Raffles Education Corp ~ A phenomenon Stock!

Raffles Education Corp was listed on the SGX back in early 2002. If I remember correctly, it was trading at below $0.20 after IPO. After many rounds of splits and bonus issues, if you held on to 1,000 shares since IPO, today you would have got 6,500 shares.

If you had invested $1,000 back then, that $1,000 would have grown by 158.444 times. ie, you shares would be worth close to $160,000 at today's closing price of $2.87.

This was probably the best performing stock in the history of SGX until Ezion came about recently. It has made Mr Chew one of the richest men in Singapore.

Today, I would like to congratulate Raffles Education as it set to become the largest education provider in the Asia Pacific region. I will continue to hold the shares in my own portfolio. Who knows? It might be worth more than $1million in 10 years time.

Performance of Virtual Fund

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $115,490 = 23.1%

Raffles Education set to be the Largest Education Provider in the Asia Pacific

- Makes strategic acquisition of Oriental University City in the PRC for RMB2 Billion

- Acquisition opens new growth opportunities and will add 5 colleges and a university to the Group’s PRC footprint

- Entrenches leadership position in the PRC education industry

Singapore, October 11th, 2007 - Main Board-listed Raffles Education Corporation Limited (“RafflesEducationCorp” or “the Group”) today announced that it has entered into an agreement to acquire Oriental University City Development Co., Ltd ("Oriental University City") in Langfang City, Hebei Province, the PRC. A strategic development that will entrench the Group’s leadership position in the PRC and set it as the largest education provider in the Asia Pacific.

Oriental University City is a company involved in the development, operation and management of educational assets in the PRC.

Under the terms of the agreement, the Group will acquire Oriental University City for a purchase consideration of approximately RMB 2 billion (S$392 million). The acquisition is payable in 4 equal instalments over a 4 year period and will be funded either through external financing arrangements, internal resources, or a combination of both, and the revenues generated by the Group’s operations in Oriental University City.

As part of the terms of the acquisition, Oriental University City will provide a pre-tax profit guarantee of RMB 100 million in 2008 and RMB 140 million in 2009. In addition, it will also transfer the ownership of Langfang Vocational Technical Institute and Langfang Health School to the Group. It will also apply to the PRC Ministry of Education to obtain the necessary approvals for the establishment of a private university, a private college and two Sino-foreign cooperative schools.

Performance of Virtual Fund

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $101,970 = 20.39%

Just back from biz trip. Unrealised gains have shrunk by some $30k mainly due to Jiutian ex bonus warrant. When the warrant starts trading, it should make up the lost ground.

Performance of Virtual Fund

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $130,140 = 26.03%

New STI Index 30 Stocks

SGX unveils revamped STI index of 30 stocks:
1. Capitaland
2. Capitamall Trust
3. City Developments
4. Cosco Corp
5. DBS Group Holdings
6. Fraser and Neave
7. Genting International
8. Hong Kong Land
9. Jardine Cycle & Carriage
10. Jardine Strategic
11. Keppel Corp
12. Keppel Land
13. NOL
14. Noble Group
15. Olam
16. OCBC
17. Sembcorp Industries
18. Sembcorp Marine
19. SIA engineering
20. SIA
21. SGX
22. SPH
23. ST Engineering
24. SingTel
25. StarHub
26. Thai Beverage
27. UOB
28. Wilmar
29. Yangzijiang
30. Yanlord

Performance of Virtual Fund on this day ~ Singaporeans have no confidence in future retirement planning

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $131,300 = 26.26%

Today the unrealised profit continued to rise mainly attributed to 8 cents or 4.4% recovery in the price of ChinaSports from $1.80 to $1.88. ChinaSports is the second largest holding in the Virtual Portfolio.

Performance of Virtual Fund on this day Liverpool had a dismal CL performance

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $124,290 = 24.86%

I have been rather inactive for the past few sessions due to my demanding work commitments. Plenty of works to prepare for my business trip next week. Anyway, the current portfolio of stocks should be robust enough to ride out the current market volatility.

