Chip Eng Seng

[Teletubby]

Alright, so we are referring to different things when we talk about "working capital". In that case, how do you calculate your version of working capital using your alternate definition? And just to clarify to make sure we are on the same page, what is your definition of ROIC? And how do you use your ROIC to calculate your "intrinsic cashflow returns"?

The true value investor adopts different methodologies for valuing companies in different businesses. Valuing a property development company using the RNAV approach makes more sense.

I get your point about observation, but I can see that you can't remember the experiences that led you to this observation. I agree that a discount to NAV should exist for a pure cash company in theory, but am skeptical about your observation that the discount to NAV is so high at 15% for a pure cash company. This doesn't make sense logically, for if the company were to get delisted immediately, and cash distributed to the shareholders, a 15% return would be realised at once.

Pardon me, but I don't get your point at all. CES is a property development cum construction cum hospitality company, shouldn't we value such companies using a SOTP approach? I see nothing wrong in valuing the property development segment using the RNAV approach, of course we can argue about the appropriate discount to the RNAV.

As for your working capital point, I don't get your pun too. According to Investopedia, working capital is defined as current assets less current liabilities. Aren't these numbers from the balance sheet? Of course if you are trying to look deeper, yes indeed cold hard cash is tied up in the business for the purpose of generating profits. But generally, most business have their cash tied up for these purposes, regardless of whether they are a manufacturing company or oil company etc. If you use the ROIC in place of the ROE to analyse the profitability, you are neglecting management's ability to use debt suitably to boost profits of the shareholders. Not too useful in my view.

Most VBs here are past investment 101 stage. Suffice to say that businesses runs on cashflow, not how it is being booked on an accounting basis. Accounting is a shadow of reality, take it as a reference, not the truth, when you analyse. Based on investopedia definition, current portion of long term debt suddenly becomes part of working capital equation when it crosses 365 days due date? I offer you another definition from cashflow analysis: It is the cash needed to run the operations of your on-going and hopefully expanding business including A/P and inventories; a subset of operating cashflow. OTOH debt, whether long or 365 days short term, is financing cashflow. Ponder whether negative working capital is good or bad thing.

Of course most companies have working capital, the difference is the degree. And developers need a lot more. If your cash is tied you can't pay dividends or share buy-backs as much as you would want.

Value investors look at ROIC for intrinsic cashflow returns ie how much cashflow can be generated for the capital that you put up. ROE can be engineered.

I was giving you an example on the cash company. As usual things are not as simple as textbook... roughly 15% discount thereabout by observation. Recently there has been a lot of RTO hence there is a certain RTO option built by Mr Market. But the logic is simple: OPMI does not have access to the cash which is why Mr Market gives it around 15% discount in case it gets delisted or payouts to employers or directors "increases". A bird in hand is different from a bird in the major shareholder's garden bush.