Sunday, February 28, 2010

February 2010 Portfolio Summary and Review

February 2010 was a somewhat interesting month, as troubles continued with PIGS (Portugal, Italy, Greece and Spain) amid talks of a potential bailout by Germany and France. Stock markets globally were on jitters due to fears of the potential fallout from these 4 countries, and the Euro currency was also threatened as people dumped it in favour of the USD as the Euro zone countries were perceived to be having numerous problems. There were even some calls for these countries to drop the Euro to prevent it from sliding further against the Greenback. Greece did get a little incensed at the Germans because Germany had implied that Greece had been imprudent with their finances, which led them into their current predicament. In retaliation, Greece demanded for more war reparations from Germany, citing the fact that Germany had yet to fully account for the atrocities they committed during World War II! This mud-slinging is likely to carry on for a while but Germany and France are unlikely to stand idly by and watch Greece sink, as a lot of their banks’ debts are also tied to Greek banks, so if Greece fails, the chain reaction would be catastrophic.

China also gave much cause for concern when it raised its reserve ratio twice within one month, reasons being possible overheating of its economy and also its frothy property market. Since China has remained the “bastion of strength” throughout the entire global financial crisis, managing to grow by a breakneck rate of 8-9% even amidst a global slump, many observers saw the tightening measures as a possible derailment to the global economic recovery. If China were to put the brakes on their red-hot growth, what would the impact be on other nations which are still struggling to overcome the effects of the deep recession?

There are also lingering doubts on the sustainability of the global economic recovery as the data coming out from USA points to a more prolonged slump than originally envisioned. The US Federal Reserve has also hiked up a key lending rate it charges banks on short term loans from 0.5% to 0.75%, signalling that they may be withdrawing their fiscal stimulus much earlier than anticipated.

In Singapore, the Government made a surprising announcement on February 19, 2010 to cool the property market, and implemented two measures to curb speculation and dampen housing prices in the private property sector before they turned into a bubble. The first was to impose a seller’s stamp duty on all sales of property made within 1 year of purchase. Previously, stamp duty was only applicable to the purchase of a property and not its sale. The second measure was to limit the Loan-To-Value (LTV) ratio to 80%, down from 90% previously. What this means is that a buyer is allowed to finance up to a maximum of 80% of the value of the property, instead of the previous allowance of up to 90%. I view these measures as being progressive but probably inadequate to address the red-hot property market, as there are still droves of people heading off to showflats and snapping up expensive high-end condominiums priced at $1,600 to $2,000 psf. I also doubt this will deter those with holding power and the HDB upgraders, who will probably still continue to purchase mass-market condos.

In the Budget Announcement for 2010 (delivered by Mr. Tharman Shanmugaratnam our Finance Minister on February 22, 2010), measures were introduced to help businesses as well as families, with more focus on businesses to grow during the recovery phase. More of the details can be found by visiting the Singapore Budget 2010 Website.

My own portfolio remained fairly dormant as no changes have been made to it since January 2010’s divestment of China Fishery and purchase of Kingsmen Creative. I have been building up on my cash reserves to wait for opportunities to purchase more shares of stable, well-run and growing companies; and hopefully these funds can be suitably deployed in the near future.

For the month of February 2010, some results were announced by the companies I own, as well as some business updates as follow:-

1) Boustead Holdings Limited – There was significant business activity and news for Boustead during Feb 2010. On February 1, 2010, Boustead announced that Salcon had been awarded two projects worth S$11 million from the power industry. Follwing that, on February 8, 2010 Boustead released their 3Q 2010 results. 9M 2010 revenus rose 3.6% while net profit rose 13.7%; but due to the nature of the earnings for Boustead’s project-based revenues, it will be better to review FY 2010 financials due in May 2010. Net cash balance increased further to S$173.8 million and order book is in excess of S$575 million. On February 12, 2010, Boustead announced that its 88.2% subsidiary ESRI Australia Pty Ltd had purchased the entire 100% stake in MapData Sciences Pty Ltd for a cash consideration of about S$3.16 million. It is good news that Boustead is on an M&A path to further strengthen their earnings base; and the acquisition was funded from the cash reserves of the Group.

2) Suntec REIT – Suntec REIT’s dividend of 0.318 cents per share was received on February 26, 2010. Other than this, there was no other news from the REIT.

3) First Ship Lease Trust – FSL Trust‘s dividend will come in on March 1, 2010; other than this there was no further news.

4) Tat Hong Holdings Limited – Tat Hong released their 3Q 2010 results on February 12, 2010 and it was pretty much a disappointment. Revenues dipped for 3Q 2010 and after adjusting for one-off items and exchange gains/(losses), earnings were much lower than anticipated indicating that a recovery was not yet under way. I will NOT be doing a full analysis and review of 3Q 2010 as I had just finished my 3-part 1H FY 2010 analysis. Separately, on February 17, 2010, Tutt Bryant announced a 50-50 joint venture with Fagioli of Europe, a privately owned company and one of Europe’s largest heavy lift specialists.

