Equity Research

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

CDW Holdings

cdwCDW Holding Limited is a Japanese-managed precision components specialist serving the global market focusing on the production and supply of niche precision components for mobile communication equipment, gamebox entertainment equipment, consumer and IT equipment, office equipment and electrical appliances. Being a reliable outsourcing partner with Japanese precision, CDW Holdings has grown from a private trading company in Hong Kong back in 1991 to what it is today.

Before I begin my analysis, all figures are in USD.

Fundamental Analysis:

(I)              Earnings:

cdw_isThe company is split into 3 business divisions, namely LCD Backlight Unit, LCD Parts & Accessories and Office Automation, with the LCD Backlight Unit being their core business segment taking up two-thirds of their revenue. Within their LCD Backlight Unit, it can be further split into two segments – Backlight Units for Handsets (mainly smartphones) and Gamesets (including digital cameras and global positioning systems for automobiles). While their LCD Backlight Unit is their core business segment, the company is focused on the production of backlight units for gamesets compared to handsets.

Over the years, the company has been performing relatively well, keeping gross profit margins consistent yet increasing their net profit margins. This reflects how management has been effectively managing operating expenses through methods such as vertical integration, evident by the recent acquisition of Mt Wuxi. In FY2013, we observe the dip in revenue due to their major customer starting to wind down orders for phased out products. In terms of the LCD Parts & Accessories, we see sales declining by approximately 40%, which is the main reason for the 10% decrease in revenue. The LCD Backlight Unit remained relatively stable due to their major customer releasing new models and maintaining order volumes in 2H2013. While for the Office Automation, their smallest division recorded a 4.1% increase in sales. This is attributable to the company restructuring this division, consulting with their customers, eliminating loss making products and commencing production of higher margin and profitable ones. While gross profits have declined in FY2013, net profits remained relatively stable due to 2 one off gains – disposal of the Suzhou Plant and the USD2mn gain on the acquisition of Mt Wuxi.

(II)              Balance Sheet & Cash Flows:

cdw_bsCDW Holding’s balance sheet is relatively clean with minimal debt, with cash increasing year on year. As of 1Q2014, the company’s cash position has increased to USD64mn, increasing its net cash position to USD55mn, a 2.3% premium over its market capitalization. Given how management has been quite ambiguous regarding who their major client is in their Annual Reports, the cash conversion cycle might be something that we have to pay close attention to. However, as of date, I do not think there is anything to worry about.

(III)              Financial Ratios:

cdw_ratioQualitative Analysis:

(I)              Business:

Gamesets being the company’s key revenue driver is heading downwards and it might not be something temporary given how the technology landscape is changing. From the images on their website, I am assuming that one of their customers would be Nintendo and we all know that Nintendo isn’t the Nintendo of the past anymore. Days where every kid owned a GameBoy or what they call Nintendo 3DS now is no longer relevant today. Today, we see strong competition such as tablets and smartphones taking over the role of gamesets be it in terms of Gaming/Camera/GPS. Looking at Nintendo, not only has their projections been off lately, they have been way off. Nintendo’s prediction of 18mn 3DS handhelds fell short of actual sale of 12.24mn, reflecting the declining of such gaming products.

“We already witness the effects of changing consumer behavior in the technology space. With advances in smartphone technology and increasing consumer preference for smartphones over other handheld devices for gaming, photo-taking and global positioning capability, the demand for gamesets is on the decline…we do not think the reduced orders for gamesets is simply temporary but indicative of a larger, permanent trend,” an abstract from AR2013.

Screen Shot 2014-07-13 at 6.52.07 pmTracking the production of Backlight Units for both Handsets and Gamesets, it is indeed true that the production of gamesets have been on the downtrend, while handsets have been slowly growing. Additionally, it is important to note how production is greatly skewed towards the production of gamesets.

(II)              Economic Moat:

Looking at the consistency in gross margins, I would say that the company enjoys a relatively sizable economic moat. Furthermore, with only a 3% swing between the high and low gross margin values, it is a relatively tight range, showing how the company is able to maintain its relationships with her customers and suppliers.

