Saturday, July 31, 2010

July 2010 Portfolio Summary and Review

OK, so maybe there’s really not much to say for July 2010 after all; unless you count the “usual” economic troubles with Europe, the housing crisis in USA, and the red-hot (but possibly overheating) property market in China. It’s basically the same old stories and news being churned over and over again for dramatic effect (playing out like a Mediacorp drama serial, no less), where the headlines and presenters are the only things changing. This has the unfortunate effect of making me very sleepy and my mind has the tendency to just “switch off” when any of these news topics come up. I apologize if I had really missed anything of significance which I somehow failed to include in this month-end summary; but then again if it was really that important most people would have known about it without me saying anything (unless you were a hermit living in a cave in the last 6 months).

So with that out of the way, I can focus on commenting on something much closer to home – property market, cars and personal finance! Apparently, HDB resale prices have hit yet another high for eight straight quarters; in the last quarter April to June 2010 prices inched up another 4.1%; with median cash over valuation (“COV”) rising to S$30,000. Some “hot” estates even saw COV rising to as high as S$80,000 to S$100,000 (as reported by Business Times July 24, 2010). This is indeed very preposterous and disturbing and it seems to be a trend of never-ending prices rises which will culminate into increased inflation for all. Private home prices have gone up as well by 5.3% in 2Q 2010 even though sales have slowed. Prices have been up 11.6% since January 2010 and are “expected to climb further”, according to pundits and “experts”. Just two days ago it was reported that a condominium called “The Scala” (located close to the soon to be opened Lorong Chuan MRT station on the Circle Line) was swamped with people trying to get a piece of it, such that a balloting system had to be set up to determine who could ENTER the showflat! Not to mention the blank cheques being waved at the agents. It sounds like a property frenzy all over again.

There are two major worries I have in relation to the escalating property prices, which for HDB resale have surpassed 1996’s peak. One is in relation to income levels, which have not risen by much in real terms despite Singapore reporting red-hot GDP growth of a projected 15%, trouncing even China and India. It was recently reported that a property costs about 22 times a typical China family’s income, and this is presumed to be unsustainable in the long-term and will correct itself. The question is how many times is a property worth in Singapore compared to a couple’s annual income? Assuming the median income of S$2,400 per person (as reported in the news some time back), this translates to S$4,800 per couple and is S$57,600 per year. Assuming a S$1 million condo (for high-end) and a mass market condo costing S$600,000 (incidentally, many resale HDB in prime areas now cost this much too!), this translates to a property being about 17.4 times to 10.4 times a couple’s annual income. Unless the data is somehow skewed in terms of median income, I’d say this is one big red flag.

The second major worry is the potential rise in interest rates some time in the future. Everyone should understand that we are living in an era of artificially depressed interest rates, as a result of the global financial crisis triggered off by the American sub-prime mortgage debacle. The aggressive buying up of properties using financing at very low interest rates creates a risk of being unable to service a higher mortgage amount should interest rates rise substantially in the near future; and this is a potential time bomb for people who leverage thinking that rates will stay low for an extended period of time.

Moving on to cars, COE prices have jumped significantly; for small cars it rose from S$29,500 to S$36,162 while for larger cars it increased from S$36,000 to S$42,889. This trend is set to persist because the number of COEs will drop by 9% every month from August 2010 onwards as the number of cars scrapped will decreased (and based on a new formula as announced by Mr. Raymond Lim – Transport Minister). The increase in car prices will increase overall inflation and will probably bump the CPI up for 2010, and probably many months after as well. It’s now becoming quite inconceivable to even DREAM of owning a car as prices for a normal Toyota Sedan will probably be upwards of S$80,000 for a decent 1.6L; and we are not even talking about the “larger” cars such as MPV which can cost in excess of S$100,000. Second-hand cars are not much better either as they are hovering around the S$40,000 to S$50,000 mark; and the idea is of course not to use financing and to pay for a car fully should you ever need to use one, as the interest rate is computed on a flat basis rather than reducing balance (i.e. mortgage loan type financing).

Much of the month of July was spent poring through the Annual Reports of MTQ, Tat Hong as well as Boustead; as all three companies held their AGMs this month. August should be a little more”relaxed” as I do not foresee myself having to put in so much hard work in reading up and analysing; though some results are expected from Kingsmen Creatives, Boustead (1Q FY 2011), Tat Hong (also 1Q FY 2011) and GRP (FY 2010 ending June 30, 2010). I will be expecting dividend declarations from Kingsmen as well as GRP.

Below is a snapshot of my portfolio and associated comments for July 2010:-

1) Boustead Holdings Limited – On July 19, 2010, Boustead announced that they have upped their stake in Controls and Electrics (C&E) from 72.75% to 78.75% through the exercise of a Share Sale Agreement. This would be a positive move if C&E can contribute more to Boustead’s bottom line. Other than this minor announcement, Boustead also announced on July 27, 2010 that they had incorporated a subsidiary called GeoConnect Malaysia Sdn Bhd, which is wholly owned under Geologic Pte Ltd. The FY 2010 AGM for Boustead was held on July 28, 2010. The shares of Boustead go ex-dividend (for a 2.5 cent final dividend and 1.5 cent special dividend, paid on August 20, 2010) on August 4, 2010; thus it will not be reflected in the portfolio summary as a realized gain until my August 2010 portfolio review. And just after market close on July 30, 2010, Boustead announced that their 91.7% subsidiary Boustead Projects had won several prestigious awards at Workplace Safety and Health Awards 2010.

2) Suntec REIT – Suntec REIT released their 2Q 2010 results on July 23, 2010. A dividend per unit of 2.528 cents per share was declared; and I will not too much into it as my stake in Suntec is quite minute in proportion to my entire portfolio. At my buy price, this represents an annualised yield of 9.11%. The share went ex-dividend on July 30, 2010 and the dividend will be paid on August 27, 2010.

3) First Ship Lease Trust – The worrying continues (unabated) as FSL Trust has now announced (on July 18, 2010) that it has secured the release of NIKA I after a banker’s guarantee of US$2.8 million was provided as security. The vessel will be deployed to the spot market to earn revenues and cash flows but visibility is poor due to the fact that there is no long-term charter locked in for this vessel as well as VERONA I. Then, on July 22, 2010, FSL Trust announced that they had filed a writ against Daxin Petroleum Pte Ltd. The details are on SGXNet but basically they are trying to salvage what they can from a bad situation and trying to recover as much monies as possible to mitigate the damage. If all this sounds utterly depressing, you are right! FSL Trust went on to announce a DPU of US 0.95 cents, significantly lower than the US 1.5 cents in 1Q 2010 and much lower than 2Q 2009’s DPU of US 2.45 cents. This represents a payout of just 33%, compared to 100% when the Trust was first constituted. I had let my greed for high yield cloud my judgement on whether the yield would be sustainable; and the hangover has been long and protracted for me. At my buy price, the annualised yield based on US 0.95 cents is about 4.62% (which admittedly is still higher than inflation and any fixed deposit). The shares went ex-dividend on July 30, 2010 and the dividend will be paid on August 26, 2010.

