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I got to know about this company JEL Corporation (J16.SG) after one of my readers dropped me an email asking for help. This company has been halted for trading since 28-Sep-2007, due to accounting irregularities found by KPMG Forensic. As such, many are still holding on to their stocks and are unable to sell their holdings after 4 months.
This is one of the worst nightmares for long-term investors. So what exactly went wrong? Can retail investors anticipate such events and avoid buying into them? I ploughed through all their previous SGX announcements back-dated to year 2006 and concluded the following observations:
1. Year 2006 proves to be very promising as JEL captures more deals with prominent brands and directors have been purchasing the shares in the open market. In addition, Executive Chairman placed out his own shares to institutions.
2. However, things start to look cloudy during the start of Year 2007. New shares at $0.22 were placed out to investors Mr. Goh and Mr. Koh, raising about SGD 6.5 mil. There are no concrete plans as to how these proceeds are to be used, management highlighted that the proceeds will be used for working capital purposes.
3. Full earnings report for FY2006 was published on 26-Feb-2007. Though bottom-line seemed to improve by a good 18%, but it is a far cry from the 65% surge in revenue. The drastic difference in net margins raises a red flag. Some might argue we ought to exclude the one-time gain in operating income in FY2005 to compare the net profit improvement. Nevertheless, even by looking at the FY2006 figures, net margin is only 2.2%. A company with very low margins should be examined more carefully to ascertain the future profitability.
4. In FY2006 report, a dividend of SGD 5.8 mil is announced, which comes up to almost 75% of the 8 mil profit. This raises another question. Why did the company decide to give out such a high percentage of dividends? Why did the management make such a decision when the company is in a growing stage, with debt-to-equity ratio of more than 1, and it just raised working capital from share placements a month ago? Shouldn't the company retain more of its profits to assist in its growth? It seems to me the new placement investors are transferring their money to the major shareholders.
5. After looking at the cashflow statements of FY2006 and FY2005, it seems that net operating cash flow is always less than net profit, which raises another red flag. Net operating cashflow (OCF) tends to be higher than net profit since net profits include depreciation and amortization charges. Net profit in FY06 seems to be higher than FY05, but OCF still remains quite stagnant at SGD 4+ mil.
6. On 14-Jun-2007, management again intends to raise working capital by share placements of 20 mil shares at $0.33. First 10 mil shares were placed out successfully on 09-Jul-2007.
7. FY07H1 results were announced on 13-Aug-2007. Net profit were up 5.2% from the previous period to SGD 4.3 mil, but on closer look, other income made up SGD 5 mil, so the company actually made a loss in reality. OCF gets worse, though it might be due to the seasonality. OCF came in negative. It also shows that the company is a cash burner as the proceeds from the Jan 2007 placements have already been fully utilised in a short span of 6 months.
8. On 17-Aug-2007, Almaq Investment Group Limited decided not to subscribe for the 10 mil new shares. Caution must always be exercised whenever institutions decide not to go ahead with the share subscription. They probably have access to some information which retail investors do not have. This is the last red flag, which eventually triggered the trading halt of the company a month later.
I believe the above are clues, which question the management's capability and their propensity towards flawed reporting. In addition, it is advisable to avoid companies with market capitalisation less than SGD 100 mil, as depicted in JEL case. Such companies probably do not have a reliably long operating history and they might not be able to weather an economic downturn.
Even though we can scrutinise the figures reported in the earnings report and put in our best possible efforts to detect any creativity, we can never outsmart the management if they intend to cook their books. So in order to protect our capital, please bear in mind to invest only up to 20% of your assets in a single company.
Please note that my objective is to educate the public on identifying red flags in companies and exiting them timely. This post is definitely not to gloat over others' misfortunes in this JEL scandal. I sincerely wish that the truth be uncovered in the earliest time to redress the grievances of all JEL shareholders. Last but not least, I urge all retail investors to help one another by highlighting companies with possible traits of accounting frauds, thereby reducing the recurrence of such dire situations.