Furthermore, in terms of production of gamesets, they are a key supplier in the wake of the reduction in number of suppliers, as abstracted from AR2012. While the gamesets are on a downward trend, it is still evident that the company commands a strong economic moat in withstanding competition, economic cycles and maintaining itself.


cdw_valuation cdw_valuation2At the current market price of SGD0.143, which translates to USD0.113 the company is definitely trading at low valuation multiples. With a P/E Ratio of 4.72, EV/EBITDA of -2.12 and normalized FCF yield of 13.6% definitely does indicate that the company is undervalued. Furthermore, if we were to base our calculations of Graham’s version of net-net, the company would fulfil it as well.


CDW Holdings is an undervalued company backed with solid financials and fundamentals. However, the company has not indicated any plans on how they plan to tide through this difficult period, especially how it is not a temporary issue. Putting myself in management shoes, I would start focusing more capital in strengthening my production of backlight units for handset, given the current growth in the smartphone industry. However, I am no expert with regards to this and perhaps it is more complicated than just strengthening their production but difficulty in supplying to companies on the scale of Samsung, Apple and Xiaomi. Given how such key concerns not being addressed, at current prices, it does not offer a wide enough margin of safety for us to invest in it.

Disclosure: The authors have no vested interest in D38.SI

Memtech International


Memtech International is a leading component solutions provider for the mobile phone, consumer digital and automotive industries. Over the recent years, we see the company transforming itself to better suit the changing environment of the technological sector. As of late, the company has two business divisions – keypads and plastics divisions, with major clients from both the mobile communications and automotive industry (e.g. Lenovo, Huawei, Alcatel, GM, VW and Tesla). The company has shut down its loss making touch screen division after the fire incident in 2012.

In this analysis, all figures are in USD and data from FY2004 to FY2007 were obtained from company’s website and not cross-referenced with the annual report. Through research, some of Memtech’s competitors would be Scintronix Corporation, Juken Technology and Fischer Tech all listed on SGX (Juken Technology was delisted in 2012, Scintronix Corporation is in the midst of getting delisted).

Fundamental Analysis:

(I)              Earnings:

Screen Shot 2014-06-15 at 1.57.39 pm

Looking at Memtech’s earnings, we would see how volatile and inconsistent it is, and may immediately strike it out of our consideration. However, to get a better feel of these numbers, we have to understand how the business has been transforming over the years. First off, the huge decline of 48.3% and 95.9% in gross profit margins and net profit margins (NPM) respectively in FY2007 was due to the Global Financial Crisis. During this period, there was much weaker demand during the last two quarters of 2008, resulting in lower selling prices, increases in raw material cost and sales & marketing expenses. Following that, as we see the economy improving, margins begin improving in tandem. Despite markets recovering in FY2011, the blip in NPM was attributable to exchange rate losses.

Subsequently, in the technological sector, 2012 was a year we see increase dominance of the smart phones. If I were to remember correctly, 2012 was the year I witness an increasing number of people around me carrying iPhones. Before, that it was still the good old days of using the indestructible Nokia phones (I remembered using the N95, which to date I still have and it is still workingJ). That aside, to put some figures to this, the global market for mobile phones grew 1.2% on shipments of more than 1.7bn units shipped, of which 712.6mn were smart phones, indicating an increase of 44.1% compared to 2011. Memtech recognizing this trend, made the strategic decision to switch their manufacturing capabilities from that of resistive to capacitive touch screens in 2011 (pretty technical here, however in layman terms, before the touch screens we are so used today, touch screens back then weren’t that smooth scrolling).

