September 2008 Portfolio Summary and Review

From this portfolio update onwards, I will be changing the format of the portfolio review to make for easier reading. Instead of everything being text-based (which can be hard on the eye especially when it concerns numbers), I have resorted to using an Excel spreadsheet (see below) to document the key aspects of my portfolio. Of course, some details have been left out such as averaging dates, but these are not as important as the first date of purchasing a company. I have arranged this in order to when I bought the company.

The main change to the portfolio since the mid-September 2008 update is the addition of Tat Hong Holdings Limited on September 18, 2008. The US$700 billion bailout has NOT been approved by Congress as at the time of this writing but the Democrats are purportedly working on another bailout plan to be tabled to Congress; voting can only take placed earliest next week so the market will, as usual, be on tenterhooks. The good news is that the DJIA and S&P 500 crashed about 7% and 9% respectively, which means valuations are getting increasingly attractive as the days go by.

Separately, Singapore is also expected to enter a technical recession once the 3Q 2008 GDP figures are released, due to a sharp drop in manufacturing output. This was not entirely unexpected as our economy is very open and thus prone to such global “shocks”. Other vulnerable countries will include Malaysia and Hong Kong as well.




There was not much news regarding the companies I own, and I will give a quick summary below. The STI stood at 2,358.91 points on September 30, 2008.

1) Ezra Holdings Limited - There was no news for Ezra for the half-month ended September 30, 2008. The Group’s FY 2008 results are expected to be released on Tuesday, October 21, 2008.

2) Boustead Holdings Limited - There was no news from Boustead for the half-month ended September 30, 2008. FF Wong’s total purchases thus far from the open market amount to 701,000 shares at an average price of S$0.98 each.

3) Swiber Holdings Limited – There were no updates from the company regarding the Equatorial Driller, and the Company did buy back more shares to the tune of 2,195,000 at an average cost of S$1.2454. This cost the Company about S$2.73 million.

4) Suntec REIT - There was no news for Suntec REIT for the period ending September 30, 2008, except for the fact that the REIT will change their year-end to December 31 instead of the current September 30.

5) Pacific Andes Holdings Limited - There was no news from PAH for the half-month ended September 30, 2008. A total of about 41 million new shares (at S$0.44 per share) were issued as a result of the scrip dividend scheme. I chose to receive the dividend in cash at the market price of PAH is much lower than the scrip dividend price, thus it would be more prudent to accept cash which can be reinvested for higher returns.

6) China Fishery Group Limited - There was no news from CFG for the half-month ended September 30, 2008.

7) First Ship Lease Trust –FSL Trust is proposing a dividend reinvestment scheme (similar to a scrip dividend scheme) whereby shareholders can choose to receive their dividends in cash or in the form of new shares. The new shares are subject to a maximum discount of 10% off the last traded market price. There will be an EGM convened to address this issue and it will be held on October 7, 2008 (Tuesday) at 3 p.m. Marina Mandarin (the venue for their last AGM).

8) Tat Hong Holdings Limited – There was no news for the company for the half-month ended September 30, 2008.

Portfolio Comments

There are no immediate pressing problems or issues with the companies I own, other than those with high leverage (Pacific Andes, China Fishery, Swiber and Ezra) which may prove a problem in the current credit crunch. However, with Ezra getting a recent S$500 million loan approved, Swiber using their third wave of sale and leaseback and China Fishery generating strong operating cash inflows, these worries have been somewhat mitigated. However, as an investor, it will still be good for me to remain vigilant and to track the companies’ quarterly reports to identify potential problem areas.

With an imminent recession and global slowdown, it is also prudent for me not to expect overly strong earnings growth for the companies I own. Tempered expectations always lead to much better outcomes as one is emotionally prepared. I am also of the view that steady, consistent growth over a period of years is much better than explosive growth which fizzles out after a brief sporadic period.

With a total portfolio return of -3.7%, the portfolio is still showing resilience during this time of turbulence, and deep into the bear market.

My next portfolio review will be on Friday, October 31, 2008 after market close, but note that I will provide a summary of my companies’ updates during the middle of the month (i.e. Wednesday October 15, 2008).

Caveat Emptor - Understand What you Invest In !

With the recent bankruptcy of Lehman Brothers, there has been much controversy over the structured products which have been sold (through various financial institutions and brokerages) to retail investors. One of them is the DBS High-Notes, while another contentious product are the Lehman Brothers Mini-Bond Series. When a major event such as a credit event occurs, these products are rendered virtually useless for the retail investor and many are now questioning the amount of risk they took up (unknowingly) and whether there was any mis-representation on the part of bank officers who sold them such products.

