My Investment Journey

I would like to share with you my journey in investing and some of the mistakes that I have made along the way. If you are new to the concept of investing, you can read up about my post on What is an Investment where I have briefly touched on the basic concepts about investing. I hope that my story will serve as a inspiration to those who are interested to learn about investing but do not know where to start. I also hope that you will avoid the mistakes I have made along the way.

NTUC FIXED DEPOSIT
My very first investment was made in 2005 when I was 16 years old. It was an NTUC Income fixed deposit plan that returns 2.5% per annum (p.a) for a minimum holding period of 5 years or 3.5% p.a if held to maturity of 10 years. There was a minimum sum of SGD10K, which I did not have, but I tagged my savings of SGD2K along with my parent's money to make that investment. Although I do not own the investment in name, it was my very first investment that got me started with the concept of growing my money.

2015 is the maturity of this investment, but I sold my ownership of this investment to my mother so that I could purchase my very first stock in 2011. So when my parents cash out on this policy, I have no more claims on the proceeds. That SGD2,000 would worth SGGD2,821 today if I had left it untouched. The stock that I had substituted for is only worth SGD2,405 today, including the dividend gains. But it was my first stock purchased and I have never regretted the decision.

LANDBANKING
Subsequently in late 2008, under the referral of a friend, I got to know a land banking agent from Walton International. Being very clueless at that time about cross border investing, interest rate parity, foreign exchange rate risk, property bubble etc, I thought that the 20% track record of y-o-y return on land banking investments was very attractive. Thus, I tagged my SGD4K worth of savings, together with my mother and brother's money, to purchase one unit of a project in Georgia, Atlanta (You can read up about it from my previous blog here).

The project was supposed to take 3 - 4 years before an exit is available, but it has been more than 6 years since I last saw my money. Subsequently after I made the investment, the effects of sub-prime mortgage crisis swept throughout the real estate industry, causing a decline in demand for land as developers reel in the losses in the property market. The debt of America was causing some fundamental depreciation in its currency against a prudently managed currency like the Singapore Dollar. The exchange rate which I bought the investment was at SGD1.48 : USD1, while the rate today is SGD1.33: USD1, an immediately foreign exchange loss.

Although Walton is still around and the deed that I received on the land is legitimate, I have already treat this investment as a written-off expense and the experience as a lesson learnt.

INVESTMENT SCAM
In 2009, a few months before I was enlisted in the army, I got to know a group of people who were investing in unconventional products that were off the market. The company was called EuroClass, (they also go by many more names as they started projects after projects). I shall not go into details about this company and the 2 brothers who are leading it. In essence, they promised a high return of invested capital with lucrative cash flow payments over a definite periods of time and they operated under the Multi-Level-Marketing (MLM) model where you can also earn extra income by referring people to invest.

Those who remembers the incident of SunShine Empire can relate to this investment experience. Though they were not operating under SunShine Empire, they were previously affiliated with the fraudulent group before it was prosecuted and disbanded. They were only able to generate cash flow returns when more people invested money with them. And when the inflow was no longer sustainable, they cited excuses of investment failure and the lost of investment capital. In all, I suffered aggregate losses of SGD8K from my mothers, relatives, close friends and acquaintances. This experience is my greatest loss and I vowed to always remember never to succumb to greed and naivety. And may this serve as a warning to those who come across similar "opportunities".

AFTERMATH
After this incident, I started working very hard to learn about investing - in the right way. You can read more about how I started in my article How I started Investing in Stocks.

Now, I own a mini diversified portfolio of a variety of regulated investments. The portfolio includes risk-free bank deposits that generates 3% risk-free returns; a saving accounts that is linked to precious metals; and also in publicly traded Stocks. I am currently managing money for 2 most important women in my life, my mother and my girlfriend. Total asset under management is approximately about SGD130,000. Although I do not have spectacular results over the past 4 years, I have been able to beat inflation by a comfortable margin and did not suffer any losses in capital.

THE FUTURE
I have become more patient with my approach, and I place the safety of capital above all else. My goal is to eventually own a portfolio that would generate cash flows that can cover my current expenditure and also a balance for growing my investments so that I can become financially free. Meaning, if I am earning SGD40K per annum, that is the amount of annual cash flow that my portfolio would need to generate for me to achieve financial freedom. Working backwards, at a rate of return of 6%, my portfolio size would be about SGD670K. I am targeting to reach my goal in 10 year's time. I plan to start learning about real estate investments when I have achieved financial freedom.

Thank you for reading, I hoped that you have enjoyed reading as much as I have enjoyed sharing. If you like my article, please share it so that more people can enjoy it too.

Do check out some of my other posts:
My Company Analysis

Disclaimers:
I do not own any of the images in this article. I am not affiliated nor will I profit from any of recommendations made in the article.

What is an Investment

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." -- Benjamin Graham

To the uninitiated, investing can be a very daunting task because of stories told about people losing their fortunes overnight and becoming laden with mountains of debt. While no one can guarantee against a loss of fortune (not even governments today), I am certain that as long as you do your homework, avoid acting on "hot tips", and never borrow or invest on margin (leverage), you can avoid suffering major losses or be laden with debt. 

There are many ways that you can invest. If  you are new to the concept of investing, here are some of the things which can get you started: Bank Deposits, Bonds, Stocks, Real Estate, Precious Metals, Precious Stones, Wine, Watches, Art, Antique, Intellectual property, etc. Basically, anything that has perceived value many years after its creation can be a form of investment. Find one that best suits your current financial circumstances and personal interest.

You can find out more about my investment journey in this article: My Investment Journey. Or you can read this article: How I Find Capital to Invest to find out how an average person like myself manage to raise money to invest despite my other commitments.

Investments usually generate returns either via Capital Gains or produce Cash Flows. Capital Gains are profits made after the investment has been sold, the ownership of the investment changes hands. Most investments produce Capital Gains, some produces it faster, some takes longer but has a higher returns. The simple rule to make capital gain is to buy low and sell high. A simple concept but extremely difficult to execute.

Cash Flow on the other hand, is money that is paid to you without relinquishing your ownership of the investment. Not every investment can generate cash flow, because there must be a reason someone is paying you for something that they do not own. Cash flow can come in the form of Dividends from Stocks, Coupon payment from Bonds, Interest from Deposits, Rental from Real Estate. Other than that, it is much harder for average people to achieve, but cash flow can also be generated when you earn royalty fees from organisations such as media companies, museums or exhibitors for the use of the intellectual property that you own. 