4) Tat Hong Holdings Limited – Tat Hong made a surprise announcement on July 15, 2010; it planned to acquire the remaining shares in Tutt Bryant which it did not already own (29.64% to be exact) through an off-market transaction at an offer price of A$0.92 per share; which is a 46% premium above the last traded price of Tutt Bryant on ASX of A$0.62 prior to the announcement. Although this sounds expensive, it’s actually “just” 9.9% above the Net Tangible Asset value of Tutt Bryant as at March 31, 2010; and Tat Hong intends to take full control of Tutt Bryant and delist it from ASX as the trading volumes are thin and the costs of maintaining a listing status can be saved (plus, Tutt Bryant has no need to raise funds through issuance of equity from the capital markets). The acquisition will be funded through internal cash flows and debt; and it will be interesting to see the financial effects of 100% consolidation of Tutt Bryant’s results into Tat Hong Group instead of just 70%; but I believe the effects will only manifest from 3Q FY 2011 onward. Tat Hong’s shares go ex-dividend on August 5, 2010 for a 1.5 cent/share final dividend (paid on August 20, 2010), so this will only be reflected in August 2010’s portfolio review. The FY 2010 AGM was held on July 27, 2010.

5) MTQ Corporation Limited – MTQ held its AGM on July 23, 2010; and its shares went ex-dividend on July 29, 2010 for a 2 cent/share final dividend. This will be paid out on August 17, 2010. Other than this, there was no other news.

6) GRP Limited There was no news from GRP for the month of July 2010 either. I will be expecting them to release their FY 2010 results in late August 2010. Hopefully there will be at least a final dividend of 1 cent/share and I am keeping my fingers crossed for a special dividend as well.

7) Kingsmen Creatives Holdings Limited – There is still totally no news from the Company at all with regards to new contracts for USS Phase 2, or for the Youth Olympic Games. Somehow, I feel the Company could do more to boost its communication to shareholders about the salient aspects of its business, instead of just waiting for the quarterly results announcements. They used to report on their order book back in 2008 but have since stayed silent. I am expecting them to report their 1H FY 2010 results some time in the middle of August 2010; and I am also expecting them to maintain their interim dividend of 1.5 cents/share as per last year.

Portfolio Review – July 2010

Realized gains have increased from S$54.0K to S$56.7K as a result of FSL Trust, MTQ and Suntec REIT going ex-dividend. I had also inadvertently left out a dividend amount of S$1,500 from my May and June 2010 portfolio reviews as a result of Kingsmen Creatives’ 2 cent/share final dividend; and so have added this into realized gains for July 2010. A simple computation reveals that my portfolio had gained just +1% for July 2010 (as there were no additions or withdrawals) against the 5.4% rise in the STI (which implies my portfolio underperformed the index for this month by 4.4 percentage points). My investment cost remains at S$175.4K as at July 31, 2010, my unrealized gains now stand at +9.6% (portfolio market value of S$192.2K).

Note that for YTD July 31 returns, I have adjusted the XIRR function to reflect Dec 31, 2010 to show the true annualised figure, inclusive of future cash inflows resulting from ex-dividend dates of shares. The figure is currently +15.6% against the gain in the STI YTD of +3.1%. I believe this more accurately reflects performance after seeking advice from some helpful readers.

August 2010 will be a pretty busy month too as Kingsmen Creatives, Boustead, Tat Hong and GRP will be releasing results. I will be analysing Kingsmen and GRP as it is their 1H results and full-year results respectively. For Boustead and Tat Hong, I will give a brief update during my month-end portfolio review for August 2010.

My next portfolio review will be on August 31, 2010 (Tuesday).

Tuesday, July 27, 2010

Boustead – FY 2010 Financial Analysis and Review Part 3

In this third and final part of Boustead’s analysis, I will post the entire transcript of Boustead’s audiocast for FY 2010 results, and after that I will highlight some salient aspects of the company (coupled with insights from the recently obtained Annual Report for FY 2010) to shed some light on the future plans and prospects for Boustead. Note that the company’s AGM will be held on July 28, 2010 at 10 a.m. at its office at Starhub Green.

Part of the reason for the delay in coming up with Part 3 was because of the arrival of the Annual Report (“AR”) and the voluminous amount of facts contained within, which required some time to digest and for me to come up with some thoughts and comments. Note that the AR should be read in line with the audiocast transcript and the reader should also have some background knowledge of each division and sub-division of Boustead and its press releases in the past 1-2 years, in order to fully appreciate and understand the implications of the analysis. I trust that readers can gather this information from downloading the AR and news from either SGXNet or Boustead’s website at

Note too that I have inserted my own thoughts and comments in brackets throughout the transcript and highlighted this in blue and square brackets [ ] for easy reference.

Boustead FY 2010 Audiocast Transcript

Question: I’d like to congratulate everybody on board for the effort in delivering such a respectable result. In fact, I think if we exclude the results from the sale of some of the assets, I don’t really see much of a trail-off at all (i.e. not much of a decline at all). Is that correct?

FF Wong: The legal completion of the lease-back project – if we are able to do that, in fact actually this year we would at least match last year’s performance; but that’s not to be, the legal completion of the lease-back transaction was completed last month (i.e. April 2010), so the contribution will be reflected in the FY 2011.

Question: This set of results and also the forward guidance is really comforting. The one area which I really want to highlight is the amazing efforts of Boustead in churning out cash that really supports the accounting profits. If you look at it, the NTA as reported is 42.2 cents, the cash per share now is 39.4 cents. It’s literally 93% of the company, and also the other thing is if we exclude the cash, which is I think is generating very little returns in the current interest rate environment, the PE ratio of this company is less than 5 times. The question is, we did see 1.5 cents (special dividend) to reward shareholders, but then again Boustead has been very diligent in scouting for projects, so my question is – is there such a need to be sitting on a mountain of cash (and still generating cash); and I am pretty sure there is no lack of bankers out there who are more than willing to bank-roll any projects which Boustead is willing to go ahead with.

