Friday, May 30, 2008

End-May 2008 Portfolio Summary and Review

2H May 2008 was relatively slower in terms of announcements and updates from the companies I own. One of the more important events was the release of FY 2008 financials for Boustead on May 28, 2008; while Pacific Andes has yet to release their FY 2008 results (as at the time of writing this). I will be providing a summary of each company’s results in my portfolio review below.

Meanwhile, oil prices have managed to hit a new record high of US$135 per barrel before dipping down below US$130 recently. Worldwide food inflation is still a major issue and Singapore’s April 2008 inflation rate hit 7.5% year-on-year ! This underscores the need for individuals to invest their money in order to beat inflation over the long-term, as bank deposits are yielding pathetic interest rates of less than 1% per annum. Even if one does not have the time to do the in-depth research and reading required to properly invest in quoted equities, one can still use a dollar cost averaging method to invest in index funds which are one of the lowest cost funds in the market. These index funds will yield market returns and are properly diversified to hedge against undue loss of capital.

Below is the summary of my investments and related news as at May 30, 2008 (STI at 3,192.62 points).:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $3.00, Gain 365%, YTD Loss 9.6%. Ezra’s special dividend of 5 cents per share will go ex-dividend on June 3, 2008. The dividend will be payable on June 18, 2008. I have not included this dividend in my realized gains until my mid-June 2008 portfolio review.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.02, Gain 56%, YTD Loss 16.2%. On May 28, 2008, Boustead released a sparkling set of results showing that net profit attributable to shareholders had increased 46% to S$51.5 million, representing a sixth consecutive year of record revenues and profits. In the spirit of celebrating their 180th Anniversary, the company has declared a final dividend of 5 cents per share and a special dividend of 2 cents per share, raising FY 2008 payout to a total of 10 cents per share. At my purchase price, this represents a yield of 7.72% which just manages to beat inflation of 7.5%. Also, on May 29, 2008, Boustead announced that they had increased their stakes in subsidiaries – ESRIA from 87.1% to 88.2% and ESRISA from 88% to 89%. The total aggregate cash consideration paid was A$330,705 funded from the company’s internal resources. I have also transcribed the entire audiocast of the company’s FY 2008 results presentation and subsequent question and answer session with Mr. FF Wong, and will present this in two parts. I will follow-up with a review of the company’s results and prospects moving forward in a later post.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.88, Gain 185.1%, YTD Loss 16%. There was no news for Swiber for the second half of May 2008, except a brief news report to say that they will be deploying their new pipelayer vessel, Swiber Chai, to assist CUEL as part of their 5-year deal valued at US$50 million per year.

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.67, Gain 50.5%, YTD Loss 2.3%. There was no news for the company for the second half of May 2008.

5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.565, Loss 13.7%, YTD Loss 10.3%. This evening, Pacific Andes released their FY 2008 financials. Net profit after tax (and excluding exceptional for comparison) rose 98.7% from HK$242.1 million in FY 2007 to HK$481 million in FY 2008. A first and final dividend of 2.07 cents per share was declared. Based on my purchase price of 65.5 cents, this represents a dividend yield of 3.16%. I will be doing a full review of PAH’s FY 2008 results in a subsequent post (as readers may note, I have my hands really full with so many results releases, so please have patience).

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.84, Gain 22.7%, YTD Gain 0.5%. There was no news from CFG for the period ending May 30, 2008.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.20, Gain 8.6%. On May 20, 2008, FSL Trust announced the successful completion of their acquisition of the first Yang Ming vessel, YM Eminence. The vessel will be leased back to the lessee on a 12-year lease and guidance for the DPU accretion of the third vessel will be announced once financing has been secured. I also received the DPU of 3.524472 Singapore cents per share today (at an exchange rate of 1.3608 to the USD).

Overall Portfolio

My overall portfolio has increased by 77.1% without taking into FSL Trust’s cost. If included, the gain is 58.1% from a cost of S$80.4K as at May 30, 2008. The market value of my portfolio without FSL Trust is S$103.2K, and if FSL Trust is included then the portfolio value is S$127.1K. Realized gains remain at S$5.9K (slight increase from projected 1.34 exchange rate for FSL Trust) until the XD date for Ezra. Boustead and Pacific Andes have yet to ex-dividend and thus these dividends are NOT included in computation of realized gains.

Comparison against STI

I have devised a new way to benchmarking my portfolio which makes it simpler for me. I will benchmark my previous portfolio performance BEFORE purchasing FSL Trust in January 2008; and do a separate independent analysis of the performance of FSLT to date against the STI.

The FTSE STI had declined by 8.32% since the start of 2008. My portfolio (without FSL Trust) has to date declined 11.6%. Therefore, I have under-performed the STI by 3.3 percentage points.FSL Trust has gained 8.6% thus far from my date of purchase while the benchmark STI has fallen 0.79% (3,218.14 as at Jan 14, 2008 to 3,192.62 today); I am happy to report that FSL Trust has managed to out-perform the index for FY 2008 thus far.

My next portfolio review will be on Friday, June 13, 2008 after market close.

Thursday, May 29, 2008

Boustead FY 2008 Results Audiocast Transcript Part 1

Boustead released their FY 2008 financials yesterday May 28, 2008. To celebrate their 180th Anniversary, the Company had launched an audiocast for their latest financial results, which saw the company achieving their 6th consecutive year of record revenues and profits. Net profit attributable to shareholders rose 46% to S$51.5 million, and the company declared a final dividend of 5 cents per share and a special dividend of 2 cents per share. I shall be reviewing and posting my views on Boustead's results in a later post; instead now I present Part 1 of the transcript of Boustead's audiocast.

Note that this is typed out entirely based on my listening to the audiocast, and some parts are re-phrased accordingly to capture the essence of what was said. I think FF Wong and KK Loh tackled many questions on the future of the company and the direction it's going to take in 3 to 5 years time. Also note that I have NOT typed out the section for Mr. Keith Chu presenting the Powerpoint Slides as I think that is largely self-explanatory in the given attachment on SGXNet and does not add much value. There are almost 6 full pages of text which I had typed out based on the audiocast; Part 1 will present about 3 pages and Part 2 will showcase the rest of it.

Question: Notwithstanding inflationary pressures, you have controlled costs very effectively. May I know what’s your strategy and is this sustainable moving forward ?

