Author: SC

The Hour Glass

C1 Est. in 1979, THG is one of Asia’s reputable luxury retail groups with 30 boutiques in nine key cities throughout the Asia Pacific Region. THG prides itself as world’s leading cultural retail enterprise. They have been recognised by notable international publications such as Monocle and Vanity Fair as one of the most influential specialty retailers in the world. Furthermore, THG has been accorded the ‘Best Watch Retail’ honours by Singapore Tatler in 2014.

Fundamental Analysis

(I) Earnings: C2

Business Operations

THG operates across several countries – Singapore, Malaysia, Hong Kong, Australia, Thailand and Japan. The bulk of their profits, about 72%, come from their South East Asia and Australia operations. It may seem that THG has minimal reliance on the Chinese spending power, however, their exposure to Chinese mainlanders actually account for about 20% of THG’s sales. We would argue that this key clientele is responsible for THG’s historical performance and it is evident that the past few years have boded well for THG – profit attributable to shareholders increased at a 4-year CAGR of 13.9% while gross margins remained consistently above 20%. Similarly, net profit margins have been very consistent in the last 4 years. This reflects the management success in margin control by keeping operating expenses below 14% of sales.

Driven by Same-Store Growth

From FY2010 to FY2014, overall store count remained unchanged at 32 which indicate that growth has been due to same-store sales growth. We can attribute this to the spending power of Chinese tourists, with Hong Kong, Thailand and Singapore ranking among their top 5 travel destinations. While the THG’s Chinese story has weakened in the past year, exacerbated by the political situation in Thailand, it was offset by the effects of Abenomics, allowing THG to eke out a slight growth in FY2014. Moving forward, recovery in Thailand is a source of growth; THG plans to open another 2 boutiques in Bangkok and 2 Laduree points of sales. Looking at 1Q2015 results, recovery in Thailand has definitely begun, with results from Thailand increasing by 95% quarter on quarter. Unsurprisingly, the primary risk would be a China slowdown.

(II) Balance Sheet & Cash Flows: C3

Efficient Inventory Management

THG has a very high current ratio of 4.9 and cash ratio of approximately 2.9x (more on this later). Some might frown upon such abnormally high current and cash ratios as inefficient cash management. However in the case of THG, we view this as a necessity given the relatively high 3-year average inventory turnover days of 192. This is typical of the luxury watch industry; in fact, companies like Sincere Watches and Cortina have even higher inventory turnover days at 313 and 258 days respectively.

Cash Hoard and Lumpy Cash Flows

We note the lumpy cash flows under Free Cash Flow (2) if we were to consider working capital changes and it is indeed a stark contrast to the FCF before working capital changes. We had 2 primary thoughts on this – one, why is this so? And two, is it a concern? To address the first issue, the disparity is due to large increases in inventory levels from same-store sales growth, as mentioned above. Also, Trade Payables/Trade Receivables has sharply increased from FY2010 to FY2014. What this means is that THG is able to get more favourable credit terms with its suppliers. Now, as per our second concern, is this a serious issue? In some sense, this can   essentially be perceived as a snowballing of liabilities. However, given that this is accompanied by increasing cash reserves, we see little risk in any liability implosion. As growth slows, the disparity between the two FCFs will also decrease. As such, we deem it appropriate to use FCF before working capital changes for our cash flow analysis.

Undervalued Associates

From an asset perspective, there is upside in the valuation of their Thai associates held at SGD8.4m. For FY2014, it had ownership-adjusted profits of SGD2.9m, in spite of the political unrest in Thailand, and based on their recent FY2015 Q1 results, we expect profits to be maintained at this level at the very least. This gives us an ROE of about 34.5%. It is quite likely that their fair value is upwards of SGD8.4m, but of course there is always a question of unlocking value and it is highly improbably that management will be cashing out their stake anytime soon. Therefore, we do not account for any re-valuation but merely view it as a subtle positive note.

(III) Financial Ratios: C4

As a regional company, there is no escaping comparison with its regional competitors, of which only Cortina is Singapore-listed.  The figures above are based on the latest annual reports except for the calculation of FCF-yield which is normalized on a 5-year average. To put it simply, there is no competition – THG triumphs the others by a fair margin. However, readers should be aware that this is a mere face value judgement; more detailed analysis on the other companies might yield new findings.