This is one of the worst nightmares for long-term investors. So what exactly went wrong? Can retail investors anticipate such events and avoid buying into them? I ploughed through all their previous SGX announcements back-dated to year 2006 and concluded the following observations:
1. Year 2006 proves to be very promising as JEL captures more deals with prominent brands and directors have been purchasing the shares in the open market. In addition, Executive Chairman placed out his own shares to institutions.
2. However, things start to look cloudy during the start of Year 2007. New shares at $0.22 were placed out to investors Mr. Goh and Mr. Koh, raising about SGD 6.5 mil. There are no concrete plans as to how these proceeds are to be used, management highlighted that the proceeds will be used for working capital purposes.
3. Full earnings report for FY2006 was published on 26-Feb-2007. Though bottom-line seemed to improve by a good 18%, but it is a far cry from the 65% surge in revenue. The drastic difference in net margins raises a red flag. Some might argue we ought to exclude the one-time gain in operating income in FY2005 to compare the net profit improvement. Nevertheless, even by looking at the FY2006 figures, net margin is only 2.2%. A company with very low margins should be examined more carefully to ascertain the future profitability.
4. In FY2006 report, a dividend of SGD 5.8 mil is announced, which comes up to almost 75% of the 8 mil profit. This raises another question. Why did the company decide to give out such a high percentage of dividends? Why did the management make such a decision when the company is in a growing stage, with debt-to-equity ratio of more than 1, and it just raised working capital from share placements a month ago? Shouldn't the company retain more of its profits to assist in its growth? It seems to me the new placement investors are transferring their money to the major shareholders.
5. After looking at the cashflow statements of FY2006 and FY2005, it seems that net operating cash flow is always less than net profit, which raises another red flag. Net operating cashflow (OCF) tends to be higher than net profit since net profits include depreciation and amortization charges. Net profit in FY06 seems to be higher than FY05, but OCF still remains quite stagnant at SGD 4+ mil.
6. On 14-Jun-2007, management again intends to raise working capital by share placements of 20 mil shares at $0.33. First 10 mil shares were placed out successfully on 09-Jul-2007.
7. FY07H1 results were announced on 13-Aug-2007. Net profit were up 5.2% from the previous period to SGD 4.3 mil, but on closer look, other income made up SGD 5 mil, so the company actually made a loss in reality. OCF gets worse, though it might be due to the seasonality. OCF came in negative. It also shows that the company is a cash burner as the proceeds from the Jan 2007 placements have already been fully utilised in a short span of 6 months.
8. On 17-Aug-2007, Almaq Investment Group Limited decided not to subscribe for the 10 mil new shares. Caution must always be exercised whenever institutions decide not to go ahead with the share subscription. They probably have access to some information which retail investors do not have. This is the last red flag, which eventually triggered the trading halt of the company a month later.
I believe the above are clues, which question the management's capability and their propensity towards flawed reporting. In addition, it is advisable to avoid companies with market capitalisation less than SGD 100 mil, as depicted in JEL case. Such companies probably do not have a reliably long operating history and they might not be able to weather an economic downturn.
Even though we can scrutinise the figures reported in the earnings report and put in our best possible efforts to detect any creativity, we can never outsmart the management if they intend to cook their books. So in order to protect our capital, please bear in mind to invest only up to 20% of your assets in a single company.
Please note that my objective is to educate the public on identifying red flags in companies and exiting them timely. This post is definitely not to gloat over others' misfortunes in this JEL scandal. I sincerely wish that the truth be uncovered in the earliest time to redress the grievances of all JEL shareholders. Last but not least, I urge all retail investors to help one another by highlighting companies with possible traits of accounting frauds, thereby reducing the recurrence of such dire situations.
NetJets, the incontestable leader in the private jet business is flying higher these days. It leases planes to customers, and allows corporates or individuals to buy fractions of time to fly in private jets. The rental fees are not cheap, but they are definitely affordable as compared to the purchase of an entire aircraft.