5) MTQ Corporation Limited – There was no news from MTQ for the month of February 2009.

6) GRP Limited GRP released its 1H FY 2010 results on February 5, 2010. I did a previous posting on it which analysed the results and also gave my views on the prospects of the company.

7) Kingsmen Creatives Holdings Limited – On February 18, 2010, Kingsmen announced that they were appointed as the official events management services sponsor for the Youth Olympic Games (to be held from 14-26 August 2010). Also, Kingsmen released their FY 2009 results on February 24, 2010. I will be doing a comprehensive review soon as well as include my Analysis of Purchase (which is overdue), but a quick summary is that revenues for FY 2009 increased 27%, but net profit attributable to shareholders only increased 5%, due to lower margins from the Universal World Studios contract. A final dividend of 2 cents per share was declared, up 33% from last year’s 1.5 cents per share, payable on May 19, 2010.

Portfolio Review – February 2010

The entire month of February saw more and more bad news trickling in from Greece, China and USA, with USA Consumer Confidence hitting a 10-month low as well. My realized gains had increased to S$53.6K due to the interim dividend from GRP. The portfolio dipped slightly from an unrealized gain of +6% to an unrealized gain of +5.4%. If I had included the dividend received from GRP, unrealized gains would have been +6.1%, a marginal increase from last month. It is expected that sluggish conditions and all-round pessimism will continue for quite some time, and will make conditions very suitable for further investments into companies for the long-term.

For March 2010, it is generally a very quiet month with no corporate updates, and FSL Trust and Suntec REIT will only announce their results some time in late April 2010. Meanwhile, I will be receiving dividends from GRP and FSL Trust on March 11 and 1 respectively. I will then decide how to make use of the cash for re-investment.

My next portfolio review will be on March 31, 2010 (Wednesday).

Wednesday, February 24, 2010

Tat Hong – 1H FY 2010 Analysis and Review Part 3

In this final Part 3, we will look at Tat Hong’s Inventory levels and I will comment on their slow but steady transformation into a “rental” company and also their building of their tower crane business in China. I will also give a quick summary and low down on the progress of their planned China expansion so far, based on announcements filed with the SGXNet.

Crane Fleet Profile

Total Fleet Profile Review

It can be seen from the table above that Tat Hong’s total number of crane units has been rising steadily over the quarters, and one would notice that the total tonnage has been steadily increasing as well. It has risen from just 41,840 tons as at June 30, 2007 to the current 49,401 tons as at Sep 30, 2009. The most recent 3Q 2010 results show that as at Dec 31, 2009 total tonnage has once again risen to 51,156 tons, and this is the first time in 2 years that I had witnessed it surpassing the 50,000 ton mark. The focus has also been to build up more of the heavier tonnage cranes, with the >250 metric tonnes cranes rising from 32 as at Mar 31, 2007 to 46 as at Sep 30, 2009 and further to 53 units as at Dec 31, 2009. In the 100-149 MT and 150-249 MT categories, one can also note a steady rise in the number of such cranes. Presumably, these cranes have higher demand and can command better rental rates in the market, which is why the Group is slowly stockpiling on these units. Lower tonnage cranes tend to be more “generic” and there are many smaller competitor companies which can provide such cranes, so Tat Hong probably has less of a competitive edge with regards to biddingin this segment; and thus also most likely enjoys lower margins.

One troubling aspect which I noticed was that crane utilization rates have been steadily FALLING over the quarters, in line with the onset of the global financial crisis and the subsequent sharp recession. Crane utilization rates represent how much of the fleet is being utilized at any point in time on contracts and projects; and a lower rate simply implies that there are less projects with which to deploy cranes to; and this points to a depressed economy where major infrastructural and oil and gas are put on hold until financing becomes available. The effects of this shift have an adverse impact on Tat Hong’s rental earnings, and they had fallen with respect to prior periods, though Tat Hong mentions that rental is supposed to be relatively more stable and offers a better cushion as compared to equipment sales. The numbers do tell the grim story – utilization rates fell from a high of 83.5% as at June 30, 2007 (the “peak” of the bull market) to just 64% as at Sep 30, 2009. The most recent 3Q 2010 announcement shows that utilization fell to just 60.9%, which brings more bad tidings. Although an analyst report once mentioned that Tat Hong only requires 40% utilization to break even, such lowered rates will definitely impact on earnings and margins. Unless the situation improves in future quarters and utilization rates stage a rebound, the Company is not likely to see a significant rise in revenues or earnings for quite some time.

Tower Crane Fleet Review

Tat Hong’s Tower Crane fleet has been steadily building up, since the time they formed their first JV as at March 31, 2008 till the present. They started off with 216 units with total tonnage metres at 35,462 and ended Sep 30, 2009 with 362 units of total tonnage metres at 66,859. This is more than a 50% increase in number of units and an almost 100% increase in tonnage-metres, and reflects Tat Hong’s growth in this new business segment. The latest figures from 3Q 2010 show that their tower crane fleet stands at exactly 400 units with total tonnage-metres at 75,602; a testament to the growth of this division.

