Friday, October 31, 2008

October 2008 Portfolio Summary and Review

I would say October 2008 was by far the most interesting month I had encountered in my three years plus of investing, and would include the most amount of volatility caused by Mr. Market’s manic mood swings. It’s amazing that regional bourses can have swings of 10-12% up and down in a day; it’s as if the underlying businesses were really changing on a daily basis to justify such strange behaviour ! Of course, we all know Mr. Market is having his manic moods again and pricing businesses as if they were going to go bankrupt the next day. In such an environment, he normally assigns a very low valuation for most businesses.

In terms of opportunities, October 2008 was a great time for me to average down on the companies which I have been a shareholder of. I don’t think I’ve purchased this much since 2005 (before I started out on my value investing journey), and it felt like there were many bargains out there waiting to be picked up, assuming you had the cash and the holding power. Note that I do NOT advocate using leverage to purchase shares in companies, whether it be a bank loan or loan from loved ones, please purchase with additional savings and extra cash which you don’t need to touch for the next 3 to 5 years. During this month, I purchased more of Ezra, China Fishery, Boustead, Tat Hong and Swiber. The Excel sheet reflects the reduction in my purchase price (highlighted in blue) as a result of Mr. Market offering very attractive valuations for me to pick up on. Accordingly, my investment cost has increased from S$109,000 as at end-September 2008 to S$125,800 as at end-October 2008, an increase of about S$16,800. My last two purchases were as recent as yesterday when I picked up more of Tat Hong and Boustead. More details will be given when I review each company in my review below.

Singapore has already reported being in a technical recession, and economists are predicting more “pain on the streets” when the recession hits Main Street and starts affecting the jobs and livelihoods of Singaporeans. Already retailers are anticipating a slowdown in sales and luxury car sales have dropped sharply. I personally have heard stories of people in financial trouble because they had borrowed heavily to fund share purchases and had to top up their margin call; and also of people in trouble because of retrenchments as they had a high-liability lifestyle. Always remember to have at least 6 to 9 months of cash for emergencies.

Meanwhile, the economic crisis seems to have deepened with many countries about to fall into a deep and prolonged recession. Some countries like Iceland and Pakistan are on the verge of bankruptcy as their central banks do not have sufficient reserves to tide through the crisis. The USA Federal Reserve has already cut interest rates to 1%, so they would not have much room more to boost the stock market; while LIBOR rates have remained stubbornly high despite measures by G7 and worldwide governments to inject more liquidity into the global financial system. In the months to come, many businesses which have been choked of credit and which do not have sufficient operating cash inflows or cash reserves may fall and go bankrupt. To my knowledge, the companies I own should be able to withstand this unprecedented period of credit strain; but I remain cautious on their near-term outlook till more clarity emerges.

There was significant news regarding the companies I own, broken down as follows:-

1) Ezra Holdings Limited – Ezra released their FY 2008 results on October 21, 2008. Net recurring income stood at US$49.9 million, an increased of 55% over FY 2007’s recurring net profit of US$32.1 million. My full review can be found in an earlier post. The Group did not declare a dividend as they are conserving cash for the funding of their MSFV and also their Vietnamese yard and training school. On October 28, 2008, the Company announced the unfortunate news that a vessel called Lifeboat Titan 1, which was owned by a 50:50 joint venture company called Casadilla between Ezra and KS Energy, sank in high seas and was lost. However, the vessel was fully insured by KS Energy and the financial impact of the loss is expected to be insignificant. The vessel was on-route to fulfill a contract with Siemens to install wind turbines, and the value of the contract was to be US$43.9 million, commencing in October 2008 and lasting till December 2010. KS Energy has deployed another vessel to complete this contract. I had added to my position in Ezra on October 21, 2008 by purchasing more shares at S$0.595, thus reducing my average cost to S$0.629.

2) Boustead Holdings Limited - There was no news from Boustead for the October 2008. The company has bought back a total of 1.5 million shares so far at an average price of S$0.6747 per share. I added to my position in Boustead on October 30, 2008 by purchasing more shares at S$0.40, reducing my average cost from S$0.6475 to S$0.58.

3) Swiber Holdings Limited – On October 6, 2008, the company sealed an LOI worth US7.3 million in Vietnam and on October 13, 2008, they also announced a maiden sub-sea contract worth US$7 million in India. On the same day, they also announced a 50:50 formalized joint venture with Rawabi Group of Saudi Arabia to explore oil and gas EPCIC opportunities in the Middle East. Finally, on October 21, 2008, Swiber announced another joint venture, this time with PetroVietnam Joint Stock Corporation to pursue more oil and gas opportunities in Vietnam (note this is just an MOU, no formal JV contract has been signed yet). Swiber are building their foundation for growth in further years and I am willing to wait for them to build their customer base in order to fatten their order books. I added to my position in Swiber on October 8, 2008 by purchasing more shares at S$0.79, reducing my average cost from S$1.01 to S$0.93.

4) Suntec REIT – Suntec REIT released their FY 2008 results on October 30, 2008. The trust declared a DPU of 2.854 cents per unit for 4Q 2008 amid strong committed tenancy and rising rental rates. Moving forward, I am cautious about the trust sustaining its dividend payout and will continue to monitor the situation. The payout represents an annualized yield of 10.3% based on my purchase price. As the counter is currently cum-dividend, this amount has NOT been added to my realized gains.

5) Pacific Andes Holdings Limited - There was no news from PAH for October 2008.

6) China Fishery Group Limited - There was no news from CFG for October 2008. I added to my position in China Fishery on October 8, 2008 by purchasing more shares at S$0.71, reducing my average cost from S$1.211 to S$1.12.

7) First Ship Lease Trust – FSL Trust announced its results on October 21, 2008 and declared a DPU of US 3.05 cents per unit for 3Q 2008, in line with their original guidance. They also mentioned that they had no commitments for more vessels and are positioned to protect the yield rather than to grow it under such volatile and uncertain market conditions. Using a conversion rate of 1.48 to the USD, the DPU is about SGD 4.50 cents which represents a yield of about 16.3% based on my purchase price. Since the counter has gone XD, I have included this as part of my realized gains.

8) Tat Hong Holdings Limited – There was no news for the company for the month of October 2008. The company has bought back a total of 1,961,000 shares at an average cost of S$0.9054 per share. The CEO Mr. Roland Ng did mention in an interview that earnings will slowdown in FY 2010 onwards, as a result of the crisis. He wants to position Tat Hong as a rental company as companies tend to rent instead of buy during lean times. Considering that rental of crawler cranes has a much higher gross margin than sale of cranes, I am optimistic this strategy will add value to shareholders in the long-term. Meanwhile, I am gearing up for short-term pain including the possibility of no dividend being declared when the company releases its 1H FY 2009 results in November. I added to my position in Tat Hong on October 30, 2008 by purchasing more shares at S$0.375, reducing my average cost from S$1.055 to S$0.715.

