Unveiling the shrouds of secrecy

Li XiaoChao reported that China March CPI figure was 8.3% in March compared to 8.7% in Feburary which was a relief to everyone following successive astronomical rise in inflation that broke decade high.

GDP also slowed to 10.6% in the first quarter compared to 11.7% in the same period last year.Wow!Seems like Premier Wen economic cooling measures are working like a charm. Soon after, analysts started commenting that China is very much a sturdy ship on its own with internal consumption taking up the slack of reduced exports. Decoupling has arise with the financial turmoil plaguing the Anglo Saxons pretty much contained and will not derail China growth to superpower status.

However, various sources have confirmed that actual March CPI figures was in excess of 10% and GDP figures was between 7-8%. Chinese spin doctors have once again hoodwinked the global financial community, throwing statisticians and economists into disarray. Meanwhile, there are great divides in the upper echelons towards implementation of economic measures in steering the precarious economy onto safer grounds. The customized GDP figure is a loud message to the provincial governors to stop their mindless pursuit of investment inflows as the economy is overheating and not in any dire need of capital inflow. In fact, the actual figures painted a picture closer to reality where numerous SME across industries have shut down in recent months; the widespread carnage will eventually trickle down to all pockets of the economy and affect everyone down the food chain.

While listed companies may be registering high growth and profits, however their receivables may even be rising at a faster rate. The confluence of high interest rates, RMB appreciation, high oil and raw material costs, abolition of VAT rebate, new labour Act and desperate government cooling measures will soon bring an economy to its knees. Be mindful that I am not a doomsayer but the truth of the Chinese economy is far from what ivory tower analysts portrayed it to be. Sure there are emerging bargains that are ripe for cherry picking but the risk reward ratio is not as favorable as compared to other emerging markets.

I am filled with bafflement when the NDRC reported that property prices will likely trend higher in the coming months due to an influx of foreign funds in the coming months. Are the bankers behind those funds living in their own ivory towers?

From my understanding, several US funds are actively sourcing for Chinese property projects but the risks far outweigh the rewards(Currency appreciation and low USD borrowing rates) in the short/med. term and my interactions with numerous funds confirmed my belief that they are only on the lookout for short term business opportunities that limit their risk exposure amid the volatile and highly uncertain global outlook. The medium term property outlook isn’t all that rosey either as there is a flood of Grade A commercial and retail spaces coming upstream soon. Just look at the upcoming IFC, Mori building and the number of composite projects ongoing in the bund…In fact Shenzhen/Beijing is a solid testament to the implosion of unbridled optimism.

Residential sector is not a bed of roses either as investment in completed residential apartments is controlled and subjected to various punitive fees imposed by the government. Furthermore, the upstream property developers are also starting to feel the pinch amid the government crackdown where credit lines have virtually come to a halt. The only bright spot is a dearth of quality high end apartments in the market catering to expatriates which might warrant further price appreciation in the short/med term.

Perhaps the land bureau and decision makers can be given a lesson in economics 101. Lesson 1: prices are determined through the interaction of the demand and supply and the curtailment of property supply will only inevitably drive prices up. So what is the government agenda behind the skew of property cooling measures? Cooling or feeding the exuberance?

Lastly, the recent appointment of the national people congress brings an impressive lineup of pragmatic and knowledgeable ministers that is going to herald china into a new economy. However decision making is still concentrated in the hands of a mighty few and blogged down by fractional alignment, hopefully factional disagreements will tone down and that each individual will work for the good of the nation rather for himself.

Cash is King!!!

Company Description

Lion Asiapac Limited(SP LAP), through its subsidiaries, operates in the electronics business in China. The company, through its subsidiary, Advent Electronics Pte., Ltd., engages in the distribution of semiconductors and related components, turnkey project management, and the sale of network and telecom products. Lion Asiapac also involves in limestone processing, as well as produces and supplies quicklime, a raw material for steel making principally to the steel mills and the construction industry in Malaysia. In addition, it trades automotive components.


