Investment Analysis of Mapletree Greater China Commercial Trust [RW0U]

***Please note that this does not constitute a stock recommendation for buy or sell. This is purely my own analysis and is to be taken as my own personal opinion and not to be taken as correct. Kindly do your own diligence in purchasing stocks.

Before I delve further into my investment analysis of Mapletree Greater China Commercial Trust, I’ve got a disclaimer to make, that I have recently initiated a small position in this and my analysis of this stock is the fastest one I’ve done compared to my previous ones. Basically I kind of came up with this just within an afternoon in office and pretty much plunk money into it the next day. I’ve slowed down in investing for the long term since I began to focus more on trading to build a bigger base to do longer term investing as it really takes a long time for investing to pay off and with a small base, the returns are quite minimal.
This is a stock i consider holding long term for dividend yield and slight capital appreciation. In my personal opinion, it is slightly undervalued, and if price drops further, I would accumulate more shares provided I have sufficient funds and the proportion fits into my portfolio.

Mapletree Greater China Commercial Trust is a relatively small REIT. It is listed on the SGX since 2013. Currently it only have 3 real estate properties, they are:

Festival Walk – located at Hong Kong, Kowloon Tong, comprising of a 7-storey retail mall, 4-storey office tower and 3 underground carpark levels

Gateway Plaza – located at China, Beijing, comprising of 2 25-storey office towers connected by 3-storey retail atrium and underground floors

Sandhill Plaza – located at China, Shanghai, a business park development comprising of 1 20-storey tower, 7 blocks of 3-storey buildings and 2 basement levels of car park


I have simplified my share price valuation to the below:

Since inception, it has been distributing >6cents per year, and being conservative, I will assume the dividend to be 6cents, with current share price bought at $1.035,

my return on equity = (0.06/1.035) ~ approx 5.8%

Gearing ratio ~ 40%,

WACC ~ 4.42%

NAV = $1.213

Using dividend model without growth, share price = dividend/rate of return = (0.06/0.058) = $1.035

It would seem that calculation for dividend model is circular, However, the rate of return I expect can be adjusted. If I expect a lower rate of return, the expected share price would be higher and vice versa. For now, I think that it is actually good to have a yield of >5%, and I can accept the circular logic of my calculation.


So why did I buy this?

Value

Not a very convincing reason since this is the only reason I’m buying it. It is a fair value based on Gordon Dividend model and the share price is at an approximate 15% discount to the NAV. I am going to use the NAV as a reference as to when to liquidate the position and will probably need to do more research and analysis to this. Waiting for the Q4 and FY 16/17 earnings release tomorrow.


What are some of my concerns?

Not very diversified

With a vision to be a Greater China-focused commercial REIT and an investment mandate in HK and first and second-tier cities in China, it only has 3 properties. This is something to look out for as I can only guess what is the management’s strategy going forward and trust in their management skills. Also, assuming that they follow through on their 3rd key strategy of value-creating acquisition growth, I am not  very sure about how easy it would be to find yield-accretive properties for it to buy. Management strategy is definitely something to look out for.

High Gearing Ratio

With a gearing ratio at slightly >40%, this is a highly leveraged REIT. Especially since with the above reason it is not very diversified and only has 3 properties, it has to buy more properties to grow, and I do not think management will fund the growth using additional debt. As such, funding channel should theoretically be limited to rights issuance or further equity placement which would depress share price. The flip side is that I can buy on dips assuming that the new properties bought are yield accretive.


Conclusion

In closing, I think it is a fair price for its value and since this is a REIT and similar to my holdings in Religare Health Trust, I plan to hold this share for a long long time. I could have bought this share few months ago when it was significantly cheaper, but this is based on hindsight bias and the 2016 was marked with significant volatility. If the share price starts to drop, I will accumulate more of it and if it rises to $1.20, I will consider liquidating it. I do not doubt the profitability of the REIT as it holds retail and office spaces, and it will generate income for sure. Any thoughts or comments? Let me know what do you think or if I am wrong in any area.

Basic information on Indices

I decided to do a post on the general information on some of the world’s global indices as I have recently completed a futures trading course, and it has piqued my  interest in futures trading, and I might decide to go down this path in the near future. Thus, I think it necessary to start compiling some information on indices as this is a potential type of futures to trade. I will try to include some general information about them, the way they are computed, the composite of them and hopefully any further useful information. I might be wrong, so please don’t take my word for it, and the post is mainly for my own benefit and ease of use.

