to declare dividend for FY 10 so as to retain reserve for the capex of the
new Anhui luggage plant and for future business development. The Board will consider
recommending a steady dividend policy of the Group at the end of next financial year
."

They have already declared a dividend policy and  reneged on it. 20% of profits this year adds up to a mere S$10 million.

2.) They are sitting on a large cash horde of S$130 million ($110 million last year) and YET did a placement exercise at LOWER than the market price at that time.

There was no need to raise money, about S$10 million worth, since they already had $110 million in the bank at that time

The kicker: They paid out dividend of the same amount just a couple of months later.

3.) Regarding point number 1, the board decided to withhold dividend as they said they have to retain capital to build the 500 stores and the new luggage facility.

-Unless I've read the financial statement wrongly, I believe they have already factored in some payment for both the facility and shops, as seen by the S$13 million spent on PPE.
-They are STILL swimming in cash with S$130million and negligible debts.

4.) Interest payment for their cash is at RMB 561,000, silhouetted against total bank balance of RMB 659,535,000.

That's 0.08%. Again, I'm fairly sure the interest rates in PRC are higher than those offered by POSB. Even then, POSB offers 0.125%, and a higher amount if you have more money.

I find it hard to believe that Dapai can earn such a miserable amount of interest on their cash balance.

5.) Profit Margins. Dapai has a whopping 21.2% net profit margin. Contrast this to Nike, Inc, which despite having huge branding power achieves only 7% net profit margin, and adidas AG with 2.4% net profit margin.

Either Dapai has a monopoly over it's market (which it doesn't) or it can manufacture stuff SO cheaply or it's so high quality that people are willing to pay a premium for it, or ....

Average selling price per backpack is RMB 75, which is S$ 15. Pretty cheap.
Average selling price per luggage is RMB195.9, roughly S$ 50. Also pretty cheap.

Since Nike manufactures most of it's stuff in Vietnam and China, I assume that both Nike and Dapai's average cost price to be similar.

Dapai's figures then show that they can manufacture a backpack for S$ 11.50 and a luggage for S$ 38.50.

If Nike/adidas is able to sell a backpack for around S$ 50 (I saw at Queensway), and Dapai at S$ 15, I fail to see how Dapai can exceed Nike/adidas' margin. Of course, Nike/adidas make other things other than backpacks and 7% / 2% includes these other things. So I might be wrong here.

Hence I decided to divest of Dapai. When you can't trust the financial reports, you can't do accurate judging.
Not to say that Dapai is definitely cooking the books, but I have some doubts. I also did mention that I did not like Dapai's business.

Never should have invested when I was in doubt. An expensive $200 lesson made.

I will steer clear of the S-chip segment from now on, unless the parent or SSH are government owned.

Wednesday, February 16, 2011

Sembcorp Industries: Potential Short Term Trade

I've identified Sembcorp Industry as a potential short term trade.

Following Alexander Elder's triple screen trading system, let's go systematically:

1.) Find the Market Direction and trade with the market tide
Basically, if said stock is on uptrend, trade only from the long side. If Stock is on a downtrend, look for opportunities to short.
Let's have a look at Sembcorp Industries' Weekly chart:




As you can see from my blue line, the long term uptrendline is still intact, and Sembcorp Industry is currently hovering over it's uptrendline support. 13week EMA is also up.

Second Screen- Identify a Market wave that is against the tide
Like Salmon swimming upstream, a wave that is against the tide is bound to dissipate. So let's have a look at Sembcorp's Daily chart:
According to Dr. Elder, for oscillators like Elder Ray, Stochastics and Force Index, on an uptrend, take only BUY signals and ignore SELL signals(vice versa for downtrends). MACD Histogram for uptrends should also be at lows, but ready to turn up. He considers MACD histogram and divergences more important than crossovers and the like.
For those familiar with Triple Screen, we are in the autumn season.


For Sembcorp, let's have a look at MACD first. MACD is at oversold region, and the 2 lines show no sign of turning up. However, MACD histogram shows oversold bars that may or may not be ready to turn up.




Oscillator wise, I have 2 on the chart. Elder recommends we BUY when Force Index is negative on an uptrend. Looking at the chart again, Force Index is negative but upturning. As an added bonus, Force Index also shows a bullish divergence. I've used the 2day EMA to smooth things out, but editing FI to 13 day eMA also shows a bullish divergence.

Stochastics also shows oversold region, indicating a BUY on daily chart.
Hence, second screen shows an almost unanimous BUY signal.

Third Screen-
The Third Screen is basically where to put your stops and buy stops.
Elder recommends BUY when uptrend is intact, a retracement is occuring and BUY signal is indicated, unless multiweek lows are reached. In this case, Sembcorp Ind. is at it's lowest level since 11 weeks ago. So it's a question mark regarding the multiweek low thing.