I sincerely thank Mr. Market for making it possible for me to purchase more shares in these companies at very attractive prices. Without a bear market to take prices down to attractive levels, an investor who practises value investing would not be able to purchase shares in the companies he is eyeing cheaply.

Portfolio Comments

The month of October 2008 will be known as “meltdown month” for a long time to come, as stocks and stock markets dropped very sharply during this month. As at end September 2008, the STI was trading at 2,358.91; but by the end of October 2008, it had dropped by 24% to 1,794.20. Considering the index traded as low as 1,478 on October 24, 2008, this shows the level of fear and pessimism in the market, as this represents a close to 62% drop from the peak. Economic recovery will be long and slow with credit markets thawing slowly and businesses just starting to feel the effects of the global slowdown.

My portfolio correspondingly suffered a fall of 49.4% from cost, and was 41.8% down after factoring in realized gains of S$9.5K from dividends received. Value investing will sometimes result in periods of sharp under-performance as shares of even fundamentally sound, cash-rich companies are sold down indiscriminately. However, I see this as a golden opportunity to accumulate shares in companies which can weather the downturn and emerge stronger 3 to 5 years later.

My next portfolio review will be on Friday, November 28, 2008 after market close.

Wednesday, October 29, 2008

Tat Hong - Analysis of Purchase Part 4

I apologize for the tardiness in posting this last portion of my analysis of purchase, but the last few weeks have been hectic and a lot of news has been released around the world. The entire global economy is a little topsy-turvy with the credit crisis (morphed from "sub-prime" into a larger Godzilla !) and currencies and interest rates (LIBOR) are going haywire.

My following analysis (based on Buffett's 12-step analysis) was completed on September 17, 2008 and one can see (on hindsight) that Mr. Market would price Tat Hong a lot cheaper over the next few weeks following my analysis. A current consideration of mine will be to average down my cost to ride out the next few years of downturn, which I am confident that Tat Hong can ride through with their established reputation, asset base and good management.

Business Tenets

1. Is the business simple and understandable ?

Tat Hong is a supplier of cranes and heavy equipment and its business consists of purchasing cranes and spare parts in order to lease them out to construction companies. The Company maintains a young fleet by constantly purchasing new equipment to maintain their fleet at less than 10 years old. The divisions within Tat Hong are as follows:-

a) Heavy Lift Department - Specializing in comprehensive heavy lift and haulage to customers. This division does rigging, project and site management, crane erection and provision of engineering services. This division looks like a service division which includes the rental of heavy lift and haulage equipment too.

b) Trading - Trades in new, reconditioned and used equipment. Products include crawler cranes, mobile cranes, earth-moving equipment and foundation equipment. Tat Hong has workshops in the region which repair and recondition used equipment and then re-sells it. There is a market for used equipment as it is cheaper than new equipment but can work just as well (in fact, less depreciation is incurred on used equipment as it is cheaper and may have its useful life extended through repair/reconditioning).

c) Machines - This department holds all the fixed assets of the company which are used to lease out to customers in order to generate revenue. The company also has a website at to offer a one-stop portal for customers to browse for their preferred equipment. There is a search engine for cranes as well as spare parts and it was easy to navigate the site as it has a user-friendly interface and is customer-oriented. Tat Hong even provides training for crane operators through courses at its in-house training center (another source of revenue).

d) Spare Parts - Tat Hong also stocks up a wide inventory of spare parts for numerous renowned brands such as Hitachi, Linkbelt and Sumitomo. With such a good array of products, Tat Hong are able to provide service for a wide variety of clients, no matter what equipment they have.

e) Support Services - Provides repair and services for hydraulic systems, engines and other types of repairs to heavy equipment.

From the above, it would appear that the business is simple and understandable. The company buys cranes and either leases them out or re-conditions them to sell. They also provide training courses as a source of revenue and have a service department which caters to repairs and maintenance. +POSITIVE

2. Does the business have a consistent operating history ?

Tat Hong has been in this business of crane leasing since the 1970’s, and over the years has established itself as one of largest companies in the region supplying cranes and heavy equipment to industries such as oil and gas, and construction. Management are very experienced and have a good handle on the dynamics of the business (they are industry veterans). +POSITIVE

3. Does the business have favourable long-term prospects ?

As highlighted in the section on “comments on regional prospects” as well as the analysis of the Group’s prospects for growth (including their strategies to be undertaken and the state of the industry for crane leasing), it is reasonable to assume that growth is still present and the company will be able to leverage on this growth in the coming years due to their market leadership and their dominant presence. +POSITIVE

Management Tenets

4. Is Management rational ?

From the observations of how Management has grown the business (slowly but steadily) and how they have allocated capital to purchasing new cranes to keep up with a modern fleet; as well as the website ecranes set up to cater for customer login, Management appears to act rationally to build the business.

Recently, they had entered the China market through a joint venture and in Australia, they used their 70%-subsidiary Tutt Bryant to acquire Australian heavy lift and crane companies in order to expand their market share. I see these moves as being positive for the long run as it helps to build their market presence, penetration as well as expand their fleet to be able to offer more value-added services.

Management has also been observed to be buying back shares during the last few trading days. Ng Sang Kuey Michael (Exec Director) purchased 70,000 shares at S$1.50 on August 15, 2008, increasing his stake to 0.073%; Tan Chok Kian (non-exec Chairman) purchased 20,000 shares at S$1.51 on the same day, increasing his stake to 0.092%. Ng San Tiong (Managing Director) purchased 200,000 shares at S$1.35, increasing his stake to 1.60% on August 19, 2008. Further, on August 25, 2008, Ong Tiew Siam (Exec Director) purchased 30,000 shares in the open market at S$1.25, going from 0% to 0.006%. The next day, Low Seow Juan $(Non-Exec Director) purchased 40,000 shares at S$1.25 too, going from 0% to 0.008%. Finally, on August 27, 2008, Leong Horn Kee (Non-Exec Director) purchased 50,000 shares at S$1.25 from open market, raising his shareholdings to 450,000 or 0.089%. (Note this info was accurate as at Sep 17, 2008)

In addition to Management’s purchases, the company has also been actively buying back shares since September 9, 2008. 105,000 were acquired at S$1.2388 starting September 9, 2008, and the buying back continued on Sep 10, 2008 with 180,000 bought back at S$1.2161 and another 25,000 at S$1.244; making a total of 310,000 shares thus far. Share buybacks reduce the number of outstanding shares in the market and hence enhances EPS for shareholders. (Note: At present, the total shares re-purchased by the Company amount to 1,961,000 at an average price of S$0.9054). +POSITIVE