ASX 200

It is recognized as the benchmark index in Australia, and it covers approximately 80% of Australian equity market capitalization. It is reviewed quarterly. It is weighted by float-adjusted market cap, which means its components are weighted by the market value of the outstanding shares held by public. Index calculation is the quotient of total available market capitalization of the constituents and its divisor. The weight of the top 10 constituents is approximately 48.7%. The ASX 200 is made up of mainly financials ~ 38.8% and materials ~ 15.7%.

Nikkei 225

It tracks the performance of the top rated 225 companies listed in the First Section of the Tokyo Stock Exchange. It is reviewed once yearly by the liquidity in the market and sector balance. It is a price weighted index, which means that price movements of highly priced stock will have significant influence on the index value.

Adjusted stock price = stock price x 50(yen) / presumed par value (yen)

Nikkei Stock Average = sum of Adjusted stock price / Divisor

The index is mainly made up of companies from technology ~ 43.51% and consumer goods ~ 22.56%.

Base on personal experience, the companies in the index are export oriented and the value of the Nikkei 225 is inversely related to the strength of the yen.

HSI

It tracks 50 of the largest and most liquid companies of the Hong Kong stock market. It is weighted by float-adjusted market cap, which means its components are weighted by the market value of the outstanding shares held by public, and also has a 10% on individual securities. It is reviewed quarterly. The index is mainly made up of financials ~ 47.57% and Information technology ~ 11.48%.

DAX

It is a blue chip stock market index tracking 30 of German’s top companies based on book volume and market capitalization. It is free float capitalization weighted, calculated as both price and total return index and has a cap of 10% on individual securities. It is reviewed on a quarterly basis. It is diversified of some sorts, with chemical companies at ~ 20.2%, automobile ~ 14.7% and others ~ 21.9%.

FTSE 100

It is a share index of 100 companies listed on the London stock exchange with the largest capitalization. It is capitalization weighted and reviewed quarterly. It appears to be well diversified with Oil & Gas ~ 11.92%, Personal & Household Goods ~ 11.77%, banks ~ 10.80% and Healthcare ~ 9.52%. It consists mainly of internationally focused companies as seen from its reaction to sterling rates, and is not a good indicator of UK economy.

S&P 500

It measures 500 large companies listed on the NYSE or NASDAQ. It is free float capitalization weighted. It is made up of approximately IT ~ 20.29%, Financials ~ 14.47%, 13.32%, Consumer Discretionary ~ 11.76% and Industrials ~10%.

DJIA

It measures 30 companies listed in USA, and is price- weighted. Its top sectors are industrials ~ 19.69%, financials ~ 18.09%, IT ~ 16.92% and Consumer Discretionary ~ 14.23%.

NASDAQ Composite

It measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq stock exchange. It is market capitalization weighted. It consists of over 3000 companies and is heavily skewed towards Technology firms at 41.52%.

Further links for more information

https://www.msci.com/documents/1296102/1339060/GICSSectorDefinitions.pdf/fd3a7bc2-c733-4308-8b27-9880dd0a766f

 

One way of investing in Gold – SPDR Gold Shares [O87]

***Please note that this does not constitute a stock recommendation for buy or sell. This is purely my own analysis and is to be taken as my own personal opinion and not to be taken as correct. Kindly do your own diligence in purchasing stocks.

images

Some shiny gold bars

Nearing the end of the year for 2016, I have been reviewing my CPF account and find that it is not growing as quick as I would like it to be. Despite the Dow Jones nearing the psychological barrier of 20,000 and the S&P hitting new highs, the STI is pretty flat which depicts the bleak outlook of the Singapore economy. As my ordinary account (OA) is above the amount of $20,000, I have been looking for opportunities to see if I am able to make my CPF money work harder. For those who are unaware, the Singapore government has decided to give 1% more for the first $60,000 in the CPF account, with only the first $20,000 in the OA applicable for it. In order words, the first $20,000 will earn 3.5%, while any excess amount in the OA will only earn you 2.5%. As the first $20,000 can’t be used for investments anyway, I am looking out for any available opportunities in the market which will allow me to earn >2.5% per annum. Due to various rules restricting the investments allowed to be made, there are not many options left. In addition, due to my current vested position in DBS, I do not have much money left allocated for stocks and bond investment. As such, I turn to the other option left, which is the amount allocated for gold. Furthermore, with such high valuations in the foreign stock markets and uncertainty in the near future, I believe that gold investing warrants a second look. Thus, I began to look at SPDR gold shares (O87). In addition, only 10% of the monies in the OA is allowed to be invested in gold.