FF Wong: This year (FY 2010), we have paid 1.5 cents (interim) with another 4 cents (final + special), this will make it 5.5 cents; that actually constitutes 65% of this year’s (FY 2010) earnings. 65% actually is quite a handsome reward to the shareholders, and based on this year’s earnings I don’t think you should complain (laughter). Actually, I think we are very comfortable with our business model, and the way we have been operating we emphasize very much on cash flow, hence we have been able to generate very healthy cash flow, but having very healthy cash flow doesn’t mean we have to give it all up to the shareholders. In particular, in this current environment there are a lot of opportunities for M&A, and we have been diligently working on various acquisitions. Unfortunately, last year the economic recovery (with respect to the capital markets) has been V-shaped, and that has deprived us of an opportunity in concluding an acquisition. So the M&A effort unfortunately has not come to fruition, but that doesn’t mean that we are not working on it. Of course hopefully from our perspective, on one hand we hope that the economic recovery will continue to stay on course, but at the same time we also hope the capital market will not recover so robustly that we won’t have a chance to buy something cheap. Apart from M&A, we are also looking at various investment opportunities in green field projects as well, especially related to infrastructure projects. As you know, infrastructure projects do require substantial investment (i.e. capital requirements); hence there is a reason why we decided to keep as much cash as possible. But give us some time to look at it, and if we are unable to make any significant inroads insofar as M&A is concerned, please come and knock on my door again and perhaps we will decide to change our mind and pay shareholders more dividends and of course personally, I would be one of the major beneficiaries anyway!

Question: Mr. Wong, I really have to thank you for working this company and how it has delivered cash, because this company is simply amazing! Because year in year out you are generating so much cash, rather than accounting profit to support the fundamentals of this company. So I think at some point in time perhaps if you could give me a certain time line, I would definitely pay you a visit to knock on your door to see how we are progressing in utilizing the cash.

FF Wong: (Laughter) You are quite right. Actually if you look at the figures, the return on equity will be a lot more enhanced if we were to operate with less cash. If we were to return let’s say S$100 million to shareholders, then a very quick calculation will show that this year our ROE was 20%; then we would end up close to 40% (double). That’s quite obvious, but having said that I would like to hold on to a little bit more (cash) but for this year I would say the dividends are quite acceptable when compared with the norms. Somebody just called me and they confirmed that actually we are paying among the highest dividends in Singapore. And he said – how are earth are you all able to pay so much dividends? I said yeah you look at our cash hoard and based on the current price (of 76 cents), the dividend yield will be about 7.3%. If we were to compare ourselves with some of the companies which keep calling for capital and also some of these companies which have issued bonds, these bonds are only paying about 3-3.5% (interest) at most in Singapore. We are paying 7.3% and it’s quite an acceptable norm I think, perhaps you should be happy! (Laughter) Come and knock on our door at least 1-2 years later.

Question: On the water division, obviously this is the first time we are seeing the segmental breakdown, and definitely (I am) very pleased to see the results, but looking at the secured orders of S$20 million and S$30 million, would we actually slip back to the Dark Ages again?

FF Wong: I can share your sentiment too. Obviously we have gone through a lot, we’ve solved many legacy problems in the past, and finally at least we are able to put these legacy problems behind us, and these problems have been responsible for the heavy losses early on these last few years. We have trimmed it down such that the overheads are very very low; so I don’t expect that we will lose money even with such a low backlog. In fact, our breakeven based on our current margin is only S$20 million turnover, so anything above this threshold means that we will be making money. In fact, we are close to concluding some sizeable projects in the Middle East. All you need actually is another project, and it will double or triple the backlog. That is how sensitive it will be in terms of upside potential, then again we have not concluded as yet – that is the crux of the matter. You are concerned and I am also concerned, but going back to the Dark Ages I don’t think so. Thank you.

[Note: FF Wong is essentially telling us that he had cut costs within water and wastewater division to make it very lean; thus even a “low” order book of S$20 million will generate a profit for the division as fixed costs have been kept low. The potential Middle East projects are also likely to be a positive catalyst should they materialize. At the time of typing out this transcript, Salcon had just announced another additional S$21 million worth of contracts in UAE, so I am optimistic that FY 2011 will turn out to be profitable for Salcon as well.]

Question: Is there any news on the proposed M&A for the wastewater division which was mentioned some time back? How will Boustead be planning to utilize its cash hoard (which I noted had grown to a net cash position of S$199 million as at March 31, 2010)?

FF Wong: This question is somewhat similar to what Mr. Tan Joo Kiat has raised, except that it is more specific on the wastewater division (M&A for wastewater division). Of course this is one of the areas we have been looking at, but so far all those possibilities really didn’t meet our criteria. The return (the IRR) of all those projects that we had been looking at has been very low, and the other thing of course is that the strategic synergies also do not meet our expectations as well. But having said that, right now we are looking at one acquisition from last year onwards actually, but it died down for quite a while and now has come back alive again. We are looking at it closely, and we have sent our people to China to carry out some due diligence, but not quite a total due diligence as such. In other words we have actually done the preliminary due diligence on the physical inspection part of it, at least we know that these projects are real (that the assets are real), but we have not gone through the legal and financial due diligence. We do not expect that we will be able to use our cash hoard for the time being with respect to M&A for wastewater division as such. How are we going to use the cash hoard of S$199 million? As you know we just announced a final dividend of 2.5 + 1.5 cents = 4 cents per share, that is going to amount to about S$20+ million. That is going to be paid into the pockets of our shareholders, this means we will end up with “only” about S$180 million. You may ask how we are going to make use of the S$180 million? We have a lot of possibilities; first of all not only M&A but also leaseback projects. Leaseback projects would require some equity money; the banks are always very willing to work with us but by and large all these projects we are looking at will be leasehold. Definitely the banks will require some money. Some of the projects we are looking at are actually very big (very large), and I do not foresee that we will be able to use up all the S$180 million, but a substantial amount of money might be required for use as equity.

[Note: FF Wong is talking about the Bio-Treat deal in this paragraph, and this deal was announced only on June 15, 2010, nearly 3 weeks after the May 26, 2010 audiocast. Now, we know that the Company is in the process of finalizing the legal cum financial due diligence and it was mentioned in the press release that this deal may or may not go through.]

Question: Will Management be returning some more cash (i.e. special dividend) this first half of the year (i.e. 1H FY 2011)?

FF Wong: Some cash dividends will be paid in the first half of the next financial year. Usually we always try to be very conservative. I would say, on behalf of the Board, that we can commit to at least 1.5 cents/share. [Note: This is similar to FY 2010’s interim dividend.]

Question: I noted that the real-estate solutions division has shown rather "lumpy" revenues as a result not only of the township in Libya but also due to the nature of design and build contracts. Moving forward, will Boustead focus more on design, build and lease projects to ensure a more steady flow of revenue (and cash)? Also, Mr. Wong did mention that Boustead was contemplating purchasing land banks to develop properties in China and Vietnam in a previous interview (please correct me if I am wrong on this). Has there been any progress on this?

