Monday, 18 September 2017

Manage Cash Holdings in Portfolio

I read yesterday’s Straits Times article ‘The best investors sit on plenty of cash’ with interest.

What are the roles of cash in your investment holdings?

Intuitively, cash gives you options during extreme market conditions. It means one can buy at depressed market price to average down, to build a position in a promising counter. In essence cash presents opportunity to reduce your losses, or increase your earnings when market recovers. 

Cash also serves as an anchor to your portfolio as its value is constant. It is a valuable tool from a trade execution stand point as described above. It also helps cushion the fall in portfolio value from a psychological stand point, reducing anxiety in investors and prevent hasty and erroneous decision making. 

However, to make full use of  cash during market downturn, one needs to have the capability of identifying the approximate low price point of your stock. More importantly, investor needs to buy fundamentally strong counters to make his bottom-fishing attempt worthwhile. 

This means changing one's mental attitude towards cash and not view it as a drag on your portfolio returns, but a valuable tool to earn you big returns. 

And fundamental analysis is a regular homework for investors. A good sense of general market conditions and broad understanding of industry dynamics help too. 

How much cash should one hold in your portfolio is then a personal choice. In general it falls within the range of 10% to 40%. I pick 15% at current market conditions which is slightly optimistic buy not euphoric yet, and may increase as market rises. Max could be 30% when STI hits 3,500. 

Some people go to the extreme level by holding 50% or even 100% cash. I would advise against that. While this might entail that that he has plenty of options on hand to cherry pick during market trough and make a killing subsequently, he may miss the preceding market rise.

Having a huge cash pile also messes with one's psychology. It takes an even greater mental discipline to sit still. And slight market movement may be amplified in his brain and trigger buy action due to eagerness to earn. This is a dangerous situation as the person is put in a position where he is always tested and tempted. 

And such extreme investment tactics require an even greater level of technical expertise and psychology maturity to deal with the uncertainty. Unfortunately many investors tend to over-estimate themselves in this area. 

Market is rational most of the time, and it is difficult to outsmart him. Hence we should not try too hard to beat him by adopting extreme cash management practices. Often, we should maintain one foot in the market, stay close and feel his pulse, and calibrate our decisions accordingly. There are times to buy, to sell, to trade, or to do nothing. 

Only during extreme market conditions then radical behaviours such as an all-in show hand is appropriate. 

Sunday, 3 September 2017

Is Tai Sin's FY17 Results a Cause for Concern?

Tai Sin Electric has been one of my long-term shareholdings since 2012/2013. Lets take a look at its latest Financial Year results that has just been released not long ago.

Overall P&L
Tai Sin has not had a great year in FY17. The total revenue, gross profit and operating profit have decreased as seen in table above.
As a cable and wire manufacturer, it is important to monitor copper price as it is the main raw materials for cable production. Tai Sin showed ability to navigate a rising copper price in last year by maintaining a constant gross profit margin at 20.6%.

But operating margin did not fare as well and we have a decreased operating margin in FY17.

Segment Revenue Breakdown

The largest business segment, Cable & Wire, suffered a 19.3% fall in revenue. In fact its $41.9m revenue reduction is more than the fall in overall revenue amount (see table above): $41.2m.

The second largest segment, Electrical Material Distribution, had higher revenue but its too small an amount to cushion the lower revenue in Cable & Wire.

Balance Sheet

Tai Sin is still in a net cash position with $22m of cash and $10m of short term borrowing. It is worth noting that short term borrowing decreased from $36.9m the previous year.
Trade receivables decreased by 21% compared to FY16.

Nothing unusual here.


The net cash from operations jumped from $8.4m to $37.4m in FY17. Looking at the changes in working capital, the line item with big change is the collection of trade receivables: $18.9m in FY17 versus -$21.2m in FY16.

Management’s comment as follow:

‘The net cash from operating activities of $37.42 million was mostly due to lower sales, lower purchases, lower bonus accrued, payment of gratuity and income tax during the year’

Management seems to have a negative view about the increase in ops cash flow and attributed it to lower business activities that leads to lower sales on credit and less cash bonus payment.

Nevertheless, it’s still a happy problem for Tai Sin that its main operation is highly cash generative, enabling it to pare down debts, acquire other companies or simply to maintain its dividends payment.

My Opinion

Its clear that the business environment has been difficult in the past one year based on the lower revenue and income. Management cited that this is due to ‘lower delivery to the Commercial & Residential, Industrial and Infrastructure Sectors as a result of completion of deliveries for the existing contracts.’