Qualitative Analysis

(I) Competitive Advantage/Moat:

If we were to be owners of THG, one key question would be ‘How does THG compete?’ What makes THG stand out from the rest? Inventory management aside, the core purpose of a luxury retailer, or any retailer at that, is to attract customers. We opine the following factors in evaluating a retailer’s ability to attract customers:

1) Pricing & Profitability Pricing is typically a key factor in differentiating retailers. However, for luxury goods, this is not so much an issue. In fact, THG increased their average unit retail sale price by 8% and was still able to grow their revenue and NPAT. This is does not mean that profitability is expected to be similar across the board – this is where efficient inventory management comes in in lowering costs. THG stands out in this aspect, as evident by its superior net profit margins. However, higher profitability does not translate to consumer utility when price is relatively inelastic and therefore does not help to attract customers.

2) Number of Stores and Store Locations C7

Prima facie, THG has the third highest number of stores at 32. However, it is always important for us to understand the intricacies behind the numbers as numbers alone can be misleading. For example, 21 of Sincere’s 39 stores are exclusive Franck Muller boutiques which in my opinion, restricts its appeal to a very niche group of customers. And even though Hengdeli has the second largest network of stores, it has an uncomfortably high exposure to the Chinese market. We can see that Sincere, THG and Cortina are equally diverse in terms of geographical market exposure, with all of them highly concentrated in the South-east Asian region. I would say that Sincere actually has the best network of stores but THG and Cortina come a very close second and third respectively. However, if we were to consider the fact that most of Sincere’s stores are Franck Muller boutiques and that it is more exposed to the Chinese market, THG would take the crown in terms of overall store network quality. To conclude, THG does not fair any worse to its competitors in terms of its ability to attract customers. We cannot conclude that THG is superior – firstly, because all of them are very close in terms of store networks and secondly, because higher profitability does not translate to consumer utility when price is relatively inelastic. It would not be wrong to say that THG has no economic moat; they have little capability in retaining customers. In terms of branding, I do not think that Cortina and Sincere are any less reputable than THG. When it comes to luxury watch retailers, the purpose of branding, in my opinion, is to provide a degree of assurance to customers that they will not be buying any fake products. Past that level, there is little marginal benefit to the retailers; ultimately, it is the brands and reputations of watches that count rather than that of the store front. On the flip side, while there is little to differentiate the companies to consumers and there is little moat, we can take comfort in knowing that THG is the one that gets the most out of every dollar in sales.

(II) Industry Outlook According to the WorldWatchReport report released on 26 March 2014:

“Despite a slowdown in sales in Asia, global consumer demand for luxury watches grew by +5.7%. Global demand was fuelled once again by BRIC markets with the highest year-to-year increases in China (+59.4%), Russia (+20.4%) and India (+12.0%) The Chinese luxury market is not dead: Interest in all luxury watch categories continues to escalate, led by Omega, Cartier and Rolex. Though sales at home may have declined, Chinese thirst for luxury watches is not showing any signs of slowdown, according to exclusive data shared for the first time by Baidu, China’s leading search engine, for Digital Luxury Group.”

This is definitely positive news and with 2 new stores in Thailand in the pipeline, THG is well-positioned to leverage on this trend. Nevertheless, the prospect of a Chinese crash is an ever-present overhang which is beyond our expertise to analyse. As such, we adopt a conservative stance and assume zero sales growth moving forward. This assumption will also guide our valuation.


If we were to look at relative valuation, THG would be an easy call to make. However as far as possible, we refrain from relative valuation for if one were to compare less-rotten apples with even more-rotted apples, the less-rotten apples would always seem fresh. In a simpler sense, it could mean that THG is undervalued, or that the rest are overvalued, and we can never be certain of either. Once again, there is no right or wrong and if relative valuation is your cup of tea, by all means stick with it. As a form of absolute valuation, we value THG based on FCF yield which currently stands at 10.7% at a price of SGD1.80. We think that anything above 10% is adequate compensation for the risk of a luxury retailer. Based on a FCF yield of 10%, we will have a target price of SGD1.93.