Personally, I prefer cash flow returns to capital gains because I get to retain ownership of an investment while money is flowing into my pocket. This is akin to buying a money making machine and waiting for it to keep generating money. I just need to make a few right decisions and I will be able to benefit for a long time, making my effort to find such investment more worthwhile. 

If you would like to learn more about the concept of capital gain and cash flow, you can read this classic book called Rich Dad Poor Dad written by Robert T. Kiyosaki. This book explains in layman terms, the concept of investing that can be understood even by teenagers.

Other than reading books, you can consider subscribing to Financial Periodicals where you can start exposing yourself and get updates on the world of investment. Examples of such periodicals include the Wall Street Journal, The Economist, The Business Times. Personally, I subscribed to a local finance magazine called The Edge Singapore where they provide insights on local market movements on stocks, real estate and many other investment related topics.

Getting started in investment is not difficult. Learning how to manage and grow your money is very important as we would eventually lose the ability to generate income when we grow old. Relying on our children to take care of us is an old concept that belonged to the older generation where having more than 5 children is a norm. Not only is our generation burden with taking care of our parents with lesser siblings, we have to deal with rising cost of living as well. Therefore, having some financial knowledge is still useful in the long run. Even if you do not invest money on your own, you would need the knowledge to find reliable investment managers to do it right for you.

Thank you for reading, I hoped that you have enjoyed reading as much as I have enjoyed sharing. If you like my article, please share it so that more people can enjoy it too.

Do check out some of my other posts:
My Company Analysis

Disclaimers:
I do not own any of the images in this article. I am not affiliated nor will I profit from any of recommendations made in the article.

TAI SIN ELECTRIC LIMITED [500.SI] - Fundamental Analysis

This article is the fundamental analysis of a company that is publicly listed on SGX. If you are reading this, it is assumed that you would have basic financial knowledge and is familiar with concepts of fundamental analysis. If you have any thoughts; spotted any mistakes made; or wish to ask questions, please feel free to leave a comment.

Business Overview

Tai Sin Electric Limited (TSE) started out as a cable manufacturing business in 1980 known as Tai Sin Electric Cables Manufacturer Pte Ltd. It was listed on the Stock Exchange of Singapore, SESDAQ in 1998 and transferred to the SGX Main Board in 2005. TSE distributes electrical and control products, accessories and solutions to a wide range of local and regional industries which includes Malaysia, Vietnam, Brunei and Indonesia. It has four Business Divisions namely Manufacturing, Distribution, Services and Strategic Investment.

TSE has the capability to manufacture 1,600 metric tonnes of copper cable and wire. It does maintenance, repair and operations with electrical needs for various industries including the oil & gas cluster. It specialises in industrial automation, panel, switchboard, power quality products & systems and power transmission solutions including cabling and electrical accessories, as well as lighting and energy monitoring solutions. It also provides more than 250 accredited testing services for materials ranging from concrete to soil and asphalt premixes.

As we can see, TSE's business is quite reliant on Copper. If we look at the price of copper that the company has placed on their website: http://www.taisin.com.sg/cooper-price/?&lang=en, at as 18 Jan 2015, copper price is on an increasing trend. Item 38 in the notes to financial statement of 2014's annual report (AR2014) shows the commitment of  TSE to purchase fixed quantum of copper from suppliers at market rate at date of delivery. There were no mention of hedging strategy used to protect TSE from raw material cost overruns. This might be an issue if copper price continues to rise.

The projects that TSE has undertaken can be seen at the website: http://www.taisin.com.sg/projects/?&lang=en , presented in a very organised manner. Under infrastructure, we can see that TSE has many government projects. As a Singaporean, I am very confident of the government's ability to pay TSE for the work completed. Therefore, this adds assurance that TSE would not have significant write-offs. However, looking at AR2014 item 7 in the notes to financial statement, Impaired receivables grew from SGD769,000 in 2013 to SGD1.31million in 2014. This can be a worrying trend if it continues. Nonetheless, analysis of the company's real profit discussed later shows that the amount of impaired receivables will not pose immediate threat to TSE's profitability.

Management Overview

There were several top management changes made on July 1, 2013. The group's managing director was replaced as part of succession planning. Several other appointments at the subsidiary level were also changed. Based on this information alone, I will be skeptical about the abilities of the new management team until they have proven themselves over the next few years.

Although succession planning is a very common thing for corporations, my analysis relies on the consistency of past factors in order to estimate the outcome of the future. Therefore, changes in the management team shakes the foundation of which my analysis is based. As such, my estimates should be subjected to a bigger margin of safety to account for this unknown.

It is very difficult to determine if the decision making of the management team will be good or bad. The best way to judge management is actually to be working directly with the management team or have opportunity to meet them face to face and ask questions. This aspect is highly subjective and is also prone to perspective bias. Therefore, personally I don't have the experience nor qualification to judge and would just go along with my gut feelings, supported by the numbers in the annual reports.

What I like about this company is their web presences. If you take a look at their website: http://www.taisin.com.sg/ , you can find many information about the company that is well organised and maintained. This demonstrates the company's commitment to be candid with shareholders and maintain as much transparency about what is happening in the company as possible.

Financial Overview

TSE scored 3 out of 4  for my 4 criteria filter (the criteria are listed on the top right hand corner of this post). It is calculated to be trading below its intrinsic value and at a price that has at least 20% margin of safety as of 18 January 2015. 

Table 1

All calculation uses FCF as the real profit instead of relying on reported net profit. Deviations of FCF from reported profit for the past 5 financial years (FY) was less than 50% (with exception for 2009 when TSE reported a huge gain from disposal of property, plant and equipment). My estimates determined that TSE uses an amount that is equivalent to 2% of its equity for capital expenditure.

FCF is derived from the cash flow statement: [Operating Cash Flows before Changes in Working Capital] (ignoring changes in working capital), factoring all tax and interest expenses, and deducting an estimated capital expenditure (CapEx). CapEx is used in place of [Depreciation and Amortization] because it is a closer estimate of what the company really needs to maintain itself.

I have derived CapEx by taking the average of [Purchase of property, plant and equipment] adding back [Proceeds from disposal of property, plant and equipment], and obtaining a percentage figure against average equity. So CapEx per year is obtained by taking this percentage figure and multiplying by that year's equity. This sum is then deducted from the Operating Cash Flow for that year's FCF.

Graph 1

From the graph above, there is a visible trend that FCF is increasing y-o-y. Looking at the balance sheet in table 3 below tells us that this increasing trend was not powered by increasing debt as total liabilities actually decreased. This is a very good sign that TSE was able to grow without issuing more debt.

