An Early Halloween – China Minzhong

The following post has 2 parts to it. Due to a short overseas trip, I did not have the chance to update my transactions immediately. As such, I have decided to combine both my purchase and the latest occurrences regarding China Minzhong.

On 20th August 2013, I accumulated more shares of China Minzhong at $1.04. With this purchase, my portfolio is heavily weighted towards CMZ. The company will be releasing its 4th quarter earnings report on 29th August. At the current share price, the company is trading at a PE of 3.67, which gives me an earnings yield of 27.2% a year. This valuation is hardly expensive. I strongly believe that China’s 12th 5-year plan will benefit China Minzhong greatly. The 5-year plan is illustrated below.

Screen Shot 2013-08-20 at 3.03.59 PMChina Minzhong’s farms have an above average yield, utilises modern technology to cultivate its crops, and its business model of leasing the farmland from the farmers and paying them for part time work helps to improve their living standards. As such, I remain convicted that the stock is deeply undervalued.

Latest Update: On 26th August 2013, an American short-seller, Glaucus Research has accused China Minzhong of fabricating its sales to two of its top customers and doctoring its books. In addition, they casted doubts over CMZ’s high margins, and capital expenditures. The company has successfully brought down other S-chips like China Metal Recycling. This report has caused massive selling in the stock, resulting in a free-fall from an opening price of $1.01 to $0.53, a sharp drop of 48%. The company has requested for a trading halt pending a material announcement. Investment brokerages, like CIMB, who were once bullish on the stock have all turned bearish, and ceased coverage of the company. 

Do I believe that the company is fraudalent? I have read the report by Glaucus and their claims do seem credible, but I would like to hear from the company itself as well. China Minzhong will release its earnings report tomorrow, and I will be awaiting the company’s response to the alleged accusations.

So, what are my plans? Even though I believe that the company has a right to defend itself, I will be liquidating all my holdings in the company once trading resumes. The reason why I am liquidating my holdings is not because I think that the company has committed fraud, but because this saga has made me realize how little I know about the company, its products, its customers and its management.

As my portfolio was heavily weighted towards China Minzhong, I am staring at sizeable losses. I have been pondering and recovering from the shock over the last 3 days. This incident has made me think twice of my investment strategy and the other companies I have invested in. Truly, this lesson has taught me invaluable lessons in investing, in which I hope to share once I am ready.

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Common Stocks and Uncommon Profits

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Common Stocks and Uncommon Profits by Philip A. Fisher is often regarded as an investment classic by the finance community. The author, Philip A. Fisher, is considered a legendary investor and a pioneer in the area of growth investing. He is reported to have made his clients extraordinary investment gains during his time at Fisher & Co, a money management company he founded. One of his sons, Kenneth Fisher, has build a very successful investment career by helping to manage the wealth of many clients as well. Warren Buffet has also claimed that he is “85% Graham and 15% Fisher”.

The book espouses the virtue of long-term investing, and includes Fisher’s own checklist regarding stock investments. This book sheds light on the more qualitative aspects of a business besides the financials, ie. the quality of its management, growth avenues, labour relations, the state of a company’s functional divisions and technological improvements to name some. It also has a portion where Fisher dishes out his invaluable advice and experience regarding stock investment, which when applied, would definitely help many fresh investors like me.

Personally, I have benefited greatly from this book. It has given me a new perspective on how to view and analyse stocks, apart from the numbers. It has also taught me the importance of growth in investing. Coupled with value investing, I believe that it would lay a strong foundation for any investor looking for significant gains in his investments.

Ultimately, it is the application of what we have learnt that matters most. As Fisher wisely said, “All the correct reasoning in the world is of no benefit in stock investment unless it is turned into specific action.”

Tiong Seng Holdings

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I initiated a position in Tiong Seng Holdings on the 8th of August, at a price of $0.25. Tiong Seng Holdings is a company that I have been keeping a lookout for since months ago when I chanced upon an event in which the CEO, Mr Pek Lian Guan, was one of the guests.

Firstly, Tiong Seng is mainly a construction company, with a secondary business in property development in second and third tier Chinese cities. The company has secured many projects in the last couple of years. A few of the notable projects in which Tiong Seng are involved are the Integrated Resorts at Sentosa and the Marina Boulevard Financial Centre. In fact, it boasts an orderbook of $1.47 billion, the largest among its peers.

The thing that got me interested in Tiong Seng was its current business strategy and its constant focus on technological improvement. The construction business isn’t the sexiest business around, with low margins and lumpy earnings. Unlike most other contractors who buy straight from pre-cast producers, Tiong Seng’s key advantage lies in its ability to design, produce and instal pre-cast components. The company has focused on reducing its reliance on labour like investing in a precast plant in Singapore, Malaysia and Myanmar. This investments help Tiong Seng save up to 50-70% of manpower costs. Its proprietary technology, Cobiax, removes unnecessary deadweight of concrete slabs by positioning ball-shaped void formers within the concrete. The resulting advantages are: lower concrete usage (by up to 30%), lower weight of building structure, and a more environmentally friendly building. This has enabled the company to build more complex structures, like the Park Royal Hotel at Upper Pickering Street. Tiong Seng has also branched out into selling this technology in Europe, and sales has been increasing steadily over the last few years.

Tiong Seng has also entered into many joint ventures with national conglomerates like Kajima of Japan – building of Resort World Sentosa, Samsung of Korea – building of NTUC Headquarters at Raffles Quay, and Shwe Taung Development Company of Myanmar – building a precast facility in Yangon. I believe these international cooperations will help Tiong Seng to increase its branding and image, while at the same time establish relationships which would pay off in the future.

The last and most important aspect of Tiong Seng which makes me comfortable is the fact that the company seems to have a committed management behind a strong workforce. As mentioned earlier, I had the chance of hearing more from the CEO, Mr Pek Lian Guan, at an event. It was mentioned that the company had a full turnout at the Safra Bay Run / Army Half Marathon, and if I recall correctly, the workers turned up voluntarily. Moreover, the company issued a stop work order for two hours during the peak haze period (when the haze climbed to a reading of PSI 400) at the site of a Housing Board development Waterway Terraces. I am optimistic that Tiong Seng’s strong focus on its employees and technological improvement will put it in good stead in the future.

At my entry price of $0.25, the company has a PE ratio of 7.44 and a PTB ratio of 0.865. It sports a dividend yield of 4%. Compared to its peers, its profit margins, ROA and ROE are very low. However, a point to note is that many of its other peers do have established property development arms which help to bring their ratios higher. Tiong Seng’s property division arm has not been performing well in the recent year due to the tightening of the property market in China. Tiong Seng’s red flag would be its gearing which is considered high among its peers. It has a debt to equity ratio of 2.64 and a net debt to equity ratio of 0.776.

I am confident Tiong Seng will continue to win contracts in this highly competitive industry. Although it has taken on significant debt to fund these acquisitions and investments, I remain optimistic that its debt is being used well. My investment in Tiong Seng is with a long term focus, as it takes time to reap the benefits of its business strategy and investments.

More info regarding the company can be found on Nextinsight in the following links:

1) http://www.nextinsight.com.sg/index.php/story-archive-mainmenu-60/916-2012/5893-tiong-seng-managing-rising-costs-with-productivity-innovation
2) http://www.nextinsight.com.sg/index.php/story-archive-mainmenu-60/916-2012/5890-tiong-seng-holdings-record-14-billion-orderbook-highest-among-listed-contractors