FF Wong: You are right actually, we have been working very hard to generate recurring income to overcome the lumpiness of the nature of our business. But unfortunately luck is also not with us. We had one project which we concluded beginning of last year, and that was supposed to be design, build and leaseback. It would have generated something like S$30 million recurring revenue for the next 15 years, unfortunately in the agreement our client had a clause included that they would have the option to buy back within 3 years. With the low bank interest rates around the world currently, they decided to exercise the option to buy it from us. So in fact this was the project I mentioned earlier on which affected our bottom line in this Financial Year (FY 2010). So, this will be reflected in FY 2011; but I personally would very much like this project to stay with us as that would ensure 15 years of recurring revenues. But I am sure you know that we still have 5 leaseback projects going on that continue to generate recurring revenue. I would like to stress that we do have some level of recurring income, not just with leaseback projects but also in the geo-spatial. About 50% of our revenues are recurring, and this amounts to S$30 to S$40 million per annum of recurring revenue. Obviously, we would not like to restrict ourselves to just Singapore in real-estate solutions. We have been dabbling in China and Vietnam; right now we own a small piece of property in Beijing, and that seems to be working out quite well but the margin is still not very exciting by comparison with Singapore. Vietnam is another place; right now we are negotiating to buy a piece of land but then again the IRR is not to our expectation.

Question: We have cash of more than S$200 million. It has been 3 years since Management had talked about acquisitions with the cash. To date there is no news on the M&A. What are the problems and hesitations? Can you share with us?

FF Wong: It seems everyone is concerned about our S$200 million cash, so I will dwell on it a bit more. I guess we have been very conservative and our expectations on IRR, or rather our criteria for M&A is perhaps overly high and cautious. However, I’d rather look at hundreds of M&A possibilities and finally conclude one rather than jump into so many and end up in trouble. Obviously, that would take time and I think it’s better to be cautious and take time rather than jump into acquisitions that we would regret. Once you get into something that has a can of worms, to correct it is always very difficult and painstaking. So, I’d rather be cautious. After all, we have been paying pretty decent dividends to our shareholders. For one, I have been happy with the dividends which I have been receiving myself.

Question: Can you update us on the initiative?

Keith Chu: Basically, successfully launched a few months back, and the idea behind this is that it is certainly something which is a basic application of our ESRI platform. What we are trying to achieve is to hopefully generate some revenues from companies or corporates who want to list on, but to put it in the perspective of the bigger picture, if you look at Geo-Spatial technology it is among the least understood of our businesses. And certainly I think it is so not just for investors but the world at large, and the way to really build up the community for geo-spatial technology would be to educate the public, and in that sense this is one of the initiatives which we are educating the public on the benefits certainly of geo-spatial technology, even if it’s a simple application. So I hope that sort of answers the question – we would like to generate some good revenue and profits from this business as well, while building up the community for geo-spatial technology.

------------End of Transcipt----------

Discussion on Plans and Prospects

One good aspect of FF Wong is that I noticed he tends to be quite candid and upfront, even with problems and obstacles. He often takes the blame and says things as they are; hence usually he ends up under-promising and over-delivering (which is a very good thing)! In terms of prospects, he mentions a few in the audiocast which I will detail below:-

1. For energy-related engineering, Boustead International Heaters (BIH) should continue to perform reasonably well on the back of stabilizing oil prices. However, the weakness is Pound Sterling is constantly a concern which may erode profits even if revenues remain constant. Controls and Electrics may suffer a fall in revenues and profits as Management had warned of tougher competitive conditions; but for Boustead Maxitherm, expectations are for this sub-division to do better as the re-structuring has been essentially completed in Indonesia, while it is at the tail end of re-structuring in Australia. Thus far, for the financial year 2011, there have been no contracts awarded for the oil and gas division of Boustead.

2. For water and wastewater engineering division, it appears that those thorny legacy issues have finally been ironed out after many years of restructuring and legal wrangling. Salcon reported a turnaround in FY 2010 and FF Wong has also stressed that the cost base has been kept low, so that even an order book of “just” S$20 million will enable Salcon to turn in a profit. If we combine the recent announced contract win for Salcon of S$21 million in UAE (Abu Dhabi) together with its existing outstanding order book, this comes up to about S$41 million. Therefore, it is reasonable to expect this division to continue to remain profitable for FY 2011, as there are still many months ahead for the division to further clinch contracts.

3. The real-estate solutions division has seen pretty strong demand as Boustead specializes in designing and building high-tech buildings with many modern features; hence I can say they occupy a niche market. With so many MNCs wanting to set up shop in Singapore, this would ensure a constant supply of business opportunities for this division. Notwithstanding this, the sharp economic recession did impact this division as can be seen from the drop in revenues and net profit before tax. The very last announcement was a double contract on March 31, 2010, one from Cenco Inc. and another from the Safran Group. Before this, on December 22, 2009 the division was awarded a S$108 million contract for an integrated facility (client not named). These contracts, coupled with the progressive recognition of the Al Marj project in Libya, should ensure cash continues to flow into the Group’s coffers and that the order book will remain of a decent size. It was mentioned during the audiocast that Boustead will be exploring land banks in China and Vietnam; but the IRR for China land is not very good. In addition, the division will also try to secure more design, build and leaseback projects to ensure a steady and consistent income stream (now that one leasehold project had to be divested as mentioned during the audiocast). It will be good to hear what the CEO and Management Team have to say about the prospects for this division at the upcoming AGM.

4. Even for the traditional “quiet” Geo-Spatial division, there is something to look forward to due to the acquisition of Mapdata Pty Ltd (88.2%) for S$3.222 million, as it comes with its own customer list as well. The idea is to serve more corporate clients and tap the higher margin end of this business, while increase ESRI’s capabilities over the long-term. How much of a boost this will give is not known, though, and the impact will have to be assessed when Boustead releases results for FY 2011.

5. The Annual Report mentions that the Group had looked at many opportunities but in the end only proceeded to act on one, which shows the level of prudence and due diligence which goes into evaluating suitable acquisitions for the Group. This conservative approach has worked well thus far for the Group in avoiding big flops but the recent Bio-Treat deal has made me wonder about Management’s thought process and rationale for the deal…..

Thoughts on Proposed Acquisition of 1% Redeemable Notes of Bio-Treat

1. The Convertible Note (CN) is paying interest of 1% per annum semi-annually; which to me seems like a really low return on that cash hoard. Most people can get 1% just dumping the cash into a long-term FD, with minimal risk. This CN thus carries a high risk of default.

2. Bio-Treat's financials are not exactly impressive. For 3Q 2010, it registered a net loss, Balance Sheet was in NTL position, there was a Going Concern issue, and heavy capex showed up in the Cash Flow Statement. The only +ve was that operating cash flows were positive. I can't imagine why Boustead would want to own 20.4% of this company when it can't even get its finances straight.

