Nenix - Trading Philosophy
Tuesday, March 31, 2009 | 0 Comments
Melynn - Philosophy on investing part 2
My first step in devising a new strategy is to think through what are the factors that caused a stock to surge and what are the factors that caused a stock to plunge.. Intuitive it sounds but all these are some points which I missed out previously.
As far as I know, there are currently 2 school of well known thoughts - Fundamental analysis and technical analysis... Is it possible to fuse these 2 together to determine the buying and selling price even when they are contradicting in nature usually? To start off, I am thinking of segregating the fundamental factors into Short Term and Long term. Short Term factors are like - Latest quarter result posted by the company, macro economic sentiment, industry trend. This list is not exhaustive as I am still in the process of researching.. Long Term factors are like 5 year company financial results, macro trend, potential to be a market leader and etc..
For technical analysis, I will also segregate the factors into short term and long term.. I am still a greenhorn in this area and I know that by mixing technical and fundamentals will definitely invite criticisms but in today's volatile market, I believe by having the knowledge to apprehend charts will let me know more on other investors' psychology. Some short term factors I can think of are momentum indicators like MACD, moving average to determine the support and resistant and long term factors are like the 5 years trend of the stock.
The reason why I think mixing these 2 school of thoughts is important because I used to overlook a point in fundamental analysis. I used to think that only fundamentals affect stock price but stock price actually affect the fundamentals too because a low stock price will affect the company's ability to raise equity resulting in taking more debt and also might affect the company's reputation too as a company with low stock price may deemed to be "lower quality". I also hope by combining the both strategies, I can avoid the mistakes of behavioral finance pitfalls
So how can I actually determine the entry price and exit price using the mentioned strategies. Also how can I determine the position sizing to manage risk?
Reproduced with permission from http://melynn-lynch.blogspot.com
Monday, March 30, 2009 | 0 Comments
Melynn - Philosophy on investing
This unprecedented 2009 financial crisis have helped me to learn quite a bit through the hard way.. My portfolio total value has shed around 50% since inception so I have been wondering is it a wrong move to buy and hold? It's always easy to answer such question on hindsight using present information which are unavailable at that point of time. I was and still a firm believer of fundamental analysis but with the lack of information which are sometimes inaccessible to retail investors, can we still make a soundly judgement ? How confident can we be that the stock is still fundamentally sound when it's fundamentals are changing dynamically. There are currently too many weaknesses in my strategy therefore I will try to improve on it based on the following points which I will be exploring further.
1. Lack of risk management
Need to think of a way to spread my portfolio risk.. Having say that, I don't intend to over diversify or use beta/variance to diversify risk.. I'm thinking of aligning fundamental analysis to risk management.
2. Emotions(behavioural finance)
Investors are sometimes their own worst enemies and personally, I am a victim of my own emotion (i.e averaging down a company's stock even when its prospect seems to be not as good as last time) .. Best way to overcome such problem is to create a system and stick to it rigidly.
3. Strategy
I am currently using fundamental analysis to buy/sell stocks but personally, I think there are some downsides for retail investors like me to use this 100%.(i.e a we are just minor share holders therefore we cant actually change the company fundamentals like what the great sage Waren Buffett does) .Can technical analysis blend with fundamental even though they oftenly contradict each other? Need to devise a rule to sell stocks.....
My journey to create a strategy starts here and I will be using the stock market to experiment it.. When I first started investing, I have used paper trading to test my strategy but for now, I think real $ should be used instead because emotions will be involved and this is one point which I hope to overcome. I will try to jot down all my findings and thoughts and if possible , I hope readers (if any) can give some feedback .. Criticisms are strongly welcomed
Sunday, March 29, 2009 | 1 Comments
Crane Rental in China (2008/12/22)
Crane rental in China (2008-12-22)
Under China's planned economic system, crane end users and owners used to be the same. So construction, petrochemical, steel, power, transport and other end-user companies owned a great deal of cranes. But as the system has moved toward a market economy, the masses of cranes that used to signify the strength of these enterprises are now starting to be seen as burdensome fixed assets.
Most of the large and super-large cranes in China are purchased by construction companies under the umbrella of state-owned monopolies Petro China and Sinopec. For example, nuclear power construction company China Nuclear Engineering & Construction (Group) announced in April 2008 that it had spent more than CNY200m (USD28.2m) on a Terex-Demag CC8800-1 Twin crawler crane. These cranes ensure the key projects remain in their own group. The rental industry has difficulty accessing these projects, but may be able to fill in vacancies.
For smaller cranes, different economic rules apply. Construction companies are increasingly turning to rental after finding that the cranes that they bought to win a project are idle once it has finished.