SPDR Gold Shares is a gold only ETF, with its mandate clearly stated out on the website – “for the Shares to reflect the performance of the price of gold bullion, less the Trust’s expenses.” It is a trust which holds gold bullion and from time to time issues shares in baskets in exchange for deposits of gold and distributes gold in connection with the redemption of baskets (in other words an open ETF, however for retail investors there is no need to create baskets as the investment outlay is very high).

The general information on it are as follows (taken from SPDR Gold website below):

Sponsor : World Gold Trust Services, LLC

Trustee : BNY Mellon Asset Servicing

Custodian : HSBC Bank Plc

Exchange Listed : SGX, NYSE, BMV, TSE & SEHK

Board Lot size : 10 shares

Trading currency : USD

Ounces of Gold: 26,509,820.12

No. of shares: 277,300,000 (as at 31/12/2016) [assuming in circulation for all the exchanges]

Gold Spot Price: US$1,152.06 (as at 31/12/2016)

Gold Measurement Method: LBMA Gold Price

Net Expense Ratio: 0.40% of the daily NAV for Sponsor Fees, payable by the Trust

Website: http://www.spdrgoldshares.com/

I have briefly skimmed through the prospectus and website and this is a relatively simple and straightforward Gold ETF. It has a trust structure which holds gold. As mentioned above, the NAV will just track the value of the gold. As and when necessarily, they will sell the gold in the vault to pay for the expenses above and whenever available, gold will be added or removed when authorized participants add new baskets to the ETF or when they are redeemed. Base on my understanding, the gold are stored in an allocated account, and only transferred to an unallocated account to facilitate gold transactions. According to bullionvault.com, allocated gold is gold owned outright by an investor and is stored, under a safekeeping or custody arrangement, in a professional bullion vault. On the other hand, unallocated gold is the property of the bank, and it is not protected from a bank’s insolvency. The number of shares provided in their website and above are freely floated in all the exchanges as confirmed in an email inquiry I sent them, but they are also not sure how many are available in SGX. I am unsure of how it actually works but I suppose there is not much impact as the number of shares I buy are quite minimal in the bigger scheme of things.

In the last week of 2016, I have bought 20 shares of SPDR gold shares at $108.39 and it has increased by approximately 1% as of the end of 2016. Previously when I started investing, I was under the influence of Warren Buffet’s believe that gold is just a piece of rock that doesn’t yield anything. However ever since starting trading in June, I have started to appreciate the value of gold and thus leading to my decision to buy the gold ETF. So here are a couple reasons why I bought some before the year end.

Rollercoaster 2016 year and uncertainty ahead

2016 has been an eventful year for the financial markets and the price of gold has risen quite a far bit throughout the year due to its image as a safe haven during uncertain times and fallen as well when risk appetite increased. With many equity indexes ending up for the year and making new record highs, it may seem odd for me to buy gold. “Be fearful when everyone is greedy and greedy when everyone is fearful”. Keeping Warren Buffet’s words in mind, this is a time to be fearful as records are broken and everyone is having a rosy picture ahead when there hasn’t been much global growth. There is quite a bit of uncertainty in terms of what Trump’s economic reform plans are, the storm brewing in Europe, the plans for Brexit. With this number of events filled with uncertainty just on the horizon, it is difficult to say that there is no problem and financial markets are doing well. As such, this is a reason to buy gold now and sell them during the crisis time when the value of it is higher. This is assuming that people still view gold as a safe haven holds true.