FF Wong: Obviously, you all realize that raw materials escalation has been going on for some time. It has always been our practice (before signing a contract), we ensure the commitment is back-to-back with respect to our suppliers. It turns out that this is an effective way to control our margins and to prevent material price increases/escalations. With respect to labour and wages, we have been under pressure as well. In that regard, I have been stressing time and time again; we have a very effective profit-sharing formula in all our subsidiaries and business sectors. We are paying very good bonuses to our staff. In the case of Boustead Projects, most will be paid 7 to 12 months bonus this year.

Question: There is a recovery for margins from 29% in 1H 2008 to 32% in 2H 2008, would this trend be sustainable going forward ?

FF Wong: I would expect so. Based on our budget (FY 2009), we will do even better.

Question: Moving into FY 2009, how do you see Salcon performing ?

FF Wong: I have been very disappointed with Salcon’s performance so far. We had promised the market that we would turnaround this division in FY 2008 but this did not happen principally because of two unfortunate situations. One of these was in Philippines (a project with the Philippine-Manila government) where Boustead got involved in a political tussle between two factions. As a result, they refused to pay us even though this was financed by ADB (Asian Development Bank). So, we took them to court and we expect to win this legal case as there is no reason why they should not pay us. In any case, we were severely affected by them. The other case was another contract where we suffered from unforeseen circumstances; one of these was unexpected rainfall (bad weather) and the project was delayed; while the soil conditions were not what we expected and presented to us. We believe we can claim against the client but based on prudent accounting practices we would need to make provisions first. But moving into FY 2009, we have secured a lot more projects than before and these are the projects without installation or sewer works. Our competence in Salcon rests on water treatment and mechanical expertise. Without having to rely on civil works, we believe we will be able to manage and control the costs much better. The other positive aspect will be from Middle East; we do expect sizeable projects to be concluded in FY 2009 but we are not ready to make announcements yet.

Question: Is it possible to know the extent of losses at your water segment for FY 2008 versus FY 2007 ?

FF Wong: I can tell you that for FY 2008, losses amounted to S$14.8 million against losses of S$7.7 million for FY 2007. Bear in mind that for both financial years, there was a huge provision for closing down Salcon in UK. The figures may look big but they are not quite meaningful as such.

Question: With respect to your Energy related business revenue (up 5% to S$137 million), with high oil prices and in view of delayed negotiations, how much growth would you expect in the coming years ?

FF Wong: That’s a difficult question. With high energy prices, we do expect this division to continue to grow. As what Keith Chu just presented, with high material prices and tight capacity (referring to labour shortage), most of the large oil majors have decided to delay their projects somewhat; hence you can see that there was a dip in order book but I can assure you that they are not dead. Negotiations are still continuing, it’s just very frustrating that we cannot conclude them. Boustead is pushing up prices and we are trying to pass on the (higher) steel, outsourcing and equipment prices onto the client. Every time we revise that, it sets them thinking and further delays the project. There will be growth but as to the extent of it, it is very difficult for me to project at this point in time.

Question: The water and wastewater division has constantly under-performed over the past 4 financial years, causing the Group much financial losses. While it seems to be an exciting industry, revenue is only S$36 million so far. How much scope is there for growth and are the margins for water projects enough for Boustead’s project parameters ?

FF Wong: As I have said in the past, water and wastewater is a highly competitive business. If you look the industry as a whole, I do not think there are many companies reporting tremendous profit as yet (meaning they have not lived up to market expectations). It is only exciting because (I think) the press was responsible for exciting the public; fundamentally there are huge prospects in China. But this is a market with low relatively low barriers to entry; hence the unexciting margins. Our strategy is to move up the ladder in terms of technology. We have spent a good deal of money in R&D and have put up a commercial scale pilot plant in China to treat industrial waste (textile waste in this case) but we cannot conclusively say that it is working or that it is working to our expectations. We will need a couple more months to ascertain that this technology works. If it works, we will be able to scale up the business and we will have an answer to our competitive disadvantage at this moment. Once we have proven we are able to compete effectively, the margin obviously is better than having to compete in BOT for waste treatment plants. That will be our answer in particular for China. Once we are successful in China, we will scale up and offer our services and technology in other parts of the world (in particular India). This technology has the potential be very big and we are already in negotiations with some of the big industrialists in China but this is subject to our successful conclusion that this technology will work. Hence, I will say that there is big potential. In the wastewater arena with many competitors using low technology, there is not much money to be made.

Question: Remember in FY 2007’s results presentation, Mr. Wong you mentioned that if there was no major capex in FY 2008, you would be looking to pay out a lot more of the cash. Would you share your current thoughts on this ?

FF Wong: We are paying a fair bit more. In FY 2007, we paid 6.5 cents per share dividend. In FY 2008, we have upped the dividend by 3.5 cents (50+%) per share to 10 cents per share in total. So we are paying 50% more than the previous year. Are you happy with it ? I am quite happy with it (side note: FF Wong owns more than 30% of the company). Obviously, you do notice that we have a lot of cash of S$150 million. We have been looking at various synergistic acquisitions. We nearly concluded one acquisition in the oil and gas sector but unfortunately they did not live up to our scrutiny. In fact, we spent nearly S$1 million on the due diligence. We are looking at a number of investments in the region which would transform the company into a much stronger company. Other than ESRI (geo-spatial) of which about 60% of the revenue is recurring, most of our businesses are on a project basis. It is our intention to look for acquisitions which are able to generate recurring income to balance out the current business model in which most of our revenues are project-based.

Question: With a net cash position of S$150 million, how does the Management look to utilize this cash ?

FF Wong: Most of our revenue is not recurring, so we are looking for a synergistic acquisition or investment to generate recurring income to balance out our project-to-project income.

Question: What kind of M&A targets would Management be looking at ?

FF Wong: We are looking at synergistic M&A possibilities. We nearly concluded one earlier on but unfortunately, after spending S$1 million on due diligence, we decided to back out as it did not live up to our expectations.

Question: Regarding the Libyan township project, when will the project be completed, the booking of the revenue in terms of FY 2009 and beyond. Also, with the township development in its infancy stage in Libya, what are the chances of securing more projects ?

