Non Income Portfofolio Building: One year On.

One year since looking for great companies, moving away from Reits and SG blue chips, things are not looking good thanks to the trade war. On the this journey, my preference for stock picking is evolving and adapting to what I have learnt, read and experienced. What I thought on day 1 might have changed due to the Marco environment or the change in preference.

As the trade war escalate, I decide to hold onto more cash and relook at my portfolio.

My concern with IGG is that with the trade war, if Apple lost it market share, the services that apps provide on IOS will lose its revenue. Services such as gaming will be affected more as the game saves may not be able to port to android. Even within android, the game saves has to be in the cloud. Losing the game saves, the gamer will lost the motivation to carry on the game, hence losing revenue. China market segment of IGG is about 28%, Apple Iphone Market share is about 15%. Another concern is 90% of revenue come from just one game. New games have been released. Let's see how the new games fare.

There is growth for live streaming and YY Inc is undervalued. Market share eroded as well as margin due to intense competition. Just like Grab/Uber. Broadcaster will move to whatever platform that  benefit them. YY Inc still has the largest market share and profitable growing net income. 75% owned by founder, he has much skin in the game.

Companies that I had look into and divested.

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Tat Seng Packaging

I bought Tat Seng Packaging(TSP) last year before I start writing this blog journal. Sometimes I re-read my own post to remind myself why I bought in the first place and not to panic. Hence I have been wanting to do a write up.

TSP business is very simple, producing packaging products such as corrugated paper boards, corrugated paper cartons, die-cut boxes, assembly cartons and heavy duty corrugated paper products. Customers are from sectors includes food and beverage industry, electronics and electrical industry, plastic and metal stamping industry, pharmaceutical and chemical industry as well as the printing, publishers and converting industry.

TSR is growing at an a impressive CAGR of 13.62% over the last 9 years. Net margin is growing as well which mean more profits and increasing dividend as EPS grows. ROE is at a record high of 20%. The standard FCF = Net profit - CAPEX, when calculated give a very bad picture. FCF drop drastically due to the cost require to build a new plant in Nantong. If we look at actual cash flow a company has in their disposal, Actual FCF = Net profit  - CAPEX - Investing activities + non-cash items + Borrowings during the fiscal year. In 2017, we can see an increase in debt which helps to boost the cash flow. However Debt/Equity is near 52%, which is still low. Interest Cover is at 30x.

Business Moat

I would say TSP no business moat for the business, there are more than 5000 similar companies in china. Therefore it really up to how the management manage the business. Cost management, efficiency, productivity such as being one of the few that operate 24 hrs , the capacity to increase production during big event like 11.11 singles day sale. (Your can read more from AGM 2017 post) Having private china investor helps too in terms of business relations.

Growth Factor

Growth in the sector will be closely related to the eCommerce sector. This sector in South East Asia alone will exceed US$100billion by 2025 from US$32billion. (Source: The edge Singapore issue 862, Read: Southeast Asia's Internet economy to exceed US$240 bil by 2025: Google-Temasek report)

Business Risk

Business risk comes from higher raw material cost if they are unable to pass on to their customers (they are able to, to some extend mention during the AGM 2017). Slow down in economy, maybe due to the trade war.  However all these are short term risk, with current and quick ratio are above one, the business has the financial strength to weather through.

Cash Cover Conversation Cycle

Receivable over Sales seem high, at around 40% but the Cash Cover Conversation Cycle (CCC) was below 0. This means that the company take a longer time to pay out than their customer to pay them which is good. However the LTM 2018 see CCC spike back up to 2008/2009 levels. This show the customers need more time to pay up, also show that they have become more conservative in keeping their cash flows. In this case, TSP also pay out faster than usual.

Trading at S$0.59 with a NAV of $0.79, PB ratio is at 0.75 and 4x PE. Dividend yield is at 5%. The current price seem reasonable.Vested at S$0.72 :(

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Tat Seng Packaging AGM 2018

I was 30 mins late for the AGM, held at Hanwell Holdings. Remembered the wrong time. A small AGM, nothing exciting. I think there is less than 30 people attended. I will write about the things I can remember or interesting. I find Mr Loh, the CEO to be very sincere as he answer questions from the shareholders after the AGM.

1. Why dividend is cut? Is there a cash flow problem?

The board said that they are embarking on a new investment. Hence they need the cash for it, so they decided to have some reduction.

Probably the acquisition of Nantong Plant.

2. What is the reason from the better performance for 2017?

This is due to better selling price and new customers but mainly from higher selling price.

3. Will the price of Tat Seng's products fall?

Due to volatility of raw material price. and competition in china, the management always try to improve their productivity, enhance efficiency and manage of cost. They will try very hard to get better return for the shareholders for the future.

4. What is the plant utilization rate in China?

The Board said this is sensitive information. Told us not to worry, they know they are utilizing properly. The fact that they upgrade their machine show that there would be bigger volume due to higher demand.

5. Is Singapore operation profitable?

Singapore operation has improved but the loss is due to corporate cost of the corporate office located in Singapore.

6. Regarding illegal discharge to public sewer. 

The incident happened in 2016 and earlier. The recent report is dug out by the press, it did not happened this year. New equipment was installed to resolved the issue and has engage Singapore test service pte ltd to inspect/test for the past 2 months and had met the regulation standard. They said they are caught off guard by the change in Singapore environmental regulation.

7. Does the plant in China face the same issue regarding the illegal discharge?

No issue in China. China requirement is less stringent than Singapore as Singapore has a much higher standard due to NEWwater.

Interesting Facts

• Raw material price is highly volatile.
• Raw material paper pulp up > 25% since 2016 Sept.
• Request a readjustment in price with customer if raw material increase more than 10%.
• Not fair game in china where contract might not be honor, if customer reject the increase in price, they can find another company.
• Logistic is very important. Require 100 trucks to delivery goods. Thus has to pay the worker well.
• Once deliveries are done, the next delivery will be prepared. Logistic will just pick up and go, hence no wait time, increase efficiency. 
• Cost of workers are keep below 10% and are confident to remain stable.
• Cost of workers has increase but volume of sale has mitigated with even higher sales volume.
• Plants are run 24hrs, which allow a huge capacity from Tat Seng. Few (20%) of competitor can do so.
• There are about 5000 competitors in china.
• China has tighten regulation, more inspections. This level the playing field. Companies that ignore the capex to meet the requirement will be force to spend. This also weed out weaker companies.
• Has the big capacity to handle eCommerce demand on special days like the 11.11 single day. 
• Plants that are invested with money from Singapore is consider a Singapore company. Whereas plant invested by money make from Singapore company in china is consider a china company.
• Impairment is due to fair value change of raw material
• China private investors are GM in company.
• China top customer contribute between  5% to 10% of revenue.
• R&D is important. If they can reduce amount of raw material used for the same product. This will save on cost.

Food

Good thing about a small AGM.  No body rush in to eat or da bao. Everything is very causal. Food by Neo garden. Best bee hoon so far I had eaten from a caterer.

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