THG is a solid company with consistent cash flow and a neck above its peers considering its share price. While our target price does not seem to indicate much upside or margin of safety, it was arrived at under conservative assumptions to accommodate for possible downsides in industry outlook.  In fact, anything above 8% FCF yield will not be considered expensive for Mr. Market. THG may not be the blockbuster counter that we all seek, but if you are looking to make your cash work in the meantime, THG will be a suitable candidate.

Disclosure: The authors are long E5P.SI

King Wan Review

We have briefly covered King Wan (KW) previously with a 3Q update. At that time, KTIS has yet to be listed on the Thai Exchange. Fast forward to the present, with the completion of KTIS’s listing and the release of KW FY14 Annual Report, we take this opportunity to revisit our investment in the company. As our thesis was based mainly on asset value, the bulk of our analysis will be as such.

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KTIS Holdings

Upon listing, KW received approximately SGD47.6m worth of shares in KTIS at a listing price of 10 THB each. Taking into account the recent fall in price (9.55THB), KW’s holdings are now worth SGD45.5m, of which SGD21.6m has been recognised in books. Therefore, we have revaluation gains of SGD23.9m.

Vessel Holdings

KW also owns a ‘Supramax’ Bulk carrier held through its 30% owned associate. Gold Hyacinth Development Pte Ltd.  This was originally purchased for USD21m, or approximately SGD26.25m based on an exchange rate of 1.25, during a period when the Baltic Dry Index was floundering near a post-crisis low level of 698. Based on DMG’s report in April, the vessel then commanded a market value of USD28m or SGD35m. Correspondingly, KW’s stake will be worth SGD10.5m, a gain of SGD2.6m. However, do note that the Baltic Dry Index in April was almost twice of its current level.

Dormitory Venture

KW recently ventured into the worker dormitory business via a 19% stake in a consortium. The land (in Tuas) has a lease term of 20 years and is to be developed to a facility with 9200 beds. It is anyone’s guess how much profits this will bring, but based on my research, the average rate for 1 bed will conservatively be around SGD250/month. Assuming an occupation rate of 80%, I expect the facility to generate about SGD4.2m in annual revenue for KW. If we use Centurion’s Holdings 3-year low net profit margin of 15% as a reference, we get estimated profits of SGD0.6m. Assuming a dummy discount rate of 10% (I have no confidence in my WACC calculation), terminal growth of 0%, we value the dormitory holdings at SGD5.5m

Pseudo-Sum-of-Parts Value

Adding all gains, totalling to SGD32m, to the current reported NAV of SGD86.4m, we arrive at a RNAV value of SGD118.4m. Based on the current number of outstanding shares, we therefore have a fair value of about SGD0.34, which is fairly close to its current share price.

Challenging M&E Industry

Due to public displeasure about the amount of foreign workers, the Singapore government has been steadily tweaking its policies to reduce the amount of foreign workers employed by companies. As a mechanical engineering company, KW relies heavily on foreigners for its labour. You can see that we are starting to observe the effects of the policies through the increased labour costs, with gross profit margins falling consistently from 23.8% in 2012 to 14.8% in 2014. While revenue has been increasing steadily, this hasn’t added much to the bottom line. If we discount KTIS’ contribution of SGD7.2m in 2012, net profit has from its core operations have actually been decreasing. In the past, the price afforded a margin of safety sufficient to offset this, but given KW’s share price increase, this is no longer something we can be certain of.  To put things simply, even if KW were to maintain its very impressive top line growth, profits would still be decreasing. To top it off (pun intended), with the slowdown in property markets, I think it would be a challenge for KW to continue its top revenue growth.

Property Developments

Things are not all bad for KW however; our fair value of SGD0.34 has been based on the assumption that we value its operations and its property developments at book value. Through its associates, KW has stakes in a number of properties in Singapore, Taiwan and China which are accounted at book value of SGD2.1m. The properties and their estimated values are as below:

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The estimates are based on average transacted prices from Squarefoot Research multiplied by the net leasable area from the official condo websites, note that these values do not include the cost of development and percentage sold. Unfortunately, we do not have enough information to value the remaining properties in China and Thailand, but I think at book value of SGD2.1m, we are fairly safe from much downside, in light of the fact property sales in Singapore and China have slowed down considerably.


