Friday, December 31, 2010

December 2010 Portfolio Summary and Review

It’s that time of the year again when I do a year-end portfolio overall review, as well as muse over the hits and misses over the past year. At the same time, I will also do a run-down of my financial position, and comment on my personal financial situation. My previous post already talked of my financial resolutions for 2011, so I will not bore readers further by delving into those. What I am simply going to do is to review my portfolio, loans and savings structure and give a very brief and succinct summary. The usual monthly commentary on the economy, property and other financial matters will follow, and I shall end off with my customary review of the companies within my portfolio. I will also make a brief mention of my expectations for my portfolio for 2011 in terms of business growth and dividends.

Review for 2010

The figure above is a new one which I compiled to take stock of the year’s decisions with regards to divestments, and also for dividends received. It offers a glimpse into realized gains and losses for the year as well as dividends received (in total) from each company within my portfolio.

Divestments and Dividends

As can be seen, there were just two divestments made during 2010, that of China Fishery in Jan 2010 and FSL Trust in Aug 2010. The capital gain and loss as indicated is taken as the absolute dollar value, and does not account for dividends received. The divestments yielded total cash amounts of about S$58,000.

For total dividends received, this amounted to about $10,800 from 8 companies, though do note that my current portfolio has just 7 (FSL Trust has since been divested), all of which yield dividends. The average monthly dividend is just $900 currently, and the blended yield based on my current portfolio cost is just 5.3%. Though this is not exactly impressive, I feel it is a decent return on investment considering I chose not to invest in high-yield, but potentially risky investments such as the aforementioned shipping trusts. There are also REITs out there offering high yields of 8-9% but I feel these have their associated risks which may be triggered upon the raising of global interest rates to combat inflation. Hence, the dividends from my current portfolio reflect a conservative approach to beat inflation yet preserve capital in the event of rising interest rates and/or another severe downturn.

Purchases for 2010 and Portfolio Cost

Two purchases were made during 2010 – that of Kingsmen Creatives and SIA Engineering (SIAEC). Capital was deployed in early Jan 2010 after the divestment of China Fishery into Kingsmen Creatives, and further purchases were made in May 2010 after Mr. Market became manic-depressive. A total of about S$67,000 was invested in total for Kingsmen Creatives. In August 2010, after a comprehensive research was performed on SIAEC, purchases were conducted over 3 days to the tune of S$49,000. Therefore, in total, S$116,000 was deployed into two companies during 2010, exactly double of the amount divested (S$58,000). The other S$58,000 came from aggressive savings and reinvested dividends. The net effect of these transactions (i.e. divestments and purchases) increased my portfolio cost from S$135,400 at the start of 2010, to S$202,400 by year-end 2010*.

*Reconciliation = Cost @ Jan 1, 2010 ($135,400) - Cost of Divested Companies (S$49,000) + new purchases for 2010 (S$116,000) = Cost @ Dec 31, 2010 (S$202,400).

Investment Plans for 2011

My plans for 2011 basically consist of researching and reading more books on investing, in order to hone my skills and sharpen my knowledge base. While I will still be conducting research in order to look out for potential gems, do note that my time will also be more limited as my work and my family demand more of my attention. This means that although I will be scouring around, the level of detail of the research may not exceed that of SIAEC, as it is both tedious and time-consuming as a one-man-show researcher of companies. Much as I would like to devote more time to this exercise, I realize that there are constraints to what one person can do. One reason I join Value Buddies forum is also to watch out for good ideas thrown up by forumers, which I can then spend more time to delve into rather than start from scratch from the more than 700+ companies listed on the SGX. However, if there are no companies to purchase, I will simply be content to accumulate cash from savings and dividends and wait until there are suitable opportunities, in order not to compromise on margin of safety.

The analysis of valuations will continue into 2011, as I half suspect valuations may rise further and contribute to stocks being more expensive than they are now. I also gauge the level of sentiment using the STI as a rough barometer, as well as the “activity” on investment forums and blogs. Lately, I had noticed more investment blogs being started by young adults (and even some teenagers) cataloguing their investment decisions. While starting young is applaudable, the sprouting up of more of such blogs also signals that the market is luring in more new players; which may indicate very early signs of frothiness and irrational exuberance. It will be interesting to observe this phenomenon in greater detail come 2011 to see if it is exacerbates.

Portfolio Expectations – Business Growth and Dividends

I am expecting business growth of about 10-15%, which is more or less in line with economic growth and inflation. The companies I own should have sufficient competitive moat to be able to raise prices to compensate for inflation in staff salaries and rentals, and the general recovery in the economy should spur more business for my companies and ensure decent cash flows. Since I am relying on all my companies to generate a decent yield for me, I would also expect that their cash flow will remain healthy; and that I can project a future dividend yield of about 5-6% on my entire portfolio cost.

Country-specific factors may influence the earnings of the companies I own too, as each country has a different operating, economic and political environment. Recently, GMG Global encountered some problems in Ivory Coast which made some of their exporting difficult, and the result was that business was affected to some extent. Although such events are tough to predict, it is safe to say that for companies which operate in countries with tough laws or unstable governments, the risk of something negative occurring is multiplied many folds. Even Boustead was not immune to problems in Libya as they attempted to build the Al Marj township according to their client’s requirements, and I’ve talked about the associated problems quite a few times already.

I was also thinking along the lines of possible scrip dividends being offered by some of the companies within my portfolio. MTQ is a likely candidate and I had already accepted the scrip for the interim dividend of 2 cents/share. I guess this validates an investor’s belief that the company will continue to grow and do well; thus the shares will be worth much more in future.

Property Market

The property market in December 2010 showed some signs of cooling down, with private property prices for mass market condos falling 0.4%, and median COV falling to $20,000. Though some believe that this is just a temporary “blip” before prices start heading north again, there are others who are confident that this is THE turning point and that prices will begin a slow but sustained descent. Whatever the case, I still feel that property prices remain high enough to be a major hindrance for young new couples trying to buy their first home. The Government has been launching more executive condominiums with the same $10,000 ceiling and priced exorbitantly (by my standard), so I feel the problem will not be alleviated any time soon.

Car (COE) Prices

I guess no one in Singapore should feel surprised that COE prices cracked the $76,000 mark for the “Open” category at the second bidding for December 2010. With the impending supply shrinkage according to the LTA’s new formula, there was a mad rush for COEs and this pushed the prices of cars up to ridiculous levels. I personally think the COE situation will probably get more and more out of hand, with prices hitting $100,000 by next year. Singapore will end up becoming a playground for the rich and wealthy with their expensive large cars, while the middle class stands by and watches on enviously as cars are priced out of their reach. It’s a sad but true situation.