5. Is Management candid with its shareholders ?

To be honest, I have not engaged Management in a face to face conversation over the Group’s business, so am unable to accurately determine if they are candid. However, from reading the Chairman’s statement, I feel he is candid enough to highlight areas of success/failure and potential areas for growing. Not enough attention is paid to bad news, however, and this could either be because the Annual Report is a piece of PR document (it usually is) or that there is genuinely no bad news to report ! This tenet cannot be convincingly answered unless I can engage Management in depth. NEUTRAL

6. Does Management resist the institutional imperative ?

Unfortunately, I don’t think the Group passes this test so easily. They are into acquisition and joint venture mode and it is unclear if Management did their due diligence independently before considering these purchases, or if they were advised by an internal team which showed the numbers the Management would like to see (hence, institutional imperative). From the numbers over the years I can at least tell that they did not over-leverage, and neither did they stray far off from their core business. NEUTRAL

Financial Tenets

7. Focus on return on equity (ROE), not earnings per share (EPS)

ROE has been consistently improving since FY 2005, even as gearing has not gone up much (remained relatively constant over the years). From 11.7% in FY 2005, ROE is now an annualized 28.9%, and for FY 2008 it was 22.7%. This shows that the Group has been enhancing shareholder value over the last 4 financial years. +POSITIVE

8. Calculate owner’s earnings (i.e. Free Cash Flows or FCF)

The formula for FCF is changes in operating cash flows (working capital changes) minus capital expenditures. Looking at the table, FCF has been healthy since FY 2005 and for every year, there is positive FCF. This is because the Group has an established business and they are able to generate strong operating cash flows to offset any replacement of fixed assets. The FCF for 1Q 2009 was about S$21.8 million, which is a healthy sign for the Group moving forward as they tackle the slowing economic conditions. +POSITIVE

9. Does the company have high profit margins ?

Net profit margins of the Group started out fairly low, but have been increasingly steadily over the past 4 financial years to hit about 15.3% recently. Starting off at 6.7% for FY 2005, the company has steadily but surely increased its profit margins through diversification of its market segments (in China and other regions) as well as strengthening its core fleet of cranes by keeping them up to date, thereby creating economies of scale. +POSITIVE

10. For every dollar retained, has the company created a dollar of book value (and hence market value) ?

The company’s book value has been increasing at a steady rate, and in a bear market such as the current, there is no equivalent dollar of market value for each dollar retained. However, the long-term prospects of the Group seem favourable at this point in time. Note that the NAV (as at October 29, 2008 is stated as S$0.8015 per share). NEUTRAL

Market Tenets

11. What is the value of the business ?

The value of the business is the sum total of its future earnings, plus a lot of intangible factors like market leadership, penetration, brand recognition, market reach and Management quality. I don’t rigidly look for an intrinsic value per se; as long as the valuation using PER is not demanding, and the company has other factors which make it a good investment. It’s a multi-prong approach which makes use more of common sense and “soft” factors which are then supported by hard numbers. Thus far, this approach has served me well. NEUTRAL

12. Can the business be purchased at a significant discount to its value ?

The current forward PER of the business is about 5.3, which offers a relatively good margin of safety. By adding in factors mentioned and discussed above, the business does seem to have favourable characteristics which would lend itself to better earnings over the years. Of course, this could very well be a cyclical industry but the presence of more building and construction activity in the SEA and Middle Eastern areas will provide business for many years to come. In addition, the Group is more diversified now as compared to the late 1990’s and early 2000 years when it made flat revenues and profits – so one can argue that it’s a different animal now. However, there is still a real possibility of capital loss if the company’s earnings cannot take off as projected, in an uncertain economic climate. I have mentally prepared myself for such an eventuality, that earnings will decline and dividends will be cut. +POSITIVE

As at today's closing price of S$0.40, the Company is trading at a mere 1.74 times historical PER and also at 50% discount to NAV. Though the CEO has mentioned that earnings will slowdown in FY 2010, as an investor my time horizon is far beyond 2010. Looking ahead into the future (FY 2012 and beyond), there will still be many opportunities for Tat Hong to capitalize on growth in Singapore, China, Australia and perhaps even India in future.

The Company will be releasing its 1H FY 2009 results in mid-November 2008. It will be good to get an update from them on prospects and the current industry conditions for the construction sector.

Sunday, October 26, 2008

Staying Positive Amidst the Global "Meltdown"

The recent global stock market meltdown and the persistent and pervasive bad news in the media has made many of my peers and relatives worried and frazzled. Reading about retirees losing their life savings and people losing life fortunes to the stock market isn't exactly uplifting news - it all points to dark and dreary days coming up and probably a lot more pain and suffering for the man on the street. However, thinking about things in perspective, having such a deep recession may actually be a good thing (I will elaborate further) and that it may not affect me as much as I previously believed. These are some of my thoughts on how to stay positive and how to weather the economic storm.

In terms of my portfolio, assuming a worst case scenario whereby I lose ALL my money (erm, touch wood !) in "high-risk" and new companies such as Ezra, Swiber and Pacific Andes/China Fishery (high gearing); it will be about a 60% permanent capital loss in my portfolio. In case readers want to leave stinging, sarcastic comments again, let me remind that this is the WORST case envisaged scenario as I view these companies as the highest risk of all the companies I own. FSL Trust is likely to survive (in one way or another) unless very extreme adverse events such as invoking of market disruption clause becomes common, issuance of massive amounts of additional shares due to DRIP or the bankruptcy of one of the lessees. Boustead has a huge cash hoard which should tide it through the hard times - being a 180 year-old company which has seen countless recessions and even one Great Depression also help in coping with the current crisis ! Tat Hong has similarly been through recessions and so far has emerged stronger and is a force to be reckoned with in Asia and the World; thus not too much worries about them going under.