Liebherr has found, for example, that two-thirds of the cranes it has sold over the past two years have gone to rental customers: "We have seen the crane rental business increasing. Central government is trying to cool down the economy, limiting state-owned companies to purchase goods. Therefore, a lot of bidding and projects are delayed. But there are huge projects that demand cranes, which give the opportunity to private companies," a spokesman says.
He says crane rental companies often work in high-value niches where domestic manufacturers are weaker than foreign competitors. "They tend to specialise in large capacity all-terrain mobile cranes and heavy duty crawler cranes, for example for lifting of wind turbines."
In recent years, the Chinese government has invested more in wind power construction, so wind turbine lifts are a big driver of demand for large cranes. According to privately-held domestic rental company Shandong Longkou Yuhua Lifting Co, a 350t AT with tower configuration can install a 1MW wind power generator. Because ATs are more expensive to buy and maintain than crawlers, and do not need to be built up on site, they command the highest prices. The average monthly rental price for a 350t AT is around CNY650,000 (USD95,000); a 500t AT is almost CNY1,100,000 per month. In comparison, a 400t crawler crane costs CNY600,000 a month.
The Liebherr spokesman adds that 3.0MW turbines are on the way, requiring at least a 750t-class crawler.
The sweet spot for crane rental extends down to about 200t capacity, says Adam Lim, corporate development manager of Singaporean crane rental company Tiong Woon. The company has a subsidiary, Tiong Woon (Hui Zhou) Industrial Services, that does crane rental based in the southern province of Guangdong. It is not the only foreign company to start a crane rental joint venture in China. Shanghai Tengfa Engineering Construction Co. Ltd was set up by two Japanese crane rental companies, Yonehara Shoji and Itochu Corp, with help from mobile crane manufacturer BQ Tadano, itself a Chinese-Japanese joint venture. The crawler crane rental company Xie Xing, which has a 400t crawler, has a Shanghai headquarters, but is actually from Taiwan, which is governed separately from the rest of China.
The working schedules of big cranes remains tight, and requires booking months ahead, or having a good relationship with the crane owner, according to Shandong Longkou Yuhua Lifting Co. But despite their popularity, the rental price of 200-tonners (CNY16,000¨C18,000 per eight-hour day) is not as much as 160-tonner three years ago. Yuhua has been in business more than 10 years, and now has five cranes, including a 500t Liebherr LTM 1500-8.1 and a 250t LTM 1250.
It says that some cranes punch above their weight class by virtue of special design features, such as long booms. The daily rental price for an ordinary 250t AT is around CNY20,000 per day, but the rental price for the Demag AC250-1 is CNY26,000¨C27,000 because of its 80m main boom, or CNY23,000¨C25,000 for the Liebherr LTM 1250 with 72m main boom. Grove's 220t AT also gains a CNY2,000 premium over the ordinary rental price for 200t class AT.
Generally, crane rental prices are lower in the south than the north of China. The monthly rental price for a 400t crawler crane is CNY500,000¨C550,000 in the south, and CNY600,000¨C650,000, or even CNY700,000, in the north. Crane demand is higher in northern provinces such as Inner Mongolia, Xinjiang and Ningxia, where there are more construction projects, especially wind power construction. Also, southern drivers are said to have difficulty working in the northern climate.
At the local level, there are worrying signs about the oversupply of small-capacity cranes in the market. These new cranes are now busy, but their popularity in five years' time remains unclear. Facing the current hot construction market, a lot of buyers are optimistic that the local construction boom will last longer than the general three to five year term that it typically takes to pay back their new crane.
Financing
Unlike state-owned crane and equipment buyers, finding capital to buy cranes is a particular problem for privately-owned crane rental companies. "Most end-users are state-owned and do not use financing. Rental companies are private and need financing," says the Liebherr spokesman.
Although leasing programmes go back to the 1980s, constraints in financial capital, risk analysis, controlling bad debts, and other factors, continue to limit their growth. Nevertheless, all the major Chinese crane manufacturers operate leasing programmes. Manitowoc and Zoomlion have set up financial leasing companies.
Zoomlion Xinxing Leasing Company was set up in June 2006 and began offering leases in May 2007. In the half year to September 2007, its sales revenue had reached CNY3bn, 15% of the total Zoomlion Group sales revenue in the period, according to general manager Jun Wan.