Proposed Disposal of Anhui Jianghuai Automobile

LAP’s EGM to dispose off its 6.16% stake(79million shares) in Anhui Jianghuai Automobile (ch 600418, AJA) at a price not less than RMB7.50 has been approved on 18th February, in a deal potentially unlocking $118 million in cold hard cash, or $0.294 per share.

An analysis of AJA’s liquidity revealed that it was trading at above RMB 8 for the past 3-4 weeks with average daily trading volume of 8million shares and an abnormal spike of 39million shares was observed on 28th March. Henceforth, we can reasonably conclude that the proposed divestment has been smoothly completed at $118million or RMB7.50/share for prudent analysis(LAP proposed to divest AJA at not less than RMB7.50/share).


Proposed Disposal of Hefei Jianghuai Automotive

LAP board of directors has also earlier approved the disposal of Hefei Jianghuai Automotive(HJA) for $14.4million of which $6million has already been paid. The transaction is expected to be finalised in the next few months as PRC regulatory approval has already been secured from the purchaser.


Huge Margin of Safety

Cash and cash equivalents 53.4 mil
Disposal of AJA 119mil
Disposal of HJA 8.4mil

Total Cash 180.8mil
Total liabilities 47mil
Total cash net of liabilities 133.9mil
Total outstanding shares 406,155,224
Net Cash per share 0.33

By FY2008, total cash per share will hit $0.45 and cash net of total liabilities will be $0.33. Based on current share price of $0.27, LAP is trading at a sinful 18% discount to net cash and 47% discount to NAV of $0.51.

It is laudable that such an anomaly exists on SGX because in fact I am exchanging my dollar for $1.22 in cash and $0.67 worth of assets. It is a screaming buy for investors at current valuation due to the extremely attractive risk reward ratio and the perfect place to anchor your funds during current market volatility. Moreover, LAP’s market cap at a mere 108 million with an astounding cash hoard of 180 million come mid 08 will be an inviting target for raiders like Carl Icahn.


Life After Divestment

After divestment of its crown jewel, LAP will basically transform into a net cash co. engaging in a range of diversified business activities from limestone processing, scrap metal collection and electronic distribution. Life after the divestment is nothing exciting and mediocre at best. In fact, scrap metal collection and limestone processing are secondary business activities serving Tan Sri William Cheng’ myriad of steel mills spread across the Malay Peninsula. The only bright spark will be achieving upstream integration through procurement of a limestone quarry that will help secure margin expansion in the current commodity boom.


Conclusion

Mr cheng owns 67% of LAP shareholding, diminishing the possibility of a hostile takeover by corporate vultures. The new LAP, blessed with minimal borrowings and a windfall gain will likely distribute part of its gains, just like the divestment of Zhejiang Motors in 2007.

Meanwhile, patriarch Tan Sri William Cheng busy with his restructuring of Lion Corp and sister companies will probably put LAP on the backburner. Given his style, it is unlikely a privatization will be in the pipeline as LAP will continue to be a feeder company supporting his primary steel mills. I reckoned the acquisition of a limestone quarry with the excess funds to be highly probable.

An entry into LAP at $0.27 is extremely attractive with the existence of a huge margin of safety cushioned by its cash net of total liabilities of $0.33 and NAV of $0.51. LAP’s target price of $0.33 can be effortlessly achieved once the divestment is completed, representing a potential return of at least 18% within a year.

China playing catch-up!

The National People Congress wrapped up without much fanfare. A reassuring fact is China appointing numerous cadres with rich working experience to take charge of its various ministries. And this will help alleviate numerous complications where national policies are badly enforced at the provincial level due to circumvention of regulations as the thumb of rule of attracting investment inflow to boost employment is their utmost priority.

