8 Pearls of Investment Wisdom for These Volatile Times

These are the words of investment wisdom on those "bear" advertisement posters on the MRT by Aberdeen. You can download the pdf file here.

Volatility is not something to fear, but something to embrace
Why do we fear stock market volatility so much? As an airplane's wings must bend during turbulence to prevent them from snapping, so too must share fluctuate, sometimes gently, other times wildly. Of course, sever turbulence during a flight can be an uncomfortable experience but we have no choice but to sit tight, knowing deep down that we'll reach our destination. But in the world of investing there is little to stop us bailing out at the slightest wobble as our emotions get the better of us. Try then to welcome volatility. Shares do not go up without it.

Think long term
All stock price movements are a combination of unpredictable noise on the one hand and the meaningful pattern of business performance on the other. Over short periods price movements are as good as random, while over long ones business performance dominates. As an investor, you should align your time horizons accordingly. If a factory, for example, is expected to provide at least ten years of returns, so should your shares.

Know the difference between gambling and investing
We all like to have fun once in a while. A trip to the casino is an excuse for a good time, but approach the stock market in the same way and you'll quickly find yourself in trouble. Successful investing is hard and often dull, requiring discipline and lots of study. For that adrenaline rush, few things beat watching the roulette wheel spinning. When it comes to making good investments returns, however, owning the casino itself tends to be more profitable than entering it. Think about it.

Be contrarian
We have a tendency to do or believe something just because others do. It makes us feel normal, part of the group. Occasionally, however, such behaviour is counterproductive and even dangerous. Rush for the exit in a crowded market with everyone else and you risk getting trampled. The same applies to behaviour in the stock market. Selling - or buying - behind everyone else is a sure formula for poor investment performance. Warren Buffet teaches us to "be fearful when others are greedy and greedy only when others are fearful."

Consider the difference between price and value
In the real world, the distinction between price and value is frequently apparent. Given the choice between a $10,000 car and a $10,000 tee shirt, it's pretty clear that the car is better value. In the investing world however, it is much harder to discern the difference. Unlike a car, who economic utility is something we can understand and even evaluate, the value of a company is somewhat intangible and thus a tricky concept to grasp. Guru stock picker Philip Fisher noted that the stock market is filled with individuals who know the price of everything, but the value of nothing.

Be humble, the stock market is smarter than you
Overconfidence might help to secure a job promotion or the attention of others at a nightclub, but in the investing world, an over-inflated opinion of yourself can be disastrous. You may think that you are in a position to predict the direction of the market or a particular stock over the next few months but remember that there are millions of others doing the same thing. Apply a little humility and ask yourself honestly whether you are really smarter than all of them. as the father of modern economics and successful investor John Maynard Keynes noted, "Successful investing is anticipating the anticipations of others."

Avoid things you do not understand
The world is an increasingly complex place and one often finds oneself blinded by science or confused by complicated arguments. With investing, it is important to understand precisely what you are buying, at least so that you can sleep soundly at night. Think about share as you would a book: if you don't understand it, put it down. Peter Lynch recommended that if you cannot summarise in just a few sentences why you are investing in a company, then you're probably looking at too much information.

And finally...
If you place bets proportional to their market odds on every horse in a race, you'll come out slightly down, after the track's take. This is a pointless strategy, particularly if you know more than others about horses. It is important to understand where you have an edge and, when you have one, to use it to your advantage. We never forget Buffett's tip, "Wide diversification is only required when investors do not understand what they are doing."

Equity Risk Premium Model

Ms. Teh Hooi Ling, in "Show Me the Money, Volume 1", recommended the use of Equity Risk Premium model for investment in the equity market.

Equity risk premium (ERP) = Inverse of market PE - risk-free rate

Singapore market
ERP about 350 basis points: market under-valued (Buy signal)
ERP about 60 basis points: market over-valued (Sell signal)

Malaysia market
ERP about 100 bpts (Buy)
ERP about -250 bpts (Sell)

US market
ERP about 100 bpts (Buy)
ERP about -200 bpts (Sell)

Rationale:

ERP is the compensation required by investors for holding risky assets (in this context, equities). Investors demand high returns to be enticed into holding stocks when fear prevails the market. When greed prevails, investors are over-confidence and require very little compensate for taking risks.

= = = = =

In the book, it was mentioned that the average one-year FD rates (1987 - 2002) in Singapore is about 3.9%. This implies:
Buy when market PE = 13.5
Sell when market PE = 22.2

However, our current 1-year FD rate is only a miserable 0.925% (from UOB website). If we are still looking at 60 abd 350 bpts, that means:
Buy when market PE = 22.6
Sell when market PE = 65.6
O_o!!!