Therefore, in FY2012, we see margins declining due to the lower demand for mobile phone keypads (Memtech’s main division). Another point to note would be before FY2013, Memtech never supplied to the automotive and consumer digital sectors but only to the mobile communications sectors. Hence, with the growth in smart phones, we see a huge decline in demand for keypads in the mobile communications sector. We observe revenue contracting by 38.2% and that accounted for two-thirds of their total revenue, showing how the keypad division is Memtech’s main business segment. With regards to the plastics division, it was growing steadily, reporting a 9.5% growth in revenue and 33% rise in net profits. Due to operational issues, the touch screen division reported net losses. While I am no expert in this area, my observation is that Memtech did not have the expertise within this business segment. Given a fire incident in the touch screen factory, management decided to shut down this loss making division. In some ways, this fire might have been a fortunate event for the company and shareholders alike.

In FY2013, with management diversifying their clientele, making inroads to the automotive, industrials & medical and consumer digital products, we see a huge improvement in gross profits. However, in that year, we still net losses due to exchange rate differences. It is my view that management has been pretty successful in this regard, having just started venturing into the automotive industry and been able to bag major clients like GM, VW and Tesla. Furthermore, the increase in gross profits was partially due to their restructuring efforts in FY2012 of their Huzhou operations. Management initiated a restructuring exercise of their keypad division production facilities, transferring their operations in Huzhou to the Dongguan and Nantong plants, consolidating group’s total production capabilities.

Going forward, we see in their 1Q2014 results, revenue was up 30.9%, gross profits up a whopping 292.6% and the company has reported a net profit. Revenue has been up mainly due to the automotive sector resulting in increase in sales figures and the company now offering a better product mix.

Overall, I would say given how volatile the mobile communications is, it has resulted in the volatility in the company’s earnings. However, given how the management has started to get a mix of industries such as exposing themselves to the automotives, consumer digitals and industrials & medical sectors, we should be able to see less of this. However, the major concern for me would be exchange rate differences, as this alone seems to be able to affect the company’s overall profitability.


Comparing Memtech to her competitors, one would observe that in this industry, how inconsistent the gross profit and net profit margins are. While to better understand why the margins are changing every year, we would have to understand how the business has been evolving every year, I did not conduct studies with regards to this.

Some common trends we can observe would be that during the Global Financial Crisis, none of the companies were spared from the decline in demand. However, Memtech fared much better where their decrease in net profits was much lesser. In FY2012, where there was a huge change in demand and increase in raw materials costs, none of the companies were prepared for this, resulting in their net profits decreasing. In this aspect, I would say Memtech fared much better again, due to the smaller decline in net profits and Scintronix Corp having started to discontinue most of their operations. In terms of margins, it can be seen how small the margins are within this industry and is not just something Memtech faces.

Something that Memtech is better than the other companies would be how Fischer Tech and Scintronix faced more than 2 years of negative net profits.

(II)             Balance Sheet & Cash Flows:


As we can see, the company’s cash levels have been constantly fluctuating given the inconsistency in company’s profitability. However, a good point to note would be that management has been paying down their debts over the years, though they did take on a debt of USD10.2mn in FY2011. I deduce that the debt was taken on to finance their increase in capital expenditures as you would see that in these two years, capital expenditures have increased significantly. Furthermore, looking at their footnotes, one would observe that in these two years, additions to leasable land & buildings and plant & equipments was significantly high. In 2011 it was approximately USD15.7mn and 2012 approximately USD9mn. In 1Q2014, we see cash levels increasing to USD44.7mn, which is a definite good sign. While short term loans still remains at USD1.11mn, it is not something the company is unable to handle while long term loans have decreased slightly to USD3.055mn.

Looking at their cash conversion cycle, I have nothing much to comment. Moreover, given how most of their clients are major players in the world, I do not see many problems in that. However, their cash flow is definitely inconsistent. We can see how in some years there is positive free cash flow (FCF), while in some negative. Once again, this is attributable to the business nature of the company. One major thing I would like to add here would be my calculation for FCF. In the past, I have always just taken net cash from operating activities minus capital expenditure. While it does not make a huge difference because the companies I look at mainly have minimal debt, however, it would be quite significant for companies with higher debt levels. In this new calculation, I have excluded the adjustments made for interest expenses and income. The reason being FCF being the money attributable to equity holders, interest expenses should be attributable to debt holders instead of us equity holders.

