The Little Snowball - Personal Finance | Investing
The Little Snowball (TLS) is a Financial Education provider that seeks to educate and empower individuals to take charge of their finances. They believe that with the right knowledge and temperament, investing can be a highly profitable venture with relatively low risk.
First introduced in July 2017, I felt that DLC hasn’t been well understood by the market for its use and purpose other than being perceived as yet another leveraged product to stay away from. Leveraged products need not be risky when controlled properly and used appropriately. It’s actually an opportunity for retail investors to act and benefit like a hedge fund.
What is DLC and How It Works?
DLCs are listed on SGX like a stock, and they are also traded like a stock. If you have a stock broker account that can trade say any single stock share, you can use the same broker account to trade DLC too. Unlike some other leveraged investment products, there are no margin requirement for DLCs.
The idea of hedging by retail investor is almost unheard of, and some people don’t want to go through the hassle of setting up a CFD trading account to take short positions in the market. While DLCs can be used for speculative purposes, I primarily want to explore the idea of using DLCs to hedge a long-only portfolio which I feel is more applicable to retail investors.
Long-only retail investors are now given the unique opportunity to at a fraction of the cost, leverage up and hedge their positions in times of short-term market downturn. It comes in different leverage levels (3x,5x,7x), both short and long.
For the purpose of discussion, I will address only a short DLC and how it can be used for hedging to protect one’s portfolio in times of market uncertainty when there’s a downside bias.
There are a total of 64 DLCs available in the market at the time of writing. Keeping to the focus of hedging a long-only portfolio, I’m only interested at DLCs concerning MSCI Singapore Index which I take to be hedging away market risk. For simplicity sake, I’ll assume that it’s a Singapore-only portfolio.
For example, you own a portfolio of shares worth $70,000. To mitigate market downside from shocks, you may consider buying a DLC SG7xShortMSGxxxxxx worth $10,000 to give your portfolio a net exposure of zero. In a market downturn, if you want to keep your positions without having to sell them out, hedging with a product like DLC can be a very useful tool to ride out short-term volatilities in the market.
While the long positions of individual stocks in the portfolio may experience loss in a market selldown, the DLC would offset the losses with a gain that should somewhat match the size of your long positions, hedging away the market risks in your portfolio. With a fully-hedged and well-diversified portfolio, theoretically, any outperformance is a result of company-specific reasons which generated excess returns (‘alpha’).
With DLC introduced, we no longer have to sit and ride out the market volatility, watching our portfolio taking a beating each day. Instead, we can now take ownership of protecting our portfolio with tools like DLCs.
Some examples I could think of to consider hedging with a short DLC:
Taking a 3-5 day vacation, wanting to put your mind away from the markets
Black swan event happening elsewhere that you expect it to spread to Asia markets
In anticipation of big news happening in the US when Asia markets are closed
There are many more ways to use DLCs to protect and enhance portfolio returns that have not been discussed. Alternative strategies could involve partial hedging or using them like modified options (straddle/collar/etc.).
Overall, I think that the introduction of DLCs is a good thing for investors. It reduces the hassle of having to set-up a separate CFD account to go short and opens up the option for investors to hedge their portfolio or take speculative positions other than for the purpose of hedging.
There is currently a DLC competition organised by UOB Kay Hian to introduce and let investors try their hands on DLC without putting their money at risk. It’s a great opportunity to experience first-hand how DLCs could work for you or test out any of the strategies mentioned that you may want to apply to your own portfolio.
This is a sponsored post. Any opinions are purely the writer’s view and should not be acted upon without due diligence. DLCs are leveraged products that require thorough understanding before employing them.
Writing an essay may be monotonous function. This is among the main facets of article creating. You will need to apply writing essay strategies. Whenever you’re completed with composing your essay then you are going to write your reference site. Today, to help you to comprehend the range of innovation that autobiographical writing provides us, let’s notice the myriad kinds of autobiographies which exist. Granted, you can make a completely new chain of blunders, but that’s to be expected particularly if that is your 1st time writing a specific sort of composition. There’s writing applications available which helps freelance writers to become more effective and may help you save a lot of hours of valuable time. It really is an instructive form of writing, and is usually found in textbooks, magazines, newspapers, in addition to the Net.
I have not been unlucky to enjoy people i respect, sometimes their praise’s service.