5 yr Avg Growth Rate/Avg ROE

Table 2

TSE has achieved a 5 year average growth rate of 9.15%, hitting my benchmark of >5% based on an estimate of Singapore's average economic growth. As companies cannot be expected to grow at high growth rates forever, the average economic growth of Singapore should be the benchmark of this criterion for all companies operating in Singapore. As long as the company is growing more than Singapore's economic growth, it should be doing well (figures obtained from http://www.tradingeconomics.com/singapore/gdp-growth).

Growth rate must be more than 5% in order for my FCF discount model to be reliable as I assumed that 5 years from now, TSE will be growing perpetually at 5%. The graph below shows the growth rate over the years. These growth rates were used to derive the estimated discount for the determination of intrinsic value that will be covered in the later part of this article.

Regrettably, the average ROE over the past 5 years did not meet my benchmark for this criteria. TSE scored an average ROE of 13.61% while my benchmark is >15%. Meeting this criteria is critical for my intrinsic value calculation as I expect my investments to return at least 15% y-o-y. However, TSE only missed the benchmark by a slight margin and its ROE for the past 3 FY was actually pretty close to the benchmark. So if the company continues to perform as they have over the next 2 years, the average ROE score will improve and this company might score full marks for my filter criteria.

Graph 2

Total Liability to Equity Ratio

Table 3

TSE has a total liability to equity ratio of only 44.33%, which beats my benchmark of at most 50%. What this means is that there is at least 2 parts of equity for every one part of liability, signifying that TSE has extremely low chance of default. This is very important especially in an uncertain interest rate environment where interest rates may increase overnight. With such low leverage, investing in TSE would allow me to sleep peacefully at night without worry that it would go bankrupt which would have resulted in a loss of invested capital.

As mentioned previously, TSE has increasing FCF without increasing its debt. If we look at the equity base and the retained earnings table, we can deduce that growth is powered by retained earnings. This is very commendable as TSE was able to payout dividends and still grow, meaning that the retained earnings more than covers its CapEx plus its expansion requirements. Having high growth rates when plough back ratio is about 50% signifies that the management was able to rationally distribute earnings that they were unable to grow back to shareholders while retaining what is necessary for them to grow. This demonstrates prudence of the management. 

Intrinsic Value

Table 4

The intrinsic value of TSE of SGD0.466 is calculated using a modified FCF Discounted Model. I have made some modifications to the academic formula to increase the accuracy of my final figures. This figure has to be taken with a pinch of salt as one of my filtering criteria was not satisfied. TSE would need to achieve an Average ROE of more than 15% for this figure to be reliable.

The [Average rate of change] was introduced to form a bridge between the growth rate of FY0 to FY1. This rate will modify the projected future growth rate of this company based on historical changes in growth rate. If growth rate has been consistent, this bridging discount will be minimal, but if growth rate has been inconsistent, this bridging discount will reflect the possible fluctuation of FY1's growth. This bridging discount is calculated by taking the average of the discounted rate of change. The discounted rate of change is simply the difference from the first FY and the next.

Rather than using 15% ROE as the discount rate to find present value of the future FCF, I've factored in a conservative inflation rate of 3.12% to be my discount factor. Since I'm expecting to double my money in 5 years, the rate of return that will deliver that expectation after factoring inflation is 18.45%. So that's my discount rate to find present value of future cash flows. Inflation rate for Singapore is obtained from http://www.tradingeconomics.com/singapore/inflation-cpi

Margin of safety for the current stock price against its intrinsic value is close to 30%, (0.466/0.36 - 1 = 29.5%), anything more than 20% is safe enough. Therefore, based on these calculations, I would say that TSE is a considerable safe investment to make that would also generate good returns over the years. Investors looking to purchase this stock must be ready to hold it for at least 5 years, provided that nothing else changes in the company's fundamentals.

Conclusion

TSE is a safe and good company that is worth investing. However, as its business deals mainly with copper based products, it is subjected to Copper's price fluctuation since there was no hedging on copper. Due to a recent change in management, the company's performance should be closely monitored over the next few years to determine if the new management is as capable as the previous one in delivering the past performance that forms the base of this analysis. With average growth rate at 9%, total liability to equity ratio of less than 1:2, and having no negative FCF for the past 5 FYs, TSE's fundamentals are strong. So long as it can continue to deliver ROE of more than 15% over the next few years and beyond, this company is a quality choice of investment. At a margin of safety of more than 20% on the current share price against intrinsic value, TSE is a bargain for investors. 

Thank you for reading. If you have any comments or feed backs, please post them in the comment section below. If you would like to check out my analysis of other companies, feel free to go to this page: http://fundamentally-invest.blogspot.sg/p/blog-page.html


Disclaimer
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.

How I Find Capital to Invest

Before I start talking about how I find capital for my investments, I would like to share some facts about myself to encourage those of you who thinks that you may not be as fortunate as I am. Rest assured that I am as average as average goes in terms of being a Singaporean. But even then, any edge that I might have over you would not have made a difference to the outcome if you had done what I did.

I did not come from a very well off family, my parents earn just enough to live an average life. Like many Singaporeans, I had a roof over my head, at least 3 meals a day, proper clothes to wear and a decent education. I went through 10 years of compulsory education, chose to pursue a diploma, served 2 years of national service, got a job, supported myself through private university and eventually completed my degree. I am an introvert and my circle of friends can be counted with my hands. I never envied what others have, nor do I yearn for the latest fad in town. To me, self-sustenance is more valuable than material possession.

I stopped taking allowance from my parent since I entered army in 2009. My army allowance from the government started from SGD440 for the first 2 months as a recruit and ended with SGD864 as a 3rd Sergeant. It was during this period of time that I started managing my money, this method of managing money is what I want to share with you and the reason for me to write this article. This is to show you that no matter how small your income, you can and should manage your money. Because money will always escape from those who doesn't know how to manage it.

You might like my article where I share How I Started My Investment Journey.

To add some flavor to the reality of my claims of raising capital, I shall throw in some of my major expenditures to show that it is still possible to raise capital even if you have commitments.

When I was studying for a diploma, the total school fees amounted to SGD6.6K. I had no means to pay for my polytechnic school fees then, so my parents had to cough up cash. Not because they did not have CPF but because the interest on loan is a very terrifying monster, waiting to devour the ignorant. Study loans usually have interest free periods, but unless you are confident of clearing the loan before it starts accruing interest, it is best to avoid it.

I rejected the Junior College route even though the school fees are substantially lower than poly because I believed that a diploma is more employable than an A Level cert, but hey, do not let my conviction sway your life decision if you are making one right now. With my diploma, I started working at my first full time job after I finished serving army in 2011.