(III)            Financial Ratios:


Again, I have nothing much to add to the ratios. While the current ratios have started to hit slightly above 3, I feel it is fine and still indicated that Memtech is a healthy business and able to meet short term obligations. ROE and ROA figures have been rocky; however, this is attributable to the rough patches the company has been through.


Compared to Memtech’s competitors, we would observe that on all ratios, Memtech could be considered the better of the three.

Qualitative Analysis:

(I)              Management:

Qualitatively, I find the way management runs the company ideal. Looking back at the balance sheet, one would note that the total outstanding shares have been decreasing every year from FY2008 onwards. There are no data on that for years before 2008 due to me being unable to obtain the ARs. However, if one were to do a backward calculations based on total NAV and NAV per share, we can see that the number of outstanding shares those few years have been fluctuating as well. From some digging, I know the company did raise capital during those periods by issuing new shares and all. Hence, the fluctuation in number of total outstanding shares you would observe if one tries calculating. This decrease in shares is a good sign as the company has constantly been buying back shares, increasing shareholder’s value. Such as in FY2013, we see the company buying back 3 million shares at the price range of SGD0.70. In FY2012 1.5 million shares was bought back and in FY2011 1.7 million shares at the range of SGD0.095 – SGD0.13. This signifies that at this price range, management feels that the company is still trading at price lower than the company’s fair value.

Furthermore, we can see that management is prudent with respect to dividend payouts. When the company is not performing well, management still maintains paying out a dividend but lesser such as in FY2008 and FY2012. However, when the company starts improving again, management would reward shareholders by increasing the dividends paid such as in FY2010, FY2011 and FY2014.

(II)             Economic Moat:

From Memtech’s margins, it can be seen that they do not have much of an economic moat. However, compared to her competitors it can be said the same. In terms of business, Fischer Tech is most similar to that of Memtech. Also, upon further digging, we would observe that the clients that Fischer Tech has are mostly different from that of Memtech. It can be seen despite what may seem to be a lack of economic moat within this industry, the companies do not really have the same clients.


Screen Shot 2014-06-15 at 1.58.14 pm

Screen Shot 2014-06-15 at 1.58.22 pm

At the price of SGD0.09, which translates to USD0.072, based on our usual indicators of P/E, FCF Yield and EV/EBITDA we would be unable to get a true feel of the company. This is because earnings and free cash flow levels have not reverted back to normalized levels. However, one thing to point out would be that Memtech is a pure net-net company. However, this would really be subjective to what net-net formula one uses. Using a more conservative net-net formula, we would derive with a liquidation value of USD0.065.


Having to come to a conclusion, I would say that it took me quite a while. Eliminating Scintronix was easy, even if it were not going to be delisted soon. Qualitatively I had quite a few doubts that I would have eliminated the company without looking into its financials deeper (however, for the purpose of comparison, I still did it). However, for Fischer Tech it was definitely a more difficult case. It was a company whose earnings have normalized yet still trading at cheap valuations – P/E of 3.93x, EV/EBITDA of 2.4x and FCF Yield of 14.1%. If it was just a case of investing in the best of the three, I would not have faced such a headache and it would definitely be Memtech, net-net being the deal breaker. However, what I was pondering about was if I just wanted to accumulate a basket of undervalued stocks, would Fischer Tech make it inside. After close to 2 hours of pondering, I came to the conclusion of no, especially after looking at the 10-year data for Fischer Tech.

To those who do not understand the point of net-net, I would explain it now. Net-net companies are companies that are trading at or below liquidation value. Essentially, no company should be trading at such valuations, and given time, would normalize back to near its NAV. This is because, if we were to do a research on the market, most companies trade near its NAV. One may read up on Ben Graham’s research for more information about this. Assuming we take the more conservative net-net formula, at a price of USD0.072 vis-à-vis the liquidation value of USD0.065, our downside would be we lose 9.72% of our capital. However, our upside is when it normalizes back to near or more than it’s NAV, our returns are approximately 100%. Given how Memtech is now supplying to the automotive sector whose landscape is not changing as quickly as the mobile communications, the probability of the company producing positive results going forward is quite high. With such odds, I would say that the odds are largely in our favor. Honestly, investing is like poker, where we only play our hand if the odds are in our favor.

