StockPick

We have reverted back to a blog approach using our own domain,

■ REIT Data
■ SREIT
■ Yield Stocks
■ MREIT
■ SGS Data

This will be my last post for this blog. I have in fact not posted since Oct-05, although I did some small subsequent updates for existing posts. The main reason is that this blog has outlived its usefulness and I have moved on to other blogs (private ones) and forum which better cater to my current needs as an investor. To recap my past one year's development as an investor, I'd like to share my following experience,

1. Being More Structured and Focussed - During my previous 10 years plus of investing, I'd buy/sell shares based on what I'd read and more on intuition, based on recollections and stringing together of such data. Although I have a good collection of Analysts' Reports and I know where to access extra stocks information from SGX and individual companies' websites, what I lack is a more structured and focussed approach which is less time-consuming. This is where this blog had been most useful. Past year results were compiled and analysed for easy comparison and trend spotting. Analysts' Reports were also summarised and compiled in the blog. So, in one quick stroke, I can have a good 'helicopter' view of the stock of interest.
2. Enhanced Decision-Making - In the blog, I'd have some analysis of the financial data of interest. In addition, I'd also penned in some of my own thoughts and probable action plan, which is useful, when I come back a few weeks or months later and am able to trace back my reasons for buying/selling a stock. In this way, the blog had enhanced and reinforced my decision making process. Now, I'd be able to provide stronger reasons for a buy/sell decision.

Moving on, I am now using spread-sheets to compile the financial data for my stocks of interest. For a quick view on the latest and past info, I'm using a forum approach, which provides better readibilty than a blog. I also continue to maintain a private blog to log in my buy/sell transactions, with some simple comments on the reasons for such actions.

I hope this blog had been as useful to the few of you who'd stumbled on it and I thank you for visiting! :D

Updates :

1. Sold the last of my hldgs on 25-Jan-06 @ $0.34 even tho' I believe there's a possible 10-20% potential upside due to the coming good Q4 results and the many bullish analysts' recommendations for semicon stocks. My reasons - GTC to me is a a very speculative stock and I'm more than happy with the profits I've made for the last 3 mths. The 6mths lock-up period imposed on the previous major shareholders and employees will also be due soon and there may be some selling. If so, I may pick up some GTC if the price should weaken, but in the meantime I'll be able to sleep much better :D
2. Added Q305 Results on 7-Jan-06 (Released on 27-Oct-05)

Background
I got GTC during the IPO at $0.30 which was listed on 24-Aug-05. I also bought more on 24-Aug @ $0.28, $0.285 on 29-Aug and $0.25 on 8-Sep for an overall average cost of $0.273. My initial studies of the IPO prospectus had given me the confidence to apply for the IPO, although the share price subsequently did not perform to my expectations. Next, the 1H results on 5-Sep-05 provided rather positive outlook for the coming months. Still, the share price didn't even attempt a breach of the IPO price of $0.30. Finally, a rather optimistic report was released by UOB-KayHian on 22-Sep-05 with a 1-year target price of $0.40. GTC share price managed to come off its low of aro' $0.25 and hit a high of $0.28 but now it looks likeit's going back down again.

So, now, a study to see what direction I should take, ie. to sell or to accumulate more shares :D

Financial Data
All the data in this case study are extracted fm the GTC IPO Prospectus and 2005 Mid-Year reports. Some of the figures in the fllwg table are extracted fm the periodical "Shares Investment",

Global Testing	2002	2003	2004	Q105	Q205	Q305	FY05
Margin (%)	18.69	NA	22.16	-	-	-	30.3
ROE (%)	-	-	14.96	-	-	-	-
DIV (US$)	-	-	-	-	-	-	-
EPS (US$)	--	--	-	-	0.0035	0.0083	0.0213
Turnover (US$M)	25.61	25.2	45.18	8.286	11.726	16.110	53.484
Cash + Bank Bal (US$M)	?	-	6.072	-	2.237	34.460	19.374
Short Term Investment (US$M)	?	-	5.282	-	1.674	1.582	-
Current Liabilities - Bank Borrowings (US$M)	?	-	29.37	-	14.19	15.664	12.183
Long Term Bank Borrowings (US$M)	?	-	22.09	-	39.1	65.356	57.856
NAV / Share (US$)	?	-	0.1101	-	0.1138	0.1308	0.1393

Issued Shares = 875,000,000 @ $0.10 Par ; PE 12.7 @ $0.28

Note : FY05 is end-Dec

Substantial Hldgs

• Yageo Corporation : 21.45% + 5.8% Deemed
• Investar Semiconductor : 6.63% (TSMC Deemed)
• Lee Hwei-Jan : 0.39% + 8.19% Deemed
• Others (> 400 minority shareholders of GTC Taiwan) : 20.92%
• Free Float : 24.41%
  

Q305 Results (Extracts)

Singapore, October 27, 2005 – Global Testing Corporation Limited ("GTC" or the "Group") ("寰邦科技有限公司"), a leading company specialising in mixed signal and logic IC testing, today reported that its net profit for the quarter ended September 30, 2005 ("3Q2005") doubled to US$6.4 million, compared to US$3.1 million recorded in the previous corresponding period. This was achieved on the back of a 32.8% increase in revenue to US$16.1 million in 3Q2005.

On a sequential basis, Group revenue rose 37.4% to US$16.1 million in 3Q2005, compared to US$11.7 million in 2Q2005. The Group’s net profit surged 159.4% from US$2.5 million to US$6.4 million in 3Q2005.

Mr Paul Yang (杨燿州), President and Chief Executive Officer of Global Testing Corporation Limited ("GTC"): "Our strong sequential growth in the third quarter of 2005 was driven by the continued recovery in the semiconductor industry which resulted in higher volume for final testing and wafer sorting services from our major customers such as Marvell and TSMC during the quarter under review. The demand was more apparent for consumer IC testing, which is our forte. We also successfully increased our revenue share for some of our existing major fabless customers such as Realtek and Sunplus and secured new customer wins.

"In addition, our gross profit margin rose significantly to 56.0% compared to 43.8% in the prior quarter. This was mainly due to the Group’s better product mix and improved machine utilization rates, which rose from approximately 80% to 90% during the same period." Capital expenditure ("capex") committed in 3Q2005 was approximately US$34.0 million, principally for new capabilities and production equipment. Total capex committed during the nine months ended September 30, 2005, was approximately US$49.8 million.

Basic earnings per share registered was 0.83 US cent in 3Q2005. Net asset value per share was 13.08 US cents as at September 30, 2005.

Outlook
Looking ahead, GTC believes that the Group will continue to benefit from the increased wafer testing opportunities brought about by the gain in pace of the recovery in the semiconductor sector. The Group has also secured new business wins from existing customers, which is expected to boost its top and bottomlines.

The Group’s customers, which include major foundries, integrated device manufacturers ("IDMs") and fabless companies, are also indicating higher tester loadings in the following quarters. An increasing number of its customers have expressed their willingness to pay higher prices for testing capacity such as Agilent 93000 capacity.

Mr Yang said: "We expect the strong demand for consumer and wired communication IC testing, such as DVD chips, STB chips, HDD ("hard disk drive") controller IC, gaming applications IC and LAN IC, to continue to drive our growth. Our machine utilization rate is expected to exceed more than 90% in 4Q2005."

Going forward, the Group intends to continue its strategy of focusing on the provision of higher margin wafer sorting of mixed signal semiconductors to fabless companies and IDMs.

In addition, the Group plans to extend its capabilities to meet the demand for testing of larger wafers such as 12 inch (300 mm) wafers. The Group plans to utilize part of its IPO proceeds to purchase new factory premises, plant and equipment and construct ancillary facilities to handle this demand.

UOB KayHian Report (Extracts)

Thursday, September 22, 2005 (BUY)
Current Price : S$0.26Target (12-mth) : S$0.40

Global Testing CorporationLeading Specialist In Wafer Sorting
Global Testing provides testing services for logic and mixed-signal semiconductors used in consumer and communications applications. It specialises in wafer sorting, a test process that ensures circuitry on a die is correctly etched, verifies that it functions effectively and provides yield information as a feedback to improve the wafer fabrication process. Global Testing's main testing facility is at Hsin-Chu Science Park, Taiwan and has a smaller facility in Sunnyvale, California, US.

Wafer sorting provides superior margins. Global Testing focuses on wafer sorting, which provides longer test time of more than 40 minutes per wafer and generates more revenue per hour of test time due to high operational complexity. It has developed expertise in testing mixed-signal semiconductors that requires more sophisticated test programmes. Specialisation in wafer sorting provided above-average EBITDA margin of 58.6% and net margin of 25.5% in FY04.