My salary was only SGD2.2K with occasional shift allowance of additional SGD400. The poly school fees that I accrued was accounted for only after working for a year by setting aside SGD550 a month. The money now sits in one of my investments waiting for my parents to retire before cashing out. My uni fees amounted to a total of SGD22K, payable by installment of SGD3.3K per 3 month semester for 6 semesters. I had to set aside SGD1.1K monthly from my salary in order not to borrow any study loans. During this period, I also sponsored myself through a dental braces treatment to align my bucktooth, the total cost amounted to SGD3.5K payable over a 1.5 year period.

This basically sums up the heavy expenses that I have to bear while raising capital to make investments. For the record, I managed to set aside SGD16K for investment alone at the end of 2014; SGD9K at the end of 2013; SGD5K from mid 2010 to end 2012. Now we can go to the main topic that you have been waiting for.

How To Manage Your Money

After reading a book called Secrets of the Millionaire Mind written by T. Harv Eker, I started to adopt his money management system. I split my monthly income into 6 different funds for various spending needs. These 6 funds are:

1. Financial Freedom Fund [FFF]
2. Long Term Spending Fund [LTSF]
3. Education Fund [EF]
4. Necessity Fund [NF]
5. Play Fund [PF]
6. Give Fund [GF]

One good thing about this money management system is that you can be frugal while still being a holistic human being. I will go into details about each fund.

Give Fund

As human beings, it is very important to give. By giving, we fill our soul and lead a happier life. Money in this fund is as the name suggest, for giving away. It may be to charity, to your family, to your friends or colleagues as a treat, or to strangers in need that you see on the streets. This money is meant to be given away each month. So regardless of how little you may be earning, believe that what you give today, may come back in a manner that is unexpected in future.

Play Fund

All work and no play makes Jack a dull boy. It is important to reward ourselves for working hard by splurging money on entertainment occasionally. However, most of the time, we don't know what is the limit that we should spend. Play fund can be used to reward yourself with something as simple as buying an ice cream cone. By setting aside money for you to blow on yourself, you do not have to worry about overspending. And if you don't have the means to spend, it should come as a motivation for you to work harder to achieve higher income so that you can live a better lifestyle. Living beyond your means is not sustainable and will eventually lead you to become heavily in debt. But do not be disheartened, if you are planning to go on a trip, you can still accumulate each month's play fund balance until you have enough for your trip. 

Necessity Fund

Humans have a few basic needs: food, water, and oxygen. Thankfully, nobody has started charging for oxygen yet, but water is no longer free compared to the past where there are wells or clean rivers. Nonetheless, this fund is for your daily necessities such as groceries, meals, transport, bills, rent, etc. Small expense items that keeps your life going. If you find that your spending in this fund exceeds what you can set aside after considering the other funds, then it is time to reexamine your lifestyle and cut down on expenses that you don't really need. Ask yourself questions like: Is that gym membership really necessary for me to keep fit?

Education Fund

Chinese have this saying: Life Long Learning. Our education do not stop after we graduate from school. So it is important to constantly upgrade ourselves and improve our productivity so that we do not become rusty. This fund is for you to pay your school fees, tuition fees, supplementary class, ballet class, piano classes, painting class etc. If you have a hobby and there is a course that you would like to sign up, tap into this fund for money. 

Long Term Spending Fund

Sometimes, we may have things we like to spend on that can benefit us over very long period of time. Such as straightening your teeth with braces, a professional camera, a personal computer, a branded bag, or a diamond ring. These items usually cannot fit into our monthly budget and have to be saved up. So by setting aside money in this fund for such expenditures, we do not get ahead of ourselves and neglect the other expense that we have. This fund also helps you to set a boundary on the big items that you can afford rather than relying on the credit limit you have on your credit cards. 

Financial Freedom Fund 

Lastly, we have come to the most important fund. If you have read the book The Richest Man in Babylon by George S. Clason, there is a very important lesson: Always Pay Yourself First. This is the fund that you should use to pay yourself. This is the fund that will allow you save up for investments and help you get ahead in life. This is the source of my capital for investments. 

We always hear advice that we need to save money, but how should we save? As you know, there are many things that we need to spend money on and usually, the money that came in is gone even before we realize it is gone. Therefore, it is very important that we restrict ourselves from a fixed percentage of our income so that we are not tempted to spend it. If you are earning a take-home income of SGD2K after CPF, the moment your salary is credited into your account, immediately transfer 20% which is SGD400 into an account that you do not have easy access to i.e no debit or atm card. You can do this automatically monthly by setting up a standing instruction with your bank for free. Tell yourself that your take home income is only SGD1.6k and you can only spend up to that amount. No matter how much we earn, we would never have enough, so if we think that we are earning less, we can actually, really save money.

However, saving money alone is not enough to grow your money. With low interest environment over the past few years, banks pay only a microscopic amount of interest on the money you put in your accounts. And if you know what is inflation, you know that you are actually losing money when you deposit money in the bank every year. But what should you invest and how to invest is something that requires you to invest your time to understand. This is another topic for my upcoming article on my investment strategy, so stay tuned.

Putting The Funds Into Practice

Now that we have covered each fund and their uses, how do we apply them in our money management strategy. For me, I assign a percentage to each fund every month. This percentage usually stay fixed unless there is a need for me to adjust my budget for unforeseen circumstances. But do not allow yourself the flexibility to adjust the budget as it would defeat the purpose of allocating funds in the first place.

As a guideline, place a heavier weightage on FFF and NF, split the other 4 funds equally. you can use your monthly necessity expense as a gauge. To illustrate, say you are taking home SGD2K a month, considering that you are still living with your parent and only need to support yourself without worrying about rental, your basic necessity spending should cover:(assuming a 30 days month)

• $4 a meal for 3 meals a day => $360 (Considering that your parents may provide some of your meals)
• $30 for a basic mobile plan with 3G
• $3 a day for transport ==> $90 (Considering that you don't travel everyday)

Total monthly necessities: $480

For margin of safety, set aside $500 for NF, which also means $500 for FFF. The balance of $1,000 is divided into the 4 other funds, $250 for LTSF, $250 for EF, $250 for PF, and $250 for GF. It is up to you whether you want to physically split the money into separate accounts. It is better if you do, but if its too much of an hassle, you can track your expenses using a simple spreadsheet or download a expense tracking app on your smart phone that is available for free. If you would like to use the spreadsheets that I have created, drop me an email at ohhanwee@gmail.com indicating your request, I am more than happy to share.

Have the discipline to record every single expense and classify it into the respective funds. Follow the parameters outlined above when you make spending decisions and spend only within your budget. Tally the balance every month to find out how well you have done. You might be surprised that you will become more careful with your spending and that money is not flowing out as quickly as before.