Disclosure: The authors are long M26.SI

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:

Screen Shot 2014-06-10 at 9.19.09 am

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).

Untitled 2

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

Sinwa Limited


Sinwa Limited, with a history dating back to the 1960s, they are Asia Pacific’s leading marine, offshore supply and logistics company servicing the marine and offshore industry in Singapore, China and Australia. With a network spanning 12 major locations and delivering premium service to more than 100 key ports, they operate on a motto of ‘Right On Time, At Any Time’. It is this solid reputation for reliability that 90% of their revenue is repeat business.

Fundamental Analysis:

(I)              Earnings:


While gross profit margins have remained roughly constant over the years – within a band of 25% to 30%, we can see that the growth in gross profits have fluctuated greatly. Furthermore, looking at their net profit margins (NPM), it has been declining since 2009 and even entering the negative region in 2012. We only see an improvement in the margins from FY2012 to FY2013. In this industry, one thing we have to understand is, chartering is a high margin business while supply is a low margin business. The high NPM in FY2009 is explained by the business split mainly into chartering and supply. The decline is due to the company starting to deviate away from the chartering business and into engineering. As the company continued to reduce their chartering business and increase their engineering business, we observe the company’s profits being affected greatly as engineering was never their expertise. However, in FY2013, we see a recovery due to the CEO changing the direction of the company by divesting all non-core businesses and focusing on their core business which is supply. This also explains the lower margins comparing 2009 and 2013, despite most of the non-core businesses being divested in FY2013. It is my believe that 4.66% is not the normalized NPM level yet as we see margins in the latest quarterly results to be approximately 10%, of which approximately 2% is attributable to the sale of the tugboat. Also, after talking to their IR, it is difficult to ascertain the industry’s average for NPM as most of their competitors are small and non-listed players. Moreover, Sinwa being a market leader in Singapore is well-armed with robust infrastructure. As such, they are able to operate with higher efficiency (cost savings) as well as ability to order in larger bulk (lower cost price from suppliers). This allows Sinwa to enjoy higher margins. Lastly, we see that EPS has been increasing, where EPS in the latest quarter alone was 1.12. However, we have to bear in mind that it was partly due to the sale of the tugboat. Going forward, we should also note another one off improvement in margins and EPS after the settlement of the dispute over the Nordic Vessel.

(II)             Balance Sheet & Cash Flows:


What started out as a net debt company, the new CEO has been able to turn this around and in FY2013 the company is a net cash company. Furthermore, they have been reducing their debt levels ever year, where in FY2012; they have effectively paid off their long term debt. While NAV has decreased, this is not a cause of for concern as it is mainly due to management divesting away its non-core business; hence, a decrease in NAV is not surprising. Furthermore, the company’s cash conversion cycle has always been positive, which is another positive sign. That said, Sinwa’s customers are mainly reputable customers such as Sodexo and BP; further decreasing concerns of probabilities of clients not paying on time, or the need to write off bad debts. Furthermore, given how their business operates on repeat customers, on the perspective of their customers, it would be ideal for them to build up a good working relationship with Sinwa too.

Looking at the company’s cash flows, we can see cash decreasing for several years, attributable to the non-core business burning cash. However, with the change in company’s direction, we see cash levels increasing in FY2013 and a positive Free Cash Flow (FCF). Furthermore, looking at the latest quarterly results, cash levels have increased by approximately another SGD8million. However, the increase in cash is also attributable to one off gains from the disposals of assets from the non-core business.