FF Wong: This current township project – contractually we are supposed to complete it within 2 years. Based on our experience in Malaysia, we could actually have it completed in 1.5 years. Unfortunately, there has been some delay as we need to thrash out some of the differences with the client’s consultants. This is obviously a learning curve for us. The consultant’s engineering practices and standards are very different from ours and there are also cultural differences which we need to overcome. We have just gone through that and resolved all the differences. In any case, we are about to kick off the project after 4 months of delay. Assuming no other differences, we should be able to wrap up construction activities within 2 years and we are expecting significant contribution from this project in FY 2009 and FY 2010. We have been promised, once we have been able to move this project, there will be a lot more to come. However, we will take this project one at a time and make some good profit before we consider pitching for another one.

Stayed tuned for Part 2 !

Monday, May 26, 2008

Risk Appetite - Objective or Subjective

An interesting thought which came up the other day as I was travelling in the bus was one of exploring and understanding the concept of risk appetite, and what it actually meant for investors. One should understand that the concept of "risk" as we know it (and which is defined by fund managers and academics) is that of the volatility of an investment or asset class. Thus, the premise which is built upon this foundational concept will necessarily revolve around minimizing volatility within one's portfolio in order to "minimize risk". As I will be discussing in the paragraphs below, this is a flawed concept which may result in substantial losses for the average retail investor.

I think most readers would have experienced some form of "risk appetite assessment" at some point in their lives; whether it is during the financial evaluation being performed by a financial planner or perhaps an indepedent financial assessment being conducted by a fund manager to ascertain one's risk tolerance. In such cases, the term "propensity for risk" comes into play; and this essentially attempts to quantify and measure a person's tolerance for risk and for risky activities (a score or weight is attached to each response in a typical questionnaire). The term risky activities will relate to the asset class one wishes to invest in, as well as the returns reasonably expected from the person in relation to his return on investment (example, if you expect +/- 20% then you are considered "aggressive" and therefore likely to be able to take on more "risk"). Such questionnaire are inaccurate in at least 2 ways that I can think of:-

1) Each person's propensity for risk is a function of his own personality AND the current state of the economy and market. It is important to note that during the boom days, risk was defined as "not making more than your neighbour by day-trading stocks", while at the nadir of the market in 2003 risk was re-defined as "trying to prevent losing your pants due to the relentless fall in the stock market". The point I am trying to get across is that risk depends on how an individual feels about the health of the economy and the state of the stock market; and this is communicated through media reports and news articles. Right now, news reports mention manufacturing output dropping to its lowest level since 1983, and inflation hitting a 26-year high of 7.5% in April 2008. Thus, investors would probably be more risk-averse as they feel that the economy is teetering on the brink of recession, and it would be foolhardy to put money into equities when there is a chance of more downside. During boom times, irrational exuberance creeps in and causes one to take on more risk for the simple purpose of trying to beat the guy next door. Thus, I argue that one's propensity for risk is a subjective measure, not an objective one which can be measured using a questionnaire.

2) "Risk" as defined by value investors is the danger of losing your original capital, and I did mention in a previous post that capital preservation is a central tenet in investing. Thus, the proper and correct way to assess risk propensity would be to ask questions relating to preserving one's capital, and not base it upon the volatility of a particular portfolio. If one invests properly and with a margin of safety, then there is very little risk of losing money; volatility will NOT affect the returns from an investment if the underlying company's business is stable and growing. Academics get it all wrong when they equate volatility with risk.

Risky behaviour is basically investing in things we do not understand or have limited information about. In fact, when I casually survey my friends about their investments, a large number have not mch idea on the company they had bought, thus bringing me to the conclusion that they have engaged in risky behaviour. In such cases however, people may already be aware that they are speculating, but still insist on it for reasons other than rationality (something like playing the lottery when the chances of winning are amazingly remote!). So, I will leave this topic as part of my behavioural finance series under "Gambler's Fallacy".

Saturday, May 24, 2008

When there's nothing to do, do absolutely nothing !

Sorry for the recent lack of updates; work has been hectic and I have had a busy schedule. By early June 2008, I should be more free to do regular reviews of the companies I own and to continue my behavioural finance as well as investment sins series.

Today I will examine the concept of "doing nothing", which is seemingly innocuous but can be highly profitable ! Warren Buffett advises that if there's nothing to do, then just sit on your butt and wait. This concept is, of course, totally contrary to a trader's mentality where there MUST be action every minute or hour in order to take advantage of price action, usually gleaned from careful studying of charts and indicators. Most investors cannot resist the urge to constantly buy and sell or to just do something; somehow inactivity makes us feel as though we are not doing enough to earn money from the stock market !

The problem with this feeling (of inactivity) is that it stems partly from how our brains are wired with regards to stereotypes about working hard and earning our keep. At our day jobs (in office), we know we must work hard and be constantly doing something in order to justify our salaries and to let our boss see that we are putting in hard work (so as to earn that big fat bonus or promotion); this ultimately translates into us thinking intuitively that we must always be doing something in order to make ourselves feel that we are getting ahead in life. When applied to value investing, this is totally contrary as most of the "action" occurs when one thoroughly analyzes a company and makes a decision to buy based on margin of safety. The rest of the time is just monitoring the company's progress and checking out other companies to invest in - certainly not the most exciting thing to be doing as it does not involve the heart-thumping adrenaline-pumping action of the stock market.

But what actually drives people to be constantly trading or feel that they should be doing something ? I think this can be attributed to a couple of reasons:-

1) Insufficient research which causes people to jump hurriedly into an investment without doing an objective and rational review of the business. This activity may have started out innocently enough but ended up in disaster should the analysis be faulty.

2) Emotions ruling your mind when you hear of other people making good money; hence you feel you need to jump on the bandwagon too.

3) Thinking you can time and beat the market by always buying low and selling high.

All these flawed concepts can make one end up a lot poorer. Thus, it is always better to exercise caution, patience and good judgement and remember that it is better to do nothing rather than the WRONG thing !

Saturday, May 17, 2008

China Fishery – 1Q 2008 Financial Statements Analysis and Review

Since first quarter results typically do not tell much about the entire financial year, I have decided to give a condensed analysis to fit one posting instead of splitting it into two and making readers come back at a later time to read “Part 2”. Of course, typically quarterly results do not give a true reflection of the business conditions as they simply capture the performance for one quarter; while there may also be several timing issues for inventory, revenue recognition or receivables which may distort some of the numbers. For the intelligent enterprising investor, he should view all 4 quarters of a company’s financials against last year’s performance to see if there has been any improvement.