In my memory, such a narrative of a slowing residential, commercial and industrial sectors doesn’t seem to be new. When I looked back at annual reports since FY13, Tai Sin had voiced similar warning about the slowdown in local construction activities and sluggish economic performance affecting its top-line, and the only bright spot in the industry is the government-initiated infrastructural projects.

Yet the company had actually performed rather consistently. Its revenue and net income has been hovering around a tight band of $280m - $320m, and $20m - $27m respectively.

It seems that while Tai Sin is clearly aware of the industry challenges and been managing shareholders’ expectations by stating them explicitly, it has also done a good job keeping its business afloat.  

And looking at the local construction and civil engineering landscape, there is no shortage of projects especially infrastructural developments initiated by the government e.g. new MRT lines, T5, Tuas port. HDB flats are still being built on a large scale, with new residential areas in the pipeline such as Tengah.

While the industry is fragmented with small players, there is a market for Tai Sin’s product. It being a market leader, and with years of experience, should have no issues maintaining a stable revenue in a boring industry, barring a severe industry and economic downturn.

From a portfolio perspective, I bought Tai Sin as a dividend play to provide cash inflow. My yield on cost for this counter is a comfortable 9.8% based on dividend per share of $0.0235. Assuming Tai Sin is going to pay out dividends of $10.2m as per last year, it is well below the net operations cashflow of $37m.

Hence, I am not worried about Tai Sin’s reduced revenue and earnings. However, it would be a cause of concern if the results drop again next year. I shall monitor its quarterly report closely.

As of now, it should continue to sit in my portfolio and dispense cash to me twice yearly.

Thursday, 3 August 2017

Raffles Medical Q2 FY17

Raffles Medical (RM) just announced its Q2 2017 results.

Results Overview
At first glance, RM’s Revenue, Ops Income and Net Income for Q2 remained constant or showed marginal fall over Q1 respectively: 1%, -1.9%, -2.3%.

Its Net Cashflow from Ops of $23.6m is similar to the $23.8m in Q1.

Balance sheet remains strong, with $112m cash and only $53m loans and borrowings.

All in all, results seem fine.

But its share price is a different story. It dropped about 5% to $1.21 on 1 Aug, one day after its result release, and fell further to $1.185 on 2 Aug afternoon. That is about an 8% drop since result announcement.   

This piqued my interest. RM has been on my watch list for long and I am interested to know if this is a good chance to start accumulating the shares.

RM Traded at High Valuation
Market has high growth expectation on RM when its shares traded at an expensive PE ratio of 32x, based on share price of $1.3 before latest quarter results. It was priced very optimistically due to its growth prospect: soon-to-commence Raffles Hospital extension, RM’s 2 new hospitals in Shanghai and Chongqing etc. In other words, RM was expected to have a 32% growth in earnings in the coming year.

Compare this to the market benchmark STI ETF, which is only trading at PE ratio of 13x and its obvious that market was valuing RM richly.

Growth Momentum Losing Steam
So Q2 results showed stagnating growth. Management explained that this is due to softer than expected demand from foreign patients (I take this as the medical tourism trend slowing down), high staff costs and expenses for consumables used. Looking forward, management acknowledged that market conditions are challenging due to economic slowdown and increased competition.

We also read more specific details from analysts’ report. RHB shared that management opined the China hospitals could take up to 3 years before EBITDA turn positive. Despite full quarter rentals from RM Holland V, revenue from healthcare services fell 1.1%, implying bigger drop in healthcare service revenue.

Suddenly outlook turns murky and not so promising anymore.

I suspect the management is also caught off guard by the business slow down. Under point 9 in Q1 report where management was asked about any variance between forecast previously disclosed and actual results, management replied that ‘current financial period’s results showed a lower than expected revenue whilst the Group remains profitable’.

Let’s look at some numbers. The company’s growth momentum has indeed weakened considerably in recent quarters. If we look back 6 quarters, there is a clear trend of deteriorating revenue and profit from operations:

Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Y on Y Growth (%)
Profit from Ops
Y on Y Growth (%)

Share price reacted by dropping big in last 2 days as mentioned above.

Such is the pitfall of investing in high growth company. All is well and share price will keep rising, so long as the company can sustain its growth. However, when company shows signs of a slowdown, market would beat the share price down. The seemingly constant revenue and earnings growth quarter after quarter give the illusion that such growth can go on indefinitely, but we never know when will the growth taper off.