Leveraging on engineering services to capture new customers. Global Testing provides comprehensive engineering support including test programme development, conversion and optimisation, probe card/load board design and probe card maintenance. Leveraging on the strength in engineering services, it has expanded its customer base from 39 in FY04 to 50 in 1H05. Customers are guiding rapid increase in wafer volume for consumer and wired communications applications such as DVD (Sunplus), set-top box (ALi), HDD controller (Marvell) and LAN (Realtek) in 2H05.

Blue-chip customer base. Global Testing's customers are reputable players in the semiconductor industry. Its top five customers are TSMC, Marvell, UMC, PMC Sierra and ALi, which accounted for 76% of sales in FY04. Its largest customer, TSMC, holds a 6.6% stake in Global Testing through a 97.1% interest in InveStar Semiconductor Development Fund.

Attractive valuation. Global Testing trades at a discount to regional peers in the backend assembly and test space. The overhang from selling by minority shareholders in Taiwan has brought valuation to an attractive level with FY05 PE at 8.5x (sector: 15.3x) and P/B at 1.2x (sector: 2.1x).

Our target price of S$0.40 represents FY05 EV/EBITDA of 5x (STATS ChipPAC: 8.8x, UTAC: 4.1x) and FY05 PE of 13x (UTAC: 18.5x).

FY05 Mid Year Results (Extracts)

Singapore, September 5, 2005 – Newly-listed Global Testing Corporation Limited (“GTC” or the “Group”), a company specialising in mixed signal and logic IC testing, today reported that revenue was down 12% to US$11.7 million for the quarter ended June 30, 2005 (“2QFY2005”), compared to 2QFY2004. Net profit decreased by 55% to US$2.5 million, compared to US$5.4 million recorded in the previous corresponding period.

On a half-yearly basis, Group revenue was down 14% from US$23.4 million in 1HFY2004 to US$20.0 million in 1HFY2005. Net profit declined 67% to US$2.5 million in 1HFY2005 from US$7.6 million in 1HFY2004. Mr Yang said: “On the back of a strong 2QFY2004 performance which coincided with the peak of the last semiconductor cycle, our interim results were impacted during the half year under review. This is in line with our earlier guidance in our IPO prospectus that Group’s net profit is expected to be lower year-on-year for the first half of FY2005, compared to the previous corresponding period. New designs for mobile handsets and digital handheld devices fueled volume growth and inventory build-up.”

On a sequential basis, Group revenue rose to US$11.7 million in 2QFY2005, up 42% from US$8.3 million in 1QFY2005. The Group’s net profit surged 6025% to US$2.5 million in 2QFY2005. Mr Yang commented: “Our strong growth in the second quarter of 2005 compared to the first quarter was driven by the rapid recovery in the semiconductor industry. We also successfully increased our revenue share for some of our existing major fabless customers such as Realtek and Sunplus.”

Capital expenditure (“capex”) committed in 2QFY2005 was US$12.8 million, principally for new capabilities and production equipment. Total capex committed in 1HFY2005 was US$15.8 million.

Gross margin for 2QFY2005 remains at a healthy level of 43.8% compared to 55.1%

in the previous corresponding period, despite a decrease in utilization rate in 2QFY2005. However, the Group’s gross margin improved on a sequential basis from 33.1% in 1QFY2005 to 43.8% in 2QFY2005. This was mainly due to the Group’s better product and improved machine utilization rates, which rose from 56% in 1QFY2005 to 80% in 2QFY2005.

Basic earnings per share registered was 0.35 US cent in 2QFY2005. Net asset value per sharewas 11.38 US cents as at June 30, 2005.

Growth Strategies

Going forward, the Group believes that its growth in 3QFY2005 will be driven by increased wafer testing opportunities as its customers are guiding for a rapid increase in total wafer volume during the period. The demand for consumer IC testing, such as DVD chips, STB chips, HDD (hard disk drive) controller IC, gaming applications IC and LAN IC, is also expected to be strong.

Mr Yang said: “We expect our gross margin in 3QFY2005 to improve further with higher machine utilization rates, compared to the average of 80% recorded in 2QFY2005, as well as increasing wafer testing volume from major foundry customers and improving average selling prices. We expect these positive trends to continue, based on our customers’ current forecasts.”

Going forward, the Group intends to embark on a concerted sales strategy to focus on the provision of higher margin wafer sorting of mixed signal semiconductors to fabless companies and integrated device manufacturers. “We plan to leverage on our strong capabilities in wafer sorting and consumer mixedsignal IC testing to tap on these opportunities brought about by the growth in the trend of outsourcing semiconductor testing services by IDMs and fabless companies,” added Mr Yang. In addition, the Group plans to extend its capabilities to meet the demand for testing of larger wafers such as 12 inch (300 mm) wafers. The Group intends to utilize part of its IPO proceeds to purchase new factory premises, plant and equipment and construct ancillary facilities to handle this demand.

IPO Prospectus (Extracts)

The fllwg were comments I previously made in forum,

Fm Page79 of IPO Prospectus,
Due to generally unfavourable and difficult market conditions in the semi-conductor industry, we expect our Group’s net profit to be significantly lower year-on-year for the first half of FY2005 as compared with that of the previous corresponding half-year. Assuming that there is no significant decrease in global demand for communications and consumer electronic devices from current level, our Directors remain confident of the prospects of our Group for FY2005.

My Comments

Bad
1. 1H05 profits will be significantly lower than 1H04 (see above), prob that's why it's offered at a low Historical PE of 10+
2. Debts of US$59Mil
3. Short history
4. Business is highly competitive and cyclical in nature

Good
1. Top 3 customers are well-known names; TSMC (21.6%), Marvell (20.3%), UMC (14.6%)
2. TSMC is an indirect shareholder but 9.48% drop to 6.63% after IPO

This one is for sure not a yield play, but likely a growth play. Look at the prospectus on what they plan to do with the IPO proceeds. They don't plan to clear/lower their debts, but rather, plan to expand/upgrade their facilities.

Other comments,

1. Why GTC chose to list in S'pore?
There're many similar cos. in Taiwan and GTC would find it hard to raise more cash there.

2. How do you compare GTC with UTAC and STATS in terms of Engineering capability?
I think their ability to get Marvell biz in S'pore and even got awards 2 years in a row shows that their enginering capability is not lacking.

The original shareholders of GTC were shareholders of GTC Taiwan, which was listed in Taiwan GreTai Securities Market. They were given GTC in share swap.

Fm the prospectus (pg64), the major shareholders have a lock-up period of 6mths. But, for 20.92% (183Mil shares) which are held by 400 minority shareholders, there's no mention of any lock-up period.

I think this must be the public shareholders of Taiwan, so very likely, many will sell to get back their money as S'pore will present them with uncertainty and risk.

Comments

• Results - Good or Bad?
  Fm the 1H05 results,
  
  • Bad compared to FY04
  • Q205 improved over Q105 and expected to improve further for Q305

• Share Price
  
  • Likely large selling activities by GTC Taiwan minority shareholders on listing
    
    • Likely will view S'pore listing as troublesome for future transactions
    • Currency risk as in S$
  • Range bound $0.25 to $0.27


• Comparisons with other Semiconductor Test Stocks
  In terms of revenue, GTC is still very small as compared to the other 2 locally listed cos, aro' 15% of UTAC and 4% of STATS.
  
• STATS (Mid-Yr05) : 1,964,264 Mil Shares @ $0.25 Par
  
  • NAV ?? vs $1.07 (2-Sep) ; EPS -$0.022 ; PE NA as losses
  • Revenue US$494.5Mil ; Net Losses US$42.18Mil ;
  • Losses since FY01 or earlier??


• UTAC (Mid-Yr05) : 1,497,980 Mil Shares @ US$0.15 Par
  
  • NAV US$0.3394 vs S$0.645 (2-Sep) ; EPS US$0.007 ; PE 42.5
  • Revenue US$140.5Mil ; Net Profit US$11.17Mil ;
  • Profitable for last 8 Quarters

Conclusions
Be warned, the above had been created to justify my recent buy :D

Based on 1H05 results and mgmt guidance, GTC results will only get better fm now till year end, but, it'll not be as good as FY04. Still, at least it's expected to be profitable.

GTC have good blue chip customers, but they may be over-reliant on the top 5 which accts for the bulk of their revenue. The loss of 1-2 of the top customers will have major impact on their profitability.