= = = = =

Although I think it's clearly a good time to accumulate stocks now, I thought it's interesting to see what the current ERP says.

To estimate FY2008 earnings share for STI stocks, latest full year EPS were used for companies with financial year ended 30 June or 30 September. For companies with financial year ended 31 December, full-year EPS were estimated using:
(FY2007 EPS / 9M FY2007 EPS) * 9M FY2008 EPS
Similarly, companies with financial year ended 31 March, EPS for FY2008 were estimated by:
(FY2007 EPS / HY2007 EPS) * HY2008 EPS

Based on yesterday's (11 December 2008) closing prices, estimated PE for Singapore market works out to be 5.28 which means the earnings yield is about 18.93%.

Using 3.9% as risk-free rate (though I don't know where I can get such good deal now), ERP = a hefty 1503 bpts!

No matter how you look at it, it's a STRONG BUY.

REITs - Glossary

Most important rules for REITs
1. A minimum of 75% of the REIT's total assets must be in qualifying real estate investments.
2. At least 90% of the REIT's taxable income must be paid out through dividends each year.
3. Maximum gearing allowed: 60% (Singapore's context)

The profitability of a property REIT is a function of 2 factors:
1. Economic moat
2. Capital allocation (whether management consistently generate good returns from its asset base)

Capitalization rate: property's net operating income / purchase price

Funds from Operations (FFO)
Net Income (after preferred dividends)
+ Depreciation
+ JV adjustments
- Gains on real estates sold
= Funds from operations

FFO payout ratio = DPU / FFO per unit

Adjusted FFO
AFFO = FFO - capital expenditures - other amortization
A more precise measure of residual cash flow available to unitholders and better predictor of the REIT's future capacity to pay dividends.

Evaluating REITs
1. Type of properties
2. Geography
3. Occupancy trends
4. Tenants concentration
5. Credit rating
6. Lease duration
7. Fee-based income
8. Interest cover

Sources:
"The Ultimate Dividend Playbook" by Josh Peters
http://www.investinreits.com/learn/glossary.cfm

Banks Valuation - Glossary

Equity/assets ratio = Shareholders' equity / assets
A key indicator of solvency and financial strength.

Net interest income: the difference between what a bank earns on its assets and what it pays on its liabilities

Net interest margin = Net interest income / earning assets

Noninterest income: fees for other services (eg. advisory, insurance brokerage)

Noninterest expenses: eg. wages, rent, utilities.

Net revenue: (aka total revenue) net interest income + noninterest income

Efficiency ratio = Noninterest expense / Net revenue
(Banks don't express their income in terms of profit margins. The lower efficiency ratio the better.)

Provision for loan losses: allowance for loan losses
The relative size of this figure to gross loan will convey how prepared a bank is for a deterioration in credit quality.
Loan-loss ratio: allowance for loan losses / total outstanding loans

Charge-off: bad loan amount - collateral's market value
Charge-off ratio = net charge-offs / gross loans
Low charge-off ratio suggest a bank is doing a good job in identifying creditworthy loans

Past-due loans: when borrowers falls behind schedule interest and princial payments (usually reported in footnote)

Nonperforming assets: total value of loans the bank seriously doubts it will be able to collect in full.
(This is not a projection of future losses as loans may be secured with collateral but the more nonperforming assets a bank has, the greater the likelihood that the eventual loss will be higher than what has already been charged off.)

Source: "The Ultimate Dividend Playbook" by Josh Peters

Dividend Drill Return Model

From "The Ultimate Dividend Playbook" by Josh Peters

Stocks, like any investment, only have value because of their ability to return cash to their owners - if not now, then eventually.

Income
We should rely on cashflow from assets, rather than selling of assets, to attain our financial goals.

Insight
Dividends provide signals such as the company's financial health, growth prospects and confidence of the management in the company.

Independence
By managing a portfolio based on dividends, the investors can achieve psychological independence to ride out short-term market volatility.

Dividend Drill Return Model

Dividend rate ($)
divided by: Share price ($)
= dividend yield (%)
---------------------------
Core growth estimate (%)
divided by: ROE (%)
multiplied by: EPS ($)
= Cost of growth
---------------------------
EPS ($)
minus: dividend ($)
minus: cost of growth ($)
= Funding gap ($)
---------------------------
Fundung gap ($)
divided by: Share price ($)
= Share change (%)
---------------------------
Core growth (%)
plus: Share change (%)
= Total dividend growth (%)
----------------------------
Total dividend growth (%)
plus: dividend yield (%)
= Projected total return (%)

Margin of safety: Look for a forward-looking total return prosepect higher than you might be willing to accept if the future was certain.