So, as mentioned, assuming the WORST, it will take me approximately 2 years to save and earn back all the capital which I had lost. I normally save 40% of my take-home salary but this recession has caused me to increase this to 50%. Assuming I still get a decent bonus this year and no bonus next year, I should be able to partially cover all debilitating losses in the event of collapse of one of my companies. Since I am still young (early-30's), I think 2 years is a short time frame to be able to earn back what I've lost. In the meantime, I will be:-

a) Cutting down all expenses relating to food (eat out less, less restaurants);

b) Continuing to use my trusty bicycle to get around nearer areas (no ERP and no petrol costs !); for further areas I will continue to use MRT and bus and try to transfer to take the 40c rebate into account to save costs. A car to me is totally unnecessary and will just serve as a burden to my plan to accumulate wealth;

c) Save more aggressively by chanelling more of my salary into a "don't touch this account" savings account with slightly higher interest rates. This account is liquid enough so that I can transfer monies to invest in the market when I see bargains, and I have been using it for 3-4 years;

d) Be more frugal when it comes to purchasing essential items such as clothing, shoes etc. Branded goods are shunned by me and I will usually get something unbranded, yet sturdy and good. That way, one can save about 50% on a pair of shoes (about S$40-S$50) instead of buying more expensive branded ones (usually around S$100-S$120);

e) Saving and reinvesting passive income - this is dividend income from my investments which I still expect to receive. Right now, I would expect dividends to continue to flow from FSL Trust, Tat Hong, Boustead, Suntec REIT and China Fishery, despite the challenging global conditions. I am prepared however, for a substantial cut in dividend or even no dividend in FY 2009 and FY 2010 should economic conditions deteriorate further, which is why point a) about saving aggressively is so important;

f) Work towards retaining my job and remaining "useful" - hopefully, the upcoming retrenchments and lay-offs will not affect me (touch wood again). The most important thing in a recession is to be able to hold on to your job so that you still have a steady income. I can accept pay freezes or even a pay cut but am praying that I can at least retain my job;

g) Look for alternative methods of earning side income - any suggestions will be appreciated from readers and I am willing to work long and hard to ensure financial stability for me and my family. Fortunately, I also have a comprehensive insurance policy which can protect me in terms of health and also has a savings plan component embedded in it.

I believe the above measures will ensure I can get through this recession, and hopefully relatively unscathed. As someone mentioned before, money can always be earned back, but your health and sanity and the love you get from your loved ones cannot be bought by money. My lifestyle and habits are not excessive and I shun conspicuous consumption, so I think after all is said and done, I should get by OK. In the meantime, I should continue to think more positively and not let the doom and gloom affect my mind. Christmas is coming up as well as Chinese New Year - perhaps we can look forward to the good times shared with loved ones instead of worrying about money all the time ? It's crises like these which make one understand the simple joys og being with loved ones and being content with what you have instead of always chasing for more.

It's a dream to be rich and financially free, but that dream can wait. Now, it's time to survive. And survive I will, through my sheer hard work and determination !

Note: Part 4 of Tat Hong's analysis of purchase will be coming up in my next post. I apologize for the delay as there has really been many events happening in the last few weeks which had taken up my time and my thoughts, and I had to blog about those first.

Thursday, October 23, 2008

Ezra - FY 2008 Review and Analysis

Ezra released their FY 2008 results yesterday, and I also took the opportunity to purchase more shares at 59.5 cents to add to my existing holdings. I will be doing a brief review here (not too detailed la) based on their financials, press release and powerpoint presentation. I will also be tackling some very pertinent questions raised by a forumer named "amigos" in the Channel News Asia forums. He obviously delved quite a bit into the industry and asked some good questions about the Group which I would like to address. Hence, I will be copying/pasting his questions on my post and providing the replies to address the relevant issues here.

Profit and Loss Analysis

The good news is that top line has grown 87% from FY 2007 to FY 2008, but this was largely expected with the delivery of more vessels thus contributing to higher recurring revenues for the Group. Also note that the Energy Services division made its maiden revenue contribution of US$29.2 million, though net margins for this division were low at 12% (resulting in a contribution of "just" US$3.5 million for FY 2008. Sales for the Marine Division nearly doubled to US$64.2 million while the offshore chartering division contributed about US$174.9 million to revenues.

Note that gross margins have fallen as a whole for Ezra from FY 2007 to FY 2008, from close to 35% in FY 2007 to just 29.6% in FY 2008. From Page 7 of their results presentation, it can be seen that gross margins for offshore and marine divisions had dipped slightly; probably due to the delays in the delivery of vessels during FY 2008 which meant that Ezra had to charter third-party vessels to complete certain projects. Their Vietnam Yard also could have started off later thus contributing to higher costs (recall that Vietnam's economy is also in the doldrums). I will clarify these issues at the upcoming AGM. As a result of the new division coming on-stream, this had the effect of lowering the Group's total gross margin. Moving forward, the recent news of Ezra winning US$104 million worth of charters for 4 vessels at rates 10-15% higher than previously attests to the continued demand for their vessels; hence gross margins should stay fairly stable around this level.

Let's take the pure recurring net earnings as a basis for comparison, as the FY 2007 and FY 2008 numbers contain a lot of one-off exceptional gains and items like write-offs, provision for forseeable losses, doubtful debts and exchange losses. I draw readers' attention to Page 5 of the presentatio slides which shows recurring PATMI of US$49.9 million for FY 2008, an increase of about 55% over the PATMI of US$32.1 million for FY 2007. Using this figure, net margins for FY 2008 stood at 18.6% while net margins for FY 2007 were 22.4%.

Balance Sheet Review

For the Balance Sheet, I must say it's more well "fortified" now against possible problems as compared to a year ago. Much of this was achieved from the de-consolidation of EOC from Ezra Group's books, thus freeing up a lot of gearing and taking it off Balance Sheet. Note that EOC, being a 48.9% associate of Ezra Group, has gearing of 2.63x which is extremely high. In a way, the Group has sold shares in EOC to dilute its interests so that the debt can be carried by its associate rather than consolidating the debt into the Group accounts. This reduces the risk in its Balance Sheet and at the same time, frees up cash for the Group to continue their expansion plans.

I would like to draw attention to a few items within the Balance Sheet which have improved over the year, and which have also been highlighted by the Management. Cash and cash equivalents has increased 5-fold from US$24.8 million a year ago to the current cash hoard of US$153 million (inclusive of fixed deposits). This has brought down their net gearing from 37.4% to just 11.5%. Also, Ezra's interest cover has improved from 14.8 times to 29 times, in anticipation of more borrowings to fund their next wave of expansion for the MFSV. The Management is preparing for the higher amount of gearing and anticipates gearing will be slightly less than 1x by the end of FY 2011. Of course, their operating cash flows from recurrent charter contracts should be able to fund part of this capex requirement. Interest cover should remain decent even as the Group gears up, as Ezra has done the wise move of NOT paying dividends in order to conserve more cash.

I noted that Citigroup's report mentions the invoking of a "market disruption clause" which seems to be quite in vogue these days due to the credit crunch; but this is unlikely to affect Ezra very much due to my perception that the inter-bank lending freeze will be short-term in nature and interest spreads (LIBOR) should ease in a few months time.

Current ratio at 1.5x is also healthy as compared to 1.4x for FY 2007.

Cash Flow Statement Analysis

The Group is generating positive operating cash inflows of US$17.4 million compared to about US$22 million a year ago. This reflects the effects of their charter contracts which have managed to provide the Group with steady mid-term cash flows. Most of the rest of the cash came from the sale of EOC, more bank loans raised and proceeds from bills payable. There was negative FCF as Ezra is still in the midst of expanding its fixed asset base; hence investors should continue to see large cash outflows relating to the purchase of fixed assets. Their long-term charters should provide cash flow visibility in the near term, while their building up of cash and absence of dividends is a good signal that Management knows how to manage their cash effectively. Please also see the capex and prospects sections which discuss on cash flow requirements for the Group in the years to come.