Deep in the heart of such controversy lies the term "Caveat Emptor", which means "buyer beware" in Latin. Essentially, it means that purchasers of securities and investment products should understand what they are buying before they plunge in, or suffer the consequences of their lack of understanding. While the flip side for this argument is that the "pushers" if such securities ought to be more informed and provide better clarity on the structure of such products; the reality is that sometimes the sellers of such products themselves may not fully understand the consequences or ramifications of obscure events such as "credit events" or "default".

If sufficient appropriate disclosure of risks had been made, perhaps the issue would not have blown up in the media to the extent that it is (in Hong Kong, and now in Singapore). I have read reports that showed retirees who invested their life savings (6-digit sum) into such derivative products, believing that the risk was low and that the product was principal-guaranteed. THe 5% interest rate seemed a little too good to be true, as bank savings rate was only a paltry 0.25% ! I guess as the saying goes - if something is too good to be true, then sometimes it isn't true. Apparently, such high returns were a form of "insurance premium" which the banks paid to ensure that there was no default on any of the underlying securities; and the retail investors were the ones who had to pay out the "insurance" when one of the firms went bust. Essentially, these investors were in the dark about being used as vehicles for insurance, while the issuer of such securities paid off these premiums to them every year. Though the risk of default at the time of issuance was low, this does not preclude the fact that the product was in itself risky and complex.

The Edge Magazine's Personal Wealth section reported that even Mr. Leong Sze Hian (who is president of the Society of Financial Service Professionals in Singapore and has 4 Masters Degrees) had problems understanding the inner workings of such products. He had to read it a few times and in depth before he could unravel the risks and characteristics of such products. So the irony is that if such an accomplished and experienced professional such as Mr. Leong finds it hard to understand such products, what about the uneducated retail investor who simply seeks a safe haven to park their retirement monies ? The banks and brokerages have a fiduciary duty to the general public to ensure that ALL the risks and rewards of ALL the products they offer are clearly and explicitly stated, and not just using glossy marketing brochures to advertise the rewards in large fonts while keeping the risks portion at font size 6.

The reason why I feel strongly about this issue even though I do not know anyone personally affected by this saga is because I feel for the people who have "invested" their life savings into such risky products, all the while thinking that their retirement nest egg was safe, only to be told now that almost all their money will go up in smoke. It could happen to your parents, uncle, aunt or a relative; so imagine the number of extra years one has to slog just to make back the money - and all because of salespeople who may be pushing the wrong product and not being able to explain such products clearly enough.

I welcome comments from readers who have something to say about this saga, and to voice your opinions on how you think this can be prevented in future.

Tat Hong - Analysis of Purchase Part 2

To continue with my analysis of Tat Hong's purchase back on September 18, 2008, Part 2 will now analyze each business unit as well as the gross margins and their respective revenue contributions. I also briefly touched on the intangible aspects of the business which makes it attractive; while counter-balancing with some risk factors specific to the industry and company.

Gross Margin and Business Unit Analysis



By referring to the 2 tables above which I have prepared, I have made the following observations:-

1. Tat Hong is increasing its business focus by going into tower crane rentals, as they perceive the China market to be very large in future for this segment and they are positioning themselves in advance to prepare for future growth. However, at this point in time, tower crane rentals seem to have much lower GP margins at 37.6% compared with their principal revenue generator – sale and rental of crawler cranes. Whether this division pans out remains to be seen, but at least it is contributing to revenues and profits instead of losses.

2. Note that although sale of cranes took up 48% of revenues, gross margins for this division were only 20% and are the lowest among Tat Hong’s 5 business units. Sale of crawler cranes and sale of spare parts generated the highest GP margins, and these constituted 22.8% and 7% of revenues respectively for 1Q 2009. Moving forward, from reading of the company’s plans and strategies, they want to increase their revenue contribution from rental of cranes as they mention that Tat Hong will transform itself into a “Rental” company (whereby gross profit contribution from rental will exceed 75% of Tat Hong’s total gross profit in three years time). This strategy is a good one as Management intends to focus more on its very high GP margin business rather than build up a division which has high revenues but low gross margins.

3. Crawler crane rental GP margins have come down a little, probably due to higher cost pressures stemming from inflation. This is not expected to significantly impact the division as a GP margin of >60% is still very high.

4. The company’s focus is also on improving margins and this can be readily seen in their quarterly financials whereby revenues increase at a higher % compared to COGS. Overall, the company is doing well to increase gross margins.

