Monthly Archives: January 2013

China Minzhong – Buy

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Fair Value -> S$2.70, currently trading at S$1.04

I’ve had a couple of readers request that I look at China Minzhong. It appeared on my original Singapore screen but I passed it up because of the S-Chip link. I subsequently decided to have another look at the company and since it’s had a bit of a run lately, I thought I’d see if it’s justified on valuation grounds or just a victim of the January effect.

Thesis
China Minzhong is a leading vertically integrated vegetable processor in China currently trading at 4.0x 2013F earnings. As the free cashflows continue to grow with earnings and market begins to understand and appreciate the business China Minzhong has the potential to see a rerating and failing that the growing earnings will mean an investor will still be compensated for the risk taken.
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Malaysia Screen

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The second screen that I’ve decided to look at is Malaysia because of geographic proximity and ease of investment for investors located in Singapore.

When looking at Malaysia, I’ve tried to stay away from any agricultural companies that are purely focused on palm oil for ESG reasons. A quick scan of the companies on the list revealed that JCY has been struggling (although management is confident their situation will improve mid-2013). Puncak Niaga looks interesting prima facie but the profitability has been volatile over the past couple of years and the business model is based on receiving contracts to repair and operate dams making it difficult to value. I’ve also shied away from holding companies that have a menagerie of businesses in their portfolio.

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Ace Hardware – Review

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A reader asked for an opinion on Ace Hardware (Ace) so I’ve had a quick look at it to determine whether it’s an investment worth considering.

Fair Value -> 1,780 – 2,280IDR, currently trading at 800IDR

Thesis

As the Indonesian middle class  and discretionary incomes continue to grow, retailers will benefit as they nibble on pieces of an ever-expanding pie. The premium retailers who occupy a niche market and have developed sustainable competitive advantages will significantly outperform. Ace Hardware stands to be one of those players with no long-term debt and an expanding store footprint.

Looking at the traditional relative valuation metrics it appears that Ace is overvalued. The level of development and amount of growth ahead of Ace mean that it’s worth looking at the total potential market for Ace to determine the intrinsic value. I believe that considering the total market for home improvement in Indonesia, Ace will still be undervalued, albeit expensive on near term metrics.
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STX OSV – No Recommendation

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Fair Value – >S$4.00, currently trading at S$1.35

Thesis

STX OSV (STX) is currently stuck in the mud because of pending rumours of a fire-sale to an Italian Ship Builder (Fincantieri). While the EV/EBITDA multiples and high ROE suggest that STX is worth significantly more than its current price (>S$4.00), rumors circulating surrounding the sale are suggesting that the sale could go ahead for 900bn KRW, which would only represent ~S$1.60 vs the current price of S$1.35.
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OSIM – Buy

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Fair Value –> S$1.80, currently trading at S$1.4650

Thesis

OSIM is a high margin business that is producing lifestyle products targeted at the increasing upper-middle income demographic. OSIM is currently expanding existing store footprint, while deploying cash that was raised via a bond offering in other strategic investments and share buy-backs. As the current cash hoard is used the business will return to previous RoE levels, which at ~50% beats the competition.
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ConscienceFood Holdings – Buy

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I don’t want to appear like as an evangelical sell-side preacher but I’m not going to spend my time looking at companies if they don’t appear to have merit in the first place. This will result in a majority of my posts representing a positive view. Nevertheless, I’ll still post information on the research I do which results in me not pursuing an idea further.

Fair Value – S$1.10, currently trading at S$0.18

Thesis

Consciencefood Holdings  (CSF) was able to obtain >50% ROE prior to the IPO. I believe the business will be able to get back to similar ROE levels either through acquisitions or returning capital through dividends.

The ROE for CSF has is significantly better than peers in the food manufacturing industry. The fact that there hasn’t been a lot of corporate activity since the IPO suggests that management isn’t likely to make any rash decisions.
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Setting up shop in Singapore

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I’ve recently been looking into the regulations surrounding setting up a formal fund management company in Singapore. There have been a number of proposed changes to the regulatory framework recently, which will limit new fund managers who want to set up shop in Singapore. While these regulations won’t stop a majority of fund managers setting up, I’m unsure whether they’ll have their intended consequence – increasing investor confidence and reducing the impact of a macro shock – in the current form. A more finessed version would be a more appropriate remedy for an industry that has been chewing on a bitter pill for the past couple of years.
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EDL – Buy

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Fair value -> 10,875LAK, currently trading at 4,650LAK

Thesis

As Laos continues to develop, utility companies will benefit from the growing populations and increasing infrastructure that’s able to carry products and services to more of the populous country. EDL is currently trading at 5x 2012F earnings with a 11% dividend yield (based on a 50% payout ratio). While highly geared at 92%, this will rapidly dissipate as the consistent earnings streams come through. Peers in the region are trading at 25x 2012F earnings and don’t have the growth profile that EDL does. EDL presents another opportunity to profit from a rerating and investors will be paid to hold it an wait.
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BCEL – Buy

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Fair value -> 15,000LAK, currently trading at 6,950LAK

Thesis

BCEL is in the right position to benefit from the increasing penetration of banking and subsequent loan growth in Laos.  Loan penetration in Laos in 2010 was only just above 12% (Loans as a % of GDP), compared to the Philippines at 34%, Thailand at 86%, and Malaysia at 149%. As Laos develops, BCEL is ideally positioned to leverage the growth from increased foreign capital flows and debt penetration.

Currently, BCEL is trading on 6x FY2012E earnings, with 50% of pre-tax profits paid out as dividends, giving it a 12% dividend yield. Even if BCEL doesn’t rerate closer to ASEAN peers, which are trading on 13x FY2012E earnings and 3% dividend yields, investors will still be paid handsomely to hold it.

I believe that BCEL is worth 2x the current price on valuation metrics and considering the level of growth that it is going to experience in the next decade.
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