The very first thing you should note is there are different types of essays. There are plenty of various article arrangements. Nonetheless, you will find all these sorts of posts that need different kinds of formats. This article is well-known in research and history courses. In case the composition is incorrectly formatted and edited, you’ll have a lousy standing by way of your pupil customers. When contemplating various types of essays you have to take note that merely what the assignment is about. Publishers adore quite a couple of subjects and different post formats due to their readerships.
Brassington employs imagery that tips at motivation that is complicated and taboos.
When you’re inputting the article that you want to be sure that you double space each line through the complete composition, for instance, title page and reference page. The kind of essay you decide on will be contingent upon your duty as well as your topic. Second, you need to type the letter by minding the structure. Needless to say, 1 option to rapidly understand what’s needed for the type of essay you had been requested to compose may be to acquire some type of test composition writing to utilize as helpful tips. When mentioning a publication, be sure you handle the exact same fashion along with format through the whole perform. The opening, body and conclusion could be the normal writing format for just about any group of article, if you are going to follow this easy structure you’re definitely going to find yourself with a superb criminal justice essay. The initial structure is utilized for records comprised within the writing. What is more, In addition, there are a few common abilities required for the article format.
Make your apology legitimate when you possibly can and admit what you did.
A comparative composition is utilized to examine best essay writing service 2019 two notions or concepts. There are several types of essays which can be used within the current millennium. While you can compose practically any kind of essay for virtually any subject, your teacher may desire a particular approach. Be a successful article writer. Chancing upon a topic which you might be already comfortable with is always recommended, because this will make it much easier to write your essay. They may be but a amazing concept for short article writing assignments. The first thing you ought to be clear about before you begin your composition is the form of article you are going to be composing. Students, who can effectively write an appropriate argumentative composition, reveal that they’re not only good authors, but in addition good critical thinkers.
I’ve had the opportunity to meet up with the IR team of HC Surgical Specialist (HCSS) awhile back and thought it was an interesting company that could be worth looking into deeper given the recent Singapore budget with heightened emphasis on the elderly population and increased healthcare awareness.
HC Surgical Specialists Limited (Catalist:1B1) is an investment holding company which provides medical services primarily in Singapore. The company was incorporated in 2015, operates 16 clinics, and is based in Singapore. HCSS was founded by Dr Heah Sieu Min and Dr Chia Kok Hoong, who both have over 20 years of experience each. Today, HCSS has 6 specialists (See: Specialist Team) and 5 GPs (See: GPs) and continues to grow the team.
HCSS’ vision is to build an organization dedicated to making private healthcare accessible to the broadest consumer base possible. This is made possible by through Medisave and by expanding into the heartlands.
It offers endoscopic procedures, including gastroscopies and colonoscopies; and general surgery services with a focus on colorectal procedures in a network of clinics.
The company also offers treatment services for other conditions, such as haemorrhoids, anal abscesses, anal fissures, anal fistula, gallstones and inflammation of the gallbladder, hernias, colorectal cancer, stomach cancer, colonic diverticular disease, and cysts and lipomas; and vein laser vascular, laparoscopy, and other general and specialized medical services.
In addition, it provides home care, such as nursing, physiotherapy, speech therapy, occupational therapy, and ambulance services; and general consultation and diagnostic services, including blood tests, X-Rays, ultrasound, CT Scans, and MRIs.
Young “Superstar Doctors”
1. Medisave Accreditation
With Medisave Accreditation, HCSS is able to encourage patients to visit private clinics instead of public hospitals as a portion of the cost is deducted from medisave account. Apart from that, private clinics typically have shorter waiting times than public hospitals. For reference, hospital waiting time can go up to 7h when a hospital faces an influx of patients.
Median Hospital Waiting Time (~2h)
Clinics are located across Singapore, in both central and residential areas, including the heartland neighbourhoods that are close to public transportation. This allows HCSS to shorten the waiting period for appointments relative to hospitals or public medical institutions, enhancing its ability to provide timely quality healthcare and treatment to patients. They’ve grown from 7 clinics in 2016 to 16 clinics today, expanding outwards from the central areas (marked by orange pins).