Inflation hedge 

There is a great deal of expectation that Trump taking office will generate inflation. There are some people that view gold is a good hedge against inflation, and others who think otherwise. There also some who say that measuring inflation using CPI is a flawed approach and gold is a good hedge against inflation if not measured using CPI. These are mixed views and I have no idea which is correct and which is not. To me, I suppose the most important thing is people’s impression and sentiment of gold. The value that people place in gold. I think that to many people, gold holds an important role as a store of value, and that is good enough for me to buy it. I may not think so, but it does not matter as I am but a small fish swimming in the huge financial ocean. I will swim with the tide. As such, if it is a store of value as people ascribe it to be, I believe that gold will be somewhat a hedge against inflation. Whether it is or not, I do not know, but as long as people’s impression of gold holds, it should be okay to hold some gold.

Appreciation of USD/SGD

The trump rally and the mention of 3 rate hikes by the Fed in 2017 has resulted in a considerable run up of USD against all the other currencies. Also, during the presidential election campaign, Trump has said that the Trans Pacific Partnership Agreement was a bad idea. If the USA is not going to ratify it, it spell big problems for the Singapore economy. Furthermore, will tepid global economic growth, Singapore is not spared from it either as it is an export dependent economy. As such, there is much headwind for the SGD and thus, buying gold which is denominated in USD presents a greater value when I sell it to receive SGD in the future.

As such, I have decided to hold them for at least a year, but I am confident that I will be able to offload them during the year at a profit. I just need to overcome a return rate of 2.5%+2%=4.5% in order to do better than the CPF return rate. The additional 2% is to account for transaction costs. If the NAV hits $150, I will sell them immediately. I believe that gold is more of a strategic move of allocating money in the short term and I still don’t think that it should be held over a long time horizon. What are your thoughts on this? Let me know what you think in the comment box below.

 

Investment Analysis of Religare Health Trust [RF1U]

***Please note that this does not constitute a stock recommendation for buy or sell. This is purely my own analysis and is to be taken as my own personal opinion and not to be taken as correct. Kindly do your own diligence in purchasing stocks.

This is an analysis of Religare Health Trust [RF1U], a business trust listed on SGX which consists of healthcare assets in India. I have recently initiated a long position in it and I plan to hold it for the long run.

religare logo comparison

Doesn’t the logo look like a green inverted tilted DBS?

It has a short listing history, only listed on SGX since 2012, and it has an investment mandate to principally to invest in medical and healthcare assets and services in Asia, Australasia and emerging markets in the rest of the world. RHT may also develop medical and healthcare assets. (Although for now, it seems like it is only developing its assets in India.) Currently it has 18 assets spread across India, 12 clinical establishments, 4 green-field clinical establishments, and 2 operating hospitals. Clinical Establishment refers to a fully centrally air-conditioned institution established and specifically customized and fitted with all fixtures, fittings, medical equipment and infrastructure required for running and operating a hospital, offering: (1) services for diagnosis and treatment for illness, disease, injury, deformity and/ or abnormality; (2) diagnosis of diseases through radiological and other diagnostic and investigative services with the aid or laboratory or other medical equipment; and (3) beds for in-patient treatment. The Greenfield clinical establishments mean that the investment is in an area where no previous facilities exist, and the Group is able to build according to its own specifications.

So where does its’ revenue come from? This is the part where it gets a bit tricky and I am slightly unsure and might be wrong. Its’ revenue is divided into 3 portions – Service fee, Hospital income and Other income.

Service fee: Aggregate of the base and variable service fee for providing Clinical Establishment services, including but not limited to the out-patient department services (OPD) and the radio diagnostic services (RDS). Based fee is an amount agreed upon with Fortis group and increases 3% p.a. revised upwards for capex/expansions and variable fee is 7.5% of the Fortis Hospital’s operating income. Sounds good on paper that it is able to participate in the operational growth of the Fortis hospitals.

Hospital income: Solely arises from the provision of medical services of the 2 operating hospitals under RHT.

Other income: Includes lease income from pharmacy, cafeteria, bookshop, automated teller machines and other amenities in the Clinical Establishments of the Group

This is slightly confusing as if I understand correctly from the prospectus, the hospital service companies will hold all of the RHT clinical establishments in the initial portfolio, and will enter hospital and medical services agreements with Fortis entities, which will manage and run the operations of those establishments and provide additional healthcare above those provided by the hospital service companies such as in-patient and emergency services. Sounds a bit odd to me, but I am definitely unfamiliar with the way how this works.


Anyways, diving straight into my own estimated calculations, using the Gordon Dividend growth Model, assuming no growth rate and constant capital structure, the back of the envelope computes the share price to be approximately $1.02.

