I have already touched once in my writings on investing in Singapore. It was a part of “Christmas Gifts for Bargain Hunter” in December 2016. At that time, I owned two stocks – Nam Lee Pressed Metal Indusries (SGX:G0I, Financial) and S i2i Ltd. (SGX:BAI, Financial) (which I still own) – from Singapore. In addition to S i2i Ltd., I also wrote about Sing Holdings, SP Corp. and Brook Crompton Holdings. Actually, I didn’t write any deep analysis – I just picked those stocks mainly following quantitative metrics. However, I had dived deeper into Nam Lee and S i2i Ltd because I owned them.
All these recommended stocks have worked well so far.
S i2i Ltd. has risen from S$1.73 to S$2.70 (peak price: S$3.30), 56.1%.
Sing Holdings has risen from S$0.31 to S$0.44 (peak price: S$0.52), 41.9%.
SP Corp. has risen from S$0.48 to S$0.83 (peak price: S$0.95), 72.9%.
Brook Crompton Holdings has risen from S$0.32 to S$0.85 (peak price: S$0.94), 165.6%.
Not bad results in a year and a half, although nearly all market indexes have soared during this period.
Perhaps it would be a good time to look at the Singapore market again. Generally speaking, Singapore's stock market could be one of the best global markets in the near future. Overall valuation is not too high and expected future returns are quite a high. Singapore stocks are still relatively undervalued when compared to regional counterparts.
As we remember, the Singapore market is very modern and elaborate. Only few Western countries are comparable in terms of legal and regulatory transparency. In Singapore, society is very business-positive and effective, but the way in which individual companies operate can be a bigger challenge – not to mention their not-always so shareholder friendly management.
Here are some companies to study and learn.
Hanwell Holdings (SGX:DM0, Financial)
Hanwell Holdings is engaged in the manufacturing and sale of corrugated paper products and other packaging products. It is also engaged in the supply of provisions and household consumer products, and manufactures and sells soy bean products and noodles. The company is also engaged in the manufacturing and sale of corrugated paper products and other packaging products. The company's segments include Consumer Essentials and Strategic Investments Packaging. Geographically, business is carried out in Singapore, Malaysia, China and Japan. Hanwell Holdings owns 64% of Tat Seng Packaging, which is a leading manufacturer of corrugated paper packaging products listed on the mainboard of the Singapore Stock Exchange.
Market Cap: S$127.29 million
Price: S$0.23 (Net Cash -0.15, Net-Net Working Capital -0.11, Net Current Asset 0.30)
Tangible Book Value: S$0.49
Price/NCAV: 77%
Price/Tangible Book: 47%
P/B: 0.5
F-Score: 6
Z-Score: 2.11
Debt to Equity: 0.17
EV/EBIT: 2.7
Dividend Yield: 2.2
After this year's price drop, Hanwell Holdings is again very cheap. Best of all, the company has been growing and profitable for the past five years. It is also comforting to know that almost 40% of the group’s current assets are in cash and cash equivalents.
Hanwell Holdings operates a high-volume and highly competitive business where margins are low. The key factor here is keeping operational cost as low as possible, but the rising cost of raw materials can bring challenging times ahead. Having said that, at these valuation levels Hanwell Holdings offers sufficient margin of safety as long as cash reserves are not misspent unnecessarily.
Lion Asiapac (SGX:BAZ, Financial)
Lion Asiapac through its subsidiaries is engaged in manufacturing quicklime and hydrated lime. It is also engaged in trading of consumables required for steel product manufacturing and building residential and commercial properties for sale. In 1996, the company was acquired by The Lion Group from Malaysia, which controls two-thirds of the company's shares.
Market Cap: S$41.36 million
Price: S$0.51 (Net Cash 0.84, Net-Net Working Capital 0.88, Net Current Asset 0.97)
Tangible Book Value: S$1.00
Price/NCAV: 53%
Price/Tangible Book: 51%
P/B: 0.5
F-Score: 8
Z-Score: 12.68
Debt to Equity: 0
EV/EBIT: -1.6
Dividend Yield: 1.0
Lion Asiapac is a very cheap and cash-rich company trying to make a turnaround. Lion Asiapac reversed out of the red in the second quarter ended December 2017 with earnings of S$128,000 compared to a loss of S$232,000 a year ago. Revenue rose 55% to S$3.0 million in second quarter of 2018, from S$1.9 million a year ago, on the back of increased demand for lime products.
Notably, Lion Asiapac has a net cash pile of S$70.7 million, or S$0.87 per share, which is 172% above the current market cap of S$41 million and almost no debt. This is mainly due the sale of the Yangzhou property business last year. With this sale, the major risk of the cash being drained was removed.
However, due to challenging market conditions, the steel trading business has been left dormant for the last couple of years. The lime manufacturing business has generated mainly small losses until recently. Looking ahead, the future looks brighter even if there are challenges.
