This week went as per what I expected in the market. We could have just closed all markets this week and still be in the same place as we ended on Friday. As the world waits intently for the results of the mid-term elections and the Fed decision on the almost stale story of QE2. I would not even dare to predict what will the markets be like this coming week. It is really any one's guess on whether we climb to new highs or plunge to correction mode. Technical analysts are going to tell you its time for the market to take a breather but as per what my boss calls technical analysts, vodoo specialists, there is no way that technical analysis is an exact science.
Before I start on my discussion topic for this week, I would like to thank my very good friend "Earn Money Online" for his very kind words on my stock picks. I have to say the Thomson Medical call was an inspired one and I am very proud of it. I remember, after I made the call 5 weeks ago, the stock fell and my friend sent me an email telling me that some analyst called for a "Hold" on the stock and asked me whether I was wrong this time. Well I think it shows that particular analyst can take his report and shove it into a place where the sun does not ever shine. Considering the offer was made at such a large premium to the closing price on Friday, my call for value on the stock was more than accurate. Babies are IN!!!! No not really, especially in my household. But to all those people looking to deliver their kids at Thomson Medical going forward, I would like to wish good luck on the fees.
Now lets see what I can pull out of bag this week. I have to apologise to those who went with my Sarin call and lost money. I do think that it is rather unfortunate that it has fallen more than 20 percent since their profit guidance earlier this month and the fact that they said the profits are going to fall significantly from the previous quarter sounded rather ominous. What in the world did they mean by "significantly"? I went around and did a survey on what people's interpretation on the words "significantly lower". Interestingly enough, I got a very wide range from my sample size of people. The indicated range actually went from 20% all the way to 80%. Personally, I placed a 80% fall in the profits for the company in 3Q2010 and projected an improvement in 4Q2010 and I still came out with a 10 times p/e valuation. That is why I have chosen not to cut losses on my position and wait patiently for the results to come out and see what the management has to say.
This week I am looking for a stock for myself to invest in for the longer term. For my own personal account, this year has been an awful year tracking only market gains and not creating excess alpha which I should be. Now that I have missed the boat on Thomson Medical, it is back to the drawing board for me. After doing my usual screening, I saw a few rather interesting candidates that aroused my curiousity. But given my ridiculous schedule I have only been able to look at one in closer detail. For those who have been following this blog over the past one year, they will know how I think. The more obscure and niche the business is, the more I am interested in the company. I also do not like companies that are heavily covered by analysts. If it is heavily researched that means the stock is a lot more efficiently priced and also more susceptible to what I call "noise". This "noise" refers to the glitches that happen over a company's growth. The volatility in the stock price will be significantly higher because of the number of different reports that are released by different analysts with different mindsets and interpretation of any new developments with the company.
Before I start, I would like to tell a story of me visiting an Hermes outlet with a friend who was buying a scarf for his girlfriend. I walked up to the counter and asked to look at a really cool looking wallet made from crocodile skin. Without even thinking I asked how much it was, totally expecting a number around the region of S$2-$5k. Guess what was the number? S$17k! For a wallet? I would be willing to sell my skin if it was worth that much! Ok jokes aside, this is how I will lead in to my latest pick for all of you. So here it is, my latest stock pick. Heng Long International.
Heng Long is one of the five top-tier tanneries of crocodilian leather in the world, with an entrenched position in the global supply chain of crocodilian skins and leather used by the luxury and high-end fashion industry.
Their principal business activities are primarily sourcing, tanning and processing of a wide range of raw crocodilian skins into crusts and high-end finished crocodilian leather for supply to the luxury and fashion industry where their products command a premium price.
They have an aggregate production area of approximately 6,605 sq m with a capacity ranging between 200,000 and 300,000 crocodilian skins per annum.
Their finished high-end crocodilian leather is sold directly or through distributorship agreements to luxury and fashion product manufacturers in Europe, United States, Asia, South America, Africa and Australia for use in the manufacture of handbags, watchstraps, boots, garments and other fashion accessories.
Around 49% of their revenue is derived from Europe, the bulk of which is from sales of farmed alligator leather used by high-end watchstrap makers catering to luxury watch brands.
The other key segment customers (either direct or indirect) in Europe includes luxury brand leather goods manufacturers and fashion houses such as Prada and Stefano Ricci.
Asia is their second largest market segment contributing approximately 42% of total revenue. Major customers in Asia include Kwanpen, a well-known local luxury brand of crocodilian leather goods with retail outlets in important cities in Asia, and other leather goods makers in the PRC and Japan catering to the Japanese consumers, as well as leather goods makers in South Korea catering to its domestic market.
Sales to the Americas and the rest of the world contributed the remaining 9% of revenue, with a significant portion of business from the Americas currently being derived from makers of western fashion boots and belts using skins of the caiman species.
What I liked about it from the revenue point of view was that the Asia segment has grown from 24% to 42% in 3 years. It is important that the company gets more exposure to the Asian markets as the demand for luxury goods are growing much faster and trust me, you will want to ride this trend. Consumer stocks in Asia have been rising this past year on an average of 40% or higher. Many people are now calling for consumer stocks to trade at more than 35 times p/e. I do admit it is rather excessive, but we are in the middle of a fast growing secular trend, ride it hard. It all started with the consumer staples stocks, soon it will move to the consumer discretionary space. Do not underestimate this trend because by the time you are convinced, its too late.
Right now, Heng Long is only on the road to recovery. The stock is trading at 32 times p/e but its revenue and profits are no where close to their 2008 levels. YTD revenues only stand at S$23 million and profits are S$2.4 million, that is for the first 2 quarters only. In 2008, revenues were S$68 million and profits were S$11.4 million. I believe we will be buying a major turnaround story in Heng Long. Forward earnings wise, I think this levels are reflecting half the current p/e multiple. If that is the case, we are looking at a much higher price for the stock. Margins are stabilising at 25.4% and this is still a very decent margin even though its still lower than the mid 30s seen in 2007-2008.
Lets look at the market capitalisation for the company, it stands at S$89.78 million and if the profits normalise back to S$11 million, we would only trade at less than 9 times p/e. Also the fact that dividends amounted to 1.2 cents in 2008, that translates to 3.4% dividend yield. For a penny stock of this size that is pretty impressive. Of course, you may argue that I am looking into the past for clues on the performance of this company, but the fact that this is a company that has been around for the better part of 50 years, I believe this is a story that is going to last.
Currently, the company trades at 1.1 times price to book value and it is something that I am very comfortable with. Thus this will be my latest buy call and I believe I will be right on this one.
Have a great week ahead.
Best,
SVI
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