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

1) Boustead Holdings Limited – The biggest news for Boustead in December was the termination of the Heads of Agreement with TT International (“TTI”) for the Big Box Project (Jurong East Entertainment Centre). The details can be found on SGXNet but essentially I was not too surprised at the failure of the deal to launch because of the repeated delays (which implied the parties were having a hard time hammering out the T&C), and also because of some onerous rules. FF Wong has a very conservative and prudent way of assessing potential M&A, and I am comforted by the fact that he will not jump headlong into a deal without doing proper due diligence to mitigate Boustead’s risks. On December 22, 2010, Boustead announced the termination of their proposed investment in Bio-Treats Convertible Notes, and instead said that they would be investing S$4 million to purchase 100 million shares of Bio-Treat at 4 cents/share. I guess this closes the chapter on both Big Box and Bio-Treat, and still leaves most of the cash stash essentially untouched and undeployed. It may mean a higher final dividend come May 2011, or it may also imply that FF Wong is again actively looking out for good M&A opportunities.

2) Suntec REIT – Suntec REIT declared a stub dividend of 1.723 cents/share to be paid on January 5, 2011 as a result of a private placement of 313 million shares at S$1.37 per share to raise funds to purchase a 1/3 interest in MBFC. The acquisition was successfully completed, and it is perceived that office rents will continue to trend up, so dividends for 2012 should be higher (it will fall for 2011 though due to rental reversions which are lower than the rates locked in during 2007-2008).

3) Tat Hong Holdings Limited – There was no news from Tat Hong for December 2010.

4) MTQ Corporation Limited – There was no news from MTQ apart from their scrip dividend scheme, which set the price of each scrip share at 83 cents/share. I have decided to accept 100% scrip as I wish to participate fully in the future growth of the Company, and am confident of its long-term growth prospects in the Middle East (Bahrain) and Australia.

5) GRP Limited – There was no news from GRP for the month of December 2010.

6) Kingsmen Creatives Holdings Limited – There was surprisingly a lot of news for Kingsmen this month. On December 3, 2010, it was reported that Kingsmen was involved in arbitration proceedings with one of their sub-contractors, Hup Lian Engineering, over some work over at Universal Studios Singapore. This is not expected to have a material effect on the Company. Three days later on December 6, Kingsmen acquired 11.7% of Kingsmen North Asia from Tan Ai Lian. On December 28, 2010, Michael Ng Hung Chiao was appointed Managing Director of Kingsmen’s China operations, while at the same time, Edward Ho Juan Hee stepped down from the same position to pursue his own interests. Michael has about 25+ years of experience working for Kingsmen, as he had joined in June 1984. Further to this, on December 29, 2010, the Company announced that there would be Management changes taking effect from January 1, 2011. Simon Ong (one of the founders) will be made CEO and will supervise the day to day operations of Kingsmen and strategic development, while Benedict Soh (the other founder) will focus on strategic roles, business development and to oversee the Group’s overseas offices. Other Management role changes can be found in the announcement on SGXNet. I feel this portends well for Kingsmen as we move into 2011 as they are looking to sharpen their focus and streamline their top management team.

7) SIA Engineering Company Limited – The only news from SIAEC was announced on December 9, 2010, saying that they had signed a S$300 million services agreement with Silkair. This is a 5-year contract and is a renewal, so does not qualify as a “new” contract announcement.

Portfolio Review – December 2010Realized gains stayed stagnant at S$49.1K as no more dividends have been declared by companies within my portfolio.

For the month of December 2010, the portfolio has gained +0.5% against a +1.4% rise in the STI. For FY 2010, the portfolio has gained +24.5% (using Excel’s XIRR formula) against the gain of +10.1% for the STI. Cost of investment continues to remain at S$202.4K, and unrealized gains stand at +20.1% (portfolio market value of S$243.1K).

January 2011 should be an interesting month as the new year promises new opportunities and challenges, and I should expect at least a trickle of corporate news and updates after the holiday season ends. Since February 2011 is the period whereby my companies will report results, I shall expect it to be still a relatively quiet month. Only Suntec REIT will report their results at the end of Jan 2011.

My next portfolio review will be on January 31, 2011 (Monday).

Let me also take the opportunity to wish all readers a very Happy New Year! May 2011 be a great year for all of you, and may you be blessed with good luck, good fortune and good health!

Monday, December 27, 2010

Financial Resolutions for 2011

The time of the year has come again for us to take stock of our lives and look back on what had transpired in the past year. As I celebrate Christmas and the upcoming New Year, I am reminded of my financial commitments and my promise to steer myself towards financial freedom. 2010 has been a somewhat turbulent year for me in terms of my personal life (I will not elaborate), and my finances have also been somewhat strained even though I have managed to maintain my saving habit. As the year draws to a close, I find myself heaving an unconscious sigh of relief now that I can look forward to a brand new year. Hopefully, it is a better one financially and also for me on a personal front.

Here are some of the financial resolutions which I have set down as part of my investment and personal finance review. Some of these resolutions will probably span more than one year, but it is good to write them down now and monitor them as I go along, as distractions and busy-ness may cause me to lose track and forget some of them. Here they are (in no particular order of importance):-

1) Review and fine-tune me and my wife’s insurance policies – After some soul searching and also by reading some good quality posts on Value Buddies forum on insurance policies, I had decided to do a thorough review of mine and make some drastic changes. I met my financial planner in mid-Dec 2010 and decided to surrender some whole life policies, to be replaced with Term policies and a Disability Income policy. Suffice to say that this decision results in short-term pain (there is a loss realized as some of the policies have yet to compound) but would result in a long-term savings (term policies are cheaper and can allow me to invest the difference). Plus, disability income insurance ensures I get a payout should I be unable to perform my job roles and duties and acts as a protection for my wife and child should something impair my ability to work. Some of the changes only take effect next year (as I will be paying the premiums next year), and it is my resolution to get my insurance coverage right once and for all so as to enjoy future peace of mind.

