A basket case of Graham-type stocks

I ran a screen on Singapore-listed stocks on 22 Sep 2016 for deep value stocks, with some simple criteria below and the sub-bullet points being the criteria’s rationale:

  1. Enterprise value < market cap
    • So that cash outstrips debt. This provides greater operational cushion even if the core business falters down the road
  2. Price to tangible book value < 0.7
    • Higher possibility of total residual liquidation value exceeding market cap
  3. Market cap > S$50m
    • Provides higher liquidity for the purposes of stock purchases and  exits
  4. Trailing-12-months operating cash flow > S$0.1m
    • Higher possibility of operationally sound business
  5. Trailing-12-months free cash flow > S$0.1m
    • Indication of higher possibility of cash pilling up over time. This raises the margin of safety as intrinsic value builds up even if the market fails to recognise the value over the short run
  6. Singapore-domiciled
    • Not including this would throw up a good number of Chinese companies, most of which may have financial and operational issues

Deep value stocks are not usually known to be cash generative from the onset. As such, to get the best of both worlds, I added criteria 4 and 5 for additional kickers to the equation. Correspondingly, these provide another layer of margin of safety for the potential investment to work out over time.

Not surprisingly, the screen resulted in just a handful of names – 5 to be exact:

  1. Dyna-Mac Holdings Ltd
  2. Hanwell Holdings
  3. Hai Leck Holdings
  4. Metro Holdings
  5. PEC Ltd

This then calls for the rolling up of sleeves to do a liquidation value analysis on each of the stocks to see if they are viable investments. I have done a very quick back of the envelope calculations for all 5 but in this post, I’ll start with what appears to be the most interesting of the lot. The “undervaluedness” of this stock seems to be the deepest among all the candidates, but it is by no means a shoo-in as an investment. This stock ended up throwing up more questions than answers as I dug deeper.

Hanwell – Money for nothing and your subsis for free

Liquidation value table


The liquidation percentages largely follow that of Graham’s conservative teachings. The rationale behind the company level liquidation percentages that move the needle in the calculations are as follows:

  • Cash – Cash levels have been rising over the years. As such, likely to be able to be fully extracted almost without much fuss. Applied a small discount in event of miscellaneous payouts or small working capital requirements
  • Trade and other receivables – Typical Graham application of 75% liquidation value
  • Property, plant and equipment (“PPE”) – The bulk of the cost and net book value relate to items other than higher-value buildings. They are mostly leasehold improvements, renovations and computers which are likely to fetch a much lower value if sold off. As such, applied larger and conservative discount to PPE


On the company level, the residual liquidation value is S$121m, out of which over 80% is made up of highly liquid cash holdings. The residual liquidation value matches almost that of the market cap of S$119m as at 24 Sep 2016. This residual liquidation value does not account for the subsidiaries which it holds. This essentially and theoretically means that the subsidiaries are available for free. A high-value subsidiary and assets held for sale are what I term as kickers as explained below.

Kicker 1

Hanwell owns about 63.9% or S$40m in market value of Tat Seng (“Tat Seng”), a publicly-listed corrugated paper packaging products manufacturer on the Singapore Exchange. Tat Seng’s stock price has marched upwards over the years as opposed to Hanwell’s declining stock price. To be conservative, applying a 15% discount to the stake in the event of a liquidation gives us S$34m. The stake is held under the group level as a subsidiary.

Just as quick points, Tat Seng’s market cap as at 24 Sep 2016 is S$63m while its trailing-12-months free cash flow is S$16m. In the last 2 years, it generated positive free cash flow. On a quick and dirty liquidation value analysis, we get a residual liquidation value of S$41m. While it is not as severely undervalued from a balance sheet perspective, it is a clearly viable business that is cash generative and the stock price should not have immense room to fall.

