Thursday, March 21, 2019

TVB vs Netflix

Recently, I did a poll on InvestingNote. It was an exercise to (1) remove the bias of choosing a company based on brand names and (2) choosing a company to invest in solely using financials.

InvestingNote Screengrab as of 21 March 2.20pm
Without the company name, most investors stated correctly that if solely based on the financials, value investor will choose Company A. Growth Investors will choose Company B.

Overall, it seems that more investors prefer a stable company than one is burning cash. But I have a feeling if I reveal the names of the companies, things may change?

Nevertheless, did I carry out this exercise so that I understand more about investors? NOPE. 

I was actually looking to invest into TVB due to their recent share price drop and negativity news.

Thus, I was looking for a competitor to compare its financials and I picked Netflix.

Many may disagree that they have the same business model. But in my opinion, their strategy as stated below are probably having over 60% similarity.

TVB Strategy

Pros: 

  • Established actors and actress in HK (Some are very famous overseas as well).
  • Stable Base in HK
  • Advertising Revenue 
  • Consistent upbringing of new actor and actress.

Cons:

  • Famous actors and actress leaving for China (Eg Charmaine Seah)
  • Seem to have a reducing base in Asia
  • Does not appeal to westerners.
  • Streaming websites

Uncertainty:

  • Switching to Internet TV
  • The growth into China has always seem to be a roadblock. 

Netflix Strategy

Pros:

  • Use lesser Known Actor and Actress to act as lead, Cheaper.
  • Cheap production + Good story-line
  • Opening up to international audience (Turkey, Korean)
  • Consistent upbringing of new actor and actress to fame or fame again.

Cons:

  • Not getting into Apple TV Service
  • Yet to get into China. 
  • Streaming websites
  • The significant number of dramas on-going - to increase cost

Uncertainty:

  • Short seasons, if the season get more popular, will the actor and actress be willingly to work for less.
  • How long can good story-lines continue to increase?

In Short

After comparing their strategy and their financials, I decided to ignore both companies and move on.

Firstly, I ignore Netflix simply due to its cash burning business and increasing debt. I am uncertain if their business is for the super long hual.

Secondly, I ignore TVB due to their recent negative scandals. Basically, they invested over HK$800 million in SMI Holdings Bonds in order to get more access into China. Since SMI Holdings had to be suspended and restructure, the bonds took a HK$500 million impairment. This resulted in the company having losses of $200 million. 

Although the last sentence do indicate that TVB does have $300 million of cash profit for 2018, but I will have prefer if their impairment was the full impairment of HK$800 million. This is because in this case, I will not need to worry about them taking a second impairment in future. 

On the other hand, I do believe SMI Holdings will recover from the setback and TVB may end up have a controlling stake in SMI Holdings. But these are assumptions with huge uncertainty and significant risks involved. 

Therefore, there seems to be too much uncertainty at stake and I choose not to invest in either company.

Please do your own due diligence before you invest in the above counters.

If you are interested in these fundamental investing discussion, do join us at our Fundamental Scorecard Telegram Group

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Thursday, March 7, 2019

Analysis of Singapore Banks and Finance Firms

As a fundamental investor, I always look at financials statement to analysis if a company is good enough to invest in. However, there is always 2 types of balance sheet we need to take note – The regular one and the Financial Institutions (FI) one.

Normal Balance Sheet
FI Balance Sheet

In the past, if I want to invest in a FI, I used to tell myself – I don’t know how to analyze their financials, let’s skip them!

But as days, weeks, years went past, and you realise that there are numerous financial firms in of Berkshire Hathaway picks, that’s probably an indication for me to start to learn how to analyze a FI financials.

After jotting down a list of criteria and factors, I reduce it to these 4 criteria.

1. Return on Assets (ROA)

Formula: (Net Profit - One-time Gain) / Total Assets x 100%

In my opinion, Return of Assets is the most powerful ratio of them all to calculate the performance of a FI. I believe it is mention by Warren Buffet before (lost track of the write up) and a good indicative ROA is 1%.

