A Newbie Guide to Investing

(07-11-2015, 02:14 PM)Yoyo Wrote: Hi Greenrookie

1) for property counters, developmental properties are booked under current assets. Is the value booked at cost of construction or booked at units already sold?

Development properties – Sing Holding AR 2014 Notes to Accounts 2.14
Development properties are properties acquired or being constructed for sale in the ordinary course of business, rather than to be held for the Group’s own use, rental or capital appreciation. Development properties are held as inventories and are measured at the lower of cost and net realisable value. The cost of development properties held for sale includes cost of land and construction, related overhead expenditure and financing charges incurred during the period of construction and up to the completion of construction. Non-refundable commissions paid to sales or marketing agents on the sale of development properties are expensed when incurred. Allowance for foreseeable losses on development properties is made when it is anticipated that the net realisable value has fallen below cost. Net realisable value of development properties is the estimated selling price in the ordinary course of the business, based on market prices at the reporting date and discounted for the time value of money if material, less the estimated costs of completion and the estimated costs necessary to make the sale.

2) cogent mentioned their building of 1 hub logistic is capitalized,what does that mean? It is now an asset? 

Capital Expenditure, capex – does not constitutes a charge to P&L when incurred.
Construction costs of 1 Hub Logistic began in Year 2012, is initially taken up to the accounts under Construction in-progress of the Fixed Assets/Property Plant and Equipment (Cogent AR Notes to Accounts #10).  Upon completion and commissioned, it is transferred/reclassified to the respective fixed assets categories – Land, Building, Leasehold Improvement, Equipments.  Thereafter, depreciation shall commerce with yearly charge to the P&L.(ie operating expenditure – opex)
 
In another word, these related costs are treated as capital in nature / capex and therefore capitalized since day 1 (back in Year 2012).  Cogent mentioned their building of 1 hub logistic is capitalized in Year 2014 basically meant that the facility is completed and ready for use.

3) capex for future investment, where does it appear in the PnL, under cost of sales or ??
 
Capex is taken up in Balance Sheet and Opex is shown in P&L.  Possible sources on the amount of upcoming capex spending for future investment – Press results release, Management briefing to analysts, Annual Reports - Chairman statement and/or Balance Sheet Notes to Accounts 31– Capital commitment.
 
Hope this helps.

thank you yoyo!

it sure helps. Maybe the context of me asking the questions. I was looking at OXley to determine the health of (or lack of) balance sheet. Was surprise that there current ratio is rather robust due to its high developmental properties ...

If it is cost of construction than that value might be "lower" since the  realizable value might not happen? Whatever it is, it seems to be a "projected value" when realizable value is concerned while cost is hardly useful if we think about if the company is strong for the bonds to "survive"

Q 3 puzzle happen when ST CEO says they need to invest even if it affect profits in ghre short term, and I was like "huh? Where capex for future investment will affect Pn L? Not just cash flow meh?"

thanks for your explanation

When you invest in a new factory, it might not become fully operational immediately either because it takes time to scale up (move in machines, processes to become mature etc) OR it takes time for customers to buy into the technology/products, resulting in lower expected IRR.

But if the depreciation policy is on a straight line basis over X years, then in the short term, the PnL will be affected due to the full depreciation effects but lower realized IRR from the capex.

Hi Greenrookie
 
Quote - I was looking at OXley to determine the health of (or lack of) balance sheet. Was surprise that there current ratio is rather robust due to its high developmental properties ... If it is cost of construction than that value might be "lower" since the realizable value might not happen? Whatever it is, it seems to be a "projected value" when realizable value is concerned while cost is hardly useful if we think about if the company is strong for the bonds to "survive"

Development properties for property counters are the equivalent of stock / merchandise to trading and manufacturing concerns. Thus, they are governed under the same valuation principle of lower of cost or NRV (NRV is basically the estimated selling value net of expenses).  By large these properties will be carried in the books at cost unless the perceived value (NRV) is less than the cost.  The carrying value of the development properties provides a quick reference of the base/minimum value, but not the fair value (ie sales value) when these properties are eventually sold.
 
Your concern of value might be "lower" (than cost) since the (intended) realizable value might not happen? resulting in foreseeable loss – is precisely addressed by this principle.
 
An example -
Said there is 2 development properties: Applying lower of cost or NRV
Property A construction cost is $100 and NRV is $150 = Cost of $100 will be taken up to books.  
Property B construction cost is $80 and NRV is $65 = NRV of $65 will be taken up to books.  
Although combined costs is $100+$80= $180, it will be recognized as $100 (A) + $65 (B) = $165 under development properties in Balance Sheet and the foreseeable loss on Property B of $15 taken to cost of sales in the P&L.
 