Shareholder equity (S) – 739,608

Debt (D) – 269,795

Cost of equity – 7.0% [assumed as the yield rate that the Group’s investors seek, which can also be taken as yield investor is seeking, and actually the yield rate I am looking at]

**Note that cost of equity above is different from distribution payout amount below, (cost of equity may vary, depending on the entry price)

FY2012 – $0.0355 (half year data available due to listing in Oct 2012)

FY2013 – $0.0405+$0.0414 = $0.0819

FY2014 – $0.0361+$0.0371=$0.0732

FY2015 – $0.039+$0.0382=$0.0772

Cost of debt – 6.5% [conservative estimate, with 4.5% fixed rate note from multicurrency MTN]

WACC – 7.31% [(S/(S+D)*(Cost of equity) + D/(S+D)*(Cost of debt)]

Valuation – $1.026 [(Cost of equity)/(WACC), Assuming no dividend growth]

For this share, I bought it at a fair price of $1.01, which is different from other shares which I buy them undervalued instead. Going by its NAV of $0.927, it is currently trading at a premium of approximately 8.95%. It also have a lot of room for expansion/acquisition via debt, with its current gearing ratio at 18.1%, and management is voluntarily adopting a gearing limit of 60%, with a target policy of 30-40%. Currently it has a distribution policy of distributing 95% of distributable income for FY2017, and have 5% retained for future capital expenditure in relation to expansion or replacement initiatives.


So why was I attracted to this? It’s for the reasons below:

Growth of Healthcare

Healthcare is always necessary and the demand for it will only rise over time. It has blossomed well in Singapore, with healthcare becoming more expensive over time (just look at the share price of medical related companies), and India being an emerging company, there will be plenty of opportunities for it to grow and develop. People are also getting more affluent in India, which results in an increase in lifestyle related diseases for the Indian locals and a growing medical tourism industry will only increase the demands for the healthcare sector. This is also receiving a boost from the government, whereby government encourages industry players to provide quality healthcare through public-private partnerships, tax incentives, and subsidies, and promoting health insurance market to make private healthcare more affordable. Moreover, Religare has a very strong sponsor, Fortis, and have rights of first refusal over the clinical establishments it own, allowing Religare opportunities for expansion of assets. Also, despite the premium over the NAV, it does not seem to earn rental fee of the hospital establishment, but rather providing medical services. Comparing to other players in the similar industry, healthcare REITs also tend to command a premium over NAV as well.

Business trust structure and distribution policy

I have been looking for an investment with constant recurring income and I guess a business trust structure fits the bill. Singaporeans in general prefer REITs, and especially with the current downturn in occupancy rates for Singapore REITs, it might be a good time to look at REITs but the reason I am not choosing a REIT is for the simple reason that I am lazy. Buying REITs, there might have a higher distribution cost and lower corporate tax, but it comes at a cost to a personal income tax. Typically REITs have a 2 tiered distribution, a component which is not taxable, and the other component is taxable. I am simply lazy to include it when filing for tax, and hence I’m looking for business trusts instead. Business trusts are not obligated by law to distribute at least 90% of income, but generally they do and since management has announced its policy so as previously mentioned, it should be okay to have a recurring income. Over time, as the green-field establishments get upgraded and with the services fees increasing each year, hopefully the distribution will increase over time as well.


So what are some of the -ve things to consider?

INR currency

As with all companies who have their business outside of Singapore, it is unavoidable that there will always be currency exchange risks. Religare is no exception, with its business in India. Management have taken steps to mitigate this risk by entering forward contracts to hedge close to 100% of cash flows for distribution, which is a good thing. I don’t think anyone can accurately predict the INR/SGD rate in the near future and hedging to lock in a fixed rate is good as it provides certainty, which equates to a more stable distribution.

Exposure to India laws

With its’ assets situated in India, it is naturally subjected to Indian laws and government rulings. I am not very familiar with Singapore laws much less Indian laws, and taking a cursory glance at the prospectus, it might be scary, as it flags out issues such as not able to validate title deeds, ability to repossess land etc. Such an example is the disposal of economic interests in Fortis Hospotel Ltd to FHL. I am unsure of the difference between economic interest versus equity interest as I always thought they are the same. Guess I need to find out more. Regarding this, I can only put my trust in the managers to see that operations and things run smoothly over there.