Ability to Control Cost?
So where do Q2 results leave RM with?

The key thing is to find out whether RM can execute its expansion plan well to sustain its growth, and concurrently control its cost.

Firstly, managing cost. We look at past 5 FYs’ revenue and operating income to derive its operating margin. It seems that RM has been able to maintain its margin quite well around 21%, until FY15 when it started dropping to latest FY margin of 17%.   Also, manpower cost, the largest component of RM expenses, has been creeping up to 51% of total revenue in latest quarter.  

Q2 2017
Q1 2017
Ops Profit
Ops Profit Margin (%)
Staff Cost
As % of Revenue

It seems to me that manpower cost will continue to be the largest component. And keeping it manageable is critical in maintaining RM’s cost efficiency.

As for China, I am even less certain about it. It’s a new market after all. Start-up costs would definitely be high in the initial years. While RM can hire local doctors and nurses which may come cheaper, company needs to invest in extensive training to enhance their service to a level similar Singapore. RM may also need some time to finetune its medical charges to suite local market’s spending power.

The only comfort here is RM is still able to increase medical charges due to the industry dynamics of healthcare inflation, but has to do it at a measured pace.

However, on the grand scheme of things, RM does have a clear expansion plan well-drawn out, with hospital expansion strategy mooted few years back to address the increasingly competitive market today. Overseas expansion plan is spearheaded by acquisition of MC Holdings to establish presence in China, Vietnam and Cambodia, followed by hospital development in China.

So its really down to the management’s execution now. Can RM pull off a successful expansion internationally and subsequent integration into its core business?

My Take
RM has always traded at high PE and that held be back from buying its shares for quite some time.

Recent drop in price triggered by the result could have been an opportune time to establish a position, provided if we can ascertain that the negative result is just a blip in RM’s growth story caused by a one-time event. But it is clearly not the case this time round, as RM is facing real challenges and much uncertainty in its expansion plans and earnings can be muted for a few years before improving. Establishing a presence in a new foreign market and navigating around obstacles such as foreign regulations, local residents’ tastes and consumption patterns, incumbents’ competition can be really tricky.

Having said that, I would still want to buy RM at a comfortable price. This stems from my confidence in RM’s management capability in growing it into the largest private healthcare player in Singapore, with the key person Dr Loo still helming the company. The company is also fundamentally strong, shown through its stellar performance over the years. 

Furthermore, healthcare industry, is promising in Asia with the mega trend of increasing affluence, a growing middle class in SEA and China that is increasingly health conscious, and ageing population that needs more healthcare service. The market is there for RM to seize.

But I will need to manage my risk well by buying at a lower valuation to cushion against future negative results. And market should not be as shocked at future earnings fluctuation as it is now, given senior management guidance and recent slowing growth.

I reckon that a PE of around 25, which, based on latest full year EPS of 4.04c which means a price of around $1, will be a more comfortable price range. PE25 is also at the lower range of its PE for the past 5 years.

I will further manage my risk, by splitting my capital for RM into 3 portion. By entering in tranches, it allows me to lower my overall purchase cost should price drops further. 

Thursday, 27 July 2017

Selling Decisions Made Simpler

Buying and selling are two sides of a successful investment. But selling can be tricky, especially when counter is deep in the money and investors are caught between realising profit or waiting for further rise.

Selling actually deserves much more attention in one's investment journey, but we rarely accord the same level of analysis and scrutiny to selling as per buying. It  is important as allows investor to recycle their capital into new counters/assets, or keep them in war chest for better opportunities. Sometimes it prevents loss from snowballing, and allow us to preserve our capital. Also, in the grand scheme of things, we need to take active steps in managing our portfolio as there is time to buy, to sell, or simply do nothing.

I analysed some of my recent share sales when it is in green but did not go as well as expected, and attempt to map out the different situations where I thought of selling. The decisions are compiled into a table characterised by judgement in 2 aspects: company fundamentals and price technicals. This table should help me make better selling decisions in future, and I hope it can be useful to readers too.

As an investor, company fundamentals should be the foremost consideration and one should analyse fundamentals first, with an eye on the expected, reasonable performance going forward. After all, buying into a company is essentially placing your faith in its ability to earn higher profits in future, so certain extent of prediction is required. Hence I have further segregated the 'Fundamentals' axis into good or bad future business performance.

For the 'Technical' axis, I am just looking at current price action and not attempting to forecast future movement.