Kicker 2

Through a web of direct/indirect ownership, Hanwell is selling a 49% stake in Million Cube Limited which holds a property development project of a golf club in Hainan, China – Sanya Yalong Bay Sun Valley Golf Club. Talks to sell it to Kang Cheng Holdings Limited (“Kang Cheng”) (unknown party) for HK$307m (c.S$54m) has been held since March 2014. While the deal has not been completed, Kang Cheng has paid non-refundable tranche deposits of HK$150m (S$26m) over the past 2 years+, with the most recent tranche amounting to HK$50m (S$9m) paid in Apr 2016. Although there is no absolute certainty of the deal ultimately materialising, the S$26m in deposits collected raise the chances of the sale completing (sunk cost fallacy on the buyer’s end) and even if it doesn’t, Hanwell has the S$26m in the bag, along with the golf course intact. Applying a 25% discount on the remaining unpaid amount gives a total liquidation amount (including deposits collected) of S$47m for kicker 2. The stake is held under the group level as assets held for sale.

On a side note, one could be forgiven for wondering why a consumer goods company is holding stakes in a golf course. I wonder that too, and part of the answer or at least its origins can be found in the last point of “Risks and red flags” below.

Risks and red flags

  • Mounting cash levels to an obscene level close to its market cap beg the question of what is going to be done with the cash and more importantly, is it really there – no dividends paid since 2012
  • Value of Tat Seng stake may decline if packaging business slides
  • Risk of loss-making subsidiaries burning through cash as holding company loans them more money or impairs the loans
    • Gross non-trade amounts due from subsidiaries (under receivables) stood at a whopping S$68.1m as at 31 Dec 2015. While a good S$8.2m appears to be converted to cash in 2015 from 2014, the impairments rose from S$14.9m in 2014 to S$23.0m in 2015. This signifies the deteriorating business of the subsidiaries. That said, Hanwell, on the company level has been able to convert much of its receivables successfully over the last few years into cash so the immediate risk of cash burn appears mitigated
  • Perceived lack of corporate governance
    • The chairman, who is Hanwell’s 2nd largest shareholder and holds a stake of 17.9%, is part of senior management/chairman of several other listed companies, including Hanwell’s subsidiary, Tat Seng; Hanny Holdings (insider trading cases more than 10 years ago); China Enterprises Limited (penny stock hammered to near-death, which very curiously appears to have indirectly sold the golf course described in kicker 2 to Hanwell in 2012! Why it ended up in Hanwell, I’ll leave it to the readers’ speculation). Most of the mentioned companies’ stock prices, other  than Tat Seng, have not been doing well. To top it off, the chairman’s reputation among netizens in online forums hasn’t been too ideal.

Mitigating factors

  • Dr John Chen, who was a former Member of Parliament of Singapore is on the Board. Having a reputable (former) public figure on the Board is never a silver bullet to governance ills but it does provide a slight slight tinge of comfort. At the very least, I suspect he would not risk being associated with a company that is outright fraudulent – think veracity of S$104m in cash on the company level
  • Sam Goi, a billionaire in Singapore who is supposedly a shrewd businessman, particularly in the consumer goods sector, has a 15.1% stake in Hanwell. He also has his son, Goi  Kok Meng, on the Board of Hanwell since 2012


Completion of the sale of the golf club which would raise the group’s cash levels by about another S$28m, thus, increasing the pressure to further unlock value for shareholders.


The 2 kickers add an additional S$81m to the existing residual liquidation value (company level) of S$121m, to reach a total adjusted residual liquidation value of S$202m. This compares very favourably with the market cap of S$119m, which provides a margin of safety of 41% and a corresponding potential upside of 70%.

The adjusted residual liquidation value does not account for Hanwell’s other subsidiaries such as Topseller Pte Ltd, Tipex Pte Ltd and Fortune Food Manufacturing which manufactures and/or distributes popular consumer products stocked in Singapore’s supermarkets. These brands include Royal Umbrella (rice), Beautex (tissue paper) and Fortune (tofu). These businesses are likely suffering from operating cash outflows, given that Hanwell’s consolidated group operating cash flows are lower than that of Tat Seng’s standalone numbers. Nevertheless, given the established mentioned-brands in Singapore, they are likely be worth much more than zero if they are liquidated.

At the group level, consolidated current and non-current debt as at 30 Jun 2016 for both Hanwell’s and Tat Seng’s group level balance sheets match precisely. This points to an absence of debt held by Hanwell’s other subsidiaries, thus, increasing the attractiveness of the stock.