Growth strategy has been clearly outlined – Growth through acquisition
3. Young “Superstar Doctors”
HCSS differs largely in its approach towards the acquisition of specialists onboard its team. HCSS aims to identify undervalued “superstar” doctors who are young at an early stage by supporting their growth through the setting up of their clinic to patient referrals. Rather than wait for these doctors to really have established themselves before acquiring them, HCSS brings these doctors into its eco-system early in the specialists’ journey and at a relatively lower acquisition cost for controlling stake. Considerations range from S$0.4m-2.2m for a 51%-100% stake in the young specialists.
Incentivising the young specialists, HCSS offers these specialists exit opportunities at 10x P/E in the 4th-5th year for the remaining 49% stake. This motivates the young specialists to work harder to achieve a higher EPS by Year 5 to exit the business, while HCSS benefits from the heightened profits.
HCSS acquired 49% of Medinex (SGX: OTX) in 2017. Medinex is a B2B service provider supporting private specialist clinics in overseeing the setting up of clinics, facilitating applications for relevant clinic licences, providing business support services and helping in the procurement of medical and pharmaceutical products. Outside of the healthcare industry, Medinex also offers business support services such as accounting and tax agent services.
HCSS as a medical support platform providing backend operational support and patient referrals takes the burden off the doctors in HCSS’ eco-system as they are able to focus on performing surgeries without the hassle of handling administrative matters.
HCSS’ strategy of growth through acquisition, for now, appears successful as revenue continues to grow rapidly. Margins still look healthy for now despite having come down significantly. The growth in revenue supports the margin compression as net income remains relatively stable while they expand.
With a net cash position, suggests there’s still runway for further acquisitions in the near future, fueling the growth of the business.
LTM Gross Margin %
LTM EBITDA Margin %
LTM EBIT Margin %
LTM Net Income Margin %
Raffles Medical Group Ltd (SGX:BSL)
HC Surgical Specialists Limited (Catalist:1B1)
Looking into Healthcare, RMG comes in mind. Comparing against RMG, HCSS has better margins primarily due to staff cost. RMG’s staff cost as a % of revenue stands at 50% while HCSS is at 35%. Played around with the numbers a little, if RMG was able to operate at HCSS’ efficiency, that translates to ~60m [(35%*Revenue)*(1-17%)] after tax in savings or 3.4 cents EPS (FY2018 EPS was 3.98c), almost doubling.
However, RMG is a much larger company owning hospitals which require much more staff performing other functions as well as higher depreciation expenses, unlike HCSS which doesn’t own an entire building like RMG. It would be interesting to see if HCSS can scale up without too much margin compression to compete effectively in the future to trade at similar valuations as RMG.
Expansion beyond Endoscopic Services
With the establishment as a successful medical support platform, HCSS can begin to scale across specialities, opening doors to increased streams of income once the growth in endoscopic services slows down. A diversified speciality works in the favour of HCSS as it can look out for more “superstar doctors” in other fields.
Inability to add new Specialists
HCSS is in the business of investing in young “Superstar Doctors”. Think of it as like a VC firm, where many of them can go nowhere and one unicorn is all it takes to reverse all the bad investments. The good thing is that risk is mitigated through low acquisition price of the specialists and there isn’t cash burn like a start-up. Understanding that there’s a potential to look beyond endoscopic services, this risk doesn’t appear to be significant.
2. Key man risk
Key man risk was a major concern when HCSS first listed as revenue was largely contributed by Dr Heah, Dr Chia only. Three years down the road, key man risk has decreased significantly since IPO in 2016 as Dr Charles Tan, Dr Lai and Dr Ong join the team along with the contributions from Medinex. Going forward, key man risk is a diminishing concern as more acquisitions takes place to diversify the contributions from the various specialists.
Overall, I think the eco-system HCSS is building up is interesting and is worth watching out for more developments in the business in the near future. The key things to watch out for are HCSS’ acquisition activities, margin compressions and branching out beyond endoscopic services.
Final dividend increased 6x to S$0.03 (FY17: S$0.005)
Special dividend of S$0.015 declared (FY17: NIL)
Total dividends payable on 24 May 2019 = S$0.045 (19% yield)
Normal dividends adequately covered by the group’s free cash flow
Potentially a sustainable 16% dividend yield play
Zero Growth Dividend Discount Model projects a target price of S$0.38 (Cost of Equity = 7.8%)
Avarga announced its FY18 results on 23 Feb after market hours. While its results were nothing to shout about, what was interesting was the dramatic change in the firm’s payout policy. The company increased its final dividend by 6x from 0.5 cents to 3 cents. Based on the current share price of S$0.235, this represents a yield of 12.8%. In addition, a 1.5 cent special dividend was declared due to the successful divestment of the group’s Tuas property for S$18.6m. With total shares outstanding of approx. 944.032m, this meant that almost all of the proceeds from the divestment is returned to shareholders. If we include the special dividends, total dividends payable on 24 May 2019 is 4.5 cents or a 19% yield.