The secret to my ability to raise capital for my investment is discipline and self-control. Pleasures can be more desirable than pain but if you believe that this short term pain will bring you long term happiness, pain will be more motivating to bear.

Thank you for reading this article, if you like what you read, please share it on your preferred social media so that others can enjoy it too. Please leave any comments that you might have below.



Disclaimers:
I do not own any of the images in this article

YANGZIJIANG SHIPBUILDING HOLDINGS LTD [BS6.SI] - Fundamental Analysis

This article is the fundamental analysis of a company that is publicly listed on SGX. If you are reading this, it is assumed that you would have basic financial knowledge and is familiar with concepts of fundamental analysis. If you have any thoughts; spotted any mistakes made; or wish to ask questions, please feel free to leave a comment.

The information presented in this article has expired its validity as we wait for the reporting of FY2014's results. 

Business Overview

YangZiJiang ShipBuilding Holdings Ltd (YZJ) is one of China’s leading shipbuilders offering integrated marine and offshore services, which are complemented and enhanced by diversified interests in financial investments and property development. The group produces a broad range of commercial vessels–containerships, bulk carriers, multi-purpose cargo vessels and offshore engineering projects. It has 5 main business segments, namely: Shipbuilding and Offshore; Financial Investments; Shipping logistics and chartering; Ship demolition & Steel fabrication (incl. Non-marine Related) and related Trading businesses; as well as Property Development. Under its umbrella, YZJ has 65 subsidiaries (51-100% equity holdings) and 5 associate companies (21-50% equity holdings) according to its 2013 Annual Report. The number is expected to change as the shipbuilding industry consolidates and YZJ expands its balance sheets.

The Group achieved a revenue of RMB14.3 billion in FY2013, down 3.1% year-on-year. Revenue from shipbuilding and its related activities was RMB12.8 billion, down 4.9% year-on-year, forming 89.5% of revenue generation. Of this amount, ship demolition works contributed revenue of RMB353 million, and other shipbuilding relevance amounted to RMB828 million. Revenue from Financial Investments (held-to-maturity assets and micro-financing) grew 14.9% to reach RMB1.5 billion. There was no breakdown of revenue generated by the Property Development in the Chairman’s statement, probably because it is a new segment that has not posted any revenue generation or it could be suffering losses due to China's gloomy property sector outlook.

However, it is noteworthy of how YZJ has justified its expansion into property development when they are shipbuilders by nature. The reasons was because of the Group's ability to acquire land at much better rates due to the location of their old yards near coastal areas, their positions as a top tax contributor allowing them to tender for urban redevelopment projects at more favorable conditions, and interestingly, because they would be able to foreclose properties and land use rights that their financial investments customers has put up as collateral. Collateral are valued at a fraction of the borrower’s land acquisition price. Profiting from the increasing trend of defaults seems like a smart move. Although in the short term, this might set back the Group's profit due to higher default rates, as long as the group has the financial muscle to pull through the property downturn, the discounted landbanks would payoff handsomely in future. 

Nonetheless, our main focus when analysing YZJ should still be its ship building business. YZJ made it into Beijing's "white list" of shipbuilders, which is a list of 51 environmentally friendly and efficient yards that entitles companies on this list to favourable government policies such as tax rebates and cheaper financing. This is significant in the sense that it can be viewed as a consolidation of the industry in China, and those yards that did not make it into the list would eventually be eliminated from the competition pool. As I am not well versed in the ship building industry, it is not within my circle of competence to pass judgement or make predictions on the future of this industry. Being a mid-cap public company of SGD4.7 billion, YZJ is not short of analyst followings. Many reviews and analysis can be easily found on the web on the shipbuilding industry and on YZJ's outlook.

Management Overview

Executive Chairman, Mr Ren Yuanlin's statement in 2013 provided very clear directions that the group is heading. Being the founder, owner (deemed interest of 26%), as well as the executive chairman gives assurance that he will be aligned with shareholders in ensuring the long term sustainability of the business. Additionally, with bonus forming the bulk of his remuneration (77%) speaks volume about the motivation for him to drive the group towards a brighter future.

What is noteworthy is that the group was able to predict a downturn in the ship building segment and aptly diversify into other segments to prevent the decline in revenue. This demonstrated foresight and experience in what they do. Mr Ren was candid enough to explain the rationale for expanding into businesses that the group is entering as well as stating clearly the benefits that each segment and component of business will bring to the group. As an outsider to the ship building business, I was able to learn much from what he has said and I like it very much.

But I have to add that from the information gleaned Chairman's message alone, it is very difficult to determine if the decision making of the board is resistant to industrial imperatives. The best way to judge management is actually to be employed in the company and working directly with the management team. This aspect is highly subjective and is prone to perspective bias. Therefore, personally I don't have the experience nor qualification to judge and would just go along with my gut feelings, supported by the numbers in the annual reports.

Financial Overview

This company has scored 3 out of 4 for my 4 criteria filter (the criteria are listed on the top right hand corner of this post). It is calculated to be trading slightly below its intrinsic value, calculated using adjusted Free Cash Flow (FCF) discount model. As a word of caution, historical record of China company's financial reporting is laden with many incidents of fraud, therefore extra care needs to be exercised when buying China Companies.

All calculation uses FCF as the real profit instead of relying on reported net profit. Deviations of FCF from reported profit was less than 50%, signifying that earnings reported has minimal accounting gimmicks.

FCF is derived from the cash flow statement: [Operating Cash Flows before Changes in Working Capital] (ignoring changes in working capital), factoring all tax and interest expenses, and deducting an estimated capital expenditure (CapEx). CapEx is used in place of [Depreciation and Amortization] because it is a closer estimate of what the company really needs to maintain itself.

I have derived CapEx by taking the 5 year average of [Purchase of property, plant and equipment] adding back [Proceeds from disposal of property, plant and equipment], and obtaining a percentage figure against a 5 year average of [Equity]. So CapEx per year is obtained by taking this percentage figure and multiplying by that year's equity. This sum is then deducted from the Operating Cash Flow for that year's FCF.

5 yr Avg Growth Rate/Avg ROE

YZJ has achieved a discounted 5 year average growth rate of 8.18%, my benchmark is >5% based on an estimate of Singapore's average economic growth. As companies cannot be expected to grow at high growth rates forever, the average economic growth of Singapore should be the benchmark of this criterion for all companies operating in Singapore. As long as the company is growing more than Singapore's economic growth, it should be doing well (figures obtained from http://www.tradingeconomics.com/singapore/gdp-growth).