Former Beijing mayor Wang Qishan, duded the godfather of China stock market will also take charge of the banking and finance portfolio. Mr Wang was instrumental in setting up CICC and also later denying Morgan Stanley a management role in the JV due to MS arrogance and "perceived supremacy". With his vast knowledge,experience in dealing with national crisis such as the SARS crisis and access to the top leaders, he will be the man to look out in steering China red hot economy into calmer waters.

Wen Jiabao reiterated that inflationary pressure is the government immediate concern as run away inflation has escalated to astronomical level. In recent weeks, widespread publicity of the escalating food prices reaching unaffordable levels have allowed some activists to expolit the issue and stir up social unrest. Whatever cooling measures are deployed to cool the red hot economy , China is mindful of the aggressive highhanded measures undertaken in the mid 90s which froze all credit lines, leading to a hard landing and plaguing the economy into recession.

From 25th March onwards, PBOC announced that commercial banks reserve requirement ratio will rise by 50bp to 15.5% in a bid to mop up excess liquidity and there are also increasing chatters of a rate hike soon. In fact the CSRC has also recently announced that property developers looking to the ECM for fund raising will be given increased scrutiny and the existence of a unspoken decree of NO commercial bank loans for all property projects will see property supply being curtailed and a waning demand due to high borrowing costs and whooping price gain over the years. Furthermore, Feburary residential transaction volume has already plunged by 54% m-o-m with signs emerging that the property market will experience more turbulent times ahead.

The global economy outlook is softening and emerging markets are not immune either. Though Chinese industrial production remains high, but growth has been decelerating(15.4% y-o-y in January vs 17.4% y-o-y in December),with exports slowing to 6.5% y-o-y in February.

The picture on the ground is pretty mixed. Plenty of SMEs are shutting down due to a myriad of factors such as the new labor law, high cost of borrowings, escalating raw material environment and stringent environmental regulatory enforcement. Of notable mention is the new labor law that brought about more definite protection to the labor force where a considerable portion of the chinese population are still working under the minimal wage bracket.Little weightage has been given to the new labor law until recently and apparantly a few casualties has emerged with a huge F&B company that is going IPO in HK forking out millions of dollar in their labor dispute settlement.

Large well capitalized firms will be the core beneficiary from the SMEs fallout benefiting from the capacity spillover. Vertically integrated firms with pricing control and access to vital raw materials will be able to outprice their competitors in the current cutthroat business environment buffered by their upstream margins and further advance their market share.

The normalization of China stock and property market, coupled with a tightening credit market where banks lending quota has all been maxed out for the current quarter; increasing trend of credit starved SMEs turning to the PE market for capital infusion and large firms cutting back on their Capital expenditure will definitely see the government tightening measures filtering down to the economic figures in mid or late 08. Meanwhile, fasten your seatbelt for the tough ride ahead.

It has been a while since I last updated my blog where my original intent was to publicize my portfolio and give it a boast of credibility. Much has changed since my graduation.

Juggling between work and social life, there leaves little personal time to pen the rationale behind each purchase and sale of my transaction on blogspot that I nearly gave up.

A brief update: My sg portfolio which was heavy on the real estate sector was slowly pared down over the years. Though I missed out on some hefty gains on LTC and LKT had I held out longer, the ride was a rewarding one nevertheless. Currently, almost all property counters are trading at a premium to their NTA or even RNAV, indicating exponential gains seen over the years might be leveling out.Well, time to move on and seek out the next multi-bagger!!!

Liquidated almost my entire SG portfolio and hiked over the causeway. KLSE! Here I come....
To my realization, there is a dearth of undervalued counters on SGX after scouring the haystack. Over the causeway, there is a abundance of goodies up for grabs. Lelong Lelong!!!
Though the significant surge in KL came in the 2nd half of 06, I might have missed the mini rally but not the tsunami. Many Singaporeans have shunned Malaysia after the Clob Saga.