Source: Avarga 4Q18 Results, p.15
Source: Avarga 4Q18 Results, p.16
Source: Avarga 4Q18 Results, p.17
Sustainability of Dividend
While the bump in dividends came as a surprise (as seen in the price gap up), what is paramount is the sustainability of the normal dividends (3 cents). Should it be sustainable and management adopt 3 cents per annum as the new dividend policy (previously 1 cent per annum), we could see Avarga being the highest yielding (16%) counter listed on the SGX. I got 16% by calculating the theoretical ex-div price of S$0.19 (= S$0.235 – S$0.045) compared with the 3 cents final dividend.
I did a back-of-the-envelope calculation of the free cash flow available to shareholders of Avarga for FY18 as shown below. Note that Taiga is at least 65.1% owned by Avarga (Taiga has been buying back shares), so I had to make adjustments in the consolidated statement of cash flows of Avarga. Assuming C$/S$ = 1.03.
After making some adjustments, I ended up with S$36.58m in free cash flow available to shareholders of Avarga. With 944.032m shares outstanding, a 3 cent cash dividend would require S$28.32m. This appears sustainable given its dividend commitment represents 77% of Avarga’s adjusted free cash flow available for shareholders (viewed another way, a cash buffer of S$8.26m).
The assumptions here are that Avarga can at least maintain its current level of profitability and cash flow generation, as well as the C$/S$ pair being stable (a strong C$ bodes well for Taiga and vice versa).
Zero-Growth Dividend Discount Model
Avarga’s cost of equity according to Bloomberg is 7.8%. Assuming zero-growth in dividends, the dividend discount model projects a target price of S$0.385, representing an upside of 64%. Even if we use a higher cost of equity of 10%, the implied target price turns out to be S$0.30, representing an upside of 28%.
I like that Avarga’s management is changing its payout policy to return more excess cash to its shareholders. We should see a gradual re-rating in Avarga driven by yield-seeking investors should management decide to formally adopt a 3 cent dividend policy or continue paying a 3 cent final dividend per annum in the future. In the meantime, patient shareholders can expect to receive generous dividends.
Thank you for reading.
Disclaimer: I am vested.
History of Increasing Dividends
Avarga has been consistently paying dividends since 2011 with periodic increases over the years. Note that the dividends computed by Shareinvestor for Dec 2018 should be 3 cents instead of the 2.5 cents shown. Also, it should have displayed the Special Dividend of 1.5 cents. This means that the full year yield should have been 21.3% (0.5+3+1.5) instead of 12.766%.
Recent Share Buybacks Provide Support Level
Avarga was conducting share buybacks frequently between Oct-Nov 2018 at prices between S$0.198-0.220. This suggests that management deem such price levels to be undervalued. Investors, on the other hand, could view this as a support level.
The recent 40+% sell-down of Sunpower caught my attention as it has always been on my watchlist due to its strategic positioning in the “Green” China economy. Upon further research, it seems that the event-driven selldown had nothing to do with the fundamentals of the company, which in fact were improving (increasing order book size, earnings, and operating cash flows). In order to keep this post brief, I have attached useful sources below that goes into detail the long-term investment merits of Sunpower as well as the recent events that transpired.
The Event – America 2030 Capital
In summary, Guo Hongxin (Founder & Executive Chairman) and Ma Ming (Executive Director), made personal loans by collateralizing their Sunpower shares (approx 1.89% of Sunpower’s total issued shares). The lender is America 2030 Capital. However, the collateral was allegedly forfeited as they had breached terms in the loan contract (this is currently being disputed between borrower and lender). Hence, America 2030 Capital took control of the collateralized Sunpower shares and supposedly sold in the open market, which caused the sell down.