Assessment of Dividend Safety
1. Are earnings sufficient to cover dividend?
2. Are earnings stable enough to cover the dividend amid short-term variation?
If not, does the company have access to other resources to fund the dividend?
3. Are earnings durable enough to cover the dividend for the foreseeable future?
4. Is the management not only able but willing to maintain current dividend payments when the going gets tough?

Durability implies:

- A firm can take a financial punch in one year and come back swinging the next.

- An earning stream that, if not quite predictable in any one year, can be relied upon over a series of years, during which short-term fluctuations should be averaged out.

Factors affecting durability:
1. Economic moat

2. Long-term demand

3. Liquidity

To know about earning prospects:
1. Management guidance
2. Analysts' consensus
3. Trailing earnings
4. Own forecast

Factors affecting earnings stability:
1. Revenue fluctuation
2. Operating leverage
3. Financial leverage

Warning signs:
1. Unsustainable earning sources
2. Excessive debts
3. Legal problems
4. Peer pressures

It would be easy to invest solely on the basis of historical trends in dividend growth but a changing situation can easily render the past irrelevant.

= = = = =

Simplified Gordan's Dividend Discount Model:

P = Div/(r - g) ; where Div = expected next dividend payment
r = (Div/P) + g

Since sustainable growth, g = (1 - dividend payout) * ROE

Prospective return = expected dividend yield + (retention ratio * ROE)

Stock Selection Criteria - by Mr. Chen Yi

Stumbled across the personal website of Mr. Chen Yi who claims an annual IRR of 34% for his 10 years of investment experience in the stock market. On his website, he listed his 10 criteria for stock-picking.

I shall modify a little and use the list as a guide for my future stock investment.

How to identify a good stock
Track record of profitability:
1. The company does not incur loss in in the last 5 years
2. Net profit should be growing for the last 3 years
Financial health
3. Current liabilities <= current asset
4. Shareholders' fund >=0.5 * total liabilities
5. Total liabilities <=5 * cash balances
Growth prospects
6. Based on what the company is doing, earning is expected to grow over the next few years
7. Annual investment return should be 25% or higher
Annual investment return = E/P + expected annual earning growth rate
Valuation
8. Forward P/E<=10
9. Stock price <=3 * NTA per share
10. Dividend yield >= 4%
Management
11. Good management

What Type of Trader Are You?

Took a personality test from: http://tharptradertest.com/

I am a...

Supportive Trader

You tend to focus on the details of life, seeing what needs to be done and doing it in a conscientious manner. You take your responsibilities very seriously and you are very dependable, practical and realistic. At the same time, you strongly value security and stability. You tend not to be a risk taker, but you could see yourself as an investor as long as you had a structure to work under.

You tend to gather information about people and use it to support them because you make others feel good about themselves. You are very people oriented, and you probably do not like abstract ideas, concepts or theories. However, since trading tends to be an isolated and relatively lonely profession you might find that it's not for you simply because there is not enough social interaction.

You probably have definite values and a clear idea of how things "should be." And when things are not the way you like them to be, you’ll probably tell people. However, you tend to adapt community standards for what is right and wrong, rather than trusting your own internal values. This might be disastrous for you as a trader/investor where being a non-conformist tends to lead to success.

Trading Strengths

1. Your creativity often comes from flashes of insight into the nature of things or the needs of people.
2. You can probably work very effectively among a team of like minded supportive traders.
3. With a careful selection process to help you feel secure, you should be able to work with simple, clear systems that manage risk and don’t aim to go for outsized returns in dynamic conditions. Probably very comfortable with clear, calm all-season trading plans.

Trading Challenges

1. You have an aversion to risk and have trouble taking socially adverse trades, even if it could make you big profits. This could eliminate a lot of options for you in trading.
2. Probably have trouble understanding concepts like how the markets really work and how to evaluate a low risk trading idea.
3. If you have an action oriented part you may jump into the markets too rapidly.