Investors should also recognize suspicions a couple of years ago that the company was funnelling money out to another company. This kind of accusation should be taken seriously because Lion Asiapac has a strong controlling owner, which can work for its own benefit. Looking at recent numbers and related party transactions, the situation looks better now.
CosmoSteel Holdings (SGX:B9S, Financial)
CosmoSteel Holdings is an investment holding company. It is a supplier and distributor of piping system components to energy, marine, water infrastructure and other industries. The firm is engaged in the sale, supply and machining of flanges, steel fittings, tubings and pipes.
Market Cap: S$29.91 imllion
Price: S$0.10 (Net Cash -0.07, Net-Net Working Capital 0.05, Net Current Asset 0.26)
Tangible Book Value: S$0.35
Price/NCAV: 38%
Price/Tangible Book: 29%
P/B: 0.3
F-Score: 5
Z-Score: 1.74
Debt to Equity: 0.06
EV/EBIT: -0.8
Dividend Yield: 4.2% (September 2017)
CosmoSteel Holdings is dirt cheap, and the reason is that the company has been losing money over the last couple of years. These years have not been easy for companies operating in the oil and gas market as the industry continued to be marked by weak sentiment and uncertainties in global economies. Considering that oil prices have taken a beating, the knock-on effects on support industries worldwide have been substantial. As might be expected with a service provider to cyclical sectors of the economy like oil and gas, CosmoSteel’s revenues and earnings fluctuate with the capital spending of the industries that it services. Eventually, capital spending will return, and the company will see better days.
After more than two years in the doldrums, there are finally some encoraging signs that the oil and gas market is rebalancing. This stock requires patience as the price has been falling in practice for the last year. In the meantime –Â while waiting for a huge jump in price if conditions improve – the investor has received a fair dividend.
Hengxin Technology (SGX:I85, Financial)
Hengxin Technology is an investment holding company engaged in the research, design, development and manufacture of telecommunications and technological products, and the production of radio frequency coaxial cables for mobile communications systems exchange equipment.
Market Cap: S$128.04 million
Price: S$0.33 (Net Cash 0.13, Net-Net Working Capital 0.18, Net Current Asset 0.66)
Tangible Book Value: S$0.78
Price/NCAV: 50%
Price/Tangible Book: 42%
P/B: 0.4
F-Score: 7
Z-Score: 4.36
Debt to Equity: 0
EV/EBIT: 1.0
Dividend Yield: 1.6%
You can argue whether Hengxin Technology is a Singapore stock at all. The business is mainly in China, and the stock is listed on the stock exchange of Hong Kong (after being delisted from its secondary listing on the Singapore Exchange), but the company’s registered address is in Singapore.
Quantitative Hengxin Technology is very inexpensive. The company has been profitable for years, but its main business segment of RF coaxial cables is a dying industry. Management has noticed the problem and made the transition to expand overseas, entering into the metro networks and high speed passenger rail networks.
As always with companies that mainly operate in China, there is an element of corporate governance risk, especially when the balance sheet appears too good to be true. In this case investors can say with a degree of confidence that current assets are real and have been verified, so the risk of default should be low.
Kingboard Copper Foil Holdings (SGX:K14)
Kingboard Copper Foil Holdings is a Hong Kong-based investment holding company engaged in manufacturing and trading of polyvinyl butyral and related products in China. The company operates through two segments, PVB and License.
Market Cap: S$325.13 million
Price: S$0.45 (Net Cash 0.36, Net-Net Working Capital 0.39, Net Current Asset 0.40)
Tangible Book Value: S$0.66
Price/NCAV: 113%
Price/Tangible Book: 68%
P/B: 0.7
F-Score: 8
Z-Score: 9.05
Debt to Equity: 0
EV/EBIT: 13.4
Dividend Yield: 0
Kingboard Copper is not necessarily the cheapest company but rather a kind of special situation. Kingboard Copper is majority owned by Kingboard Chemical Holdings (roughly 65%). A unit of Kingboard Laminates, which is 72.59% owned by Kingboard Chemical Holdings, made an unconditional cash offer of 40 cents per share to minority shareholders of Kingboard Copper in March 2017 to take the company private. It was a ridiculously low offer, just slightly higher than the market price at that time (a 17.7% tender offer premium), and far below the company’s tangible book value.
Many small shareholders were enthusiastic when the company was forced to court because they had not taken into account the interests of shareholders as a whole. Surprisingly, the decision of the Bermuda Court of Appeals was in favor of the majority of shareholders. The desired rapid stock price rise shrank up to nothing.
If you bought the stock in 2014 or 2015 and sold it after the tender offer, you can congratulate yourself. Otherwise I recommend keeping your fingers apart from the company that operates in China and that is really showing no respect to minority shareholders.
Conclusion
Before investors jump onto the bandwagon of seeking a bargain through net-net stocks, it is still best to do their homework and dig further into the company's business and fundamentals. Not all net-net stocks work out well for investors, and some might even end up losing you money. But if you choose the right ones and take care of appropriate diversification, you will get huge upside potential with reasonable margin of safety.
Disclosure: Long CosmoSteel Holdings.