Profit and Loss Analysis

China Fishery’s (CFG) 1Q 2008 was a mixture of good and bad. First, the bad news is that revenues have dipped 2% from US$121.8 million in 1Q 2007 to US$119.3 million in 1Q 2008. This was attributed to weaker fishmeal prices as compared to the beginning of last year (currently, they are at about US$1,050 per ton), but Management sees prices stabilizing and they are confident it will trend slowly upwards as fishmeal is an important component to feedstock. Fortunately as well, the good news is that CFG’s trawling operations were much stronger in 1Q 2008, accounting for 81.7% of revenues compared to just 65.7% a year ago. This helped to offset some of the decrease in revenues from the lower ASP of fishmeal.

The good news (and this one is really very positive indeed) is that CFG has managed to control costs very effectively, to the extent that cost of sales dropped by 42.3% compared to the drop in revenue of just 2%. Vessel operating costs were also reduced by 23% and this improved gross margin greatly, from 34.8% in 1Q 2007 to 44.6% in 1Q 2008. CFG may be seeing the benefits of integrating their trawling and fishmeal operations to achieve greater economies of scale, and their margins are showing it.

By controlling costs over at the cost of goods level, CFG have managed to grow net profit from US$30.5 million in 1Q 2007 to US$40.4 million for 1Q 2008. Note that the first quarter is traditionally the stronger fishing season due to weather conditions, and may not be representative of the entire full year (in other words, do not just take 1Q results and multiply by 4 to annualize the net profit). However, with better cost management and greater economies of scale, plus the deployment of CFG’s three upgraded supertrawlers to new fishing grounds in the South Pacific, we should see much better revenue and earnings growth from 3Q 2008 onwards. Meanwhile, for 1Q 2008, net margins are an impressive 33.9% against just 25% last year.

Balance Sheet Review

There was not much noticeable change in the Balance Sheet and there are only a few things to highlight. Two things to note are the higher trade receivables amount of US$41.4 million compared to US$8.9 million as at December 31, 2007, as well as the higher deferred expenses of US$25.1 million. Higher receivables could be a result of a timing differences between receivable recognition and cash collection, but the explanation for the higher deferred expenses was due to the capital outlay associated with the purchase of an additional fishmeal plant in Peru in April 2008.

Bank loans were also drawn down for investments during the peak fishing season, thereby pushing up current portion of bank loans from US$44.8 million to US$70.4 million. As a result, most of the cash for 1Q 2008 came from financing activities, unlike in the previous quarter where most of the cash came from operating activities. Of course, one has to take into account the fact that indirect method of preparation of cash flow statement tends to use the differences in working capital changes to estimate cash flows movements; hence it may not take actual business conditions into consideration. A more accurate (but nevertheless burdensome) method of ascertaining the effects of cash would be to directly question Management.

Cash Flow Statement Analysis

Basically, there is nothing much to comment on the cash flows which I had not covered in my preceding paragraph. The large increases in working capital (i.e. trade receivables) and the large drop in trade payables contributed to the negative cash outflows from operating activities of US$16.2 million. This could either be a red flag or simply a timing difference in relation to cash yet to be received from trade debtors, or payments paid early to trade creditors. Without further information to enlighten us, we can only speculate; but CFG has a good track record of strong operating cash inflows, so I have a tendency to believe the latter rather than the former.

Proceeds were raised from short-term bank borrowings amounting to US$26.8 million, but gearing actually decreased from 108.3% to 100.3% due to the increase in retained earnings. Overall, I expect to see stronger operating cash inflows in the 2H 2008.

Future Plans and Strategies

As mentioned, CFG will deploy the upgraded super-trawlers in 2H 2008 into the South Pacific. This is expected to increase their revenues through increased catch. Subsequently, in FY 2009, they will deploy three more.

The acquisition of the additional fishmeal plan in Southern Peru should also help to improve efficiencies in processing fishmeal, and help to lower cost of goods. As can be seen, Management’s efforts to reduce costs are not merely empty words; in fact, they really did manage to reduce costs significantly which is very impressive and commendable. Moving forward, I would expect to see a good 2Q 2008 ahead.

Thursday, May 15, 2008

Mid-May 2008 Portfolio Summary and Review

May 2008 is turning out to be a very interesting month indeed as there are a couple of positive events relating to the companies I own. In addition, China Fishery and Swiber had also released their 1Q 2008 results yesterday and I am pleased to say that both saw good growth in their businesses, with earnings registering growth of 33% and 184% year-on-year respectively. Inflation continued to be high in Singapore and the effects of the sub-prime crisis are still felt now and then when a US company announces a major write-off, but it seems like the worst part of the crisis may be over. Hopefully, the cleaning up will begin soon to let banks weed out all their lousy debts and to build up confidence in their lending abilities.

During May, cyclone Nargis hit Mynamar and caused untold suffering and pain to the poor residents there. It is estimated that in excess of 100,000 may eventually die from the effects of this disaster. Recently too, a major earthquake measuring 7.9 on the Richter scale hit the Sichuan province in China, resulting in over 20,000 deaths and untold suffering. I urge all readers to join me in offering a prayer for the victims of these natural disasters, and to hope that aid and assistance can be swiftly delivered to enable them to rebuild their lives. Please also help to contribute whatever you can to charitable organizations to help these unfortunate people.

Below is the summary of my investments and related news as at May 15, 2008 (STI at 3,207.43 points).:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $2.54, Gain 294%, YTD Loss 23.5%. On May 7, 2008, Ezra announced 2 new orders for vessels, one being a 30,000 bhp multi-functional support vessel (MFSV) and the other a 12,000 bhp AHTS for S$95 million. On May 14, 2008, Ezra announced that their Vietnamese Fabrication Yard owned by HCM Logistics secured a third contract worth US$55.4 million to be delivered in FY 2010. This brings their order book to US$214 million.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $1.295 (average), Market Price $2.08, Gain 60.6%, YTD Loss 13.7%. On May 14, 2008, Boustead announced that their acquisition of the additional 10% in GBI Realty was completed. Boustead's FY 2008 results should be released around 24-25 May, 2008 and this year will see the company celebrating their 180th Anniversary.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $2.89, Gain 186.1%, YTD Loss 15.7%. Swiber released their financial results for 1Q 2008 yesterday, and I will be doing a review and analysis of their results soon. In a nutshell, net profit increased 184% while revenues increased 267%. Higher admin expenses (probably staff costs) and finance expenses eroded some of the increase in revenues, and the contribution of shipbuilding from Kreuz probably softened gross margins from 28% in 1Q 2007 to 25% for 1Q 2008. Moving forward, it will be good to see their drilling division contributing soon to revenues from 2H FY 2008 onward.