Example Trader: Andrew Carnegie

Andrew Carnegie rose from a poor Scottish immigrant worker to become the second richest man of his era (next to John Rockefeller). He parlayed some wise investments into a $40,000 investment that he used to buy a farm which turned into a million dollar oil landfall the very next year. He invested that fortune in steel and newspapers. His company was eventually bought out by J.P. Morgan and became U.S. Steel. And once Cargnegie retired, he proceeded to give away over $300 million before his death. Here is Carnegie's philosophy:

"Man does not live by bread alone. I have known millionaires starving for lack of the nutriment which alone can sustain all that is human in man, and I know workmen, and many so-called poor men, who revel in luxuries beyond the power of those millionaires to reach. It is the mind that makes the body rich. There is no class so pitiably wretched as that which possesses money and nothing else. Money can only be the useful drudge of things immeasurably higher than itself. My aspirations take a higher flight. Mine be it to have contributed to the enlightenment and the joys of the mind, to the things of the spirit, to all that tends to bring into the lives of the toilers of Pittsburgh sweetness and light. I hold this the noblest possible use of wealth."

In 1908, he commissioned (at no pay) Napoleon Hill, then a journalist, to interview more than 500 high and wealthy achievers to find out the common threads of their success. Hill eventually became a Carnegie collaborator, and their work was published in 1928, after Carnegie's death, in Hill's book The Law of Success and in 1937 in Hill's most successful and enduring work, Think and Grow Rich.

He was generally known to be warm hearted, conscientious, and very cooperative. And you, like Carnegie, want harmony around you and you work hard to accomplish it.

E&E - Charts & Valuation

Historical chart, 1994 - 2008

Historical low - 30/01/1995: US$0.451

Historical high - 29/09/1997: US$3.799

Unconditional offer to minority shareholders by Kingboard during its acquisition of E&E in 2004: US$2.85.

Stock price plunged below major trend lines during the crash in Sep-Oct 2008. ='(

1-year chart, 2008*

*Up to 26 Nov, 2008

Recent low - 30/10/2008 : US$0.810
Recent high - 13/04/2007 : US$2.674

During the year, Kingboard has acquired a total of 679,000 E&E shares at an average price of US$1.423 (with the bulk of transactions in October), raising its total interest in E&E to over 71%.

= = = = =

Basic Share data

Number of shares in issue as at 30/09/08: 178.9m (excluding treasury shares)
Free-float: 18.8% (ie. 33.6m shares)

Last traded price as at 26/11/2008: US$0.870
Market capitalization: US$155.6m

(As at 30/09/2008, cash per share: US$0.392m, NTA per share: US$2.04)

My Valuation

Using PE ratio

Current PE (based on FY2007 fully diluted EPS): 4.51

Current PE (based on YTD 3QFY2008 fully diluted EPS): 4.15

Assuming PE of 8, base on YTD 3QFY2008 fully diluted EPS, price = US$1.677

Using Gordan's Dividend Discount Model

Dividend yield (based on dividend of US cents 20.5 paid in FY2007): 23.6%

(Interim 8.0 US cents + Final 4.5 US cents + Special 8.0 US cents)

If divdend rate = 12.5 US cents per share, dividend yield: 14.4%.

Number of years to recover investment through dividends: ~ 7

Assuming dividend rate at 12.5 US cents with 0% growth rate and required rate of 9%,
Price = US$1.389 (very conservatively, I would add.)

Why I like E&E?

I mentioned in my previous post that I like the stock mainly because of its generous divdends.
Here, I shall attempt to further justify my liking.

Earning Prospects and Growth

E&E survived and remained profitable during the Asian financial crisis in 1997, burst of dot-com bubble in 2000 as well as the outbreak of the second gulf war and SARS in 2003. This track record provides assurance that the company is strong enough to withstand turbulent times.

Although current credit crisis may soften market demand for PCB, healthy long-term outlook is supported by the growing importance of technology in our daily lives (eg. computers, laptops, handphones, etc). The postive long-term outlook is further bolstered by consumers' demand for higher speed, lighter weight, more functions and better performance for new electronics products as well as shortening of product life cycle. As one of the world's top PCB players , E&E is likely to benefit from the trend.

However, increasing competition and volatility in the prices of raw material pose challenges to its profitability, as evident in the lower profit margins in the recent years (average profit margin: FY1991 - 1999: 14.5% vs FY2000 - 2007: 10.6%). The problem is partially mitigated by E&E's close association with Kingboard Group, which allows E&E to enjoy preferential access to developemental capabilities and competitive pricing for raw materials. In addition, the Group is striving to improve profitability by shifting its product mix towards higher layer-count PCBs and is currently building a new plant to focus on HDI.

Admittedly, as someone unfamiliar with the development of electronics and technology, I do wonder what is the likelihood of PCB being substituted by something newer, cheaper and better, say, nanotechnology?

Financial Health

The Group has a strong balance sheet as at 30 September 2008. Cash and bank balances amounted to US$70.2m against total borrowings of US$180.0m. This translated to a net gearing of 29.5% which I think is a comfortable level.

