Dubai triggers the correction

Last Friday, Dubai created wave in financial market by asking for loan repayment extension. Market suffer a knee jerk sell off, many of the European bank are being affected, because of lending money to them. The debt amount is staggering.

Compared to last Friday sell off, STI only suffered a bit. The market player properly figured out Dubai is not US. Only stocks linked to the middle east likely to be impacted. However, this could be the trigger point for a meaningful market correction.

Those with cash should start looking to add position. Growth likely to be muted for US in coming years. The future still lies with China. Should add good stock which could ride on China wave.

Hongguo FY09 Q3 result

Revenue +27.23%
Gross profit +17.49% (because cost increase faster)
Selling and distribution cost +35.39%
Net profit -27.5% after the cost and tax increase

Cash and cash equivalent 247,971
Current liabilities 244,356
Debt repayable in one year 40,974
Net cash from operation 46,281

EPS 3.52 RMB cts (27% drop)

Sales still increase due to outlet expansion, but the profitability suffers. The gross profit margin is now 35.2% due to lower selling price. This actually tally with other consumer stock's performance. But management foresee the pick up in consumer demand and would intensify the store expansion. This might signal the bottom.

The result is uninspiring. Year to date, the earning is 13.10 RMB cts. Assume Q4 they are able to earn another 4 RMB cts, it would be 17.1 RMB cts (3.46 SGD cts). At last closing of 0.30 cts, it work out to be PE 8.67. This is not expensive. If the earning growth can restart, it could come down very quickly. Investor might want to look at next quarter result to decide.

Market weakness in October

Last Friday, US market dropped again. The new set of numbers do not look good, especially unemployment rate rose. This could be the trigger point to a mild correction which bring all the market back to ground. The market rebounded from Mar low base on the green shoot theory, but economy recovery would not be straight line most of the time.

US numbers
The numbers do not look good. After the financial and subprime crisis, the American is unlikely to go back to old way of spending. Now thrift is the in thing among the people. This would means the demand is unlikely to pick up fast enough for us to return to strong growth. Other countries need to participate more in the consumption to drive growth.

V or W shape of recovery
The stock market looks like recovering in V shape but many suspect it would be W instead. That means the current market euphoria is on the basis on growth coming back next year. Some say this is just inventory restocking, where demand comes from under supply. After the restocking, the demand is unlikely to catch up again.

Local stock market
Many think that the market has run far ahead. Due to the huge cash waiting at the sideline, we saw a continuous strength of equity. You see, market is all about human psychology. If more and more people believe that the market is overvalued, they would find excuse to take profit and wait for better entry point. This couple with the traditional weak October sentiment, we could see some healthy correction.

I see the crisis is over but the growth is going to be slow in coming years. Depends on the correction, and oppotunity, there would be some bargain that worth the risk.

Book: Yes, you can time the market

Over the weekend, I was reading the book "Yes, You can time the market" by Ben Stein and Phil DeMuth. It is quite an interesting book to read, especially the concept presented in the book. The authors are trying to prove that you can actually time the market, despite the conventional wisdom. Don't get it wrong. It is about time the market on long term basis, not short term.

The analysis presented is interesting. First, take the S&P 500 index as basis, chat the ratio like PE or dividend yield against its 15 years moving average. Using lump sum investment and dollar cost averaging approach, compare buying regardless of the market timing against buy the stock when particular point fall below the moving average. It shows market timing actually work(when buying the market, not individual stock).

I think the basic principal is quite obvious. Buying good stock is not enough, you have to buy it cheap enough, in order to enjoy good return on your capital. By combining the buy low and long term compounding strategy, it actually make more return than just buy and hold regardless of buying time.

FJ Benjamin FY09 full year result

Turnover -12%
Gross profit -15%
Rental +10%
Operating profit -65%

Net loss of 2,661 compare to profit 14,804 of previous year. Report highlight the underlying profit is 4,065 excluding the one off item and forex loss.

Fixed deposit 14,008
Cash on hand 19,346
Borrowing 53,505
Net borrowing is 20,151

Net cash from operating activities 21,781

Cash at end of FY is 14,823, after minus off the bank overdraft 18,531. I suppose the overdraft has been included in the current borrowing. The cashflow is a bit tight, after comparing the real cash on hand vs net borrowing. The group has to watch over the cost tightly. However, if the operating cashflow remain stable, it should be able to pay off the borrowing.

Although expenses come down together with the turnover, it is not enough to offset the impact. This highlight the difficult retail environment, luxury segment is not being spared. The result is uninspiring. Unless there is a clear indication of retail sentiment turn around, the business would remain challenging.

Genting Intl right issue

Those chasing hot stock should beware. The pattern is too common already. First, some news being released cause sharp run up of share price. The next moment, company announce share placement to raise more money. Many has done that to raise capital for growth or to prepare the tough time ahead.

Genting has debts to fund the expansion and new casino, but the cash hasn't roll in yet. In the analyst forecast, there are just too many assumption which when things go wrong, the share price could see sharp correction. But, human is animal of hope, only story could get people excited.

Weak Sep and Oct

Traditionally Sep and Oct are two weak months for equity. The situation took a turn at Mar, market trending upwards. The easy money has been made and I missed the boat. Never mind, the economy might recover some what. But, the old growth would no longer be back. American is not going to spend like last time and it would take a while for the next demand to come on stream.

I am looking at adding some equity position if the stock did pull back during month of Sep and Oct. The key thing to do well in this mini cycle should be riding on correct stock. Stock that is not exporting goods to US but meeting the demand locally or across Asia.

Hongguo FY09 half year result

Revenue +19.31%
Cost of sales +29.31%
Gross profit +6.2%

Selling and distribution expenses +42.5%
Profit after tax 38,022 (-38.69%)

Cash and equivalent 208,097
Current liabilities 182,456
Amount repayable in one year 14,426 + 41,008

Cash generated from operation 95,753
EPS 9.58 RMB cts (from 15.63 last year same period)

Revenue continue to increase, the company still on the growth track. Gross margin decreased to 38.5% from 43.3%. The retail competition is fierce. Expenses increased because of continue store expansion. But the cost escalation is at alarming level.

This shows the consumer spending is slowing in China because of the financial crisis. But as the China economy picking up and the existing brand building effort already spent. The group could back on the growth track in coming years. The cashflow is strong, more than enough to cover the loan.

I remained confident in the China consumers. But, like planting fruit trees, it takes a while for it to bear fruit. If we estimate the second half they are able to make the same amount of money. Forecast EPS is 19 RMB cts or 4 SGD cts. The stock closed at 0.28 last Friday. It is about PE of 7. It is definitely not very expensive. But I won't buy at the current market level, as market has priced in lots of optimism. Hopefully when the China economy turn up, the company would be able to made up the growth.

Downward drift

Market has priced in too much optimism already. Ahead of the Q2 earning season report, the market is set to fluctuate in tight range. Once the earning disappoint, it could correct significantly. Then, maybe it is good time for those still holding lots of cash to enter. Of course, many people have different opinion towards the market and stock price. For me, if it is a little bit expensive and the situation is unclear, I don't want to be caught. I just wait patiently.

Recently, MIDAS announced quite many contract win. I think this is a result of the China railway network expansion policy filter down to the ground level. I am quite bullish on the railway sector. It has nothing to do with export and US consumer. This is government money and they are determined to spend it.