Complex trust structure

religare health trust structure

Enough said. The trust structure diagram is complicated and confusing. I am also unsure of how the relationship between Religare and Fortis work out to be and it does not seem to be as simple as it is.

Fee Structure

Base fee – 50% paid in units

Perfomance fee – 50% paid in units

Development fee – payable in the form of either cash or units

As you can see, there is high potential for dilution, something to watch out for.


Conclusion

In closing, I think it is a fair price for its value and I plan to hold this share for a long long time. In the short run, there will definitely be a dip in revenue due to the Fortis Hospotel Ltd sale transaction to FHL, but I am optimistic of its’ long term prospects to be a dominant player in the India healthcare field. However, a part of me is unsure of how this can be beneficial to society as a whole in providing affordable healthcare as the hospital service business is to charge the patients a high fee for medical care. This is probably compounded more by the fact that the board of directors is mainly composed of finance trained people and only a single person with a degree in medicine in the mix. Any thoughts or comments? Let me know what do you think or if I am wrong in any area.

First visit to AGM – Sunningdale Tech Ltd 21st AGM

**Note that the below is merely my own opinions and based on my own memory of the AGM. It may be biased and may not be accurate at all. Readers please be advised if you are planning to invest in the stock, kindly do your own diligence. Thanks.

This is a late post as the AGM for Sunningdale Tech Ltd was held on the 18th April 2016 at Pan Pacific Hotel and I was distracted by events that happened the past week. This was also my first time going for AGM. I have always wanted to visit one in the past, notably for Saizen REIT, but my previous work doesn’t allow me to do so. Thus, I was quite excited and happy that I was able to attend this one. Visiting AGMs will allow shareholders to understand the company better via issues raised and discussed which can’t be found in the annual reports or from websites and also to be able to listen to viewpoints from other shareholders and to learn from the more experienced shareholders.

 

Sunningdale Tech Ltd (BHQ) is a company listed on the SGX, and it is a manufacturer of precision plastic components. It has 4 main business segments – Consumer/IT, Automotives, Healthcare and Mould fabrication. It’s main clientele is from China, Hong Kong, Singapore and Malaysia. It is considered a micro-cap company, with approximately $200M SGD market capitalization. It is currently trading at a low P/B ratio of approximately 0.644 and has a P/E ratio of about 5.It has a global presence via the multiple manufacturing facilities throughout the world, giving it the strategic position to target and capture opportunities in diverse business sectors globally.

As I look around the people who attended Sunningdale’s AGM, I noticed that most of the people are quite old, whereby most of them looked to be above 50 yo, and very few young people. As per the annual report, the shareholding is quite fractured and mostly owned by retail investors. Also mentioned by the Chairman during the QnA session, the shareholder base is quite stable, as he noticed the same bunch of people at the AGM over the years. However, I can’t help but notice 2 young people decked in suit with their suitcase who are most probably institutional investors.

The AGM began with the CEO [Mr Khoo Boo Khor] giving a short update on the financial statements of the company, which could be found from the annual report, and followed by the integration of their acquisition of First Engineering Ltd. Looking at how they praised the efforts and glowing reports of the integration, I must say they are very happy with their acquisition.

After the very brief presentation by the CEO comes the QnA session. This is the most anticipated time for me as I get to hear the concerns and viewpoints of other more experienced shareholders. I supposed I was quite fortunate due to the fractured shareholding, many various shareholders raised questions and I got to learn quite a bit from it, compared to the STARBURST Holdings AGM which I attended a few days later, whereby 80% of the shares were held by the Chairman and CEO and few questions raised by the shareholders.

Some of the questions raised were pertaining to future company revenue growth, currency volatility impact on company’s profits, insider buying/selling, impact of 3D printing, dividend payout policy, etc etc. Most of the questions were actually answered by the Chairman [Mr Koh Boon Hwee]. I was quite impressed as despite his age, he was still sharp and quick-witted. After returning home and digging his background, only then did I realized that he was previously the Chairman of DBS and SIA as well. However, it seemed to me that he overshadowed the CEO and the CEO seemed to have a smaller presence in the room compared to the Chairman.