Capex and Prospects

Ezra intends to expand its fleet into the deepwater segment in order to cater to oil majors committing more E&P dollars to this growing segment. They aim to be one of Asia's first companies to serve this segment, which is lacking in support vessels and which promises to show healthy growth in the coming years. Note that lower oil prices do not affect the committed capex of huge oil majors such as Shell and Chevron as they have already planned to drill in deeper fields for the last 10-15 years. It is my personal opinion that oil prices will not stay depressed for very long (in other words, it's only temporary) and with the recovery of the world economy perhaps by FY 2010, oil prices should start to trend upward again. The world has finite oil reserves and these are being depleted at an alarming rate. Most of the shallow oil fields are depleted and deeper wells need to be drilled to find oil reserves. This will spur the growth of the oil and gas industry into the future (past FY 2012) unless the industry gets threatened by a credible and cheaper substitute.

Ezra's commited capex for their 5 MFSV and one deepwater AHTS amount to US$650 million, while they plan to spend another US$100 to develop their Vietnam yard(s) at Ho Chi Minh and Vung Tau, Academy and Energy Services division. The Group has secured a S$500 million (about US$333.33 million) loan to finance part of this capex, and the remainder should be funded through internal cash flows. The slides mention that funding has been secured, but more needs to be asked on the nature of this funding and the interest rates on the debt. I will be asking this at the AGM as well.

Note that Ezra's policy has been to construct a vessel only when firm demand has been established for it. This means that a customer would have indicated interest in advance to charter a vessel before Ezra undertakes to construct one. This minimizes the possibility that the asset will be left idle when completed; in fact Ezra's new vessels have all been chartered out upon delivery, and existing ones have also been signed on to new charters (refer to press release dated October 20, 2008). Thus, the committed capex should ensure the Group gets firm charters to justify investing this amount of monies into each vessel.

For Energy Services division, Ezra is currently managing a drilling programme with a client called STP Energy in New Zealand. According to the press release, this is on a cost-plus-basis which means rising costs do NOT affect Ezra's profit margin on this contract. It is unclear what "additional upside" means but I assume it refers to revenues of US$25 million. Using a net margin of about 12%, this translates into potential additional net profits of US$3 million. More details need to be disclosed with regards to the nature of this program, the client and the prospects of the division, and I will clarify this during the AGM too.

For EOC, although gearing is very high at 2.63x, the Company has just recently chartered out its FPSO and heavy lift accommodation barge; hence I expect the recurring cash flows to be able to reduce some of this debt over time. In addition, EOC are said to be the front-runner for an FPSO project in Vietnam; I will check with Management on this again by December 2008.

Replies to Queries raised

A forumer raised some interesting queries on Ezra amid the current global financial gloom (yeah, no better phrase for it, since everybody looks set to jump off cliffs going by the current sentiment). I will present each question/issue and my answer to it in turn. Some of the queries may already have been tackled in the earlier section of this post.

Question: With almost certain economic slowdown for next year, global oil demand will inevitably be lowered to region of $50-60. Based on Ezra's expansion projected forecasts, most of their vessels are expensively built for deep water operations. Now, deep water operations are highly expensive stuff and is only feasible when oil price is high. Facing such a scenerio, where does demand for Ezra's vessels stand? Remember, oil companies will not pay big money for expensive vessels to support shallow water operations (that will still be profitable at $50/barrel)

My Reply: Oil prices are not expected to stay around this level for very long, I estimate probably another 2-3 years, once the recession is over (and yes, it will be over, it just depends on the time taken); oil prices should resume their steady climb upwards. Oil majors have committed capex for drilling and E&P in deeper waters a long time back (even before I invested in Ezra probably); so they will not just "pull the plug" halfway because as oil majors, they need to look for more reserves and the shallow water ones are running out. As such, Ezra only builds a vessel when there is firm demand from a customer (as mentioned above). Their smaller vessels should provide stable charters (recurring cash flows) while the future larger ones can command premium rates as they are newbuilds amid a lack of supply.

Question: Expensive vessels - their capex and debt worry is no joke. Think about it, US$650m for 5 MSFV. Vessels like these have never been that expensive in history and Ezra has built 5 of them. How they're going to pay for them (including finance interest) is a big question mark to me.

My Reply: I would like to emphasize that "vessels like these" are non-existent in history as oil majors have never drilled so deep before, so I am not sure what basis of comparison is being used here. Please note that these are highly-specialized and state-of-the-art vessels with many safety and environmental friendly features incorporated in them. The cost is very high precisely because they are unique and suited to specific environments (harsh deepwater); therefore oil majors should be willing to pay premium charter rates for them because without these vessels, they can't do their E&P effectively. Financing should not be a big issue as the Group has essentially secured funding for the vessels and their interest cover of 29x currently should ensure enough buffer for future finance costs. Don't forget that operating cash flows are coming in all the time and will contribute to the cash flow situation positively over time.

Question: Based on their 4Q earnings of a dismal $6m+, how are they going to run their business with such debt obligation behind them? All the industry players are expecting a major slow-down in the oil and gas sector next year. Will their 1Q09 earnings be worse? I'm not ruling that out.

My Reply: I assume you refer to the earnings after the exceptional items have been factored in ? I suggest to cnocentrate less on earnings per se and more on cash flows, which will be crucial in the coming years as Ezra scales up its fleet. Yes, there will be slowdown in the sector because of the global recession, but this is NOT a permanent and irreversible situation and the oil majors and oil and gas support players should be able to weather this. Even if Ezra's 1Q 2009 earnings dip, I do not see a problem with their long-term earnings and cash flows as I am invested in the company to grow with it till at least FY 2012 when their fleet composition stabilizes. By then, they may be quite a different animal. Don't forget about their fabrication yard, energy services division and their potential FPSO win, all may turn out to be positive catalysts.

Question: Contracts, contracts, contracts - Contracts can be signed, they can be void too. When companies go bust, they don't care if contracts are void or if they're sued. Fact is if a business venture doesn't make money, there's no point continuing in a contract that will only see red. Will Ezra's long term contracts be cancelled due to unforeseen circumstances? I'm not ruling that out.