Performance of Virtual Fund

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $102,350 = 20.47%

Performance of Virtual Fund

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $136,890 = 27.38%

The fund came so close to crossing the final hurdle. I thought I was able to close the fund today. It looks like I have to wait a little longer.

The unrealised gain has declined by some $20k as I was not able to response swiftly to the market movements today. I was engaged in the management meeting most of the day. But it also adds realism to this exercise that the value of the fund can fall sometimes.

One last switch for the season finale:

Sold
50,000 Foreland @ $0.60, Realised profit = $5,000
100,000 CMZ @ $0.285, No Gain no loss

Bought
47,000 ChinaHongxing @ $1.25

Sum invested = $556,940
Cash holding = $289
Realised profit = $57,229 = 11.44%
Unrealised Profit = $157,730 = 31.5%

Performance of Virtual Fund

Sum invested = $551,690
Cash holding = $539
Realised profit = $52,229 = 10.44%
Unrealised Profit = $162,730 = 32.5%

Tomorrow I may achieve my $250,000 gain or 50% return target. I only short of $35,041!

Maggie Q and the charging Bull

Someone asks why i put Maggie Q photo in my blog. Well, i happened to come across this photo in her latest movie. She is pretty and wearing red (symbolising red chips). I thought by putting her next to the charging bull on her right. The bull sees red sure cannot tahan and would cheong like mad. My feng shui master told me so. haha...

Virtual Fund transactions

Transactions for today:

Sold
22,000 Tiong Woon @ $1.15, Realised profit = $2,200
20,000 Swiber @ $3.56, Realised Profit = $8,800

Bought
100,000 CMZ @ $0.285 = $28,500
48,000 ChinaMilk @ $1.43 = $68,640

Sum invested = $551,690
Cash holding = $539
Realised profit = $52,229 = 10.44%

Some thoughts on the Virtual Fund

This Virtual Fund has caused a bit of controvesy in the investing community. Some forumers feel that it is easy to simulate this kind of virtual thing as it does not involve human emotions; greed and fears. Some friends have asked me if I could develop a similar portfolio for them in real terms.

Personally, I feel that the timing of the launch of this Virtual Fund is crucial to the overall profitability so far. The fund was launched after the major correction subsequent to the sub-prime woes. The rush into China stocks over the last few sessions also contributed significantly to the gains.

If you have been following this blog, you would appreciate what I have done on a day to day basis. It was mentioned at the outset that the fund was created with a specific intent and purpose. For the benefit of people who follow my buy and sell movements, I have also detailed my daily transactions and balances. I hope to be as transparent and accountable in the whole process as this exercise could well be used as a testimonial of my fund management skills in the future.

To be fair, I have treated this fund as if I were managing real money. Personally, I also hold most of the counters in my own portfolio. The dollar value involved of course is no way near the $500,000 war chest. But the investing principle involved is similar.

As you can see, i do actively manage the counters by making timely switches, taking into account the latest market developments and the fundamental of individual stocks. Had I not been keeping myself abrest of the trends, would I have bought into so many China stocks before the current rally to maximise the return?

During the past 2 months, I was fortunate enough to develop a portfolio for a friend with an initial capital of $7,000. The investment has yielded capital gain of close to $2,000 or 28%. Her mother came to know about it and asked me to invest $5,000 for quick return. I turned her down as I never promised quick bucks!

I think there is still a lot of steam left in the China related counters. There will be profit taking here and there but in the medium term you can expect very decent return if you stay invested.
Good luck!