Guo and Ma then obtained an interim injunction to prevent America 2030 “from selling or otherwise dealing in company shares which were used as collateral for personal loans”. They also “lodged a report with the Commercial Affairs Department of the Singapore Police Force over the loan agreement with America 2030”.
Guo and Ma also “begun legal proceedings in the Supreme Court of Singapore to seek the return of the collateral shares“.
From what I can see and what Sunpower has announced, this entire fiasco has nothing to do with Sunpower as a going concern. 2 months ago, Sunpower’s market cap was $383.6m ($0.52 per shares), today it is $221.3m ($0.30 per share), a decline of 42.3%.
I believe Sunpower Sunpower has been unfairly punished and is currently trading at compelling valuations. There are 3 share price catalysts that should send Sunpower higher.
The adoption and renewal of the share buyback mandate are usually held during a company’s AGM day. To call an EGM so urgently just to adopt a share buy-back mandate signals to me that the management is also of the view that the company’s stock is undervalued. The share buyback mandate, which will most likely be approved, will enable Sunpower to commence open market purchases on or after 28 December 2018. This should provide some form of price support.
Sunpower’s earnings are seasonal with the majority of earnings coming in 4Q. Management is of the view that Sunpower’s 4Q18 will be stellar considering:
Quanjiao and Lianshui projects will continue to secure new customers driven by the closure of small “dirty” boilers
Full-quarter electricity revenue contribution by the Changrun Project
Additional revenue from providing heating during winter by Xinguan Plant
Full quarterly contributions from Yongxing Plant (acquired in Sep 2018), which will benefit from higher seasonal activities in 4Q
M&S segment expected to benefit from a record order book of RMB2.2b and usually higher deliveries of work-in-progress products in Q4.
I am forecasting 4Q18 PATMI (excl. CB effects) of RMB100m which translates to FY18 PATMI (excl. CB effects) of RMB220m, which is below the forecasts of UOB Kay Hian and Lim and Tan (RMB250m). This means that Sunpower is currently trading at only 5x FY18F P/E (4.4x if we use RMB250m) despite its multi-year growth profile.
My personal arbitrary short-term (<1 year) target price for Sunpower is $0.45, representing 50% upside, implying a 7.5x FY18F P/E.
Share Price Catalyst #3 – Outcome of legal proceedings between Guo & Ma v America 2030 (Date uncertain)
There are 2 possible scenarios, either Guo & Ma wins the lawsuit or America 2030 does. In the latter event, nothing exciting happens. However, in the event Guo & Ma wins, there could potentially be a short squeeze scenario as America 2030 would have to either buy up shares in the open market or purchase them from a substantial shareholder at a premium, both of which would be a positive catalyst for the stock.
Sunpower has 2 business units, namely Manufacturing & Services (M&S) and Green Investment (GI). Both business units are seeing robust growth in terms of order book size and project pipeline.
For the M&S side, Sunpower’s order book size has hit a record Rmb2.2billion as at Sep’18. This provides the group with strong earnings visibility in the near to mid-term.
For the GI side, Sunpower has massive CAPEX plans to build/acquire centralized steam & electricity facilities. For instance, it plans to grow annual steam and electricity capacity by 3.5x and 5.3x respectively by 2021. Upon completion and ramp-up, these facilities provide Sunpower with recurring cash flows. One interesting caveat is that such facilities allow Sunpower to seek advance payments from its customers due to its exclusivity.
Sunpower is founder-led with management collectively owning 42%. Hence, there is a strong alignment of interests with shareholders.
Based on Sunpower’s AR17, Guo Hong Xin (Founder) and Ma Ming (Executive Director) own 20.02% and 17.42% respectively.
Key Risk Factors
High debt levels – Due to the massive CAPEX required for the GI segment, Sunpower finances its projects with 60% debt and 40% equity.
Forex risk of convertible bonds – the debt is denominated in USD while Sunpower’s income is denominated in RMB. Further weakening of the RMB vs. USD will adversely affect the debt servicing capabilities of Sunpower.
Execution risk – Sunpower may not have adequate experience in the GI segment and hence there might be execution hiccups which will adversely affect its ability to service its debt obligations
Undervalued Investment with a target price range of $1.64 – $1.94. This represents a margin of safety of 70 – 100%.
Prudent, competent and transparent management.
Improving balance sheet health despite industry consolidation.
A steady performer with strong earning capabilities.