The discount is based on a decay factor to consider the effect of time on accuracy, so that older performance would have lesser weight on future performances. For example, growth rate in 2013 is multiplied by a decay factor of 83%, 2012 is multiplied by 80% so on and so forth. The final sum is averaged to obtain the growth estimate of 8.18%. This is inline with the declining trend of Growth rate over the past 3 years.

Its 5 year average return on equity (ROE) is 26.01% based on FCF, my benchmark is >15% to factor for a investment strategy that expects a doubling of capital in 5 years.

Total Liability to Equity Ratio

However, the criteria that failed to meet the mark was the leverage ratio. Total Liability is 136.48% of Equity, quite a high leverage ratio for my appetite. High leverage ratios increases a risk of default which translates in to the possibility of losing any invested capital. Although its interest coverage ratio was more than 10 (Earnings before interest and tax divided by interest expense: 4,761,895/ 330,951 = 14.39, ideal ratio is 1.5 times or more), I am still not comfortable with the balance sheet. 

This could be attributed to the manner at which assets are valued or the classification of debt expenses that might be far from reality. Bank borrowings swelled from RMB3.3 billion in 2012 to RMB12.2 billion in 2013, factoring for the jump in Total liability. Interest expense would be significantly different in 2014. Considering the uncertainty in current global interest rate climate, a highly leveraged company is extremely vulnerable to rising interest rates.

Intrinsic Value

The intrinsic value of TTJ of SGD1.272 is calculated using a modified FCF Discounted Model. I have made some modifications to the academic formula to increase the accuracy of my final figures. This figure has to be taken with a pinch of salt as one of my filtering criteria was not satisfied. As I have yet to determine the discount rate to account for the increased risk (I don't subscribe to CAPM and beta), I did not factor in the increase in risk of default due to the high leverage ratio which should have resulted in a lower intrinsic value.

The [Average rate of change] was introduced to form a bridge between the growth rate of FY0 to FY1. This rate will modify the projected future growth rate of this company based on historical changes in growth rate. If growth rate has been consistent, this bridging discount will be minimal, but if growth rate has been inconsistent, this bridging discount will reflect the possible fluctuation of FY1's growth. This bridging discount is calculated by taking the average of the discounted rate of change. The discounted rate of change is simply the difference from the first FY and the next.

Rather than using 15% ROE as the discount rate to find present value of the future FCF, I've factored in a conservative inflation rate of 3.12% to be my discount factor. Since I'm expecting to double my money in 5 years, the rate of return that will deliver that expectation after factoring inflation is 18.45%. So that's my discount rate to find present value of future cash flows. Inflation rate for Singapore is obtained from http://www.tradingeconomics.com/singapore/inflation-cpi

Margin of safety is only 5.5%, (1.272/1.205 - 1 = 5.5%), while my benchmark is >20%. There is no significant discount in price to offer a buffer, in case of error in estimation. I would not recommend the purchase of this company stocks.

Conclusion

I believe that YZJ will be able to continue performing up to its past performance standards based on its competent management team, the economic climate which it operates and the relationship it has with the China government. Being a mid cap that is well followed, it is my believe that the value of this company will be more or less correctly reflected by the market most of the time. Although the calculated intrinsic value is not attractive to me, if investors are willing to bear the risk of default over high growth and ROE rates, and is willing to hold the stock for more than my 5 year projected investment period, this investment might still be profitable.  

Thank you for reading. If you have any comments or feed backs, please post them in the comment section below. If you would like to check out my analysis of other companies, feel free to go to this page: http://fundamentally-invest.blogspot.sg/p/blog-page.html



Disclaimer
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.

Singapore Exchange Write Up

Brief History of Singapore Exchange

Singapore Exchange (SGX) is the first demutualized, integrated securities and derivatives exchange in Asia Pacific. Formed on 1 December 1999 as a holding company, it is the merger of 3 former exchange companies: the Stock Exchange of Singapore, Singapore International Monetary Exchange Ltd and Securities Clearing and Computer Services Pte Ltd. The merger arose out of the recommendations of a Committee appointed by Monetary Authority of Singapore which recommended that the companies position themselves as leading international exchanges for the trading of Asian products, and the trading of global products in Asia. Previous shareholders from these companies were issued new shares that were fully paid for by SGX.

SGX became the second exchange in Asia-Pacific to be listed via a public offer and a private placement on 23 November 2000 (the Australian Securities Exchange was first to list in 1998). Benchmark indices such as the MSCI Singapore Free Index and the Straits Times Index consist of stocks listed on SGX.

SGX is the most internationalized exchange that connects investors in search of Asian growth to issuers in search of global capital. It offers its clients the world’s biggest offshore market for Asian equity futures, centered on Asia’s three largest economies – China, India and Japan. With more than 40% of companies listed on SGX originating from overseas, SGX provides premier access point for managing Asia capital and investment exposure.

Besides offering a fully integrated value chain from trading and clearing, to settlement and depository services, SGX is also Asia’s pioneering central clearing house. It is headquartered in Singapore, the most globalized city in Asia and recognized with AAA strength and stability, allowing SGX to become a leading Asian counterparty for the clearing of financial and commodity products.

As of 2013, SGX is the 6th largest exchange in the world with more than 770 listed companies and approximately $1 trillion total market capitalization. It is the gateway to the financial market in Asia.

Operation of SGX

SGX is Asia’s most international securities market, supported by the world’s fastest trading engine, state-of-the-art data centers and co-location services. Trading, clearing and settling securities and derivative products is carried out in a centralized electronic auction marketplace operated by SGX. Advanced technology is used for undertaking targeted, balanced, risk-based regulation so as to secure the trust and confidence of its market users in the integrity of the various facilities and services which make up the marketplace.

There are three channels to trade securities in SGX, namely, via SGXAccess, Singapore Exchange Securities Order Processing System, and Virtual Terminal Interface. Orders are routed through one of these accesses to the central trade matching engine, known as the Central Limit Order Book (CLOB), for the matching of trades before such information is transmitted to the Central Depository (Pte) Limited (CDP) clearing and settlement systems (AsiaEtrading.com, 2014).

The after-trade processes of clearing and settling the financial and delivery obligations of buyers and sellers ensure that participants can enter the market with the confidence that their transactions will be completed.


SGX operates through several subsidiaries including Singapore Exchange Derivatives Trading Limited (SGX-DT), Singapore Exchange Derivatives Clearing Limited (SGX-DC), Singapore Exchange Securities Trading Limited (SGX-ST), and Central Depository (Pte) Limited (CDP) (The World Federation of Exchanges, 2013).