As GTC is rather small, there's room for aggressive growth and I believe this is what the mgmt intends to do. This is seen fm their decision to move their listing fm Taiwan to S'pore where there's less competition for them to raise cash (fewer similar semicon cos. here) and their use of the IPO proceeds for expansion rather than to pay off their huge borrowings. GTC shld thus be seen as a potential growth stock, rather than a dividend yield play. Still, one lingering question I have is why they'd not been able to grow despite their listing in Taiwan previously. Semicon biz is also a highly cyclical biz and this is evident fm their good results in FY04 and the subsequent pull-back in Q1-05.

GTC must thus be seen as a high risk stock and be treated with due respect.

My Action

Haha.. U tell me :D

Maybe trade between $0.25-$0.27 and wait for rally aro' end-Dec to B-Jan. Watch Q3 results closely and the mgmt guidance. May rally if Q3 results surpasses that of Q2. Also got to watch the 6-mths lock-up period (Feb-06) closely as insiders may be waiting to sell. Good thing it shld be after FY05 results are out :D

Share Price

• $0.25 - $0.295

References

• 21-Mar-06 : Set Up Home Video IC Testing Centre
• 14-Mar-06 : Set Up Advanced CMOS Image Testing Centre
• 9-Mar-06 : Clarification - Major Shareholder will not sell out in Open Mkt
• 13-Feb-06 : FY05 Results / Press Release
• 27-Oct-05 : Q305 Results / Press Release
• 22-Sep-05 : UOB-KayHian Report
• 5-Sep-05 : Mid-Year 2005 Results / Press Release
• 23-Aug-05 : Balloting Ration
• IPO Prospectus

Disclaimer : Use the above at your own risk! We'll not be responsible for any losses incurred but you can give us credit if you make money :D

Updating in Progress...... 26-Mar-06

Note :

1. Original post was created in Jul-05, some of the contents may not have been updated.
2. I'll stop updating this post on a weekly basis and will now do it on a quarterly basis, after the quarterly reporting period, to reflect the latest in REITs.

Background
During the past couple of years or so, interest in REITs had been very high, with good capital gains made by unit holders in all the REITs. After a decline in REITs prices in my last update on 6-Jan (CMT new units issue were even undersubscribed), most hv recovered (except MMP)and even reached new highs. MLT, AREIT, CMT and CCT continues with their acquisitions while new REITs (ART 1-for-5 issue @ $0.68 to Ascott s/h , Keppel 1-for-5 issue to Kepland s/h and AllCo IPO @ $1) will soon make their mkt presence.

But, as local REITs are very much still growing up from its infancy stage, I believe money can still be made by being selective on our investments.

MapleTree, CCT, A-REIT still have room to grow locally, but CMT and even MapleTree will likely move up to the next level and expand overseas soon. Local competition-wise, REITs in shopping malls is currently the most intense, with CMT vs Suntec vs Prime and new REIT (CentrePoint) coming on-line soon. CCT will have to face off KepLand this year in the Office Bldgs arena and we may see others like UOL coming in. A-REIT will also likely face off Cambridge REIT (group of private Industrial Property owners being organised by Finian Tan) soon. I wonder if we'll see some mergers in the longer run.

Other countries like HK and Malaysia are also taking the cue fm S'pore's success and are launching their own REITs. I'm sure this will impact our mkt in the longer term as foreign investors start to switch their funds out of S'pore for more attractive yields and growth prospects of foreign REITs. Lastly, watch the bank interest rate very closely as this will strongly affect the price of REITs. With coupon rate for both 3-mths T-Bills at 2.67%, my personal thoughts on Risk vs Yield have been adjusted up by 0.5% on 6-Jan-06,

• More than 5.75% : Comfort Zone
• 5.25-5.75% : Calculated Risk Area
• 4.75-5.25% : Playing with Fire
• Less than 4.75% : Playing with your Life :D

It's of course not so simple as just yield vs risk. Look at other things like NAV, asset base, potential growth, quality of assets and mgmt, parentage,... and draw your own conclusions :D

At its peak in 2005, REITs accounted for 60% of my profits and forms more than 40% of my portfolio. But, with the danger seen in increasing interest rates, I hv reduced my exposure to REITs. At end-2005, REIT accounted for ~45% of my profit and forms ~17% of my portfolio. I don't expect to be able to replicate the same profit level in 2006 and will be maintaining REITs at aro' 20% of my portfolio, more as a defensive measure.

Yield Data
Data for S'pore listed REITs are as fllws,

REIT	Period	DPU (cents)	Mkt Price	Annualised Yield	NAV	Assets Type
CMT	Q3 : End-Sep '05	2.55	S$2.29	4.454%	$1.52	Shopping Malls
CCT	Q3 : End-Sep '05	1.81	S$1.52	4.763%	$1.58	Office Buildings
MapleTree	Q3 : End-Sep '05	4.47	S$1.00	4.492%	$0.57	Industrial Buildings - Logistics Warehouses
A-REIT	Q2 : End-Sep '05	2.91	S$2.00	5.820%	$1.21	Industrial Buildings - Factories
Suntec	Q4 : End-Sep '05	1.605	S$1.10	5.836%	$1.06	Shopping Malls + Office Bldgs
Fortune	Q3 : End-Sep '05	HK8.247	HK$5.75	5.737%	HK$6.68	HK Shopping Malls
MMP	NA	NA	S$0.95	5.284%	S$1.03	Shopping Malls + Office Bldgs

NOTE : Mkt Price is as on 6-Jan-06

Results Announcements (Not Updated)

• Suntec : 26-Jul after mkt close. DPU 1.561cts for Q3 ($1.18->$1.21)
• Fortune : 27-Jul after mkt close. DPU HK8.25cts for Q2 (HK$6.65->HK$6.50)

Dividends xd (Not Updated)

• 25-Jul : A-REIT ($2.37-> $2.36)
• 28-Jul : CCT ($1.53->$1.55)
• 29-Jul : CMT ($2.64->$2.59)
• 2-Aug : Suntec ($1.19->$1.19)

Other Dates (Not Updated)

• 27-Jul : A-REIT announces acquisition of 9 properties at $271.7Mil ($2.33->$2.31)
• 28-Jul : MapleTree starts trading ($0.68->$0.885)
• 17-Aug : Prime lodged draft prospectus. Price $0.93-$0.98 for min yield 5.12%
• 25-Aug : A-REIT announces acquisition of 3 properties at $70.25Mil ($2.20)
• 25-Aug : A-REIT 1-for-20 Preferential Offer
• 1-Sep : A-REIT announces acquisition at $34.8Mil ($2.26-$2.29)
• 13-Sep : Prime launches IPO @ $0.98 after 5pm
• 15-Sep : A-REIT xo ($2.24 -> $2.23)
• 16-Sep : CMT 1-for-10 + New Shares, xo in 12-Oct
• 19-Sep : Prime starts trading fm 2pm ($0.98 -> $1.05)
• Q4-05 (?) : Link REIT (in HK) launches IPO
• 2006 : KepLand launches Office REIT
• 2006 (?) : CentrePoint REIT launches IPO

Comments

• CMT - Yield is 4.454% @ $2.29. Price recovered during the past weeks after dropping close to $2 previously due to the under-subscription of new units in Nov-05. Although the yield have improved from less than 4% previously, the risk is still high for me, esp since NAV is only $1.52 (greatly improved from $1.30 previously). The only way for them to improve the yield is either for the price to drop further or to expand with yield accretive acquisitions (not that many quality shopping malls left). China ones fm Capitaland may be spun off as a separate REIT. The full impact of the acquisitions of Bugis Junction and Jurong Entertainment complex will be seen in the coming quarter.



• CCT - Yield is 4.763% @ $1.52. Price hv been steady for quite a while now. I guess they may do some acquisitions soon as there are still many quality office bldgs aro'. Can consider to accumulate some if prices drop below $1.45. But, competition will come this year when Kepland launces their own Office REIT.



• MapleTree - Yield is 4.492% @ $1.00. Prices hv firmed up to aro' $1 recently. Hv been on an acquisition trail since IPO both locally and overseas. With NAV at $0.57, the risk to me is still very high. Best for speculative play.
  
  
• A-REIT - Yield is 5.820% @ $2.00. Prices hv been recovering recently after touching a low of $1.7x. At NAV of $1.21, premium to NAV is still high. Can consider to buy some if yield is above 6%.
  
• Suntec - Yield is 5.836% @ $1.10. Prices hv recovered after touching a low of $1 due to the failed deal with CDL. This is largely due to Capital Group accumulating in the open market and crossing the 5% holding level. Acquisition fm Wing Tai hv proceeded and Suntec will also acquire CHIJMES fm LKH, both being funded with debts. With the increasing interest rate, hv to be careful of REITs.



• MMP - Yield is 5.284% @ $0.95. Newly listed on 19-Sep at $0.98, hit intraday high of $1.13 before dropping to current level.
  