"Our financial leasing company not only has entirely new construction products, but also second-hand equipment," says Wan. ¡°Buyers could sell their own existing equipment to Zoomlion Xinxing Financial Leasing Company as the deposit or the first payment for new equipment purchasing, then this old equipment could be re-rented to the buyers by Zoomlion Xinxing Financial Leasing Company. This method can reinvigorate buyers' fixed assets.¡±
An alternative for private companies are secondhand cranes. Although Chinese state regulations make it difficult to import secondhand cranes, private companies are the main buyers of the secondhand cranes in China that make it through. The most common purchases are rough terrain and crawler cranes.
Tower cranes
"For tower cranes, China is a huge market," says Adam Lim at Singapore's Tiong Woon. "But China has quite a number of producers of tower cranes. The tower crane rental business is not as good as the crawler crane business."
While Tiong Woon's subsidiary has focused mainly on crawlers and mobiles, its Singaporean rival, Tat Hong, also known for its crawler crane fleet and distributorships with Hitachi-Sumitomo, among others, has spent millions of Singaporean dollars setting up a major presence in tower crane rental in China through four joint ventures and alliances.
Tat Hong's advantage in the Chinese rental business is its alliance with one of China's major manufacturers, Fushun Yongmao. Tat Hong owns a stake in Yongmao Holdings, the Singapore-traded parent of the Chinese tower crane manufacturer. In February 2008,
it upped its share from 18% to 20%.
In January 2007, Tat Hong entered a 50:50 joint venture through a Chinese subsidiary with what it says is the country's largest tower crane rental company, Beijing ZhongJian Zhenghe Construction Machinery. The joint venture is called Jiangsu Zhenghe Tathong Equipment Rental and has operations in Beijing and Shanghai.
In December 2007, it bought an extra 5% (costing USD650,000) to give it a controlling stake. Under terms of the deal, Beijing ZhongJian Zhenghe contributed 33 tower cranes from its rental fleet, worth CNY35m, and Tat Hong supplied four cranes and cash to make an equivalent amount.
In April 2007 a wholly-owned Tat Hong subsidiary Tat Hong Equipment (China) paid CNY13.1m (USD1.92m) to buy a 76.4% stake in a four-way joint venture with China Nuclear Industry Huaxing Construction Company Ltd and two individuals, Gao Song and Sun Zhao Lin. The new company, called Jiangsu China Nuclear Industry Huaxing Construction Machinery Co., Ltd, providers of tower crane rental, heavy lifting equipment and related services to the construction industry in China. It has a special focus on the Chinese nuclear industry. Its headquarters are based in Yizheng, Jiangsu province, and it operates in Shanghai, and the southeastern provinces of Jiangsu, Zhejiang, Guangdong, Anhui, Shandong and Jiangxi. It also agreed to pump CNY45.8m of capital into the new JV, based just north of Shanghai, a month after the acquisition was completed.
In April 2007, the fleet consisted of 36 tower cranes. The company predicted it would increase the fleet size to 200 units and have turnover reaching CNY70m by the end of 2008.
Although Tat Hong was not available to speak to Cranes Today about its Chinese tower crane business, it has made several statements in published quarterly reports.
"We see vast potential for growth in the Chinese market, where tower crane usage is prevalent and the development of equipment rental is still in its infancy. We believe the Chinese market presents excellent advantages for the early mover and our acquisitions are intended to accelerate our penetration into the region," said Roland Ng, Tat Hong president and CEO in a May 2007 press release.
In an April 2007 presentation about the company's tower crane initiatives in China, he said that equipment rental is highly fragmented, with small companies of up to 40 staff. Rental is only available in Beijing, Shanghai, Guangzhou and Shenzhen. He added that there is lots of potential for demand from national utilities.
In November 2008, the company announced further plans to compete in the Chinese tower crane rental market. It announced a memorandum of understanding with Fushun Yongmao Construction Machinery to set up a new joint-venture tower crane rental business called Beijing Tat Hong Equipment Rental. Tat Hong would have a 55% stake in the business, which has an initial registered capital of CNY20m. In a statement, the company said that the joint venture would be mutually beneficial for both parties, 'as the Chinese tower crane rental market is growing rapidly.'
Tat Hong's investment seems to be paying off. Also in November, it issued a downbeat press statement about trading conditions: "Going forward, conditions are expected to be more competitive." But its Chinese operations seem to be going the other way. It reports that its Chinese tower crane rental division increased revenue three times to SGD11.4m (CNY51m) in the six month period to September 30, contributing 3.1% to the group's total revenue. It also predicts steady demand for tower crane rental in China from energy and infrastructure.