10 years ago in 1998, Warren Buffett bought this company. Honestly, we might not even know of such businesses a decade ago. So why did the Sage buy into NetJets then? Might it be for his own convenience of flying with privacy, or did he foresee that global trade will extend to most parts of the world now in 2008? I reckon that it is the latter, as the Sage had always been able to anticipate the major events and invest much earlier than the rest of the herd. In modern days, higher managements of corporates need to have the ability to travel from country to country efficiently, timely and safely. These conditions are fully satisfied by NetJets, which explains their booming business.
I am ceaselessly impressed with Warren Buffett, and he never stops giving surprises to the investing community. Following this article, perhaps we should start thinking about how the world looks like in another ten years' time. Will we able to screen out a gem before everybody else? This should be the ultimatum for all the Sage followers.
10 years ago in 1998, Warren Buffett bought this company. Honestly, we might not even know of such businesses a decade ago. So why did the Sage buy into NetJets then? Might it be for his own convenience of flying with privacy, or did he foresee that global trade will extend to most parts of the world now in 2008? I reckon that it is the latter, as the Sage had always been able to anticipate the major events and invest much earlier than the rest of the herd. In modern days, higher managements of corporates need to have the ability to travel from country to country efficiently, timely and safely. These conditions are fully satisfied by NetJets, which explains their booming business.
I am ceaselessly impressed with Warren Buffett, and he never stops giving surprises to the investing community. Following this article, perhaps we should start thinking about how the world looks like in another ten years' time. Will we able to screen out a gem before everybody else? This should be the ultimatum for all the Sage followers.
One of my reader has requested me to comment on China Hongxing Sports (BR9.SG) and its short-term and long-term prospects. Please note that the following should be purely used as reference purposes. I am only going to touch on the key pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities.
Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.
Background:
The Group is principally engaged in the design, manufacture and sale of sports shoes, sports apparel and sports accessories in China. It principally targets the youth market and the mid-range market segment of the sporting goods industry in China.
The Group manufactures its sports footwear at its production facilities in Quanzhou City, China and has a current annual production capacity of approximately 17.9 million pairs of sports footwear. It has plans to boost total capacity to 23.9 million pairs. The manufacture of sports apparel, sports accessories and a portion of its sports footwear are subcontracted to selected contract manufacturers who meet the quality and design requirements of the Group.
Pros:
1. Definitely a growth stock with a compelling story. Rides on the Olympic 2008 consumer sports frenzy. IPO price of $0.40 on Nov 2005 and it is at least a 5-bagger now if stock is held since then.
2. One of the leading consumer sports brand with growing market share trailing that of big boys like Li Ning and Anta.
3. Rising net margins from 9 months ended FY06 of 12.75% to 9 months ended FY07 of 18.85%, as a result of more footwear manufactured in-house.
4. Very low interest-bearing loans. Loans stood at 10 rmb mil as of FY07Q3.
5. Management has been delivering their promises till date and have been utilising the shareholders' funds efficiently. With the recent share placements, management has put forth many future plans which adds visibility to shareholders. They intend to further expand the sales and distribution network, advertise more aggressively, renovate and relocate older stores, establish 4 logistics centres and expand in-house production capacity.
Cons:
1. Noticed that the operating cashflow is always lagging behind the net profits by quite a gap. Not too sure why is this so, is this a trait of sports companies? If operating cashflow continues to deteriorate from net profit, it might signal that the company might not be reporting its profits reliably.
2. Branding is a very crucial asset to the company. Due to the short operating history, if negative news break out regarding the quality of the brand, stock prices will plummet. Advertising expenses will continue to climb in order to build brand recognition, though management assures to keep the expenses under 20% of revenue.
3. Company keeps increasing ASP to maintain/improve margins, which might result in smaller competitors producing counterfeit products and thereby losing sales.
4. Aggressive future plans, which gives rise to execution risks. But recent management share purchases in the public re-affirms management confidence in the company's prospects.