(III)            Financial Ratios:


Looking at the ratios, there is nothing more that I would like to add. Increasing Current Ratios, decreasing Debt/Equity and LTD/Equity reaching 0 are all positive signs. Furthermore, looking at the Return on Equity and Assets, they have been improving, but once again we have to understand the difference between FY2009 and FY2013 is due to the change in business as explained before.

Qualitative Analysis:

(I)              Understanding the Industry:

Within the ship chandling industry, there are 5 major players that dominate approximately 65% of the Asia Pacific market, with Sinwa being the largest. The other 4 significant players are namely Fuji Trading, Wrist, HMS Group and EMS Seven Seas. Furthermore, within this industry in Singapore, we can observe consolidation of market share by the bigger players as vessel owners start to prefer working with the bigger companies.

Furthermore, with regards to the nature of this industry, it requires companies like Sinwa to be ready at any point in time. To quote Bruce Rann, “As a case in point, just last week, one of Sinwa’s largest clients placed an order worth SGD185,000 and wanted it by 10am the following day. Sinwa filled the order on time”. Evidently, we can see the competitive nature of this industry, where new and smaller entrants would definitely find it difficult to compete with these larger players.

(II)             Key Elements in their Supply Business:

Their clients want guaranteed, timely, and quality supplies and services, which Sinwa is able to provide. This is evident from 90% of their revenue being made up of repeat businesses. Furthermore, their No. 1 client – Sodexo, is a global company and is the largest catering company in the world. As Sodexo continues to grow within the Asia Pacific region, it is definitely advantageous for Sinwa.

(III)            Going Forward:

In growing their bottom-line, they are planning to enter into the Thailand market, where the oil and gas industry is growing. Expectations of the demand for marine, offshore supply and logistical services would outstrip the local supply, hence, making it ideal for Sinwa to grab onto this opportunity. I had my concerns with regards to this, given Thailand’s political situation, and Sinwa’s IR has reflected that the company is still reviewing this and reviewing if their step into Thailand is still feasible. Also, assuming that the company does enter into the Thailand market, we would not expect a huge increase in terms of CAPEX spending, as the company will be resorting to renting until they have entrenched themselves with a steady customer base.

Also, the company has plans on expanding their warehouse so that they are able to directly import chilled food such as Australian meat. By doing so, they are able to cut out the middleman, reduce operating cost and buy in bulk, which would further decrease their operating costs. The company expects to spend SGD10.5 – 11million on building the bigger warehouse, which in my opinion, the company is able to do so comfortably without taking excessive loans.

From this, I feel that management has learnt from their past mistakes and taking more prudent steps going forward in expanding their business.




Looking at Sinwa in terms of P/E, it is definitely not cheap especially based on empirical research on the Singapore market. In terms of EV/EBITDA of 6.44 it can be considered relatively fairly valued. While in terms of FCF yield, it is somewhat undervalued given that it has a FCF yield of 6.7% which is significantly above the benchmarks, even after applying a 33% discount allowing for errors. Lastly, the company is definitely not a net-net based on Graham’s Net Working Capital formula.


At the current price of SGD0.245, Sinwa is not an undervalued company in my opinion. It can be seen that most of the indicators would indicate that Sinwa is probably nearing a fairly valued company at this point in time. Assessing Sinwa qualitatively, it is evident that management has been taking decisive steps in changing the company’s direction, which has proven successful for the time being, bringing the company back into the ‘green’. Going forward, it would really be dependent on how successfully the management ‘steers this ship’, especially if they were to enter the Thai market. Overall, my view is that other than the fact that management has been able to turn the company around it still lacks a fair margin of safety for investors.

Disclosure: The authors has no vested interest in 5CN.SI

ADT Corporation

Have been pretty busy recently to actually post part 2 of New Toyo. However, will post the full analysis done on ADT Corporation first.


ADT Corporation is a provider of electronic security, interactive home and business automation and monitoring services for residences and small businesses in the US and Canada. The company provides home, business and home health solutions and services. It was a spinoff from its parent company Tyco in September 2012, and is the largest home/small business in USA and Canada.