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.51, Gain 46.8%, YTD Loss 4.7%. Suntec REIT announced a good set of results and declared a dividend of 2.5185 cents per share (note that part of this dividend has taxation of 18%).

5) Pacific Andes (Vested since March 29, 2006; Rights Issue July 11, 2007 at S$0.52 per share; averaged down August 17, 2007) - Buy Price $0.655 (rights-adjusted), Market Price $0.555, Loss 15.3%, YTD Loss 11.9%. There was no news on Pacific Andes during the period ended May 15, 2008. They should be releasing their FY 2008 results by May 30, 2008.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.50 (average), Market Price $1.86, Gain 24.0%, YTD Gain 0.5%. CFG announced their 1Q 2008 results on May 14, 2008. Revenues dipped by 2% due to softening of fishmeal prices, while net profit improved by 33% to US$40.4 million. They also reiterated that fishmeal prices are likely to stay stable after dipping last year, and will trend upwards slowly as demand for fishmeal is still very strong. The 3 upgraded supertrawlers will be deployed to the South Pacific by 2H FY 2008 and each supertrawler should contribute about US$12 million extra in revenues. Assuming CFG continues its strict policy of cost control, I am confident that FY 2008 will see higher profits compared to FY 2007.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.15, Gain 4.1%. FSL Trust had, on May 12, 2008, announced the acquisition of three container ships from Yang Ming Marine in Taiwan. My previous post had discussed the financial effects of this acquisition and stated the yield accretion. Financing has yet to be secured for the third vessel but FSLT has already exceeded its 1:1 debt-equity ratio. Thus, it may have to issue equity in future to fund further acquisitions.

Overall Portfolio

My overall portfolio has increased by 72.5% without taking into FSL Trust’s cost. If included, the gain is 53.5% from a cost of S$80.4K as at May 15, 2008. The market value of my portfolio without FSL Trust is S$100.5K, and if FSL Trust is included then the portfolio value is S$123.4K. Realized gains have increased to S$5.8K due to the XD of Suntec REIT, China Fishery and FSL Trust. The funds should be arriving in late May 2008. Ezra has yet to cum-dividend, thus I have not included it under my realized gains.

Comparison against STI

The FTSE STI had declined by 7.9% since the start of 2008. Without FSL Trust, my portfolio has declined 13.9%.To date in 2008, my portfolio has under-performed the new benchmark FTSE STI by 6 percentage points.

My next portfolio review will be on Friday, May 30, 2008 after market close.

Monday, May 12, 2008

First Ship Lease Trust - Acquisition of 3 Container Ships for US$210 Million

This evening, FSL Trust surprised me by announcing the acquisition of three (3) container ships from Yang Ming Marine Transport Corporation, a listed Taiwan-based shipping company and the 16th largest container liner company in the world. After all, it was less than a month ago on April 21, 2008 when FSLT announced that it had acquired 2 crude oil tankers from Geden Shipping (a Turkey-based company) for US$140 million. I was not expecting another acquisition so quickly, to be frank.

With this most recent acquisition, FSLT has fulfilled its target of US$300 million of acquisitions for FY 2008, with just 5 months into FY 2008. In fact, the acquired vessels make up a total of US$350 million, which means FSLT needs to draw down on its remaining US$200 million credit facility AND arrange with its lenders to finance the remaining US$50 million. In the press release, it was mentioned that FSLT Management are trying to increase the second credit line to about US$265 million in order to acquire all 3 vessels. The first 2 have been acquired on a 12-year lease and will be delivered by end-May 2008 and end-June 2008. For the third vessel, financing and documentation has yet to be completed and assuming FSLT can complete it soon, the vessel will be delivered by end-Oct 2008.

According to the announcement, the acquisition is immediately accretive and will add US 0.02 cents for the 2Q 2008. This will raise DPU to 2.77 US cents for 2Q 2008, while DPU for 3Q 2008 will hit US 3.05 cents per unit. This is NOT factoring in the accretion from the third vessel, which FSLT will announce in due course once financing and documentation are completed. Therefore, using the DPU of 3.05 US cents per unit, we arrive at a full year DPU of 12.2 US cents. Using an exchange rate of 1.36 to the USD, full-year DPU is about 16.59 SGD cents. Based on the closing price of $1.13 this evening, the projected future yield is about 14.68%. If we factor in the potential accretion from the last vessel, we can expect an additional 0.09 US cents per share DPU (2 vessels add 0.18 US cents, so one vessel adds 0.09). Thus, full year DPU will rise to 12.56 US cents or 17.08 SGD cents; giving a yield of 15.1%.

Suffice to say that FSLT Management is being extremely aggressive in their acquisitions; with the aim being (I suspect) to increase the unit price through yield compression. The purpose of this would be to eventually issue equity to fund future acquisitions as FSLT has now reached its targeted debt-equity ratio of 1:1. Management had indicated that any subsequent acquisitions would preferably be funded by equity, assuming equity can be issued more cheaply than obtaining debt. At the unit price level of $1.13, it certainly does not make sense for Management to issue new units as the cost of equity is too high.

Thus, Management is taking a big risk that the unit price will adjust upwards significantly so that equity issuance can be done at a higher premium to the current market price. This will enable less dilution for existing unit-holders and allow the trust to "finance" itself once again. Once the debt-equity ratio falls below 1 due to equity issuance, the Trust can then turn to debt once again to continue to fund purchases; and the cycle continues. This is the best-case scenario assuming it pans out, and Mr. Market shall be the one to decide if this will occur.

Meanwhile, as a shareholder, I will continue to enjoy the higher dividends which are going to come from yield accretion. As mentioned before, I am treating FSLT as a steady dividend play with regular cash inflows (preferably increasing over time). Any capital gains are an added bonus, and I shall review FSLT again once more information on financing and Management's future plans are elaborated on in a separate press release in future.

