Tuesday 30 December 2014

My SG Porfolio 2014 (Top Realized Gains & Losses) and Some Recent Picks

My portfolio experienced quite a few changes in 2014 and I thought its good to highlight a few for my own tracking purposes. I consider this year a lucky year for me as I've sold my 2 main losers before it went down even further. I'm glad to realize a few winners too although most of them went even higher after my sales. Also, my event-type portfolio did not register any losses for 2014. Currently I have 15 Singapore companies in my portfolio and throughout the year it fluctuated between 14 to 18 stocks. Percent wise, my largest total unrealized loss currently in my SG portfolio is -4.4% while the largest total unrealized gain is about +61.3%, both inclusive of dividends.

I classify my portfolio to 2 main types. The first is the normal ones where we just make the purchase based on its quantitiative & qualitative strength and hold on to them until value is realized. The second type consists of event-driven stocks wherein their results depend a lot on certain external or internal corporate action(s) which I feel will close the price-value gap in a reasonably short period of time. Unlike in the USA, these situations are few and far between in Singapore. Consequently, I define them quite loosely and am pretty flexible with the type of event that occurred. For this group, I ensure that there is at least some degree of undervaluation before I make my purchases just to be safe.

Below is a list of my top realized winners (I define this by a more than 30% gain on an annualized basis) and my worst realized losers (Since annualized loss shows less meaning here, I define it by a total loss of more than 10%). Typically I'll buy up or sell down my shares on a scale over a period of time. To make things simple, my annualized returns are based on a maximum holding period which means the actual returns should be slightly higher.

Top Realized Winners

SMRT Corporation Ltd
Average Cost (Incl. Fees): S$1.02
Average Sold: S$1.49
Max Holding Period: 211 days
Returns (net of costs, include div) based on avg price: +47.6%
Annualized: +96.0%
Comment: Quite lucky here as a short while from my initial purchase, the price spiked up due to government's announcement about the new model. Nevertheless, the price at S$1.02 was clearly undervalued. The non-fare segment of the company was rather attractive too. Considering the nature and moat of the business, I probably run the risk that I've sold too low at S$1.49. Price now is S$1.58.

PNE Industries
Average Cost (Incl. Fees): S$0.1044
Average Sold: S$0.167
Max Holding Period: 480 days
Returns (net of costs, include div) based on avg price: +82.25%
Annualized: +57.8%
Comment: Price now at S$0.151.

UE E&C Ltd
Average Cost (Incl. Fees): S$0.737
Average Sold: S$1.20
Max Holding Period: 694 days
Returns (net of costs, include div) based on avg price: +77.4%
Annualized: +35.2%
Comment: Price now at S$1.26.

Koyo International
Average Cost (Incl. Fees): S$0.0528
Average Sold: 0.0864
Max Holding Period: 688 days
Returns (net of costs, include div) based on avg price: +66.4%
Annualized: +31.0%
Comment: Unfortunately the price thereafter went up as high as S$0.194. If I'm a bit more patient, it could have been a 250+% gain... Price now at S$0.154.

Worst Realized Losers

Vard Holdings  
Average Cost (Incl. Fees): S$1.097
Average Sold: S$0.958
Max Holding Period: 468 days
Returns (net of costs, include div) based on avg price: -12.7%
Annualized: -10.0%
Comment: This is probably my most foolish purchase in 2013. Fortunately, I sold months before the steep fall in oil prices. Counter is at S$0.595 now.

Fujian Zhenyun Plastics
Average Cost (Incl. Fees): S$0.168
Average Sold: S$0.155
Max Holding Period: 934 days
Returns (net of costs, include div) based on avg price: -1.8%
Annualized: -0.71%
Comment: Lucky here as I heard it is recently suspended due to some issues with its accounts. Price now at S$0.149.