Source: Cranes Today Magazine
Sunday, March 29, 2009 | 0 Comments
Tat Hong Fundamental analysis
Background
Mainboard-listed Tat Hong Holdings Ltd ("Tat Hong" or the "Group") is one of the largest crane companies in the world - ranked number one in terms of fleet size of crawler cranes, fourth in terms of total number of cranes owned, and seventh in terms of aggregate tonnage. In the Asia-Pacific region, it is undisputably the largest crane company, with its fleet size ranging from 50-1000 ton cranes.
Established in Singapore in the 1970s, Tat Hong is principally engaged in five core activities - rental of cranes, rental of towercranes, rental of general equipment, sale of cranes and other heavy equipment, and sale of spare parts for these equipment. It serves diversified industries, including infrastructure, oil & gas, mining, construction and engineering sectors, across a geographical footprint that stretches over Australia, Singapore, Southeast Asia, Indo-China, India, Middle East and China. Tat Hong currently has a combined rental and sales inventory fleet of over 600 mobile crawler cranes. The Group enjoys a number of exclusive distributorship agreements for cranes and other heavy equipment with companies such as Hitachi-Sumitomo, Sumitomo, Yanmar, Bomag, Kato, Mustang, Kawasaki, Mitsubishi and Linkbelt.
Following the listing of its Australian subsidiary, Tutt Bryant, on the Australian Stock Exchange in December 2005, Tat Hong had actively acquired, through Tutt Bryant, a number of companies, including Kingston Industries, Bay Hire, Muswellbrook, North Sheridan and the rental business of Bradshaw Ultra Heavy Haulage, extending its presence and increasing its market share in its crane and equipment rental businesses in Australia.
The Group has significantly expanded its presence in China, building on its interest in Fushun Yongmao, a towercrane manufacturer listed in Singapore, and its foreign-sino joint-venture company, Shanghai Tat Hong Equipment Rental Co. Ltd. In January 2007, Tat Hong entered into a joint venture with China's largest towercrane rental company, Beijing ZhongJian Zhenghe Construction Machinery, followed by the acquisition of China Nuclear Huaxing TatHong Machinery Construction in April 2007. In February 2008, Yongmao Holdings Limited, the Group's 20%-owned associated company, was successfully listed on the Main Board of the Singapore Exchange Securities Trading Limited ("SGX-ST").
| Discount Rate | Grade | |
| Profitability | 2/4 | B |
| Growth | 1/3 | A |
| Financial Health | 2/5 | A |
Cash Flow | 4/8 | B |
| Effiency | 2/5 | A |
Profitability
1. Has the company been generating free cash flow consistently.
Tat Hong has had a pretty good history of generating free cash flow. Free cash flow is negative in year 2003 and 2004 but has recorded a good growth on the following years. It is still not consistent as they are still plowing most of their money back to capital expanding and this is not a good sign that the firm has much of an economic moat.
Company' net profit/operating profit margin has decreased from 21% to 20% but prior to that, they have been increasing consistently.
3. Is the company's ROE more than 10%
Tat Hong's 2008 ROE is 27% and has been increased consistently.
4. Did the company increase financial leverage agressively to get a high ROE
Tat Hong's financial leverage has decreased from 2.08 to 1.88 therefore the ROE is of highest quality.
5. Is the company's ROA more than 8%
Tat Hong's 2008 ROA is 13% and has been increased consstently.
6. Has the company's operating expense increased drastically over the years
The company total expense is steady at 16 to 17% of sales until year 2008 when it increased to 19%.
7. Is the company's inventory rising faster than sales
Inventory has increased 26 % from last year while sales increased 32%. Although there are exceptions but on the safe side, its better to take this point into consideration because when a company produces more than its selling, either demand has dried up or the company has been overly ambitious in forecasting demand. Unsold goods will have to get sold eventually,
8. Has the company's receivables percentage of sales increased more than 20%
Account receivables increased from 11 percent of sales to 13 percent which is a growth of 18%.
Conclusion : With the likely downturn of the economy, it will definitely affect the crane business therefore I will conservatively grade the profitability as B due to the inconsistent generation of free cash flow and also inreasing of total expense.
1. Is the company's sales growth more than 15%
Tat hong's sales has grown at an annual growth rate of 27% over 7 years.
2. Is the company's operating income growth more tha 15%
Tat hong's operating income has grown at an exploding rate of 68% over 7 years.
3. Is the company's net profit growth more than 15%
Tat hong's net income has grow at an exploding rate of 79% over 7 years.
Conclusion : Will expect a decline in growth due to the possible demand crunch but looking on a longer time horizon, I will still grade the growth A.
Financial Health
Tat hong's financial leverage has been decreasing consistently over the past 7 years and it is at 1.88 in year 2008. This means that for every dollar in equity, the firm had $1.88 in assets. It borrowed the other 0.88. This is fairly conservative for a company which generates such high ROE.