Fundamental Analysis:

(I) Earnings:


While growth of gross profits and net profits have been fluctuating year on year, it is important to note the consistency in gross profit margins and net profit margins at approximately 57% and 12% respectively. Furthermore, EPS has been increasing each year.

(II) Balance Sheet & Cash Flows:


Being a relatively young company, it is still a net debt company. However, given it ability to generate positive FCF of approximately USD 500 million, I do not foresee much issues with its debt. Moreover, most of its debt are long term debt, hence, in the short run, the company only has to settle the debt of USD 3 million. Moreover, if one calculates the LTD/Equity, which can be seen later, it is less than 1. Therefore, with the issue of indebtedness, it is not much of an issue. Looking at the cash conversion cycle, it is positive and the huge difference between trade receivable days and trade payable days is something worth taking note of.

(III) Financial Ratios:


In terms of ratios, we can observe that current ratio has increased quite significantly from FY2011 to FY2012 and stagnated somewhat from FY2012 to FY2013. While Debt/Equity and LTD/Equity has increased over the years, as said previously, I do not foresee much problems going forward given how the company has been able to generate positive FCF and that these figures are still below 1. In terms of ROE and ROA, it has been generally been quite stable.

Qualitative Analysis:

Looking at the company’s revenue, 91% of it comes from recurring income from existing customers. Hence, it is crucial to analysis if the company is able to retain customer loyalty and if they are able to defend this economic moat they have well. Also, in the home security industry, the other top 2 players are Protect America and FrontPoint Security.

(I) Economic Moat:

Looking at a survey done by Bain Capital:


We can seen that ADT Corporation is definitely a brand many US residents are able to relate to and are the first to consider when it comes to home security. Furthermore, what is important to take note of is that there are actually 50% of their customers who did not bother considering any other brands when choosing home security.

(II) Business Analysis:

(II.1) Essentially, when choosing a home security company, what qualities are we actually looking out for?

1) Experience matters – One definitely wants a security company who has the experience in keeping their families safe. It need not be a long track record but rather one that has proved itself efficient and effective over a number of years and comes highly recommended from respected sources.

2) Wireless matters – Wireless is the way going forward. Wireless systems cannot be disarmed with a snip nor are they easy to tamper with. A weak cellular signal, not even a phone line, is needed to operate a wireless security system.

3) Power backup – In an event of a power shortage, we definitely want the alarm to still be live.

(II.2) Now, we will compare the advantages and disadvantages of choosing ADT Corporation as our home security system.


(II.3) Evaluation:

1) Cost – Comparing ADT to other reputable brands , the monthly cost is approximately the same. Picking the other top 2, FrontPoint Security cost $35 – $50. While Protect America cost from $20 – $43.

  • NB: Protect America charges for the number of door and window sensors, meaning that for lower cost packages there will be doors/windows without sensors which defeats the point of a home security system.

2) Complaints – Compared to FrontPoint Security, ADT definitely has failed in this aspect. FrontPoint Security has very few negative complaints. In fact, they have always responded directly to either apologize, or to explain the situation. Only 28 complaints registered by the BBB. Likewise with Protect America, they have only 395 complaints registered with the BBB. All complaints to date have been closed and its important to note that with 130,000 monthly customers that’s 0.003% complaints of their customer base.

3) Wireless – ADT has been pushing their wireless services, trying to mitigate such problems from occurring.

(III) Valuation:


Looking at ADT Corporation in terms of P/E, it is definitely not cheap especially based on empirical research. However, comparing it to the S&P 500 and Industry Average, it is still relatively cheap. In terms of EV/EBITDA, at 5.17 it is definitely cheap in terms of empirical research. While in terms of FCF yield of approximately 8% compared to the US 30Y Treasury or Corporate Bond yielding at approximately 4%, it suggests that there is a 100% upside in price. However, giving a 30% discount for any miscalculations and errors, there is still a 70% upside in price which is a relatively comfortable margin of safety in my opinion.