Top Event-Type Winners

Fuji Offset Plates Manufacturing Ltd
Average Cost (Incl. Fees): S$0.35
Average Sold: S$0.45
Max Holding Period: 2 days
Returns (net of costs, include div) based on avg price: +27.9%
Annualized (Simple Average): >5000%

Captii Ltd
Average Cost (Incl. Fees): S$0.0351
Average Sold: S$0.041
Max Holding Period: 123 days
Returns (net of costs, include div) based on avg price: +17.5%
Annualized: +61.3%

From both the realized and unrealized results, I'm glad that my endeavor to ensure the risk of permanent capital loss is kept to the minimum has been working well. More details about my investment philosophy can be found in my post here. As always, I find that the timing of sales is always the hardest part of the entire investment process. Should we wait for the momentum to fizzle before selling even though it is already above my estimated value? But then again, how do we know that momentum has fizzled and what if the price falls below intrinsic value and never goes back up again? Because of this problem, I tend to start selling in phases when it is near my estimate of intrinsic value range. I guess the trick here is really to make purchases at a price so low that even if the sale is mediocre, the eventual results will still turn out good.

Some Recent Picks

I shall end off this post with 3 recent picks for my portfolio. For the normal portfolio, they are Sembcorp Industries and AP Oil International. You may want to check out my analysis for Sembcorp Industries here and AP Oil here. The event-type pick would be Avi-Tech Electronics Limited (company website) which I have accumulated at an average price including costs of S$0.699. Let's see how things goes from here. What about you guys? Care to share what are some of your picks? Have a fantastic 2015 ahead!

Related Articles:
Sembcorp Industries: Is It Worth The Buy Now?
AP Oil - A Neglected but Cheap Stock in Singapore
Avi-Tech Electronics - Is Quick Profit Possible?

Long AP Oil, Sembcorp Industries & Avi-Tech.

Wednesday 24 December 2014

SEMBCORP INDUSTRIES (U96.SI): Is It Worth The Buy Now?

The recent oil price rout has beaten down many stocks of oil-related companies and probably its good to have a look to see if valuations are compelling enough. Now, I usually like to buy clear-cut bargain type stocks and consequently most of my portfolio consists of small to mid cap businesses like AP Oil (see post here for full details). However, one of the rare blue chip companies that I monitor is Sembcorp Industries. Some metrics (based on 8 Dec '14) as follows: 

Price = S$4.15
Shares Outstanding = 1801.4 (million)
Market Cap = S$7,565 (million)
P/E (TTM) = 9.70
P/NTA (mrq)= 1.51
ROE (ttm) = 14.91%


Sembcorp Logo

I wouldn't go into details about the business but will probably highlight a few things so that the reader can get a general understanding about its operations. I encourage you to look at the Company's Website as it provides a comprehensive overview of its businesses here.

Sembcorp Industries is listed in the SGX and its business consists of 3 main segments:


Developer, owner and operator of energy and water assets over 6 continents with an established presence in Asia and growing presence in emerging markets. The company has established a niche as a global leader for the provision of bundled energy, water and on-site logistics to customers in energy-intensive industrial sites, and as a developer, owner and operator of large-scale combined power and water plants.

Sembcrop Utilities Network
Sembcorp Utilties Network

As shown in the picture, the Utilties segment already has a global footprint (including emerging markets) and the guidance was that there's still potential for expansion. This segment of the company is what probably attracts many investors now due to its natural moat, source of recurring income as well as potential growth.


Separately listed in the SGX, this segment is a leading global marine and offshore engineering group specializing in a full spectrum of integrated solutions in ship repair, ship building, ship conversion, rig building and offshore engineering and construction. This segment is likely causing the steep decline as it is highly related to the oil industry. 

Urban Development

Sembcorp owns, develops, markets and manages urban developments such as industrial parks, business, commercial and residential spaces in countries like China, Vietnam and Indonesia. The company's early involvement in the development of industrial, residential, business and commercial areas also provides potential opportunities for the provision of utilities and other solutions.This is smallest segment contributing less than 10% to bottom line.

I don't want to bore the readers with in-depth study of the business model but please do have a look at the company website and annual reports regarding its business strategies and the like.