My Reply: Ezra's clients are large oil majors who have been around for a very long time and are established players in the O&G arena. It is very unlikely that they will "go bust" or the world will have to survive on water as fuel instead of petroleum ! On whether the long-term contracts will be cancelled, oil majors cost of extracting oil is VERY LOW, probably only a few USD per barrel; hence there is totally no incentive for them to discontinue E&P activity just because oil prices dropped below US$70 recently. Support services are an essential part of the oil and gas value chain and oil majors cannot do without them. Try installing a topside platform on your own without the proper equipment, or do winching or well-servicing, and you will know what I mean. It's a symbiotic relationship between oil major and vessel charterers. Each will not want to "sabotage" the other and ruin this relationship by cancelling contracts prematurely. Ezra also has the reputation of being a premier vessel provider in South-East Asia, and is one of the few Asian companies owning such assets in the region.

Question: STP who? Does anyone of you know who owns STP energy - the paymaster for Ezra's 2 drilling rigs on time charter to them (Ezra)? If the insiders in the industry don't know who they are, who knows? Everyone in the industry knows that exploration/drilling stage in oil and gas can make or break a company. Either you find oil and you strike it rich, or you go bust with no oil found. In today's climate, either way STP will be in for a rough ride. At time charter rate of $160k a day per rig, even if they find oil, at today's oil price you can be sure the margins will be low. If they don't find anything, the company can just close shop and pat their backsides and leave. The way Ezra is doing business is really worrying. Their reluctance to reveal more about this project and who the hell STP are is really worrying (to the investors that is).

My Reply: I am not sure where Citigroup got their information on STP Energy and why they chose to use this information to show that Ezra was "less than transparent". From my queries with Management through Ezra's IR, the Company has said that the Citigroup analyst had NOT spoken or met up with Management to discuss STP Energy; in other words the analyst did not clarify his concerns and doubts with Management before writing the report. Apparently, parts of the information were pieced together through fragments of news bits found on the Internet; thus I would NOT rely on the rigour of the analyst's reporting due to this. From what I understand, operating an oil rig costs a lot and the figure mentioned is not surprising. Ezra has reiterated tha the contract is on a "Cost-Plus Basis" which mitigates the downside risk of earnings not materializing. As to whether the client is credit-worthy, I shall have to find out more from the Management at the AGM.

I think I have address most of the concerns brought up by this forumer except for the STP Energy one. I think the questions are rather pertinent and am quite glad to be able to answer them. If anyone else has issues to bring up about the industry or company, please feel free to leave a comment.

Thursday, October 16, 2008

Stock Markets - Predictors of the Future ?

As I was journeying on the bus and the MRT, I was thinking of how accurate the stock market is as a predictor of things to come. The market started its bear run in Oct 2007, and now Singapore is in a technical recession because of 2Q and 3Q 2008 GDP. So in a way, the stock market decline was able to "predict" the recession coming up and price it into share prices. This must be why people say that the stock market is a leading indicator, as it tends to react to future news and expectations even before they materialize and become apparent to the man on the street.

The reason for this uncanny ability of the stock market to anticipate economic slowdowns and recessions is due to the fact that most forward-looking news is incorporated into the price through investors/traders expectations of the future. Of course, there are some who argue that it might be a self-fulfilling loop created, whereby people's expectations of others' expectations forms either a positive feedback loop to push prices up or a vicious cycle (like what we are witnessing) to force prices lower. The analogy which Benjamin Graham used of Mister Market is extremely apt as stock markets are the collective actions of millions of participants, al trying to maximize their own gain and all thinking that they are (somehow) smarter than the guy next to them.

Normally, all this frenetic activity prices stocks very reasonably and fairly; and on "normal" days the market price can be said to be an accurate reflection of a company's intrinsic value. However, during periods of economic prosperity or depressive gloom, there is a tendency for the market price to over-shoot and land up too high or too low. Let me elaborate on this with respect to the current prevailing sentiment in the world. With the USA in constant fear of being "in a recession" and the rest of the world also afraid of tumbling into a long, deep recession; this has caused market prices to reflect the most pessimistic scenario, whereby many companies are priced as if they were better off dead than alive (below NAV !). This kind of weird asset pricing occurs in extreme conditions (admittedly, current conditions are unprecedented) and acts as a barometer of sentiment about the future (or the lack of one !).

The fear and trepidation is quite apparent in the last 3 weeks as the crisis has spiralled into something of an avalanche instead of being just a tiny snowball. On my blog alone, the number of visits has increased to more than 300+ daily (compared to 100-200 during the bull market and on normal market days). There are also seemingly more people acting sarcastic or cynical, which I may attribute to acute stress as a result of the sudden plunge in the value of their shareholdings. After some thinking and reflection, I realized that this is the PERFECT opportunity to purchase more shares in companies which I am confident in, and which can emerge from this crisis stronger. As a value investor, the idea is to own shares in good and growing companies, instead of relying on hindsight investing to tell if one should sell at the peak and buy back at cheaper prices (incidentally, anyone can be a hindsight investor by looking at a historical chart and sounding intelligent when they point out when you should have bought and sold; but try doing that in real time hehe). So the crux of the matter is to own shares in companies that will do well 3-5 years from now; the short-term price fluctuations do NOT matter as there is no intention to sell anyway.

Based on the above observation of the predictive abilities of the stock market, what I can say for sure is that the market will almost ALWAYS start moving up about 6 to 12 months from the recovery of an economy. This means that almost no one can accurately time the bottom as no one will know how long or deep the current recession will last. Stock prices are useful future indicators of how the economy will turn out; and investors who wish to own a piece of a great company should make use of this rare window of opportunity to purchase to his heart's content. Just make sure you leave enough funds for emergencies !

Saturday, October 11, 2008

A Value Investor's Test of Resolve

I shall type this post purely from scratch and this is based on the thoughts that I had rationalized over the last week as the stock market had taken probably the worst slide in the last 21 years (since the 1987 market crash). I intend to cover a few areas so please bear with me if the post seems haphazard, I am trying to organize my thoughts as I type and if there are some ideas which seem disjointed, it's because this is a rather "ad-hoc" posting.

What we have witnessed in the past 2 weeks is probably the worst rout in the history of stock markets, and for some time to come no doubt. I shall not go into the details as every major newspaper and website would have covered the events to death, sounding more doom and gloom to an already panicky cauldron of potent witchbrew. Mr. Market has shown time and again that he can be extremely emotional; as one year ago he was irrationally exuberant and bidded up the share prices of companies to lofty valuations. Now, exactly a year later, he is ferociously thrashing every one who made him look like a fool for being such an eternal optimist. I was reminded of some sections of the "Intelligent Investor" which stated that in a bull market, you'd worry about not making as much money as your neighbour; in a bear market, you just worried about whether your money will dwindled to absolutely nothing as the value of your portfolio dips by 50-60%. But I digress.

