Sunday, April 6, 2014

Annual report review: Yangzijiang, Sabana Reit, Lee metals and Venture

Talk about book review, I will do a annual report review, so there will be no numbers here, just qualitative analysis/thoughts.

When we invest, we have in mind, a story for the company. The annual report confirms the story, unlike a novel, the more predictable the story is, the better it is, I do not like companies that give me surprises. Lets look at a few companies under my portfolio.

Lee Metals:

Story intact. Headwinds expected as competition increased, but construction expected to remain robust for the next few years. Key catalyst will be the TOP of Austville, and key expansion will be in the manufacturing and fabrication arm. MRT construction should demand strong. Only words that surprised me is "leader" position. Didn't know Lee metals is a leader in the supplier of reinforced steel, always thought Tata Steel (Natsteel) is the biggest. Gearing is high due to the management of inventory, if there is no wild swing in Steel prices, given their track records, Lee metals should be able to navigate fine.


Not vested. Again, AR is about the new capabilities (With 3D printing mentioned) and customers' satisfaction.  My story is about that of recovery. The last paragraph confirm my story is that of management too. "I am confident as the global economy returns to growth, the Group efforts over the past several years to broaden its market share and customer base, and to deepen the knowledge and domain technology will pay real dividends."

For the past 2 years, Venture falls more than its dividends when it goes X D. I wanted a bigger margin of safety too. So I wait. Hope I don't miss the boat on this one. It has to go closer to $7 cum dividends or $6.5 X D for me reduce cash holding.


Generally, story intact. Shipbuilding segment continues to do well. 10000 TEUs container delivered with the rest on scheduled. Seaspan exercised more options. The verdict on other segments such as property and HTM are still in the open. Story of conglomerate in the making is intact(Think Keppel). Mentioned injection  of HTM into a full finance company either through an IPO or reverse takeover in the future. Such spinoffs could be catalysts but will not happen anytime soon.

Biggest shocker, although not addressed in the AR is that Ren Yuanlin might be stepping downing in the next 3 years. Story would no longer valid if he leave totally, meaning not serving as executive director, or CEO.

As for the HTM, there is a need for some numbers. They now have a target of 12% yield for their HTM investments, some numbers would be appropriate here (Posted in valuebuddies by me )

The HTM is no longer made up of mostly of 1 year investment. (See note 15)

2013 2012
Within one year 8,343,505 8,047,060
Between one year to two years 4,361,700 3,362,900
Over two years 2,056,740 620,000

A big increase of investment whose maturity is over 2 years (15%). Maybe some "refinancing" behind the doors? It is fine with me as long as there are no surprises.

There also do not break down the HTM by yield anymore (Hope I didn't miss it )

Impairment is minimum
As at 1 January 653,250 554,280
Allowance made 587,220 405,196
Allowance reversed (605,876) (306,226)
As at 31 December 634,594 653,250

Prudence of type of collateral
Collateralised by: 2013 2012
– Listed shares in PRC 877,000 130,000
– Restricted shares of listed companies in PRC 150,000 230,000
– Unlisted shares in PRC 1,781,440 2,646,000
– Properties and land use rights 8,535,505 6,498,960
– Guaranteed by non-related corporations 3,418,000 2,525,000
14,761,945 12,029,960

If you ask me, rightly or wrongly, I think shares are the most useless collateral as the shares will most be probably be worthless when the company go bust. Glad shares as a collateral is reducing even though HTM is increasing.

Renyuanlin mentioned 2014 could well be the "darkest before dawn" as the fat margins of boom years orders are delivered and 2014 will see the lower margins orders being delivered. I see the "darkest moment" manageable (meaning while margin might be affected, it should not result in a loss) due to the following:

1) Tax rebate. From AR: "Newyangzi has recently been accredited as a “High/New Technology Enterprise” by Jiangsu Ministry of
Science and Technology Department. Upon the approval from the tax authority, Newyangzi will be enjoying a preferential corporate income tax rate of 15% for a period of 3 years starting from the fiscal year of 2013 by virtue of a preferential tax policy for accredited enterprises, as opposed to the prevailing corporate income tax rate of 25%. " Since rebate start in 2013, I expect the positive reversion to tax paid in 2013 and the tax savings in 2014 to offset some margin weakness.

2) Steel prices is still at historical low, although we do not know how long it will last, but given the excess supply, it should not be anytime soon.

Sabana Reit:

Sabana reit is one investment that I couldn't appreciate its story. I recently accumulate more when its price hit $1.1 It is a lucky decision since the price improve with the general market. I always believed that the conversion of Master leases to Multi-tenanted leases will not result in an Exodus of tenants as the sub-tenants have been increasing. I also believe the ex-master tenants are still renting. My analysis is correct. From AR:

"The vacant space (by NLA) at the four returned properties totaled 194,634 sq ft (or 5.5% of the total portfolio). That compared positively to 240,635 sq ft (or 7.3% of the total portfolio) of vacant space (by NLA) at the four expiring master-tenanted properties as at 30 June 2013. As at March 2014, the net balance of NLA available for lease was at 184,680 sq ft or 5.2% of the total portfolio."

However, the rent must increase or occupancy improve to offset the higher cost of managing mult-tenant units. As of March 2014, another 10000 square feet of space found tenants. Slow but progressing.

Then the predictability of story ends. Here are the few surprises/shocks I had:

1) You think the recent acquired AMD building occupancy sucks? Well,

200 Pandan is at 54.1%

123 Genting lane is at 62.8%

8 common wealth is at 68.6%

Lor Chuan is at 93.8%

With the exception of Lor Chuan, I was shocked by the high vacancy rate of the other 3 master leases, no wonder they wanted to return the master lease. So is rental income at 123 Genting, 8 commonwealth and 200 Pandan going to fall badly despite better or constant occupancy rate? We will need the Q1 results to figure that out.

2) Introduction of Units Reinvestment Plan.

Please la, manager cash out on their units very quickly after they get their management fees through units, what then will give investor's confidence? Also, given the high yield of the Reit now, and the discount on the units to attract people to subscribe to it, it's dilution to shareholders' ownership will not be insignificant.

3) Management is still " continue to take a selective approach in regards to new acquisitions and will continue to invest across asset types for greater diversification and stability" Please la (x2), fill up your stupid space first!

So, in generally, we have a idiot proof business in terms of industrial property reits, and at rather attractive valuation, but we have management whose interest is not aligned with the shareholders.

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