Friday, March 27, 2009

Bought Venture, RMG, Wheelock

1 lot Venture @ 5.08, 12 lots RMG @ 79c, 5 lots Wheelock @ 93c.

Long term investments.

Am now 50% invested. This is a comfortable position, since the stocks are still quite low (but not as low as the Asian Crisis or SARs), and the markets may be turning around for good.

Thursday, March 26, 2009

US market: End Mar rally - is this the turning point?

After falling forever, the market is now in the 3rd week of a rally attempt:

A closer look at the attempt:
First 2 weeks: Rally started on Mar 10th. Its first week was unimpressive. Started as a reaction to an 'leaked' Citibank memo saying it was 'operationally profitable' - any excuse for a rally. There was a distribution day on Mar 16th soon after. Depth sucked - Bespoke reports that the big day up on Mar 10, and again for the whole first two weeks of the rally (including the big day up on 23rd).

Bespoke: Before the 10th, the market was so oversold that it requires a substantial rally just to work it off : "Before Tuesday's move can be considered anything more than an 'oversold' rally, we are going to need a few more days of similar action.".

We may be willing to overlook the distribution day on the 22nd due to options expiration.

Conclusion: First two weeks are just an oversold rally. Doesn't mean anything yet.

3rd Week: Starting to see a better pattern of accumulation days on high vol and drops on low vol.

IBD reports market depth starting to look OK (26th Mar):
  • IBD100 keeping up with indexes, but "only a handful" of top rated stocks rising in high vol.
  • Bredth of the rally is impressive: only one industry group (funerals) is down since the Mar 11th rally, and defensive plays (food, utilities) are up less than the indexes.
Short term, the market looks overbrought now.

Conclusion: Wait for the pullback - on lower vol. See if market depth keeps improving. That would convince me that this is at least this is at least a tradable rally. It may even be the turning point....

Wednesday, March 11, 2009

Saturday, March 7, 2009

Quick Notes on RMG

Brief notes, no time. RMG has 517m shares issues plus 16m options (giving potential 533m shares issued).

1) 08 Full Year results and Valuation

FY08 profit up 35% (excluding 07's exceptional gains), EPS now 5.9c.

At a price of 77c, that gives a PE of 13.
Nett cash of 18m, or 3.5c per share. Excluding cash, the PE would be 12.5.

2) Cyclical aspects. Demand in 4Q

Growth dropped, revenue flat.

YOY revenue in 4Q rose 12%. This is a moderation in the growth rate (22% in 2Q and 17% in 3Q). Q-on-Q, growth was almost flat at 0.14% for Q4.

BT article on Mar 7th, p11, Chen Huifen:
"In 1998, after the start of the crisis, the number of foreigners visiting Singapore for medical tourism dropped almost 35% to 10,698 from 16,418 in 1997. About the same time, the public hospital's market share of in-patient admissions went up, while the private hospital pie shrank."

"Nomura projected a 2% dip for Raffles this year... the decline is likely to be buffered by an increase in day surgery cases and the increasing complexity of cases handled, correlating to higher average revenue per patient."

As of July 08, 1/3 of RMGs patients were medical tourists, 2/3rd locals.

Another data point: during the Asian crisis, occupancy at parkway dropped 20%.
3) Business Model: How falling demand would affect them?

In 08, most of their revenue/profit (60% and 73% respectively) was from the hospital. It would be nice if both these businesses had separate income statements, because I would like to model hospital demand dropping more than healthcare. But they don't, so we have to estimate from the consolidated statement:

Revenue 200m (Hospital 120m, healthcare 80m)
Fixed costs (staff, depreciation, operating leases, and other operating expenses) were 126.8m
Variable costs (inventories and consumables, purchased and contracted services) were 35.4m
Giving PBIT 38m

Note that staff costs were by far the largest component, at 98m.

If revenue declines 2% across the board as predicted by Nomura, PBIT would decline 15% to 32.2m.

A worse scenario. If foreign visitors to hospital (1/3 of patients) decline 35%, and local visitors (2/3 of patients) decline 20%, and healthcare revenue declines 10%, this gives a revenue of 156m (down 22%), leading to a tiny profit of just 1.6m.

All this is just guesswork anyway....don't get too carried away with the modeling. Just to illustrate, their business model is highly cyclical due to high fixed costs - they can't just fire all their staff because they have less visitors.

They may not be able even to cut bonuses, as they are trying to recruit specialists, and there is a shortage of medical staff. A lot would depend on how much of their staff's pay was variable (eg: bonus) or fixed - could mean 10-20m difference in profit.

Do RMG's staff (both GPs and specialists) work on comission according to the number of operations they do? If so it would cushion the business model in a downturn. But also has the effect of making the doctors as trustworthy as used car salesmen (heard many stories abt this in Singapore - not yet abt RMG though).

