A cheaper alternative to Kingsmen Creative?

Design Studio is Singapore's leading furniture manufacturer, interior fitting-out and product specialist. They serve the residential, commercial and retail properties. 

DS is slightly different from the more popular Kingsmen Creative which specialises in Corporate/Retail Interiors, Exhibitions/Events, Theme parks & Museums.

3 Business Segments
Residential - supply and install products like Kitchen cabinets, vanity cabinets, wardrobes etc.
Commercial - Interior fitting out to Hospitality and Commercial developments
Distribution - Distribute imported brands in Singapore 

Notable clients

• Trump Tower, Las Vegas
• Burj Khalifa, Dubai
• Resorts World Sentosa
• Marina Bay Sands
• City Developments
• Capitaland 
• Keppel Land - Reflections at Keppel Bay
• GoucoLand Limited
• Far East Organisation
• South Beach Mixed Development
• Westin Hotel, Marina Bay

These big names bodes well for DS' reputation, helping them to gain more clients in the future.

Valuations
Design Studio
PE ratio = 6.8
PB ratio = 1.2
Dividend yield = 11.8% (more on that later)

Kingmens Creative
PE ratio = 11.5
PB ratio = 2.0
Dividend yield = 4.0%

Past results

DS revenue has been on a general upward trend for the past 5 years, riding on the wave of the local property market here.

However, what makes me uneasy is how the profits do not seem to be aligned with the rising revenue. This has probably got to do with its margins for each individual project, and product mix.

Although the margins have been fluctuating, it is still higher than its peer Kingsmen who enjoys about 5-6% margin instead.

Strong Balance Sheet

I love the fact that Design Studio has zero debt and sits on heaps of cash. FCF has been in the positive for the last 5 years. The only concern is the erratic FCF, and that sometimes FCF per share is lower than dividend per share. Things are improving for the past 2 years, and I hope DS continues to do so.

History of rising dividends

Total dividend has been on an upward trend. Ordinary dividend however, was more volatile. Not sure what management had in mind when splitting the ordinary and special dividend proportions.

At current price of $0.54, it's a 11.11% yield.
Looking at their order book, it's likely 2015's dividend will be at least 5 cent - 10.80% yield.

Strong Order Book

Unlike the Oil & Gas companies or Engineering companies, each contract of DS does not last more than a year (typically 3-6 months). This does not provide much visibility and stability in the recognition of revenue for multiple years.

Instead, I would reference their order book for the following year's result. Thus far, 2014's ending order book looks healthy despite the softening property market in Singapore. Their diversified business segments allowed the company to weather through soft markets.

Business Moat?
Integrated Business - Other than manufacturing and installation furniture and fittings, DS also provide interior fitting out, furnishing and design solutions. This allows the company to provide an all-in-one solution for its clients.

Liquidity (or the lack of)
89.81% held by immediate holding company
10.19% held by public as at 11 March 2015

20 of the largest shareholder makes up 98.14% of the shares outstanding.

In normal circumstances, the substantial shareholders would have little to no movement in their shareholders. Effectively, only 2% of the shares are available for trading. This explains why average daily volume is only about 19,000.

Dependent on property market
Residential segment takes up about half of DS' revenue. The softening property market will have adverse impact on the Group, as evident in the change in order book composition. 

The uptick here is that the hospitality segment is poised to pick up the slack due to Singapore Tourism Board effort to spruce up Singapore and bring back the tourists here. New and existing hotels will be potentially DS' client for Alterations & Additions (A&A) services.

I was immediately interested when I found out the strong balance sheet and FCF ability they had in recent two years. I've initiated a small position with DS back then. Now that I've found out about their moat and past clients, I will probably add more to the position. I hope I'm right though.

I'm also watching out for that public float percentage.

Changi Airport & Xiamen's MOU has positive impact on this Company

Changi Airport Group (CAG) and Xiamen Airlines signed an MOU this month to embark on initiatives to grow passenger traffic between Singapore and China. 

Case in point, Xiamen (second tier city) is currently the fourth largest Chinese city for Changi Airport, just behind the key metros of Beijing, Shanghai and Guangzhou.

The airline has reportedly grown passenger traffic at Changi at a compounded rate of 9% since 2009. This together with the relaxed visa requirements for Chinese to visit Singapore will surely aid in driving up numbers from China.

Now the important question is, who provides Gateway services and Food solutions for Xiamen Airlines?

Yes, SATS. This sleeping dragon is really awake. They've reported their Q1 results and are as follows:
Revenue down 4.2% 
on weakening JPY, divestment of an Australian Subsi and the transfer of their food distribution business to their JV, SATS BRF Food formed earlier this year.
Profits up 14.5% 
due to excellent cost control. Staff cost, the largest component, was down $3.8m due to a 550 reduction in headcount. Cost of sales also reduced at a higher pace than revenue from better sourcing. Also, Share of Associates and JV rose 23% due to better contribution from both Gateway and Food solutions.
EPS up 15.4% 
Interim Dividend 9 cents (up 1 cent)

The mystery case of XD status
24 July (Friday) was SATS XD status. Technically, the price will fall by about 9 cent (from $3.69 to $3.60) due to XD. This happened early in the trading hours until about 1030am.