A total of US$89.4m was generated from operations over the 9-month period. According to Note 7 in its latest results announcement (3Q FY2008), "the solid financial strength was driven by earnings growth and effective management of our cash conversion cycle".

Management

In my opinion, the Group has shown a proven record of strong operating cashflow and its management has exercised prudence by not over-relying on financial leverage to expand growth.

It is noted Kingboard has acquired a total of 679,000 shares of E&E at an average price of US$1.423 from the period April to Oct 2008. This, in a way, conveys the confidence of the directors in the company. However, the series of transaction has raised the deemed interest of Kingboard in E&E to over 71%. What is the probability of E&E taken private?

I've roughly looked at the historical financial performance of Kingboard Chemical Holdings Ltd. and find that the management has done a good job in increasing shareholders' value. Since E&E is the subsidiary of Kingboard and has owners of Kingboard on its board, I'm inclined to believe the performance of E&E will not be too far off the mark of Kingboard's.

E&E - Dividend Analysis, FY2000 - FY2007

I like this stock because of its good dividend. Its average dividend yield over the recent years is a decent 8.9%.

Since the Group started paying dividends in 1995, its dividend payout ranged between 34-55% until FY2002. Excluding the outliers, the dividend payout has increased to the 60-70% region in the recent years. It is therefore, reasonable to assume that the management will keep its dividend payout about two-third of its profit.

Gross dividend has been increasing over the years except for FY2002. During that year, gross dividend declined only 23.3% compared to 53.8% drop in net profit. As the Group aims to maintain a "consistent dividend policy", dividend payout surge during years in which earnings growth were lower (FY2002, FY2003 and FY2007).

In the Chairman Statement of its 2007 Annual Report, the dividend was recommended after "having considered the Group's continued ability on free cash flow generation and their (the Directors') confidence in the corporate performance going forward." This is a heartening statement, in my opinion.

Someone has suggested that the high dividend may be attributed to the needs of E&E' s parent company. I am not sure of Kingboard's financial health and will have to find out. I also do not know under the current corporate structure, how E&E will be affected should the financial health of its parent company deteriorates.

It is noted that E&E's dividends were fully supported by its strong operating cashflow. Since its listing in 1994, the Group has generated positive net cashflow from operating activities every year. I believe the consistent dividend policy has also helped the management in being prudent with its uses of cash.

= = = = =

Updated on 26 Nov 2008:

Health Check - Kingboard Chemical Holdings

A check with the latest Interim Report 2008 of Kingboard Chemical Holdings shows that its profit attributable to equity holders of the Company (excludes exceptional item) rose 35% to HK$1.76b for the 6 months ended 30 June 2008.

In addition, its cash holding stood at HK$5.4b against total debt of HK$11.3b, of which HK$2.9b is due within 1 year. Current ratio was about 1.56, net gearing about 29.2% and interest coverage ratio at 13.8 times. Net cash from operating activities for the six months totaled to HK$1.0b.

E&E - Financial Ratios Analysis, FY2000 - FY2007

Liquidity ratios

I think the company had done a fairly good job in maintaining liquidity though it should be noted that the ratios are trending down. I would prefer to see the current ratio at around 1.5 and quick ratio above 1.

Debt ratios

Gearing has increased over time but was still kept at comfortable level. It would be good to see the interest coverage ratio going higher, say 7 times.

Efficiency Ratios

Fairly consistent over the years

Return on Equity (using DuPont Model)


Personally, I do not view E&E as a growth company. Profit margin has undergone erosion during the period in review as the PCB industry has grown increasingly competitive. Asset turnover was affected by rapid expansion with below-expection performance of new plants. The impetus for increasing ROE can only come from higher equity multiplier, which essentially means higher liabilities for the company.

E&E - P&L Analysis, FY2000 - 2007

Revenue
By business sector
The computer & peripheral was the largest market segment for the Group in FY2006, accounting about 42% of total turnover. Next in line were communication & network sector, followed by consumer electronics, with revenue contribution of 26% and 13% respectively. Automotive accounted for 9% and the rest were categoried under others.

By geographical sector
China has been the Group's largest and one of its fastest growing market. Its sales went up from US$82.4m in FY2003 to US$291.3m in FY2007. Share of China's contribution in FY2007 was 51% of the overall sales compared to 34% in FY2003. Together with Southeast Asia (20% of FY2007 turnover) and other Asian countries, the contribution of Asia market grew to 75% in FY2007 (See chart below).