3. Bio-Treat is currently issuing rights and raising funds to clear off its massive debts; and its indebtedness to secured creditors. It looks like a pretty messy affair and there's no guarantee that after all the re-structuring, the Balance Sheet can be cleaned up. The new enlarged share cap (assuming conversion of all the CN) is about 3.9 billion shares! Any earnings will be severely diluted once the share capital expands by so much.

4. Boustead is spending about S$42 million out of its roughly S$199 million net cash hoard to acquire these CN; and this is about 21% of the cas hoard. I question if they may be spending too much of the cash on a company which has yet to undergo proper and successful re-structuring.

5. I understand that Boustead intends to buy into 20% of Bio-Treat as their "gateway" into the China water and wastewater market. It mentions synergies between Salcon and Bio-Treat. However, FF Wong also did mention in 2008 that the Chinese wastewater industry was highly competitive and margins were very thin. Thus, am not sure why Boustead chose to buy into Bio-Treat; a more pertinent choice may be Sound Global (formerly Epure) as they are a larger player.

6. Noted that there are many warranties and covenents to protect Boustead in case of any default or problems, but this Giant Delight is an unknown entity and there is also not enough information on Chen Dawei, and whether they can honour their obligations should things go wrong.

Other than the above points which I felt warranted mentioning and dissection, the effective conversion price of S$0.05 looks attractive compared to the last-done market price of S$0.08 to S$0.085 for Bio-Treat on SGX in the last few weeks. I guess more information needs to be provided on this complex deal as the terms and conditions are very technical (even for me as an accountant), and FF Wong himself has not commented on this acquisition even though it is a material sum of money for the Group.

The best method to get some answers is to grill the Management on this during the upcoming AGM. At present, I am not pleased with this corporate move until more light can be shed on the merits of the deal.


All in all, the general impression is that the Group is doing relatively well and holding up despite the global financial crisis putting a spanner in the works. By slowly building on their core competencies and divesting unrelated businesses, the Group can become stronger and more focused. The title of this year’s Annual Report is “Long-Term Focus”; and I have no doubt a shareholder should also share the same vision as the company with regards to his investment in Boustead.

Friday, July 23, 2010

Sun Tzu - War On Business Part 10 (Digital Academy)

We have now come to Part 10 of this 13-part series for Sun Tzu, War On Business. So far, it’s been a good journey with yours truly learning a lot of business lessons by observing and watching this half-hour program every week. Hope readers have been enjoying the posts so far as there have not been many comments on each post (could it be people are not bothering to watch this series?). Whatever the case, I hope readers can read through each episode’s summary and glean some useful knowledge from it.

In this episode, James is back again in Mumbai, India; and this time he visits a film school called Digital Academy headed by Mr. Kartikeya Talreja (“Talreja”). It occupies about 44,000 square feet of space and has many theatres and elaborate built-up sets within the compound. Currently, though, this film school only has 600 students enrolled per year, and according to Talreja this is less than optimal as he envisions a capacity of 1,200 students per year. His vision is for Digital Academy to be a world-class brand, attract international students (i.e. not just from around India) and have branches/outlets in major international cities. James mentions that one should “Carefully Compare the opposing army with your own”, a reference to comparing the competition out there with your own business to see if your goals are realistic or not.

In dissecting the business, James first comments that the location of Digital Academy is not exactly in the best neighbourhood (no visibility). It also does not have a (main) door that welcomes you; plus it has a very small and insignificant looking signage. These are just the overall physical aspects of the building though, once inside James discovers that there are actually very good courses, talks and seminars held, whereby industry professionals (e.g. famous singers/actors) are invited to give lectures and use their own careers as examples of how the students can hope to make it big in the film industry. There are also lavish sets on the premises which give rise to the possibility of filming grandiose and colourful dramas (all in Bollywood’s style, of course!). Video-editing software is also used to slice and dice and edit the sequences to produce the final product to be displayed to audiences.

However, a visit to the school’s website tells a different story. According to James, the website does not scream “Creativity”! In fact, it looks staid and boring and just dishes out many facts (text) and is very lengthy and wordy (note this was before the revamp, clicking on their website now would offer something different). James mentioned that the perception of a film school is very important for a film school, as this ties in with the nature of the film and showbiz industry! Students need to be attracted to join the film school, and the exterior of the school as well as how it marketed and presented itself were of utmost importance.

As part of Digital Academy’s revamped marketing strategy, James suggests that Talreja get his own students to design a video to be uploaded to their website. It turns out that the students have many innovative ideas on how to portray Digital Academy, from the informative to the wacky (one video shows a “Guardian Angel” popping in and out and saving hapless passers-by). In the meantime, Talreja is also busy selecting a new logo cum signage to be displayed prominently on the blank wall outside the school, in order to attract more eyeballs.

Lessons to be learnt here include:-

1) Prominence is key to attracting customers (students) – This applies to any business which has a retail shopfront, or which needs to present a certain image to the general public. One has to ensure there is an attractive sign as well as have other accoutrements which come along with the business itself, in order to make it look inviting and attract patronage.

2) Modern marketing channels are varied and should be fully utilized – Internet marketing was identified as one of the effective marketing channels which Digital Academy could have used to market itself and its courses, but it was not effectively utilized. A business should explore all types of marketing communication channels and find out which are the most suitable for itself (and also the most cost-effective). Promotional campaigns (and trade events), flyers, viral marketing, tele-marketing and TV advertising are some of the alternatives.

3) Avoid perceptual gaps – In the episode, it was highlighted that Digital Academy’s website was staid and “standard”, and was perceived as being “boring”, unlike what was happening in the real academy where there was much innovation, drama and good content flowing. Therefore, it is imperative for a business to ensure that it portrays a positive and dynamic image of itself, and of course in reality it must also be able to deliver on its promises, otherwise there would exist a chasm in terms of expectations.

4) Make use of internal resources where possible (to save costs) – I noted that James asked Talreja to get his own students to design a video to be placed on their school’s website, effectively eliminating the need to hire a media company or external “consultants” to come up with a marketing program! This was an ingenious way of making use of the resources and tools at your disposal to save on costs. Companies should look inwards first before they start to engage external “help” to do their marketing or promotional campaigns. Sometimes, an in-house team may be more effective as they know the company inside-out.

Altogether, it was an enlightening episode and it was fun and amusing to watch as well. Next episode features the China company Ultizen and entrepreneur Lan Hai Wen.