Utilization rates stayed relatively constant for Dec 31, 2009, at 77.4% against 76.7% for Sep 30, 2009. However, if we look back at better times, utilization rates were as high as 91.9% (June 30, 2008) and 83.9% (March 31, 2008). Still, with Tat Hong building up their fleet further, we can expect revenues to grow in future with Tat Hong’s JVC capturing a larger share of the market (and also a larger slice of the pie).

Business Prospects and Plans

As at the time of writing, Tat Hong is still focusing on its strategy of building up its rental income base and reducing its reliance on equipment sales. With the global financial crisis still lingering and corporate spending still not back to pre-crisis levels due to difficulties in securing financing, the Equipment Sales Division should experience continued weakness. Thus, revenues will not be as high as FY 2008 or FY 2009 as these were exceptionally strong years. It will be a slow and steady return to recovery for the economy and Australia’s mining and infrastructure projects will be under way only in FY 2011. Even in the South-East Asian region, companies are wary of spending too much on capex as the recovery is tentative and many issues remain, especially with China’s possible overheating and Greece going into default on its debt. Let’s examine the pillars on which Tat Hong will be able to enjoy a recovery, and see if it can translate into earnings resilience in the near future.

Tower Cranes In China

Below is a brief history of Tat Hong’s investment and development of their Tower Crane division:-

September 5, 2006 – Establishment of Shanghai Tat Hong Equipment Rental Co., Ltd.

January 10, 2007 – 90%-owned Shanghai Tat Hong Equipment Rental Co., Ltd enters into a JVC agreement with Beijing Zhongjian Zhenghe Construction Machinery Co., Ltd to establish a company named Shanghai Zhenghe Tat Hong Construction Equipment Rental Co., Ltd for the purpose of engaging in rental of towercranes and related construction equipment. Registered capital is RMB 70 million and Shanghai Tat Hong will take a 50% equity stake (Tat Hong Group’s effective stake is 45%).

April 3, 2007 - 90%-owned Shanghai Tat Hong Equipment Rental Co., Ltd entered into a JVC agreement with China Nuclear Industry Huaxing Construction Co., Ltd, Gao Song and Sun Zhaolin to establish China Nuclear Huaxing Tat Hong Construction Machinery Co., Ltd. Registered capital is to be RMB 66.6 million and Tat Hong’s shareholding will be effectively 76.36%.

November 10, 2008 – Entered into an MOU with Fushun Yongmao Construction Company Ltd to establish a JVC in China to be named Beijing Tat Hong Equipment Rental Co., Ltd for rental of towercranes in China. Registered capital shall be RMB 20 million and Tat Hong shall hold 55% equity stake.

August 4, 2009 – Tat Hong Equipment (China) Pte Ltd entered into a JVC agreement with Beijing Tat Hong Zhaomao Equipment Rental Co., Ltd and Mr. Yuan Zheng to establish Si Chuan Tat Hong Yuan Zheng Machinery Construction Co., Ltd with a registered capital of RMB 140 million. Tat Hong will hold a 53.8% direct and indirect equity stake.

As can be seen from the above corporate developments, Tat Hong has been working on building their Tower Crane division since 2006, when they established their subsidiary in China. There was a slow but steady commitment to pump money into setting up Joint-Venture Companies (“JVC”) in China, and till now there are already three JVC set up in various forms. With the help and support from AIF Capital, which Tat Hong had issued 65 million RCPS to, the monies raised of S$62.5 million (net of fees) was pumped into China to further develop their tower crane capabilities and expand their fleet. It remains to be seen how this will bear fruit for them, but I maintain a long-term view of at least 3-4 years before tangible benefits arise.

Economic Recovery and Crane Rental Focus

Tat Hong’s fortunes are, in a sense, tied to the global economic recovery as their business depends a lot on customers spending on capex to buy cranes and general heavy equipment. Thus, their business can be viewed as cyclical as it is linked to the economic situation of the world, and South-East Asia as well. It was fortunate of me to purchase some shares when the outlook for the economy was extremely depressed, as this meant valuations were also close to rock bottom (of course, I did not suspect so at the time).

But with the gradual healing of the economy, which may take a couple of years, Tat Hong should gradually also see their business picking up. However, with their focus on crane rental rather than equipment sales, this subtle shift in their business model would divert more earnings towards crawler and tower crane rentals. It is their aim that 75% of profits eventually come from crane rental; and this will form a stable “core” base of earnings as crane rentals are subject to less volatility and variability. This is the reason their Fixed Asset base has been steadily increasing while their inventory levels are dropping, as evidenced by their Balance Sheet every quarter. Whether this strategy works well in the near future remains to be seen, and needs to be more closely observed in terms of Cash Flows as well.