2) Improve budgeting techniques and track cash flows more rigorously – Normally, I prepare a rudimentary budget at the start of every new month in order to budget for any one-off expenses, and to ensure my account has sufficient cash to handle all my GIRO expenses. The payment dates and amounts are fixed and they are all keyed into a spreadsheet to simulate expenses for the entire month. I had discovered in 2010 though, that there were still some months where my credit card bill was higher than expected; though with my current “Pay Myself First” policy this has not affected my savings adversely. However, this means that I will have to be more stringent in reviewing my expenditures and ensuring I do not rack up a bill larger than what I budgeted for. I had thought of implementing a rolling budget for 3 months but will see how tedious this can be before deciding.

3) Increase savings rate from current 50% - My current lifestyle allows me and my wife to save 50% of our take-home salary, and thus far I am pleased with the progress though I must admit that some months are pretty tight when it comes to ad-hoc expenses (e.g. weddings, medical bills, capital expenditure with regards to my child), and have to be supplemented by dividend income. The aim for 2011 is to be able to raise my savings rate from 50% to 55%, and this should be possible if I assume my lifestyle remains unchanged (i.e. simple living without a car) and me and my wife’s salary increases through normal increments. Admittedly, this may be tough but if it cannot be achieved at least the retention of the 50% mark with an increase in salary translates into higher absolute amounts being saved per month.

4) Devote time to researching investment ideas and reading good investment books – This resolution is going to be tough as I am more and more occupied with work commitments as well as family commitments. Family commitments would include, of course, interactions with my family members as well as my in-laws, as well as spending sufficient quality time with my daughter, who is getting more precocious by the day! I realize that serious investment research is not so much difficult to do as it is tedious, and it is a task which consumes copious amounts of time as one needs to pore through annual reports, quarterly filings (financial statements) and corporate announcements. Compiling spreadsheets and adding annotations and footnotes is also very time-consuming, and writing the report from a quantitative and qualitative perspective in order to either justify the purchase or reject the thesis is also another tedious task in itself. My last report on SIAEC stretched up to 40 pages including diagrams, charts and tables; and I believe that if I do undertake extensive and detailed research on another SGX-listed company it may also take up the same amount of time and effort. But I shall endeavour to channel more time to such constructive activities, and I am also prone to using time on the bus or MRT to think through investment issues and gather my thoughts on potential companies to invest in. As for good books, I shall resolve to visit the library more often to borrow books which enhance my knowledge of investing and which can also teach me lessons on stock market lore and history.

5) Finding more ways to increase passive and active income (and sources) – With me and my wife’s jobs being our main source of active income, it is my desire to actively search for other avenues which will bring in cash. Currently, I have a tenant and am drawing some rental income monthly, and am also giving tuition to one student (another source of active income). From my blogging, I am also deriving some minor income from Nuffnang. I resolve to try to look for ways to enhance my active income sources, such as taking on another student (if time permits and does not violate my apportionment of time for my family) and to seek out business opportunities to be a sleeping partner in a business with a robust business model. For passive income, I will endeavour to increase my equity investments’ cost and enhance my yield so as to increase the passive income cash inflows from current levels. As of now, my estimated dividend yield for 2011 is 6% and will bring in about $12,000 of passive income purely through dividends (assuming all dividends remain the same for 2011 as for 2010). However, this increase in yield shall NOT be at the expense of margin of safety, in other words capital preservation shall always be paramount, and will rank ahead of superior yields.

6) Seek out methods to lower expenses and costs – With the impending re-structuring of my insurance policies and the lowering of premiums, this is also one source of cost-cutting for me moving into 2011. Other methods I can think of include looking into ways to reduce tax payable (SRS is not applicable to me as I have not hit 40), reducing unnecessary expenses on dining and leisure, using more discount coupons, bringing my own water out for lunch daily instead of purchasing drinks; and other such small habits which will add up. I also plan to clear up the clutter in my house and uncover any objects which I thought I may have lost, so that I do not have to spend money replacing what I already have. All capital commitments shall be reviewed and unless absolutely necessary, I will not upgrade or replace any items (yes, this includes my 5.5 year old trusty phone which still works very well). If an item can be repaired or re-conditioned, it shall be done instead of buying a new item to replace it. After all, the motto our government likes to promote is reduce, reuse and recycle, right?

7) Reducing my HDB Mortgage Loan – Even though it has been reiterated time and again that an HDB loan is one of the cheapest loans around (at 2.6% per annum interest rate), the fact is that I am still servicing this loan using my CPA OA funds (which accrue interest at 2.5% per annum). This means that technically, I lose out on 0.1% per annum every year. With the new CPF rules stipulating an additional 1% interest on OA balances up to S$20,000, this means that the amount is now accruing interest in excess of 0.9% over my loan interest rate. Therefore, technically, I should retain the loan as long as possible. However, factoring in the low amount of my CPF OA (which has mostly been used for loan servicing with only a 6-month buffer) and the fact that I want to use my higher contribution (I am still below 36) to clear off as much loan as possible, I will be exploring methods to reduce the loan through higher loan instalment payments or lump sum one-off repayments.

8) Seeking higher interest rates on my emergency and opportunity funds – With interest rates hovering at a dismal 0.125% per annum at most major banks for savings accounts, my funds are being eroded at a rate of about -3.275% per annum (with inflation raging at 3.4%). I will thus seek out banks offering more attractive interest rates, such as the CIMB Starsaver Account. Please note that I am NOT advertising for the bank and will receive no commission whatsoever from promoting this account. The account has no minimum fees and as long as you contribute S$500 per month in increments, they will pay 0.8% per annum interest on your balance. The catch is that the account must be open for at least 6 months (or there will be a penalty fee) and the minimum initial deposit is S$5,000. Another issue is that CIMB Bank currently has only two outlets in Singapore – Knightsbridge and Raffles Place; and ATMs are also severely limited in number. However, as I plan to operate this as an Internet-only account using GIRO transfers to effect fund movements, this should not be a problem.

I guess there are probably going to be more “resolutions” which pop up as the year goes by, but I think for now that’s a good laundry list. Part of me was also afraid to get too long-winded, as I know I have the ability to just ramble on (and bore the reader). Perhaps readers can share some of your financial resolutions as well?

My year-end portfolio review and special review will be out either on December 31, 2010 or January 1, 2011 as I still have to crystallize my thoughts and put them on paper. It’s going to be rather lengthy but I hope to be able to explain my own performance to myself so that I can (hopefully) suggest improvements for the new year.