Check out the website for Digital Academy over here:-

Sunday, July 18, 2010

The Essence of Investing

After the trials and tribulations over the past 4.5 years, I admit I do spend an inordinate amount of time doing self-reflection, and at the same time, reading up on value investing and doing some independent thinking and analysis of my past mistakes; and how I can always improve on my investing techniques and stock selection process. Close to my heart is Benjamin Graham’s definition of investing, which bears repeating: “An investment operation is one which upon thorough analysis, guarantees safety of principle and an adequate return. Operations not meeting these requirements are speculative.” Notice that the man does not define investment in terms of making lots of money, and he also does not specify any time frame with which one should practice the above. This has led me, in recent months, to truly define and ask myself what is my purpose for investing; and what I would eventually like to achieve from it. The answer was quite clear and simple – my purpose for investing is not to “strike it rich”, but to obtain an adequate return on my invested capital which is higher than inflation. With that in mind, I focused on capital preservation and margin of safety, concepts which most readers are familiar with by now but I will discuss these two concepts from a slightly different perspective this time. In particular, the concept of margin of safety is not cast in stone and its definition is subject to interpretation by the practitioner.

Capital preservation is a concept which is not fully appreciated in the stock market. In fact, I dare say it is often downright neglected! This is because of the human being’s propensity to lunge after profits and gains, and to let the greedy side take over (I call it the “Dark Side of the Force”); while the prudent and conservative side of his brain takes a back seat. As veteran investors in the stock market probably know, NOT losing money is already quite an achievement, much less making a pile. Hence, the overarching principle involved in investing should be to protect your principle at all costs; and this can be done by undertaking a rigorous and painstaking research process to protect your downside. Before you even consider purchasing a security, ask yourself if the business can continue to grow or remain stagnant, if competition can erode the competitive advantage which a company has, or if the company has debt levels which you are not comfortable with. In other words, pre-empt yourself for the downside, instead of looking at glittering profits which are non-existent. This is the mindset which an investor should adopt if he wishes to generate a consistent and sustainable gain in the stock market. By protecting your downside, you would be able to sleep well and let your money compound. Please also do note that yield counts as part of capital preservation, as it acts as a return ON investment (not return OF investment). One should aim to preserve capital ex-dividend, meaning the value of the company should remain or even increase the same regardless of dividends being paid out, as a company is supposed to be continually generating cash flows and profits to keep its equity base constant.

The above concept of capital preservation can only be fully appreciated in a bear market, when the market prices of securities tumble like rocks falling off a cliff dragged down by the force of gravity. With corporate fundamentals acting as a cushion, one need not be afraid of declines in market price in the face of the Mr. Market’s desperation. For Graham was right when he said we should not let a certified lunatic with wild mood swings decide the right value of companies in which we own shares of. To quote a simple, yet effective example, imagine a company was worth S$50 million (net worth – assets minus all liabilities), would you accept a price of S$20 million for the company, which is a 60% discount to its true net worth? Stated as such, it would seem obvious to both a casual observer (with average intelligence) and a reasonable man that a huge bargain was at hand and up for grabs. However, in reality, a mish-mash of emotions and cognitive + psychological biases serve to confuse and confound investors into buying high, and selling low. As investors, we have to constantly be aware of these biases and be mindful of their pervasive effect on our investing behaviour, lest we let ourselves suffer from the cardinal sin of losing our precious capital.

The traditional definition for “Margin of safety” would indicate that the investor has some leeway in being wrong in estimating the intrinsic value of a security, and this margin would provide a cushion to ensure that he preserves his capital, or else loses as little of it as possible. But margin of safety can be a notoriously elusive and subjective concept, so much so that two veteran investors may not see eye to eye on the required margin of safety for a particular security; or even whether it has any margin at all! Each of us has a unique ability to read into a company’s financials and business situation cum model, and form our own conclusions as to the attractiveness of the business with which to invest in. Consequently, the margin of safety demanded should also be commensurate with our risk tolerance as individuals, based both on personal circumstances (e.g. age, presence of child, aged parents to support etc.), and asset allocation (some investors may choose to “diversify” into different asset classes, hence he would require less margin of safety as he has parked limited funds in equities). Hence, my point is that the margin of safety is a fluid concept which is not cast in stone, but is subject to interpretation and personal observation and deduction. Furthermore, as a company evolves through time and grows or declines, one should also adjust their view of required margin of safety accordingly; or if there is no longer a margin of safety, the investor may consider divesting his stake to preserve capital for channeling into other more promising securities.

To conclude, the essence of investing is very basic and simple; but somehow human beings have a strange and inexplicable tendency to make simple things complex. The two most basic tenets should be capital preservation and margin of safety; and together these two powerful concepts will guide an investor through all kinds of markets, and allow him to screen through all types of companies for suitable ones. I believe that if one is armed with this knowledge and practices it faithfully, he/she will not get a bad result in his investments.

Wednesday, July 14, 2010

Tat Hong – FY 2010 Analysis and Review Part 2

Part 2 of this analysis takes a closer and in-depth look into Tat Hong’s business divisions, in terms of revenue performance, gross margin as well as proportion to total revenues. Take note though that FY 2010 is a year of the economic downturn and so the figures shown will probably be depressed and not reflecting normal economic conditions.

Business Unit Revenue Analysis

For 4Q 2010, crawler crane rental took up 32.2% of revenues, down from 34.9% a year back. The division also saw a 9.4% increase in revenues. The dip in proportional contribution can be attributed to higher equipment sales as enquiries increased post-crisis. Indeed, sale of cranes jumped 68% to S$50.2 million from S$29.7 million a year ago, and this division took up 38.3% of revenues for 4Q 2010, much higher than the 26.9% a year ago. Tower crane rentals also saw increased business year on year, as revenues increased 34% to S$8.5 million. Though this division only contributed 6.5% of total revenues for 4Q 2010, it is expected that with the new JV and business expansion which the Group is undertaking, this contribution is set to rise further in future periods. Spare parts and general equipment hire saw dips due to reasons as lined out in the financial statements announcement, but should see more pick up once the Australian side gets going with their economic boosting plans, amid progress on oil and gas projects picking up steam once again. Recall that Tat Hong owns 70% of Tutt Bryant which is their Australian subsidiary, and Tutt Bryant had also reported muted numbers as a result of the ongoing financial crisis.

For FY 2010, the effects of the shift to a “rental” model are more apparent, as crawler crane rentals took up 33.4% of revenues (at S$165.4 million), compared to 28.4% in the previous year. Though revenue for crawler crane rental dipped 8% year on year, it was still the dominant revenue contributor and with the high gross margins, has helped to keep overall gross margins afloat for the Group. Crane sales’ contribution has dipped from 40.3% the previous year to 34.5% for FY 2010, roughly in line with the contribution from crawler crane rental. The 33% dip in revenues was mainly due to the sharp drop in business for the first 3 quarters, which was partially mitigated by the higher sales recorded in 4Q 2010. Tower crane rental’s revenue contribution jumped from a mere 3.9% to 6.8% for Full-year, and the division experienced a 36.5% growth in sales as Tat Hong expanded their Tower Crane fleet substantially through more synergistic acquisitions and joint ventures in China. Moving forward, it is expected that this division can continue to grow, with the help and network which AIF Capital provides. General equipment rental’s contribution dropped to 14.6% while revenues fell 38.5% year on year; while for sale of spare parts its contribution increased slightly to 10.7% from 8.8% while revenues dipped slightly by 4.1%.