2. Is the company's debt to equity between 0.5 to 1.5 or smaller.
Tat Hong's debt to equity is at 0.88 and been decreasing consistently over the years too.
3. Is the interest coverage more than 5 and been increasing consistently
Tat Hong's interest coverage has been improving over the years and it is at 12.99 in year 2008. In other words, Tat Hong has earned enough money to cover its interest obligation 13 times over, which is a pretty safe margin.
If a company has an excessive high current ratio, it can probably sound some alarm bells because it indicates that the company has a large amount of current assets that could - and probably should - be invested back into the company . Tat Hong's current ratio is at 1.39 in year 2009 and they have managed to maintain it above one over the past 5 years. Even though the 1.5 mark is not met but this level is still relatively safe.
This figure is not really meaningful if used alone as it needs to be compared with other companies in the same industry but generally, a quck ratio higher than 1 puts a company in fine shape.
Cash Flow
1. Is the company able to generate improving/consistent operating cash flow to sales
Tat Hong's ocf/sales for Fy06,07,08 is 6.51%, 6.27% and 10.12%. They have shown improvement but it is still not consistent.
Tat hong's free cash flow to operating cash flow for Fy06,07 and 08 is 17%, 68% and 38%. The recent plunge is due to the increased of capital expenditure. There is no guideline for this but generally, the higher percentage of free cash flow, the greater the financial strength of the company.
3. Is the company's cash flow coverage improving
The following are the various cash flow coverage I'm covering.
| FY05 | FY06 | FY07 | FY08 | |
Short term Debt Coverage | 0.06 | 0.15 | 0.14 | 0.23 |
Capital Expenditure Coverage | 0.64 | 1.21 | 3.28 | 1.63 |
Dividend Coverage | 1.20 | 2.93 | 0.83 | 2.23 |
Capex + Cash Dividend Coverage | 0.42 | 0.85 | 0.67 | 0.67 |
The capital expenditure coverage ratio compares a company's outlays for its property, plant and equipemtn(PP&E) to operating cash flow. Tat Hong's capital expenditure coverage has been increasing for the past 3 years till last year where it plunged quite substaintally due to increase of capital expenditure.
For conservative investors focused on cash flow coverage, comparing the sum of a company's capital expenditures and cash dividends to its operating cash flow is a stringent measurement that puts cash flow to the ultimate test. If a company is able to cover both of these outlays of funds from internal sources and still have cash left over, it is producing what might be called "free cash flow on steroids". This circumstance is a highly favorable investment quality. Tat Hong's ratio has been hovering at the level below 1 which tells us that they are not able to fully coverage the capex and divided with the generated operating cash flow but nevertheless, the ratio is still at a decent level.
Conclusion : Based on the above, Tat Hong has a good record of generating free cash flow and also its cash flow coverage ratio has been improving over the years but still, its coverage is not at the ideal range and also the free cash growth is inconsistent therefore to be conservative, I will give a B grade.
Efficiency
1. Is the company's cash conversion cycle inproving consistently over the last few years
It is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.
| FY05 | FY06 | FY07 | FY08 | |
Days Sales Outstanding (days) | 72 | 58 | 51 | 53 |
Days Inventory (days) | 198 | 177 | 168 | 174 |
Payables Period (days) | 162 | 156 | 159 | 175 |
Cash Conversion Cycle | 107 | 79 | 61 | 52 |
| FY05 | FY06 | FY07 | FY08 | |
Receivable Turnover | 5.08 | 6.29 | 7.09 | 6.89 |
Inventory Turnover | 1.84 | 2.06 | 2.17 | 2.10 |
Fixed Asset Turnover | 1.98 | 2.34 | 2.02 | 2.03 |
Asset Turnover | 0.74 | 0.85 | 0.77 | 0.76 |
Valuation
Multiples
| Current | Target | Target Price | |
Book Value per share | 0.63 | 0.5 | 0.44 |
Operating Cash Flow per share | 4.38 | 4.00 | 0.51 |
Free Cash Flow per share | 11.36 | 11.00 | 0.54 |
Price Earnings per share | 2.79 | 2.50 | 0.50 |
Price sales per share | 0.44 | 0.40 | 0.51 |
DCF
| Cash flow growth rate | 0.05 | 0.08 |
| Margin Of safety | 0.15 | |
| Overselling rate | 0.13 | |
| Discount rate | 0.14 | 0.12 |
| Per Share Value | 0.62 |
| Margin of Safety | 0.53 |
| Consider Selling | 0.70 |
Friday, March 27, 2009 | 0 Comments