However, let's take a rational and objective approach, both Najib and Abdullah are considerably pro liberals, attracting significant FDI and tie-up with middle east firms. Currently, ties between Singapore and KL have warmed up and a team of delegates will be checking out the Iskandar for a better understanding of the geographical and economic prospects. Ho Ho Ho, cant imagine having a new Suzhou across the causeway, the mutual benefits will be enormous however it is too early to count the chicks yet.
Being vested in Malaysian shares allowed a participation of currency appreciation if the Ringgit is floated and shares on the Bursa are relatively cheap where you can find plenty of counters with low EV/EBIDTA.

However a lot of the P&L statement do not tally with the cashflow , hence it is vital to take the P&L statement with a pinch of salt. Look at the trasmile fiasco, there are plenty of landmines waiting to detonate in your face over at Bursa.

My love with Bursa can be attributed to my courtship with Gcorp when I accumulated a bunch at a low of around $0.40-42 in late 05 which has since rocketed to a 52 weeks high of around $1.4++. An entry into Gcorp provide a cheaper entry into LKH which I have since liquidated recently.

Portfolio Update

Securities Date of Purchase Price Date of Sale Price Remarks
HoBee 6.5.2004 $0.265 23.5.2007 $2.3
MultiChem 2.3.2006 $0.25 17.01.2007 $0.255
LKH 29.9.2005 $0.6 28.3.2007 $2.16
Special Dividend of 0.075 Less Tax in 06
LKH 5.10.2005 $0.645 28.3.2007 $2.16
Special Dividend of 0.075 Less Tax in 06
Lion Teck Chiang 3.10.2006 $0.245 15.2.2006 $0.265
TPA 12.1.2006 $0.24 27.12.2006 $0.25
Adjusted for Dividend of 0.06124 Tier One, 0.01095 Less tax in 06
Lee Kim Tah 15.1-7.2.2006 $0.33 7.9.2006 $0.375
Bukit Sembawang 24.5.2004 $13.4 6.10.2006 $22.4
Not Inc. of Special Dividend 3.125 Less Tax, 1 for 2 @5 in 05

Portfolio Adjustment

1. Partially pared my stake in Bukit Sembawang

2. Increased my holding in Lee Kim Tah. However, after getting hold of this piece of news which has yet to be disclosed by the company....short term weakness might prevail

FROM THE STATES
Land allotment to Singapore firm cancelled
Special Correspondent
366 words
2 March 2006
The Hindu
08
English
(c) 2006 Kasturi & Sons Ltd
Without environmental clearance, housing project could not be completed: Government
MoU cancelled by order dated February 17 Company can question cancellation, says court The State Government has cancelled its order allotting 104.71 acres of land to a Singapore-based real estate company. A submission to this effect was made before the First Bench of the Madras High Court, which is hearing a batch of public interest litigation petitions questioning the allotment and attributing ulterior motives to the deal. On Wednesday, when the matter was taken up, Additional Advocate-General A.L. Somayaji informed the Bench that the memorandum of understanding (MoU) between the Tamil Nadu Government and Lee Kim Tah Holdings Limited, as well as the land allotment order passed by SIPCOT, had been cancelled by a government order dated February 17. The Bench, comprising Chief Justice A.P. Shah and Justice K. Suguna, allowed the withdrawal of the petitions, stating that in view of the cancellation of the land deal the main prayer in the petitions did not survive. The judges, however, gave liberty to the parties concerned to seek other remedies available in law, and added that the Singapore company too could question the cancellation order. The government order said that since the mandatory environmental impact assessment clearance could not be obtained for developing a township at the Siruseri plot, the project could not be completed as intended. Invoking the "impossibility of performance" clause, in view of the objection raised by the Ministry of Environment and Forests, the order said the MoU needed to be cancelled "since the subsequent event has put an embargo on proceeding with the project, and the purpose for which the allotment orders were issued became frustrated." In this regard, it pointed out that the Centre, through a communication on December 30, 2005, directed the State to stop all activities at the site. The State submitted a compliance report to the Centre on January 17. Intimating the cancellation of the MoU and the sale deed, the State Government also asked the Singapore company to re-convey the property so that the money deposited by it could be refunded.