Upon KTIS’s listing and its current share price of SGD0.345, we think that our original thesis (value of KTIS) for KW has already run its due course given our targeted fair value of SGD0.34. Moving forward, we have identified downside risks to its operations, negated by upside potential from its property developments. Potential for future revaluation gains are definitely present, but since we are unable to place an estimate, we refrain from including them in our calculation of fair value to be on the safe side. One thing is clear that the margin of safety is much lower now, with future returns to be more uncertain than before given the volatile nature of KTIS shares and KW’s vessel holdings. Furthermore, given how KW is currently trading at P/E 17.9x, normalised EV/EBITDA 13.1x and normalised FCF yield of 3.23%, we have decided to exit our position in King Wan Corporation. We leave it to each individual to weigh the risks and potential gains based on your risk appetite..

Disclosure: The authors have no vested interest in 554.SI

Why Growth Is Not Always Good

As a value investor, I find the overemphasis on growth to be rather unsettling; it is very common to see analysts place a target price based almost entirely on earnings growth, eking out an unremarkable 5 to 10 percent capital yield gain as a call to buy a particular stock. I am currently reading a book – Value Investing: From Graham to Buffett and Beyond and it raised a very interesting point that growth may not even be necessarily beneficial for shareholders.

Excerpts from the  book

Earnings Power Value

The traditional Graham and Dodd earnings assumptions are (1) that current earnings, properly adjusted, correspond to sustainable levels of cash flow and (2) that this earnings level remains constant for the indefinite future. Under these assumptions, the equation for the earnings power value (EPV) of a company is EPV = Adjusted Earnings x 1/R where R is the current cost of capital.

More importantly, there is an important and close connection between the EPV of a firm and its strategic situation, and the line of connection runs through the reproduction cost of the assets.  The relation between earnings, and hence growth, and the reproduction cost of assets is an aspect not commonly examined by investors.

Three Scenarios of Growth

When we consider economically viable industries, there are three possible scenarios.

In the first, the firm’s EPV may fall substantially below the reproduction value of its assets. In this case, the management is not using the assets to produce the level of earnings that it should. The cure is to make changes in what the management is doing.

In the second, the EPV and the asset value are more or less equal. This is the situation we would expect to see in industries where there are no competitive advantages. The return these companies earn on the capital invested in them just equals the cost of acquiring that capital, and there is nothing left over for the previous investors. Thus, the EPV that equals the asset value defines the intrinsic value of the company, regardless of its growth rate in the future.

In the third situation, if the EPV is significantly higher than reproduction costs of the assets, then we are looking at an industry setting in which there must be strong barriers to entry. Firms within the barriers will earn more on their assets than will firms exposed to the entrant of new competitors in their industries.  For the EPV to hold up, the barriers to entry must be sustainable at the current elvel for the indefinite future.

Difference between EPV and Asset Value

The difference between the EPV and the asset value is the value of the franchise enjoyed by the company in question. Competitive advantages enjoyed by incumbent firms constitute barriers to entry that protect the incumbents from profit-eroding competition. These advantages and barriers are responsible for the firm’s franchise. The defining character of a franchise is that it enables a firm to earn more than it needs to pay for the investments that fund its asset. The EPV is greater than the asset value; the difference between the two, as we said, is the value of the franchise. Therefore, the intrinsic value of a firm is either the reproduction costs of the assets, which should equal the EPV, or those assets plus the competitive advantages of the firm that underlie its franchise.

So when is growth bad?

Under many commonly encountered strategic situations, growth in sales and even growth in earnings add nothing to a firm’s intrinsic value.  As we explained earlier, growth on a level economic playing field creates no value.