Tat Hong’s Competitor

Tiong Woon (listed on SGX) is one of Tat Hong’s competitors and for FY 2008 (it has a March year-end), revenues were S$158 million with a net profit of S$28.3 million (net margin of about 17.9%). Stripping away exceptionals, net margin is around 12.8%.

By comparison, Tat Hong had an FY 2008 revenue of S$640 million and earned S$89.8 million (net profit attributable to shareholders). This is a net margin of about 14%.

Intangible Aspects for Tat Hong Holdings Limited

a. Largest crane company in South-East Asia – this gives it a competitive advantage in terms of being recognized as a leader, thus exposing it to potentially more lucrative contracts. Being in pole position also means more bargaining power.

b. Diversified operations in South-East Asia and Middle East. The scale of its operations means that there is a lot more potential for economies of scale and cost savings, as is reflected by their improving GP margins.

c. They have diversified into larger cranes which gives them a competitive edge (niche) as the supply is small; thus they can command premium rental rates.

d. The industry has high barriers to entry and significant capex will need to be invested by a new entrant in order to pose a credible threat to Tat Hong.

Risks relating to the Business and Company

i) A major slowdown or downturn in the construction industry will hamper the company’s ability to grow its earnings and top-line. This could happen if there is a global economic slowdown; however, Asia’s real estate market is somewhat resilient and may not be directly affected as infrastructure spending is usually government controlled and funded by the government.

ii) Another risk is the slowdown in oil and gas E&P activities because of the recent dip in oil prices below US$100 per barrel. However, this is not a major long-term concern as oil majors still need to spend eventually to drill oil and cranes will be used for such purposes. I also forsee that oil prices will remain above the US$100 barrel mark in the mid-term, thus spurring continual E&P activities from oil majors.

iii) Rental rates may fall or slow depending on the supply/demand dynamics. If Tat Hong does not renew their fleet often, they may fall behind in terms of getting best fleet for rental, or be unable to adequately service their clients.

iv) Tat Hong is in a high capex business and they need to spend significant sums on capital fixed assets. If operating cash flows drop drastically, the company could face high cash burn and be in trouble.

Part 3 will discuss Tat Hong's regional plans for growth as well as the strategies they intend to use, and I will comment on whether I think they have long-term potential as well as to evaluate their effectiveness. I will also be touching on the regional prospects with regards to the infrastructure and construction spending for each country as outlined by Tat Hong, and to comment briefly on that.

Tat Hong - Analysis of Purchase Part 1

This is part 1 of my analysis of Tat Hong Holdings Limited which I had recently purchased on September 18, 2008 at an average price of S$1.055 per share. Please feel free to contribute comments and opinions on any part of the analysis. Note: This is NOT a recommendation to buy or sell shares in the company and I disclaim all responsibility for readers who follow any advice on this blog - please do your own research too.

Background

Tat Hong Holdings Limited is a crane-leasing company which also specializes in rental of heavy equipment such as foundation equipment, piling rigs, graders, ski loaders and compaction equipment. The Group has offices in Singapore (HQ), as well as Australia, Hong Kong, Malaysia, Thailand, Vietnam, Indonesia and China. The Group is very diversified and has a pan-Asian as well as Middle East presence. They are ranked No.1 in terms of crawler crane fleet size, and No. 4 in terms of total number of cranes owned.

The Group has five main divisions - rental of crawler cranes, rental of tower cranes (new division), rental of spare parts, sale of cranes and sale of spare parts. I will elaborate more on the separate divisions in a later post. Firstly, I will go through the financials and offer some comments:-


Note: Market Price on Sep 15, 2008 should be changed to "My Purchase Price". Sorry for the error. How the table should be read: I purchased Tat Hong based on FY 2008's historical PER of 5.95 times and with a dividend yield of 7.2% based on FY 2008's full-year dividend of 7.6 Singapore Cents Per Share.

Comments on Company’s Financials, Gearing, Cash Flow and Dividend Policy

Before FY 2004, revenues were flat and the company had even incurred a net loss. This was due in part to the downturn in Singapore’s construction industry and also because Tat Hong had not diversified its operations into the region (i.e. South-East Asia). Using 1Q 2009 as a gauge of the company’s growth (as their operations are not cyclical through the year), we obtain a revenue increase of close to 20% and a net profit increase of about 38.1%.

Debt equity as at June 30, 2008 was reasonable at 0.38 times, and has not exceeded 0.5 in the past 3 financial years. Considering their prudent growth strategy target of about 10% increase in net profit over the next 2-3 years (till FY 2011), I believe the company will not over-stretch itself.