To summarize, we should be able to see more revenue shifting to crawler and tower crane rentals in future periods, as Tat Hong slowly shifts its business model during this crisis to focus more on stable rentals rather than volatile equipment sales.

Business Unit Gross Margin Analysis

The gross margins for crawler crane rental for FY 2010 remained fairly constant at 61.9% against 62.7% for FY 2009. This was despite the slight dip in revenues year-on-year, and showed this division to be fairly resilient in spite of the global financial crisis. As Tat Hong shifts more and more of their inventory to fixed assets, we should see the gross margins for the Group improving as rental of cranes has a much higher gross margin than equipment sales. Sale of cranes for FY 2010 only generated gross margins of 8.4%, against gross margins of 61.9% for crawler crane rental! However, for tower crane rental, gross margins fell 5.3 percentage points from 42.1% to 36.8% due to increased competition. This is one area which Management should try to tackle as the erosion in gross margins may offset any positive effect from fleet expansion and revenue growth. It is useless expanding revenues while not keeping a cap on pricing and gross margins.

It is also not explained why the gross margin for sale of cranes fell by a whopping 8.8 percentage points from a decent 17.2% to the current 8.4%. This is a clear red flag and has to be addressed at the AGM, as quite a significant and substantial bulk of revenues continues to flow into this division. One possible reason I can speculate on is that Tat Hong had to give discounts to induce customers to trade during this difficult period, and this impacted their gross margins but allowed them to capture and retain market share, and to build on existing customer relationships.

Gross margins for sale of spare parts also dipped slightly to 57.1% from 58.4%. For general equipment rental, the surprising result was gross margins were lifted by 7.6 percentage points to 43.5% from 35.9% a year ago. This also was not explained at length and it is rather disturbing to see gross margins fluctuate so much within just one year. I had the impression that their business was a stable type with not much pricing movements unlike in manufacturing; but apparently I was wrong as margins have moved around a lot within the divisions, even as outwardly, the gross margin for the Group shows little change. This is another query to raise up during the upcoming AGM.

Part 3 of the analysis will focus on Tat Hong’s Inventory levels, as well as plans and prospects, as the world attempts to emerge from the worst recession in 70 years. Hopefully, Tat Hong may stumble but will not fall flat due to this crisis.

Friday, July 09, 2010

Boustead – FY 2010 Financial Analysis and Review Part 2

In Part 2 of this analysis, I will be dissecting and commenting on the business unit performances for Boustead and also the underlying reasons, and to see if there are prospects for each division to improve and sustain its performance moving into FY 2011.

Divisional Revenue Analysis

Sad to say, Engineering Services division saw a dip in revenues from S$438.8 million in FY 2009 to S$360.9 million in FY 2010. A further breakdown shows that this was mainly due to Energy-Related and Real-Estate divisions registering lower revenues year on year. This 17.8% fall can be attributed to a slowdown in orders for these two divisions due to the global financial crisis, and as mentioned in the Group’s press release there was also a timing difference in the recognition of the sale of an industrial leaseback asset worth S$67.8 million which will only be taken in during FY 2011.

For Energy-Related Engineering, there was a 16.5% dip to S$122.3 million in FY 2010. Boustead International Heaters (BIH) continues to suffer from the exchange weakness in Pound Sterling which has impacted revenues from this sub-division (this has been going on for a few quarters already due to the ongoing crisis in Europe). Controls and Electrics fared worse due to tougher competition (the Company did not mince words on this, but the question is how to overcome the competition!), while Boustead Maxitherm had completed its restructuring in Indonesia, but was still being restructured in Australia. This of course implies that it was no generating optimal revenues and my grouse is that the “restructuring” has gone on for long enough, so when can shareholders see this division contributing revenues at full strength? It is definitely frustrating to read of such problems, but in a sense also refreshing as you seldom see companies come clean with problems as most of them simply love to trumpet successes. That said, it would also be helpful for shareholders to learn of how the division plans to resolve these issues and pull up the revenue contributions for this promising division.

For the Water and Wastewater division (i.e. Salcon), the turnaround finally came in FY 2010 with the division registering revenues of S$54.9 million, 105% higher year on year. While it is commendable that profitability has been finally achieved for Salcon after years of “restructuring” and legacy issues impacting the bottom line, one question I have is whether this profitability is a one-off thing (judging from the description of some of the items contributing to the profits for FY 2010), or whether it can be consistently sustained in future periods? Part of the answer lies in the audiocast by Boustead which I will provide a transcript of in Part 3 of this analysis, but suffice to say that shareholders will be waiting with bated breath over Salcon to see if it can maintain its performance for FY 2011. As at the time of writing, Salcon had also announced a S$21 million wastewater project to commence in Abu Dhabi in UAE, further boosting its order book. But the withdrawal of Boustead’s participation in a S$175 million JV for a water infrastructure system was a blow for the division was it would have contributed a lot to the top and bottom line for the division. But knowing FF Wong’s stringent standards, if the project could not yield good IRR, he would rather gracefully withdraw from it.

The Real Estate Solutions division saw a 31% drop in revenues to S$183.7 million for FY 2010, and this was mainly due to a drop in the amount of revenue recognized from existing projects compared to a year ago. It sounded strange to me that revenue from a design-build-lease project was “eliminated” upon consolidation, as this meant that revenue was recognized intra-group. Perhaps a more detailed explanation of the accounting entries would give a better idea on why this was so. I suspect the contract was recognized internally until the billing could be done to external parties; and was a timing difference, hence no revenue would be recognized post-consolidation. For the Al Marj Township project under Boustead Infrastructures, more than 50% of the villa is now complete (still slow, to be frank), and I would expect the remainder of the revenues to be recognized in FY 2011 with a possible spillover into FY 2012 as well. Boustead is also focusing more efforts on design-build-lease for more consistent and recurring revenue streams (more on this in Part 3 from the audiocast), and the press release had stated that they are focusing their efforts in China and Vietnam.

For Geo-Spatial Technology, since the customer base comes from mainly government agencies, it represents a very stable and recession-proof source of revenue and this division has been Boustead’s “cash cow” for some time. Revenues improved marginally by 0.8% to S$74.8 million which was commendable considering the effects of the global financial meltdown. Note too that this division under Geologic Pte Ltd has also released the web portal, which is a free website to enable Singapore users to access destination planning (go check out the URL for more info!); and on Feb 12, 2010 ESRI Australia had purchased a company Mapdata Sciences Pty Ltd for about S$3.16 million which will add to their customer base. Contribution will probably only be noticeable in FY 2011 as the acquisition was done late into FY 2010.