Growth in sales that finds its way to net income would seem to imply that there is more money available to investors. But growth generally has to be supported by additional assets, more receivables, more inventories, more plant and equipment. These extra assets that are not offset by higher spontaneous liabilities have to be funded by extra investment, whether from retained earnings, new borrowings, or sales of additional shares. That cuts into the amount of cash that can be distributed and thereby reduces the value of the firm. For firms that are not protected by barriers to entry, the new investment produces returns that are just enough to offset the cost of the net investment, resulting in zero net gain.

When EPV is equal to the replacement value of assets, a $1 million investment for example, should produce an additional $1 million in adjusted earnings. Nothing has been value-added to the amount and as a result, intrinsic value does not increase because it is as good as changing a dollar bill for another dollar bill.  For firms operating at a competitive disadvantage, additional growth will actually destroy value (think of it as paying a dollar for fifty cents).

My 2 cents – what does this mean to an investor?

Whenever I read a book, the chief question that hangs in my mind will inevitably be – how do I apply this to my analysis? To me, a mix of practicality and theory would provide the best value for fundamental analysis (contrast this with the concept of beta). While determination of the replacement value of assets requires several adjustments and calculations which I have yet to cover in my reading, I am apprehensive of the degree of knowledge that us retail investors can gather for an estimate of replacement value.

Nevertheless, the insight put forth by the book does seem valid to me and an alternative method that I am I considering would be to compare the 5-year CAGR of CAPEX/Operating Cash Flow (OCF) against 5-year CAGR of OCF. Capital expenditure is essentially the amount of reinvestment made into the business by the company; when CAPEX/OCF growth exceeds OCF growth it means that every additional of reinvestment is generating less than a dollar of additional cash. The idea here is that if CAPEX/OCF growth significantly exceeds OCF growth, it may be a cause for concern. Be it due to diseconomies of scales or what not, under such a scenario, shareholders would be better off receiving the additional CAPEX as dividends.

In employing such a method, one should also be aware of its limitations in order to make a sound judgement. Firstly, there is might be a time lag between capital expenditure and the benefits of it depending on the nature of capital expenditure. You don’t have to be an Einstein to know that it takes a few years for a factory to be built and using a 5-year CAGR is meant to reduce the impact of timeliness. Secondly, CAPEX only increases supply-side potential. The underlying assumption of using the 5-year CAGR of OCF is that there is sufficient demand in market to meet the increased supply. When there is insufficient demand, it would be difficult to conclude strictly that a dollar of CAPEX yields less than a dollar in cash. Of course, the nature of the lack of demand – cyclical or non-cyclical is important for your judgement. Cyclical falls beyond management control may be short term and do not imply that growth is bad. Non-cyclical ones indicate poor management and more cash should be returned to investors rather than be used for expansion.

To conclude, this episode reminds us that as fundamental analysts, there are boundless opportunities for critical thinking and evaluation, for even something so typified as the quintessential quality of stocks can have another side to it. Who knows what else we have left out?

How to Value Property

As fundamental investors, the art of valuation is our main weapon against the irrationality. In a land-scarce country like Singapore, property holdings are a common and significant source of value, even for companies not in the property business. Today, I would like to share my method of valuing properties. It may not be the most accurate, but as always, the objective here is to broaden perspectives.

I categorise property valuation under two categories – Earnings and Asset Value.  Earnings is derived mainly from rental income while Asset Value refers to the fair value of the land and building if it were sold. At a deeper level, the two are actually converge as you can convert earnings into a pseudo-Asset Value using a DCF or rental yield model.

Before we jump into the nitty gritty of the two categories, there are a few key terms that you should know when it comes to property valuation.

Gross Floor Area (GFA)

When you buy a plot of land, you do not just simply build a one-storey house. By building more than one-storey, you are able to increase the gross floor area even though your land area remains unchanged.

Gross Floor Area ratio (GFA Ratio)

The GFA ratio is simply the ratio of your gross floor area to your land area. The higher the ratio, the greater number of floors you can build for a unit area. Everything held constant, a plot of land with a higher GFA ratio will be worth more than one with a lower GFA ratio. This GFA ratio is set by URA.