I am here to categorically state that as I am HUMAN too, I was affected by the emotional roller-coaster unleashed by a manic Mr. Market, and I was rather distressed throughout the whole week. This being my first true bear market (and a savage one at that), the severity, intensity and consistency of selling has truly amazed me. Reading books on such selling is one thing; actually witnessing it is an altogether different experience, one that I certainly won't like to experience too many times in my life. However, I would like to state that I did NOT capitulate and sell all my shares in a panic, even though the recent news on Ferrochina's bankruptcy and China Printing and Dyeing's scandal have further exacerbated my lingering worries about the financial health of my companies.

Being an aspiring value investor, I think the most rational and prudent thing to do would be to do a quick review on the underlying health of my companies:-

1) Ezra - I had sent the IR department an email on their loans and whether refinancing was needed or would be a problem. I also clarified if they were going ahead with their MSFV plans as industry conditions are more uncertain now. The reply was that they had no problems with their business as they had secured long-term charters with National Oil companies and International Oil majors (lower counter-party risk), while the Group had built up strong branding and relationship with their bankers over the years and there was no risk of the banks "pulling the plug".

2) Swiber - Some indications of their financial health are the consistent share buy-backs which Management is making, and also the recently sealed third sale-and-leaseback deal. Do recall that not too long ago in March 2008, the company raised S$100 million in bonds (at 4% interest rate) which have a 3-year maturity (maturing in FY 2011). As there is currently no announcement of their Equatorial Driller, this means that the company will not proceed to build it as yet and therefore does not need to pay a deposit to the yard, thereby saving more cash. I have also personally spoken to the Management, CEO and BOD and found them to be intelligent businessmen who know how to run a company; and they all have rich experience in oil and gas industry. Some Management also consist of talents such as Mr. Glen Olivera who has many years of offshore drilling experience; thus he would know how to properly run the ODS division.

3) Boustead - Off the cuff, I recall that Boustead had a cash hoard of about S$150 million as at 1Q 2009, and this will probably be boosted further by the sale of a property announced earlier in the calender year. All their projects are proceeding smoothly including the many projects Boustead Projects won in FY 2008, as well as the Al Marj township contract in Libya and the various O&G contracts too. With their strong net cash position, this is the company I'd worry about the least; and Boustead may also be on the quiet prowl for a suitable acquisition target which they can acquire cheaply as a result of the global turmoil. In addition, the company has been using its cash hoard to buy-back shares cheaply at prices which can be deemed under-valued, as a way of enhancing shareholder value.

4) Pacific Andes (PAH) and China Fishery (CFG) - It is true that these 2 companies are highly-geared, and are at risk in such a credit crunch. Of the 2, I would think Pacific Andes is more at risk than China Fishery because PAH operates on a very low net margin but with high gearing nonetheless. The good news is that most of the capex and financing is needed by CFG and not PAH, and many of PAH loans will not be due till late CY 2009. CFG has strong operating cash inflows and their balance sheet, though geared, has many assets (e.g. permits, fishing vessels) as collaterals to the banks so I don't see a problem where banks will pull the plug. Also, note that CFG, unlike Ferrochina, does not intend to incur significant capex to expand since they had already done this in FY 2007 with the acquisition of the Peruvian fishmeal operatons. In fact, Chairman Ng Joo Siang said in CFG's FY 2007 AGM that they intend to be prudent and keep cash. That was back in April 2008; so I don't think they will be reckless and over-extend. I trust in Management's capability as CFG, PAH and PAIH have been around for at least 10 years.
5) FSL Trust - After attending the EGM, I am of course not happy to learn that the DPU will probably have to be cut as a result of the dividend reinvestment scheme. But at least FSLT does not have a vessel pipeline coming up and they do not have to scramble for funds to pay for these vessels. Their aim now is to preserve cash and maintain their portfolio, rather than grow which is impossible as they cannot tap the frozen debt markets and the depressed equity markets. Hence, although FLST's yield will probably fall in the coming quarters, at least I can be assured of some cash flows and that there is no danger of them imploding. *Note too that the USD:SGD rate has actually risen to nearly 1.48 in recent weeks, therefore this may offset the effect of the lower USD DPU (recall the previous 2Q 2008 DPU was based on an exchange rate of 1.41+).

6) Suntec REIT - The recent collapse of a Japanese REIT has raised renewed fears of REITS being unable to refinance their huge borrowings to acquire real estate assets. Suntec had just secured financing for a bridging loan to acquire the 1/3 stake in ORQ, and this will be a 3-year loan at competitive spreads. The press release also states that Suntec REIT WILL NOT have any refinancing to be done in FY 2008 and FY 2009, thus only by FY 2010 will it need to refinance its loans. Thus, though DPU and yield may be affected, I do not see any further danger to the REIT as a going concern.

7) Tat Hong - I bought this company recently due to its strong operating cash flows from 12-18 month locked-in leases and its cash balance was S$79 million for 1Q 2009. The Company has also been buying-back shares from the market and I don't think the Management will be silly enough to buy back shares when they have loans to refinance. Their gearing is 0.38 and though they spend quite a bit on capex, note that they have FCF to back them up, and that the CEO Roland Ng has said that with the impending slowdown, they will build up their cash reserves by selling inventory. Note that when times are bad, people rent (they don't buy). Tat Hong's aim is to become a rental company and as computed in Part 2 of my analysis of Purchase for Tat Hong, gross margins for crawler crane rental can go as high as 60-65%.

After this objective review of my companies which has calmed my jangled nerves somewhat, it is time to comment on some of the remarks, suggestions and reponses I had on my blog (and through private messages on forums which I visit). These range from the good (encouraging), the bad (how could you have let all your profits evaporate and be in a net loss position ?) and the ugly ("I told you so !"). The thing to do, of course, is to ignore the callous and those who are in the position to gloat on my "failure". For at least I can hold my head high and say I invested with proper prudence, research and I had done my homework. Even if I were to lose money, I lose it with full knowledge that I had made an error and I will seek to modify my value investment style to accommodate the error. Moreover, my horizon is 3-5 years for the companies I own, and I see this recession as a setback to their growth, but it will not make them topple like bowling pins.

As the title of this post states, this vicious bear market is the ultimate test of a value investor's resolve and how he stands up to repeated criticisms on his style. Advocates of market timing suddenly pop up to point fingers and tell value investors that they should have timed the top to sell and then bought back at the bottom, not realizing that this is 100% hindsight investing, isn't it ? To have conviction is to be steady and not falter even when everyone around you is losing confidence in you, and is the most difficult test of all. Those who are more diplomatic have stated that I ought to be more "flexible" to accommodate the future (i.e. the credit crunch); but no one could have guessed it would have snowballed to this acute extent. I do concede, however, that I need to improve on my analysis in order to be a better investor, and that there are still more things to be learnt in order to be a more rigorous value investor. I still reject the idea of market timing as I don't think someone can get it right over and over consistently. My aim, I reiterate, is to own well-run companies which can give consistent returns, and I shall NOT deviate from this philosophy whether it is a raging bull market, or a depressing bear market.