Gross margin has been increasing over the years, which is a positive sign. From just 26.9% in FY 2005, this has steadily increased to 39% in FY 2008, and the most recent quarter (1Q 2009) saw a gross margin of 36.8% (partly reduced because of their foray into tower cranes, which have a lower gross margin – see Gross Margin by Business Unit table). Net profit after MI (less exceptional gain) has also been increasing steadily to the current S$84.6 million in FY 2008, as a result of expanded scope of operations and increasing diversification into different countries through organic growth and acquisitions (in Australia).

Net margins have been steadily on the climb – a very good sign. Net profit margin was 6.7% in FY 2005 and this has improved to 15.3% for 1Q 2009, more than double compared to 3 years ago. This shows that Management has focused on expense control amidst an environment of rising costs.

The issue of free warrants are exercisable at the strike price of S$2.50 per share. Currently, the market price is only 50% of the strike price and thus there is not much risk of dilution from the exercise of warrants. Tat Hong also has an ESOP which sees about 1 million new shares entering the market every financial year – this is hardly dilutive so can be considered immaterial.

Shareholder’s equity has been steadily increasing while gearing has been relatively constant. This is due in part to good profits made from business activity and also healthy operating cash inflows which help to offset the impact of bank interest payments, taxes and investments in subsidiaries and fixed assets. The annualized ROE for 1Q 2009 is 28.9% and much of it is NOT debt-funded but as a result of higher net profits. ROE has been steadily increasing over the years (from FY 2005) to over 25% currently. Note that maintaining high ROE gets increasingly difficult as the company’s equity base increases with the increase in retained earnings.

Dividend policy is twice yearly with payout declarations in September (interim) and March (final). Note that the company had only started paying interim cum final in the last 2 financial years due to good results and strong cash flows, and this may not always continue into the future. DPS for FY 2008 was 7.6 Singapore cents per share, representing a yield of 6.8% based on last done price of S$1.12. Assuming the company has better years ahead, the possibility of an increased dividend payout is high, assuming the company continues to generate excess cash flows with which it can use to pay out dividends, while retaining sufficient cash for expansion and growth.

As can be seen in the above table, the Group has been generating strong operating cash inflows over the last few financial years, which is an indication that its business is stable and generating strong Free-Cash-Flows (FCF). This gives a confidence boost that the company will not succumb to sudden shocks as it has manageable debt and also gives me assurance that it is paying out dividends with FCF instead of through borrowings.

Territorial Expansion Details

Below are some highlights and summaries I made of Tat Hong's foray into the region:-

Singapore

i. S$12.6 million convertible loan agreement signed with Hiap Tong Corporation Pte Ltd. Convertible into ordinary shares representing 20% stake in Hiap Tong. Hiap Tong will be going for an IPO soon on SGX.

ii. Singapore listing of China-based crane maker, Yongmao Holdings, for S$0.35 per share. Tat Hong currently owns 20% of the company after an open-market purchase of shares (average consideration of S$0.45 per share).

iii. Acquired 30.2% of Kian Ho Bearings Limited

China

i. Established Shanghai Hai Tong on Sep 5, 2006 to enter tower crane rental business

ii. Secured 5-year RMB 87.5 million contract from Sky China Petroleum Services Co, Ltd and a 4-year contract worth US$10.8 million with a China National Oil Company – both contracts carried out through joint ventures with KS Energy Services Limited;

iii. Completed investment in joint venture with Beijing Zhongjian Zhenghe Construction Machinery Co., Ltd (to enter China’s tower crane rental business);

iv. Completed investment in China Nuclear Huaxing Tathong Machinery Construction Co., Ltd (76.4% stake)

Australia

i. Listed Tutt Byrant on Dec 9, 2005 at A$1.00 in an IPO on ASX;

ii. Acquired Queenslands Equipment rental company, North Sheridan Pty Ltd and Muswellbrook Cranes Services Pty Ltd (A$17.8 million acquisition) through Tutt Bryant;

iii. On Dec 12, 2007, Tutt Bryant acquired rental business of Bradshaw Ultra Heavy Haulage Pty Ltd;

iv. Acquired Caradel Hire through Kingston Industries Pty Ltd, which is a wholly owned (100%) subsidiary of Tutt Bryant.

More to be continued in Part 2 of my Tat Hong analysis. The next part will feature each separate division and talk about their revenue contributions and gross margins.