SGX-DT provides Euro dollar, Euro yen, and Japanese government bond and stock index futures trading services in the Asia-Pacific region. It also provides interest rate futures contracts trading and hedging services, including hedging loans and deposits, and interest rate swaps in Singapore dollar, the U.S. dollar, and yen; and intra-commodity, inter-commodity, and inter-market trading and arbitrage services.

SGX-DC is the first Asian clearing house authorised as a Derivatives Clearing Organization by US derivatives regulator, the Commodity Futures Trading Commission. New and existing US customers will be able to clear their derivatives contracts efficiently through SGX's derivatives clearing house in compliance with the latest US laws and regulations, including the US Dodd-Frank Act, the Commodity Exchange Act and CFTC's regulations.

SGX-ST operates as a security stock exchange in Singapore. The company provides security listing services to companies and provides marketplace for trading of domestic and foreign securities which are traded on a scripless basis to the general public. Physical shares are deposited in individual’s CDP securities account which debits or credits all share transactions electronically. With the increasing volume traded on stock markets, it becomes more difficult to keep up with transactions using traditional methods of delivering physical shares to buyers. Computerised transfer of shares means transactions are recorded accurately and almost instantaneously. Share owners no longer have to hold physical shares to prove ownership.

CDP is a clearing and depository house which provides depository, clearing, settlement, and computerized book-entry services for the Singapore securities market. The company also acts as a central nominee, holding securities on behalf of its depositors.

Products of SGX

SGX has 3 major categories of products, namely Equities, Debt, and Money Market. Under Equities, SGX offers trading of shares, preference shares, deferred shares, warrants, investment trusts, unit trusts, loan stocks, Real Estate Investment Trusts (REIT), and Exchange Traded Funds (ETF). Under Debt, there are Singapore Government bonds, corporate bonds, convertible bonds, warrant issues, and floating rate notes. In Money Market, there are Treasury bills, Singapore dollar negotiable certificates of deposit, and commercial paper. SGX also offers trading of Global Depository Receipts (GDR).

Services of SGX

SGX offers services such as Issuer Service, Market Data Service, Member Service and Connectivity, and Depository Service.

Issuer service is the equity and debt capital raising platforms for companies in search of global funds. It offers corporate action services and corporate solutions to listed issuers.

Market Data Services are a range of real-time price information, company announcements, corporate actions and reference data products on SGX’s securities and derivatives markets. This information is distributed to a wide range of market participants by international and domestic market data vendors, brokers and financial institutions and also made available through the SGX website and other media channels. It involves sales and distribution of market price data and other information to market users.

Member Services and Connectivity offers trading and clearing members across both the securities and derivatives markets best-in-class access, connectivity and co-location services. SGX Points-of-Presence are hosted in other major financial markets, while POPs from key markets such as the US, Germany and Australia are in turn hosted by SGX in its domestic data centre. This provides access and connectivity to SGX’s trading and clearing platforms in securities and derivatives markets.

Depository Services are provided by CDP, which is the clearing house and central securities depository for all Singapore-listed securities. CDP has links with other central securities depositories including those of the United States, Japan and China to support settlement of cross-border trades. It also provides settlement and custody services relating to securities listed on SGX and unlisted securities.

Uses of SGX Products and Services

Investment managers who can benefit from the products and services provided by SGX ranges from domestic retail investors to international institutional investors. Issuers can value their businesses and raise capital, investors can make decisions on which securities to buy or sell, and those exposed to various risks can find a means of transferring that risk to other parties through the trading which takes place and the prices established in the market.

Aside from securities investors who can benefit from the 770 listings on the Main Board and Catalist board of SGX, other investors such as REIT investors can benefit from the wide variety of REIT listings that is the largest in Asia outside of Japan. Derivative investors can benefit from the licensing agreement with global index provider MSCI which grants them access to a total of 19 MSCI indices, covering Asia’s key growth markets. Similarly, fixed income investors can benefit from the 424 bond listings, each with different characteristics and rate of returns. With a large variety of choices to choose from, investment managers are able to craft highly customized portfolios for various needs.

Improved market infrastructure such as the introduction of securities margining, short-sell reporting and long-dated orders, as well as additional initiatives such as circuit breakers allow investors to more effective safeguard their investments by limiting their losses or locking in their profits . Retail investors can benefit from the educational initiatives that were designed to increase financial literacy and allow them to make informed investment decisions. In addition to online initiatives, these investors can join forums and seminars organized by SGX to meet like-minded people. Established data connectivity with ASX and Eurex provided investors with enhanced and cost-effective access into both markets. Co-location services offer more value-added services and investors greatly benefited from the speed of exchange trading and market data services provided within one location.

How I Started Investing in Stocks

While I was working at a part time job, right after completing my national service, I started to become interested in stocks investment. I began reading intensively on Warren Buffett's (WB) methodology from his letters to shareholders as well as books that other people wrote about him. If you are reading this post, it is probable that you are also interested to learn how to invest in stocks, so I am going to share my experience with you.

You might like this article on my humble view of What is an Investment

I picked a role model and started modelling after him. So this should be your first step if you are a rookie and have no experience whatsoever in picking stocks. There are many gurus out there who had made it big by investing in stocks. Other big names such as Jim Rogers, George Soros, Peter Lynch, John Templeton and many more who are worthy of your time to read up on, to find a style that fits you. If you do not know what is your style, just read up on their investing methods and find one that is the most agreeable to you. Or you can just follow me ;)

You might like this article where I share How I Find Capital to Invest.

After absorbing WB's wisdom, I started learning to read the annual reports and figuring out where to find the numbers that was mentioned as noteworthy. Do note that at this point, all the qualification I had was a Diploma in Digital Media Design and I have had no experience nor exposure in the world of Finance before. If I can pick it up, so can you, all it takes is interest and passion. I started creating excel spreadsheets to crunch my numbers for me based on the stuff I read.

One of the things that WB said struck a bolt in me. It was an excerpt from the Adam Smith interview aired in October 1993, and it went like this:

Adam Smith: If a younger Warren Buffett were coming into the investment field today, what areas would you tell him to point himself in?

Warren Buffett: Well, if he were doing – if he were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time.

Smith: But there’s 27,000 public companies.

Buffett: Well, start with the A’s.

So what I did next was to set a goal to analyse all the company that is trading on Singapore Stock Exchange (SGX) back in 2011 (you can read up on my short write-up about SGX here). When I got started, there were 700+ companies on both mainboard and catalyst combined, not as daunting as the 27,000 in America. As I crunched the numbers from company to company, my excel spreadsheet grew to become more sophisticated beause I was also continuously reading more books about value investing. I was reading Benjamin Graham's (WB's mentor) Intelligent Investor at that time and I incorporated whatever wisdom that I gleaned from its chapters into the spreadsheet. As a result, not only was I able to navigate comfortably through any annual report to find whatever information I need, my MS excel skills improved tremendously as well.