Tutt Bryant and Fagioli Joint Venture (Australian Market)

On February 17, 2010, Tutt Bryant released an announcement via ASX that they were entering into a 50% JV with Fagioli (a privately owned company, and one of the largest heavy lifting specialists in Europe) to form TBF Oceania Pty Ltd. The press release mentioned that the combined resources of both companies will enable the JV to provide a new level of lift and shift capabilities in the Australian market. The synergistic effects of this joint venture will probably take some time to manifest itself, but it is a step in the right direction as Tutt Bryant is taking measures to improve their product breadth as well as to garner new customers in the process. Recall that in 2006 and 2007, Tutt Bryant (which is 70% owned by Tat Hong) went through a series of M&A to expand their product offerings and entrench themselves more firmly in Australia. With the global financial turmoil, the Company had also seen their revenues and profits adversely affected. With the pick up in infrastructure and oil and gas projects seen to be slow, most analysts and economists only expect a significant pick up in activity from FY 2011 onwards (note that Tat Hong has a March year-end, thus FY 2011 starts from April 1, 2010).


The above is just a summary and preview of what’s in store for Tat Hong in the next couple of quarters. My focus will be more on their cash flow generation capability and also how they manage their Balance Sheet. Their gearing is still somewhat high and hopefully as economic conditions improve, they can manage to reduce this further. The RCPS may also be a potential issue in 4.5 years time as the conversion price has been set at S$1.50 and the current market price is nowhere near that level, hence it would be to ordinary shareholders’ disadvantage if the RCPS are not converted to ordinary shares.

Tat Hong’s FY 2010 results will be released in late May 2010, and I am hoping for a decent final dividend to be paid out as well.

Saturday, February 20, 2010

Sun Tzu – War On Business Part 1 (Prince of Wales)

During the Chinese New Year festive holidays, I managed to catch an episode of a new TV series called “Sun Tzu – War On Business”. It is hosted by a very prominent and prolific entrepreneur called Mr. James Sun (“James”), who made a name for himself as the only Asian to have appeared in the finals of the reality TV Series “The Apprentice”. In 1995, at just the tender age of 18, he set up his own investment firm Sun & Associates and invested US$5,000 of his savings into popular auction portal eBay. Six months later, he was staring at a huge profit of US$150,000. This and other instances of savviness has made him a successful entrepreneur and investor, and next on the cards is a hedge fund he plans to set up, targeting an annual return of 35% per annum. The Sunday Times also did an interview with James which was published on February 14, 2010, and it features some of his money habits and also details how he built his wealth.

What was intruiging, though, was his new TV show which was a sort of reality TV show in which James looks at businesses from top down and advises on how to improve the business, by focusing on aspects such as Management capabilities, division of labour, human resource, technical skills, operational details and financial management. James will then meet with the CEO/owner to discuss aspects of the business, what’s wrong, what’s good and what’s bad; as well as what is needed to improve or enhance the business. Throughout the half-hour show, James uses a lot of quotes from Sun Tzu’s actual “Art of War” Manuscript; and though I cannot remember the word for word references as I only watched the program once, I think it’s the lessons learnt and issues dealt with which resound in me the most.

This episode focused on an F&B business located in Singapore called Prince of Wales pub. Essentially, the owner is an Australian Mr. Malcolm Davies (“Mr. Davies”) who owns a pub cum hostel – the top floor had beds and acted as a backpacker’s hostel, while the bottom floor (of the shophouse) was a pub cum dining area. The concept was one where foreigners could get good drinks, entertainment, relaxation as well as cheap accommodation. James was then called in to assess how to improve the state of affairs at the pub, as there were lingering issues with operations and also some customer complaints.

To cut a long story short, I will summarize the main learning points I picked up from the program (not in order of merit) from memory:-

1) Proper Segregation of Duties/Roles and Operating Procedures – In any organization (even small ones such as a pub cum hostel), it pays to have a clearly defined set of rules and regulations, as well as roles and responsibilities for each and every staff. Granted, most of the staff in small businesses tend to multi-task and may gave numerous roles to fill, but the important point is that someone who specializes in say sales, cannot be tasked to do something like mixing drinks for example! So each person has to be briefed on what to do, and how to react in case of any emergencies. One such emergency occurred on one of the nights when James visited – the sink got inexplicably stuck and caused a lot of problems as orders could not be processed; and resulted in tremendous amount of frustration for patrons and Management.

2) Control over Operational Aspects – During the program, it was revealed that the Mr. Davies had an issue with serving food (as opposed to just drinks and beverages) as the food was provided for by an adjacent restaurant and not cooked in the Prince of Wales premises at all (as they had no kitchen). When some mystery shoppers (planted by James himself) complained that the food (fish and chips) was cold and slow, Mr. Davies himself invited the restaurant manager to talk to the customers instead of taking the blame himself, which James felt was not the right thing to do. He advised that Mr. Davies should try to take back operational control of the food, which was an important aspect of the business, so that he could ensure its quality and timeliness. Look also at point 5 for more on this.

