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Sunday 22 January 2017

My First Rescue

This will be my first post to write about an undervalued company and I hope to rescue this "Princess" as the Value Investing Knight. Such companies do not receive much attention from the masses, but they may jolly well turn out to be uncovered gems.  
This company is CHUAN HUP HOLDINGS LIMITED (SGX:C33). I will use CH as the abbreviation in this post.

CH's main business activities are electronics manufacturing services and property development after disposing of their shareholdings in their associate company, CH Offshore back in FY2015. That explains the special dividends of SG$0.02 per share distributed in FY2016.


On hindsight, the call to dispose the stake in its offshore marine business was a good move, considering the fall in share price from the offer price of SG$0.55 to today's price at SG$0.24. This divestment aside, there are 3 strong points worthy for us to raise our Value Sword.


1. Price to Book (PB) Ratio at 5 year historical low





As shown by the green line in the Bloomberg Chart above, the current PB ratio of 0.54 is even lower than 0.55 in June 2012.

2. Net Cash is at 50% of the Market Capitalisation, Net Current Asset Value, NCAV is almost 100% of the Market Cap


CH's management (Peh's family) has been very conservative and it has always been in a net cash position. The current net cash as at 30 Sep 2016 is USD77m while the market cap is approx. USD154m as at 20 Jan 2017. If we were to add Short Term Investments of USD32m to net cash, the % of market cap will increase to 70%. The reason for the inclusion is Short Term Investments are almost as liquid as cash equivalents.

Adding some toppings to the ice cream, the NCAV (Current Assets minus Total Liabilities) is USD150m which is 96% of the market cap. The Father of Value Investing, Benjamin Graham used this approach to value companies and found his set of undervalued companies.
Given that CH has investment properties, investment in associates (i.e. An Australian property developer, Finbar group) and Available For Sale (AFS) investments under Non-Current Assets in the Balance Sheet, these additional value should be priced into the share price. Hence, the potential upside is around SG$0.15.
I have summarised the above into a table which should be more visually helpful. For those who just started out in your investing journey, it will be good to google the definition of any financial terms that you are unfamiliar with. Investopedia will be a good reference.





3. Positive Operating Cash Flows for the past 5 years




As shown above in the Bloomberg's screenshot (please note that the numbers above are different from those reported in Annual Reports as these are standardised version), CH has positive operating cash flows since FY2012 except for the recent FY. Cash Flow Statements are much more difficult to manipulate as compared to Income Statements and given the fact that CH has been paying out dividends of SG$0.01 per share (relatively good dividend yield of 4.3% at current price) since FY2012, there are strong grounds to believe that the company is generating operating cash flows. Back to FY2016, when one looks under the Cash Flow Statements, it is realised that the negative operating cash flow is due to the increase in held for trading activities of USD20m as highlighted below. Hence, the reason for the negative operating cash flows is not due to underlying business operations. Personally, I would think they should be classified under investing activities because these are not the true operating activities of CH.




The operating cash flows are also supported by the steady operations from its 76.7% owned subsidiary in Electronics Manufacturing, PCI Limited. PCI has been generating positive operating cash flows for the past 10 years. Electronics manufacturing may not be the most exotic industry to be in but this business is definitely providing the stable cushion for CH given the more cyclical nature of property development.

Besides the above 3 points, one can still explore further into the following factors but I will not be elaborating much into them for now:


Management
Terence Peh is the CEO. The CFO and Head, Corporate Development were previously from Straits Trading. All 3 of them graduated with Degrees in Accountancy (may be a downside given that there is no other unique view)

Corporate Governance

Peh's family owns more than 50% of the shareholdings in the company.
The Chairman is a Non-executive Director and an Independent Director. However, the independent directors only represent 40% of the board members. Once again, most of the board members graduated with Accountancy degrees.

Competitors
The closer SGX listed competitors for the Electronics Manufacturing segment is CEI Limited and PNE Industries (PCI does not seem to be performing well in terms of ROE against these peers but more analysis needs to be performed to understand better)
For property development segment, smaller property developers such as Oxley and Roxy-Pacific can be used as closer competitors. (CH seems to be more value for price in this case)

Future business outlook
Will the margins for Electronics Manufacturing be getting lower or will the property sales in Australia and Philippines be lower than before? These are some questions one may want to ask.

Then, you can make your final decision on whether it is time to wield your Value of Swords. I have struck to rescue this princess to my fortress as she has been neglected for a long time. It will require some time for her to recuperate before she turns into Snow White again.

In summary, retail investors like us do not always need to follow those big banks' analysts or institutional investors to invest in value companies. You can follow your own value investing approach or follow the Value Investing Knight to uncover them. Most importantly, we must seek fulfillment from this process and attain knighthood in this long journey!

REMEMBER THE KNIGHTHOOD FORMULA:

VALUE = PRICE + RETURNS

Have an awesome start at work tomorrow! Happy Chinese New Year in advance if my next post does not come in time. 


Please feel free to post any comments and questions you have. I will try to answer as soon as possible.


THE V.I.K


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