The crux of the thesis hinges on 2 issues:

  1. Is the cash real?
  2. Can management be trusted not to squander the cash pile?

On cash, I am inclined to think it is real since Hanwell operates out of Singapore, at least at the company level. While the same can’t be said for the overseas subsidiaries, in this case, it doesn’t really factor into the thesis anyway with kicker 1. As for Kicker 2, Googling led to at least some sources (Tripadvisor and Raffles Hainan) pointing to the golf course being a real development. Continuing on cash levels, KPMG, the auditors, would have to have sent bank confirmation letters locally to Hanwell’s 3 principal bankers – DBS, UOB and Standard Chartered – and in my opinion, being top-tier/Singapore banks, it provides less leeway for hanky panky. I would be more concerned if they were smaller and/or are less well-known banks based outside of Singapore. Also, more than 90% of the cash at the company level is tied up in fixed deposit accounts. This makes it slightly harder to use tricks such as last minute bank deposits from some other unrelated bank accounts to create the illusion of cash on the balance sheet. Lastly, interest income amounting to S$1.3m in FY2015 or an interest rate of 1.4% adds up to the story of fixed deposits being S$91.1m as at 31 Dec 2016.

On whether management can be trusted, my opinion is: not really. I suppose the 41% margin of safety is where it is going to be applied – on management screwing up – mitigated by a leap of faith that Sam Goi and Dr John Chen keep a close watch to protect their reputation and monetary interests.

I will end by saying I will likely invest in Hanwell, starting with a small stake, but it will be in conjunction with a basket of other deep value stocks for diversification.


Thoughts on position sizing

For me, position sizing has been somewhat haphazard and based on non-quantitative intuition of how much risk I am willing to take on a particular position given its potential upside and downside. Having put this on the back burner for a long time, it is at least somewhat of a framework now although it is still a little rudimentary. The right approach should be the utilisation of the Kelly Criterion which would provide a sounder mathematical basis to allocation.

I first came across the Kelly Criterion a few years ago, after reading the book, Hedge Fund Wizards by Jack D. Schwager but have never quite utilised it. By incorporating the Kelly Criterion into my portfolio, I will be able to determine how much each position should be sized in accordance with the probability of an investment working out and the payoff ratio. The formula goes like this:

Kelly % = W – [(1 – W) / R]

W = Winning probability
R = Win/loss ratio

Plenty has been written about the Kelly Criterion so I shan’t go into the details. To read more about the origins of the formula and how it should be used, Investopedia has a quick introduction to it. The Kelly Criterion is not without caveats – the most important being that the 2 variables of W and R must be correctly assessed.

In a typical casinos game, the odds of the game can be accurately determined and payoffs are fixed beforehand. As such, the W and R variables can be plugged into the Kelly Criterion. It works well theoretically and in practice under such clear cut situations.

On the other hand, for equities and correspondingly, the underlying businesses, these are inherently complex and there are many interlocking sub-variables and situations that are out of management’s control. This ultimately means W and R are really just estimations based on imperfect information. Without a crystal ball, these assessments are at best approximately right and even then, are subjected to each assessor’s individual biases that will lead to skewed inputs – risk of garbage-in-garbage-out.

That said, I still think it is better to be approximately right than precisely wrong, and that is why I will still be utilising the Kelly Criterion to manage my portfolio. Some tweaks will of course be needed to reduce the risk of overconfidence (I think I am a natural optimist and tempering the bull in me will be most ideal) and portfolio blowups from unexpected market declines. Below are some that come to mind which I will be implementing.

  • Instead of a full Kelly, utilise half Kelly (half of whatever the percentage the Kelly Criterion spits out)
  • No single position to take up more than 15% of the portfolio

Do I have an obsession with tech-related companies?

I came to the realisation that my last few investment opportunities writeups have been on tech-related companies – Sapiens, YouGovVeriSign and Ebix.