Capitulation ? An opportunity for Value Investors

Investopedia defines the word "capitulation" as the act of surrendering or giving up in the stock market. Investors try to sell equities in an effort to get out of the market and into less risky investments such as bonds or commodities. True capitulation usually involves extremely high volumes and sharp declines and it a symptom of panic selling. In other words, it can be said that people totally ABANDON hope that they can recover their losses and just painfully sell and take their losses. This kind of behaviour is akin to surrendering yourself to the whims of Mr. Market and totally giving in to his pervasive influence.

In the past week, we have seen an upheaval of sorts. The collapse of Lehman Brothers, the bailout of AIG by the Federal Reserve (using US$85 billion) as well as the merging of Merril Lynch into BoA and the subsequent sharp share price declines for both Morgan Stanley and Goldman Sachs; all point to a massive shift in the financial landscape which makes up corporate America, and Wall Street. Once great names, these companies were brought to their knees as a result of years od excesses and re-packaging of "risk", thus creating a bubble of complacency which ultimately led to their financial doom. This issue has probably been debated to death in the financial press and even books have started to be written about the sub-prime crisis, so I shall not delve too much into it myself.

In the most recent news, the USA Government has asked Congress to approve a plan to buy up US$700 Billion worth of toxic mortgages, in what is turning out to be the largest financial bailout since the Great Depression era of 1929. In the 2-year plan (in which details have yet to be worked out as at the time of writing this post), the Government would assist firms with toxic debt to relieve the financial strain off financial institutions and help them to resume lending. Of course, some detractors argue that it's like throwing a pail of water into a raging fire; but proponents of this rescue package say that such a co-ordinated effort would bring further stability to the system and prevent the whole financial system from "seizing up" due to a crisis of confidence and distrust which is now rampant on Wall Street.

As a result of all this, we have seen something akin to capitulation on Thursday morning on SGX, where the STI dipped to as low as 2,304 before staging a massive recovery when this news broke out. On Friday, as further feel-good effects seeped in, the index climbed close to 6% to recover quickly to the 2,500 level. The capitulative effects after three days of massive selling (Monday to Wednesday) opened up a good window of opportunity for value investors who seek a good margin of safety, as Mr. Market has battered down prices to such extents that they are becoming nothing short of ridiculous. A rumour about Macquaries drove Macquarie shares listed on SGX down to amazing levels, while any other quick rumour (about AIG's stakes in MP REIT and FSL Trust) was enough to cause a significant dive in the price of the shares. Such is Mr. Market's manic disposition and his emotionally-charged actions result in blatant mis-pricing of asset values.

I took the opportunity to purchase shares in Tat Hong Holdings Limited on Thursday morning as a result of Mr. Market's depressive mood, as I had been doing research on the company for about a month and found it a suitable target for long-term investment. The purchase was made at an average price of S$1.055 per share. More details of my research process and why I found it a suitable investment will be posted in due time, and I will include this in my September 2008 month-end portfolio review.

So to conclude, if one senses that capitulative effects are being manifested in the market, one can take advantage of this by purchasing shares in a company which one has been eyeing (and which one has done research on),

Mid-September 2008 Portfolio Summary and Review

Interestingly, this was the half-month where everyone’s long awaited “crash” scenario came finally came true. The instability of the economic situation, coupled with the global slowdown as a result of the sub-prime crisis, finally hit home as the Straits Times Index fell through the 2,500 level. As a gauge of market sentiment, the index is very useful and there is currently a lot of uncertainty and fear going around as investors are finding out that every rally is simply a bear market rally which “traps” them to buy, even as prices go inexorably lower. Mr. Market is ferociously thrashing every stock that made a fool of him a year ago (by being over-valued) !

The fascinating aspect of the current bear market (and probably previous ones too, which I have not lived through as an investor) is that prices have the tendency to dip downwards almost every single day without fail, as if the selling is so pronounced the savage that it resembles a tidal wave. It is only with such ferocious and brutal selling that one uncover gems of companies selling at bargain basement prices. However, as Mark Sellers said, not many have the guts to purchase when the entire world seems to be selling, and the psychology of human behaviour is indeed fascinating when it comes to the stock market, as people start avoiding stocks like the plague when they become better bargains !

I took the opportunity to purchase more of China Fishery, seeing that Mr. Market was extremely manic-depressive today. Please also note that due to time constraints and the nature of value investing, I will NOT be providing half-monthly updates for my portfolio from October 2008 onwards. In future, all portfolio updates will be on a monthly basis.

Below is the summary of my investments and related news as at September 15, 2008 (STI at 2,486.55 points).:-

1) Ezra (Vested since October 6, 2005) - Buy Price $0.645 (bonus adjusted), Market Price $1.23, Gain 90.7%, YTD Loss 63%. There was no news for Ezra for the half-month ended September 15, 2008.