China Hongxing has been falling due to the recent correction and is currently trading around 68 cents. I will classify this company as a high-risk & high-return company. It has high volatility from a short-term perspective and this should be on the list of many traders.
I have previously profited from this company, though I am not vested at the moment. From a long-term perspective, this company is a viable purchase. This counter is definitely not for the faint-hearted.
Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.
Background:
The Group is principally engaged in the design, manufacture and sale of sports shoes, sports apparel and sports accessories in China. It principally targets the youth market and the mid-range market segment of the sporting goods industry in China.
The Group manufactures its sports footwear at its production facilities in Quanzhou City, China and has a current annual production capacity of approximately 17.9 million pairs of sports footwear. It has plans to boost total capacity to 23.9 million pairs. The manufacture of sports apparel, sports accessories and a portion of its sports footwear are subcontracted to selected contract manufacturers who meet the quality and design requirements of the Group.
Pros:
1. Definitely a growth stock with a compelling story. Rides on the Olympic 2008 consumer sports frenzy. IPO price of $0.40 on Nov 2005 and it is at least a 5-bagger now if stock is held since then.
2. One of the leading consumer sports brand with growing market share trailing that of big boys like Li Ning and Anta.
3. Rising net margins from 9 months ended FY06 of 12.75% to 9 months ended FY07 of 18.85%, as a result of more footwear manufactured in-house.
4. Very low interest-bearing loans. Loans stood at 10 rmb mil as of FY07Q3.
5. Management has been delivering their promises till date and have been utilising the shareholders' funds efficiently. With the recent share placements, management has put forth many future plans which adds visibility to shareholders. They intend to further expand the sales and distribution network, advertise more aggressively, renovate and relocate older stores, establish 4 logistics centres and expand in-house production capacity.
Cons:
1. Noticed that the operating cashflow is always lagging behind the net profits by quite a gap. Not too sure why is this so, is this a trait of sports companies? If operating cashflow continues to deteriorate from net profit, it might signal that the company might not be reporting its profits reliably.
2. Branding is a very crucial asset to the company. Due to the short operating history, if negative news break out regarding the quality of the brand, stock prices will plummet. Advertising expenses will continue to climb in order to build brand recognition, though management assures to keep the expenses under 20% of revenue.
3. Company keeps increasing ASP to maintain/improve margins, which might result in smaller competitors producing counterfeit products and thereby losing sales.
4. Aggressive future plans, which gives rise to execution risks. But recent management share purchases in the public re-affirms management confidence in the company's prospects.
China Hongxing has been falling due to the recent correction and is currently trading around 68 cents. I will classify this company as a high-risk & high-return company. It has high volatility from a short-term perspective and this should be on the list of many traders.
I have previously profited from this company, though I am not vested at the moment. From a long-term perspective, this company is a viable purchase. This counter is definitely not for the faint-hearted.
I have added a new company to my watchlist.
Sunshine Holdings (Y34.SG) is currently priced at SGD 0.170 and I have calculated its fair value to be SGD 0.550. The company is principally engaged in the development of residential and commercial properties for both retail and office developments in selected cities in Henan Province, China. The company sells all the residential units and most of the commercial units, as well as provide property management services for its completed properties. It also leases out some of its commercial properties to retailers and companies.
Please be reminded that the companies listed on my watchlist are intended for long-term investing, so please do not expect instant gratification on the prices.
http://tylequityresearch.blogspot.com/
Sunshine Holdings (Y34.SG) is currently priced at SGD 0.170 and I have calculated its fair value to be SGD 0.550. The company is principally engaged in the development of residential and commercial properties for both retail and office developments in selected cities in Henan Province, China. The company sells all the residential units and most of the commercial units, as well as provide property management services for its completed properties. It also leases out some of its commercial properties to retailers and companies.