  
• Fortune - Yield is 5.737% @ HK$5.75. Price hv weakened since Link IPO was launched in HK. With more choices of REITs in HK, Fortune hv become unattractive.

Disclaimer : The above are my own opinions only. Do not rely on it for your investment decisions

Updates :

1. 20-Nov-05 : Added Q106 Results (Released on 14-Nov-05)
2. 27-Oct-05 : AGM Presentation Slides - The statement "Sale of GASCO expected to close in April –June 06" is critical in my opinion as this sale adds $0.07 to NAV. I expect price weakness and will remain aro' current NAV of $0.32 till Apr-06. May even dip to $0.30 or lower within this time.
3. 24-Sep-05 : Added in 3-mth price chart & SGX announcements

Background
K1 recently announced an agreement with MacQuarie Infrastructure Fund to sell them GASCO. This will raise K1 NTA by $0.07. Mkt reacted initially and share price went up fm aro' $0.295 and hit $0.325 before falling back. I got some at $0.31, although it dropped to a low of $0.295 subsequently. However, after Kim Eng released a positive report on 13-Sep, with a target price of more than $0.39 to $0.44, the share price went up again. It'll likely drop back again as the deal is not yet done and investors will get tired of waiting. So, now, a study to see whether I should accumulate more shares :D

Financial Data
All the data in this case study are extracted fm the K1 Ventures 2004 Annual and Mid-Year reports. Some of the figures in the fllwg table are extracted fm the periodical "Shares Investment",

K1 Ventures	2001	2002	2003	1H04	2004	1H05	2005	Q106
Margin (%)	NA	NA	27.5	14.59	16.08	14.65	12.44	?
ROE (%)	-3.01	-19.97	2.91	-----	4.65	-----	9.50	?
DIV (S$)	-	-	-	-	-	0.0106	-	-
EPS (S$)	-0.009	-0.0491	0.0077	0.005	0.013	0.016	0.030	0.0033
Turnover (S$M)	53.176	35.804	63.041	105.034	230.458	255.324	576.815	153.898
Cash + Bank Bal (S$M)	?	336.974	235.333	?	44.562	105.535	201.046	70.478
Short Term Investment (S$M)	?	19.087	99.001	?	58.382	55.126	63.942	341.053
Current Liabilities - Bank Borrowings (S$M)	?	-	-	?	-	-	-	3.976
Long Term Bank Borrowings (S$M)	?	-	16.563	?	135.705	118.45	122.363	575.387
NAV / Share (S$)	?	0.25	0.26	?	0.29	0.29	0.32	0.34

Issued Shares = 1,877,412,503 @ $0.10 Par ; PE 10.5 @ $0.31

Note : FY05 is end-Jun

Substantial Hldgs

• Temasek Holdings : Deemed 36.69%
  Kephinance Investment : 36.08%
  Keppel Corporation : Deemed 36.08%
• BV Singapore Holdings : 14.14%
  BV Investment Holdings : Deemed 14.14%
  Kamal Bahamdan : Deemed 14.14%
  Alex Vahabzadeh : Deemed 14.14%
• Greenstreet Partners 6.46%
  Steven Jay Green : Deemed 6.46%
• GKW Unified Holdings : 5.93%
  Gary Winnick : Deemed 5.93%
• Free Float : 33.53% (15-Sep-04)
• Others
• Outstanding Options : 20,445,500
• Outstanding Warrants 2002 : 230,000,000
• Proposed Warrants 2005 : 38,000,000
  

Q106 Results (Extracts)

Review of Group Performance

The Group recorded total revenue of $153.9 million in the first quarter of FY2006 (1Q FY2006), representing an increase of 94% over 1Q FY2005. Profit attributable to shareholders for 1Q FY2006 was $6.6 million, an increase of 79% over the prior corresponding period. Earnings per share increased to 0.35 cents from 0.20 cents, marking a 75% increase over 1Q FY2005. Group EBITDA was $39.6 million, representing an increase of 235% over the prior corresponding period.

The improved results for 1Q FY2006 were mainly attributable to contributions from (i) Helm Holding Corporation (Helm), the Group’s transportation leasing operations; (ii) Mid Pac Petroleum, LLC, the Group’s retail gas operations in Hawaii (Mid Pac); and (iii) The Gas Company, LLC (GASCO).

The Group recorded contributions from Helm since the completion of the acquisition of the company on 8 July 2005, and a full quarter’s results from Mid Pac compared to one month in the prior corresponding period as Mid Pac was acquired in September 2004. Correspondingly, raw materials, consumables, staff costs and other operating expenses for the first quarter also increased compared to 1Q FY2005.

Depreciation and amortisation in 1Q FY2006 increased substantially following the acquisition of Helm. Due to the accounting treatment for GASCO as a “Discontinued Operation”, no depreciation charge was taken subsequent to the announcement of the sale in accordance with accounting standards. This resulted in an increase of approximately $0.7 million in profit attributable to shareholders.

The increase in interest expense in 1Q FY2006 was due mainly to the acquisition financing of Helm. The Group’s share of result of associated companies in 1Q FY2006 represented earnings from Helm’s joint ventures and associated company.

Balance Sheet Review

Since 30 June 2005, Group shareholders’ funds increased by $40.7 million to $635 million as at 30 September 2005. Of this increase, $26.1 million or 64% was attributed to the effect of adopting the new accounting standard, FRS 39 – Financial Instruments: Recognition and Measurement, from 1 July 2005 as disclosed in paragraph 8 below.

Shareholders’ funds were also positively impacted by increases in the investment revaluation and translation accounts, profit attributable to shareholders and the issuance of shares arising from the exercise of share options in the first quarter.

Following the acquisition of Helm on 8 July 2005, Group total assets more than doubled from $784.2 million as at 30 June 2005 to $1.68 billion as at 30 September 2005. Total current assets increased by $113.6 million to $368 million due to the inclusion of the total assets of GASCO of $264.4 million arising from the reclassification of GASCO as assets held for sale (GASCO Reclassification). The increase was offset by the reduction in cash and cash equivalents due to the acquisition of Helm.

Non-current assets increased by $785.7 million to $1.32 billion mainly due to the substantial increase in fixed assets, investment in associated companies, available-for-sale investments and intangibles contributed by Helm partially offset by the GASCO Reclassification. Intangibles of $261.1 million as at 30 September 2005 comprised mainly goodwill and other intangible assets arising from the acquisition of Helm.

Current liabilities increased by $224.4 million from $33.9 million as at 30 June 2005 to $258.3 million as at 30 September 2005. The increase resulted principally from classifying $122.8 million of GASCO term loans to current liabilities, due to GASCO being reflected as a “Discontinued Operation”, $33.8 million in restricted cash in escrow and owing to minority shareholders of Helm, $16.9 million in shareholders’ loans used to fund the acquisition of Helm, and $10.4 million increase in tax provisions mainly arising from the acquisition of Helm.

Non-current liabilities increased by $587.5 million in connection with the acquisition of Helm. Non-current liabilities would have been $122.8 million higher had the GASCO term
loans not been reflected as current liabilities in accordance with accounting standards.

Prospects

Following the acquisition of Helm, the Group has grown into a sizeable diversified investment company with total assets of $1.68 billion. The proceeds from the sale of GASCO, which is expected to complete by June 2006, will contribute significantly to the Group. It is anticipated that the Group’s continuing operations in transportation leasing and retail gasoline operations will positively impact the results of the Group.

My Comments

• EPS is 0.33cts but is only 0.07cts fm continuing operations, ie. the sale of GASCO will hv big impact on future EPS
• NTA dropped fm $0.31 to $0.20 (NAV $0.32 to $0.34). Goodwill ($28.5Mil -> $185.45Mil) / Intangibles ($17.34Mil -> $261.13Mil) very high for Helm acquisition?!
  

Kim Eng Report (Extracts)

• Strong earnings – FY05 earnings rose 164.7% to S$56.5mil as revenue increased 150% to S$576.8mil. Stable core-earnings aside, the company also expects its latest acquisition of Helm Holding to contribute in FY06E. Helm Holding is North America’s largest locomotive operating and independent railcar leasing company.



• GASCO – k1 has entered into a sale and purchase agreement for GASCO to Macquarie Infrastructure for a cash consideration of US$238mil. GASCO was purchased for US$118.8mil in August 2003. The transaction is scheduled for completion by 2H06 and is subject to approval from the Hawaii Public Utilities Commission and US Federal Trade Commission. k1 stands to gain a whopping US$119.2mil from the GASCO deal, which would be their largest divestment gain to date. The net impact to NTA is 7ct accretion, raising proforma NTA from 31cts to 38cts. If GASCO is disposed, the remaining businesses include child-care, education, technology, energy, life sciences & transport. All of these units carry divestment potential.