Lastly, I would advise those who post comments to be diplomatic and tactful. I will not hesitate to delete comments which I think are rude, tactless, insulting or blatantly deragotory.

Saturday, October 04, 2008

Tat Hong - Analysis of Purchase Part 3

In part 3, I will explore some of the regional prospects for Tat Hong, and also the Company's plans for growth based on their press release for 1Q 2009 (I also offer some comments for each point). But first, please see a snapshot of Tat Hong's fleet which I have summarized below:-

Comments on Company’s Strategies and Plans for Growth

1. There is a gradual shift to larger and bigger capacity cranes for rental and sales market - From the table, it can be seen that their fleet of cranes now consists of 42 cranes which are >250 metric tones, up from about 20-25 two years ago. The fleet also contains 82 crawler cranes between 150-249 metric tonnes, and the total fleet size has remained relatively constant over the last year, though the % of large cranes is higher now. These larger cranes can help to garner higher rental rates and also be sold at higher prices in a tight market. One important aspect of the Company's profitability is the utilization rate for cranes, which continues to remain high presently at around 75%. According to analyst reports, the Company's breakeven utilization rate is 45%, so there is still a margin of safety for them. However, there are risks that this can plunge in a protracted economic slump; but I am betting on the Management's astuteness to tide the Company through this difficult time (should it come).

2. The Company intends to focus on Singapore and Australia markets as key growth drivers in the coming years - Considering Singapore has the potential for many more construction projects, and that their Australian subsidiary Tutt Bryant has been actively acquiring companies to expand their market share, this bodes positively for the company.

3. Actively explore opportunities to secure more long-term structured rental contracts - The Group intend to negotiate for contracts which enable more stable and consistent revenue and cash flows so as to smoothen out the otherwise “lumpy” contractual nature of their current business.

4. Grow tower-crane rental business in China

Increase size of JV rental fleet to 200 units by 2009 – This can be done by purchasing more units of tower crane gradually over time, in order to stock up in anticipation of lower supply in the market. However, care must also be taken to ensure that the company does not buy expensively, and end up with excess capacity which are unable to be rented out.

b) Expand presence into more PRC cities – I assume this will be done through more joint ventures. Considering the company has a strong reputation in S.E.A and is one of the global players, this should make it easier for them to find potential JV partners.

c) Expand through strategic acquisitions – Tat Hong are looking out for companies to buy over in China too, and in the current economic climate, they may very well be paying a discount for a good company as valuations in general are very depressed.

d) Targeting 20% contribution from China to the Group’s bottom-line by FY 2010 – This implies that the Company intends to grow their tower crane rental business and let it make up a significant portion of net profit (not just revenues). In order to do this, they need to scale up and make use of economies of scale to lower COGS in order to grow this business division. I see this as possible if Management is careful in screening potential acquires and joint venture partners, and receives government support as well.

5. Expand Australian Operations – Tat Hong’s aggressive strategy of using Tutt Bryant to acquire companies in Australia is bearing fruit, as their scope of operations in Australia has increased significantly. North Sheridan, Caradel Hire and Bradshaw are expected to increase earnings significantly in the near-term. Contributions from associates jumped 234% in 1Q 2009 from S$789K to S$2.6 million, and it is expected that more profits will flow from associated companies to the Group in future.

6. Tat Hong owns 70% of Tutt Bryant - A quick check on ASX shows that Tutt Bryant is trading at A$1.415 per share*, with a total issued share capital of 129,913,000 shares; effectively valuing the entire company at A$183.8 million. Tat Hong’s 70% stake will be thus worth A$128.7 million, or S$181.9 million using a rate of 1 A$ = S$1.4131. Thus, their 70%-share of Tutt Bryant makes up about S$0.36 per share of value.

*Note: This information was accurate at the time of preparing my analysis, the market value may have fluctuated since then.

Comments on Regional Prospects (extracted from Tat Hong’s 1Q 2009 Presentation)

i) Middle-East is most active and vibrant with respect to construction activities, fuelled by oil boom. Even though oil prices have dropped to US$106 per barrel, it still has spurred the oil companies and oil countries to ramp up construction and building. Examples of “modern” Middle Eastern cities are Dubai and Qatar.

ii) In Indian news on July 9, 2008, the Government has planned capital outlay of 23,849 billion Rupees over the 11th five-year plan. Forecast growth of 15.6% over a period of 5-years till FY 2012.

iii) For China, forecast growth rate for construction industry is about 11.3% per annum during FY 2008 to FY 2012. The industry is expected to be worth about US$315.32 billion by FY 2012.

iv) For Australia, there is to be a Building Australia Fund which will provide funding for US$20 billion worth of infrastructural projects over the next 2 years from budget surpluses. The industry is forecast to grow to US$106.04 billion by 2012.

v) Vietnam’s government is assisting the infrastructure and real estate boom and urban areas are rapidly developing, industrial areas are being built and the entire country is modernizing rapidly.

vi) Malaysia has inherent uncertainties relating to its political climate, but the construction industry is still expected to grow at a high average of 6.58% during 2008-2012.

vii) The total value of construction projects from Indonesia had hit US$51.92 million from 4,682 projects country-wide, not a large figure and there is definitely room for growth. The industry is expected to grow at an average rate of 5.74% for the 2008-2012 forecast period.

viii) For Singapore, the Government is deferring S$4.7 billion worth of public sector construction projects to 2010 and beyond. This is because of existing projects such as the IR, Marina Business Financial Centre (BFC) and downtown MRT line taking up much resources. In future, there will be other projects like the development of the Jurong Industrial area which will see new hospitals being built, as well as the Sports Hub and National Stadium in Kallang area. All these should provide sustained demand for cranes and construction equipment, of which Tat Hong is a beneficiary.

From the above, one can conclude that regional prospects are decent, and I am cautiously optimistic that the Company can grow its bottom-line by about 10% per year (a very conservative and "steady" growth rate). Though the future is never clear, I am basing my cautious optimism on the fact that the Company is one of the largest in South-East Asia (hence, less prone to down cycles which traditionally weed out smaller players) and that they have a robust fleet renewal programme in place which ensures they continually update their fleet to ensure good rates and high utilization.

On a side note, I had passed by some construction projects in downtown area and near Chinatown, and seen many cranes with the "Tat Hong" label on the crawler crane. It makes me happy to know that their cranes are being utilized for these high profile projects. I have also spotted Hiap Tong heavy equipment being deployed on some of these construction projects, but I believe Hiap Tong will wait for market conditions to improve before listing as they can get a better valuation then.

For Part 4 and the last part of my analysis of purchase, I will be using Buffett's 12-step approach as a framework to analyze the Company and my reason for purchase.