For the calculation of ROA, I will remove the one-time gains, such as gains from disposal of subsidiaries or fixed assets, from the earnings figure.

2. Price to Book Ratio

Formula: Share Price / Book Value Per Share

To analyse a stock, I do believe there should be a criterion that relates to the share price in order to indicate if a FI is a good investment at that point in time.

Price to Book ratio is chosen because it looks at the liquidation value of a company.

In the aspect of a financial firm, their assets tends to be more liquid than other companies. Thus, this should be taken into account.

3. Allowance For Doubtful Debt (ADD)

Formula: Allowance For Doubtful Debt / Total Loans & Advances & Receivables x 100%

ADD indicates an FI ability to underwrite the loan applications for its customer. A higher percentage could meant that the credit review for the loan applications is too relax in order to gain market share!

Some companies may not have ADD, and it is not because that their companies are doing really well, but it maybe due to the company's ability to reverse previous years' doubtful debt.

In this case, the ADD is not explicitly stated and we will probably require the annual report to be released before getting the actual information.

4. Net Interest Margin (NIM)

Formula: Interest Income - Interest Expense x 100%

This formula is similar to the Gross Margin and looks at FI's ability to charge more interest to their clients despite providing an almost similar product. This formula relates to a FI's competitive advantage against it competitors.

If you are interested in fundamental analysis as shown above, do sign up for our latest AIM-SG course HERE where we will discuss fundamental investing theories and many more!

The companies selected for review are the following firms:

Banks: DBS, UOB, OCBC
Consumer Finance: Hong Leong Finance, Sing Investment & Finance, Singapura Finance
Diversified Finance Services: IFS Capital

*Do note that Pawnbrokers, IFAST and Net Pacific Financial Holdings are ignored due to their business model.

FI Analysis

From the analysis above, there are a few observations:

1. Higher ROA result in Higher PB ratio. 

I consider ROA to be the most important criteria, but I did not knew it was inversely related to PB ratio.

2. Higher Interest Income Do Not Result in Lower NIM. 

In terms of maths calculation, I thought NIM will definitely be higher if the FI has a lower interest income, but this is not the case.

3. 1-Year Analysis Is Not Sufficient

An analysis of 1 year result is not sufficient to clearly indicate a company's strength or its weakness. More results will be required.

4. ADD % not Significant

There is not much significant difference between the ADD % for the selected FI. A deeper analysis will be required once their annual reports were released.

In Short

Despite the short exercise above, it actually reveals significantly the difference between FI and their target markets.

However, this is just a preliminary review and more analysis will be required if one intends to invest in any FI stated above.

If you are interested in discussing about various fundamental investing thesis, do click HERE to sign up for our latest AIM-SG course. We will also be discussing about various companies selection ideas that we have and many more!

The author is vested in one of the FI discussed above. 

Please do your due diligence before investing in any FI above.

Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.

Sunday, March 3, 2019

Take A.I.M. - The Singapore Market Version!

With the success of "A.I.M.- Actionable Ideas Movement", Simple Investor and I had decided to conduct a similar course for Investors of the Singapore Stock Market.


I can never say enough. But once again, I will like to say a BIG THANK YOU to everyone that attended AIM. You made the event a success! 

What is A.I.M. – SG Version?

This is an extension of the newly design course – Actionable Ideas Movement – within the Singapore Market.



The main AIM for this course is to:

(1) introduce new investing methods to the Singapore Investors; and
(2) by the end of the course, we hope participants will be able to invest in Singapore Markets with comfort and the right mindset, regardless of the macro environment.

This course also AIMs to provide what participants want such as the following:

1. The course will allow participants to ask questions beforehand. These questions will be answer during the course. (An email will be sent to the email address you registered with eventbrite for the questions you will like me to talk about during the session.)

2. Participants will be allowed to provide and discussed stock ideas in the SG market during the small group discussion facilitated by TUBInvesting and Simple Investor!