4) Long term Growth Potential

Hospital licensed to operate 380 beds. In 2H08, 30 new beds planned to be added to give 230 operational beds. (Need to confirm if this was done, try their Annual report when it comes out). Assuming all beds were utilized in 2008, giving an average of 215 beds for the year, long term this gives a 41% increase plus if 304 beds could be utilized (ie: assuming an 80% utilization rate). Equivalent to +13.8m hospital profit (based on the FY08 28m profits from the Hospital segment) - actually would be slightly more since depreciation remains the same. Would increase their PBIT by 36%. Would reduce their long term (ex-cash) PE from 12.5 to 8.

5) Conclusion

With long term growth potential, their valuation looks reasonable.

Biggest risk is if thir revenues drop. Even a small revenue drop may have large effect on their (leveraged ie: high fixed costs) business model. A lot would depend on how much of their staff's pay was variable (eg: bonus, commission) or fixed.

Brought Venture and Wheelock

Bought 1 lot Venture at $4.47.

Bought 5 lots Wheelock, at 88c.

Half my intended positions.

Wednesday, March 4, 2009

Wheelock End 08 update

Released 4Q08 results on 20th Feb. They recognized a headline grabbing 200m loss on their listed investments in HPL and SC Global, but I'm valuing these at zero because I can't be bothered to go thru another two companies' financial statements.


After collecting for The Cosmopolitan and The Sea View, they have abt 380m (31.5c/share) nett cash (after deducting debt and tax liabilities). They have a tiny 7% in receivables (ie: risk free) for both these projects, due Jan 09. So lets say a total of 33c/share nett cash.

Projects and Landbank:

End Dec 08.

Property Description
and price estimate
% sold and completed (based on URA's payment scheme, not Wheelock's revenue recognition)
% Payment collectedPayments owed
Ardmore II
118 4 bdrm units. Priced 4.2m-5.5m. So revenue conservatively is 500m.
Assume 200m development costs. Gives 300m.

100% sold.

"Progress billings for Ardmore II range from 40% to 45% and we expect to achieve 60% by the end of 2009."

Assume all 45% collected as part of the cash.
Awaiting 55%. Translates to 180-210m or 13.5c per share.
(All the properties below are same as before)

Scotts Square
388 1,2 and 3 bdrm units.

ASP $3,994 psf (3Q08 results, Sect 10).

From floor plan(Apartments-->floor plan): scotts wing has at least 150,000 sq ft, orchard wing 72,000 sq ft, total 222,000 sq ft. So 620m for the 70% sold. Deduct development costs of 168m. So 452m for the 70% sold.

70% sold.

"Foundation works for the project are expected to complete in early 2009 and the next staged progress payment of 10% has commenced in the 1st quarter of 2009."

Expected TOP 2011.
0nly 20% collected
80% unrecognised, so not in receivables.
Gives 361m (or 30c per share).

At least 30% of the development's units sold to Singaporeans. So up to 40% may be sold to foreigners.
Orchard View
30 4-bdrm units.

No idea what it can sell for.
Expected 2009.
To be launched for sale upon completion, so no URA payment schedule.
Ardmore IIIWait till next property cycle.

Investment Properties:

Half their balance sheet is made of 790m for Wheelock place. No idea how this is justified, for an 80yr leased property that generated 37m revenue in 2008. As an very rough guess, I would cut its value to 300m (25c/share) instead.

In results they said:
"A copy of the revaluation report is available for inspection at the Company’s registered office, 501 Orchard Road, #11-01 Wheelock Place, Singapore 238880, during normal business hours for 3 months from 20 February 2009."

Wonder if anyone will ever take them up on their offer?

They will also hold a few retail outlets in Scotts Square.

Sunday, March 1, 2009


[Originally done in Jan 09. Interesting company, and Sean Malstorm's articles on disruptive business models are facinating reading for anyone who ever played computer games. But for Nintendo itself, I think their portable DS faces too much challenge from the iPhone to make the shares a buy.]

Sells games and the devices to play them on. Deals in two segments: mobile gaming (DS) and living room console (Wii). For a breakdown:
  • The DS (released end 2004) is further along its product life-cycle than the Wii (released end 06).
  • Currently (half-year ending Sept 08), 10m units wii vs 13.7m units DS. Software sales in units were about equal between the two, 81m (wii) vs 85m (DS). So assume the profit from mobile and console segments are currently about equal - Nintendo does not give a breakdown.
  • I expect Wii product life-cycle to last at least few more years. Unsure about DS. See Q4 here. and Q14 here.