SATS closed at $3.80 instead, registering a 11 cent increase despite a 9 cent XD. This is either pure speculation or insider trading. Either way, their near term catalysts remains.

• Rebates offered by CAG
• Cost controls and productivity drive
• Increase in DPS for 2015
• Jetstar contract win
• Improvement in Japanese operation from Delta Airline win
• CAG & Xiamen Airlines MOU until 2018

Earlier, I predicted SATS Q1 results to come in 7-8% growth. I've to say a 14.5% growth was pleasant. Overall revenue fall for the group should recover with the recent contract wins and the easing of Visa requirements for Chinese to Singapore.

I'll remain vested =)

Predicting SATS' Q1 results from the operating metric!

Headline summary

Gateway Services flat

Food Solutions growth of 2-3%

Attempt to predict Q1 FY2015/16 results

Business segment proportion of revenue:

60% Food solutions

40% Gateway

Geographical proportion of revenue:

Singapore 82%

Japan 13%

Others 5%

Take a look at Q1 FY2014/15 aviation operating metric first.

Overall Singapore aviation operating metric last year was up about 1.5-2% (heavier on Food Solutions)

Overall Singapore revenue (actual) for the quarter was up 1.3%. **Food Solutions revenue dropped despite the growth in Singapore's metric was due to weakening Yen.

So, let's try to extrapolate this to Q1 FY2015/16 result, 

Singapore revenue to similarly grow about 2%

Food Solutions to remain flat.

WHY?

Although more meals were produced (2.5% YoY growth) in Singapore, the Japanese Yen has considerably weakened against the SGD from 2014 to 2015 (largely due to QE in Japan). This weakening of the Yen is expected to offset the moderate growth in Singapore's revenue.

The Bottomline?

I still expect EBITDA to growth around the 6-7% range (Q4 FY14/15 = 7.2%) mainly due to continued cost management effort. Will continue to add on price weakness, but it doesn't seem like the price will be weak anytime soon.

Disclaimer!

But of course, all these are mere guesses and me being bored. I have never proclaimed to be pro at earnings estimates. I'm just trying to have some wild guesses and also hone my analysis capabilities.

Cheers!

M1 Q2's result - not the best

M1 released its Q2 result after trading hours today.

Q2 Y-O-Y
Net Profit up 1.0%
Diluted EPS up 0.5%

Q1 Y-O-Y
Net Profit up 6.6%
Diluted EPS up 5.0%

1H Y-O-Y
Net Profit up 3.8%
Diluted EPS up 3.0%

Notice that Q2's result was a drag. It dragged the overall 1H 2015 profits to 3.8%. Contrast this with Q1's profit of 6.6% increment. 

I looked at its detailed financial statement and realised that QoQ revenue was stable ($294M vs $278M - drop largely due to lower handset sale, maybe iPhone & Samsung lull period). Margins however were compressed in Q2 due to higher cost of sales (likely to be handset sale).

The saving grace, however, is that Management guidance for FY2015's results is still "Moderate Growth" (mid to higher single digit). However, that's not to say that they can't miss that guidance. Who knows?

The next saving grace, is that interim dividend remained at 7 cents (no change). This could probably provide some support M1's share price.

Not overly concerned nor overly complacent with Q2's result. Still hoping that Q3 and Q4 would bring would turn the tides, especially with new handsets from Apple & Samsung in the later half of the year.

Think the china stock market turmoil is over? Think again.

If you've been living under the rock for the past few weeks, this article summarises what happened to the Chinese stock market.

What?
From July 2014 to June 2015, the Shanghai Composite Index rocketed from 2050 to 5020 (close to 150% increase)

Why?
Not because of the underlying Chinese economy, definitely not. The economy registered the lowest growth (link). Instead, the Chinese government relaxed the margin trading regulation (buying stocks using borrowed money). 

This resulted in hordes of your inexperience investors with and without financial knowledge buying stocks. That meant that people are merely buy stocks because someone told them to do so. They've no idea what they're doing.

That screams BUBBLE.

Scramble to "save" the market and curb social unrest
Then, in Mid June 2015, the Chinese stock market started to crash on margin trading calls and the government decided to intervene.

1. Interest rate cut
2. Government bought stocks to prop up prices.
3. About half of the companies suspended their shares from trading
4. No more IPOs for the time being
5. Fund managers ordered to buy their own fund
6. Substantial shareholders (>5%) cannot sell their shares for at least 6 months

Creating a bigger bubble
I think there might be a few more actions which I've missed out. But, in my own words, this is what the government is doing:

1. It removes the free market notion.
2. It manipulates the market.
3. They're merely kicking the can down the road.

A bubble has to burst eventually. The Chinese government needs to recognise that. The recent two days of rebound in SSE may only be a dead cat bounce.

