Re-assessing Parkson prospects

My investment in Parkson failed to achieve my 10% p.a. share price appreciation target. It is about time that I reassess my original investment thesis.

Parkson Holding holds about 55% interest in Parkson Retail Group listed in Hong Kong Stock Exchange. Parkson Retail contributes as much as 71% revenue in FY 2010 but used to be a lot higher prior to 2007. As such Parkson Retail was more or less the mirror of Parkson Holding prospects. Parkson Retail was having fantastic growth(see below). They were having more than 40% growth rates prior to 2007 due to very rapid stores expansion and economy was doing very well. Growth rates moderated (10-15%) in the last 2-3 years. And that disappointed a lot of investors. Since then, the share price of Parkson Holding and Parkson Retail have been see-saw going no where.



2 - 3 years of price going nowhere is a very testing time because what is obvious to a lot of people is that the stock is fully valued for 2011, may be 2012 too. The management credibility is a bit dented because they keep saying they will open more stores but the pace has been slow.

As a retail investor relying heavily on annual reports, here is what I can assemble to analyze Parkson's recent growth.



A few pointers,

1. Top line has been growing only at 10% and a disappointing single digit 5% in FY 2010.
2. Slowing top line has impacted their bottom line growth as well.
2. They have been opening only 2-3 stores in China as opposed of 4 - 5 stores.
3. The pace of expansion in Malaysia and Vietnam has been ............ rather slow.

What I don't like about Parkson management is they have been very stingy in providing information. They at least should let us have the lettable retail floor space for us to do meaningful analysis. That has handicapped me and the closest analysis that I can come out is revenue/store and pre-tax profit per store. Average revenue per store is about 30 mln generating about 10 mln pre-tax profit. ( Will need to use this number later).

I have an entry price of RM 6 in 2008 and to achieve my 10% return per year, by 2013 Parkson Holding share price needs to be around RM 10. To achieve RM 10, it would need at least EPS of 0.67/share selling for 15X PE. To do 0.67 EPS, it will need at least about have growth of 20-25%, implying at least 15% same store growth and at least 4 - 6 new stores. Possible but I don't put too much hope for this scenario for margin of safety reason.

If the same store growth is anaemic, only 10% growth and they open 4 - 6 stores per year, I will be doomed. Extrapolating 700 pre-tax(FY 2010) with 6 stores/year for the next 3 years will give me approximately pretax of 1 bln and estimated after tax profit attributed to equity holders will be around 0.39/share(1,036 mln*.75 nett of corp tax*.53 effective interest/1,036 mln outstanding shares). Share price could be in the region of 5.85 to 7.8. My potential return could be 0 - 6% p.a., dividend not included.

Looking back, I was relying too much on the past growth rates to set my entry price of RM 6. At hindsight, I was also relying too much of my assumption: big population, high urbanization = high growth. Analysts sing the same song for their Indonesia venture recently. The key issue really is how fast they can open more stores and whether they are also coincides with how well the general economy is doing(same store growth).

Don't get me wrong that I begin to feel bearish with the stock. In fact I still like the stock a lot but how much should I pay. If I were to pay for RM 5/share, I will have much higher chance of achieving 10% target.

Transmile, PN17 -- not going Chapter 11?

Transmile has been suspended since March 03, '11. They have appealed not to be delisted. A few weeks have passed since then, and suddenly this news flashed on The Edge.

It said on Thursday, March 24, the proposed disposal was completed on Wednesday and the final disposal consideration of US$66.99 million was received in full.

To recap, Transmile’s disposal of the aircraft would enable it to reduce its debts by 39% to about RM320.1 million.

It had on Jan 10 signed a sale and purchase agreement with FedEx to sell four MD-11F aircraft for US$17 million (RM52.2 million) each to be satisfied entirely in cash. With the completion of the proposed disposal and usage of the proceeds of US$68 million (RM208.8 million), the net amount of outstanding debt obligations to be restructured was expected to be reduced by up to 39% to RM320.1 million.

Recently, it proposed a scheme of arrangement to ring fence its unit Transmile Air Services Sdn Bhd (TAS) and preserve it as a going concern.

Sounds like a good news and if the stock was still quoted, I'm quite sure it will cause the stock price to gap up. Many technicians will call that a bullish sign and ride on the trend!!!I am sure million of shares could have changed hands but not many would have analyzed the company and will be shocked to find out the value of the company is ZERO.