Saturday, May 10, 2008

The Rise and Fall of Businesses

As I had been very busy the entire week, I have not been able to blog much at all even though I had many ideas and issues floating in my head. One of these is about the interesting aspect of the rise and fall of businesses. As readers may know, all businesses technically have an “infinite” life and can last in perpetuity as they can have different owners while retaining the same name and registration number. However, most businesses tend to fall into cycles where they start-up, grow rapidly and then fizzle out (some go out spectacularly in a big BANG like a supernova !). This follows the teachings of most marketing textbooks which state the four phases of a business: Start-up, growth, maturity and decline. I will proceed to discuss each of these phases and give some examples. Readers are free to debate or discuss whether these examples are relevant and to give more examples where applicable.

Start-Up – This is the phase where a company acquires a core business, be it in Information Technology, Oil and Gas Support or a new industry such as Bio-Fuels. Start-ups are usually fraught with risks and most of them go belly-up within 2 years due to inability to manage costs and also inability to adapt to changing consumer preferences and tastes. To be fair, sometimes the fault does not lie with the Management; it may be that the dynamics of the particular industry are not conducive for long-term sustainability and profitability. In Singapore at least, the food industry is cutthroat and extremely competitive. One example of casualties are the numerous bubble tea shops which opened in 2001 and 2002 and subsequently went out of business as the bubble burst (no pun intended !).

Growth - A company which has survived the hardships of the start-up phase can now grow rapidly by establishing a solid customer base and also decent margins. Assuming it has a competitive advantage with respect to either cost control or product differentiation, it can now build up a sizeable business and market share in order to enjoy sustained profitability. This is the phase in which the company needs to either borrow heavily to expand or root for an IPO (raising funds through equity issuance). Many of the newly listed companies on SGX are examples of start-ups which have grown to a point where they need to raise funds to grow further. An IPO is one of the methods. Some recent examples of IPO would include China Zaino, China Eratat and Hisaka Holdings. During such a phase, the company’s products/services find quick acceptance and their revenues and profits grow very rapidly, to the order of 70-100% per year. However, such rapid growth usually cannot be sustained more than 2-3 years and the company will enter the maturity phase* after this. Some examples of listed growth companies will include Wilmar, Swiber, Ezra and many China companies seeking to increase market share in a huge market (China Hongxing, Celestial and Cosco come to mind).

*Note: There are companies which still manage to grow after 10 to 20 years by diversifying their product offering, keeping up with trends and offering better value to existing customers, but these are a rare few.

Maturity – In this phase, the company’s products and business units have stable customer base and their revenues and profits no longer enjoy rapid growth. It becomes harder to get new customers and the market may get saturated with other competitors who also begin to offer the same products and services. During such a phase, the company may generate more cash than it requires and may not know how to productively employ this cash. Companies can either gun for more organic growth through internal restructuring or product innovation, or acquire other businesses to complement their existing one. These moves are key to determining if the company moves back to the growth phase, or if they push it towards the decline phase. Examples of mature companies are many of the blue chips such as Great Eastern, Fraser and Neave, Yeo Hiap Seng, the local banks, SIA and Venture Corporation. Examples of mature companies which are mature but acquire to grow are Olam International, China Fishery and OSIM. Examples of mature companies which grow organically without acquisition (thus far) will include Boustead.

Decline – This is the saddest phase of a company’s life cycle, where its products begin to fall out of fashion or become victims of commoditization or competition. A decline can be defined as the phase of a company’s life where earnings and revenues fall, with declining margins and also less operating cash inflows. Declines can be short and sharp (when a company goes bust quickly by over-extending itself of expanding too quickly), or it may be long and protracted as the company slowly bleeds itself to death. At such a stage, assuming a company is listed, it will valiantly try to shore up capital by issuing rights and more equity (as its deteriorating balance sheet will make it an unsuitable candidate for bank loans or company-issued bonds). Assuming it is able to turn around (in rare cases), then it can slowly go back to the mature phase where operating cash flows can sustain the business, or perhaps they had found a new business to go into or a new way of positioning themselves which changes consumers’ perceptions. But in the majority of cases, companies will eventually liquidate and fold, with creditors getting pittance and shareholders usually getting nothing at all. Examples of once growing companies now in decline include Creative Technology and OSIM.

These 4 phases are anything but distinct in the real world, with some companies a hybrid of both growth and mature phases, while others may be in limbo alternating between mature and decline phases. It is never really very clear-cut but a shrewd investor should at least be aware of the life cycle stage his company is in so as to avoid unpleasant surprises. A careful study of companies’ fundamentals and the industries in which they operate is necessary in order to make an informed judgement, in order to save oneself from a lot of heartache and potential loss of capital.

Sunday, May 04, 2008

Swiber Holdings Limited – AGM Highlights and Snippets

Swiber’s AGM had the uncanny timing of 1 p.m., which was sandwiched between the morning and the afternoon, right smack in the middle of lunch. I had made feedback to Swiber’s IR company (August Consulting) prior to the AGM informing them of the weird timing and that it was very difficult for shareholders who were working to make it for the meetings as afternoon leave was usually granted at 12:30 p.m. The problem was exacerbated by the fact that the company was holding its AGM at its premises in International Business Park, unlike for FY 2006 where their AGM was held at the more central location of Raffles Hotel near Beach Road.

Despite these “obstacles”, I managed to rush down to the AGM via a cab and was pleasantly surprised to find that the AGM was held at Swiber’s newly completed auditorium on the third floor. Their previous EGM was held in the company’s Boardroom on the fourth floor, so it was a good experience to attend the AGM in a spanking new auditorium which could seat up to 200+ people. Mr. Oon Thian Seng (Independent Director) told me that the auditorium was completed just this year and was used for training and briefings to staff.

At the AGM, the formal proceedings were brief and quick and the turnout was quite poor (due to the aforementioned reasons). I took the opportunity to speak to Mr. Oon Thian Seng, Mr. Francis Wong and finally Mr. Raymond Goh. I covered topics with them ranging from the credit crisis, to the potential for deepwater as well as various accounting issues (accounting issues were handled by Mr. Francis Wong as he is a trained chartered accountant and is very knowledgeable about the financial affairs of the company).

Chat with Mr. Oon Thian Seng:-

1) Prospects of the Company – Mr. Oon mentioned that Swiber was entering an “exciting phase of growth” and that he was sure the equatorial driller (to be delivered in FY 2010) would be very well-accepted and would provide a boost to the company’s earnings. He mentioned that Glen Olivera designed the entire driller and his industry experience shows that he was perfectly capable of designing something which would suit the benign deepwaters of South East Asia. He was surprised that other competitors had not done this before and designed a driller which was suitable for Asian waters, but my personal view is that other companies may not have Glen’s expertise and experience when it comes to designing a driller. More on this later during my chat with Mr. Goh.

