Tuesday, January 25, 2011

Well, Lets Get Back to the Basic

An idea told by Benjamin Graham, glorified by Warren Buffett.

I found this article at Fool.com. Do take a read if you were to understand what happens when you purchase a stock. Isn't that what investing is all about?

Back to the Basic: What is a Stock?
http://www.fool.com/investing/beginning/2011/01/24/back-to-the-basics-what-is-a-stock.aspx?source=iaasitlnk0000003

Saturday, January 22, 2011

The Good: Teo Guan Lee Corp

Nope, this is not a poultry industry business although company with this kind of name tend to be involved in poultry business. Rather they are in primarily apparels industry and a little property investment (less than 2% of revenue). There isn't much to talk about the company's history. It started in 1934 as a small enterprise dealing in general merchandise. Now it has 2 offices; 1 in Prai and another in KL, 9 boutiques and 400 consignment outlets. (Anyway i copy this from their website so you can just read from there)

Apparels
Its apparels business includes manufacturing, marketing and distribution. Basically from front end manufacturing to sales. Well, apparels business is typically very competitive in Malaysia because somehow, we aren't that good at branding our goods which could have give this sort of business great economic advantage, pricing power, apart from the likes of Padini (locally) and Bonia (internationally). So, what do Teo Guan Lee (TGL) has? Well, the company name may not sound sexy but their brands do (not all entirely theirs). They have 2 house brands and 8 character licensing brands.

House Brands: KikiLala, Cuddles
License Brands: Sesame Street, Garfield, Power Puff Girls, Tom&Jerry, Popeye, Ultraman, Pixie&Dixie, Pronic

I think you would have able to guess TGL is in kid's apparels business. For their house brand, I believe KikiLala has a strong branding locally and would appeal to most parents. Trendier parents might prefer the likes of Guess Kids, Gap Kids or Baby Gap but that is entirely a different market. For the license brand, they are able to product products using the character brand mentioned and when you look at them, they are about fun and kids wanna have fun. So the bigger name might sound a little...boring I guess. But their advantage is not entirely protected for 2 reasons. First they don't have exclusive right to produce them. Second, is the threat from "pasar malam" products. Walk out to a pasar malam or any store, you'll definitely see one of those. So the only way to differentiate themselves is the quality and of course the appeal.

Being in a kids' apparels business is quite different from the adult one as business tend to be very cyclical as parents would tend to buy more new clothes for kids during festive season particularly during CNY as a set of new clothes is a must by Chinese tradition of course not forgetting Hari Raya as well. But, if they buy from TGL this year, you can be reassure they'll llikely to return the year after because kids tend to grow faster when they are....kids. So there is some form of repeatability there but TGL may still need to cushion the low season. Probably would prefer CNY and Aifilfitri falls on a different quarter. TGL did okay last 4 quarters and manage to register profits although I think mainly cushioned by rental income from properties.



Financial Fundamental
When you look at fashion and apparels businesses, the No.1 thing that would worry is the inventory. And TGL did quite average in comparison to its peers although they are in a different business. Table below are measured in months. You can clearly see why Yen Global is struggling.


We have seen better brand products tend to command better margin. However for TGL, although they have good branding appeal with their license products, they still couldn't top it. Maybe parents are more sensible towards their kids and purchases are less impulsive.


But I would say, there could be a little untap pricing power potential for TGL although they could afford to have lower margin as they do not need to spend much on SGA expenses. They could just leverage on Cartoon Network. In 2010, TGL generates RM4 on every RM1 spend on SGA, Padini (RM2.87), Bonia (RM2.17), Hing Yiap (RM4) and Yen Global (RM1.80). 

From 2006-2010, liquidity for TGL is a bit of a worry as it has stay below 1. But it has steadily improved from 0.46 to 0.76. And from the latest quarterly report, it has now improved to 0.93. 

DE ratio has improved as well to about 33.3%. Receivables turnover rate is pretty average which is about less than 2.5months probably due to their heavy reliance on consignment outlets sales. It is pretty clear as Padini managed less than a month, Bonia and Hing Yiap less than 2 months while struggling Yen Global needs about 8 months!

So fundamentally they are OK and things seems to get better for TGL.

Properties
I never like businesses that diverse into property investment. It doesn't make too much sense to shareholders as well. And owning a property for rental income from Corporate is not a good idea due to double taxation (corp tax + witholding tax for dividend). BUT, TGL case is different in fact I am quite glad that the management did that as it provide some income and liquidity during the low season.



Valuation
I do like Teo Guan Lee business model actually as the don't have to worry too much on the marketing side. This gives them the advantage to keep the cost down although they would to pay for licensing fees. But this do make their work whole lot easier. If you can't beat 'em, buy 'em. Trend? What trend? The management has also keep looking for new licensing opportunity over years and in 2009 they have secure "Transformer" license just when the movie was a hit.

So the golden question is, how much would you pay? 

Revenue growth wise, TGL isn't really exciting. Although revenue CAGR for past 5 years is about 8.4%, I am looking at about 3%. Parents seems to have control their spending on kids during bad times. But TGL does have enough pricing power to pull when needed after looking at their 2007 result (manage 14.4% growth in sales when gross margin improves by 1045 basis point). 2007 is when commodities prices are on the rise.