PS: The assessment of NRV by management is subjective/judgemental, based on the current market sentiment.  In the event of adverse market conditions, a re-assessment and writedown in value may be warranted (impact will flow to the P&L in the form of cost of sales).

Hope this clarify

Hi Weijian and Yoyo,

Thank you for your input. Now I understand better how the business "flow into numbers". it seems that given the good sales of projects by OXley, it's developmental properties should be recorded at costs rather than NRV. 

I also understand what it means when I read RandD is capitalized, and how capex affect PnL

Hi buddies,

Another newbie qn here. Why is interest and finance costs/expenses added back to operating cash flow? Why is it not a cash item? 

I understand form depreciation perspective, since no cash involved ... But interest cost it is cold hard cash flowing out to creditors, isn't it? 

Thanks for patience in replies

(10-12-2015, 09:35 AM)Greenrookie Wrote: Hi buddies,

Another newbie qn here. Why is interest and finance costs/expenses added back to operating cash flow? Why is it not a cash item? 

I understand form depreciation perspective, since no cash involved ... But interest cost it is cold hard cash flowing out to creditors, isn't it? 

Thanks for patience in replies

The interest, and finance expenses, are real cash items, but not part of operating cash flow. The cash flows are considered in either financing or investing cash flow. Aren't there?

(10-12-2015, 09:50 AM)CityFarmer Wrote:

(10-12-2015, 09:35 AM)Greenrookie Wrote: Hi buddies,

Another newbie qn here. Why is interest and finance costs/expenses added back to operating cash flow? Why is it not a cash item? 

I understand form depreciation perspective, since no cash involved ... But interest cost it is cold hard cash flowing out to creditors, isn't it? 

Thanks for patience in replies

The interest, and finance expenses, are real cash items, but not part of operating cash flow. The cash flows are considered in either financing or investing cash flow. Aren't there?

There is two basis of accounting - cash basis or accrual basis.  The international financial reporting standard is using the accrual basis.  (IIRC cash basis is in use at Japan).

Cash Flow Statement basically grouped all the inflow and outflow of cash into 3 main categories - operating activity, investing activity and financing activity.  In simplicity, classify all cash movement into one of these 3 activities to construct the cashflow statement.  However, the cashflow statement is constructed in an indirect approach/manner, ie back-calculated the cash impact from the operating result.  This necessitates the adding back of (1) non-cash items, such as Depreciation, Amortisation, Prov for Doubtful Debts, Impairment expense...(2) Other items are also added back not for non-cash nature, but due to its effect/impact already accounted for, such as gain/loss on disposal of fixed assets (effect included under proceed from disposal of fixed assets), (3) Some items due to presentation purpose, as such Interest Income and Interest Expense.

A typical Cash Flow Statement: 

Cash Flow from operating activites
Profit before tax
Adjustments
  all items in the above (1), (2) and (3) - thus interest income and interest expenses
to arrive at Operating Cash Flow before change in Working Capital
  change in working capital
to arrive at Cash Flow from operations
  Interest income   (singled out for accounting report presentation)
  Interest expense   (singled out for accounting report presentation)
  Income tax paid, net   (singled out for accounting report presentation)
to arrive at Net Cash Flow from operating activities.
<see AR2014 of Penguin, where the interest income is derived from short term bank deposit>

Cash Flow from investing activities
such as 
Purchase of Fixed Asset
Advance and Loan to associated companies (eg AR 2015 of Low Keng Huat)
Interest income (see AR2015 of Low Keng Huat - classified here due to the bulk of interest income derived from associated companies Notes to Accounts 29(a))

Cash Flow from financing activites
such as
Payment of dividend
Bank borrowing and repayment

In short, interest is mostly regarded as an operating activity, however sometime can be considered as an investing activity (such as the case of Low Keng Huat).  Do not be overly concerned with the way it is presented in the financial statement, what is of importance is the magnitude of the item.

Hope this helps.

(10-12-2015, 07:57 PM)Yoyo Wrote:

(10-12-2015, 09:50 AM)CityFarmer Wrote:

(10-12-2015, 09:35 AM)Greenrookie Wrote: Hi buddies,

Another newbie qn here. Why is interest and finance costs/expenses added back to operating cash flow? Why is it not a cash item? 

I understand form depreciation perspective, since no cash involved ... But interest cost it is cold hard cash flowing out to creditors, isn't it? 

Thanks for patience in replies

The interest, and finance expenses, are real cash items, but not part of operating cash flow. The cash flows are considered in either financing or investing cash flow. Aren't there?

There is two basis of accounting - cash basis or accrual basis.  The international financial reporting standard is using the accrual basis.  (IIRC cash basis is in use at Japan).