How to make use of the table? First, look at the vertical axis and determine whether the company currently has good fundamentals. Then move on to horizontal axis to see if its price is currently on an uptrend or downtrend.

While the table maps out various selling considerations and help frame the thought process, it is by no means definitive. Investors would still need to make some judgement call with regards to company's present fundamentals and future prospects. For example, with a counter that is currently facing difficulties but its share price been rising, such as some small marine companies in the oil & gas sector, one will have to judge whether its future prospect is good with high possibility of turning around. That will then affect whether the counter should be sold or bought more.

Anyone thinks this can be used to guide selling decisions for some used-to-be-strong companies but now going through a rough patch? Eg. M1, Comfort, SPH?

Thursday, 29 June 2017

Term Insurance

I have never talked about personal financial planning in my blog, even though it is such an important topic.

It is important because financial planning helps us manage risks of undesired events that can wipe out one’s savings and assets. The cost of dealing with, and recovering from, these catastrophic events is very large, such as medical cost for dread illness, cost of surgery due to accidents, or cost of having a caretaker over long term. These events are unforeseen but the risks are very real. Financial planning helps us prepare for these events happening, and enable us to recover from incidents more easily and get back on with our life.

Financial planning is a broad topic. Insurance is one important piece of the puzzle. A commonly shunned topic among common folks, but no less important than investment.

In general, insurance plans can be grouped according to the purpose and type.

Life Insurance
Health/Medical Insurance
Investment and Annuity
Term Plan
Critical Illness
Investment Linked
Whole Life Plan
Long Term Care
Endowment Plan
Medical Expense

Universal Life Plan
Disability Income

I just want to jot down some personal opinions here about Term Insurance. Purely on Term Ins alone, I am not wading into the debate on term vs whole life vs ILP. Tonnes of well-argued opinion pieces in other blogs.

It should be the bedrock of one’s insurance portfolio
I believe Term Plan essentially fulfils the simplest objective of protecting against permanent loss of income when family’s breadwinner dies or becomes incapacitated to work. Due to its low premium and pure-protection nature, it should be included in one’s insurance portfolio.

It is suitable to protect against temporary needs
Term insurance provides coverage for a specific period (hence the name ‘term’), after which the plan will end. It is suitable for temporary financial commitments which cease after some years. For example, mortgage loan payments with fixed loan tenure. Providing for dependents can also be a temporary need for some people who are clear about dependents’ timeline, ability and willingness to eventually self-support when they start working.

Consider difference in amount of financial commitment further down the road
First point here is that term plan should cover total amount of liabilities, which require some thoughts and projection. But do bear in mind that some liabilities would decrease as we grow older, because we have spent our working life providing for, or clearing off, these liabilities. Mortgage loan is one such case.

Another scenario. There is an ‘end-date’ to which we would need to provide for our kids, which is till the age they start earning their own keep. We need more money to raise 5-year-old kids compared to a 15-year-old. The older kids may take on part time jobs to supplement some income. One can explore suitability of a decreasing term life insurance here.

What happens after term plan coverage ends?
Term plan usually ends at 60 or 65. While financial commitment might have ended, possibility of major medical expenses increases with age. And medical procedures cost a bomb. Total surgery and treatment costs for heart bypass or liver transplant can a 6-digit amount.

One may still need an insurance that provide lifetime coverage against critical illness, especially during old age, to prevent a one-time capital drawdown to treat big diseases that can deplete one’s assets.

One consideration that I have is, would my financial assets built up over the years from investment be able to cover medical costs for different plausible illnesses or major diseases comfortably, and allow me to enjoy life travel around the world and perhaps hire caregiver too? Would need to do some deep visioning exercise and project the amount I would have accumulated by then. But given that future is largely uncertain, I need to be conservative in estimates. And there are many what ifs, such as another financial crisis just when I need to drawdown the capital for medical treatment.

But my heart says that I do not really want a large chunk of my wealth to be blown on single instance for medical treatments.

I read that there are term plans that cover up till age 99. Sounds like a solution too and that’s for another article some other day.

Thursday, 8 June 2017

Could Basic FA Have Helped Me Avoided Noble?

I bought Noble stock at the earliest date of, according to my record, early 2010 at a price of $1.69 (price quoted pre-10 to 1 share consolidation from here on). I traded a few rounds of Noble after that, with the highest buy price at $2.02 and lowest at $0.845. Details were sketchy as I just started investing back then and didn’t keep proper transaction records.