Please be reminded that the companies listed on my watchlist are intended for long-term investing, so please do not expect instant gratification on the prices.
http://tylequityresearch.blogspot.com/
The Singapore market has been trending down since the start of this year. When you switch on your machine these days, more often than not, you will see a sea of red numbers. Companies are selling at cheaper prices day after day, but how cheap is considered cheap? And when do we know if the prices have bottomed?
Honestly, nobody knows when the prices have bottomed, so do not waste your time trying to locate the lowest price. Time will be better spent to look at the fundamentals of the companies, instead of looking at the daily price fluctuations. Till date, many people around me are not vested in the market yet, but the replies from them are always 'I will invest only after the market crashed!'. What puzzles me is that even after the market crashed, how do they know which company to invest in? There are 700+ companies listed in Singapore, so is it really so easy to reap the returns by throwing your money into any company? Some of you might rebuff that we can just invest in blue-chips like DBS, Singtel, etc. when the market crashes. You are right that eventually these blue chips will do fine when the market recovers. But again, why do you want to waste such a golden opportunity of gaining multi-folds (as opposed to a few folds) during a market recovery? Time waits for nobody, so please be prepared to grab the opportunity when it comes knocking.
The stock market is a human game. Different individuals react to the market differently. It does not matter the initial capital of the investment. I started off my investing journey with a mere SGD$ 1,000. The amount of the initial capital is not the key; what is precious is the learning process, the discovery of your investing traits as the years go by. You can only know more about your inner character when you are vested in the market, and the fine-tuning along the way will make you a better investor. Investing is a life-long education, so I strongly urge everybody to start investing early.
So in turbulent times like these, who can we turn to? For those who have prepared themselves well, this will be an opportunity for them. But for those who have just started investing, worries start settling in their minds. Honestly, nobody can predict if the market will go lower or spike up. You can rely on no one except yourself.
Do you believe what you see? I do, I believe my own eyes more than anything else in this world. So I trust the figures and information reported on the company/industry, instead of getting myself affected by others. It is based on these information that I derive the intrinsic value of the company. So did the company operate differently few weeks ago as compared today? I doubt, but it seems that some stock prices differ 50% in just a span of weeks. I have made more purchases recently, with the expectations that they will rise to my calculated value in years to come. Having said this, please do not be enticed to follow and purchase blindly. Even after purchases, please always ensure that you are at least 20% in cash and only invest up to 20% of your portfolio in one company. Your 20% cash will come in helpful to shoot flying elephants and in the event of fraud or insolvency, the exposure is capped at 20%.
S-shares have been hit pretty badly these days and some are really worth looking at. The market can go either way this year, but I am still on the optimistic side as I see many good companies at good prices. Everybody makes mistakes, but remember to learn from them and not to repeat them again.
Last reminder: Believe Your Own Eyes!
Cheers!
Honestly, nobody knows when the prices have bottomed, so do not waste your time trying to locate the lowest price. Time will be better spent to look at the fundamentals of the companies, instead of looking at the daily price fluctuations. Till date, many people around me are not vested in the market yet, but the replies from them are always 'I will invest only after the market crashed!'. What puzzles me is that even after the market crashed, how do they know which company to invest in? There are 700+ companies listed in Singapore, so is it really so easy to reap the returns by throwing your money into any company? Some of you might rebuff that we can just invest in blue-chips like DBS, Singtel, etc. when the market crashes. You are right that eventually these blue chips will do fine when the market recovers. But again, why do you want to waste such a golden opportunity of gaining multi-folds (as opposed to a few folds) during a market recovery? Time waits for nobody, so please be prepared to grab the opportunity when it comes knocking.
The stock market is a human game. Different individuals react to the market differently. It does not matter the initial capital of the investment. I started off my investing journey with a mere SGD$ 1,000. The amount of the initial capital is not the key; what is precious is the learning process, the discovery of your investing traits as the years go by. You can only know more about your inner character when you are vested in the market, and the fine-tuning along the way will make you a better investor. Investing is a life-long education, so I strongly urge everybody to start investing early.
