Analysis of construction companies

I have been always wanting to invest in a construction company for a few months already but didn’t free up enough time to analyse the companies. I recently concluded my analysis and will post my analysis.

I feel that the construction sector will boom in Singapore with the development of future MRT lines, new condominiums and new HDB flats. The prices of the construction companies are depressed so much that P/E ratios of most construction companies are less than 10, with some being as low as 3.

Firstly, I read analyst reports by Kim Eng and DMG on the construction sector to get an overview of the sector and the different companies involved in the sector. I also used ShareInvestor to sieve out the good construction companies by using certain criteria such as P/B, P/E, ROE, etc. The comparison of the companies are presented below.

Then, I did a financial analysis of the all companies listed in the table above, except CSC and Yongnam (negative cashflow for many years). I will present the analysis table of the individual companies and summarise my findings.

Lum Chang

Lum Chang’s revenue, equity and cash flow are not consistent even though it has the highest current ratio and lowest P/B among all the companies. On a side note, Lum Chang is currently trading “cum dividend”.

Chip Eng Seng

CES received the “Most Transparent Company Award 2010” (Runner-Up) at the recent SIAS Investors’ Choice Awards, Construction category. It has the highest NPM, ROE, ROA, dividend yield and lowest P/E ratio among all the companies in comparison. Despite all these, the revenue and cash flow are not consistent so I’m not comfortable in investing in this company even though it has many merits.

OKP

OKP’s revenue dipped only in FY2005 and FY2008. If not, it’s on a consistent rally. Its equity and cash flow is increasing consistently and its balance sheet is strong with little debt. I was torn between investing in OKP or Hock Lian Seng (HLS). In the end, I decided to invest in HLS as I felt HLS is more well-versed in the MRT construction with many projects completed for LTA versus none for OKP. Also, if OKP were to bid for a MRT project, it has to do so as a joint venture with another company as OKP doesn’t have experience in this segment.

Hock Lian Seng

I will present HLS analysis in another post as I purchased this company. I will do a separate thorough analysis on them like my previous purchases.

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TMC FY2010 analysis

Thomson Medical Centre released the FY2010 results on 26th October 2010. TMC did not disappoint as usual. I have updated my analysis to include FY2010’s results.

Its revenues grew 21.2% compared to FY2009. Net profit grew 27.8% for FY2010. The gross profit margin and net profit margin improved as well. GPM is at 43.71% while NPM is very close to 20%.

Looking at balance sheet, it has zero debt with total cash, including fixed deposits, standing at $30.5 million. Its ROE and ROA improved as well. ROE, excluding reserved valuation, stands at 27.6% compared to 21.6% in FY2009. ROA stands at 9.7%. Retained earnings increased to $28 million. Equity stands at $142.1 million and the equity CAGR is at 15.05% over the 5 years.

At the cash flow front, free cash flow is at $20 million for FY2010. Capex expenditure was a mere $808,000 for FY2010. This showcases the great cash generating abilities of TMC!

The intrinsic value of TMC stands at $1.16 when using DCF. I used current year FCF of $20 miilion, discount rate of 5% and cash flow growth rate of 15% (the actual average FCF growth rate is at 22.46%).

My take on Peter Lim’s offer

Peter Lim has offered $1.75 per share. This is at a premium of 51% over the intrinsic value I calculated.  I’m still torn whether to keep my shares or sell it. One part of me wants to keep the shares as TMC is a gem and I feel it has potential to grow even further. The other part tells me to sell as I don’t know if Peter Lim will act in the interest of shareholders just like the management of TMC and whether he will meddle with the daily operations of TMC. A win-win situation would be when Peter Lim doesn’t interfere with the operations of TMC and also provides money for TMC to expand in Singapore following the space crunch that has been around for some time.  Since Peter Lim is buying over a huge stake of 39.34% of the company, he might even have plans to buy the whole company and de-list it. We don’t know what his real intentions are. I will just wait and see for the next 2 weeks how this saga pans out and decide slowly…

BREAKING NEWS: Peter Lim makes General Offer for TMC

“Remiser King” Peter Lim, who was made more famous after bidding to buy over Liverpool, has offered $1.75 a share to buy over Dr Cheng Wei Chen and family’s 39.34% stake in Thomson Medical Centre. Dr Cheng is the founder and largest shareholder of TMC. The offer price is at a 62% premium over the last traded price of TMC. The cash offer will be extended to all the remaining issued shares and when 50% or more of the remaining shares are agreeable to be sold, the shareholders will get $1750 per lot. Owners of TMC will receive a offer letter no earlier than 14 days and no later than 21 days.