3. TUBInvesting and Simple Investor will also come up with the stock idea for the year each for discussion!

4. There will also be a weekday evening FOLLOW UP SESSION 6 MONTHS LATER to review on all the ideas that was discussed (No extra payment required).

Highlights of the Course:

- The revelation behind “Big Ideas Investing Theory” by TUBInvesting

- Moat Investing/Own Business Not Stocks by Simple Investor

- A Explanation of a Step by Step Investment Process

- Answering Your Questions Given Beforehand

- Small Groups Discussion for Ideas Generation

- TUBInvesting Idea for the year!

- Simple Investor idea for the year!

- Get to participate in the next AIM – HK/US version for just $20!

- A booklet of the slides and a simple packed lunch will be provided!

- There will also be an Investment Game at the end of the course!

If you are interested in this event, do sign up via this LINK. I will only be limiting the course to a maximum of 20 pax (Left 15 now!).

A little note to those interested in the Investment Style of Warren Buffet and Charlie Munger, I look forward to meeting you at the event!


Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.

Thursday, February 28, 2019

Big Idea 13

As indicated in my last post, I had already sold Big Idea 5. Therefore, I am still on the lookout for the next idea to invest in.

Currently, for my Big Ideas Investing Theory, I have wrote about 12 Big Ideas and I had sold about 3 of them. Overall, I am still holding on to 9 of them which contributes about 60% to 70% of my portfolio.

I caught a glimpse of Big Idea 13 on a valuebuddies forum. Then I went to work on it. I was so excited about this idea that I shared it on my Fundamental Scorecard Telegram Group.

Then, Simple Investor shared it on his Facebook Page.

Screengrab of Simple Investor Facebook Page
OMG...this ballooned the members on my Fundamental Scorecard Telegram Group from 48 members to the current 130 members within 2 days. I am still very amazed by the support and will like to still say a Big "Thank You" to the old and new members in the group.

So after my initial analysis on Big Idea 13, I came up with this summary.

"The company has 2 business entity - Semi-con and CEM.
Last year FCF due to Semi-con. CEM still loss-making.
Recently they sold and completed the Semi-con business of 14 million for 84 million.
Current NAV is 20 cent at about 45 million.
84 + 45 = 129 million / 56cent per share.
As per disposal report, they will give out 24 cents as special dividend (May or may not eventually)
Current share price is 34.5 cents. 
Full year result should be announced soon.
The one-time gain on disposal will be huge.
If want to keep for long term, I am not so sure. But short term, share price should spike up.

Please DYODD."

That night, the company released its full year results.

Portion of the full year results
It seems to indicate that I made a MISCALCULATION in my Net Asset Value. Instead of 56 cents, it is just 37 cents. Oh No!

I apologized to the group and continued to do my homework for the next 2 days. After all, I am already vested at this point (The impatient me...and the information below could be biased).

What Did I Found Out?

1. The Company had completed the sales its Semi-Conductor Business at S$84.5 Million (Actual Sale Price). The company is left with its Contract Equipment Manufacturing (CEM), which is loss-making for the last 3 years.

2. 80% of the Actual Sale Price amounted to S$67,600,000 was paid to the Company along with the reimbursement of S$8,000,000 for the cash left by the Company in Semiconductor business.

3. 20% of Actual Sale Price of S$16.9 Million is subjected to the following condition as per its Sales and Purchase Agreement:

a. "...the Purchaser will engage an accounting firm to conduct an audit on the cumulative revenues of the Target Group from 1 January 2018 to 31 March 2019 (the “2018 Revenue”). Should the 2018 Revenue be less than 80% of the cumulative revenue for the period from 1 January 2017 to 31 March 2018 (the “2017 Revenue”), an amount equal to the difference between the two will be deducted from the Escrow Amount and be released by the Escrow Agent to the Purchaser..."

b. "...If the amount to be paid to the Purchaser, as a result of the occurrence of any or both the aforesaid events, is less than 10% of the Actual Sale Price, an amount equal to the difference of the two will be released by the Escrow Agent to the Seller..."