• Unscathed by Hurricane Katrina – One of k1’s investments is McMoran (MMR). After Hurricane Katrina struck, the oil & gas company reported that all facilities should resume production with only minor repairs needed at Main Pass 299. k1’s subsidiary had previously held a 2/3 interest in k-Mc, which in turn owns a stake in Main Pass 299. When Hurricane Ivan struck in 2004, k1 had incurred exceptional charges of S$3.3mil due to damanges at Main Pass 299. However, since K-Mc venture has been sold in late 2004, k1 is not expected to book any further exceptional losses. Therefore, any concerns on exceptional charges are unfounded.



• Maintain Buy – While the initial euphoria from the GASCO sale announcement may have subsided somewhat, the current price level is still trading at the pre-GASCO transaction NAV of $0.32 – this level is also our base support view. At the last traded price of $0.305, technicals point to very minimal downside risk of between 0.5ct - 1ct (3.2%) with medium to long term upside rewards of 8.5cts (27.8%) and 13.5cts (44.2%). The risk-reward equation is attractive. Maintain Buy.
  

FY05 Results (Extracts)

Review of Group Performance

The Group’s revenue at $576.8 million for the year exceeded the prior year by $346.4 million or by 150%. The Group reported earnings before exceptional items of $56.5 million, representing an increase of $35.2 million or 165% over the prior year. The Group’s earnings per share before exceptional items increased from 1.33 cents to 3.05 cents or 129% over the prior year. The higher revenue and earnings were in part attributable to the sale of the Group’s investments in K2, Inc. (“K2”), and SEMCO Energy, Inc. (“SEMCO”), as well as the gain recognised upon the exit from K-Mc Venture, LLC (“KMc”). Additionally, the strong operations of The Gas Company, LLC (“GASCO”), the Group’s gas distribution business in Hawaii, and Mid Pac Petroleum, LLC (“Mid Pac”), the Group’s retail gas operations in Hawaii acquired on 1 September 2004, contributed to the positive results.

The Group’s share of its associate’s results improved by $2.4 million compared to the previous year due to a change in accounting policy relating to the treatment of goodwill and reduction in operating losses of the associated company. During the financial year, KULC ceased to be an associate as a result of the injection of the Group’s investment in KULC in exchange for an equity interest in Knowledge Universe Holdings.

The exceptional items for the year comprised expenses associated with repairs for damages caused by Hurricane Ivan to KMc’s oil production facilities prior to the Group’s exit from K-Mc and income from the reimbursement of developmental costs for utility lines of GASCO.

Balance Sheet Review

Group shareholders’ funds increased from $459 million as at 30 June 2004 to $594.5 million as at 30 June 2005, an increase of 30%. The increase in shareholders’ funds resulted principally from the private placement of shares in the amount of $76 million and the profit attributable to shareholders for the year of $56.5 million. Shareholder funds were also impacted by an increase in the investment revaluation account, which was offset in part by a special dividend paid during the year.Current assets of the Group as at 30 June 2005 were $318.3 million or $175.1 million higher than the previous year-end mainly because of the proceeds from the sale of the Group’s investment in K2 and SEMCO Energy.Non-current assets of the Group of $465.8 million as at 30 June 2005 were $53.5 million lower than the last financial yearend. The decline was primarily attributed to the sale of the Group’s investment in K2., SEMCO and the reduction in the pledged fixed deposits with financial institutions upon the Group’s exit from K-Mc. The decrease was partially offset by the additional injection of the Group’s investment in KULC, a former associated company, in exchange for an equity interest in Knowledge Universe Holdings and the increase in assets acquired from ConocoPhillips. The purchase price allocation of the assets acquired resulted in an increase to fixed assets and the recording of intangibles, representing largely goodwill and customer relationships, in the amount of $18.7 million.The decline in non-current liabilities of the Group as at 30 June 2005 was a result of the reduction of term loans and deferred liabilities upon the disposition of the Group’s former subsidiary, K-Mc, being offset in part by the increase in deferred taxation.

Prospects

On July 8, 2005, The Group completed its acquisition of an 80.1% ownership interest in Helm Holding Corporation (“Helm’). It is anticipated that the acquisition of Helm will positively impact the results of the Group for the next financial year.

Mid Year 05 Results (Extracts)

Review of Group Performance

The Group has performed well in the second quarter and its earnings for the second quarter and half year have exceeded those in the corresponding periods last year.

Second Quarter

The Group’s revenue of $175.8 million for the second quarter was $116 million or 194% higher than the corresponding period last year. The Group reported earnings before exceptional items of $27 million for the quarter, representing an increase of $21.9 million or 424% over the same period last year. The increase in earnings and revenue was underpinned by the strong performance of the operations of The Gas Company (“GASCO”), the Group’s gas distribution business in Hawaii, and Mid Pac Petroleum (“Mid Pac”), the Group’s retail gas operations in Hawaii acquired on 1 September 2004. The improved results in the second quarter were also attributed to the gain from the sale of the Group’s investment in K2 Inc of $19.9 million and the gain recognised upon the exit from K-Mc Venture (“K-Mc”) in the amount of $7.9 million.

Half Year

For the first six months, the Group’s earnings before exceptional items of $32.1 million grew by $23.4 million or 268% over the same period last year. The Group’s earnings per share before exceptional items improved to 1.74 cents from 0.55 cents in the corresponding prior year period. The Group’s revenue for the half year increased from $105 million to $255.3 million, an increase of $150.3 million or 143% over the first six months last year. The higher revenue and earnings were largely contributed by the sale of the Group’s investment in K2 Inc, the operations of GASCO and Mid Pac, and the gain recognised upon the exit from K-Mc.The Group’s share of its associate’s results improved $2.2 million compared to the first half of last year due to a change in accounting policy relating to the treatment of goodwill and reduction in operating losses of the associated company. KULC had ceased to be an associate as a result of the injection of the Group’s investment in KULC in exchange for shares in Knowledge Universe Holdings in October 2004.The exceptional items of $3.3 million for the half year pertained to the expenses associated with repairs for damages caused by Hurricane Ivan to K-Mc’s oil production facilities incurred prior to the Group’s exit from K-Mc.In the opinion of the Directors, no factor has arisen between 31 December 2004 and the date of this report which would materially affect the results of the Group and the Company for the half year just ended.

Comments
As K1 is a venture co., a good way to value the co. would be to look at the NAV. Looking at the past years share price data, it can be seen that the share price in fact track the NAV very closely, usually at most 1-2cts discount to NAV.

After losses in FY01 and FY02, K1 had been profitable for the last 3 years. There had been increasing turnover and improving EPS and ROE during this period. Turnover more than doubled every year from $63Mil to $577Mil, EPS from 0.77cts to 3cts and ROE from 2.91% to 9.5%.

The negative is the decling margins fm 27% to 12%. Another big negative is the large nos. of outstanding warrants and options that may be exercised at a price lower than the current share price. When exercised, it'll dilute existing shareholders' stakes. NAV and EPS will suffer.

Lastly, K1 had paid dividends only once in the past 4 years. I don't expect K1 to be a dividend play due to its nature of biz. I would be most worried if they pay out fat dividends as that means they are no longer working hard to buy new biz to develop. K1 should be viewed as a growth play, with share price going up as the mgmt work hard to enhance their assets.

Conclusions
Be warned, the above had been created to justify my recent buy :D

K1 looks like a well managed co. and had grown rapidly during the last 3 years. If they continue to grow like they did during the past 3 years, it'd be a good long term hold.

The recent announcement of the sale of GASCO is not a for sure done deal. Thus, the share price of K1 had not shot up to the potential NAV level. It may take a few more months for the deal to be finalised.

My Action
To accumulate more K1 shares on price weakness. As my entry price is $0.31, I'd try to buy below this level. Should have a couple of mths to work on, assuming their sale deal is not scuttled.