Turnover breakdown by geographical segments: FY2000 vs. FY2007

On the other hand, the share of Europe and America decreased to 18% and 6% respectively in FY2007.

By layer count
While the sales of 2 to 6 layered PCBs consistently contributed about 70% of revenue, the management hopes to improve its profitability by shifting its product mix towards more sophisticated products, such as the higher layer count PCBs and HDI. The Group deems HDI to be a key growth drivers in years to come.

Historical performance
Business of the Group follows the cyclical nature of the PCB industry and is very much affected by the boom and bust of the technology sector.



FY2002: Demand for PCB remained weak after the burst of the dot.com bubble. In addition, excessive global PCB production capacity also resulted in the erosion ASP (weighted ASP of PCB products dropped by 15.7% during 1H FY2002).

FY2003: Economic prospect was dampened by the outbreak of Iraq war (the 2nd Gulf War) and SARS. At the same time, ASP continued to be under pressure. ASP of 8-layer and above PCBs dropped 26.2%, leading to decline in overall ASP of 20.1% during the year.

FY2006: sales of 6-layer and above products decreased despite a modest growth in the 2- and 4-layer PCBs. As a result of the change in product mix to lower layer count business, ASP declined by about 4.2% on y-o-y comparison.

Profitability
Based on data available (FY2001 - 2007), growth of gross profit has been erratic due to business cycle as well as fluctuations in raw material prices and average selling prices of PCBs. Average annual growth rate of gross profit was 4.3% with average gross profit margin at 22.1%.

Total operating expenses grew about 9.6% on average but its share over turnover has declined to below 10% in the recent years.



Despite the problems in FY2002 and FY2003, the Group remained profitable. Nonetheless, earning growth was far from smooth.

With the recovery of demand towards the end of FY2003, the Group's was operating at about 90% of its capacity. Hence, capex for FY2004 was increased to to US$92.2m (FY2003: US$22.9m, + 301.8%) to ramp up production capacity.

As a result, finance cost surged 202.0% in FY2005 as bank borrowings increased. (Nevertheless, interest coverage and net gearing ratio remains comfortable at 16.1 and 35.2% respectively.) Slow down in the earning growth in FY2005 was also affected by an exceptional items of US$1.7m (of which, $1.4m was redundancy payment made to streamline the Group's Hong Kong plant and US$0.3m was for non-recurrent professional fees related to the takeover offer made by Kingboard) as well as increased of effective tax rate from 7.3% to 10.2%.

The Group was operating near full capacity utilization in FY2006. Besides expanding production capacity, it also set up a new plant to focus on the more sophisticated and higher value-added HDI PCBs to improve profitability.

In FY2007, the Group's gross margin and profitability were adversely affected as its new plants in Kaiping experienced a longer than expected learning curve and low manufacturing yield on complex product categories. The management took rigorous measures including strengthening management and workforce as well as process and product capabilities to improve production yield. Losses at the Kaiping plants have been narrowing since.

According to the recent research report by CIMB, E&E intends to delay the commencement of its new HDI plant amid the current economic slowdown.



Notes:
(1) Reporting currency was changed from SGD to USD in FY2003
(2) End of financial year was changed from 30 June to 31 Dec in FY2006

= = = = =

Updated on 26 Nov 2008:

Further Number Crunching on Earning Growth
If historical performance is of any indication, average growth rate of profit attributable to equity holders of the Company:
FY1991 - FY2007 (16 years): 19.3%
FY2000 - FY2007 (7 years): 15.2%

The above figures should be read with care as growth rate of FY2004 was boosted to 186% after negative growth of 54% and 42% in FY2002 and FY2003 respectively. Excluding these 3 years, the average growth rate will look as below:
FY1991 - FY2007 (13 years): 16.9%
FY2000 - FY2007 (4 years): 4.3%

UOB i-Account

Monthly average balance: $3,000
Fall below fee: $7.50
Monthly fee: $2

Based on the above, annual fee for maintaining account = $24
Current interest rate for amount first $15,000: 0.35%
In order to fully offset annual fee of $24, monthly average balance to be maintained = $6,857.15

Where to Park Cash?

It is widely advocated that we should maintain at least 3 - 6 months of liquidity (some say 6 - 12 months. For the even more conservative ones, 12 - 36 months). Some options where cash can be parked:

1. Savings or current accounts
Currently, most banks are offering interest rate of less than 0.5% for amount less than $10,000. However, it pays to do a little research. For example, Maybank is offering 1.08% for its iSavvy savings account. The catch is that this account can be only operated through internet, mobile banking and ATM cards. Service charges are applicable for over the counter transactions.