Review of Virtual Fund Performance for Sep 2007

Sum invested = $540,050
Cash holding = $1,179
Realised profit = $41,229 = 8.25%
Unrealised profit = $91,570 = 18.31%

Shareholdings as at end of Sep 2007:

C&G Ind 50,000 Bought $0.59 Last $0.675 Unrealised Profit $4,250;
ChinaEnergy 20,000 Bought $1.38 Last $1.52 Unrealised Profit $2,800;
ChinaSports 100,000 Bought $1.35 Last $1.67 Unrealised Profit $32,000;
FibreChem 25,000 Bought $1.35 Last $1.57 Unrealised Profit $5,500;
Foreland 50,000 Bought $0.50 Last $0.565 Unrealised Profit $3,250;
Jiutian 250,000 Bought $0.55 Last $0.65 Unrealised Profit $25,000;
Midas 20,000 Bought $1.41 Last $1.73 Unrealised Profit $6,400;
Sihuan 50,000 Bought $0.76 Last $0.845 Unrealised Profit $4,250;
Swiber 20,000 Bought $3.12 Last $3.46 Unrealised Profit $6,800;
Tiong Woon 22,000 Bought $1.05 Last $1.11 Unrealised Profit $1,320

The Virtual Fund has achieved return of 26.56% since inception on 5 Sep 2007. This is half of my expected return of 50% for only 3 weeks!

Most unrecognised value stock: C&G Industrial

Cai Junyi, 33, CEO of C&G: Key driver of C&G's business, and holds a master's in economics

C&G Industrial has emerged as the stock with the most unrecognized value among SGX-listed companies in a complex analysis by Business Times senior correspondent Teh Hooi Ling.It has a lot of cash - some 40 per cent of its market cap is represented by cash. On top of that, assuming it can maintain its first-half operating profit, the company may rake in $44.8 million in pre-tax profits this year, she wrote.According to Bloomberg, the cost of capital for C&G - a producer of PET chips used to manufacture polyester fibre - is 10.73 per cent.Based on this, that business is worth $335 million, assuming it can maintain that performance in perpetuity.A caveat Hooi Ling had: In the analysis, investors have to decide if they think the respective companies can maintain their current performance for their existing businesses, and that these are not top-of-the-cycle figures.The analysis was based on McKinsey’s three-step approach to disaggregate a company's current market value into its current performance, its return premium, and the value expected from its future growth.

Source: Business Times

Review of Own Portfolio for Sep 2007

Latest Holdings:

Cash
C&G Industrial +5.5%
China Energy +10.1%
ChinaSports +23.7%
ChinaWheel +2.1%
FibreChem +2.6%
Foreland +8.6%
Hongwei -2.6%
Jiutian Chemical +58.5%
Pine Agritech -8.7%
Sihuan +11.2%

CPF
Asia Enterprise -12.3%
Midas +10.2%
Raffles Education +1.8%

Own transactions

Bought:

Fibrechem
ChinaWheel
C&G Industrial

Partially Sold:

Hongwei
Foreland
Pine
Jiutian

Which companies hold greatest market value?

By TEH HOOI LING SENIOR CORRESPONDENT

Most investors associate high- PE stocks with high-growth stocks. But as pointed out by consulting firm McKinsey in a couple of its reports, there is another, possibly more important, component which accounts for a stock's high or low earnings multiple.

That is return on capital. It makes sense. Growth requires investment, and if the investment doesn't yield an adequate return over the cost of capital, then it will not create shareholder value. That means no boost to share price and no increase in the price-earnings multiple.
So a high-PE stock could be one which is generating high growth at a return which slightly exceeds its cost of capital, or one which is chugging along slowly and steadily but earning a return on capital that far exceeds its cost of capital.

McKinsey has proposed a three-step approach to disaggregate a company's current market value into its current performance, its return premium, and the value expected from its future growth. Current performance is derived by estimating the value of a company's current earnings in perpetuity, assuming no growth.

At no growth, it is assumed that depreciation is equal to capital expenditure, and therefore net operational profit less cash taxes is equal to free cash flow for a business that does not grow. So dividing net operational profits after cash taxes by the cost of capital would give us the value of current earnings, with no growth, in perpetuity.

The premise is that companies with the highest ROICs relative to their WACCs are the greatest creators of value for shareholders

Return premium is the value a company delivers by earning superior returns on its growth capital. In order to assess how a company's return on growth capital influences its PE multiple, McKinsey recommends discounting a company's cash flow as if it grew in perpetuity at some normalised rate, such as nominal GDP growth. Through repeated analysis, McKinsey has found that the result is a good proxy for the premium a company enjoys in the capital markets because of its high returns on future growth capital.