Thursday, December 23, 2010

Porter’s Five Forces Series Part 2 – Intensity of Rivalry

In this second part of the Porter’s Five-Forces series, I take a look at intensity of rivalry. This is an important factor as the more in-fighting there is amongst companies within the same industry for market share and profits, the more rates of return will be depressed and suffer. If companies practice cutthroat pricing and start under-cutting one another, it will result in a lot of happiness only for the consumer and a lot of pain for all players involved as it can become a vicious cycle. If rivalry is intense, players may also have to spend a lot on marketing, advertising and promotion to regularly promote superior product features or for brand awareness, so as to stay one step ahead. This can, in the long-run, erode margins further and prove very costly.

In some industries where there are several dominant players, some of them may eventually recognize the hazards of price competition and destructive rivalry and may voluntarily restrain their rivalry. Some of the factors below will intensify rivalry and make it harder for firms to compete with one another:-

1) Many equally balanced competitors – If an industry has no clear dominant player then it becomes a “free-for-all” and will result in fierce fighting for a share of the profits. Even if there are only a few players, assuming they are evenly balanced in resources, then they may end up innovating and fighting constantly to stay ahead and drag down one another’s rate of return. This will ultimately benefit the consumer most; and firms would do better if they are able to employ some degree of co-operation, or if there is one dominant firm in the industry.

2) Slow industry growth – In industries where growth is rapid, all players within the industry are able to increase sales (and profits) without taking sales away from one another. This is evident in an industry such as MICE which is expanding rapidly in South-East Asia, including China; and will mean that all players (Pico FE, Kingsmen and Cityneon) will be able to enjoy higher revenues and profits. For slow growth industries, there is hardly any growth prospect for any one player so they tend to start attacking one another for market share, which increases the intensity of rivalry.

3) High fixed costs – Firms which have a high fixed cost structure will slash prices to maintain turnover as they have a high breakeven point. Some examples quoted are steelmaking and paper making. Industries which produce perishable goods also have to cut prices rapidly as they have to achieve rapid throughput.

4) Products are not differentiated – This point is pretty simple. If the products are commoditized then firms will compete purely on price, which means there will be higher intensity of rivalry between competitors to undercut one another.

5) Extra capacity added in large increments – This relates to adding of extra capacity in a sudden, large increment such as building a new plant. This occurs when there is a huge demand shift in the industry which causes all players to simultaneously increase production and build facilities to increase manufacturing; resulting in a future over-supply situation. We have seen how this happened for the textile and shipping industries.

6) When rivals have different strategies, origins, personalities and relationships – This refers to rivals within the industry adopting tactics which destroy shareholder value for all players, rather than engaging in “tacit collusion” to try to boost revenues and profits for all players. The rules do not allow any player to gain an upper hand and to establish a high rate of return. In the end, all players engage in actions or corporate strategies which affect all players negatively, and result in a sub-par return for all firms within the industry.

7) High exit barriers – If an industry has low returns, theoretically, this should spur the weaker firms to exit the industry in order to free up resources to deploy to higher value-added activities or businesses. The reduced supply will ensure that the firms that remain can capture a greater market share and thus generate a higher rate of return on capital employed. In reality, however, it may not be easy for firms to exit an industry due to the following factors:-

a. Specialized Assets – If assets within the industry are highly specialized and cannot be deployed for any other purpose, this would make it very tough for players to exit unless they suffer a drastic write-off, or decide to switch business altogether. One example I can think of is the OSV business, in which companies such as Ezra and Swiber have highly specialized assets catered to the O&G industry which cannot be used for any other industry.

b. Fixed Costs of Exit – There may be fixed costs involved in exiting an industry. Examples given include amounts paid under labour agreements, divestment process needing lawyers and accountants, as well as compensation for any broken (frustrated) contracts.

c. Strategic Loss – The business or division may form an integral part of an organization’s overall strategic goals or alignment, and divesting it may be undesirable because of this. It may hold some reputation or may be kept within the organization for other reasons.

d. Emotional Barriers – This has to deal with emotional circumstances which make the manager or CEO unable to divest or discontinue an operation or business division. The person may have spent so much time and effort to build up the business, and is therefore unwilling to let it go. The managers may also be ill-suited for any other trade other than the one he was assigned to do. It is possible for a division to be retained for purely emotional reasons rather than rational ones, and is pretty common as we are all humans.

e. Government and Social Barriers – Governments often step in to prevent closure of businesses in order to save jobs and promote social cohesion. As a result, companies within the industry grimly battle it out and endure the low returns which are endemic to the entire industry.

Part 3 to be released next year will talk about the threat from substitutes and also buyer power, and I have combined these 2 as threat from substitutes is just a very small section.

Sunday, December 19, 2010

Tat Hong – 1H FY 2011 Financial Review and Analysis

Previous analyses done on Tat Hong have always dragged into three parts, which on hindsight seemed rather unnecessary considering there is not much change to key numbers such as gross margins and inventory levels from prior quarters anyhow. Hence, in the interest of brevity, I have decided to condense my entire analysis and review into just one post. Though this post may be a little on the long side (and not to mention devoid of the usual Excel tables which you see in most of my analyses), I hope to be able to touch base on all three aspects of the financial statements as well as discuss briefly on Tat Hong’s plans and prospects moving forward.

Profit and Loss Analysis
(Note: All numbers refer to 1H 2011 and NOT 2Q 2011)

It was rather disappointing to note that once again, the effects of a larger increase in COGS has offset any positive effects from an increase in revenue. Revenue may have risen 22% to S$294.4 million, but gross profit only increased 13% to S$108.4 million. Gross margins fell from 39.6% in 1H 2010 to just 36.8% in 1H 2011, and this was attributed to scaling down of major projects in Singapore and Malaysia, strong competition and higher cost of sales (for tower cranes). In my opinion, all these do not constitute very good reasons for the drop in gross margin, and it serves to show (rather glaringly) that even though Tat Hong is one of the largest crane companies in the world, it seems to lack persuasive pricing power and is unable to pass on the increase in costs to customers. At least, that’s what the numbers tell me. While the original rationale for the purchase of Tat Hong was the notion that being a top player meant that it would be able to exert some form of pricing power, recent events have proven otherwise. My recent article written on Porter’s Five-Forces and my intense reading on this topic has also broadened my knowledge of how companies are able to maintain sustainable competitive advantages. Apparently, I may have to revisit whether Tat Hong truly has much pricing power or competitive moat in this capital-intensive industry. If not, Tat Hong may well turn out to be my next major mistake after FLS Trust!