Business Model (I)
The game console business by Sony and Microsoft has typically been the razor blade model. Both of them lose money on the colsoles sold, and recoup their profits on the games brought for the consoles. Nintendo in contrast, sells a lower end console which it makes a small to medium profit on. Nintendo makes a large profit selling its in-house software (about 60%) and a smaller profit (estimate 10%) from third party software.

For the big picture, Sean Malstrom writes about Nintendo's disruptive strategy. In essence, this is to profitably sell an innovative but cheap, 'stripped down', 'easy to use', low end product, aimed at new customers (in this case girls, parents or 'casual users', not existing gamers). After conquering the low end of the market, the new entrant will have the market share and resources to conquer the 'high end' (for example, male teenagers who play conterstrike 17 hours a day). Unrelated examples of disruptive products are Air Asia and the iPod.

Cyclical Aspects
Video games (console) has their own cycle, tied to their console lifecycle. I expect wii product lifecycle to last at least few more years. Unsure about DS.

Games and unaffected by the economic cycle and generally hold up well in recession as a cheap form of entertainment.

Competitive advantage:
Nintendo has some competitive advantages in the current product cycle.

Most importantly, market share. All sales figures are estimates, but it is clear Wii and the DS are kicking ass. For the Wii:
  • Installed base of Wii overtook the Xbox360 and PS3 consoles in Sept 07.
  • Currently estimated at 24m Wii vs 21m XBox (
  • In Nov 08, Wii sold almost double the amount of Xbox360 and PS3 combined - graph for US market here.
For the DS:
  • DS started outselling the PSP around 2 to 1 in 06. Currently estimated 40m units sold life-to-date vs PSP's 25m. Recent US graph here.
From Sean Malstrom's excellent atricles Nintendo's Shield and Sword, some of the compeditive advantages that Nintendo has in the current generation are:
  • Image. The Wii is changing the image of video gaming from that of a solitary, nerdy activity spent staring intently at a screen, to a fun-filled, social or family one. Hard to put into words - see the Shield article for pictures. "I believe as a principle that it is also the strategy to heighten the social status of video games in general." - Q5 of Nintendo Investor Relations Q&A here. This is similar to the way that Apple, with U2, positioned the iPod, as a for listening to music, beating other contenders, like Creative, that made (technically) superior and cheaper products that beat the iPod on every measurable metric.
  • Games are far cheaper to develop for the Wii. May change the business model of game development from the risky, high-cost, 'blockbuster model' (movies) to the lower cost 'television model'.
Having said that, Nintendo does NOT have a sustainable competitive advantage. Dominance in the console industry has switched places 3 times in the past decade.

Business Model (II)
Nintendo is not a Buffet-like company which can sit back and milk its profits for years or decades, such as Coca-Cola or the Washington Post. At first glance, it's sale of games and hardware makes it seem like a hamburger company which sells consumable products on a continuous basis. This is wrong. It is better to imagine Nintendo as a company that undergoes a series of projects (in the short term each 'project' is a new game, in the long term a new platform), where the payoff from each project is unknown. They key is that they must keep releasing new 'projects' to entertain and surprise their customers in new ways. Their income is project based, not revenue based. Worse still, the payoff for each project is unknown at the start.

In their own words:
  • "I basically do not think that an entertainment product can become a necessity... the future is not necessary stable...Because every business built on a single product which was once a necessity has been broken down by an innovative, disruptive technology....every company whose life expectancy was long or used to be called an excellent or a visionary company will collapse 5 or 10 years later.": A17 here.
  • "[I] believe that once we think it is stable, then that is a sign of great danger.": A19: here
  • "what we are most afraid is a situation where people stop playing with their DS. Before DS launched, people lived without DS without experiencing any inconvenience back then....we need to provide them with interesting proposals one after another in order to keep their interests." : A9 here.
  • "our business can be finished as soon as our customers become indifferent to our products. Accordingly, we are always reminding ourselves that we need to offer something new before our customers get bored of our current proposals." Q4 here.
  • "what matters to us is whether or not we can continue to constantly create and offer new surprises one after another" A24 here.

The biggest threat I see is the encroach of mobile phone gaming into the DS space. Mobile phones have traditionally been very hard to develop games fore, due to the fragmented market (meaning thatm, wven when using an OS independent language, you have to rewrite the games for different platforms due to the different input and output on different phones). And it has been hard to design a mobile phone gaming device - remember the adds for Nokia's Ngage.

The threat here is Apple's iPhone and iTouch (some sort of PDA), one of the few remaining integrated hardware and software companies:
Although the iPhone is not as good as the DS for games (lacking buttons), it may be 'good enough' for most people. Especially since everyone is going to buy a phone anyway. The games usually sell for between 99c and $9.99. After looking at the Rebel Onslaught demo, I think iPhone will kill the DS. It is a matter of convenience and price.

Since I estimate that DS makes up to half their revenue/profit, stop the analysis here.