c. "...Should the Deducted Amounts be less than the Escrow Amount, the remaining balance or the balance 10% of the Actual Sale Price, as the case may be, will be held by the Escrow Agent to settle any claim by the Purchaser in relation to a breach of the Share Purchase Agreement against the Seller (the “Escrow Remaining Amount”). The Escrow Remaining Amount will be held in escrow for a period of 18 months from the date of Completion (the “Escrow Claim Period”), and subject to any applicable claims being settled, be released to the Company upon the expiry of the Escrow Claim Period..."

4. Under the Sales and Purchase Agreement, it is also stated:

a. "...The net proceeds from the Proposed Disposal, after deducting all costs and expenses, 5% commission payable for deal introduction and financial advisory services, staff retention and compensation and assuming that the full amount of the Estimated Sale Price of S$84,500,000 is received by the Company, are estimated to be approximately S$77,100,000..."

b. "...intends to return the entire net proceeds from the Proposed Disposal to its shareholders by way of a special dividend or capital reduction, as the case may be. It is anticipated that a first distribution of 24 cents per share based on the first payment received by the Company upon Completion (i.e. 80% of the Actual Sale Price) will be made by the Company as soon as practicable after Completion has taken place..."

5. Number of Shares the company has is 233,916,970 (Round up to 234 Million).

6. Investment Properties is stated at cost and the valuation is much higher. This is indicated on Annual Report 2017.
Abstract from Annual Report 2017 
7. As per an 2018 analyst report from CIMB, it is stated the following:

"In the Contract Equipment Manufacturing (CEM) business, the company's key subsidiaries are i.PAC Manufacturing Pte Ltd (Unlisted), and AMS Biomedical Pte Ltd (Unlisted). i.PAC Manufacturing and AMS Biomedical provide modular and full turnkey assembly, system integration, reliablility testing, packing and distribution services for dierent industries. 

1. i.PAC Manufacturing 's depth of expertise in mechanical, electronics and electrical engineering also embraces vision systems and laser technology, enabling it to handle wide ranging complex projects across multi-electronic sectors such as in displays, semiconductors, storage media, aerospace, solar and other high-tech capital equipment industries. 

2. AMS Biomedical , with its ISO9001 and ISO13485 accreditation, is a leading choice as a contract manufacturer of medical equipment and devices, specically for the medtech industry, according to management."

8. As per 2018 full year results, the following has been stated about the CEM business:

a. "In contrast, the S$18.71m sales for the remaining CEM business represented a significant 52% growth over the previous year. This was due to new customized automation contracts and strong build-to-print sales."

b. "We will focus on getting new customers in the built-to-print area in order to achieve greater stability in our top-line. We also expect further growth in the customised automation area as there are a few promising projects in the pipeline."

9. In addition, as per 2018 full year results, it seems that the loan of S$7 million has already been paid.

Why Did I Continue To Stay Vested?

1. Dividend to be paid out soon = 67.6 Million / 234 Million = 28.8 cents. 
- At this point, we knew the net proceeds will be returned to shareholders and at least 24 cents will be given first.

2. Investment Properties Net Worth = 11.5 Million / 234 Million = 4.9 cents.
- A lower valuation is used for calculation.
- About $600k of rental income is generated.

3. Cash Net Worth = 1 Million / 234 Million = 0.4 cents.
- The company has at least 1 Million of cash left. The company has been reimbursed with 8 Million of Cash and has also paid off a loan of 7 Million.

4. Will the 10% of the Escrow Amount be released after 31 March? ~ Based on my very conservative calculation, it seems that this will not occur.

- 2018 Revenue of Target Group = 36.3 Million (I deem Dec 2018 till Mar 2019 to have no revenue in order to be conservative.)

- 2017 Revenue of Target Group = 53.6 Million + 5.4 Million = 59 Million (I deem Dec 2017 till Mar 2018 to be 30% of the revenue of Half Year 2018 Financial Report.)