Chat with Mr. Francis Wong:-

2) Long-term Receivables of US$8.8 Million – Mr. Wong explained that this amount was part of the seller’s credit placed for the sale and leaseback transactions. This was a standard clause for all sale and leaseback which means that a portion of the proceeds needs to be placed with the buyers. This amount earns interest and will be repayable in 8 to 10 years time. This, plus other receivable amounts in the Balance Sheet, are principally the reason for the negative operating cash flows in Swiber’s Cash Flow Statement. If not for this timing difference and this seller’s credit, there will be an operating cash inflow.

3) Hedging for Bonds – I enquired if the company does hedging and asked if Mr. Wong could explain the hedging policy of the company. Mr. Wong said that hedging would be done every time debt was taken up from the MTN programme, as the funds received would be in Singapore Dollars (they report their accounts in US dollars). The hedge used was a simple one to lock in the rate at a given point in time, coupled with interest rate swaps as stated in their Note 16. Any hedging gains or losses would be recognized in equity till such time that the transaction was completed, then the reserves would be reversed out to Profit and Loss account as realized derivative instrument gains or losses.

4) Oil Trends and Prices – Mr. Wong’s view of the current high oil price situation was that it was unsustainable as it is partly contributed by speculators driving up the price of oil. He also said we had to account for the weak USD playing a part in driving prices to recent record highs of nearly US$120 per barrel. By right, oil companies can function very profitably at US$70 per barrel, which he thinks will be the eventual price oil will settle to once the current bout of speculation dies down. For most oil companies, their cost is about US$40 per barrel for deepwater oil extraction; while for shallow water he says their cost is even lower (at less than US$1 per barrel !). This was because most oil companies had set up proper equipment and infrastructure near coastal areas (shallow waters), thus all they needed to do was to “turn on the tap” and oil would flow. It was effortless and cheap but the problem was that oil in such areas is running out; thus oil majors are moving to regions such as South East Asia and into deeper waters in search of more oil reserves.

5) Obtaining Financing During Credit Crunch – Mr. Wong did concede that obtaining good financing during the current sub-prime crisis-related credit crunch was proving tough. This was because banks, suffering from a lack of liquidity due to massive write-downs of debt-related securities, are less prone to lend money to just anyone and would be highly selective when it came to extending loans. In spite of this, he proudly mentions that Swiber had managed to draw down on their medium term note (MTN) program to raise S$100 million at a very attractive interest rate of around 4%. He said the rate was very good as SIBOR and LIBOR used to be about 5 or 6% just a few years back.

Chat with Mr. Raymond Goh:-

6) Prospects for Offshore Drilling Services Division – Mr. Goh was very optimistic about the prospects for Swiber’s Drilling Division, because of the Equatorial Driller. He said that this driller represents Swiber’s future growth and that he anticipates the drilling unit will contribute as much as the construction unit is doing now. Once the first driller is completed and rolled out by FY 2010, contracts should start to flow in. When oil majors see how successful the first driller is, Swiber will then consider building a second one to follow up, but this will come much later. Mr. Goh feels that the market is not placing enough value on the drilling division as it has the most potential for growth in the coming years. In fact, he said Swiber had saved money by not acquiring a drilling company; in fact just by hiring an experienced drilling team (including Mr. Glen Olivera who had worked for UNOCAL’s drilling team before and drilled more than 150 wells) and designing and building the Equatorial Driller, Swiber had effectively already obtained their Drilling Unit at a much lower cost.

7) Competitive Advantages of Equatorial Driller – The driller costs less to build as it is unlike the semi-submersible drillers which are more catered for the harsh North Sea conditions. As a result of lower costs in manufacturing the driller, Mr. Goh mentions that lower rates can be charged to customers; thus creating a win-win situation as Swiber still gets good margins (as costs are lower to build), yet they are also under-cutting the competition by offering very competitive rates to entice customers to use Swiber’s services. In a sense, I will see this as a competitive advantage which is unique as the Equatorial Driller’s design is difficult to mimic (it is an original design from Mr. Glen Olivera) and thus such cost savings can be maintained as competitors will find it difficult to duplicate.

8) Diverse Nationalities within Swiber’s Headcount – Mr. Goh mentions that Swiber has hired staff from about 20 different nationalities to work in the company; and all are hired based on merit and expertise and not based on familial connections or through internal networks. In the spirit of meritocracy, no person will be hired based on family relations and Mr. Goh imposes the rule that no Management staff can have any siblings within the company. These are the hallmarks of a professionally-run company employing high standards in terms of hiring quality staff to join its ranks and head its various divisions.

9) Ability of the company to continue growing – Mr. Goh cautioned that growth will eventually have to slow down and stabilize for the company, but he still sees an exciting 5-year period from now till FY 2013 where the company would be growing both its EPCIC operations as well as its new drilling division. Since the drilling unit was still new, it had yet to build up a track record and this was necessary to make the oil majors take notice. Thus far, the drilling division has only secured one contract valued at US$25 million from NuCoastal in Thailand. Mr. Goh asked for shareholders to be patient and to give him time to build the company to greater heights. In the meantime, I will fully support the company’s decision to fully retain ALL its earnings and NOT to pay out a dividend.

Through my interactions with the Directors, I can sense that they are also looking forward to an exciting growth phase for Swiber. It will be interesting and insightful to see how the company leverages on the joint ventures and alliances which it has made so far in order to extend its business further. Tie ups have been announced in Brunei with Rahaman, Vietnam with Petro-Vietnam; as well as Principia and most recently, CUEL of Thailand. The important thing is for the company to be able to capitalize on such relationships to secure good repeat business and larger contracts for the company; to enable it to scale new heights in terms of revenue and earnings growth. Only through consistent and stable recurring earnings stream can the value of the company be enhanced, and all shareholders will benefit as a result.

News Alert: This just in from Energy Current. One of Swiber's barges, Swiber Giant V, sank off the coast of Indonesia. Salvage operations are underway now and Swiber has chartered SMIT's pontoon Giant 2 to fulfill their contractual obligations. The incident is not expected to impact Swiber's earnings, though I suspect it may affect margins as they need to charter a vessel instead of using their own. During the course of work, accidents do occur and I accept this as part of the risk of owning a business. The full news article can be viewed here.