3) Proper Positioning – James also advised Mr. Davies to do proper positioning of the tavern/budget hotel to ensure that it was “neither here nor there”. This was important because travellers and tourists would be able to target their search and thus pinpoint his pub cum hostel as a place to visit if he positions himself correctly.

4) Planned, Phased Expansion – There was also mention of expansion into Padang, Indonesia but then the earthquake occurred and destroyed almost everything, and so the deposit placed on a building there was also lost. In the end, Mr. Davies took a trip to Kuala Lumpur in Malaysia to assess the market there and see if there was potential to expand his operations there as well.

5) What-If Cost-Benefit Analyses – From point 2 on having a kitchen against catering food from outside to satisfy consumers’ requests for good food to be served, Mr. Davies did an analysis and got some numbers and he found out that there were space constraints with regards to building a proper kitchen. It would also cost about S$55,000 and in the meantime, the hostel area would not be accessible during the renovation works, which means opportunity costs as well. Eventually, he decided against it and used the money to cater for buffet spreads in his pub; and also to use the money to spruce up the pub (e.g. repainting the walls) and to come up with a system of table numbering (to ensure food orders could easily be traced to customers). This shows that doing detailed, in-depth cost-benefit analyses really does help the business to make better decisions, and of course James was also instrumental in providing the catalyst for this to take place, and spurring Mr. Davies on.

Overall, James did comment that he was surprised that even though there were flaws recognized by him in the running of the pub; nevertheless it still managed to “make money” (i.e. be profitable). Therefore, he was confident that if the problems inherent in the business and pointed out by him were solved, the business would prosper and grow even further. Mr. Davies was open to suggestions although he did point out that the insertion of “mystery shoppers” gave rise to an unrealistic situation whereby the “customers” were deliberately being picky for the sake of being so (though he did eventually and grudgingly acknowledge flaws in his own system).
A special guest on the show was Mr. Kenny Yap, CEO of Qian Hu Corporation Limited listed on the SGX. He was invited to also have a look at the business and comment on it, and he mentioned that all pubs should have a “Signature Dish”, which is something all customers will order instantly when they visit a food outlet. He mentions that this is also part of branding and creating an identity.

So from this simple half-hour program, I was able to take away many lessons on how to run and manage a business; and for this episode it showed an F&B outlet. Truthfully, I felt that half an hour was too short a duration and did not give sufficient time to analyze the business (especially the numbers) and all aspects in which it operates. In fact, one hour should be adequate, but I guess there are time constraints posed on such programs. I had initially wanted to stretch this out into a “War On Business” series where I would review and catalogue each episode and the business lessons which came along with it. Problem is at this point in time, I do not know if I can catch every single episode as I am not always home on Sundays when the episode airs. Thus, I will report on this reality TV series on an ad-hoc basis under the category “Business Lessons”.

Readers are welcome to comment on the lessons learnt if they have watched the program, and also on what I posted to encourage a healthy discussion.

Check out the Prince of Wales Pub's website at

Monday, February 15, 2010

GRP – 1H FY 2010 Analysis and Review

On February 5, 2010, GRP released their 1H FY 2010 results. Considering the Company has hardly any news and updates in 6 months (it does not report quarterly), suffice to say this was quite a “momentous” event indeed! I immediately sat down to thoroughly run through its financials, commentary and to read about its plans and prospects. I shall now do an analysis and summary here and offer my comments on what to expect from the company in the next 6 months.

Profit and Loss Analysis

Disappointingly, revenues had dipped 5.4% from S$13.4 million in 1H FY 2009 to S$12.7 million in 1H FY 2010. In one traces back further, revenues had dipped 11.5% from 1H FY 2008 to 1H FY 2009, from S$15.2 million to S$13.4 million, so this is a 2-year continuous decline and does not bode well as it appears to be an effect of the global financial crisis; which has crimped demand for GRP’s products. This is probably also a result of oil prices which have remained low and which has affected its Hoses and Marine segment.

If one breaks down the revenue contribution, Hoses and Marine contributed S$5.54 million (43.6% of total) for 1H 2010, up 13.2%; Metrology and Measuring Instruments division contributed S$6.61 million (52% of total), down 12.9%; and uPVC Pipes and Fittings contributed S$0.57 million (4.5% of total), down 40.9%. Hoses and Marine had increased its contribution to 43.6%, up from just 39.7% in FY 2009. This is actually positive news as Hoses and Marine has traditionally registered much higher gross margins than Metrology division, and Metrology’s share of revenues has dipped from 54.3% for FY 2009 to the current 52%. However, gross margins dipped from 38.9% to 35.9% as a result of more intense competition, and the better performance for Hoses and Marine was attributed to upgrading projects at two oil terminals. It remains to be seen if this is a one-off event or if the Company can look for more of such opportunities to boost revenues for their most profitable division.

uPVC Pipes is the most “commoditized” division of the Group and thus I was not surprised that it was hit the most badly, with revenues falling 40.9% to just S$0.57 million. Personally, I think the Group should exit this loss-making division and just focus on its Hoses and Marine and Metrology as these two divisions are the cash cows and have stable characteristics. It may be possible to bring up this point during the next AGM after the FY 2010 results are announced some time in August 2010.