Semcorp Industries 5-year Summary
Sembcorp Industries 5-year Summary

The 5-year financial summary seems to show that on aggregate, the company is performing reasonably well in terms of revenues and earnings. The free cash flow is pretty lumpy as expected due to the capex heavy nature of the marine industry as well as the growing phase of the utilities business. Something that I don't quite like is that the company is currently in net debt and with debt/equity ratio of  65% - but I argue that the overall earnings power is more than sufficient to finance this and the S$2200M cash on hand is definitely enough to pay out the S$930M borrowings due within 1-year. The company has been paying dividends as far back as more than 10 years ago and the past 5 years shows a payout ratio of about 30%-40%. Assuming dividends is maintained at S$0.17, yield is about 4.1%.

Another worrying trend is the decreasing ROE from 20.6% to 15.7% over a period of 5 years. A 15% ROE is still pretty good in general but its also good to pinpoint the reasons for the decline.

Sembcorp Marine & Utilities ROE
Sembcorp Industries Segment ROE

Obviously, we would prefer a business that is able to at least maintain its rate of return whilst employing incremental amounts of capital for expansion over an extended period of time - the Utilities segment is one good example. From 2009 - 2013, while using increasing amounts of capital, ROE for the Utilities business is relatively stable fluctuating between 15.6% to 19.6% while Marine is showing a consistent decline from 38.2% to 20.8%. Kudos to the Utilities segment in this aspect. Of course, we can't discount the fact that Marine's current rate of return is still very decent, but its inability to maintain this may be a cause for concern.

Perhaps a 10-year summary can provide a more meaningful insight of Sembcorp Industries 2 core operations:

As can be seen, both segments registered huge growth in both revenue and net profit over the past 10 years. The clear winner here is no doubt the Marine segment having registered 420% and 259% growth versus Utilities at 140% and 183% growth in revenue and net profit respectively. Are these growth sustainable enough for the analyst to make a decision with regards to its earnings power?

10-year Sales & Earnings Graph for Sembcorp
10-year Revenue & Profit Chart for Utilties & Marine

A look at the chart above shows that in general, the earnings of the Marine is volatile especially since 2007 while that of the Utilties segment is more stable, with earnings contribution surpassing the Marine segment since 2012.

Sembcorp Industries Net Profit Margin (10-Years)
10-year Net Profit Margin Chart for Utilities & Marine

The 10-year period net profit margin confirms this view point. Although the Marine registered a higher average net profit margin (7%) than Utilities (6.2%) over this period, the Utilities segment's margin is more stable at between 4% to 9% versus Marine's 3.5% to 11.5%. Do note that the 9% margin achieved in 2013 includes non-recurring income which when adjusted, should bring it lower to about 7.5%.

It is not wrong to say that due to the nature of its industry, typical utilities businesses are quite stable. For Sembcorp Industries, with the support of the statistical exhibits from the revenue, earnings, ROE and Net Profit Margin, I argue that its Utilities business is inherently stable and because of this predictability and stability, the Utilities business warrants a higher valuation as compared to other businesses. For the Marine segment, because of its dependence on order book & oil prices, coupled with its statistical showing, we can't for sure say it is a stable operating business. But based on its leadership position in its industry and strong features like ROE, it is also unfair to conclude that it is a lousy business that is worth a very low valuation.


On 8 Dec 2014, the market cap of Sembcorp Industries is about S$7500M while that of Sembcorp Marine (listed separately with code: S51.SI) is S$6100M. Sembcorp Industries owns 60.7% of the Marine business. With this, the implied valuation of Sembcorp Industries excluding its stake in the Marine business is S$3800. This necessarily means that the market is valuing the Utilties and Others segment at a low P/E (2013) ratio of  7.9x. That's really quite interesting.

Originally, I would prefer to use cash flows to value Sembcorp. However, the free cash flows are not very consistent owing to the heavy capex required, presumably for future growth. Coupled with the lack of guidance in estimating maintenance capex, perhaps its better to value the entire business on an earnings basis.

Utilities Valuation

Removing one-time items from the IPO of Sembcorp Salalah in Oman and impairment charges at Teeside in UK, the adjusted 2013 earnings would be about $$380M. As shown above (table and chart), the Utilities segment has shown sustained growth in revenue and earnings in the past decade. We know that this segment is still in the midst of expansion and track record has shown management to be prudent in this aspect.. From this, I think its fair to say that 2013 earnings for Utilities is a nice guide for future earnings. At what multiplier should be fair for this segment then?