Cash Flow Statement basically grouped all the inflow and outflow of cash into 3 main categories - operating activity, investing activity and financing activity.  In simplicity, classify all cash movement into one of these 3 activities to construct the cashflow statement.  However, the cashflow statement is constructed in an indirect approach/manner, ie back-calculated the cash impact from the operating result.  This necessitates the adding back of (1) non-cash items, such as Depreciation, Amortisation, Prov for Doubtful Debts, Impairment expense...(2) Other items are also added back not for non-cash nature, but due to its effect/impact already accounted for, such as gain/loss on disposal of fixed assets (effect included under proceed from disposal of fixed assets), (3) Some items due to presentation purpose, as such Interest Income and Interest Expense.

A typical Cash Flow Statement: 

Cash Flow from operating activites
Profit before tax
Adjustments
  all items in the above (1), (2) and (3) - thus interest income and interest expenses
to arrive at Operating Cash Flow before change in Working Capital
  change in working capital
to arrive at Cash Flow from operations
  Interest income   (singled out for accounting report presentation)
  Interest expense   (singled out for accounting report presentation)
  Income tax paid, net   (singled out for accounting report presentation)
to arrive at Net Cash Flow from operating activities.
<see AR2014 of Penguin, where the interest income is derived from short term bank deposit>

Cash Flow from investing activities
such as 
Purchase of Fixed Asset
Advance and Loan to associated companies (eg AR 2015 of Low Keng Huat)
Interest income (see AR2015 of Low Keng Huat - classified here due to the bulk of interest income derived from associated companies Notes to Accounts 29(a))

Cash Flow from financing activites
such as
Payment of dividend
Bank borrowing and repayment

In short, interest is mostly regarded as an operating activity, however sometime can be considered as an investing activity (such as the case of Low Keng Huat).  Do not be overly concerned with the way it is presented in the financial statement, what is of importance is the magnitude of the item.

Hope this helps.

Hi yoyo and CF,

Thanks. I think the classification matters. If I would to Just take OCF minus PPE to calculate FCF, then APTT which added back interest expenses (which is not in

(20-10-2014, 08:53 AM)CityFarmer Wrote:

(19-10-2014, 11:10 PM)ValueBeliever Wrote: If HK rejects Alibaba, I m sure its got a good enough reason to reject SGrand (=why wait if its a good deal to list in HK).

FYI, Alibaba was rejected for dual-class shareholding structure. Is Sino having the same issue, and is rejected with the same reason? I seriously doubt so, although I don't know the company well.

(19-10-2014, 11:10 PM)ValueBeliever Wrote: All I heard from Singapore official comment is HK people are not realistic - haha! Wasnt it true that Singapore aspire to be like street smart HKer! How history change? So much for China is good for Asia!!

I don't know the source for the statement. I reckon the statement means the protesters, rather than HKers as a whole. For those familiar with Hong Kong, will agree that HKers are very pragmatic. I admire that they run, instead of walk, when moving along streets, in order not to waste time travelling. I hardly able to catch-up

(19-10-2014, 11:10 PM)ValueBeliever Wrote: My own observation of chinese mainland stock is that they are untouchable as the well connected played them to ridiculous level. Corruption in imbue into the system and it gets into the stock market so much that that they way the chinese would play it. Its like Malaysia CLOB. The PE ratio is off the chart and lets not talk about book value!

There are true in the statement, but on the other hand, major foreign funds are still eyeing on China stocks, and remain vested. It might also true on the flip side of the coin, thus worth a deeper yet caution look into the China stocks, IMO

Thanks yoyo and CF,

I think the classification matters. If we just take FCF as OCF - PPE, then those with fiancé expenses as operating cashflow would be "bigger than what it really is"

I was looking at what "sustainable dividends" or conservative dividends APTT could give by subtracting the capex for expansion for Taichung and discounting for its growth

So I guess my hunch feeling of subtracting it / not including it it OCF will give a more accurate picture of FCF

(10-12-2015, 09:19 PM)Greenrookie Wrote: Thanks yoyo and CF,

I think the classification matters. If we just take FCF as OCF - PPE, then those with fiancé expenses as operating cashflow would be "bigger than what it really is"

I was looking at what "sustainable dividends" or conservative dividends APTT could give by subtracting the capex for expansion for Taichung and discounting for its growth

So I guess my hunch feeling of subtracting it / not including it it OCF will give a more accurate picture of FCF

The input for valuation, is the "adjusted free cash flow", rather than OCF ex-PPE at face value in the financial report, isn't it?  

If part of the investing activities are recurring, i.e. part of the core operation, than it should also included into the "adjusted FCF" too, IMO.

Some financial writers suggest not to read too much into any financial reports (though read we must) but check how much real solid cash & assets a company has. But how to be sure Cash & Assets are real?
i still remember investing in "S-CHIPS"