I believe Peter Lim has been eyeing TMC for some time and with the stellar FY2010 performance (I will be analysing FY2010 results in another post), it gives him added impetus to be the largest shareholder of TMC. At $1.75, TMC P/E will be at 32.3. Current P/E is at 19.9. Peter Lim might even buy over the whole company and de-list TMC. I’m actually not willing to let go of TMC, even at $1.75, as I feel that it has potential to grow even further. But then again, if Peter Lim decides to buy over the whole company, I would have no choice but to sell my stake. Looking forward to Monday opening to see how the market will react to this news. I believe the share price of TMC will skyrocket on Monday.

Source: http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_15B84C10877ACE69482577CB003FD162/$file/Media_Release_Peter_Lim_makes_general_offer_for_Thomson_Medical_Centre_Limited.pdf?openelement

Dapai Analysis – Part 4

In this part of the analysis, we will look at the SWOT analysis and intrinsic value of the company.

SWOT Analysis

Intrinsic value

I did a DCF intrinsic value calculation. I used average free cash flow growth rate as 0% (to be ultra-conservative) and discount rate as 9%. The intrinsic value I got was $0.35. The latest quarter NAV is at $0.30. Thus, it is around 32% undervalued when using the NAV.

Even with 0% CF growth rate, the stock is very much undervalued with very high MOS. I feel buying Dapai is almost a risk-free purchase as the company is debt-free, has lots of cash and intrinsic value is high.

Dapai Analysis – Part 3

Thus far, we looked at the overview of the business and the cash generating ability of the business. Now, I will delve into the qualitative part of the company and also address the future growth avenues of the company.

Qualitative analysis

Economic moat: I would not say the economic moat of Dapai is wide but rather satisfactory. It is the No.1 backpack company in China with 35.8% market share. The 2nd company, Jinhou, is very close with around 30% market share. The competition is quite intense in this business.

Competitive strengths and advantages:

  • Leading brand and good branding
  • Sponsors for big competitions such as Beijing Olympics
  • Large market share of 35.8%
  • Market survey shows that Dapai is a market leader
  • Able to leverage on Tian Liang and gradually raise ASP to increase profits
  • Huge cash hoard
  • Lots of FCF generated

Insider buying and/or share buybacks: Cheng Xizhong, Executive Chairman and founder, has 53.65% stake in the company. The company has not done any share buybacks till date. I feel that it should as it’s stock is grossly undervalued.

Is management transparent, honest and competent?: Yes, I have confidence in the management. On 12th Oct 2010, the company released a profit warning statement saying that the next quarter net profit will take a suffering as the luggage segment is facing some supply issues. They had sub-contracted all their luggage manufacturing to a number of suppliers, of whom two major suppliers were unable to meet the orders due to their labour shortage problems. As a result, Dapai’s luggage sales had been adversely affected. The company has concluded that to prevent such problems in the future, it will build a new luggage manufacturing plant. This shows that the management is transparent and honest instead of sweeping the problem under the carpet. Also, on 22nd Oct, it released a statement saying they have acquired a land for luggage manufacturing facility and the facility will be completed by 4QFY2011/1QFY2012. Once complete, the factory will produce four million pieces of luggage per year. This shows competence of management and they have resolved the issue swiftly.

Also, in May 2010, the management thought of doing a share placement exercise. However, the shareholder’s went against this plan at the AGM. Even though, Chen Xizhong has the majority share of the company, he didn’t use his power to override the decision of the minority.  He listened to the shareholder’s and didn’t undertake the share placement. This shows that the company has the interest of the shareholder’s at heart.

Future growth
  • Plans to dual list in another exchange
  • New factory to be built to make luggages
  • Total of 500 new stores to be opened by end of the year
  • Company to leverage on the internet for online shopping (http://dapai.taobao.com/). Revenues set to increase once this kicks off in full force
  • Company is looking into acquiring an international brand
  • China consumerism and travel will go up with the economy picking up

What I don’t like about this business? Highly competitive and fragmented. Thus, high MOS demanded (another MOS: current price below NAV)

Dapai Analysis – Part 2

In this part of the analysis, I will present the financials of Dapai and do a quantitative analysis on them.