Sector P/E ratio for Utilities Business
Sector P/E extracted from Gurufocus
I shall now run the risk of being criticized by fellow investors with the following. As seen in the Sector P/E extracted from Gurufocus, the P/E ratio for Utilities segment in S&P 500 is about 22 (Yahoo Finance shows similar numbers). Of course, S&P 500 concerns the US market plus the current P/E provided may be a poor indicator etc and there are other valuation methods. But for simplicity's sake, i decided to use this as a reference. I had also alluded above that because of its business characteristics and strong statistical showing, the Utilities business is inherently stable and probably deserves a high valuation. I'm not going to use P/E of 22 for the reason that its way too high. Of course, P/E of 10 is unfair too. A reasonable estimate should be probably about P/E=15 which means the Utilities segment is worth about S$5700.

Marine Valuation

The Marine segment is in a relatively volatile business affected by things like its orderbook, oil prices and sentiments. What I am looking here is for a long-term average of what Marine can consistently earn in the future. Perhaps its better to normalize the earnings and take the average result of the past 10 years, giving us an earnings power of about S$285M. A long term P/E of about 12-13 should be decent enough for a company like Marine, considering its long operating history and track record, despite its supposedly fluctuating business environment. This means that Marine is worth around S$3550M.

Adding them together, the Valuation should be about S$9250M (or price of about $5.15) as compared to current market cap of S$7,565 implying a margin of safety of 18%. I've decided to ignore the Urban Development segment since it probably is too small (for now) to affect the overall valuation significantly (I'll consider it as an x'mas gift).

True, the business is currently priced in the market above its book value and on this basis some may feel it is liberally priced. However, accounting treatment has its own constraints and certain non-quantifiable information such as Sembcorp's strong reputation, customer relations and capacity for innovation is not captured directly in the financial statements. I believe these intangibles is definitely worth something for Sembcorp (unlike many companies out there) but I hesitate to come out with a value. Anyway, compared with many blue chip companies, a price to tangible book of 1.5 is actually quite low. As an ongoing business, it is usually the earnings power of its assets rather than balance sheet valuation that really counts and based on these considerations I'm comfortable with the above indicated valuation.


Sembcorp Industries has been buying back shares recently. However, a quick check at the total shares outstanding for the past years does not show a decreasing trend. This is likely due to the company's policy of issuing stock options. There's not much to conclude about the value of the company here.

It is worth highlighting that a director of Sembcorp Marine has bought some shares during the recent price decline, possibly indicating that Marine segment is undervalued as well.


Sembcorp Industries is an industrial conglomerate with its core operating business earning a decent return on capital. Based on the market price of Sembcorp Marine, the implied valuation of the market clearly undervalues the Utilities segment. An investor who wants to take part in the undervaluation of the Utilities segment probably could buy Sembcorp Industries and correspondingly short an equivalent proportion of Sembcorp Marine. However, I prefer not to bet against the Marine segment. Looking it at another point of view, buying shares of Sembcorp Industries could bring about a natural industrial and geographical diversification from the Utilities, Marine and Urban Development businesses.

The concern here is whether the margin of safety is enough to justify a purchase. I'm here reminded about a similar concept (we call this 'safety factor') during my university days studying Engineering. To put it very simply, we were taught that if the consequences are severe or gravely (For eg, when building a bridge for cars and which may involves lives of many people), the typical safety factor should be high. Similarly, if we were to build a chair (that probably won't kill someone if it collapse), a small safety factor should do fine.

For a company like Sembcorp Industries, I believe we don't need too high a margin of safety to justify a purchase. 20%-30% should be fair enough. However, this is not to say that a margin of safety as low as 5%-10% is sufficient. This would mean that investors who bought at about S$5.00 even though Sembcorp Industries dropped from a high of S$5.50 may not be putting their money to good use.

All in all, I believe this analysis is consistent with our stock investments philosophy (read more about it here) and should do quite okay in the long term. I'll really appreciate if you can share some insights about this company. Thank you!