You might like my List of Very Good Companies With Strong Fundamentals

It took me 2 years to complete what I started out to do. My girlfriend who has some background in finance helped me along and gave me tremendous morale support. Throughout the 2 years, we both purchased some stocks based on my spreadsheet analysis result and most of these stocks are still in our portfolio till today, generating satisfactory results and zero losses. 

Currently, as I have just completed my Degree in Finance and also gotten an upgrade in my excel skills (I've learnt how to script Excel's VBA Macro by Googling), I have rebuilt my excel spreadsheet and calling it the Template Analyzer. I am in the process of rebuilding my SGX analysis from scratch. Previously, whenever I make changes to my template spreadsheet to reflect the new knowledge that I've gain from books, I would have to spend time going back to modify all the other spreadsheets that was already saved as the company's name. It was a time consuming and tedious process. 

Therefore, as I started afresh with more relevant and accurate financial knowledge plus my supercharged excel skills, my new spreadsheet is now capable of transferring the figures from the Template Analyzer into a master spreadsheet that is acting as a database at a click of a button. Additionally, the data can also be transferred back into my Template Analyzer and automatically repopulate all the companies that I have completed before, saving me lots of time in updating my analysis. With this database, I can also compare my intrinsic value against the current share price without as much hassle as before. My next breakthrough would be to scrape real time stock price from the internet, something that I know is possible but have yet to succeed. So if you know how, please guide me.

By adopting WB's investment style, I am investing as a long term, bottom-up, fundamental and value investor. In my next post about my investing style, I'll share more with you about my investment strategy. So stay tuned. :)

You might like my article where I share How I Started My Investment Journey.

Thank You for reading. Do post any comments that you might have below.

YONGNAM HOLDINGS LIMITED [Y02.SI] - Fundamental Analysis

This article is the fundamental analysis of a company that is publicly listed on SGX. If you are reading this, it is assumed that you would have basic financial knowledge and is familiar with concepts of fundamental analysis. If you have any thoughts; spotted any mistakes made; or wish to ask questions, please feel free to leave a comment.

Business Overview

Yongnam is an ISO 9001:2008, ISO 14001:2004 and OSHAS 18001:2007 certified company and accredited fabricator of the highest S1 category from the Singapore Structural Steel Society. With more than 40 years of experience in steel fabrication, the Group’s two production facilities in

Singapore and Nusajaya, Johor, Malaysia have a total annual production capacity of 84,000 tonnes of steel fabrication. Among its many completed projects are Marina Bay Sands Integrated Resort, Gardens by the Bay, Civic, Cultural & Retail Complex at Vista Xchange, One North, and Marina Coastal Expressway.

Financial Aspect

 As my analysis is heavily reliant on Free Cash Flow (FCF), it is imperative that I explain how I've obtained the numbers so as to clearly state my grounds for any discussion. As mentioned in my first post, I have substituted the charges for [Amortization and Depreciation] with an [Estimated Capital Expenditure] (CapEx) because of accounting limitations in the former as well as the possibility of manipulating financial figures. CapEx is an estimate that gauges how much a company would need to expense in every FY in order to maintain status quo of its operations. It is better to be approximately right than to be absolutely wrong. 

My version of CapEx uses the 5 year average of [Purchase of property, plant and equipment] adding back [Proceeds from disposal of property, plant and equipment], and obtaining a percentage figure against a 5 year average of [Equity]. So CapEx per year is obtained by taking this percentage figure and multiplying by that year's equity. This sum is then deducted from the Operating Cash Flow for that year's FCF.

Table 1

In the case of YongNam, I have derived that it requires an amount equivalent to approximately 25.6% of its equity to replenish its capital stock. The estimated amount of CapEx for each FY can be seen in the second last row of the table 1. From here, I am able to derive my FCF calculation.

My calculations have revealed that although the reported earnings for FY2013 was a net profit of SGD5.5million, in terms of FCF, it was actually a loss of SGD40million. Purchase of property, plant and equipment for FY2013 did not quite match up with its previous years' amount despite have similar or bigger sized balance sheets. This is flashing an alert that the company might be postponing the reporting of expenditure to next year so as to not incur losses in the FY2013. Posting losses can be very damaging to a listed company which might suffer declining share prices and a lot of answering to investors.

Then again, it could have been my analysis template attempting to fit all companies through the same mould and that YongNam truly has reduced need for CapEx from FY2011 onward. We shall have to wait till its FY2014 report to be out before arriving at any conclusions.  

 5 yr Avg Growth Rate/Avg ROE

Because my FCF calculation for FY2012 and FY2013 is actually negative, growth was posted as negative figures. The negative figures has caused my formula in my spread sheet to not reflect reality, returning an Average Ploughback ratio that is more than a 100%. This is one of the reasons why I would only look at companies that has scored full marks for my 4 criteria filter. The intrinsic value is only reliable when these 4 criteria are met.

It would take more data over more FYs to convince me that YongNam requires less CapEx, which would bring down the percentage and in turn increase the FCF calculation. Until that happens, I would rather stay away from this company and focus on others that have better financial figures. 

Table 2

YongNam has failed both my filter criteria of growth rate and return on equity (ROE). 0.63% against the benchmark of at least 5% for average growth. 3.82% against the benchmark of more than 15% for average ROE.

Total Liability to Equity Ratio

At 89.9% total liability to equity ratio, its almost 1 part debt for 1 part equity. In my view, this is not very safe. Liabilities can be taken at their booked value, but assets' value are quite subjective and may not actually worth what they are recorded for. As such, I would need more assurance that the company is far from the risk of default. My benchmark for this criterion is less than 50%.

Table 3

Intrinsic Value 

I am not able to derive an intrinsic value for YongNam because none of my 4 criteria filters were met. The value I got was actually negative, which is really a formula error to be omitted. In my opinion, I would stay away from this company as it did not fit into any of my expectations of a good business. And since its numbers do not look good to me, I would not bother with going in-depth to analyse its Business and Management Aspect. 

But if you think otherwise, I am open to discussion as to why this company is actually good and that my analysis is flawed. Please feel free to leave a comment. Thank You! :)

Thank you for reading. If you have any comments or feed backs, please post them in the comment section below. If you would like to check out my analysis of other companies, feel free to go to this page: http://fundamentally-invest.blogspot.sg/p/blog-page.html

Disclaimer
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.