Financials

As Dapai is a China-based company, its financials are based in RMB. So, I had to convert to SGD and the rate I used was 1RMB=0.2SGD. This rate is just an approximate.

Firstly, the revenue is increasing from FY2007 to FY2008 and then dips in FY2009. The reason cited for this in the annual report is that there was softer demand from first-tier cities, especially Beijing and Guangzhou, due to its higher dependence on domestic consumption. Overall domestic consumption was weakened due to the global financial crisis.

The gross profit and gross profit margin decreased from FY2008 to FY2009 as the average-selling price (ASP) was decreased to fuel demand.

Looking at the Q2FY2010 results which were released on 11th Aug 2010, the revenue, gross profit, GPM, net profit, NPM all increased when compared to Q2FY2009 as the ASP went up and new models were released. Thus, I feel the dip seen from FY2008 to FY2009 is only temporary.

Looking at the balance sheet, Dapai is cash-rich with zero debt! The CCE stands at S$108.4 million for FY2009. The ROE and ROA is also high. Shareholder’s equity is also seen increasing. The NAV as at Q2FY10 is $0.30. The current share price is around $0.20.

Looking at the cash flow part, cash flow from operations is increasing throughout. Capex in FY2009 was at S$39 million due to cost of construction of new office cum factory building purchased in 2008. Dapai has low capex requirements and thus produces lots of free cash flow.

Dapai Analysis – Part 1

I recently purchased a company called “Dapai” and will present the overview of the company, its financials and quantitative analysis, qualitative analysis, SWOT analysis and intrinsic value calculation in 4 different parts.

This first part will cover the overview of the company.

Overview of Dapai

Dapai is a Chinese company that is involved in designing, developing, manufacturing and selling of backpacks and luggage under the Dapai brand in China. It is the No.1 backpack company in China with a 35.8% market share.  Dapai was previously known as China Zaino.  The name change was done in May 2010 to allow consumers of Dapai products to identify the brand name with the listed company.

Its products are sold through distributors in over 3,000 concessionary retail outlets in 26 provinces, autonomous regions and municipalities throughout China. Most of these outlets are located in major department stores such as Beijing Wangfujin Department Store, Beijing Xidan Department Store, Dalian Department Store, Jinan Silver Shopping Plaza, Nanjing Zhenjiang Taihe Store and Qiangdao Parkson, and supermarkets and hypermarkets such as Carrefour, Darunfa, Haoyouduo, Jizhidao, Oushang and Renrenle.

Strategically located in Quanzhou City (Fujian Province), Dapai has a total of 64 production lines with an annual production capacity of approximately 26.1 million units of backpacks and luggage.

Dapai targets the mid-range mass market consumer segment between 13 to 50 years of age in China, and are viewed by consumers as a premium brand focusing on quality and affordability. This is evident when Dapai was named “2007 Top 500 Asia Valuable Brand Award” by Supervision and Management Centre of Asia International Brand Certification; “Top 12 Bags Brand in China in 2006” by the China Leather Industry Association, and “Top 100 Favourite Youth Brands in Quanzhou 2006”.

In addition to appointing China’s Olympic celebrity Tian Liang as Dapai’s brand ambassador, Dapai also sponsors prominent sporting events such as the national gymnastics team in the 2008 Beijing Olympics, and the 2007 – 2008 China Women’s National Basketball Tournament. It is the only backpack company in China to do TV advertisement as well. You can watch the advertisement featuring Tian Liang below.

Dapai has its own extensive R&D team to ensure that it produces good quality products whilst keeping up with the latest trends and design products suitable for our target consumers. As a testament to its commitment to the quality the products, Dapai has been awarded ISO 9001 in 2007.  Every year, the R&D team comes up with between 800 to 1,000 new backpack and luggage designs of which approximately 200 are selected for commercial production.

The range of products Dapai carries can be found at http://www.chinazaino.com/products.html. However, I believe this website has not been updated for some time. You can also visit http://www.dapai-bag.com/ to look at the products Dapai carries.