3. Took a trading position in TPA strategic at 24cents. I see a potential return of 20-30% in 2-3 months time. Low risk involved due to its huge cash holding.

4. Initiated a position on Multi chem at 25 cents since the PCB sector seems to be doing remarkedably well despite the slum in the general tech sector. Moreover, Eucon which is a proxy to Multi Chem has started to cheongggg...

Gcorp @ M0.40

General Corporation Berhad


I am a staunch advocator of the much esteemed Low Keng Huat, so how can I possibly miss out on its grossly undervalued holding company – General Corporation. Several positive catalysts have since transpired and a rerating of the stock seems imminent and we will provide a meticulous breakdown of these determinants in our analysis.


Profile

General Corporation Berhad’s(GCB) principal activity is developing of residential and commercial properties. Other activities include manufacturing of tyres and other rubber products for industrial use, manufacturing of confectionery products, investment in associates, construction of buildings, quarry operations, provision of management services and investment holding. Operations are carried out in Malaysia, Australia, Singapore and other countries.





Balance Scorecard

Half Year 06 FY05 FY04
Net profit M$3,733,000 M$6,137,000 M$10,167,000
EPS M$0.0127 M$0.0207 M$0.0342
Debt/ Equity 0.0490 0.0681 0.1032
Current Ratio 2.13 2.17 2.00

Share Information

Date 31.01.05 29.07.05
Price M$0.51 M$0.47
P/E 24.6x 22.7x
Dividend Yield 5.4%
Adjusted NTA 1.338


Positive Catalysts- Cessation of loss-making Rubber and Confectionary Division


GCorp’s rubber products division, represented by Fung Keong Rubber Manufactory, has shut down its loss-making manufacturing activities since early this year. Moreover, its confectionery division whose products are marketed in Australia under the Simpsons, Charlie and Uncle Bills brand names have been plagued by high commodity prices and limited operating efficiency compared to global brands such as Cadbury, Hershey and Nestle.

Henceforth, for the past few years, GCB's rubber products division and confectionery business have endured acute haemorrhage. Thank god! The drain on the coffers has now been arrested with the cessation of Fung Keong Rubber Manufacturing, Vredestein FKR and English Style Confectionary.

However, the liquidation of both the rubber products and confectionery divisions will only benignly elevated its financial results from 2006 onwards and a net loss of about RM5.1 million will still materialize for FY06.


The Goose that lays golden eggs


Gcorp’s associate Low Keng Huat is shedding its mammoth baggage through its aggressive rationalization and divestment plans in order to capitalize on its core competency of property development(Refer to my earlier article to get a good grasp of LKH).

The causes for rejoice are aplenty -- the property market in Singapore has hit rock bottom and LKH is poised to book some hefty gains with the divestment of several non-core assets. Besides, LKH forging a strategic partnership with UOL/UIC by leveraging on each other comparative advantage will put both parties in good stead in time to come. The tie-up with Wee Cho Yaw is a match made in heaven as Gcorp will assist UOL/UIC to break into the Malaysian property scene. In return, LKH can tap onto UOL’s brandname/expertise and UOB’s financial clout to offer innovative financing for its home buyers.

The beauty of geographical diversification is finally bearing fruit -- with Malaysia experiencing a softening of its property sector, adverse operating conditions is bound to delicately dent its operating figures which will be opportunely offset by favourable operating results from its Singapore division.

According to my estimates, LKH is expected to register a profit of at least S$33.6 million for its 2nd half FY06, translating into M$36 million filtering down into Gcorp’s bottomline. However, its loss making divisions will most likely trim the gains to M$30millions, evolving into an alluring EPS of M$0.114 and undemanding PE of 3.5x at the current price level of M$0.4.

Over the medium term, with new launches in the pipeline commanding an estimated gross value of RM720 million, Gcorp is poised for a rerating by the investment community.