Share Price

• 1mth : $0.28 to $0.325
• 3mth : $0.26 to $0.325
• 1yr : $0.23 to $0.325

References

• 14-Nov-05 : Q106 Results
• 27-Oct-05 : FY05 AGM Slides
• 22-Sep-05 : Reply to SGX
• 22-Sep-05 : Query by SGX on Increase in Trading Vol & Price
• 13-Sep-05 : Kim Eng Report
• 19-Aug-05 : K1 Ventures to sell Gas Company in Hawaii for US$238M
• 18-Aug-05 : FY05 Results
• 12-July-05 : K1 Completes Acquisition of Helm Hldgs Corp
• 25-Apr-05 : Propose Issue of 38Mil Warrants to Greenstreet Partners
• 3-Feb-05 : Q2-05 Results
• 30-Jun-04 : AR2004
• 30-Jun-03 : AR2003

Disclaimer : Use the above at your own risk! We'll not be responsible for any losses incurred but you can give us credit if you make money :D

Updates

1. 20-Nov-05 : Added in FY05 Results (Released on 27-Oct-05)
2. 24-Sep-05 : Thomson share price hit $0.205 on 22-Sep, the first time it closed above $0.20 since Feb-05. It has hit my first tgt which I had previously planned to sell some of my hldgs when I first did this study. Now, after looking at the other healthcare stocks which have hospital operations like Parkway, Raffles Medical and even loss-making HMI being traded at a premium to NAV, I have decided not to sell till the FY05 results are announced or if share price goes above NAV of $0.25. I don't expect any negative surprises and if results are good, I may even consider to hold for longer term. Note that prices may drop again in the coming weeks as it had gone up a bit too fast (aro' 10%) fm $0.185.

Background (Not Updated)
Thomson Medical had been trading below its IPO price of $0.22 since listing in 26-Jan-05. I wanted to apply for the IPO but good thing I missed it as I was busy then. I bought my first lots in Mar-05 when we were expecting our 2nd kid and was visiting Thomson regularly for check-ups. It's always very crowded and the waiting time so long, so I assume biz must be very good. Also, a lot of publicity aro' then due to Zoe Tay delivering there.

Recently, after my studies on HMI, I have been accumulating Thomson Medical shares. Now, a full study to justify my purchases :D


Financial Data
All the data in this case study are extracted fm the Thomson Medical 2004 Annual Report. Some of the figures in the fllwg table are extracted fm the periodical "Shares Investment",

Thomson Medical	2001	2002	2003	1H04	2004	1H05	2005
Margin (%)	NA	1.35	NA	-----	12.66	15.58	?
ROE (%)	-----	-----	-30.82	-----	7.90	-----	?
DIV (S$)	-----	-----	-----	-----	-----	-----	0.01
EPS (S$)	Pre-List	Pre-List	-3.15	0.0125	0.0198	0.0133	0.0224
Turnover (S$M)	30.773	31.160	31.837	17.787	36.378	19.040	41.176
Cash + Bank Bal (S$M)	?	?	5.813	7.853	9.167	11.84	10.976
Short Term Investment (S$M)	?	-	-	-	-	-	-
Current Liabilities - Bank Borrowings (S$M)	?	?	1.836	2	2	2	1.36
Long Term Bank Borrowings (S$M)	?	?	30.172	27.7	27.7	16.7	9.8
NAV / Share (S$)	?	?	0.1023	0.2501	0.2596	0.2505	0.2656

Issued Shares = 264,975,700 @ $0.12 Par ; PE 11.8 @ $0.175

Note :

1. NAV for 2004 and 2003 based on pre-list no. of shares. Would be 19.49cts and 7.68cts if based on post-list.
2. EPS for 2004 and 2003 based on pre-list no. of shares. Would be 1.48cts and -2.37cts if based on post-list.
3. FY05 is end-Aug

Substantial Hldgs

• T Holdings Pte Ltd : 53,029,200 or 20.01%
• Harilela (Singapore) Private Limited : 44,722,250 or 16.88%


• Cheng Wei Chen, Dr : Direct 30,016,050 or 11.33% ; Deemed 65,577,300 or 24.75%
  Lee Siew Chin, Dr : Direct 12,548,100 or 4.74% ; Deemed 83,045,250 or 31.34%
• Dr Cheng Wei Chen is the spouse of Dr Lee Siew Chin. Each of them is deemed to be interested in the shares held by each other and both are deemed interested in the shareholdings in T Holdings Pte Ltd.
• Cheng Li Chang, Dr : Direct 3,234,200 or 1.22% ; Deemed 56,263,400 or 21.23%
  Yeo Chye Neo Angeline, Dr : Direct 3,234,200 or 1.22% ; Deemed 56,263,400 or 21.23%
  
  • Dr Cheng Li Chang is the spouse of Dr Yeo Chye Neo Angeline. Each of them is deemed to be interested in the shares held by each other and both are deemed interested in the shareholdings in T Holdings Pte Ltd.
• Hari Naroomal Harilela, Dr : Direct 1,481,400 or 0.56% ; Deemed 44,722,250 or 16.88%
  
  • Dr Hari Naroomal Harilela is deemed interested in the shareholdings in Harilela (Singapore) Private Limited.
• Free Float : 40.44%

FY 2005 (Extracts)

Revenue

• Increase by 13.2% ($36.4Mil to $41.2Mil)
  
  • Hospital Operations & Ancilliary Services : +11.2% ($30.9Mil to $34.3Mil)
    • Due to increase in inpatient admissions
  • Specialised & Other Revenue : +24.4% ($5.5Mil to $6.9Mil)
    • Due to increase fm Thomson Women's Clinics (3 new clinics)

Gross Profit

• Increase by 20.6% ($14.43Mil to $17.4Mil)
• Gross Profit Margin : 39.7% to 42.3%
• Due to better direct materials margins, labour efficiency and reduction in overhead

Net Profit After Tax

• Increase by 35.5% ($3.9Mil to $5.3Mil)
• Due to higher revenue, GPM and lower finance cost (reduced by $18.5Mil fm IPO proceeds and surplus funds)
  

Mid-Year 2005 (Extracts)

Revenue

• Increase by 7% ($17.8Mil to $19.0Mil)
  
  • Hospital Operations & Ancilliary Services : +5.8% ($$15.3Mil to $16.1Mil)
    • Due to increase in inpatient admissions
  • Specialised & Other Revenue : +15.5% ($2.5Mil to $2.9Mil)
    • Due to increase fm Thomson Women's Clinics (2 new clinics)

Gross Profit

• Increase by 11.7% ($7Mil to $7.9Mil)
• Gross Profit Margin : 39.5% to 41.3%
  • Due to better direct materials margins, labour efficiency and reduction in overhead cost

Net Profit After Tax

• Increase by 11.8% ($2.5Mil to $2.8Mil)
• Would have been higher if not for promotional expenses for IPO listing & full depreciation of Millenium Wing

Bank Borrowings

• Decrease from $29.7Mil to $18.7Mil (use IPO proceeds)

Annual Report 2004 (Extracts)

Revenue
In FY2004, total revenue for the Group rose by 1.3% to S$31.3 million. Revenue for FY2004 was mainly contributed from hospital and ancillary services operations. The increased revenue was mainly from higher number of inpatient admissions which increased by 9% compared with FY2003. The Group also recorded a 4.4% increase in the number of deliveries and a 11.1% increase in the number of operating theatre cases over the previous financial year. The revenue contribution from specialised and other services business segment, post acquisition, was S$442,000.

Gross Profit
Our gross profi t increased by $3.0 million (or 30.2%) from $9.8 million in FY2003 to $12.8 million in FY2004. Despite an increase in revenue of 1.3%, cost of sales reduced by 12.1%. Gross margins improved from 31.7% to 40.8%. This was mainly due to lower direct materials and lower direct labour costs. Labour effi ciency improved due to streamlining of procedures and job scope and automation of administrative procedures.

Profi t before Tax
Our profi t before taxation improved by $5.7 million from a loss of $0.9 million in FY2003 to a profi t of $4.8 million in FY2004. Our hospital operations and ancillary services business segment recorded profi t before taxation of $4.6 million for FY2004 as compared to a loss before taxation of $0.9 million for FY2003. The improved performance is due to increased revenue from operations. The specialised and other services business segment recorded, post acquisition, a profi t before taxation of $218,000.

Moving Ahead
The outlook for the healthcare services industry in Singapore is very competitive, with many private and public healthcare services providers in the market. However, the Group is confi dent that it will continue to enjoy a steady stream of patients with its well established relationship with our tenant specialists and supportive accredited specialists. We believe that with our track record of over 25 years and our good working relationship with specialists, we will continue to be one of the preferred healthcare providers for women and children. As one of the leading providers for women and children’s healthcare services, our local growth strategy is to capitalise on the Government’s $300 million pro-family incentives announced in August 2004. We believe there will be a positive outcome with this initiative and we expect birth rates to increase in the coming year. Our other plans include the setting up of additional Thomson Women’s Clinics, extending parentcraft services and implementing new and innovative programs to encourage the use of our hospital’s facilities and services. Regionally, we aim to increase our presence by intensifying marketing efforts at key catchment areas for foreign patients. We will also be exploring opportunities for healthcare consultancy services, hospital management services and seeking out strategic regional partnerships. The Group intends to work closely with the Singapore Tourism Board to market its services to the region, in particular, Indonesia. We will organise road shows, public forums and seminars to showcase our capabilities and competencies with the aim to attract more foreign patients to our hospital.