And finally, value from growth represents how much a company delivers by growing over and above nominal GDP growth. It can be calculated as that portion of the company's current market value that is not captured in current performance or the return premium. For a company that grows more slowly than the GDP, this value will be negative.
I've decided to use this three-step approach on some Singapore-listed companies.

Three-step method

First I downloaded from Bloomberg the entire list of stocks traded on the Singapore Exchange with attributes like return on invested capital (ROIC), market capitalisation, their weighted average cost of capital (WACC), and so forth.

I then calculated the difference between the ROICs and the WACCs, and ranked them from the highest to the lowest. The premise is that companies with the highest ROICs relative to their WACCs are the greatest creators of value for shareholders.

From the top 50 companies, I randomly picked 13 and went through their latest results one by one so as to calculate their pre-tax operating margin, their asset turnover, and their ROIC (excluding and including cash held in banks). Finally, I attempted to attribute how much of the stocks' current market value is from its current performance under a no-growth scenario, how much of it is from return premium, and how much is from expected future growth. The results are pretty interesting.

The formula I used to calculate ROIC is net operating earnings before interest and amortisation charges, but after cash taxes divided by total assets, net of excess cash, and non-interest-bearing current liabilities.

Almost all the companies on the list have strong ROIC. A company can arrive at a high ROIC by either having a high profit margin, or more efficiently utilising its assets to increase sales. The former is measured by operating profit margin, and the latter by asset turnover.

As can be seen from the table, most of the companies are high-margin, low-volume businesses. The three exceptions are Hersing Corp, Apex-Pal and Olam, which are low-margin, high-volume businesses.

Meanwhile, a lot of these companies also have a lot of cash. With the exception of MobileOne and StarHub, all have more than 5 per cent of their market capitalisation represented by cash in the bank. The most extreme was C&G Industrial, which according to its June 30, 2007 balance sheet, has 557 million yuan in the bank. That's about $112.5 million, or about 40 per cent of its current market cap of $274 million.

I then tried to calculate the value for these companies based on their existing businesses under a no-growth scenario. As suggested by McKinsey, I divided net operational profits after cash taxes by the cost of capital (obtained from Bloomberg) to arrive at that number.

So companies whose existing business, under a no-growth scenario, has a higher value than their current enterprise value are presumably undervalued. Enterprise value is market cap plus debts minus cash.

From the list, you can see that C&G Industrial tops my list of companies which has the most unrecognised value.

As mentioned, it has a lot of cash - some 40 per cent of its market cap is represented by cash. On top of that, assuming it can maintain its first-half operating profit, the company may rake in $44.8 million in pre-tax profits this year. According to Bloomberg, the cost of capital for C&G - a producer of PET chips used to manufacture polyester fibre - is 10.73 per cent. Based on this, that business is worth $335 million, assuming it can maintain that performance in perpetuity.
Raising its cost of capital to 15 per cent would reduce the current business worth to $240 million. Add in the company's return premium and the stock still looks undervalued. Other stocks which appear undervalued based on the above screening include Courage Marine, Hersing, MobileOne and Micro Mechanics.

In all the above analysis, investors have to decide if they think the respective companies can maintain their current performance for their existing businesses, and that these are not top-of-the-cycle figures. Another factor to consider is the WACC, whether they think it is too low and hence not representative of the risks faced by the companies.

For example, Courage Marine is enjoying the very high dry-bulk freight rates now. Can this be sustained? Perhaps the current valuation of its business is high enough, relative to its enterprise value, to allow for the easing of freight rates going forward.

As for MobileOne, its high valuation has much to do with its relatively low WACC. Is that justified?

Meanwhile, among all the stocks I looked at, Olam has the highest imputed growth value and return premium based on its current enterprise value. The value of its existing business - under a no-growth scenario - only makes up about 19 per cent of its enterprise value today.