Administrative expenses and other operating expenses also increased by 37% and 30% respectively, both more than the % increase in revenues. For admin expenses, it was explained as increased professional fees for privatization of Tutt Bryant and increased recruitment expenses; so hopefully it is a one-off event and will not repeat itself. The explanation for the higher operating expenses is rather lengthy and can be found on Page 12 of 15 in the financial release, hence I will not go into detail. Suffice to say there is a one-off impairment of remaining goodwill of S$2.5 million relating to Kingston Industries, which contributed to the higher overall expenses.

The only really bright spark was the recovery in share of profits of associates, turning around from a loss of S$371K in 1H 2010 to a profit of S$4 million in 1H 2011. This follows the recovery in the global economy (no thanks to the massive printing of money by the US Federal Reserve) and companies such as Kian Ho Bearings and Yongmao reported better results, flowing down to Tat Hong’s bottom line. As the months go by, and the gradual recovery asserts itself, there should be more contributions from Tat Hong’s associates helping their bottom line and cash flows. Share of losses from joint ventures improved to S$318K from last year’s S$2.45 million, and could be a sign that things are turning up.

Overall, net margin was just a measly 5.9% against 7.1% a year ago, and this reflected the amount of margin which was literally eaten up by higher expenses during the year. It was already a disappointment to see gross margins declining 2.8 percentage points, but net margins have taken a further beating as well.

Balance Sheet Review

Tat Hong’s fixed assets amount continues to climb to S$573 million as they purchase more cranes and equipment to be used for leasing rather than trading. It is conceivable that this number will continue to rise as Tat Hong continues its strategy to beef up its rental income as compared to its trading income, in order to be able to tide over the cyclical nature of the construction industry.

Inventories fell slightly by S$14 million as Tat Hong winds down its trading inventory, and they have managed to keep trade receivables fairly constant in spite of the 22% rise in revenues. I shall touch on cash later as I feel the cash flow statement is another area of disappointment. Bank loans rose higher at a total of S$345 million compared to S$244 million six months ago, and this was attributable to the funding of the acquisition for Tutt Bryant (which the Company had declared to use a mixture of internal funds and bank borrowings) and for their tower and crawler crane expansion (including China expansion). This means that the Group is in a net debt position of close to S$250 million, which is a rather scary prospect considering all the companies I own so far are at least in a net cash position. This is another red flag which I am earmarking to monitor in case I need to justify a divestment. Subsequent quarters need to be carefully studied to see if the Tutt Bryant acquisition results in better profits and cash flows which will reduce Tat Hong’s debt to more acceptable levels.

Cash Flow Statement Review

In one word, the cash flow statement looks – dismal. While cash flows from operating activities was positive at S$26.5 million, capex took up a solid S$51.7 million and resulted in negative FCF of S$25.2 million. It’s no big secret that Tat Hong has never been a provider of FCF, and it pains me to admit that this was not a big criteria for me to look at back in late 2008 when I first purchased shares in this company. It seems that this ignorance is now coming back to bite me in the butt. As expected, the bulk of cash was generated once again from bank loans and finance leases, and it is no wonder why the Company cannot afford to at least increase its dividend from 1c a year ago, when other companies in my portfolio are all raising theirs. The glaring difference and uncomfortable truth is that my other companies all generated FCF, but not Tat Hong. Therein lies the problem, and if this persists for several more quarters, then it is indeed a valuable lesson learnt and I shall have to decide to divest.

Plans and Prospects

There is nothing new in this section which I had not really mentioned in previous versions of Tat Hong’s plans and prospects. In fact, the Company themselves mention that the recovery is more than likely to be “patchy and gradual”, using their own words. I would take this to mean that earnings will probably recover slower than anticipated, and even then it may indicate that the quality of earnings may suffer, as only share of profits from associates had increased. Obviously, I had known that Tat Hong was in a semi-cyclical business, but somehow still chose to invest in it back in 2008. Management’s assertion that they can weather future “storms” by switching to a rental model has yet to be conclusively proven as it has not been tested, so right now it simply sounds good in theory.

I will not regurgitate what the Company has put forth in their Group Outlook statement, which can be found in Slide 27 of their presentation slides attachment which can be downloaded from SGXNet. Suffice to say that most of the strategies have already been reiterated time and again in every quarterly announcement, but have yet to bear concrete fruits. Although tower crane segment is expanding and growing, competition is also very stiff as can be seen by the lower gross margins on tower crane division compared to crawler crane, so even though Tat Hong has several significant JVs in China, all is not a bed of roses.

As to the potential of Tutt Bryant, analysts were quick to jump on the optimism bandwagon by asserting that the recovery in key industries in Australia such as mining and construction would provide a strong boost to Tutt Bryant’s earnings, which would then translate to higher revenues and profits in Tat Hong’s Group financials, now that Tutt Bryant is a 100% subsidiary of Tat Hong. I guess Tat Hong’s management must have seen something worthwhile in Tutt Bryant to commit the funds obtained from loans to increasing their stake in it, other than citing factors such as the pervasive lack of trading activity and the non-necessity for Tutt Bryant to raise funds. It may take a while though, for any improvement in Tutt Bryant to be noticeable, but it is one aspect I have to look out for.

Finally, I will be looking out for the usual key metrics, including gross margins, debt levels and cash flow generation, to justify if continual ownership of Tat Hong remains a good proposition. If not, this company may soon join my menagerie of mistakes.

Wednesday, December 15, 2010

Porter’s Five Forces Series Part 1 – Threat of Entry

Much has been talked about the usage of Porter’s Five Forces for analysis of an industry which affects a potential company to be invested in, and it is true that investors need to have sound knowledge of the industry characteristics in order to make informed decisions. However, I realized that I never managed to do a detailed study of the Five Forces and how they impact the study of industries in order for investors to arrive at conclusions regarding the attractiveness of a Company to invest in. Aside from analyzing the fundamentals, financials and prospects (as well as Management quality, of course), I believe the Five Forces framework and model developed by Michael Porter can act as a very good backbone for one to establish a sound investment thesis, provided it is done rigorously and objectively.

This series on Porter’s Five Forces and industry and competitive analysis serves to elucidate the factors behind each of the Five Forces, and to discuss the application of each of the Forces towards understanding industry dynamics. Much of the material which will be discussed is taken from, and adapted from, a book called “Value Investing – How To Become A Disciplined Investor”, published by the Financial Times Guides and written by Glen Arnold, who is a Professor of Finance at Salford University. Please do buy or borrow the book if you wish to read more in detail on how he discusses the Five Forces. This blog and my subsequent posts only serve to provide a summary of the points brought up, and to relate my understanding of the Five Forces to SGX-listed companies. The opinions expressed are my own and do not constitute an inducement to either buy or sell securities in any of the Companies mentioned. The Five Forces are (in no particular order of merit): Threat of Entry, Intensity of Rivalry, Supplier Power, Customer (Buyer) Power and Threat from Substitutes. This post shall begin by discussing on Threat of Entry.