Comments (Not Updated)

• Improving NAV (from premium to discount)
  • IPO : Price $0.22 vs NAV $0.1949 (FY04)
  • Now : Price $0.185 vs NAV $0.2505 (mid-yr '05)
• Profitable in 1H05
• EPS is 1.33cts
• If profitability continues to full-year, may declare dividends
• Assuming FY05 EPS is aro' 2cts
• Shld be able to give at least 0.5ct dividend
• => 2.7% Net Yield @ $0.185
• Purchase by Director
  • 150,000 shares twice in Jul & Aug
  • Either good indication that Thomson is doing well or director averaging down IPO shares :D

• Re-designation of COO

  • May be bad as it indicates COO didn't perform up to expectations
  • May be good if purpose is to improve results in new area

Conclusions (Not Updated)
Be warned, the above has been created to justify my recent additional buy of Thomson Medical shares. This will be intended for mid to long term hold as Thomson Medical looks like a potential good yield stock. Daily trading volume is very low, so it's not recommended for those who may need to sell in the short term as you may not be able to sell at a good price.

My Action (Not Updated)
Decide after FY05 results are out. Most likely sell half my hldgs if it hits above $0.20 for immediate 10% profits. My dream target price is aro' NAV, ie. $0.25. There'll likely be strong resistance at $0.22 (IPO price) as many who got fm IPO will look to exit, given its illiquidity and price drop after IPO. There's also a risk that results may not be up to my expectations. In that case, become long term hold :D

Share Price (Not Updated)

• 1mth : $0.17-$0.19
• 3mth : $0.165-$0.19
• 1yr : $0.165-$0.22

References

• 27-Oct-05 : FY05 Results / Press Release
• 12-Apr-05 : Mid Year FY05 Results
• 31-Jan-05 : FY04 Final Results
• Annual Report 2004
• IPO Prospectus
• Blog Bullrun / Forum
• Open Mkt Transactions by Director
• 26-May-06 : Buy 174,000 Shares @ $0.3341 by Harilela Hotels (S) Pte Ltd
• 25-Apr-06 : Buy 100,000 Shares @ $0.395 by Harilela Hldgs (S) Pte Ltd
• 21-Apr-06 : Buy 130,000 Shares @ $0.395 by Harilela Hldgs (S) Pte Ltd
• 19-Apr-06 : Buy 274,000 Shares @ $0.395 by Harilela Hldgs (S) Pte Ltd
• 10-Mar-06 : Sell 100,000 Shares @ $0.30 by Phua Wee Thuan
• 9-Mar-06 : Sell 100,000 Shares @ $0.295 by Phua Wee Thuan
• 8-Mar-06 : Sell 100,000 Shares @ $0.2993 by Phua Wee Thuan
• 6-Mar-06 : Sell 200,000 Shares @ $0.305 by Phua Wee Thuan
• 24-Feb-06 : Sell 50,000 Shares @ $0.315 by Phua Wee Thuan
• 24-Feb-06 : Sell 50,000 Shares @ $0.31 by Phua Wee Thuan
• 21-Feb-06 : Sell 50,000 Shares @ $0.305 by Phua Wee Thuan
• 17-Feb-06 : Sell 50,000 Shares @ $0.295 by Phua Wee Thuan
• 13-Feb-06 : Sell 50,000 Shares @ $0.30 by Phua Wee Thuan
• 17-Nov-05 : Buy 45,000 Shares by Phua Wee Thuan
• 2-Nov-05 : Buy 245,000 Shares by Angeline Yeo Chye Neo (Wife of Cheng Li Chang)
• 31-Oct-05 : Buy 100,000 Shares by Phua Wee Thuan
• 15-Aug-05 : Buy 150,000 Shares by Phua Wee Thuan
• 8-Jul-05 : Buy 150,000 Shares by Phua Wee Thuan
• Others
• 26-Oct-05 : Hospital Consultancy Agreement in Vietnam
• 18-Oct-05 : Thomson Medical Delivers 24% More Births in Jan-Sep 2005
• 7-Oct-05 : Promising Brand Award
• 12-Jul-05 : Redesignation of COO
  

Disclaimer : Use the above at your own risk! We'll not be responsible for any losses incurred but you can give us credit if you make money :D

Updated : Added in figures for FY05 on 29-Aug-05

Background
A couple of weeks ago, I noticed several posts in CNA Forum on HMI. Forummers were complaining about this Healthcare stock which was at $0.05-$0.055 (now, $0.06-$0.065, likely due to interest triggered by optimistic posts in the forum) and kept going into the red, despite a rights issue in 2003. My interest was piqued as I also have special interest in Healthcare stocks, with holdings in Thomson Medical and Raffles Medical, and cannot understand why HMI should be making losses. Parkway, at the other extreme, is the best performing Healthcare stock.

I did some studies and contributed a few posts. My initial studies points to the fact that HMI is not like other penny stocks which I'd classify as "junk". HMI will post losses of aro' $5Mil due to write-off of assets in their loss making Health Education biz in S'pore for the recently concluded FY05 in Jun-05, but very likely, they'll start to post profits fm then on.

This study will help me decide on whether to add HMI to my portfolio and if so, at what price.

Financial Data
All the data in this case study are extracted fm the HMI 2004 Annual Report and 2005 mid yr results,

HMI	2002	2003	1H04	2004	1H05	2005
Turnover (S$)	33,864,381	32,829,483	16,292,000	34,020,358	19,737,000	38,963,000
Cost of Services (S$)	(21,902,967)	(21,605,867)	(7,850,000)	(21,727,797)	(9,250,000)	(23,292,000)
Gross Profit (S$)	11,961,414	11,223,616	8,442,000	12,292,561	10,487,000	15,671,000
Net Profit (S$)	(4,523,157)	619,673	199,000	758,420	(112,000)	(5,296,000)
EPS (cents)	(2.37)	0.27	0.09	0.29	(0.04)	(1.85)
Trade Receivables	6,026,186	21,068,097	-	49,753,858	47,391,000	48,636,000
Cash + Bank Bal (S$)	677,823	1,088,496	-	1,615,525	3,998,000	8,739,000
Current Liabilities - Bank Borrowings (S$)	7,367,498	8,093,986	-	4,609,218	3,791,000	5,406,000
Long Term Bank Borrowings (S$)	13,817,814	13,169,460	-	12,167,033	11,786,000	11,199,000
NAV / Share (cents)	?	?	?	7.40	6.90	5.34

Issued Shares = 286,686,600 @ $0.05 Par ; PE 18.9 @ $0.05

2003 : Additional 95,562,200 shares were issued by 1:2 rights issue

Substantial Hldgs

• Nam See Investment (Pte) Ltd (Direct 267,901 ; Deemed 130,020,000)
• Gan See Khem (Direct 172,500 ; Deemed 130,437,901)
• Chin Koy Nam (Direct 150,000 ; Deemed 130,460,401)
• Free Float 49.39%

Highlights (30-Jun-05 Announcements)

• Mahkota Medical Centre, a 228-bed hospital, has achieved a double-digit revenue year-on-year growth over the last three financial years from FY2002 to FY2004. In addition, the Company has also negotiated a contract to provide hospital management services to the Grand Hospital Bengkalis, a 150-bed hospital in Indonesia, which will commence operations in the fourth quarter of 2005.



• The healthcare education and training business has incurred a loss of S$1.5 million for FY2004. It is expected to sustain a loss of approximately S$1.5 million for FY2005. The Company having assessed the performance and the prevailing market conditions has decided to restructure the healthcare education and training division in order to stem further losses. In conjunction with this, the Company intends to make a one-time write-off of approximately S$5.6 million comprising mainly of non-cash items including fixed assets, revaluation reserves, and deferred expenditures, resulting in a net loss in the Company’s consolidated results for FY2005. Further details on the progress of the restructuring exercise will be announced when such plans are established.


My Comments : Impact of write-off on FY05 (End-June) Results
• Net Loss $4.5~$6Mil
• NAV drops below $0.05 (6.9ct minus $5.6Mil/286,686,600 shares = 1.953cts/share)
• Reduces subsequent Annual Depreciation Expenses by 1/3 or ~$1.2Mil

Highlights (Mid-Year 2005 : Dec-04)

• Revenue
  
  • Malaysian operations revenue grew by 21.2% to $18.92 million while the Singapore operations contributed $0.82 million to total revenue.
• Malaysia registered a profit after tax of $2.56 million. The losses in the Group's education operation in Singapore widened by 17% to S$0.78 million
• NAV - Mid Year '04 : 6.9cts ; Jun '04 : 7.3ct

My Comments - Profits continue to come from M'sia operations and losses from S'pore operations, resulting in net loss for the half.