2) Boustead (Vested since September 13, 2006; averaged down November 13, 2006) - Buy Price $0.6475 (split-adjusted), Market Price $0.965, Gain 50.2%, YTD Loss 19.9%. There was no news from Boustead for the half-month ended September 15, 2008, other than a brief notice of the striking off of a dormant subsidiary in the United Kingdom. FF Wong purchased shares in Boustead from September 9 through 12, at S$1.00 a piece, for a total of 600,000 shares.

3) Swiber (Vested since February 14, 2007) - Buy Price $1.01, Market Price $1.22, Gain 20.8%, YTD Loss 64.4%. Swiber had a string of announcements this half-month, beginning with their third sale and leaseback arrangement with Platou Finans for US$225 million. This was announced on September 2, 2008 and involves three 18,000 bhp AHTS as well as two 78-metre DP2 subsea support vessels. I will not go into too much detail as all the numbers have been presented in the press release, I just wish to highlight that Swiber will receive 25% downpayment on each vessel and the total consideration will be US$225 million. US$18 million will be recognized in stages in an exceptional gain as this represents the excess of the proceeds over the book value of the vessels. The next day on September 3, 2008, Swiber announced that they had achieved a milestone for pipelaying installation whereby Swiber Conquest, the Group’s flagship pipelay barge, has laid 150 kilometres of pipelay work within 6 months. This press release sounds more like a PR exercise though, as there is not much informational content which can be construed as being useful for the investor to alter his evaluation of the company’s capabilites (no comparison was made with industry standards – so we will not know how “good” 150 km of pipelay work in 6 months is !). On September 4, 2008, Swiber announced the formal inking of the contract (formerly LOI) with CUEL in Thailand for a 5-year job beginning September 2008 (worth an estimated US$50 million per annum). The company has also been consistently buying back its shares from the open market (check SGXNet for details).

4) Suntec REIT (Vested since December 9, 2004) - Buy Price $1.11, Market Price $1.29, Gain 16.2%, YTD Loss 24.6%. There was no news for Suntec REIT for the period ending September 15, 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 and July 3, 2008) - Buy Price $0.5475, Market Price $0.24, Loss 56.2%, YTD Loss 61.9%. There was no news from PAH for the half-month ended September 15, 2008.

6) China Fishery Group (Vested since November 20, 2007) - Buy Price $1.211 (average), Market Price $0.90, Loss 25.7%, YTD Loss 51.4%. There was no from CFG for the half-month ended September 15, 2008. I have added to my position in CFG at prices of S$0.925 and S$0.90 on September 15, 2008, bringing down my average cost to S$1.211 from S$1.50.

7) First Ship Lease Trust (Vested since January 14, 2008) - Buy Price (Averaged Down) $1.105, Market Price $1.07, Loss 3.2%. There was no news from FSL Trust for the half-month ended September 15, 2008, except for a small news snippet of FSL Trust wanting to list on ADR (USA OTC Bourse).

Overall Portfolio

The loss on my current portfolio is 6.9% from a new cost of S$98.4K as at September 15, 2008. The market value of my portfolio is S$91.6K. Realized gains amount to S$8.6K as a result of the dividend from FSL Trust, Boustead, Suntec REIT (inclusive of the dividend from Pacific Andes which I will choose to accept in cash instead of scrip). Including realized gains, the total gain as a % of my cost is 1.8% (about S$1.8K).

Note that this will be the last half-monthly review for portfolio. In future, I will just be providing an update on the companies I own and how their businesses are doing. I am also exploring a better method of benchmarking performance, probably to book value growth of my companies. Comparison to the STI is inaccurate as the index components are switched over time – thus there is survivorship bias involved.

My next portfolio review will be on Monday, September 30, 2008 after market close.

The Pendulum Swings from Irrational Optimism to Brooding Pessimism

We have now come to a stage in the economic cycle which can best be described as "unbridled pessimism", if such a term actually exists. A few investing blogs such as Jeflin's have written about such events and how it has translated into pervasive fear in the stock markets. One would recall that not too long ago (perhaps just more than a year back), pundits and commentators were extremely positive about the global outlook and were thumping themselves on the back for predicting "explosive global growth". The same bunch of people are now falling over themselves to proclaim, in no uncertain terms, that we are in the worst financial crisis to befall us since the Great Depression. Not exactly a case of being very accurate and mystical, considering their lack of forecasting skill. But I will elaborate on the mechanism of pendulum swings and how it applies to capitalistic economies.