Higher interest rates can also achieved for monthly savings accounts such as POSB MySavings and OCBC Monthly Savings account.

2. Time deposits
For research on best deals: http://singapore-fixed-deposits.com/wordpress/

3. Money Market Fund

Money used for investment purposes may be kept with Money Market Fund which is less risky than normal unit trusts and incurs no sales charge. Rates are usually better than normal fixed deposits.

4. Singapore Government Securities (SGS)

SGS can be bought and sold over the counters at banks with a Debt Securities Account. The minimum sum required for investment is $1,000. Investment in T-bills can also be made with Phillip POEMS account.

Prices and yields can be monitor from https://secure.sgs.gov.sg/apps/goto/?app=dailyPrices

Interests, discounts as well as capital capitals derived from SGS are tax-exempted for Singapore residents.

Tying the Knot? Thrash Out the Money Issues First

This is an article by Lorna Tan in the 'Invest' section on The Sunday Times dated 2 November 2008. I personally do not find the article useful except for the last part on CPF nomination. Nevertheless, I shall summarise it here and address some of the points based on my current subjective assessments. I may come back to this post and add on to the list of concerns as and when I thought of any, or simply update on my thoughts on the various issues highlighted.

Establishing financial goals
How many children? How kind of lifestyle? When do you plan to retire?

Children - probably 2 (plus/minus 1)?
Lifestyle - a simple and comfortable lifestyle focusing on basic needs is good enough.
Retirement - no concrete plan for retirement yet.
I think the interest of a fixed deposit with principal amount of $2 million should provide a sufficiently comfortable lifestyle for 2 retirees in current time.

Say, interest rate at 0.875% p.a - This yields interest of $17,500 per year which translates to $1,458.33 per month (Together with CPF savings of, say $300 per month, each person will have an allowance of about $1,000 per month).

Savings and spending strategy
Draw up household budget and decide on bill-paying responsibilities.

Knowing your combined financial worth
Calculate your combined wealth. Develop family cash flow and balance sheet.

Very important!

Setting up a fund for emergencies
About 6 - 12 months of mortgage payment and household running expenses (in case of illness or loss of job).

Say, $1,500 for mortgage payment + $1,000 for household income (without children and allowance for parents) that should roughly be $25,000 in joint-account fixed deposit.

Handling of monthly household expenses
The article advocated allocation of the job to the more conservative party.

Maintaining separate banking accounts
Self-explanatory.

To be managed separately.

Deciding on contribution to the joint account
Percentage of individual's monthly account for equity sake.

Taking disposable income as 100%,
20% for joint account for joint expenses + savings + investment
20% for parents (both sides)

Handling increases in earning power
Form some kind of common understanding or broad agreement so that such situation will not pose a point of contention when arises in the future.

Planning to buy a house
How much of your pay should you be saving towards the down payment for the house? Where will the savings be held? How is the mortgage going to be financed - via CPF and cash and in what proportion?

Preferably, all mortgage to be paid via CPF - that is about 20% - 21% of total gross income of each individual. Early repayment should be considered after setting aside sufficient amount for emergencies and investment.

Edit: 16 Jan 09
Key Factors to Consider for Housing Loans
* Affordability
* Duration of repayment
* Interest rate
* Consequences of non-payment

Handling the investment of the joint savings
The article advocated the more financially savvy person, and not necessarily the same person handling the household expenses as he/she may be too risk adverse.

To be considered only after setting aside sufficient emergency fund. Some options are regular investment in diversified unit trusts, Singapore government bonds, exchange-traded fund, structured deposits and gold-savings account.

Reviewing your existing insurance policies
Add your spouse as your insurance beneficiary. Mortgage-reducing term assurance plan which protects the surviving spouse by paying up a portion or all of the remaining housing loan in the event of a partner's untimely death.

Updating your CPF nomination
CPF nomination will be revoked upon marriage. If you do not submit a new nomination, your CPF savings will be distributed according to the Intestate Succession Act, which decides who receives your assets should you die.

If you do not have any children but one or both of your parents are alive, then your spouse gets half of your assets, while the reminder goes to your parent(s). If you have children, your spouse gets half of your assets, and your children will share the reminder equally.

= = = = =

Edit: 19 Jan 09

On a separate issue, interesting blog posts on "Budgeting for Baby - The First Year" by Panzer.
Part 1
Part 2
Part 3

= = = = =

Financial Planning for Your Marriage by Wilfred Ling

http://www.wilfredling.com/content/view/553/9/

E&E - Introduction

Background

Founded over 35 years in Hong Kong, Elec & Eltek International Company Limited (E&E) was listed on the SGX Mainboard on 5 September 1994. Its principal business activities include manufacturing and distribution of high-density double-sided and multi-layer printed circuit boards (PCBs). It has 22 offices worldwide and 17 plants in Asia (1 in Hong Kong, 2 in Thailand and 14 in China) with total annual production capacity of over 56 million square feet.