If one subscribes to efficient market theory, rising price means the market knows the company will survive this quake while declining means the company done something wrong -- perish. Rising price can persist for weeks, months or vice versa. This means nothing to me, it's merely a reflection of fickle minded of Mr. Market that know nothing and indecisive.

Will Transmile survive? How much should we pay for Transmile, if it ever be quoted again?

To answer those questions, the first question that I have is how many planes do they still own after disposing their aircrafts. What is the revenue that they can generate based on that capacity, since they have no money to buy more planes?





After going through the Balance Sheet, you can see that they separate fixed assets into Aircraft, property, plant and equipment(APPE) and assets held for sale. So, we know that Aircraft, property, plant and equipment is really the productive asset that can generate revenue.

In 2009, they have 132 mln APPE that generated

151 mln revenue

13 mln losses in gross profit

249 mln operating LOSSES!


In 2010, they have 95 mln APPE that generated

207 mln revenue

13 mln Gross Profit

143 mln operating LOSSES#####!!!!!!

Well, you may argue that it's not fair to just look at the final operating losses since they have a lot of one time charges and impairment. Wrong!!!

Actually, I don't need to waste time further as I cannot see how 2% Gross Profit is going keep this company going.



However, since I am not going talk about this stock forever, let me finish my analysis. The management is pretty honest actually by supplying this information. Based on Q4 '10 data, the company is generating 400 k + EBITDA or 2 mln annualized EBITDA.



If I add back the depreciation to EBITDA, it should give some idea of how much cash Transmile can generate. Unfortunately I cannot find the information.

They paid 25 mln interest in 2009. Assuming now that they have their debt cut by 1/3, they need to serve 17 mln interest per year. I doubt they can service their interest.

All the charts that I show you are from Q4 '10 earning report released on Feb 22 and I was wondering why people still pay 0.20 per share for dead Transmile(see chart). My foot efficient market theory #@####@!




It is too bad that KLSE does not allow people to short stocks or else this is the perfect stock to short the moment it gaps up.

Transmile, Chapter 3

I picked Transmile as a case study because I personally have a small loss when invested in this counter, about RM 1,000 -- not a big deal. I was lucky to escape this near death incident but this RM 1,000 lesson has a big impact on the way I invest from that day onwards. In this chapter 3, let me first extract a few pages from 2006 Annual Report on the special investigation results(Click on the images to read the details).







You see from the audit adjustments that they have falsified at least 300 mln plus of revenue which were never existed.



We all also can see that they have siphoned out at least about HALF-A-BILLION Ringgit over 3 years for buying equipments that never existed.



It was kind of difficult to detect a problem like this by analyzing their cash flow statement, account receivable trend, or yield on cash, etc. What happened in this case was the business model was truly a great model. It was a cash generative business but it was too bad that the management siphoned out the money.

There is a very important aspect we all should look at when we analyze company, that is corporate structure and related company transactions.



Why such a simple business need such a complex structure? In this case, the management was using TAS and CenWorldwide as a medium to create all the false invoices and others.

From that day onwards, whenever I see a company with corporate structure like Octopus, I tend to raise my level of paranoia and I hope you will do the same.

Transmile, Once Upon A Time in Wa Wa Land .... II

May 08, 2007. The day of the beginning of Transmile ending. The day before, Transmile told Bursa that they were unable to submit its final audited account for YE 2006. Their auditors from Deloitte & Touche walked away from the audit because they could not obtain certain documents related to sales, account receivables and fixed assets.

The announcement upset many people. The stock has a huge bearish downside gap. The company lost almost 750 mln of market capitalization within minutes of opening bell. Why would people willing to buy at RM 13 on May 07 and willing to dump at RM 10 at 9.00 am May 07, 2007. It will remain as a mystery to many retail investors. Why would someone willing to give away 30% discount to flush down a big block? Why would they want to get rid of their holdings before waiting for more news?

This is what professionals trained for -- shot first, ask questions later. If you are wrong, the situation is better than what you thought, you can always bought back at lower price later. How does this works exactly. Assumming you bought 1,000 shares at 13.00 and sold it for 10.00, RM3,000 temporary realized loss but you have 10,000 cash on hand. If the stock price dipped to 8.00, your 10,000 will buy you 1,250 shares. When the stock price has a technical rebound to RM 9.50/share you can cashed it for RM11,875. So you have a realized loss of RM 1,125. This loss is much narrower compared to holding on to the stock and you loss is capped at 3,000.