As readers may know, a pendulum is a device which swings from one extreme (left) to the other extreme (right) and back again to left. This is known as one wavelength in physics and the swing of a pendulum can be likened to one complete revolution. Applying this to economies, one extreme of the pendulum would signify irrational optimism about the economy's future prospects - the belief that economies in capitalistic nations will continue to grow without stopping at a steady, constant rate. This view necessarily espouses the theory that excesses which are built into the system will be "flushed out" naturally by the process of competition and that equilibrium will be achieved in a smooth, sustained manner. However, from what has been observed in past boom/bust cycles and if you include the current sub-prime mess, it is rather apparent that excesses in a system do not automatically clean themselves out in a tidy way; but often leave a big mess and a substantial trail of devastation which knocks the economy out of whack for a short period of time. Take the dot.com bubble, Asian Financial Crisis and the LTCM debacle and you will notice a pattern emerging for such "catastrophic" events. They all started out with excesses and ended up with a bust so painful that the most of the world thought that the capitalistic world (as we know it) was coming to an end.

Somehow, this process has been rinsed and repeated yet again in our most recent episode of sub-prime; namely that another shock wave has rippled through the economy and caused the collapse of notable names like Bear Stearnes and (probably) Lehman Brothers. I would argue that in any capitalistic society, such booms and busts are a necessary part of "cleansing the system" of bubbles and exuberance. Hence, back to the pendulum analogy, we find that it will begin to swing rather precipitously from one extreme to the other extreme. This can take a very short span of time (as evidenced by previous boom to bust incidences) and in our case, took less than a year and a half (since June 2007) for the full effects of the sub-prime mess to seep into every aspect of the financial system.

So now that the pendulum has swung to extreme pessimism, the question is when will it swing back again, and how long will it take ? This question has probably been tackled to death by the financial media and every guru and pundit has some view on it; so I won't go into details and bore the readers out there. Instead, if I looked at this from a different perspective, I would say that as long as the excesses have been cleared (i.e. all write-downs and write-offs have been completed) and when confidence is again restored, the pendulum will then start to swing back to the left again towards optimism. The point to note is that human emotion and psychology is probably the hardest to accurately predict, and so the eventual recovery of the economy, of confidence and of the markets will probably be a slow, gradual healing of a deep wound rather than a quick "stitch" to seal the crack. I am more of the opinion that the pendulum will swing slowly from right to left and that it will not be in a hurry to accelerate - which implies that I believe in a long, protracted slump until confidence returns to the system.

Of course, my opinion is but an opinion, and does not matter much in the grand scheme of things. What matters most to the retail investor is how he processes the information at hand to make decisions which will help him to maximise his wealth, and to beat inflation (at the very least). By being invested in good companies which can weather the economic storm, one stands a chance of preserving his capital and earning a decent return on his investment. An investor should follow a disciplined approach of looking at companies to determine if they are suitable investments for the long-term, and temper this with knowledge about economic cycles and the boom/bust model. Only the fittest survive a storm, and only a consistent investor who can adapt to changing times will be able to churn up consistent returns over time.

Swiber and Boustead - News Snippets

Just some short news snippets (my recent posts have been rather lengthy and will probably make readers fall asleep, so it's good to have short snippets now and then).

Swiber initiated its share buy-back programme last Friday and bought back 200,000 shares at an average price of S$1.3151, which will cost the company S$263,020 (excluding brokerage). Today, the company announced that it bought back another 186,000 shares at an average price of S$1.3662, incurring a total of S$254,113.20. The total shares bought back so far amount to 386,000 costing the company a total of S$517,133.20. Readers may recall that as recently as June 26, 2007, the company had raised S$120.4 million for business expansion through a placement of 55,350,000 new shares at S$2.1748. So I guess you can say that the company is buying back at a "discount" of nearly 38.3% (using an average re-purchase price of S$1.34 per share over 2 trading days). If we consider that the total amount they are allowed to re-purchase is only 42,435,000, I guess it's a pity that they cannot "re-purchase" all their share placement shares at $1.30+ and then hopefully re-issue new shares in future at a higher price ! Haha, just kidding but it's a sneaky thought.....

Boustead also announced today that Mr. FF Wong, CEO, had purchased an additional 142,000 shares of Boustead at a price of S$1.00 per share. This has effectively increased his already large stake of 31.7% to 31.73%. Perhaps the CEO is trying to signal something by purchasing shares in his own company, as he is acutely aware of the value of the business and the latent potential for future growth, but readers are free to conclude on their own if this means anything. Whatever the case, it is always more important to analyze the business first, before looking for any insider purchases.