Profit attributable to shareholders, however, managed to rise 11.1% to S$2.32 million despite the challenges stated above. Credit must be given to Management for being able to steer the company to better profitability in spite of the harsh conditions. Distributions costs were reduced as sales volumes dipped (falling 29%), and stringent cost controls were implemented for administrative expenses (therefore falling 10%); and these measures helped to boost the bottom line.

Balance Sheet Review

GRP has one of the cleanest Balance Sheets I’ve seen in my career in accounting, and it is both simple to understand and easy to read. A quick glance reveals some positives – cash and bank balances increased yet again to S$14.2 million while inventories fell to S$8 million (as a result of purchasing inventory from Japan at favourable exchange rates). Trade payables also dropped to S$1.9 million as Management accelerated payment on a foreign currency denominated payable to take advantage of the same favourable interest rates. As a result, current ratio increased further from 4.77 as at Jun 30, 2009 to 5.87 as at Dec 31, 2009. This ratio is actually a little on the high side, and it shows that the company is hoarding cash (cash constitutes more than 50% of its total current assets); thus it may be better for the Company to return cash to shareholders if it cannot find a better use for it, or be able to deploy it to generate good returns.

ROE is computed as 9.36% for 1H 2010, compared to 8.72% for 1H 2009. Simply put, ROE could be much higher if the Company could allocate the cash to businesses or activities which drove up net profit. By itself, 9.4% is pretty decent for an ungeared company, but unless the Management intends to use the excess cash generated (please see “Cash Flow Statement” section), ROE is going to be eroded further moving forward.

NTA for the Group stands at 17.78 cents per share as at Dec 31, 2009.

Cash Flow Statement Analysis

To put it mildly, GRP is currently swimming in cash. They have about 10.21 cents per share in cash on their Balance Sheet. Their cash has also been building up over the last 2 to 3 years, and the Company is generating very healthy Free Cash Flows every 6-monthly period.

There was net cash inflow from operating activities of S$2.2 million, up from S$1.3 million in the corresponding period last year. Capex was low for 1H 2010, at just S$203K; so this means free cash flows of about S$2 million was generated. This was an improvement over 1H 2009 when about S$1.2 million of free cash flow was generated. Note that financing activity cash flows (negative S$1.4 million for the 1-cent per share dividend payout) only consisted of payment of dividends, so this is essentially one of the “cleanest” cash flow statements I have analysed.

If we assume the company continues to pay out 1 cent per share dividends every 6 months, this would result in a cash outflow of just S$1.4 million. Looking at their FCF generation of S$2 million for 1H 2010, technically they can pay out 1.5 cents per share and still be able to have enough cash buffer for operational expenses. With the cash building up comfortably even in the midst of the downturn, perhaps shareholders can expect a special dividend come time for FY 2010 results? At my purchase price of 20 cents, the current dividend payout (assuming it is unchanged) represents a dividend yield of 10%, which is much, much better than inflation and leaving money in the bank.

Plans and Prospects

Well, let me put it this way, GRP was never on the list for grand expansion plans or rosy prospects. They are simply a company that is plodding along, generating tons of cash along the way; but with limited growth prospects. The only reasonable possibility is for them to conduct an M&A, which may be what the war chest of cash is being saved up for. No M&A seems to be on the cards even though Management had alluded to looking for the right opportunity back during FY 2009’s AGM. They are careful in their selection and did not want to commit to an acquisition or merger which will not benefit shareholders and give a decent return on investment.

All I can hope for in the next six months is for the business to be stable and generate more excess FCF. The Management did highlight that 2H 2010 is expected to be “challenging” for Hoses and Marine due to the unpredictable oil prices, but that Metrology division should see improved sales. Most importantly, I am hoping that gross margins can improve after seeing the unexpected dip of 3% for 1H 2010. The Company’s track record should be able to carry it through this downturn without much permanent negative after-effects, and it remains to be seen if Management can successfully maximize shareholder value (perhaps through a share buyback which has to be mandated at an AGM/EGM).

I would like to take this opportunity to wish all Chinese readers a very Happy and Prosperous Lunar New Year! May the year of the Tiger be a good one for you with a resounding ROAR!

Wednesday, February 10, 2010

Property Investing – A Discussion on the Pros and Cons

It is with some trepidation and reluctance that I venture into the topic of property investing, for Singapore is a country whereby its residents fall in love with property, and where most of the rich folk make their money from properties. Personally, I also know a few relatives who are sitting on very good rental yields on property which was purchased a few decades ago. With the steady and relentless rise in property prices, for both HDB flats and private properties, I think now has come the time for me to voice out my views on this matter. Firstly, it is to highlight the salient aspects of property investing; secondly it is also a “diary” of sorts to remind myself of my thoughts at this point in time (when property is hitting new all-time highs).