I have taken the trouble to tell my readers that there is no guarantee that a well manage company will not give you negative surprise from time to time. This can happen to Public Bank, Maybank, CIMB Bank, Maxis, Nestle, BAT, etc..... shot first, ask questions later is the best protection you can have when navigating the stock market. This is extremely counter intuitive but it has served me well from time to time.

Analyst, damned analyst. Should analyst must be also responsible for minority shareholders losses even though they always has disclaimer as their immunity? Should they be punished for the wrong analysis? Here is the example.



The stock has been downgraded from buy to trading buy. The analyst believe the worst case scenario of write off would not account for more than 15% of 2006 unaudited net profit, or 30 million. Obviously they probably considered some kind of uncollectible account receivables or asset impairment. We knew there were three key words in the announcement -- sales, account receivables and fixed asset. Why were they still using the questionable numbers to do analysis? They mentioned in their previous day report that their sales has increased by 400 mln from 550 mln to 989 mln while account receivables trippled from 111 mln to 381 mln. That was equivalent prolonged credit terms from 73 days to 140 days. Why the analyst was still using normal analysis technique to advise their clients? What was their points, can't they smell fraud was going on? Can't they dissect the problem with some level of skeptisms?

Why they did not raised the possibility that at least 200 mln of sales never existed before? Can't they tell some of the assets esspecially the property, plant and equipment transactions never existed before or inflated? While 140 days terms seem to be reasonable when they are operating in good faith. WTF they still talked about P/NTA or break up value when the whole BS was questionable? I bet you know what to do when you see another announcement like this.

More WIP coming.............

Transmile, Once Upon A Time in Wa Wa land.....I

Transmile was such a dream stock. If you owned this stock from early 2000 to 2007, Peter Lynch could have hired you as his star analyst, praising you as a stock picker genius. No question will be asked, nobody was going to argue that you are a genius because you have spotted a 10 baggers.

It was such a beautiful growth stock story. How not fall in love with this "wonderful business"?. This was the kind of stock that you would like to buy and hold forever. The stock would have been able to withstand all kind of tribulations by just a word of bond by Robert Kuok. Having a solid and trustworthy owner and run by very frugal board of directors for sure allow you to sleep soundly every night. Seven of non-executive directors received below RM 50 k/year, 100-150 k, one person; 150 -200 k, one person; and 200 - 250 k one person. They have spotless attendance when comes board of directors meetings.

The most valuable part of the business model was the landing rights in all overall the Asia Pacific especially China and USA. These landing rights would not be easily secured, we all suspected Tun Ling Liong Sik did the magical string pulling job. They have wonderful business partners like DHL or Pos Malaysia. So, what is there to complaint?



This was no story of dot com, they are not selling hot air. These guys have real stuffs to sell. They have real sales, they have real nice double digit EPS growth.



Public Mutuals owned them, reputable foreigners owned them, ING owned them, etc .........so why shouldn't I?

But then you noticed something that always made you felt uneasy. Long term debt has gone up from 153 mln(2004) to 492 mln(2005) and they issued 340 mln convertible bond. So they have 832 mln long term debt. Many many times jumped though you were trying console yourself that they still have 260 mln cash. Furthermore if they get into trouble, Robert Kuok would have no trouble at all to bring in more investors. They have been paying dividend every year.

Look at the big picture. Look at the long term future, don't be so gun shy, or else how are you going to be the next billionaire, you reprimand yourself a little bit. Look at the capacity that they have added ..... it's almost 3 times.




If you are a student of Fisher-Buffett, what are you waiting for? Many of you should know the grand episode of this drama. What went wrong with Transmile? ........

Adding another link

This blog is neither very popular nor extremely active. The blog is hardly very detailed in analysis but merely surfaces issues or banner headlines for readers to think about(lack of time was always my excuse). So normally adding another link will not increase traffic dramatically. But I must add one link today.

I must say that I am impressed by this "kid" from Good Stock Bad Stock. I do not know what his parents feed him, his analytical skills is superb -- above average I must say. His choices of links are very good too. Delivery and writing skills definately belong to professional league. When you allow "kids" who are uncontaminated with "Wall Street" or "Corporate Street" greeds, they seem to be able produce excellent analysis. The kind of analysis will cut through all the bull shits leaving you with crystal clear thinking.

"Kid", if you happen to read this, I wish you all the best. I think you can go very far.

Enough is enough

Two events caught my attentions.



The international community is finally taking actions. Gaddafi, enough is enough, it's payback time, AH(ass-hole). This is market positive.