Economic Effects of a Bear Market on Companies

I think by now, any normal man on the street will be all too aware of the effects of an economic slowdown coming to our shores, as well as feel the effects of heightened inflation. The newspaper has been blaring the news out almost every day in a non-stop stomach-churning litany of bad news, contributing to the ever-increasing gloomy sentiment prevailing in the stock markets. But an investor should ask the all-important question: How will these economic events impact on the companies I own ? I would like to address some of these issues here:-

1) Slowing Demand for Goods and Services - With any economic downturn or recession, people will tend to cut down on their spending and conserve cash for a rainy day. This will translate into slowing demand for goods and services across most sectors, but particularly for consumer goods such as electronic goods, cars and restaurant dining. Thus, during a downturn, such consumer-related companies typically feel the effects first-hand as consumers may spend less and eat more at home. Ironically, it is the spending effect which helps to grow GDP for a country (though it may not be good for an individual's wallet or personal finances, but that's another story !). There will be higher unemployment, more retrenchments and even pay cuts/freezes which will make people tighten their wallets further. All these contribute to the contractionary effect on the economy.

2) Higher Cost of Goods - Inflationary pressures and the global commodity boom has raised the cost of goods for many companies. These include the prices of tin, steel, wheat, rice as well as oil. Even though oil prices have come down somewhat to the current US$106 per barrel, they are still much higher than a year ago and the inflationary impact can be felt across the globe. Many companies which rely on oil as an important component of their costs (e.g. airlines, plastics industry and semi-conductor companies) are facing an uphill battle in controlling their COGS while maintaining their gross margins. Food companies also face rising cost of materials as the prices of rice, flour and other raw materials has risen tremendously, while they are unable to fully pass on the effects to final consumers as there is a limit to how high they can raise prices without affecting demand adversely. It should be noted that many companies in the food industries have reported lower protfits, with some reporting losses. The inflation rate was 6.5% in July 2008, down from 7.5% for April-June 2008, and estimates are that it will stabilize around 4-5% for the FY 2008.

3) Difficulty in Raising Equity - With the current economic turmoil and risk aversion, companies which require funds for expansion are unable to turn to the equity markets as the demand for IPO has almost dried up in the last 12 months. Most companies have to resort to pulling the plug on the IPO as the valuations they are garnering are not attractive enough for fund raising, while subscription rate may also be dismal, leading the under-writer to have to mop up the rest of the shares. Rather than subject themselves to such conditions, most companies would rather seek alternative methods for raising funds, while waiting for equity markets to recover their footing.

4) Difficulty in Raising Debt - The sub-prime crisis which erupted in the USA since June 2007 has contributed to this phenomenon. Not only are companies "squeezed"when it comes to raising equity, but now even debt is hard to raise as banks are suffering massive write-downs and a liquidity crisis because of weakened balance sheets; thus they are unable to lend as per normal conditions and will screen each potential borrower more stringently. Interest rates are also apt to be higher and the cost of financing may be prohibitive for some companies. Thus, all in all companies may find it increasingly difficult to either re-finance their debt, or to obtain fresh funds for expansion. In this respect, highly-leveraged firms with poor operating cash inflows are more at risk of getting into big trouble, as they have no other source of cash besides financing.

5) Cash Conservation and Heightened Risk Aversion for M&A - More companies will start to conserve cash as a result of points 3 and 4, and this would mean dividends may be cut or not paid at all in order for companies to preserve cash for operations. M&A activity will also lessen as there is higher risk aversion because companies are not willing to pay premiums to acquire in the current climate. A lessening of such M&A activity points to a sluggish economy and may lead to a vicious cycle of even more risk aversion, until some large company dares to step up the fore and declare a major acquisition. Recently, Coca-Cola announced the acquisition of China-based Huiyuan, in one of their largest acquisitions to date. However, such news these days are more the exception rather than the norm. Ironically, it is this period of uncertainty which makes valuations more compelling for acquirors, and companies such as Boustead with a huge cash hoard can take advantage of such conditions to acquire cheaply.

It has to be noted that I have covered the general aspects of an economic slowdown, high inflation, high commodity prices and also the sub-prime crisis. These are the main events dogging companies now as they struggle to grow their businesses and their profits. Some industries are described as "recession-proof" such as luxury goods and staples such as basic food products; but even these will be indirectly affected by a slowdown.

Suffice to say that no company can escaped totally unscathed from these effects, except those with pricing power, market leadership and prudent expenses control. Booms and busts are part of the economic cycle and all companies should be prepared for such cycles. It is the company which can weather the storm which may turn out to be a big future winner, and who knows, maybe even the next blue chip ?