I don't like to spread fear. But I know, rationally, that once those retail investors deleverage and sell their shares, its only a matter of time when SSE falls back to the 2000 range. 

They think they can fight the market. I don't think so.

Liberty Wireless & M1 impact

M1 announced that it will grant Liberty Wireless access to its mobile network to offer services to postpaid customers. In essence, M1 is selling their spectrum to Liberty Wireless (who has no radio spectrum because only the 3 local telco has them) for the latter to resell to consumers.

How big this contract is currently still unknown. So I've no way to tell the impact of this arrangement to M1's financials. However, there are things we can know.

New revenue stream
By selling the spectrum to Liberty Wireless, M1 has diversified its revenue and even an recurring one as well. This is quite important to the company as mobile revenue takes up more than 80% of its service revenue and 60% of its operating revenue.

Its good to always diversify your revenue to protect your company from any adverse impact.

Cannibalisation
By allowing a new entrant into the market, this creates greater competition for M1. In fact, there will be a strain on the market share of M1's mobile customer.

Liberty Wireless has also said that its strategy will be focused on data centric plans. This suggests a potential roll out of higher data bundles with lower pricing. LW will be able to do this and maintain a decent margin because of its low capex requirement; it leases spectrum from M1 and has less costs on its P&L. There could be a repeat of what happened in the Fibre Broadband space where competition would likely drive ARPU down and this could adversely impact M1 given its high concentration on Mobile revenue.

How to fight back?
I've no privy to M1's management discussions, but I could try to piece the puzzle together. Recall that M1 recently announced its new product - mobile payment service?

One of the key note for this potentially successful product is that it will only work if its customers are using M1 data plan. This creates stickiness with M1.

Its like Apple. Apple always ensures that its products are closed and interconnected. Just like how iTunes are only available to Apple product users and not open source - thereby creating demand on both iTunes music sales and Apple iDevices sales.

Should M1's mobile payment service really becomes hit, they could really have a strong moat to lock its its customers and reduce their churn rate.

Time to switch on radar for potential unlocking of warchest

China stock markets are crashing. 

Huge bear attack on China Market.

China's stock market crash is just the beginning.

These are a few of the headlines lately, grabbing the attention away from the Greece turmoil.

How bad?
On 5 June 2015, the Shanghai Composite Index hit an all time high of 5000. One month later, it crashed 30% to 3500.

What else?

As of today, approximately 45% of China's market cannot be traded (companies have called for trading halt). Should the suspension be lifted, one could only wonder how much more beatings the market will take.

Ripple effect

This is felt in the various Asian market. Hang Seng index had wiped out 2015's gain. Singapore's Straits Time Index fell close of 1.67% today. It is not clear the immediate impact on our market, but I guess its safe to say there'll be volatility in the near term.

Looking at the chart above, it looks like the strong support would be near 3250. However, if the Chinese were to head for a full deleveraging, it would seem that it'll hit 2500 instead.

I'm sitting on the sidelines with my warchest. I'm going to let the madness slowly unfold before dipping into the market. Meanwhile, it's time to start tabulating my list of stocks and monitor them with their target price.

Let's get rich together Report Card - June 2015

	Name	Portfolio %	Average price ($)
1	SATS	20.92%	3.11
2	M1	18.33%	3.63
3	Parkway Life	7.87%	2.34
4	Sembcorp Industries	7.67%	4.56
5	Singtel	5.92%	3.52
6	StarHub	6.81%	4.05
7	CapitaMall Trust	6.54%	1.95
8	Raffles Medical	6.47%	3.85
9	Vicom	5.08%	6.04
10	Sheng Siong	4.35%	0.68
11	UOB	3.88%	23.05
12	Old Chang Kee	2.92%	0.87
13	SIIC Environment	1.69%	0.20
14	Thai Beverage	1.55%	0.46

Expected Annual Dividends: $2,537 ($211/month)

Dividend Yield: 4.27%

Unrealised gain: $3,139, 5.28%

STI Index (ES3):
Dividend Yield: 2.74%
Unrealised gain: flat (2 Jan $3.41, 2 Jul $3.38)

Star of the portfolio:

Thai Beverage    - 68% capital gain

Sheng Siong      - 31% capital gain

Singtel                - 21% capital gain (Dividend stocks can grow too! =D )

Raffles Medical  - 20% capital gain

SATS                  - 16% capital gain (Slow and steady)

First US Stock

I also just made my first purchase in the NYSE. Guess who?

Berkshire Hathaway. Yes, the mega stock. I saw the stock price coming down and thought it's a good price to adopt a position in Berkshire. This is one stock where I would have no trouble sleeping peacefully at night.

A sneeze

The financial market had a minor sneeze due to the Greece contagion fear. However, the sneeze was so small that it didn't rattle the markets enough for me to accumulate any of my target stocks.

It's alright for me because my balances in OCBC are still earning a decent interest.