- 80% of 2017 Revenue minus 2018 Revenue = 10.9 Million.

5. Present Value of 2nd portion of Escrow Amount = (4.225 Million / 234 Million)/1.15 = 1.5 cents.
- For the 2nd portion of the Escrow Amount, lets just assume only 5% is released after 18 months. 
- Discount given to the 2nd Portion of Escrow Amount = 15%

Deem Estimated Value Of Big Idea 13 = 28.8 + 4.9 + 0.4 + 1.5 = 35.6 cents.

What Are The Risk Involved?

1. No Escrow amount are paid out. Only 24 Cents or less of Dividend are paid.
- Despite all the information being stated in the reports, we cannot be certain that all the stated dividends will definitely be paid without any confirmed dividend announcement.

2. CEM Business continues to be loss-making for a long time.
- CEM Business has been loss making for the last 3 years despite growing top line. We cannot be certain the CEM Business will just turnaround.

3. Significant Cap-ex is required.
- From the 2018 full year report, it seems that the company's fixed asset will be sold along with the Semi-Conductor business. Without machinery, the CEM business will not be able to continue. Thus, we should be expecting some capital expenditure to occur in future.

4. My Calculation Is Wrong.
- My Calculation comes along with many assumptions. Thus, any changes in the assumption will result in the changes the Value of Big Idea 13.

In Short

When my initial thesis on Big Idea 13 was wrong, I panicked and quickly checked back. As I explained to the members of the Telegram Group, the attractiveness of the company has reduced significantly after I checked back. If it was a "10" at the start, it has since reduced to a "6".

But I remained vested due to the above calculation and that, despite being loss-making, we will be getting the "revenue growing" CEM business for free.

One of the point that was not discuss above is that there is a growing inter-segment revenue between the Semi-conductor and CEM business as per 2017 Annual Report. Furthermore, there is a high possibility that the Chairman and Managing Director of the Company, one of the key employees, will be entering into a three-year retention employment contract with the sold Semi-Conductor Business.

No idea comes without risk. But they must be calculated risk.

Oh... I have yet to announced the company's name - It is Manufacturing Integration Technology Ltd.

Please do your own due diligence before you invest this counter.

If you are interested to know more about The Ultimate Scorecard or Full Analysis, do visit the Fundamental Scorecard website for more information! 

We have also released the Moat Scorecard with InvestingNote. Do take a look!

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Wednesday, February 27, 2019

The New Idea That I Didn't Act On It

This article contains a portion of the Moat Scorecard Analysis Write Up 6 written on 27 Jan 2019 for my Moat Scorecard subscribers. For the Full Write Up, please subscribe to Moat Scorecard.

Having sold off one of my biggest holding of a Big Idea (Big Idea 5 - HongKong Land), I started search for the next possible Big Idea.

Firstly, I was looking at Courts Asia. But before I could make a decision, Nojima made a general offer. Damn!

Then along came Avi-Tech Electronics Limited (Avi-Tech). To be honest, I first came across this company when it passes Ultimate Scorecard in January.

Portion of Avi-Tech Ultimate Scorecard in Jan 2019.

I was surprised to see this new entry in my Ultimate Scorecard. This new company excites me in view that it was able to generate Free Cash Flow constantly for the last few years and the cash profit margin has been consistent.

What Does The Company Do?

The company specializes mainly in Burn-In Services, with a portion in Manufacturing and Engineering services.

However, the fact that it passes Ultimate Scorecard now is due to its share price being on the downtrend.


Why?