Introduction – Threat of Entry

Threat of entry refers to the threat of competitors entering an industry where incumbent companies are operating, thereby reducing profit margins and taking away some of the “fat” which the incumbents currently enjoy. New entry is something which incumbent companies abhor, and some companies put in place barriers which prevent easy entry into a highly profitable business unit or market segment; while others send out a signal to potential entrants of their intention to fiercely retaliate should it encounter such competitive threats.

Barriers to prevent threat of entry

The following are some of the barriers which firms can possess in order to discourage entry by potential competitors:-

1) Large economies of scale and high capital costs – Companies which are large in scale and have massive amounts of assets are difficult to copy as the competitor would need huge amounts of cash to spend on capex and infrastructure. Some examples I can think of are SIAEC which has built six hangars to date, and Tat Hong with their growing fleet of tower and crawler cranes.

2) High risks associated with imitation – The incumbent company may have a unique combination of skills and human resource which the competitors find difficult, if not impossible, to emulate effectively. Some examples given in the book include the McKinsey method, and I can think of other examples which relate to human expertise and internalized knowledge which is difficult to replicate.

3) Access to distribution channels – Competitors may find it very tough to secure a wide network of distribution channels, especially when the incumbents have already firmly established and entrenched themselves with distributors. Some examples could be food distribution where new entrants may find it an uphill task to request for supermarkets to stock up their produce as they do not have the prior relationships. Logistics companies also need to tie up with trucking companies to smoothen the flow of their operations, and a new entrant may find it difficult to negotiate favourable terms.

4) Switching Costs – This relates to the buyers of a product or service and how easy it is for them to switch from one supplier to another. If there are high switching costs, then it would not be easy for an entrant to offer a competitive product or service which can lure buyers away from the incumbent.

5) Differentiation – This involves establishing a reputation such that the product or service offering means something of higher value than what the competition can offer. Once this is established, it is very difficult for buyers to make a switch.

6) Experience – Incumbents may have accumulated experience and knowledge over the years of being in an industry, and this is embodied within their staff and corporate culture. It would be nearly impossible for a new entrant to obtain this knowledge and expertise. An example which was given is Intel, which has decades of experience in developing micro-processors; thus it makes it very difficult for new entrants to catch up.

7) Government legislation and policy – Government regulations and restrictions may play an important role in preventing new entrants from entering certain industries. For example, airlines are regulated in Singapore and thus Singapore Airlines enjoys an enviable position as the national carrier. On the telecommunications front, there are also three strong incumbents SingTel, M1 and Starhub and the Government is hesitant to grant a license for a fourth operator as the market is already reaching saturation point.

8) Control over raw materials as outlets – Some companies may have exclusive relationships with the supplier of their raw materials, and these may either be explicit (i.e. contractual) or implicit (an established long-term relationship). New entrants may find it tough to penetrate the market unless they are able to somehow grab the attention of the raw material supplier, but often this comes at a considerable cost and may eat into gross margins.

This post summarizes the factors which affect threat of entry, and how an investor can select a company which has the above factors to discourage or prevent easy entry into their turf from potential competitors. In the next post, I shall explore the next Force which is Intensity of Rivalry between existing companies (within the industry).

Friday, December 10, 2010

Is Property Truly Affordable?

Some of the more recent reports on property as published by our incumbent major newspaper, The Straits Times, seem to imply that property prices have softened and thus has become much more affordable for the general public. In Saturday’s newspapers (December 4, 2010), an article called “Our First Home” appeared and talked about how median COVs have fallen since the August 2010 cooling measures were introduced, and also gave examples of two young couples who managed to find their dream homes. One of them purchased a 4-room flat at Bukit Panjang (Mr. Kelvin Teo and wife Alberta), while another (Mr. Ang Tiong Wei) was featured purchasing an EC at the newly launched Esparina Residences in Sengkang last month. Overall, the news article(s) tried to portray a very rosy picture of couples finally managing to clinch their very first home, while property prices have “softened” enough for most first-time buyers to readily afford a flat of their choice. But is this really the case?

Much has been talked about measures of affordability such as Price-to-income ratio (HPI), which compares median house price to annual household income. Another often used measure is the debt-servicing-ratio, referred in short-form as DSR. DSR is the proportion of income used to pay mortgages, and it is generally recognized that this should not exceed 35% for it to be comfortable for the mortgagee. In a very comprehensive article (published in TODAY November 12, 2010) written by our Minister for National Development Mr. Mah Bow Tan on housing affordability, it was mentioned that HPI for young couples was around 4.5 for resale flats. But in the example quoted in Saturday’s news, the couple was granted a $50,000 HDB grant on a 20-year old flat in Bukit Panjang (not the most accessible of places in Singapore), and their household income was less than $3,500 a month. A simple back of the envelope computation will show that if the grant was NOT given, the HPI would have been close to 9x or 10x. There may be other similar cases floating around Singapore which have not been highlighted by the mainstream media, but which will become easy fodder for the opposition parties or alternative independent news websites and blogs. The point here is that HPI is still significantly high in Singapore for most young couples who had just started working and do not have high incomes and large savings. Even though a few luckier couples managed to find their “dream” home, they may still be over-leveraged from the point of view of HPI. Now let’s take a look at the DSR in the next section.

The international benchmark for DSR is around 30-35%, and the same Mah Bow Tan article mentions that the DSR for new HDB flats in non-mature (i.e. remote) estates averaged 23% based on a 30-year loan. Accordingly, of course, the article then categorically states that these flats are affordable, even though the ratio comes close to 29% for premium projects such as Punggol Waterway Terraces. I think we have to keep things in perspective, though. What the articles have been talking about here are 30-year loans, which basically span close to half a person’s natural lifetime! I shudder to think of what our society is becoming when taking 30 or even 35-year loans is becoming the norm rather than the exception, as the articles talking about DSR use this tenure as a benchmark. One cannot assume that he is able to “flip” the property at a higher price within 5 to 10 years, as the market, being unpredictable, may frustrate such attempts and you may have to go on servicing your debt into your twilight years. Also imagine a case where the loan tenure was shortened to 20 or 25 years instead of the current default 30 years, I think the DSR would probably soar above 35% for many cases; and many would end up being forced to dip into their cash savings instead of just using their CPF OA to fund their over-priced houses. Not to mention that a lot can happen in a span of 30 years, such as job cuts, pay cuts and retrenchments, which may greatly affect one’s ability to service the mortgage loan. Therefore, generally DSR is a number which can be manipulated by the media depending on the metrics used, and readers have to be careful to sift out information which may contradict conventional wisdom (such as how many people actually fully pay out 30-year loans, as the interest accumulated by then would probably amount to close to 50% of the original cost of the property!).