Truth be told, I have always been skeptical about tech as an area ripe for investing, simply because the pace of change is so fast and you never know where and which direction the next wave of competitive disruption is going to come from. Think MySpace, Friendster and WebVan which have all gone the way of the dinosaurs,  and all the Ubers of the world which have burned through billions of capital without generating a dollar in profits. Warren Buffett has been known to absolutely shun the notion of investing in tech companies.

That said, I would hesitate to paint all tech-related businesses with the same broad stroke. The irony with Buffett is the fact that Berkshire has stakes in IBM, VeriSign and most recently, Apple, although Berkshire’s positions in VeriSign and Apple were most likely initiated by his deputies.

My investment theses of Sapiens, YouGov, Verisign and Ebix are not so much based on the tech theme being all the rage now with investors. I will be the first to admit that technology in itself is not a moat. Rather, these companies happened to be tech-related; and by leveraging on technology, they created relatively strong moats such as network effects, switching costs and Intangible brands, for themselves within the space they are in. These have made it hard to dislodge their competitive positions, paradoxically, because of technology as an enabler in creating those moats mentioned. Ultimately, these qualities will come to nought if it does not translate to the most crucial metric – cash flow. In these 3 businesses, they generate copious amounts of cash and will likely continue to do so for many more years to come.

Cash flow generation is the core reason why I like Sapiens, YouGov, VeriSign and Ebix as investments. They just happen to be tech-related.

Grabbing life by the horns

“Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything – all external expectations, all pride, all fear of embarrassment or failure – these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.” – Steve Jobs

Alice Schroeder’s Reddit Ask Me Anything thread

I had the good fortune of stumbling upon Old School Value’s Facebook post on Alice Schroeder’s Reddit Ask Me Anything (AMA) thread. For the uninitiated, Alice Schroeder is the author of the wonderful book – The Snowball – on Warren Buffett.

Though the thread is more than 2 years old, it doesn’t discount the fact that it is a treasure trove of insights from the woman who spent many years understanding his methods and profiling him. It’s probably the next best thing to hearing from the man himself.

Culled some interesting points from the thread for future reference.

  • On how Buffett does his famous back of envelope calculations:
  • Schroeder on a cheap opportunity being a catalyst by itself and on her mistake of anchoring her desired buy price:
  • On Schroeder’s book recommendations:
  • Schroeder on not tying oneself to a single investment approach:
  • On looking forward to life:
  • Schroeder on how to get ideas to start a business (in relation to having understanding disruption and having a sense of how the future looks):
  • Schroeder on assessing B2B businesses’ competitive advantages:
  • On the differences between how Buffett filters opportunities then and now:

Investment opportunity – Sapiens International Corporation N.V.

sapiens logo.jpg

An investment opportunity write-up fresh from the oven! Well, not exactly since it has been 2 days since I completed the write-up so it really is a little stale.

The company in question is Sapiens International Corporation N.V., a software solutions provider to the insurance industry, listed on the NASDAQ. In a nutshell, its software helps insurance businesses process their policies, claims and billing which can get very unwieldy given the volume upon volume of transactions to be processed daily. The systems are mission-critical to its customers and as such, require plenty of deliberation by customers before signing up for Sapiens’ offerings. Once implemented by customers, this leads to Sapiens pretty much locking in their customers – high switching costs. It also means Sapiens then throws off plenty of cash flows from the maintenance services it will be providing over the 10 to 15 years during the typical product life-cycle of its installed software.

Valuations wise, it trades at an adjusted free cash flow (taking into account only maintenance capex/capitalised software based on Bruce Greenwald’s method) yield of 6.9%. I arrived at an intrinsic value of USD16.06 per share based on a simple discounted cash flow valuation, as compared to its price of USD13.29 per share as at 12 Sep 2016. While the margin of safety of 17.2% isn’t that wide, Sapiens is a high quality business that can reinvest capital at a relatively good rate and I am comfortable owning it.

One of the things I am trying to find out or at least have some doubts on, is the level of licensing revenue which has been declining. Currently checking it out with the company and hoping to get a reply on the matter soon.

For further details, including the financials, risks, and the general thesis, feel free to view or download a copy from the link below.

Sapiens – 14 Sep 2016 (NASDAQ) (USA)