Division Profitability

By comparing the numbers in this way, one can see if profitability had actually improved year on year as I place the margins side by side. For Energy-related engineering, PBT margins had actually improved to 16.1% from 12.6% despite the 16.5% drop in revenues, and this shows better cost control and higher margins (possibly from better pricing) as compared to a year ago.

For Salcon, the numbers are not directly comparable as the division registered a loss in FY 2009 but a profit for FY 2010. There will be more discussion on this in Part 3 where FF Wong mentions in the audiocast about Salcon’s order book which will allow the division to break-even.

For real-estate solutions division, a direct comparison is also tough as the project revenue flows are lumpy and there was also additional recognition of one-off profits for FY 2009. Therefore, do not take the numbers at face value – otherwise it would seem that the division did much worse with PBT margins of just 9.1% compared to 22.2% a year ago! In light of the S$67.8 million divestment only being recognized in FY 2011, perhaps this should be reviewed again once FY 2011 is over to see if the PBT margins normalize.

For Geo-Spatial unit, PBT suffered an 11% drop (which was not adequately explained), and this could be due to the weakness of the AUD against the SGD. But it is a cause for concern as PBT margin fell 3.3 percentage points from 28.3% to 25.0%, even though revenues inched up 0.8%. Oh well, more questions to ask during the upcoming AGM, I guess.

Part 3 of this analysis will focus on the prospects for each division, based on the transcript of the audiocast held on May 26, 2010 (of which I will post up as well). I will also be commenting briefly on the M&A deal for 20+% of Bio-Treat, and offer my views on this.

Monday, July 05, 2010

Sun Tzu - War On Business Part 9 (Meru Cabs)

Part 9 of the very interesting and insightful Sun Tzu series brings us to Mumbai, India, where James meets up with a budding entrepreneur called Neeraj Gupta (“Neeraj”), who is tackling the bustling city’s transportation issues by setting up a luxury taxi service called Meru Cabs. Meru Cabs is a modern taxi service which relies on clients calling up the call centre at Meru to book a taxi in any part of Mumbai, and a taxi will be sent to their chosen location within half an hour. Neeraj had this idea to take advantage of India’s growing middle class population, and started the company 10 years ago as a garage centre. 3 years ago, it converted to a taxi service company. Their target market does not just include middle to upper income clients, but also corporate clients.

But first, a little background on India’s taxi industry. The state of taxis in general is in really bad shape and the Government wants to revamp the taxi service. Competition is intense only in New Delhi as there are no other major players in Mumbai (Meru is the largest player). Neeraj wants to scale up quickly and provide good service to the locals, in order to take the business to new levels.

James decided to test out Meru’s service quality himself and called the hotline for the taxi service. The call was answered within 4 minutes (James considered this acceptable as Mumbai was a very large city), and a cab duly arrived in 30 minutes to pick him up. He noted that black and yellow taxis were indigenous to India but they are mostly in very bad shape, hence will not prove to be much competition to Meru (as it could not serve corporate clientele). James described the cab as being cool (good air-conditioning), and it also had a navigation system plus a metre to clock up the taxi fare. The cab driver was well-groomed, experienced and also wears a uniform, symbolizing professionalism. In short, it had all the features of a premium service.

The call centre is named the “Subscriber Relations Centre” (“SRC”), because Meru views all its cab drivers as “subscribers”, and the Company spends US$200 on each recruit for training and testing. With this kind of money spent, it is important for employee retention as it would be a costly affair if there was high staff turnover at the SRC. But according to interviews with some of the subscribers, they felt as though their grievances were not heard.

James paid a visit to the corporate office of Meru, and he saw a nice corporate office environment; but a visit to the SRC painted a different picture as the conditions there were more “shabby” and less professional as compared to the corporate office. The office was rather cramped and felt over-crowded, and this did not make for a pleasant environment for the subscribers to work in. Also, in India, there was personal pride derived from being part of a good organization; therefore an employee’s self-worth was intricately tied up with his/her morale. In short, the employee’s morale is largely contingent upon his work environment. Thus, there existed a dichotomy in terms of managing the expectations of the subscribers, who can be seen as a key pillar of Meru Cabs.

James Sun invited Anu Sharma, an entrepreneur, to act as an advisor to Meru Cabs. She recommends the Company take up relationships with its employees, most importantly with its “subscribers”. Though demand for Meru’s service is high, it was equally important to be able to retain its drivers as well. James and Anu then suggested that Neeraj undertake a 360 degree “subscriber retention program”. A merit system would be set up to recognize and reward long-serving and outstanding subscribers; and a dinner would be thrown for all subscribers to include their families as well, in order to instill pride in them on being part of a successful organization (this is leveraging on cultural norms). During a Management Meeting, Neeraj manages to convince the rest of the Management team of his ideas and they agree to produce certificates to commemorate long service, to be given away at the dinner.

With short notice given, it was a challenge to find a suitable venue to host the dinner, but in the end a suitable location was sourced for and a buffet dinner catered for all subscribers and their families. Some of the subscribers interviewed expressed surprise and pleasure at receiving awards to recognize their hard work, and also appreciative of the Company’s gesture to throw a dinner for them and their families.

Quite a few lessons can be learnt from this insightful episode:-

1) Importance of assessing the competition – It’s prudent for a company of Meru’s size which wishes to expand into other cities in India to first size up and check out the competition. In Meru’s case, Mumbai did not have a significant player who was able to provide the same quality and service levels which Meru was offering, hence they were “safe” in their home territory.

2) Employee retention is as important, if not more, than customer retention – As can be seen, the drivers were the important catalyst which enabled Meru Cabs to be such a successful business. Neeraj was neglecting their welfare, which caused them to become disgruntled and unmotivated. This could result in high employee turnover which would do the company no good.

3) Goodwill is inherent in high employee morale – To add on to the second point, high employee morale also translates into intangible goodwill for the business. A happy and well-treated employee will spread good things about the company he works for, which in turns will raise the profile of Meru Cabs through word of mouth.

4) Look for Cultural Cues in handing out incentives – India’s case is unique in that much of an employee’s self worth is tied to the company he works for; hence Neejar (who is an Indian himself) should have known this and taken advantage of it by recognizing the subscribers’ contributions much earlier.

5) Ensure equality for all employees, as far as possible – It would be a very distinctive internal corporate problem if two different batches of office workers had two vastly different working environments, one of which is spacious while the other is cramped and uncomfortable. Since Meru Cabs prides itself on being professional, it should standardize the treatment of all employees and accord them the same working environment.

The next episode will feature another Indian company, this one is also located in Mumbai, India and is a film school called Digital Academy. It’s interesting because it produces films and serials in classic “Bollywood” fashion, many interesting sets and dramatic acting!

Check out the website for Meru Cabs over here:-