So in turbulent times like these, who can we turn to? For those who have prepared themselves well, this will be an opportunity for them. But for those who have just started investing, worries start settling in their minds. Honestly, nobody can predict if the market will go lower or spike up. You can rely on no one except yourself.
Do you believe what you see? I do, I believe my own eyes more than anything else in this world. So I trust the figures and information reported on the company/industry, instead of getting myself affected by others. It is based on these information that I derive the intrinsic value of the company. So did the company operate differently few weeks ago as compared today? I doubt, but it seems that some stock prices differ 50% in just a span of weeks. I have made more purchases recently, with the expectations that they will rise to my calculated value in years to come. Having said this, please do not be enticed to follow and purchase blindly. Even after purchases, please always ensure that you are at least 20% in cash and only invest up to 20% of your portfolio in one company. Your 20% cash will come in helpful to shoot flying elephants and in the event of fraud or insolvency, the exposure is capped at 20%.
S-shares have been hit pretty badly these days and some are really worth looking at. The market can go either way this year, but I am still on the optimistic side as I see many good companies at good prices. Everybody makes mistakes, but remember to learn from them and not to repeat them again.
Last reminder: Believe Your Own Eyes!
Cheers!
One of my readers have requested me to comment on China Auto Elec (T42.SG). I have posted my thoughts on my site.
http://tylequityresearch.blogspot.com/
I have just created a watchlist for companies worth taking note of. Readers are welcomed to take a look.
I have attached my simple Discounted Cash Flow valuation worksheet due to some requests from my readers. Hope it is useful.
Thank you.
Thank you.
There are many readers who have emailed me to express my opinions on certain companies. For those who are interested to find out more, please visit my site and rest assured I will try to get back asap.
Cheers! :)
Hi ROI,
If discount factor is 10% = $1.22
If discount factor is 15% = $0.82
Anyway, can anybody enlighten how to compute the wacc for sp chemicals? thx
TYL, if u were to take discount factor as 10% & 15 %, what will be the target price of SPChem.?
hi renzouken,
I am glad to hear different views on the discount factor, I chose to use the risk-free rate of return as my forecasted figures of the financial statements and free cash flow is based on a conservative level. In addition, I have used only ten years of DCF, with no company growth from year 2010 and without terminal growth, so using 6% as the risk-free rate is logical to me.
i am not really educated in wacc as computing firm risk does not sound an easy task to me, i will appreciate if any of you can demonstrate the usage of wacc by calculating the fair value of sp chemicals, thx =)
totally agreed with renzouken. higher wacc shld be used for share compared to bond.
Hi TYL,
I don't quite agree with using the 6% discount rate. In any case, i thought that the local historical and present bond rates has been much less than 6%?
I agree that the discount rate won't pose a problem if you use relative valuation to compare companies in the same industry, but since now you're trying to derive an intrinsic value for the company, the discount rate matters significantly. A free cashflow to firm analysis should use a wacc discount rate as you're discounting the projected cashflows based on firm risk, unless the cashflows have been adjusted somehow with such certainty that the risk level is equivalent to a government bond, then the risk-free rate can be used. In fact, the growth rate and discount rate are probably the most important derterminants in valuation.
Just my two cents' worth
i have just posted my golden rule of thumb in investing, hope more ppl can spread this golden rule hehe
hi hogenterprise,
I chose the discount rate to be approx the bond-rate return of singapore. anyway, I have been using the 6% discount factor over the years....as long as you keep this rate constant when calculating companies' intrinsic values, it should not pose a problem as better-valued companies will still surface when comparing companies in the same industry.
good hard work. TYL, why u choose 6% for the discount rate? Thought normally for chinese listed coy , WACC shld be 10% or above???
Keep up the good work.
I have added a new section named Sector Comparison in my report. This should provide more information.
I have just compiled a research report on a SGX-listed company. I hope the report will provide good value and information to those who are looking for good-valued companies.
Cheers!