PCBs are used in the production of wide variety of electronics products, ranging from consumer products such as toys, electronic games and audio visual equipment, to more sophisticated products such as mobile phones, PDAs, computers, and networking and telecommunications devices. Other products in which PCBs are used include automotive components and advance medical equipment.

Parent Company - Kingboard

E&E was acquired by Kingboard Chemical Holdings Limited (Kingboard) in 2004 and has became the largest PCB enterprise in China. Kingboard is a leading vertically-integrated electronics materials manufacturer and one of the world's largest laminate producer (Laminate are used in the production of PCBs). With Kingboard's other PCB companies (Techwise Circuits Company Limited and Jiangmen Glory Faith P.C.B Co., Ltd.), the Group was ranked one of world's top PCB players in terms of sales revenue in 2006. (See table below)



Products and Services

High density interconnect (HDI)

Microvia

Backplanes

High-end servers

PCBs (up to 40 layers)

Quick-Turn Around (QTA) (custom-designed PCBs that are delivered in shorter term than usual production lead-time)

Customers

Sectors:

- Computer and computer peripherals

- Communicatin/networking

- Consumer electronics

- Automotive

Major customers in FY2006:

Others include:
- Jabil Circuit
- Minebea
- Celestica

- Simens

- InFocus

- Mitac

- NEC

- Samsung

- Alcatel

- Hitachi

- Sony

- Johnson Control

- Ericsson

Comparables

Environmental Management System

This last part may not be relevant for investment analysis but it adds some positive affirmation to my personal investment decision in the company. =)

All of E&E's plant operates under a common environmental management system (EMS) framework that is believed to provide the most consistent and effective way to protect the environment and pursue continuous environmental improvements in its global operations.

Quoting from its website:

"In contributing to sustainable development at all levels of society, we have developed a balanced business strategy that meets environmental protection, economic and social needs. We are sponsoring local communities to support habitat conservation. Elec & Eltek realizes that one company alone cannot do much for the environment. It is our hope, however, that we can still environmental consciousness in others and that our efforts will have a multiplier effect throughout the community."

Source:
E&E website: http://www.eleceltek.com/sub_index.htm
Kingboard website: http://www.kingboard.com/kbeng/index.asp
DBS Vickers Report dated 27 March 2007 by Don See
CIMB Report dated 25 August 2006 by Jonathan Ng

25 Golden Rules - Peter Lynch

1) Investing is fun, exciting, and dangerous if you don't do any work.

2) Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

3) Over the past 3 decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.

4) Behind every stock is a company. Find out what it's doing.

5) Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.

6) You have to know what you own, and why you own it. "This baby is a cinch to go up!" doesn't count.

7) Long shots almost always miss the mark

8) Owning stocks is like having children-don't get involved with more than you can handle. The part-time stock-picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don't have to be more than 5 companies in the portfolio at any one time.

9) If you can't find any companies that you think are attractive, put your money in the bank until you discover some.

10) Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.

11) Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistent big winners.

12) With small companies, you're better off to wait until they turn a profit before you invest.

13) If you're thinking about investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.

14) If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you're patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worldwhile.

15) In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.

16) A stock-market decline is as routine as a January blizzard in Colorado. If you're prepared, it can't hurt you. A decline is a great opportunity to pick up bargains left behind by investors who are fleeing the storm in panic.

17) Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.

18) There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.

19) Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested.

20) If you study 10 companies, you'll find 1 for which the story is better than expected. If you study 50, you'll find 5. There are always pleasant surprises to be found in the stock market-companies whose achievements are being overlooked on Wall Street.

21) If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.

22) Time is on your side when you own shares of superior companies. You can afford to be patient - even if you missed Wal-Mart in the first 5 years, it was a great stock to own in the next 5 years. Time is against you when you own options.

23) If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it's a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value, small companies, large companies, etc. Investing in six of the same kind of fund is not diversification.

The capital gains tax penalizes investors who do too much switching from one mutual fund to another. If you've invested in one fund or several funds that have done well, don't abandon them capriciously. Stick with them.

24) Among the major stock markets of the world, the US market ranks eighth in total return over the past decade. You can take advantage of the faster-growing economies by investing some portion of your assets in an overseas fund with a good record.