(IIII) Conclusion:

Looking at ADT Corporation in all aspects, while in terms of fundamentals, it may still not be very strong, however, given that it is a relatively young country, I would not use current results to project what the company would be like 5 or 10 years down the road. Qualitatively, ADT is a household name, with strong consumer penetration within the United States. While it has its fair share of negative complaints, so do other companies. While not trying to defend their mistakes of not resolving issues quickly, with 6.4 million customers, one has to understand that they are unable to provide the kind of personalised feedback like FrontPoint and Protect America. While ADT may be slightly costly, it pays to know that our family is safe. Lastly, in terms of valuations, I would say that with all indicators showing that the company is undervalued, and an upside of 70% after discounting for mistakes and errors, I would say that ADT Corporation is an undervalued company.

Disclosure: The author is long ADT Corporation (USD 28.50). It will not be reflected in my SG holdings, but it is held within my family portfolio. 

New Toyo (Part 1)


New Toyo International Holdings is a leading regional provider of specialty packaging materials with over 30 years of experience. The Group has two core divisions – Specialty Papers Division focusing on production of laminated foil paper, and coated paper and metalised paper, while the Printed Carton and Labels division offers mainly gravure and lithography or offset printing of packaging materials for cigarettes and fast-moving products.

The company has a strong manufacturing base with multiple facilities located strategically across the region, in Singapore, Malaysia, Vietnam, Australia, China and Thailand, to ensure effective support to its customers in Asia Pacific and the Middle East. The Group specialises in high quality packaging products for international tobacco companies as well as government-owned tobacco monopolies. It also serves locally-based companies in the consumer-related industries.

Fundamental Analysis:

(i) Earnings:

Screen Shot 2014-03-09 at 9.47.13 am

In terms of earnings, we can see that the period-on-period growth rates for gross and net profits have been pretty choppy, with no consistency over the years. However, in terms of margins, the company has been pretty consistent, with gross profit margins approximately 16% – 17% and net profit margins averaging around 5% – 6%. Also, EPS has been relatively stable over the years.

(ii) Balance Sheet & Cash Flows:

Screen Shot 2014-03-09 at 10.17.13 am

We can observe that the company has been able to turn around from a net debt to a net cash company, with SGD 25.3million net cash at the end of FY2013. Furthermore, the company has been able to reduce their long term debts from SGD 62million to SGD 6million. Going forward, if the company is able to continue this performance, it would definitely signify long term competitive advantage because the company is so profitable that even expansions or acquisitions are self financed.

One can observe that the growth in revenues had outpaced the growth in receivables in all years except FY2013. Also, the growth is not really aligned, where for certain years, growth in revenue is positive, yet growth in trade receivables is negative. For this, I still have not found any adequate reasoning. Also, in terms of cash conversion cycle, we can observe that is is negative for a number of years which can be dangerous. However, given the company’s clients being renowned, reputable and of good credit standing (e.g. BAT), it mitigates the risk of defaults and the negative figures are not a cause for worry.

In terms of cash flow, it is strong where the company is consistently producing positive free cash flows every year. Furthermore, cash from operating activities net investing and financing activities, is still positive, hence the company has consistently been able to add cash back to its reserves. This is evident from the fact that their cash and cash equivalents has been growing steadily each year to an all time high in FY2013 of SGD 59.9million. However, we have to take note that increase in free cash flow is partly due to the reducing of CAPEX spending, and in the long run this may be worrying as it signifies that the company is not reinvesting in its capital goods.

(iii) Financial Ratios:

Screen Shot 2014-03-09 at 9.53.01 am

Looking at the ratios, the company’s ROE and ROA has not been very consistent. However, in terms of indebtedness, the company has been steadily increasing their current ratio, signifying that the ratio of current assets to liabilities is increasing. Furthermore, in terms of total debt and long term debt to equity, it is under 1 and decreasing every year. This is another indicator of the company being able to manage their debt well. Going forward, with the tapering of QE and increases in interest rate, it is encouraging to see the debt levels of the company decreasing.

In my next post, I would be covering the qualitative aspect of the company.