High and consistent historical dividend
Yang Zi Jiang (YZJ) is the largest private shipbuilding in China. YZJ produces a broad range of commercial vessels such as container ships, bulk carriers, and Liquefied Natural Gas (LNG) vessels. Apart from the main shipbuilding business, YZJ is also engaged in its own financial investments and other shipbuilding related business such as ship logistic, chartering and design services.
Over the years, YZJ had diversified their product mix to provide for multiple streams of income. This is in line with what the management intention to achieve back in 2013 – a 40% revenue from other streams of income apart from shipbuilding activities. Overall, a diversified product mix provides for lower risk exposure especially in an industry downturn where the number of shipyards in PRC had declined from over 3000 since the peak of the industry to less than 300 back in 2014.
Physical, Geographical and Operating characteristics
YZJ’s customer mix is mainly derived from the Asian continent. While PRC & Taiwan form a good proportion of the Asian Market, historically, it only accounts for RMB 4 Billion which translates to an average of roughly 30% of the YZJ’s total order book. Apart from Asia, a major part of YZJ’s order book is also derived from European countries.
While YZJ’s order book is extremely volatile in nature and depends largely on the market’s demand. We are able to infer two things:
1) Contribution from the Asia market is filling up the decline from the Europe Market.
2) Demand from America countries is on an on-off basis.
The potential catalyst of growth stems from the e-commerce industry, belt and road initiative and stricter international maritime organization rules and regulations on vessel emission standards.
Stricter environmental rules and regulations had resulted in an increase in the demand for LNG carriers. Because of this the group believes that there is a huge LNG carrier demand driven by international trade in LNG and had since expanded into catering for this segment. As such, we can expect a higher contribution from the LNG segment moving forward.
Belt and road initiative will contribute to the global economic growth. As the global economic growth improves, we can expect higher trade activities among countries and hence resulting in an increase in shipping activities. This will contribute to the recovery of the shipbuilding industry.
A trade war between the US & China. Amidst the potential 25% tariff imposed on steel which will directly affect the YZJ’s cost of goods sold, YZJ operations will also be affected by a lower demand for commodities and weaker global trade volume which is a key driver for the demand for the construction of ship vessels.
While the main attention is between US & China, it is vital to remember that other nations targeted by the announcement are also major trading partners with the USA – Canada, South Korea, Japan and Brazil. The direct impact on an all-out global trade war is one that should not be taken lightly as it affects not just raw materials but also finished goods.
The birth of a behemoth. With the State Council, China’s cabinet, recently given its preliminary approval to merge China State Shipbuilding Corp. (CSSC) with China Shipbuilding Industry Corp. (CSIC), YZJ is set to compete with a potential giant that commands a combined revenue of US$81 billion.
While the focus of the shipbuilder’s activities differs from YZJ’s focus in cargo and container vessels, the birth of a new giant nonetheless poses higher competition in the shipbuilding industry as it is able to command higher economic of scales.
Prudent, Competent and Transparent Management
YZJ is founded by Ren YuanLin, age 64, who is currently an executive chairman to the company. His Son, Ren LeTian is appointed as the CEO of the group on 2015 as part of succession planning strategy for the continuity of the business and is currently responsible for the group’s overall shipbuilding operations. With a succession plan in place, investors can rest assured that the group will be in safe hands when YuanLin steps down in the future.
In addition, most of the board of directors and executive officers have vast experience in the shipbuilding industry and most of them worked their way from the ground up, usually started as a technician or welder. As such, I believe the management are all competent individuals who are able to make decisions that are in the best interest of YZJ’s long-term sustainability.
Ability to identify macro-changes & prepare ahead of time
A good example of the management’s competency and professionalism can be seen in their ability to identify macro-changes in the industry and shift their resources to prepare ahead of time.
Back in 2014, the company had forayed into Liquefied Natural Gas Carriers in anticipation that the global demand for a more environmental friendly vessel will increase due to the heightening of eco-friendly regulations. In 2015, YZJ immediately secured their first order for LNG carriers and in 2016, the proportion of LNG carriers had increased up to 5.6% of YZJ’s order book. This is only made possible by YZJ’s swift and decisive management and also the groups R&D capabilities.
While it is important to acknowledge the right decisions that the management had made, it is also important to understand how the management behaves when their decision had failed to deliver the results expected.