Highlights (AR2004)

• Revenue
• Division
  • Hospital operations - 2004 : 32,487,528 ; 2003 : 31,245,057
  • Education - 2004 : 1,532,830 ; 2003 : 1,584,426
• Country
  • Malaysia - 2004 : 32,682,579 ; 2003 : 28,030,410
  • Singapore - 2004 : 1,337,779 ; 2003 : 4,799,073
  


• Asset Restructuring Exercise
  
  
  
  • MMCSB completed an asset restructuring exercise with the divestments of a major part of its properties to Genuine Foresight Sdn Bhd and its subsidiary companies. The restructuring exercise capitalized on the Malaysian government’s waiver of real property gains tax as well as to unlock and reflect the value of MMCSB’s assets.
    
    
  • Included in the Group’s trade receivables is an amount of approximately $46,336,000 (RM102,318,828) [2003 : $14,829,000 (RM32,138,090)] related to the disposal of some overseas leasehold properties and medical suites by MMCSB to GFSB group of companies in which certain shareholders of the Vendor have an interest. The profit on the disposal amounting to approximately $4,243,000 (RM9,390,102) [2003 : $9,100,000 (RM19,633,610] was included in other operating income. This transaction contributed to the Group recording a net profit of $758,420 and a positive net current asset position of $39,803,426. According to management, if the Purchaser is unable to pay the Consideration, this amount can be offset by the capital reduction of MMCSB as mentioned in Note 6(c).


• Subsidiary : Mahkota Medical Centre (30% +10% via M'sia subsidiary)


• In addition to its existing hospital management and technical consultancy contract, MMCSB had, in February 2004, secured a contract to provide medical equipment consultancy services to the Grand Hospital Bengkalis, Riau.
  
  
• Mahkota Medical Centre (MMC) in Malacca has initiated a multi-phase upgrading program to improve its facilities and services. A newly remodeled ward comprising 44 beds was completed and opened to patients in September 2004.
  
  
• As at 30 June 2004, the Group holds a total of 40% equity interest in MMCSB. Pursuant to an agreement signed by the shareholders of MMCSB on 21 September 2002, the Group exercises control over the Board of Directors and accordingly considers MMCSB as a subsidiary company. The existence of control can be demonstrated, inter alia, by representation on the Board of Directors, participation in policy making decisions and control over the management of MMCSB. MMCSB’s shareholders have approved the following capital reduction scheme:
  

(a) Increase of authorised share capital from RM50,000,000 to RM100,000,000 by way of the creation of 50,000,000new ordinary shares of RM1 each;

(b) Increase of issued and paid up share capital from RM30,000,000 to RM96,000,000 by way of a bonus issue of 66,000,000 new ordinary shares of RM1 each to be credited as fully paid up through capitalisation of M66,000,000 from revaluation surplus and retained profits and that such bonus shares shall rank pari passu in all respects with theexisting ordinary shares of MMCSB including but not limited to dividend and return of capital;

(c) Reduction of issued and paid up enlarged share capital from RM96,000,000 to RM4,800,000 by returning RM0.95 per share to the shareholders of MMCSB; and

(d) Consolidation of 96,000,000 ordinary shares of RM0.05 each to 4,800,000 ordinary shares of RM1 each.

The capital reduction exercise aims to maximise the value of MMCSB to its shareholders by separating the assets ownershipfrom the hospital operations of MMCSB.The capital reduction exercise will require the approval of the creditors of MMCSB and the High Court of Malaya. In the event that the capital reduction exercise is approved, the proceeds from the capital reduction will be returned to the shareholders of MMCSB. MMCSB’s shareholders can consider investing such proceeds in Genuine Foresight Sdn. Bhd. (“GFSB”) . The result of the capital reduction is that MMCSB will have a low paid-up capital and in the opinion of MMCSB’s directors, a better return on equity and capital employed.


• Rights Offering (December 2003)
  
  • ~$1.89 million for working capital after deducting expenses of $0.52 million and setting-off the shareholders' loans of $2.37 million.



• Property, Plant and Equipment
• NBV (30-Jun-04) = $16,669,296
• Depreciation for 2003 = $3,722,584

Comments

• GPM looks good at 30%
  
  • Profits from M'sia operations (MMC) - $2.56Mil after tax ; Double digit growth
  • Losses from S'pore operations (Education) ; Write-off in FY05 $5.6Mil
  • Net Losses due to High costs and Expenses + S'pore Education Biz


• Sale of assets in MMC
  
• Now in Trade Receivables ($46Mil)
  
  • Good for HMI to get cash as can reduce Bank Borrowings ($15Mil+) and thus Finance Cost ($1.5Mil~$1.8Mil)
• May be paid by buyer using cash fm Capital Reduction Exercise
• HMI gets small, regular Rental Income as shareholder


• Impact of write-off on FY05 (End-June) Results
  
  • Net Loss $4.5~$6Mil
  • NAV drops below $0.05 (6.9ct minus $5.6Mil/286,686,600 shares = 1.953cts/share)
  • Reduces subsequent Annual Depreciation Expenses by 1/3 or ~$1.2Mil


• Comparison with other Healthcare Stocks
  
• Thomson Medical (Mid-Yr 05) : 209,941,907 Shares @ $0.12 par
• NAV 25.05cts vs 18.5cts share price ; EPS 1.33cts ; PE 11.8 @ $0.175
• Revenue $19.04Mil ; GP $7.855Mil ; GPM 41.3% ; Net Profit $2.792Mil ; Cash $11.84Mil ; Borrowings $2Mil + $16.7Mil
• Raffles Medical (Mid-Yr 05) : 398,851,999 Shares @ $0.10 par
• NAV 25.01cts vs 50cts share price ; EPS 1.25cts ; PE 19 @ $0.48
• Revenue $52.9Mil ; Operating Profit $5.613Mil ; Net Profit $5.025Mil ; Cash $28.55Mil ; Borrowings $1.995Mil
• Parkway (Mid-Yr 05) : 725,711,212 @ $0.25 par
• NAV 52cts vs $2.10 share price ; EPS 4.04cts ; PE 28 @ $1.93
• Revenue $216.28Mil ; Net Profit $30.36Mil ; Cash $29.9Mil + $66Mil ; Borrowings $40.2Mil + $233.2Mil

Conclusion

Either a long term buy (2-3yrs) or short term speculative buy (buy at $0.05-$0.055 and sell at $0.06-$0.065 for 20% returns). I doubt that HMI will show very good profits in the short term as it only has 40% of MMC that's generating all their profits and yet incurring high costs and expenses locally. So, I think HMI must grow their overseas biz to at least 2-3x the current size before we see good economy of scale. In the short term, there may be speculative fervour, fuelled by over-optimism (like CNA forum) which may drive the share price up (my guess is $0.07-$0.10 based on historical data), but, it'll drop back again once investors gets tired of waiting for the profits to come in.

Looking at the other Healthcare stocks, Thomson looks good as it's below NAV and is profitable. I believe Thomson will issue a maiden dividend if they continue to be profitable at year end. That should drive their share price up higher but it'll subsequently still settle down to illiquidity again due to its small caps nature. Raffles Medical has low debts and is profitable but somehow, I don't find it attractive. Parkway will always be the mkt favourite due to its ownership and larger size. Thomson and HMI (MMC anyway) could also potentially be future takeover targets by Parkway as they provide a good fit to their existing portfolio.

Price Chart

• 29-Jul-05 : Start of HMI thread in CNA Forum ; Share Price Range moves up to $0.06-$0.065 in Aug-05
• 30-Jun-05 ($0.045) : MISCELLANEOUS :: HMI TO FOCUS ON HEALTHCARE DELIVERY AND MANAGEMENT CONSULTANCY
• 7-Feb-05 : HALF YEAR FINANCIAL STATEMENT AND DIVIDEND ANNOUNCEMENT
• 27-Aug-04 : FULL YEAR FINANCIAL STATEMENT FOR THE PERIOD ENDED 30-JUN-04

Sources

• 29-Aug-05 : FY05 Results / Press Release
• 30-Jun-05 : Announcement (Write off of Education biz assets)
• 7-Feb-05 : Mid Year Report 2005
• Annual Report 2004
• Annual Report 2003
• Analyst Report - DMG Partners
• CNA Forum

Disclaimer : The above are for my own reference only. Do not rely on it for your investment decisions