Net Lettable Area (NLA)

A building will not be able to rent 100% of its GFA. Out of the entire GFA, some of it would have to be used for common areas like lifts, corridors, toilets etc. Such areas do not earn rental income for landlords. Therefore, adjustments would have to be made to the GFA to obtain the NLA for which rental income would be charged. While the exact adjustment would be hard to determine, I usually apply a discount of about 20% to the GFA, after all, every owner would want to maximise the NLA so I think 20% is a sufficiently conservative amount.

Now we move on to the actual valuation in terms of Earnings and Asset Value which are actually very similar.

1. Determine land area

If it is a new acquisition, this will be disclosed in the announcements. Otherwise, you can find the information in the notes of Annual Reports.

2. Find the gross floor area

To do this, you first need to know the GFA area. This information can be obtained from URA’s Master Plan. Simply search for the address of the land and it will zoom in and display its corresponding GFA ratio. Once you have that figure its simple arithmetic to find the GFA. Make the necessary adjustments and you would have your NLA.


3. Average rental/price per unit area

This is usually the most challenging and the most critical part of the research. My general principle is to base it on recent transactions in the vicinity (the nearer the better).  To find such information, you can use sites like propertyguru or commercialguru which property owners use to advertise their properties for sale or rent. While this isn’t exactly a recent transaction, it does give a flavour to what the market rate is for properties in the area. However, one disadvantage is that new property launches may not use such platforms for their marketing so you may not be able to find timely information in such scenarios. There are ways around this; if you are loaded (the subscription fee isn’t cheap) you can subscribe to URA’s REALIS where you will be able to find records of all recent transactions.  Squarefoot Research is a much cheaper alternative – the free account provides sufficient information about transaction prices and there’s always the option of a paid subscription. I’m not paid to advertise for them by the way.


Depending on the situation, choose the appropriate valuation method based either on rental or sale price, multiply it by the net lettable area and you will arrive at your final figure. The method of valuation depends largely on management intention – do they intend to dispose of the property to unlock shareholder value or to retain it as a source of income? In scenario A, if the company owns the land and is sitting on the premises as an office or factory space, asset value would be the way to go. In scenario B, if it is redeveloping a land and intend to rent the units out as an additional source of income, I would go with earnings.

It seems pretty straightforward at this point but it won’t always be that easy. When it comes to Asset Value, the valuation described above is based on Sale Price x Net Lettable Area.  There are times where the sale price is for per land area rather than per net lettable area depending on where you get the information from, therefore caution would have to be exercised in multiplying by the correct denominator.  In any case, I think using either would be fine as value from building (net lettable area) and land (land area) are mutually exclusive since they are just linked by the GFA ratio (for a large part).

I would like to end with a warning against converting asset value to earnings for example, in the case where a company (like a property developer) develops a condo and sells the units. Upon conversion, asset value becomes merely a top line in your income statement, so remember to account for margins.

Sinarmas Land – Lessons on Consolidation

I’ve been having the hardest of times piecing together an analysis on Sinarmas Land. Unfortunately, I am unable to overcome my various apprehensions and doubts about the company to produce a complete analysis. This is solely due to my (lack of) depth of knowledge; it certainly does not reflect anything negative about the company but through the course of my attempted analysis, I did learn a few vital lessons which I would like to share.

I’ll start by what analysis I have of the company and draw out the lessons from there.

Sinarmas Land


Sinarmas Land Limited is engaged in the property business through its operations in Indonesia, China, Malaysia and Singapore. It combines two big developers: Bumi Serpong Damai Tbk (BDSE) and Duta Pertiwi Tbk (DUTI) that are both listed on the Indonesian stock exchange.

Fundamental Analysis:

BDSE and DUTI comprise a large part of the Sinarmas entity. We focus our attention first on determining a fair value for these two subsidiaries.

As of 16/5/2014 and assuming an exchange rate of 0.0011, BSDE has a market capitalisation of SGD3232.8m and is 49.87% owned by Sinarmas. Similarly, DUTI has a market capitalisation of 402.2SGDm and is 44.16% owned by Sinarmas. Using an equity weighted approach, they constitute a market value of SGD1789.8m in total. This actually exceeds Sinarmas’ current market capitalisation of SGD1719m. Considering that Sinarmas has substantial assets besides the two, it seems that the counter is severely undervalued, at face value. It is certainly tempting to conclude as such, but if we do believe that price will converge to its true value in the long term, then the risk in such a conclusion would be that the true value of BDSE and DUTI is actually less than it currently is. We therefore have to ascertain the fair value of BDSE and DUTI, i.e. are they currently overpriced?