Long Sembcorp Industries (U96.SI) @ S$4.15 with the hope it'll go down for further accumulation
No position in Sembcorp Marine (S51.SI)

Wednesday 10 December 2014

Our Stocks Investment Philosophy

Analyzing and investing in stocks have been my passion for years. Personally, I feel it is one of the rare few endeavors that taps into our logical, mental and emotional faculties. At the end of the day, not only do we understand how things work in a business but we began to understand more about ourselves and our biases as well as our friends and family members whom we interact with in making investment decisions.

Below are some reasons why I decided to start this blog. Throughout the blog, you will notice that I like to use words like 'we' or 'our' to give credit to people, friends, authors and investors who gave incredible insights to a particular investment concept, business or a specific company during the process of learning, interactions, discussions and research.

The underlying purpose of this investment blog is mainly to:

1) Briefly summarize our investment thesis and pen down our thoughts in a simple and coherent manner
2) Keep track of the main reasons that we feel justify our initial purchase in the shares of a particular business
3) Reinforce and relearn investment concepts
4) Subject our theses to scrutiny and feedback so as to gain new insights in our investment journey

Our Stocks Investment Philosophy

Security selection requires a skillful balance between the facts of the past and the possibilities of the future. This can be attained through the use of right strategy and knowledge, keen awareness about one’s own emotional and logical faculty in making judgments and decisions as well as experience.

A brief summary of our investment framework which we adhere to are as follows:

A Business Perspective  
This is the core philosophy that encompasses all others. We view a stock as a piece of a business and in doing so, we remain focused on the cash the business will generate and on its financial position as opposed to the opinions of other investors in the market. Both the statistical exhibits as well as the qualitative background of the company are examined. We make sure we understand the business to a reasonable extent before proceeding.

Conservative Valuation
If the business passes our initial analysis, we will estimate how much the business is worth commensurate to its assets, earnings and dividends. The valuation should mirror closely to what a knowledgeable and prudent businessman will pay if given an opportunity to invest in the same business over which he could exercise control.

Margin of Safety
The unifying theme here is that we try to buy things on sale - our opportunity comes when we can capitalize upon a favorable difference between price on the one hand and indicated or appraised value on the other. Margin of safety is both a source of potential profit as well as downside protection.

Because the future is uncertain, the margin of safety is not a guarantee of profit and hence the need for diversification to better capture individual probabilities of profit potential as well as spreading unsystematic risk.

We do not presume to know when or to what extent we will be rewarded for identifying a security that is mispriced in the market but we know from experience that most will eventually. Because we don’t know when, we take most positions with a long-term perspective and this necessarily requires patience. A catalyst is a bonus but not compulsory during the decision-making process.

I'll be extremely interested to know from you guys what are the other qualities or features in your investment process that you feel is indispensable and should be included in the overall investing framework. Do leave your thoughts in the comments section!

Wednesday 3 December 2014

AP OIL (5AU.SI) - A Neglected but Cheap Stock in Singapore

AP Oil (Company Website) is listed on the SGX and its main activities consist of 3 segments:

  1. Manufacturing of a range of lubricating and specialty chemicals for industrial, automotive and marine applications under the group's own brand names.
  2. Trading of base oils, additives, chemicals and some related 3rd party products.
  3. Franchising which includes trading in raw material for products under the company's brand name. 
AP Oil International Logo

Their products are marketed to some 20 countries including Singapore, Bangladesh, Myanmar, Vietnam and others. What attracted me to this company is its relatively strong asset backing as well as ability to generate solid operating earnings and free cash flow. Also, throughout the company's more than 30 years of operations, it only suffered one year of loss which is due to one-off losses in a new business venture. Some key metrics are as follows:

Price = S$0.191
Shares Outstanding = 164,531,172
Market Cap = S$31.43M
P/E (ttm) = 7.0x
P/NTA (mrq)= 0.74x
EV/EBIT (ttm) = 4.3x
ROE (ttm) = 10.9%

AP Oil Financials

AP Oil International Singapore 5-year results

Having a P/NTA of 0.74x may not be spectacular but I would like to highlight a few things. The first is that the balance sheet is pretty clean and liquid, with net cash of S$20M (1H2014 Results) or S$0.12 per share. This compares quite favourably with the current market price. Secondly, a close look at the statements shows Associates contributing about $650K to the bottom line while it is booked at $2.9M. If a knowledgeable businessman were to buy this part of the company, I believe they would probably pay at least 7-8 times of its earnings (i.e. about $5M). Lastly, management is able to grow its book value consistently at a compounded rate of >10%/year since 2002 when the statements are available.