Thursday, May 01, 2008

China Fishery Group – AGM Highlights and Snippets

I attended China Fishery’s AGM which was held on April 28, 2008 (4 p.m.) at Raffles Hotel Level 3 Function Room. Incidentally, Banyan Tree were also holding their AGM there and it was a little confusing at first because Banyan Tree had all their banners out in full force and I thought I had mistakenly stumbled into the AGM of another company.

The crowd trickled in slowly and by the time the AGM started, there were about 30+ people in the room and by then, it was announced by the hotel that there would be a “fire drill” and “sorry for the inconvenience caused”. It turned out that the fire drill was somewhat unconventional as it meant a power failure during the middle of the AGM, causing all lights to go out and the microphones to be unworkable. Nevertheless, this had the effect of amusing the shareholders and Management rather than distracting them, and I was pleasantly surprised that Management was able to make do with an uncomfortable situation and still carry on with the Meeting.

What was special about this AGM was the use of an official poll to tabulate results of votes, rather than the usual “show of hands” which is highly inaccurate. CFG are adhering to proper high standards of corporate governance by introducing this, even though it meant a 15 to 20 minute delay as the votes were being tallied and counted. In the meantime, Management was candid enough to invite questions from shareholders on the business and on the financials. After the meeting, I approached Mr. Dennis Chan (Finance Director) and Mr. Ng Koo Kwee (Executive Chairman) for a chat about CFG’s plans and prospects.

Chat with Mr. Dennis Chan:-

1) Upgrading of Supertrawlers – The three upgraded supertrawlers will be deployed to the South Pacific Ocean by 2H FY 2008 to increase the catch volume and also to tap relatively untouched waters. Mr. Chan mentioned that upgrading was done so that the supertrawlers would use less bunker fuel (hence saving costs as oil prices are climbing) and also increase the fish hold capacity of the vessel (thus increasing top line). Three more will be deployed to the South Pacific by 1H FY 2009, thus increasing the number of supertrawlers there to six. All the upgrades are funded by internal operating cash flows.

2) Expansion of Fleet – When asked about the company’s plans to grow its business, Mr. Chan did not rule out securing more VOA (Vessel Operating Agreements) and he said that if the price was right, of course CFG would like to increase their vessel fleet through a fifth or even sixth VOA. However, these VOA must come at a reasonable price as the cost of assets to be acquired in Peru had already risen nearly 100% due to the consolidation in the fishing and fishmeal industry there. He also said that CFG is unlikely to acquire more fishmeal plants from now on, and will be focusing more on acquiring more vessels to boost margins and revenue growth.

3) Interest Rate on Senior Notes – I mentioned that the interest rate on Senior Notes was 9.25%, which was actually very high. Mr. Chan said that Peru’s effective tax rate is about 37%, thus the effective interest rate which CFG was paying on these senior notes comes up to only about 6+%; thus this was still affordable and the fact that CFG has strong operating cash flows means that Management is not worried about not being able to pay down the debt gradually and the principle in 2013. In fact, a share buyback program was just approved at the EGM, but Mr. Chan said that it makes no sense to buy back your own shares using cash when cash can be better deployed to pay down debt. He does not rule out the possibility of slowing paying off the Notes when CFG has accumulated a sizeable cash balance. After all, he maintained, if not for the acquisitions of VOA and additional fishmeal plants, the company would be in a very strong positive cash flow position; and should remain so from FY 2009 onward.

Chat with Mr. Ng Joo Kwee:-

4) Fishmeal Prices – Mr. Ng expects fishmeal prices to trend upwards over time. He said that prices are now hovering around US$950 per tonne, but they hit a peak of about US$1,200 per ton some time last year. He thinks prices will stabilize and slowly climb as fishmeal is an important component of animal feed and the demand will always be there. He also advised shareholders to look for fishmeal resources on the Internet to keep track of fishmeal developments and prices. Fish oil is an essential component of fishmeal and I confirmed that CFG was also producing this product.

5) Steam-Dried versus Flame-Dried Fishmeal – Since it was announced that steam-dried fishmeal would fetch better prices and margins as compared to flame-dried fishmeal, I proceeded to ask Mr. Ng if any of the recent plant acquisitions would be converted to steam-dried variety so as to command higher ASP. Mr. Ng said that the manufacturing and production facilities required for steam-dried fishmeal were very different from those of the flame-dried variety; hence the same plant could not be used to produce both unless the equipment was overhauled. That said, he did assure that one of the plants was being converted from flame-dried to steam-dried.

6) Probable Contingent Liabilities – I also asked about whether CFG may be exposed to possible lawsuits and litigation for offenses such as damaging the environment or over-fishing. Mr. Ng laughed and assured that the impact would be non-existent at best; minimal at worst. He mentioned that each vessel was tagged with a GPRS-like device in order to track the locations of each vessel as it went trawling. This was to ensure that the vessels did not stray from the designated fishing zones, thus there was no danger of “accidentally” fishing in protected waters.

7) Regarding Expanding the Business – Mr. Ng mentioned that CFG would continue to look for suitable opportunities to expand the business by buying up smaller companies with fishing vessels. He said that the industry was very fragmented and only the larger players could afford to survive as they had the “holding power” to keep inventory of fish to wait for more favourable prices. The larger players were literally “gobbling up” the smaller companies and this meant that their competitors were also growing along with CFG. Thus, even though CFG was the sixth largest fishing company in terms of capacity, other competitors were also expanding.

8) Cash is King – Mr. Ng concluded our chat by emphasizing that it was better for CFG not to be overly aggressive in their acquisition due to the sub-prime crisis. He did not want to gear CFG excessively and mentioned that having enough cash was very important. CFG prefers to take a prudent approach to expanding over the next few years so as to slowly integrate their operations; instead of doing a fast-track expansion which may drain the company of cash and resources. This is something I would personally prefer as well – steady, consistent growth instead of quick and explosive growth only to fizzle out later.

Overall, the atmosphere was cordial and professional and the Chairman was friendly and stayed back to take questions from several shareholders. I certainly hope to see the company growing earnings steadily (10-20%) per annum while keeping up their dividend policy. Looking at the Ng family’s track record in building up PAH and PAIH, I have much less to worry about.