A quick snapshot of the Balance Sheet of the 3 companies:

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BDSE – Market cap of SGD3232.8m vs equity of SGD1475.7m.

Paying 2.19x BV is very steep for a developer; most developers in the Singapore market trade below book value. From a value perspective, the only reason to do such a thing would be if the RNAV is significantly higher. Personally, I feel that a price of 0.8-1.0 times of RNAV would be a comfortable range for a fair value. In this case, this would require the RNAV to be at least double of BDSE’s current BV. Typically, the bulk of asset revaluation lies in a company’s non-current asset which, for BDSE, comprises largely of its Land for Development account.


Unfortunately, imperfect information is often a bane of retail investors and particularly so when it comes to dealing with foreign companies.  The only information I could get out my secondary research in terms of market pricing was the news about BDSE selling up to 95 hectares of land for RP 2 trillion to joint ventures. This translates to RP 2,105,263 per sqm of land in BSD City versus RP 120,221 per sqm (amount divided by land area) in the book. That’s 20 times more.

This is where I ran into my first roadblock. If you choose to believe such reasoning, this counter would be severely undervalued. However, looking at the historical values of the various lands in the account, I notice that the amounts have been revised even when the land area has remained the same. This points to the likelihood that the book value is actually revised yearly which contradicts the purpose of our revaluation exercise and this is only the tip of the iceberg.  My next roadblock is due to the consolidation of subsidiaries and it provided me with the most important revelation I have had in a long time.

Pitfalls of Consolidation

Based on common accounting practices, a parent company is required to consolidate its reports with its subsidiaries. This is why there is often a ‘Profits due to non-controlling interests’ line in the income statement. While most would only focus at the bottom number, this is something you should adjust for (or I would anyway).

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As can be seen in Sinarmas’ case, there is a substantial difference between both numbers which will drastically affect your valuations.

In terms of balance sheet at the parent level, the balance sheet of the subsidiaries is always fully consolidated, regardless of the percentage of ownership by the parent. The rationale is that as long as a parent has a majority stake, it will have full control over the subsidiary’s assets. We investors should know better that this does not equate to full ownership over all of the subsidiary’s assets, therefore, adjustments would have to be made to reflect the percentage of ownership.

Sharp-eyed readers will notice that the sum of BDSE’s and DUTI’s accounts exceeds that of Sinarmas which might seem to refute the point I just made. For example, total current asset for BDSE and DUTI is around SGD1700m vs Sinarmas SGD1300m. This is because when consolidation is done by the parent, adjustments are made to remove intra-group transactions; you cannot earn money by selling to yourself. Therefore, the equity value of a parent should always be less than the sum of its subsidiary’s book value, assuming they are not fully owned and that there are not other assets owned by the parent company. The same concept applies when calculating fair value.

To deal with this, common practise is to apply a holding company’s discount of 20-30%. A better method would be to subtract the value of the company’s books from the group’s (for the various accounts), and then compare this value to the sum of the subsidaries’ books to approximate the percentage discount, but that’s only if they are listed. Caution will also have to be exercised when valuing the ‘Associated Companies’ account of the parent because there might not be a conspicuous distinction between associates of subsidiaries and associates of the parent company. If you are not careful, you might end up valuing the same entity twice.

It gets more complicated when it comes to the cash flow statement because cash flow statements are always consolidated at a group level and is unadjusted for subsidiary contributions. If the subsidiaries were all from similar industries, we might be able to assume that their cost make-up are similar (same percentage of depreciation etc.), then we can adjust the cash flows based on a percentage of ownership basis as well. Nevertheless, it is still a rather stretched assumption because the sizes of the subsidiaries may still differ. It’s even worse when the subsidiaries are in vastly different industries, and unfortunately in this instance I do not have the slightest clue. I admit this is an area I have yet to seriously contemplate but it is definitely something I will explore deeper so till then, all that I have said about cash flow statement might be just gibberish.