Anyhow, back to the case of Mr. Ang buying Esparina Residences (an executive condominium or “EC”) at Sengkang. It was reported that he felt lucky to have secured a flat and that he “only” paid $899,000 for his three-bedroom, 1,184 square foot flat. Please note that this is AFTER a $30,000 housing grant, or else the EC would have cost a whopping $929,000! A simple calculation will show that the unit costs $785 psf, which is a hefty price to pay indeed for a condo with HDB-like features and in a remote location like Sengkang. Let’s not even consider the fact that Mr. Ang and his wife CANNOT be earning more than $10,000 a month or else they would be disqualified from purchasing an EC. Let’s take the scenario where their combined household income is exactly $10,000 a month, or $120,000 per annum. This means that the HPI ratio would be about 7.7x for them, which is not exactly low either. The DSR cannot be computed unless we know more about their loan quantum and tenure, but I can bet it’s probably a 30-year loan and that it is “affordable” by conventional standards of having a <35% DSR.

The problems as highlighted above are due to the pervasively low interest rate environment we find ourselves in. Note that for resale flats and EC, it is clearly stated on HDB’s website that one needs to take a bank loan to finance the purchase, and that purchasers are not entitled to obtain a HDB concessionary loan (at a constant 2.6% per annum). Of course, most readers should be aware that bank loans are being offered at phenomenally low rates now of about 1% to 1.5% for a lock-in period of 2 to 3 years, which makes the one taking a HDB concessionary loan look like an idiot (incidentally, I am one of those “idiots”). However, one should also note that interest rates for the last 18 months have been artificially low, and that the long-term average interest rates for mortgage loans should hover around 3% to 4% for bank loans (i.e. higher than HDB’s concessionary loans, which is why it was termed “concessionary” in the first place). So the couples featured in these articles are literally staring at a “time bomb”, as they are fully exposed to interest rate increases in the near future after their lock-in period for their super low-rate bank loans expire. This could literally mean a mortgage installment which is either double or triple that of their current amount, as rates may rebound from a low 1% to 1.5% to as high as 3% to 3.5% which is the long-term average. Even re-financing may not help as all banks would have raised the rates for their new bank loans in tandem with the global economic recovery some time in 2013 or 2014. Therefore, I assert that the low interest rate environment is exacerbating the illusion of affordability by granting couples with cheap current loans which may turn out to be very expensive mistakes in the future.

So with the above evidence being presented, ask yourself this – is property really affordable in Singapore?

Sunday, December 05, 2010

Boustead –1H FY 2011 Financial Analysis and Review Part 2

In Part 2 of Boustead’s review, I shall cover the divisional margins and also the plans and prospects for the Group, taking into account the recent interview with FF Wong as featured in Sep’s issue of The Edge Singapore. Note that much of the discussion will be based on plans and discussions which have yet to materialize, hence this material is meant to be informative rather than definitive. I would advise interested readers and investors to go through the actual articles and/or interviews (these can be found on Boustead’s website) to judge the content for yourself, if need be.

Divisional Margin Analysis and Review

The above table gives a very interesting snapshot of Boustead’s divisional margins for 1H 2011 versus 1H 2010. One can immediately see that for Energy-related Engineering, margins were adversely affected and had dropped to just 11.7% from 15.3% a year ago. So although revenues increased by a very healthy 38.7%, PBT only increased by 6.6% to S$8.8 million. It was mentioned in the press release that the upstream oil and gas business suffered a slow quarter, and I take it to mean that the contracts clinched also resulted in lower margins. This is rather disappointing as I had thought that with the successful restructuring of Boustead Maxitherm, this division would see stronger revenue as well as PBT margin contribution. Instead, it seems to be contributing to start-up losses, perhaps due to preliminary expenses or restructuring one-off costs?

For water and wastewater division, one can see that it has been a very valiant and admirable effort indeed by the team there, as they have managed to increase revenues by 65% to S$13.1 million for 1H 2011. However, as FF Wong had mentioned, this is a very low margin business, and this is reflected in the low PBT margin of 5.3% for a PBT of S$0.7 million. I guess the positive aspect of this is that even though margins are probably being squeezed, there is still some profit to be derived from the division which is adding to overall Group profit, rather than deducting from it. It remains to be seen if this can continue for 2H 2011, but with Salcon’s order book being much healthier than it has been in a long while, I am optimistic that the division will be able to pull off a second consecutive year of profitability.

Real estate solutions division (led by 91.7% owned Boustead Projects as well as Boustead Infrastructures) had a good half-year, with revenue rising by 41.3% to S$187.8 million. For PBT however, this was boosted by the one-off gain from the sale of a leasehold property which was booked in 1Q 2011, hence the PBT margin looks as though it jumped to 18.7%. The problem with the division is the lumpiness of earnings as it is very much project-based, and it also hides the fact that the Al Marj project in Libya is causing quite a bit of headaches for the Group due to the delays and design disagreements, which have resulted in slower-than-expected progress and cash flow hiccups. Still , for 2Q 2011, there were contributions from two major projects located at the Seletar Aerospace Park. With Boustead’s focus being on design, build and lease projects for more consistent income, this division should see better days ahead in terms of less lumpiness, though I suspect margins and revenues may suffer. Still, it may be a small price to pay in exchange for smoother and more predictable cash inflows for the Group.

The real surprise came from the Geo-Spatial Division, which (to me) always seemed like a slow growth division which acted like more of a cash cow. However, for 1H 2011 this division demonstrated revenue growth of 26.2% and PBT growth of 22%, with a very admirable PBT margin of 24%. I guess part of this can be attributed to the stable nature of geo-spatial technology demand, as most (if not all) of ESRI’s customers consist of government agencies; while the other reason could also be due to the recent acquisition of Mapdata Pty Ltd which provided a boost to the service offerings for ESRI Australia. Whatever the case, not much detail was given as to why the division managed to grow at such a healthy clip, but as they say – the numbers speak for themselves and I am very pleased with the performance of this division thus far. I hope that this encouraging performance can continue into 2H 2011 and perhaps we can see even stronger cash flows coming in to boost Boustead’s already-swelling cash stash. But then again, this stash is probably about to be deployed, as will be detailed in the section(s) below.