So here are some of my takeaway points from the AGM:

  • Diversified business segments – Despite revenue from healthcare segment dropping, the Chairman noted that this is due to timing issues of revenue recognition and healthcare projects tended to be realized over a longer period of time 3-5years compared to that of Consumer/IT which has a shorter period of <1 year. Also, due to the stiff competition in plastic precision parts, their strategy is not to specialize in a single product and they plan to expand their product offering in order to capture a bigger variety of markets instead.
  • No fixed dividend payout policy – A shareholder pointed out that even though revenue has increased 41.8% y-o-y, dividend payout has not increased to match revenue growth. In fact, it has only increase by 25% to 5cents per share for FY2015. The Chairman reiterated that there was no designated dividend payout policy communicated.
  • Pricing pressure from customers – Due to devaluation of RMB and various factors, they are facing strong pricing pressure from customers. The Chairman has pointed out that this is a risk and they are picky about the customers they work with and customers which they can do business with for a long time. They will not accept businesses with single digit profit margins, and are striving to keep profit margins at double digits.
  • Credit concentration risk – They are careful that credit risk with respect to trade receivables are not concentrated within a few clients. From their annual report, it can be seen that it has approximately 31% due from 5 major customer groups which are established MNCs. The Chairman also noted that this is low relative to its industry peers where credit concentration norm is approximately 70%.
  • CCY exchange risk – With the central banks of various countries intervening so often, the currency exchange volatility is increased. The Chairman pointed out that most of the transactions are done in USD, and would definitely gain from an appreciation of USD. Also, they have tried to mitigate this risk by way of natural hedging through the foreign currency borrowings they have as much as possible.
  • Rising wage cost in China – Despite the devaluation of the RMB, as with all emerging countries, as the economy develops and grows, wage cost will rise along as well. This is a clear issue for Sunningdale as they have quite a number of plants situated in China. To combat the rising wage cost, specifically from Shanghai, they are building a plant in Suzhou, which will hopefully reduce cost. They are monitoring this closely.
  • Strong positive cash flow – Enuff said, cash is good, and they have been generating positive cash flow over the past few years. Of course granted that past actions are no predictors of future actions but if they have a track record of doing so, I don’t see why they won’t maintain to generate positive cash flow. As of now, they are in a net cash position of $6.3M, which will be reduced after paying out dividends for FY2015.
  • Focus on operational efficiency and full integration of all acquisitions and subsidiaries – Guess this is right up in the CEO’s alley with his years of manufacturing operation experience. There is an emphasis on operational efficiency, which will hopefully bring down cost. There is underutilisation in the Southern China plants, and they are making plans for restructuring exercise. Also, there are synergies between the various subsidiaries due to streamlined processes and unified systems and processes across all the entities. This should be good as people can communicate to each other with the same terminologies and understand things better.
  • Potential dilution of shareholding – Motion was passed to grant the board the mandate to be able to issue shares up to 50% of the issued shares of the capital of the company. This is a cause for concern as it may result in the company causing massive share dilution if it requires to raise significant amount of capital for aggressive growth via acquisitions. Hopefully this won’t come to pass.

After the QnA session and the voting on matters put forth on AGM and EOGM, the meeting is concluded with a mini lunch buffet outside the room. As I was seated in the room till the end, I could see that people were leaving halfway throughout the meeting and only when I exited the room then I realised why. The old aunties and uncles were crowding around the table jostling for food. I could see that there was not much food left. Thankfully, some nice uncle came over to me and shared some of the puffs and pastries which he has accumulated on his plate. I had some bee hoon as well.

Overall, it was an eye-opening experience for me and I highly recommend shareholders to attend the AGM of their vested companies. Granted, different companies will have different settings and ways of conducting their AGMs but it would definitely be a good experience to learn more about the company.

Also, just an update on the Q1 results of Sunningdale Tech Ltd for FY2016, net profit actually dropped 49.3% y-on-y. This might seem like a big deal, but on closer inspection, it appears that this drop is due to a  $1.1M in 1Q15 compared to a foreign exchange loss of $3.2M in 1Q16. This surprised me a bit as I was not expecting the FX volatility to have such a significant impact on the earnings. Guess I need to learn more about the currency volatility impact on this. Despite this, revenue has actually increased 4.4% y-o-y with gross profit margin somewhat flat. Can only wait and see how things go…