Secondly, the fear of Japanese insurance companies need to redeem their overseas investment is unfounded. The Japanese authority has been smart, standby with tonnes of liquidity to combat panic. What is even more interesting is people outside Japan thought that was a great opportunity to buy. The poured in money like no tomorrow. See the one day action? On that day, the market was down by almost 11% but recovered half of it.



How bad is this quake to disrupt the supply chain? My take is not very big. First, the softening of the technology related products started since Q4 2010 means the world has spare capacity to pick up the slack. Secondly, technology companies were optimistic and did not cancel capital projects. We are going to be okay when additional supply coming up slowly. Thirdly, we are dealing with very sophisticated multinationals that have multi sites as part of their disaster recovery plan. Will supply chain choke growth? Unlikely.

What about the nuclear plant? The meltdown and etc? In case you are still behind the news, they already talking about restarting the plant. So you figure out the risk.

ENGINEERS were last night able to restore electricity to one of the reactors at the crippled Fukushima Dai-Ichi nuclear plant.

But power was still not getting through to its five other reactors, prolonging efforts to start up water pumps needed to prevent more radiation leaks.

http://www.smh.com.au/environment/power-restored-at-one-of-plants-reactors-20110319-1c1cu.html

I have written most of the analysis with my left brain. It's not healthy if I don't let me right brain to speak. As a closing, let's offer our prayers to those who are affected by natural or man-made disasters. May God offers comfort, healing and protection to all.

Japanese Quake and Japanese Yen

I have no idea what the market is doing because this post is written on March 12, 11.

I got this picture from http://www.kathylien.com/site/



If one were to compare the magnitude of recent quake to 1995 Kobe quake, the yen recovered in 3-4 months while the stock market recovered after six months.
They focused on all entries in the “Chronology of Important World Events” from the World Almanac for the period beginning with Pearl Harbor, and then eliminated from their list any events that the New York Times didn’t carry as a lead story and that the Times business section didn’t report as having affected investors.

There is an analysis appeared on Market Watch saying non-economic events has small effect on the stock market. The panic will normally short lived.

(Market Watch)The result was a list of 49 distinct events. On the day the news of those events hit the market, the S&P 500 moved just 1.46% on average, less than one percentage point more than the 0.56% that prevailed on all other days. Because of this small difference, the professors concluded that there’s a “surprisingly small effect” of noneconomic news on the stock market.

http://www.marketwatch.com/story/earthquakes-rarely-shake-the-stock-market-2011-03-11

Another dividend stock: P.I.E Industrial

Forget about the sky high oil price, sovereign debt, Japan earthquake, etc for a while. Focus on businesses that printing money.

Most people have been pretty bearish about technology stocks. Technology index has plunged by almost 40% and has been on the down trend for almost 1 year. It's almost 20% below 200-day MA, pretty depressed I think.



I know Jim Rogers is shorting Nasdaq but when he closes his trades, he will never tell you. It's all depending on the situation based on his reasoning. He has been bearish about dollar on the long term but when it became depressed in the short term, he bought USD.

P.I.E core business is EMS and raw wire cable manufacturing(automotive, medical and energy industries). See below chart on the 2009 revenue contribution from various segments.



Despite of so called being in the electronic and technology industry, it's not a very capital intensive business at all. They only spend a few million (RM 2 -5 million) for CAPEX compared to 20-30 million profit/year. (Click on the below chart on financial highlights)



They have more than 100 million cash on their balance sheet and debt free.

They have been paying generous dividend around 0.35 - 0.39 in the last three years. At RM 4/share, this company paying you 8.7% gross dividend.

What I did not like about the stock was lack of growth characteristic while operating in a very cyclical sector. They have been buying properties to burn their cash, not a bad thing but it was a weakness that the management has more money than ideas.

But then I saw this in the Star, this excite me a little bit because they finally putting RM 50 million to expand production capabilities. I don't think this is going to affect the dividend payout as they have enough cash. I think they are also smart enough to target at the high end and not the low end. I do think they have enough know how looking at the background of mother company and their management. The MD was from Intel and has extensive experience in rubber and plastic industries. If Foxconn can make stuff for Apple and HP, I don't think this is going to be an issue, unless Foxconn does not want to transfer their know how.

(The Star)GEORGE TOWN: P.I.E. Industrial Bhd is investing about RM50mil this year to expand its production capabilities in line with the growing demand for high-end medical, telecommunication, and computer markets.

P.I.E. managing director Alvin Mui told StarBizWeek that the group, a business unit under Foxconn, had recently obtained the ISO 13485 certification, enabling it to manufacture more complex electronic parts used in surgical equipment.