The implications are dire and clear; how often have we taken a group-level cash flow value to calculate free cash flow? And when we did that, did we even consider the degree of subsidiary contribution? For parents with fully owned subsidiaries, we would have dodged a bullet. But for companies like Sinarmas which considers 49.87% and 44.16% owned companies as subsidiaries, the difference would be far, far too huge.

With that and after so much deliberation on how to analyse Sinarmas Land, I suddenly recall a very wise man’s analogy about baseball and investing.

“What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want.”

Disclosure: The authors have no vested interest in A26.SI

Convictions Paying Off

(Posted on behalf of TL)

Currently interning in Shanghai in a real estate PE firm, hence, my posts have been pretty lagged, for that I apologise. However, it is due to my workload and China blocking most social sites. I find my work quite satisfying – surveying potential sites, researching on its potential, preparing investment pitches, doing research reports on the Shanghai property market etc. Only ‘miserable’ part being in Shanghai would probably be the unstable wifi connection I am having in my apartment, inability to constantly access the usual social sites (stuff we have pretty much taken for granted) and lack of friends. That said, after a while, I am pretty much getting used to not going online checking Facebook anymore. I guess in someways, without these social media, life goes on as per normal. However, blocking all my news sites like Bloomberg is definitely getting on my nerves.

Anyway, main purpose for uploading this post is really kudos to us all who remained invested in King Wan Corporation! Just saw the Annual Report, well have not really analysed the financials but management has declared a 1.5c dividend, an increase of 0.5c. 🙂 Will probably upload my research report on the Shanghai Office Market after I’m done with it.

Disclosure: The author is long King Wan Corporation


(Posted on behalf of TL)

Sorry for the long hiatus. Previously, I was busy with exams and after exams my schedule had been pretty tight – rushing back to Singapore, packing for my internship in Shanghai and all. That said, over the past month or so, I have been meaning to blog about convictions.

Believe many of us have bought a stock and had our convictions tested when faced with some adverse news. Even I, despite all the research I have done in a stock, my convictions would be tested from time to time. Looking at King Wan Corporation, after the stock had rallied to 34c in May 2013 and started dropping till 25c in March this year, my average buy price excluding dividends collected. I started having thoughts about selling the stock in fear of it dropping further given that the Thailand economic conditions did not seem to be getting better.


For the case of King Wan, it was much easier to remain calm as it was just a case of economic climate in Thailand, and not some news regarding the fundamentals of the company shifting. In another scenario, I was invested in Quindell (QPP.L), a stock listed in the London Stock Exchange. Basically, the huge drop in the price was due to a research report done by an independent blogger – Gotham City Research (GCR) claiming that Quindell has conducted fraud. Looking at all the evidence in front of me – GCR’s past track record in profiting from such scenarios (see BLINX) etc., I decided to do some ‘smart speculation’ and buy into the company at 26 GBp. Being my first time entering the London market, the whole experience was very new to me. I was flooded with news from FT, Motley Fools and a whole range of other news agencies, something we don’t see in Singapore where counters do not get such huge coverage especially those in the catalyst market. Secondly, people are able to short the stocks in London, hence, we see QPP under huge shorting pressures, which actually brought the price down to approximately 18 GBp. To be honest, my conviction this time was really tested especially with all the negative news, some of which I could not ascertain if it were true. Furthermore, despite the huge director buybacks, this did little to help push up the price.


To cut to the chase, I would like to just say that when faced with such scenarios, I always go back to the basics. I start from ground zero again, looking at all the information I have for my initial purchase of the company. Only in the event that something has changed for the worse, where the company’s fundamentals has changed would I decide it is time to cut losses. Hence, the reason for my second buy-in for QPP, averaging my buy price down. While it is still too early to start celebrating, however, I remain quite optimistic and we slowly start seeing the share price climbing back up after the dust has settled.

“Be Fearful When Others Are Greedy, Greedy When Others Are Fearful”

 Disclosure: The author is long QPP.L and 554.SI