I believe it is due to the reasons below:

  • Semiconductor industry had seemed to reach its peak in 2017 and it has been on a downtrend for the whole of 2018.
  • As per RHB Analyst Report on 12 Sep 2018, “In 2HFY18, its engineering segment took a hit due to delays in customer projects as well as a slowdown in orders from clients. This led to the unit booking a loss, which dragged down Avi-Tech’s overall profitability. However, management believes that the segment has likely hit a low already, and business will likely pick up from here, with new customers being secured at the same time. However, it will likely take about 6-9 months to ramp up. As such, the engineering business will likely continue to be a drag on profitability in FY19 – albeit to a smaller extent.”
  • The company’s revenue and net profit has been reducing for the last few quarters as compared to its 2017 figures.
3rd Quarter 2018
4th Quarter 2018
1st Quarter 2019
More Research Done

As per the RHB Analyst Report on 12 Sep 2018 and 2018 Annual Report, it has been reported that Avi-Tech's customers are in the automotive industry rather than the chipmakers. 

RHB Analyst Report on 12 Sep 2018: "As Avi-Tech mainly provides burn-in services for chipmakers in the automotive sector, where there has been gradual and steady growth. We expect the burn-in business to continue to grow by 10-15% pa, and not be impacted by the slowdown in the
semiconductor sector. This is partly due to the fact that the majority of their burn-in customers are from the automotive sector, which is enjoying steady growth."

2018 Annual Report Letter to Shareholders: "...Furthermore, with the slowdown in the electronics sector, the overall semiconductor demand is anticipated to moderate. Nevertheless, due to the continued demand for sector-specific semiconductor chips such as in the automotive, cloud and networking  and data security industries, we are cautiously optimistic as there will be opportunities for growth for our business segments..."

In addition, as per a post on Valuebuddies on Avi-Tech, it has been stated by a CIMB Research Report that the customers of Avi-Tech are not within the chipmakers industry.

Screengrab of Valuebuddies Thread

Thus, with the above understanding of Avi-Tech's customer base, the downward impact to Avi-Tech's revenue and net profit may be less affected than other similar companies within the same industry.

I had also reviewed the last 5 years of revenue and net profit for each different segment.


The results shown that the company's burn-in services generated the biggest gross margin but the engineering services had dragged the Avi-Tech's business downwards. In the event, the company continues to concentrate on the burn in segment and maintain its relationship with this group of existing customer, Avi-Tech's revenue and net profit could rise back up.

In Short

With such deep understanding of Avi-Tech's business, it is important to come to a decision of whether I should make the purchase of the shares at the current share price.

Eventually, I decided NOT TO make the new purchase due to the information below:
  1. 2018 Annual Report Note 9: "Of the trade receivables balance at the end of the reporting period, $2,906,000 (2017: $6,410,000) is due from four major customers."
  2. 2018 Annual Report Note 30: "Included in revenues of $35,720,000 (2017: $39,982,000) are revenues of $12,258,000 (2017: $10,420,000) and $3,860,000 (2017: $5,462,000) arising from sales to two major customers from the Burn-in Services and Manufacturing and PCBA Services business segments. In 2017, included in revenues of $39,982,000 was revenues of $8,788,000 arising from sales to a major customer from the Engineering Services business segment. These revenues account for approximately 45% (2017: 62%) of the Group’s revenue."
  3. RHB Analyst Report on 12 Sep 2018: "However, it will likely take about 6-9 months to ramp up. As such, the engineering business will likely continue to be a drag on profitability in FY19 – albeit to a smaller extent. '
Basically, from the information above, it seems that the major customers had been paying in cash, since revenue from top 2 customer has maintained but trade receivables has decreased significantly. 

Furthermore, the Engineering Business will continue to drag the business for another 3 to 4 months and this will continue to impact its bottom line. With that, its Price to Earning Ratio will increases significantly and I believe its dividend payout will also be affected.

Therefore, I believe Avi-Tech should be on my watchlist, while I await for a higher margin of safety. 

Nonetheless, it is important to note that this is just my analysis as each investor should still make their own decision.

Please do your own due diligence before you invest this counter.

If you are interested to know more about The Ultimate Scorecard, do visit the Fundamental Scorecard website for more information! 

Oh... and do remember, please like our Facebook page (T.U.B Investing) and follow me on InvestingNote.