“Our involvement in the medical sector was limited before. The certification allows us to tap into the medical industry more aggressively.

“We will also manufacture special paper-based packaging materials for surgical gloves and medical devices,” he said.

P.I.E. would also use the investment to start a new converter business division to provide milling, die cut, and silk-screening manufacturing services for the trendy consumer electronics, telecommunication, and computer markets, Mui said.

The new initiatives would start in the second half of this year, Mui added.

“We have already received orders from new and existing customers for such products,” he said.

On the group’s core products such as scanners, measuring sensors, and assembled cables and wires, Mui said demand from the United States and Europe was still strong.

“Based on current orders for new and existing products, we expect a rise in orders by 20% to 30% this year from last year,” he said.

They have reputable shareholders like Foxconn, iCapital and Public Mutual funds as owners make me begin to like this stock.

Disclosure: I don't have direct position but intend to do so without notifying you. So do your own research and conclusion.

P.S. I'll be in China again for a week, so I'll try to do 1 - 2 scheduled posting while I'm away. Good luck.

Jim Rogers: Short emerging markets, Nasdaq. Long Commodities

It's has been a while we did not hear from Jim Rogers. Here is his latest investment strategy.

China People's Congress Take Away

A few priorities that the Chinese leaders will be driving:

1. Reduce income gap between rich and poor. The strategy will be implemented by imposing higher minimum wage and tax the rich.

http://www.chinadaily.com.cn/business/2011-03/05/content_12121070.htm

2. Declare war against inflation.

Target 4%. Release strategic inventory to boost supply and implement price control

http://www.chinadaily.com.cn/business/2011-03/05/content_12121431.htm

3. Fight housing bubble

Flood the market with supply

http://www.chinadaily.com.cn/business/2011-03/05/content_12120160.htm

4. Target 7% GDP growth from 2011 - 2015

http://www.chinadaily.com.cn/business/2011-03/05/content_12121759.htm

Comments
They seem to be serious to address the problems rather than denying problems. I still think this one of the best managed economies in the world.

Will need to keep an watchful eye on the commodities.

Nothing seems to be right

XDL was registering 16% EPS growth(2010 0.1983 vs 2009 .1705), paying 2.5 sen dividend, paring down debts, no big increase in account receivables, and having about the same level of account payable. In other words, fundamentals are looking good. Share price however remained under water.



What is wrong with XDL in specific and Chinese companies in general? The biggest problem is stigma/INTEGRITY. There have way too many scandals that leave a very bitter taste on investors' tongues. Here is the most recent case of China HongXing listed in Singapore exchange. The CEO was buying back shares. The company was paying dividend. Order booking was strong and etc. The engaged reputable audit firm like Ernst and Young. In other words, we should consider it as a well managed company but unfortunately they still encountered dishonest management siphoned out money out of the company(shareholders). See below on their announcement that they cannot finalize their financial statements due to accounting irregularities.



Incident like this will surely shake the confidence of investing community. The CEO, Board of Directors, Security Exchange have put in place of strong control yet they are still unable to detect fraud. I doubt we can detect problem like this too even we have access to the management or talking to them regularly. Cheap it may sound(selling at 2X PE like XDL) but I think it is too dangerous to put hard earned money on the line. It is too difficult to tell whether these guys are building houses on the sand.

Turtle bought 1,000 SOP shares @ 3.51/share

Importance of liquidity

Extracted from Berkshire Hathaway 2010 Annual Report.

Every serious investor should read Berkshire Hathaway annual report. Obviously you should know that the biggest take away I have after reading 2010 Berksire annual report is the importance of liquidity.

Who would have known that the simple lesson that you learned at home help you run business. Who would have imagined that $ 1,000 reserve lesson has help one of the richest man on the planet to manage a multi-billion $$$ business. Berkshire has a policy at any one time of keeping $ 20 billion cash. Average earning of Berkshire for the period of 2006 - 2010 is roughly about $ 6 billion/year. This translates to easily about 3.3 years of earnings. Wow! A normal personal finance consultant will ask you to keep a reserve of 6 months salary and if we want to apply this rule, it will be 36 months. It's very conservative but that's what margin of safety is. You should be able to outlast any bear market if you have 36 months of cash(salary) in hand. Cash, truly, is king!

Turtle Portfolio Update - March 2011

Some records update. Cash stood at 43% of book value, it's a bit high I know but it will be handy under current scenario of very uncertain market conditions.

Smart Money Buying, Small Guys Hiding

Take a look at this table.



See you all shortly.