The Essence of Property Investing

Property investing generally differs from equity investing in one important aspect – it makes use of leverage and collateral to “multiply” gains. This is what I had observed in the majority of cases as Singaporeans are generally not cash-rich enough to purchase the entire property outright, therefore most will pay a downpayment of say 20% and finance the remaining 80% through the use of a bank loan. Since those who can fully pay for their properties are just a small minority, I can conclude that most people make use of leverage for their property purchases, and when it comes to property investing, most may already own 1 property (in which they live in), and are contemplating a second property purely for investment purposes.

Even with equities, one can make use of leverage (commonly known as “margin”) in which shares are used as collateral to purchase even more shares. However, this blogger has always discouraged the use of leverage in equity purchases because during good times, your gains are magnified; but during bad times, your losses are exacerbated manifold. The same scenario also plays out in property investing as leveraged is usually heavily employed. Assuming a S$1 million piece of property, the down payment will then be S$200,000, with the remaining S$800,000 financed by a bank loan.

Assuming that property prices go up amid bullish sentiments, the property is then worth S$1.2 million, and you can sell it to pocket a S$200,000 gain. Considering you only put down S$200,000 worth of cash in the first place, this translates into a gain of 100% on your initial investment! On the flip side, assuming the market tumbles and sentiment turns bearish, the property may be worth just S$800,000. Assuming you sell, you then incur a loss of S$200,000 which will wipe out your entire capital. This simple scenario did NOT take the cost of debt into account, and I shall elaborate on that in a later section.

Risks and Rewards

The risks are as mentioned above with regards to property prices, and these are similar to stock prices in that they can rise and fall. However, property is far more illiquid and there may not be a ready market out there, which means it may be hard to sell or the bid-ask spread may be large and significant. Another risk is that of the bank asking for the topping up of the loan quantum as the collateral (which is the property you purchased) has fallen in valuation. This is a risk unique to leverage as there is no such risk of topping up if you had paid up fully in the first place. So the important thing about buying properties is the ability to stomach such dips by having sufficient cash buffer, and also being able to buy and hold if things go wrong.

The rewards (positive) side of holding a property is that it is a tangible asset, unlike shares which are essentially intangible (i.e. scripless). This means there will always be value in a property, unlike shares which can crash to zero if the company goes bankrupt and needs to wind up. The value, however, is based upon independent valuations as well as last transacted prices, and can be unique to the area (location) and the tenure (whether freehold or leasehold). Another positive about properties is the ability to rent it out to earn rental yield. This is unlike shares in which the dividend yield is determined by the company and the economy at large. Of course, one can argue that tenants may be in short supply during periods of economic turmoil; and in extreme cases, rental income may also not be able to cover the monthly instalment payments assuming you had purchased close to the peak of the market cycle.

Interest Rates

Interest rates are an aspect which property investors have to keep a close eye on, and much research needs to be done to ensure you get a good loan package; otherwise you may bleed more cash than is necessary just to service the loan. For HDB, they offer concessionary loan rates of 2.6% per annum, which has been “fixed” for the last couple of years. Most banks offer 2-year fixed rates (lock-in period) and thereafter start floating the rate, using SIBOR as a guide. The idea is to get a low interest rate on your mortgage and then re-finance once the lock-in period is over. It may be useful to look for a mortgage broker who can offer their services to hunt for the best home loan package to suit your needs, rather than to do the tedious homework yourself.

The often talked about threshold for affordability is that the debt servicing ratio must NOT exceed 35% of your total income. This is defined as the monthly payment amount divided by your total gross income (per couple). An example would be a couple earning S$10,000 a month – they should not service debt which is higher than S$3,500 a month, including car loans and other loans as well. Interest rates are currently at multi-year lows which makes many loans appear “cheap”, but take note that when rates rise in the near future due to inflation the impact on instalments may be quite significant. Do factor in potential rate increases to budget and buffer against such events and to ensure one is adequately covered and that the debt servicing ratio remains below 35%.

Conclusion: The Property Cycle

To conclude, one must be able to read the property cycle very well, as I had mentioned earlier that property involves leverage; and is also illiquid. Thus, one would really look to “buy low, sell high” rather than “buy high, sell higher”, as the risks are a lot higher for property compared to equities due to the two reasons mentioned.

With housing prices hitting new all-time highs recently, for both HDB resale as well as private, to me at least, it does not seem like a good time to commit to an investment property, even if one has the cash.

I would like to hear readers’ views on the property market and property investing. Is this really the way to make “big money” in Singapore? Have there been any cases of “horror stories” that you had heard? I will be blogging more about property in the months to come, as I read more and digest the news bits.

Saturday, February 06, 2010

Tat Hong – 1H FY 2010 Analysis and Review Part 2

In Part 2, I will be examining the Business Unit performance for Tat Hong’s various divisions (they have 5 in total) and commenting on the margins for each division. Please note that the financial crisis may skew the numbers during this period, thus it may not be representative of the actual gross margins in terms of the average performance for each division over the long-term. I will need more time and data to compile in order to see the trend of gross margins and also the core performance of each division as a comparison against Management’s stated growth plans.