A blemish that smudged the masterpiece


Low Keng Huat outstanding shares is 120,953,000
General Corp owns 48.6% of Low Keng Huat
Net asset quoted outside Malaysia -- M72,773,000 (Low Keng Huat) Item 15 of AR
Book Value of Low Keng Huat – 72,773,000 + 37,110,000/(48.6% x 120,953,000) = M$1.87/share = S$0.841

In item 15 of the AR, the market value of quoted shares (Low Keng Huat) is M$58,366,000, whereas the net book value of these shares in GCorp’s balance sheet is M$139,080,000 indicating (M$139,080,000 - M$58,366,000) /297,084,626 = M$0.272 /share of its NTA is at best “illusionary” and not realizable in the immediate future.

Interestingly, General Corp. adopt an extremely aggressive stance of accounting(far more superior to marked to market valuation) that booked its associates’ interests at cost plus retained profits. At the time of inception, Low Keng Huat is trading at a mere S$0.43, yet the net book value of these shares is lodged at an astronomical high of $0.841 which will only sky rocketed further as long as LKH stays in the black. Retained profit is mere form and short on substance as a single bad investment decision can wipe out years of cumulative retained profits in the blink of an eyelid.

Burden with these lingering doubts, I made a call to Gcorp, hoping that they could shed some light on the true net book value of LKH. What could be more enlightening than a answer from the horse mouth. Their evasive posture of refusing to provide me with an actual figure confirmed my initial suspicions.


Merits


With its haemorrhage arrested, management is now poised to start afresh from a clean slate and embarked on its next phase of expansion – building up its land bank and zealously growing its bottomline through new property launches. The invigoration of new blood (Low’s descendents) into the management ranks seems to have injected a new lease of life into its business. Taking a cue from LKH”s AR which will smitten every investor who see this writings on the wall “priority was given to improve bottomline and shareholders’ returns rather than increase turnover at the expense of profitability.”

Although NTA was artificially inflated through some incongruous accounting methodology, however, at its adjusted NTA of M$1.338, Gcorp is only trading at a mere 0.30x of its NTA, coupled with a attractive forward PE of 3.5x, all these inherent ingredients primed GCorp for a stratospheric rise to the moon.

Low Keng Huat Update1

LKH is a value play( the kind of stock Peter Lynch would yearn for), hence the dearth of a exciting growth story. The catalyst is the divestment of non-core assets such as Chijmes, Duxton NZ and possibility Duxton Melbourne and Perth. In the foreseeable timeline of 1-2 years, cash/share net of debt could easily surpass the current share price of 68cents.

The attraction of LKH lies in its cash hoard, hence future earning streams that are likely to come online such as Twin Regency, Domain 21, Regency Suites etc are omitted from the analysis.

Recently, I called up the company to enquire about the possibility of providing me with a breakdown of their holding cost(net book value) and total borrowings of individual hotels under their portfolio. Thrilled by their response that they will answer all queries that is public information. I waited diligently for their reply.
To my dismay, the response by the finance director 3 days later was, the information can be partially gleaned from the Item 38 of the AR which is a geographical breakdown of their total assets and liabilities. However, as their assets are not marked to cost, it provide little or no value in computation of the net book value of their hotels.

Since management is not forthcoming with their disclosure of public information, I shall pursue the matter no further and wait fervently for the announcement of their FY financial statements out in March 06 to gain a more comprehensive picture of their financial standing.

I suspect LKH is raising cash to dole out some scrumptious dividends so as to utilize their S44 tax credit, however their reply got me so peeved that I will only raise the question at their upcoming AGM.

I had incorporated the liquidation of Duxton NZ into my above analysis, however a complete analysis of their cash and debt standing proved to be impossible due to the dearth of details from their Chengdu Amara and Chijmes divestment, henceforth my analysis contain a certain degree of conjecture and postulation.

Will go into seclusion till their FY financial statement is out, as vultures are spotted in both the “mother” and “son”.