Statistically, we see that the earnings and free cash flows are on average, relatively stable and consistent. As alluded above, the trailing ROE is 10.9% and has decreased significantly from 22% in ’09. However, if we adjust for the low returns due to the huge excess cash horde, it should be higher (we estimate it to be in excess of 14%).

The company pays out 10-20% of its earnings, giving a relatively mediocre yield of about 2.5%. The only consolation is that the company has been paying dividends since 2010.

AP Oil Business

Now, we're no genius in the petroleum lubricating or specialty chemicals industry. Much of the qualitative aspects of the company should be reflected into the financials. Since there’s no easy way to ‘quantify’ its quality, our main concern is whether or not we can count upon the company to remain in business like it has before in the foreseeable future.

Other than the usual risks like fluctuation of raw material prices etc (which AP Oil has proven to manage quite well overall and our guess is that the current low oil price bodes well for its bottom line), the key business risk is the concentration of its major customers. The top 2 customers contributes about 40% sales in 2013 and the top 3 about 59% sales respectively in 2012. This got to be a big minus. As a sort of counterbalance, the company has plans to grow market share in existing markets and foray into untapped new territories. Hopefully, this will introduce both customer and geographic diversification. With its strong financial position and experience, AP Oil is well poised to take advantage of further expansion opportunities.

AP Oil is likely to enjoy regular recurring sales from repeat clients. Firstly, the lubricants and blended chemical are expendable products and secondly, it is hardly ‘postponable’ (i.e. once it’s being used up or expended, they need to replenish it pretty soon). Also, our guess is that for some applications and clients, these products form a small part of their budget and it is quite unlikely for them to actively source for another supplier.

Lastly, some products are non-standard and require certain R&D and technical know-how. When a customer orders a product to meet specific requirements, R&D is required to develop a new formula to meet these requirements. Note that AP Oil will retain ownership of the formulation which builds on its existing knowledge and database. In some cases, customers provide sensitive formulation owned by them (which may be sometimes a positive too in terms of customer retention).

AP Oil - Valuation

It seems that AP Oil is a pretty solid business with decent assets backing. Is the company undervalued relative to the market price now? 

As mentioned, AP oil consists of 3 segments. The financial reports separated their individual revenue and gross profit contributions (all 3 segments are still positive here) but lumped all the expenses together. Thus the best way to value the company is by considering the whole.

With its predictable & stable results, it is not hard to have a conservative earnings power estimate for the company of about $4M, which is lower than the past 5 years as well as the TTM results of $4.5M. Despite having a relatively simple business model, nice track record, potential for growth and strong financial setup, I hesitate to give a high multiplier due to some key risks I’ve discussed earlier (I'll probably touch more on that in my future post). A 9-11x multiple should be good enough. Adding to our $12M estimate of net excess cash, the valuation becomes $52M or $0.315 per share. Comparing market price of 0.191, we have an upside of 65%.

Of course, this is just a very simple but in our opinion, quite reasonable valuation process. Although we did test this with other valuation models (which coincidentally gives an intrinsic value range of between $0.25 - $0.35 which reinforces this estimate of $0.315) I think this is good enough. As long as the estimate is sensible and conservative, coupled with a huge margin of safety, there’s no need for an accurate figure. It’s better to be approximately right than precisely wrong.

Insider Ownership

Insider ownership is pretty high at about 50% and the management should care enough for the business to do well. The question here is do they own too much to ignore outside minority shareholders?


With a long operating track record, potential for growth, coupled with a price that offers sufficient margin of safety, we decided to take a position in the company. Sure, the business isn’t the best of the best but a purchase at this low price should be well justified. It's not easy nowadays to find a relatively good ROE company with low valuations. If one can find 10 companies like this, the diversified result should turn out quite satisfactory.

Long AP Oil (5AU.SI)