In 2011, the management had identified ship demolition, scrap metal trading and related logistics support elements as important elements for hedging against steel prices and diversifying their revenue streams. As such, in 2013 the management developed three other business segments:
Shipping logistics and chartering
Ship demolition, steel fabrication, and related trading business
However, some of the segment turned out to be non-profitable and in 2014 the management decided to rationalize its group structure by hiving off non-profitable business – ship demolition and property development. In its FY2014 annual report, the management had provided clear and transparent information with respect to their decisions rather than covering it up or even worse, continuing its non-profitable business.
In my opinion, this is a clear sign of a manager who has the competency to realize their mistakes and the courage to not only admit that they were wrong but also provide an immediate rectification. This is exceptionally important as the industry is in its downturn since 2008 and any minor mistakes can prove to be fatal in the long run if not rectified.
Management Prudence Towards Operations
Another example of competent managers can be seen from YZJ’s management decision to not actively pursue offshore engineering projects back in 2014. This came despite YZJ’s successful penetration into the offshore engineering sector back in 2012 and its current ability to break even on projects.
In the FY2014 Annual Report, the management explained their decision by the fact that:
the company is a relatively new player that has yet to acquire any competitive advantages.
severe drop in demand for oil rigs due to the plunge in oil prices.
there is a limit in the demand for oil rigs globally relative to the group’s mainstay in ocean-going vessels
Based on the above, we can infer that the management understands the company strengths and weakness in relation to the industry or sector that they are operating in. Because of that, they are willing to forgo opportunities in areas that YZJ is weaker in and focus their attention on areas that YZJ has competitive advantages.
Fair Remuneration That’s Aligned with Shareholders’ Interest
Based on the above information, it is evident that the major bulk of the senior management remuneration is derived from the profit sharing scheme rather than salaries and bonuses. This aligns the management and shareholders interest and management will only be rewarded when the company performs as opposed to high fixed salaries and bonuses.
Improving Balance Sheet Health
While 90% of the industry players had exited the market since the peak of the industry back in 2008, YZJ had improved its liquidity, solvency and working capital over the years. YZJ’s total liabilities and borrowings had decreased while its net asset value and cash position had increased significantly over the years.
With a healthier balance sheet, YZJ is in a better position to compete with other shipbuilders when it comes to tendering for contracts. In addition, YZJ will also be able to secure bank borrowing easier and at a cheaper cost due to the improved health of its balance sheet.
This can be inferred from the following:
Liquidity and Solvency Analysis
Current Ratio: Current Assets / Current Liabilities
Quick Ratio: (Current Assets – Inventories – Restricted Cash) / Current Liabilities
With respect to the spike in debt levels, it has been explained by the management as:
2013 borrowings: increased significantly as a fund deployment strategy to strengthen cash position through cash management activities that generate return exceeding our current borrowing cost
2011 borrowings: increased significantly due to higher working capital requirements
Working Capital Analysis: Learning from Past Mistakes
*** For the calculation of working capital, I’ve removed several current assets that are evidently not meant for working capital purposes. Entries excluded are: Hold-To-Maturity Financial Assets, Derivative Financial Instruments, Restricted Cash and Land/Developmental Properties
Based on the working capital analysis, we can conclude that YZJ’s working capital had since improved since 2013. Between 2008 and 2013, we see that YZJ’s working capital is consistently in the negative region and in 2013, they had to make use of bank borrowings to finance for their working capital.
While that may be a potential red flag, YZJ’s management had acknowledged the weakness and problem that their weak working capital may pose and had since improved to a desirable level. As such, moving forward, I do not foresee any short-term problems when it comes to YZJ’s working capital but I believe we should pay close attention to the future behaviour of YZJ’s working capital.
A steady performer with strong earning capabilities
Capitaland has long been one of Singaporeans’ beloved stocks. It first listed on 21 November 2000 with a turnover of S$2.9b managing S$17b residential development properties, investment properties, serviced residences and hotels. Fast forward 18 years, today it has become a powerhouse in Asia with S$5b turnover (LTM), managing S$88.8b of assets across 32 countries.
With the recent hike in ABSD, Singapore residential developers have undoubtedly been punished in a bid to prevent an oversupply of residential properties being developed in Singapore. Capitaland wasn’t spared either, but the effects of diversification shone brilliantly in the case of Capitaland. Although Capitaland declined ~6%, other developers fared much worse, experiencing 15-20% decline after the announcement was made.