With cost of revenue at about 63.1% of revenue, SGA expenses at 25.9% and Capex average out to RM1.4mil, the adjusted fair price to pay for TGL would be RM1.85.  

Tuesday, January 11, 2011

You Do It Best, When Do Nothing At All

Recent rally has excited many and have definite caught the interest of retail investors who have stayed sideline for the last couple years. I found an interesting article from Smart Money. It is not easy to find a contrarian investor during such bull market.

Make More Money by Not Trading at All

Read more: Make More Money by Not Trading at All - SmartMoney.com http://www.smartmoney.com/investing/stocks/make-more-by-not-trading-at-all-1294681052069/#ixzz1Ajbygzn0

Tuesday, January 4, 2011

The Good: My E.G. Services Bhd

This is a relative young company whois in an almost monopoly position in its ..well..own industry. Founded in 2000 its got itself listed in 2005. There aren't too much romance to talk about the history of this company so I'll skip that.

Business
My E.G., i think it probably stands for Malaysia E-Government services provider. Its business model is divided into 2 division: Government to Citizen (G2C) and Government/Enterprise Solution (GES). I think most of us are familiar with G2C especially during this "summons promotions" period. Anyway besides summons, they also provide services like driving theory test bookings, issuance and renewal of licences, electronic bill payment and payment ("EBPP") as well as online information services on electronic bankruptcy or liquidation status searches (E-Insolvency). All these can be done through the internet or its kiosk in the less developed area.

GES is not an internet based service but a software or system development as well as maintenance service provider to government and enterprises. Target market are the driving, insurance and financial institutions and others la.

Historically, G2C is the bigger contributor in revenue than GES. But sadly, individual contribution from them has not been disclosed ever since 2008.



Management
Apart from the MD,  the rest of the directors are what you need to be in a government business if you know what I mean. There is not much mentioned about the rest of the co-founder but I guess he does have a decent team with him - technically.

Service and product quality
I have only use this a couple of times. Services is okay (just click and pay, not much to comment about) but I've never tried their CS before to be honest. But everything can be done in decent internet speed apart from the "normal hours" when traffics are expected to be high till March. Product quality, yes there is, still a little annoying where i have to log in like a thousand times to pay for tickets. But overall better than most government sites.

Okay, that's about its business in 15 minutes - a pretty simple business.



Financial History
Well, if you look at the past 5 years, its revenue and operating income growth has been staggering at 34% and  50.3% respectively largely due to its acquisition of its competitor mySpeed Sdn Bhd. Since then sales growth has been quite impressive registering 19.8% in 2009 and 18.3% in 2010. Well, My E.G business model is pretty resilient during tough times so are we probably seeing revenue growth slows down? Erm..growth wise maybe but I do believe public awareness of My E.G. services is still pretty low. To be honest, their ads are really confusing and message delivery is mediocre at best.


Being in an e-commerce business, My E.G. gross margin is high in comparison to most industry, and it has improved steadily since 2005 from 31.6% to 59.8%. And they did use this margin to their advantage by increasing their A&P activities. I think this is a good strategic move but seriously the quality needs to be improved. This is probably the reason why sales efficiency has drop over the last 5 years from RM10.88 generated of every RM1 spend on SGA to RM5.93 in 2010.

My E.G has been conservative on its leverages on debt, keeping the D/E ratio below 1 although debt level has  increased to RM5mil in 2008, they are still in a very healthy position for the fact that they still have RM11mil in cash.

Receivables turnover rate is about 3.5 months in FY2010 which is likely to be contributed from GES division as G2C divisions transactions is either by cash (FPX) or credit cards. They should have no problem collecting these from the banks.

Overall, the financial condition of My E.G. is pretty strong and are more than capable to generate more than RM7.5 million of cash in the next few years. And they have a pretty decent ROE at 18% on average.



Valuation
Well, this is the tricky part. This is a young company with a huge prospect for growth and they have plan to continue to expand their services by commercializing various government services over the next 5 years. Well this expansion plan wouldn't take huge amount of capex, but their expansion on e-Services center and kiosk will. Problem is, it is unknown how much capex are they going to incur in the future and how much has the expansion from center and kiosk has contributed to its growth. So I'm taking a 3 stages guesstimate normalized  growth of 8.7% over the next 5 years before it declines steadily to terminal growth of 3%. (How I come out with 8.7%, well that's a secret). Capex should near its depreciation level at about RM6mil. That would give me a safe purchase price at about RM0.37. (NOTE: There are huge chances that I might have undervalue this company but it is better safe than sorry). So unless I get this sweeeeet deal, I would rather wait till it becomes more predictable. Sadly, somehow rather that name below has double the shares price.



But My E.G has great growth potential and 15 years contract with government has given it a monopoly position. Will it face contract termination of any sorts if there is a change in government? Nope, I don't think so as it does not make business sense to any government to do that. My E.G. business model benefits both sides as it does not only generates revenue to the company but its solution would have tackle much government administrative mess and inefficiency at the lower level. And the current higher SGA expenses is unlikely to remain at this level on the long run once its has own the public mind. My E.G. does sound like a great business to invest in, but we have seen how often mismanagement occur when a corporate is given a monopoly position in this country. Anyway things look find as for now. But I'll keep this very close under my radar.