Prospects and Plans
(With extracts from The Edge Singapore article titled “Re-Orienting Boustead” published September 27, 2010)

There are plans for Boustead to make acquisitions in the coming months by making use of its huge cash hoard, and these acquisitions will leverage on its engineering expertise. Surprisingly, there was talk on possibly divesting of some of Boustead’s units in order to raise more cash for larger acquisitions. FF Wong’s focus is on becoming a pan-Asian company instead of spreading itself too thinly by going global, as it is very difficult to compete and be up against the very large players in the world. I believe this is part of the Group’s strategy to focus their resources on achieving more tangible results, and since Boustead is, after all, a Singaporean company, it made sense for them to focus on expanding their reach in Asia first.

It was mentioned that two countries where opportunities abound include Indonesia and Vietnam. My knowledge is that Boustead is actively exploring land banks in China and Vietnam and may even take a stake in them if it is deemed attractive, barring successful legal due diligence of course. It remains to be seen if there can be ample opportunities in these countries for Boustead to capitalize on to grow the business, but time will tell if things can pan out the way the Group wants.

Energy-Related Engineering Division

Interestingly, this division is expected to maintain its growth momentum on the back of high oil prices hovering around US$80 per barrel. The division was recently awarded about S$9 million in contracts in Brazil and Chile; and Boustead Maxitherm has also completed restructuring, which means I would expect contributions to flow in more swiftly for 2H 2011.

A surprising piece of news was that Boustead was contemplating divesting BIH (Boustead International Heaters), but the offers were “not right” according to FF Wong. BIH generated revenues of S$122 million in FY 2010 and occupy a “niche” market, hence Boustead is not in a hurry to sell and could consider expanding the division into the China market instead. Another option (which sounds quite appealing) is to list BIH separately in order to unlock the value of the business; and since the unit has built up an enviable track record over the years, this should not pose much of a problem. The advantage of a listing, as mentioned in the article from The Edge, is that investors can then better value the company and hence better appreciate Boustead’s diverse businesses. It was even mentioned that 91.7%-owned Boustead Projects could be considered for an IPO as it itself has a very good track record. I guess shareholders like myself have to wait with bated breath to see if there are any significant developments afoot with BIH and other sub-divisions of Energy-Related Engineering Division in the months to come.

Water and Wastewater Division

This division, represented by 100% owned Salcon, experienced a turnaround in FY 2010, and has been performing admirably for 1H 2011 so far. Salcon has been winning projects in Abu Dhabi, Vietnam and Indonesia and has been building up its order book, so even though margins are low and competition is keen, the division has still managed to eke out a small profit before tax. Barring unforeseen circumstances, I am confident that Salcon can continue to do so as they had just won a few major contracts (locally as well). Of course, recent news regarding Boustead’s intention to purchase a 20% stake in Bio-Treat through its convertible bonds for S$43 million also opened up the possibility of expanding this division quickly and decisively. However, as of this date, there has been no further news on this as the necessary due diligence (financial and legal) are still continuing, though the physical due diligence (inspection of assets) has been essentially completed.

A rather crazy idea which was mooted during Salcon’s loss-making years was to list the division when it chalked up three consecutive years of profits, as Salcon carried with it the reputation of being a Company with very strong technical expertise (not unlike Hyflux) and could hold its own in international circles. With the high probability of a second-consecutive year of profits for Salcon, this “dream” may yet come to fruition instead of remaining merely a fantasy. With Salcon operating in a tough environment amid stiff competition and tight margins, it may be better for Boustead to eventually divest itself of Salcon and realize some profits and cash; and use these to invest or focus on businesses which yield better margins, cash flows and ROE.

Real-Estate Solutions Division

It was mentioned in Boustead’s press release that the average value of enquiries has decreased even though the volume of enquiries has picked up. This is interesting as it would mean that the deal sizes would be smaller for Boustead Projects, but hopefully these also come with fatter margins (thus far the larger contracts seem to come with thinner margins). It’s actually not such a bad thing to snare numerous projects of smaller size, rather than waiting for one large project but getting worse margins for it. As things stand, Boustead is determined to focus its expertise on design, build and lease projects which are able to garner recurring income (and cash flows). This should bode well for the division in the years to come as it can leverage on its competencies to scale up its recurrent income base.

As for Boustead Infrastructures, it is disappointing to note that there are still teething problems associated with the Al Marj township project in Libya. Negotiations are under way to mitigate the negative impact of the delays and design modifications, but it looks like FF Wong’s foray into Libya may have resulted in more problems than benefits (though to be fair, it was unclear at the time that there would be so many issues). Even FF Wong admitted himself during the recent AGM that Libya was a headache. Hopefully, by 3Q 2011, the persistent problems can be solved amicably and an optimal solution be implemented to address the Group’s risks.

Meanwhile, another interesting development which I am tracking is the Big Box project which Boustead announced with TT International (“TTI”). Since readers can dig up some information on this from SGXNet and Boustead’s announcements, I will not go in depth into the salient details except to say that the Heads of Agreement and Long-Stop Date have both been extended, as TTI had recently been granted a court order to prevent it from being liquidated. This bodes well for the project which is expected to be cash flow positive and very lucrative for both Boustead (which is taking a 60% stake) and TTI (remaining 40%). It shall be very interesting to see how Boustead handles this deal and whether it can be successfully launched.

Geo-Spatial Technology Division

This division, traditionally recognized as the “cash cow” of the Group, has actually begun to grow quite steadily and I admit it was a surprise to learn of the increase in PBT. I guess this can be attributed to the stable nature of their client base consisting mainly of government agencies. Hence, this division is recession-proof as governments are unlikely to decrease spending even in the face of slowdowns or recessions. Looking ahead, I do not expect the same growth rate for this division as evidenced by 1H 2011; instead it will probably moderate back to the 5-10% level which is the long-term average. But as long as the division is raking in good cash flows, I am not complaining.

My next review for Boustead will be after the release of their FY 2011 results some time in May 2011. Until then, unless there are material developments associated with the Company, I will be content to just write about the Company in my monthly portfolio reviews.