Business Unit Revenue Analysis

Looking at 1H FY 2010 (“this year”) versus 1H FY 2009 (“last year”), one can clearly see a trend of revenues shifting from equipment sales to crawler crane rental. For this year, crawler crane rental took up 34.5% of revenues, up from 24.6% last year. By contrast, equipment sales % fell from 46.9% to just 32.2%. If we add up Tower Cranes’ share of revenues, then for crane rental for this year, the proportion of contribution to revenue jumps to 41.4%, versus just 27.7% last year. That is a significant jump of 13.7 percentage points and does demonstrate Management’s commitment to transforming Tat Hong into a “rental” company. Of course, if we are comparing revenues on a year on year basis, the drops have been pretty steep due to the severity of the global downturn; and Tat Hong is after all in a cyclical industry where the demand for their cranes and heavy machinery stems from economic growth and policies which affect construction and oil and gas industries.

Looking at 2Q 2010 versus 2Q 2009, there were steep drops in crawler crane and general equipment rentals, with decreases of 16.9% and 43.6% respectively. The Company should focus more on cost control during such periods and I was disappointed that they could not reduce their cost base, thus eroding profits by a significant amount as compared to the drop in total revenues. Tower Crane division was the only bright spark amongst a dismal quarter, as revenues there climbed 45.5% from S$6.1 million to S$8.9 million. Equipment sales dropped a very steep 50.8% as customers withheld investments in capital equipment due to higher financing costs by banks amid tightened regulations in the wake of the financial crisis. A recent announcement by Tutt Bryant also seems to imply the worst is yet to be over, and demand for the Group’s services may remain subdued for quite a while. It will take a least a few more quarters (I believe) for business activity to get back to pre-crisis levels. In the meantime, the Company is channelling more funds into growing their China Tower Crane operations, while slowly converting more of their inventory to fixed assets (from sales to rental).

Business Unit Gross Margin Analysis

2Q 2010 versus 2Q 2009

It is readily apparent that gross margins for 4 out of 5 business divisions declined, with only General Equipment Rental showing an improvement in gross margins of 6.2 percentage points to 44.2% for 2Q 2010. Note too that crawler crane rental gross margin remained very high at 60.5%, despite dipping about 2 percentage points from the same period last year. For Tower crane rental, gross margins were 32.6% and 36.1% for 2Q 2010 and 2Q 2009 respectively. Though this is significantly lower than crawler crane margins, it is still much higher than the gross margins achieved through equipment sales, which on average only registers gross margins of less than 20%.

The good news is that the revenue mix has shifted significantly, away from equipment sales and towards more of crane rental, as can be seen in the previous table. For 2Q 2010, Equipment sales made up just 33.6% of revenues, down from 45.2% a year ago. Crane rental, on the other hand, made up a total of 40.6% of revenues for 2Q 2010, up from just 29.8% a year ago. This has resulted in overall blended gross margins increasing from 36.8% to 39.7%, as more revenue has been accrued through higher margin activities. Since the trend for the Group is to move towards being a “rental” company, and Tat Hong is also building up its Tower Crane division in China, there is a high chance of increasing gross margins in the years to come.

1H 2010 versus 1H 2009

For 1H 2010, gross margins for crawler crane remained quite stable, at 61.1%, just a slight dip of 2.2 percentage points from the same period last year. This was probably due to customers asking the company for lower rates as the economic crisis has hit everyone hard. Tower crane margins also dipped to 33.9% from 36.8%, and the most severe dip came from Parts and Services which saw gross margins fall 8.8 percentage points from 61.3% to 52.5%. General Equipment Rental saw a huge boost in gross margins, surging 17.8 percentage points from 24.3% to 42.1%. Though it is unclear what caused the big boost to gross margins for this division, it is most likely pricing power and possibly a shortage of supply, but this is just postulation. More quarters will have to pass to determine if this was a one-off occurrence, or whether there is persistence in maintaining these higher gross margin levels.

Overall, for 1H 2010, gross margins improved to 39.6%, up 5.3 percentage points from 34.3%. Note that there is a trend of increased gross margin as Tat Hong shifts away from its heavy reliance on equipment sales and moves towards crane rentals. It is beefing up its rental fleet (classified as PPE), while reducing its inventory of cranes and heavy equipment. However, the revenues will certainly dip as crane rentals typically have lower volume compared to equipment sales, especially during bullish periods. With the news from Tutt Bryant that conditions have yet to significantly improve, and that the economy may remain sluggish for an extended period of time, Tat Hong’s earnings are also expected to stay flattish, though Tower Crane segment shows good signs of potential growth.

Part 3 of the analysis will focus on Tat Hong’s Inventory levels, as well as plans and prospects, incorporating all the news which has flowed in since Nov 2009 when the results were released.