If I do enter this trade, Elder recommends having a BUY stop order at 1 tick above today's closing price to catch any upside breakout, and BUY order will NOT be filled if there's a downside breakout. Hence reduces the trader's risk, at the expense of a few ticks profit.

For Singapore Market I doubt we have this kind of buy order, so it must be done manually.

So what should my buy price be? Today's HIGH was $4.93, so I should be buying ONLY when prices reach 4.94/4.95 bid/ask. If tomorrow downside breakout, I won't be caught, but I'll be sacrificing that few ticks of profit.
What should be stop loss be then? Elder recommends stop loss 1 tick below the low of the past 2 days, whichever is lower. Looking at Sembcorp, my stop should be when Bid/Ask is 4.81/4.82.

This leaves me with a total downside risk of $160 per lot if the trade goes awry ($4.95 to $4.81), with a target sell price of around $5.10 to $5.20, a reward of $150 to $250 a lot. (includes round trip commission) This leaves me with Risk/Reward Ratio of roughly 3:4, not very good actually.

I will see how it goes tomorrow. :)

Readers who would like to open an OptionsXpress account to trade in the US Market, kindly contact me :)
OptionsXpress commission is USD 14.99, lower than E*Trade, and also they have an office in Singapore, so fund transfer can be done via I-banking or Singapore Dollar Cheque with no TT Fees. Currency Exchange is also done at the JP Morgan Institutional Rate, which offers a spread tighter than what you can exchange on your own.



Monday, February 14, 2011

Dapai International Holdings: Looking to divest

Having thought about it for awhile, I have decided to divest my stake in Dapai International as soon as the price turns up. I was helped along by the many helpful cbox friends in LP's cbox.

My initial reasons for buying Dapai was purely because it was undervalued, I mentioned that it's business model was poor. Original Post here

It's PER is at 3+, and trading at 2/3 of NAV.
Intrinsic value calculated as a function of free cash flow with 10% discount rate and 0% growth is $0.52.

Very attractive right? Definitely. very undervalued.

However, there are many many cons against it.

Let's talk about it's fundamentals first.
- Company is in a growing, but not fast growing, segment of retail, Backpacks and Luggage.
Affluent Chinese can afford to buy highly differentiated retail goods like Samsonite, LV etc. Poorer chinese people probably would not look at Dapai, whose backpacks sell at about RMB 80-100. This leaves the middle class Chinese segment.
-High competition. Low barriers to entry.
-Product differentiation is not there.

Now let's go into the juicy bits:
- Company is a S-chip. Some China plays come to SGX having been rejected first by HKSE. It's financial figures might be...let's just say..."virtual". Lack of corporate transparency.
-Company might never reach it's purported intrinsic value. Why?
1.) Lack of interest in S plays
2.) Poor analyst coverage-CIMB used to cover Dapai, unsure why they decided to stop
3.) Poor institutional demand- BB's drive the market, not us.
4.) Lousy business.

I got the rest from Valuebuddies.com: link here
From member D.O.G. :
"2. Margins & Returns on Capital

Price is the main consideration for consumers since no-brand backpacks have the highest sales. Gross margin of 30% and net margin of 17% (both figures from 1H10) are pretty high for a company with a small market share in a fragmented, price-conscious, low cost-of-failure industry.

ROE for 2008 was 35%, for 2009 it was 21%. ROA for these years was 31% and 19%. These are incredibly high rates of return for a manufacturing business.

The pieces don't seem to fit.

3. Share Placement

The company did a share placement in May 2010. This was at a time when the company had only RMB 24m of debt and was swimming in cash. On 31 Mar 2010, almost 40% of shareholders' equity consisted of cash, RMB 551m. Yet the company chose to issue shares BELOW the reported tangible book value per share.

If the financial statements are correct there was absolutely no need to raise any money, and definitely not at such a low price. The amount raised was RMB 58m, only about 10% of the amount recorded on the books prior to the placement. There was basically no real change in the cash position after the placement, except that the new money was left in the holding company i.e. not injected into China.

The company claims it needed the money for "overseas working capital" or dual-listing expenses. Well, the 30 Mar 2010 balance sheet shows RMB 776m in retained earnings and RMB 551m of cash at the Group level. Surely one of the cash-rich subsidiaries could spare RMB 58m for a dividend to the parent company?

There is no excuse for not being able to get money out of China, since the company was able to do just that for its dividend payment in May 2010. Money left China and was paid to the holding company, and was then paid out of the holding company to shareholders.

===

The placement alone already does not make any sense. Put together with the impressive margins and supernormal returns on capital, the whole thing looks very odd.

Also, the placement proceeds of RMB 58m almost exactly match the money paid out in dividends (RMB 60m). The placement was done in April, and the dividends were paid in May. Maybe it's all just an amazing coincidence and I have an overactive imagination. Maybe.