China’s No.1 hotpot chain Haidilao Group finally filed for IPO on 17th May 2018 after almost 4 years of IPO rumours and sending its sole soup base condiment supplier Yihai International into its all-time high since listing. Considering its fairly predictable of cash flow and bright growth prospects, there is little wonder why it is trading at over 50x P/E in today’s volatile market environment.
Despite trading close to it’s all-time high level, there seems to be some room for its share price based on a DCF implied value of HKD 21.1, representing 22% upside. It is still relatively cheap on a forward P/E of 37x.
2. Simple business model
Yihai is Haidilao’s soup base condiment production arm which was spun-off and listed on the main board of HKex in July 2016.
The company’s products are mainly made from soya bean oil, animal oil, chilli, flower pepper, etc. According to its prospectus and annual report, soya bean oil was the primary cost driver of its cost of raw materials, which accounts for about ~20% of the cost.
It then sells the finish goods to either Haidilao Group (“Related Party”) to be consumed in its chained restaurant, or sold to 3rd party distributors such as supermarkets for retailing.
3. Shareholder & Management
Post spin-off, Yihai international is still ultimately controlled by the founders of Haidilao Group, which consist of Mr. Zhang Yong and Ms. Shu Ping, Mr. Shi Yonghong and Ms. Li Haiyan. This ensures shareholder interests between the two companies are well-aligned and Yihai is ultimately benefiting from the growth of Hadilao.
Its day to day business are directly managed by young and internally promoted professionals aligned with Haidilao’s culture and practice.
CEO, 45, Ms. Dang Chun Xiang, joined Sichuan Haidilao and served as the head of the operations department from January 2011 to December 2014. Her role expanded to deputy general manager from January 2014 to December 2015.
CFO, 38, Mr. Sun Shengfeng, joined Sichuan Haidilao in September 2007, and has held various positions successively: assistant to CFO, chief accountant, deputy head of the finance management department, deputy head of the asset management department.
4. Proven track record
Revenue: Almost doubled from 2015 to 2017, benefiting from the expansion of Haidilao group and growth of 3rd party sales
Gross Margin: improved drastically from 34.7% to 37.2%, reflecting a lower commodity material price
EBIT & EBITDA Margin: improved from 20% level to 25% from 2015 to 2017. In terms of % of sales, all expense items are fairly stable despite a fast-growing sales level, which means the expense structure is fairly mature and does not rely on heavy marketing or discount to sustain.
Expenses: as a manufacturing entity, the largest non-material cost is distribution expenses and it accounts for about 9% of the sales value.
5. The hotpot industry (How much it is expected to gain from Haidilao’s IPO)
For the past 5 years, about 55% of its revenue came from Haidilao hotpot. Judging by Haidilao’s queue at each outlet one will gain a rough idea of how sustainable its business model and growth prospects are. Its performance dictates Yihai’s performance to a large extent. Since more than 90% of Haidilao’s revenue comes from the PRC, it makes more sense to focus on the hotpot industry in China.
PRC hotpot industry grew at 11.6% CAGR from 2013 to 2017 according to Frost and Sullivan, outpacing the overall F&B sector. It will continue to outgrow the overall F&B sector with 10.2% CAGR.
According to Frost and Sullivan, the hotpot industry is the biggest segment among F&B industry and accounted for 13.7% of the overall market share. An F&B white paper published by the Chinese version of Groupon, Meituan, shown an even higher share of 22%.
Haidilao’s sales growth outperformed by market standard by more than 3 times and was recognized as one of the top 10 hotpot brands by the Chinese F&B association from 2013 to 2016. It also has the highest market share among other Chinese hotpot franchise, almost achieve a share that is more than 2x of the 2nd player Xiabuxiabu catering.
6. Sales to 3rd party sales (How Yihai has grown and will likely to grow outside of Haidilao Chain)
While Yihai’s total revenue was growing at 39.4% CAGR from 2015 to 2017, 3rd parties sales also grew at a similar CAGR at 38.2%, reflecting a strong demand for its condiment products beyond just Haidilao stores.
The growth was organic. Not only because it is able to maintain its sales growth to 3rd party distributors but also because it achieved this result with no debt and no additional..