And what is the current price of Noble on 7 June 2017? $0.033. That is a whopping 98.4% plunge in from the highest price I ever paid for it. For the record, I held my Noble shares from 2010, and just recently sold in Mar this year at $0.195. In other words, I witnessed its share price dropped, and dropped, and dropped further. I lost around $13k on this share. 

It is the most epic, disastrous and horrendous investing experience I ever had.

Investors usually have a short memory and I believe many would not recall that Noble was once trading at $2.2, and perhaps I am one of the very few investors who held Noble for this long, and still bother to calculate the amount of loss and do a post mortem on this? 

While there are many analysis now looking back at Noble and concluded that it inflated its assets, had questionable accounting principles and unsustainable business models, they don’t matter to me because these are with hindsight benefit.  I am interested to know whether I could have avoided Noble, or rather, sold off before Iceberg and Muddy Waters shorted it using basic Fundamental Analysis which I usually employ for other share investment?

So, this exercise would look at Noble’s business quality using basic fundamental indicators, which are gross profit margin, net profit margin (pre tax), debt/equity ratio, pre tax operations cashflow, free cashflow, pre tax operations cashflow to net earnings ratio. I pick these because I think they function quite well as filtering criteria that remove companies that one should not invest in, and represent the qualities I look for: healthy margins and good earnings backed by strong cashflow with conservative amount of debts.

Iceberg released its research report in Feb 2015, with Muddy Waters followed suit two months later. So the period of this study will be the 5 FYs from 2010 to 2014. Without further ado, lets start.

*I extracted the figures from paid service of ShareInvestor portal

Gross Profit Margin
Net Profit Margin
Cashflow from Ops (Pre tax)
Free Cashflow (SN4 - Capex)
Cashflow from Ops (SN4) /Net Earnings before Tax

Would the numbers have made me reject Noble? – Yes, Probably, Not Sure, No
·       Gross Profit Margin – Yes. Extremely low margin of 1 plus percent which had been deteriorating from FY10 to FY14, albeit with a small improvement in the last year.

·       Net Profit Margin – Yes. A super big turn off with a company that earn less than 1% net on its revenue.

·       Debt/Equity Ratio – Yes. A debt/equity ratio consistently above 1. It means that out of all the assets that it owned, more than half did not belong to the company/shareholders. And in most of the years, only 25% of the assets belong to the true owner of company. Not healthy at all.

·       Cashflow from Ops – Not sure. While Noble had 2 years of negative cashflow out of the 5, it did have 3 straight years of positive cashflow. I may need further digging to find out how does this compare to its earnings, revenue, and what caused the large positive cashflow in FY11.

·       Free cashflow – Probably. Noble had only 2 years with positive free cashflow out of the 5. It showed huge volatility here, with free cashflow swinging from big negative to big positive annually. Such inconsistent free cashflow would probably deterred me from buying the share.

·       Ops Cashflow/Net Earnings Pre Tax Ratio – Not sure. Same as SN4, Noble did have 3 positive years from FY11 to FY14, and the numbers looked good too: with at least 1.6 times, and highest of 3.9 times ops cashflow backing up its net earnings. But I would probably seek more clarity on the -6.45 ratio in FY14.

Based on these very top-line, fundamental numbers, I deduced that Noble had extremely weak earnings margin and balance sheet strength. As for cashflow, it had questionable, or less-than-desired cashflow generation ability.

But could these numbers have prevented me from buying its shares?

I shall say that if I were thinking of buying it for the first time, these numbers would have turned me away, simply due to its appalling earnings margin and extremely high level of debts.

But if I already had a position in it, the chances of me selling out would be much lower. It would have riled some suspicion in me, prompted me to study the numbers more in depth. But the complex financial statements meant that I would probably give up halfway before gleaning anything conclusive. There could also be many other psychological factors and noises at play: buying into Noble’s past glory of ever-increasing share price, swayed by news or analysts report on commodity bull run, Noble’s size and blue chip status, mental reluctance of cutting loss etc.

But one thing I will remember by heart is that you have to scrutinise the financial statements before investing. This is the most basic of company research to be done religiously. And when there are numbers similar to above, avoid and look for others. It would be better to miss out profiting than losing money on it.

The share purchase happened long time ago in 2010. But looking back at old experiences can usually provide golden lessons too. Let this be a costly lesson to remember for life.

Readers, any experience, stories or opinions to share?

Manage Cash Holdings in Portfolio

I read yesterday’s Straits Times article ‘The best investors sit on plenty of cash’ with interest. What are the roles of cash in your i...