Maybe the stock is cheap for a reason."



I will err on the safe side and will be looking to divest after FY2010 results release soon.
If there' divided declared, I'll hold till XD.

Saturday, February 5, 2011

Sri Trang: IPO fiasco

Sri Trang Agro company PCL listed on the SGX on Monday, a dual listing away from the Stock Exchange of Thailand, which is it's main listing board.

It was unique in that IPO price was not fixed before offer; retail investors had to pay the maximum price of $1.60, and in the case where price is fixed lower than $1.60 (due to demand from institutional investors or so I've heard), monies would be returned to the bank account of the applicant.

STA was supposed to set pricing on Tuesday, 25/1/11, but delayed it till Thursday where it first issued a statement saying the listing on SGX was off, then, barely an hour later, issued another statement saying to ignore the first statement, and the listing would go on as planned.

Doesn't inspire much confidence, does it?

Then, listing price was set at $1.20, 25% off the max price, indicating demand from BBs was lacking.

Furthermore, listing date was changed from 28/1 to 31/1.

This IPO caused me sleepless nights over that weekend, for 2 reasons:
It looked like a repeat of 2 recent IPO fiascos:
-Amtek Engineering
-China Gaoxian

STA finally released allotment results, and there was NO ballot, meaning everyone who applied received shares. Even ultra small cap XMH had over subscription.
Having applied for 1 lot, received 1 lot.

The last time an IPO saw undersubscription was Amtek Engineering (once a STI component stock), and what happened on listing day? Opening price of $1.00 thereabouts. Immediate 23% loss for unit holders.
Amtek was even worse than STA for the fact that all applicants received FULL allotments, meaning had you applied for 100 lots of Amtek, you'd receive 100 lots of Amtek. STA was a tad better, having received applications for 22 million shares, with an offering size of 20million shares for public.

This led me to much anxiety over whether STA would open underwater.

Secondly, the recent China Gaoxian dual listing IPO in the Korean Exchange was reminiscent of STA.
China Gaoxian was trading at $0.445 before the trading halt to announce pricing of their Korean Depository Receipts. Gaoxian's management decided to price the KDRs at $0.405, which was a 10% discount to the last traded price in SGX. At the open of trading halt, Gaoxian dropped to $0.390 and barely recovered to $0.420.

Even worse, when trading of Gaoxian KDRs opened in KRX, when the KDRs opened deeply underwater at about $0.340, the SGX listed Gaoxian shares plunged all the way from $0.390 to $0.355 in 1 day, and subsequently closed at $0.300 on Wednesday.

This was all very reminiscent of STA. STA announced pricing of SGX shares at a discount to the last price traded on SET, the shares are fully fungible, the main listing's price dropped after annoucement of pricing, and lastly, which STA did not follow, the "tail wagged the dog", meaning that the KRX share price led the SGX share price during opening day.

All this was very worrying for me over the weekend.

And, who would've known, STA DID open underwater at $1.15 on Monday. I was kind of relieved. However, within an hour or so, STA's price did rise to a high of $1.25. Unfortunately, I was indecisive and did not sell it off then. Closed at $1.19. Then, since I had to go out on Tuesday and could not monitor the price action, I just put an overnight sell queue at $1.23 (which just nicely covers all commissions). It was filled at 11:30am, sold to a retail investor. Unfortunately STA's price shot up to a high of $1.29. Missed out on a small ang bao here :(

This whole episode was not worth it, even if I did manage to sell it at $1.29, for all the anxiety it caused.

I'm sticking to big ticket IPOs (Hutchinson Whampoa, GIC-linked) from now on.

 I believe however, that this stock is a pretty good one fundamentally. It provides exposure to a commodity which is in shortage currently, and has better fundamentals than the highly speculative GMG. STA's SGX PER is at 7+, Price/NAV at 2x, and also STA's plantations, which are mainly in the south of Thailand, while volatile, is a known danger to us in this region, rather than GMG's plantations in Africa. It also pays out 30% of profits as dividends, which while not spectacular, provides a nice margin of safety for the company to reinvest earnings. My main beef with it is the high debt level (4.5x FY2010 earnings) and volatile region exposure (South Thailand). I'd be alot more pleased to keep this stock were it's main plantations in Malaysia.


Since I believe in this stock, why did I sell it away? Discipline would be the answer I guess? I bought this strictly as a stag, and I believed (at that time), as it was a stock with exposure to a hot industry, it would be oversubscribed and would have had netted me a nice ang pao for CNY.

Also, I read somewhere that most IPOs fall back to their IPO pricing 6-12 months after listing, with some notable exceptions like Amazon.com, Google and locally STX OSV, GLP and MIT.

I'd prefer to buy this company then at a cheaper price.

And if it's story was still compelling then, yet at a higher price than IPO, why not?