Best World

[Boon]

A Buffett Approach To Buying Growth Stocks
MAY 23, 2013
http://www.forbes.com/sites/investor/201...5b01355853

Growth or value? It’s one of the most basic questions in the investment world. Pundits debate the attractiveness of growth versus value stocks, and mutual funds neatly chop up the market into “growth” and “value” funds.

There’s just one problem. The distinction between growth and value is flawed.

Just ask Warren Buffett. He doesn’t seem to differentiate much between growth and value. “Market commentators and investment managers who glibly refer to ‘growth’ and ‘value’ styles as contrasting approaches to investment are displaying their ignorance, not their sophistication,” he explained in his 2000 annual letter to Berkshire Hathaway BRK.A +%shareholders.

To Buffett all investing is about value. Assessing a company’s growth prospects is simply one part of gauging value. Rapid growth in sales and profits can add a ton of value to companies whose shares may at first glance look pricey. Some of Buffett’s big recent buys bear out that notion.

When Berkshire acquired Burlington Northern Santa Fe back in 2010, the railroad had a not-so-lean price/earnings ratio of about 20, but it had increased earnings at an average annual rate of 19% for seven years. LubrizolLZ +% had a five-year earnings growth rate of about 40% when Berkshire bought it back in 2011. Lubrizol had increased earnings in six of the seven years before being acquired.

Buffett doesn’t look at just one growth-related metric when assessing a company’s value. As he noted in that 2000 letter to shareholders, a high growth rate can sometimes “destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years.”

Buffett isn’t explicit in the metrics he uses to gauge a company’s growth prospects, but his former daughter-in-law and colleague, Mary Buffett, offered an idea in her book The New Buffettology. Buffett wants a firm’s earnings to have increased reasonably consistently over the prior decade, and he looks at a number of other earnings-driven variables. These include return on equity, return on retained earnings, free cash flow and debt—which should be no more than five times annual earnings. Buffett is concerned with the quality of a company’s earnings and its sustainability over the long haul.
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[MOV]

Hi Boon,

Thanks for your regular updates on BWL.

Sure there are different ways to estimate 'growth', some use ratios as you mentioned etc. For me, I simply apply DCF from my own estimates of growth in current markets (Taiwan mainly) as well as new markets (China). Note that Taiwan is on track to exceed management's own target of TWD1800 million this year, therefore their target seems reasonable..

For China, I'm not quite sure how they can achieve RMB500 million (~RMB50m Q1 exports only) this year unless China revenue shoot up later half of this year due to DS licence. Hangzhou is almost the same size as Taiwan in terms of population and BWL took 2-3 years to develop that market. However I am optimistic of their growth in China once licence is awarded as you can see them building a good base now. They can grow city by city for a long time..

(vested)

[Boon]

http://bestworld.listedcompany.com/news.html/id/531071

Third query from SGX in two months on "unusual price movements", issued yesterday, to which the Company has yet to reply.
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[Boon]

Hi Boon,

Thanks for your regular updates on BWL.

Sure there are different ways to estimate 'growth', some use ratios as you mentioned etc. For me, I simply apply DCF from my own estimates of growth in current markets (Taiwan mainly) as well as new markets (China). Note that Taiwan is on track to exceed management's own target of TWD1800 million this year, therefore their target seems reasonable..

For China, I'm not quite sure how they can achieve RMB500 million (~RMB50m Q1 exports only) this year unless China revenue shoot up later half of this year due to DS licence. Hangzhou is almost the same size as Taiwan in terms of population and BWL took 2-3 years to develop that market. However I am optimistic of their growth in China once licence is awarded as you can see them building a good base now. They can grow city by city for a long time..

(vested)

Hi MOV,
 
Thanks for your reply and it is good to have participation from more buddies.
 
“Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.”(Understood and agreed)
 
Rapid growth in sales and profits can add a ton of value to companies whose shares may at first glance look pricey. Some of Buffett’s big recent buys bear out that notion. (This is a situation where the importance of growth component can be enormous and whose impact can be enormous as well)
 
A high growth rate can sometimes “destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. (This is a situation where the importance of growth component can be negligible and whose impact can be negative or insignificant)
 
Your statement “In BWL case, seems like its growth component is simply having an enormous bearing on its market price.”  
 
If growth in sales and profits is going to add to tons of value to BWI/BWL going forward, logically then the importance and impact of the growth component would be enormous and should be factored in accordingly in the calculation of value. 
 
BWI’s share price closed at 1.215 yesterday
 
Based on your DCF model, do you think too much growth (or not enough growth) had been priced into the current market price already?
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[Coco]

Best World has a consumer base already in China which is buying its products imported through agents. Many of these users are apparently being educated that they can become distributors when the direct-selling licence is awarded. There is little gestation time needed for Best World to set up a direct-selling network. Hangzhou has about 10 m population, thus it is a good start for Best World. It's potential to boost the company's bottomline is clear.  However, it's unclear what the numbers will be since this is uncharted territory in many ways. The share price is factoring in growth but only time will tell if this growth is over-rated or under-rated by the market currently. And I think its unclear 'what the risks of operating in China are and the unknown unknowns.  (Boon, btw, I have PM-ed you. Pls check yr inbox)

[Boon]

This is going to be a super growth stock in the making.
Management seems to be doing and executing the right things.
Looking forward to their 2Q results which I believe will lead to another round of stock upgrade from analysts again.

“Looking forward to their 2Q results which I believe will lead to another round of stock upgrade from analysts again.”
 
Agreed. Stock upgrade is highly likely after 2Q2016 results announcement.
 
“Management seems to be doing and executing the right things.”
 
Agreed.  What have attributed to their success? See Founders’ speeches in the June/July/2016 BWL Taiwan bi-monthly bulletin.
 
“This is going to be a super growth stock in the making.”
 
It could well be depending on the definition of  “super growth stock.” – especially on what is that limited extended period of time ?
 
DEFINITION of 'Supernormal Growth Stock'
A security that experiences particularly robust growth over an extended period of time. A supernormal growth stock is one that significantly outperforms the market and provides investors with returns that are well above average. In nearly all cases, these stocks only maintain their accelerated growth for a limited time before coming back down to Earth.
http://www.investopedia.com/terms/s/supe...hstock.asp
 

[Boon]

Rapid growth in sales and profits can add a ton of value to companies whose shares may at first glance look pricey.
 
Generally, the higher the expected growth rate, the more investors are willing to pay “higher” price for it now.
 
Investors who have paid high share price today per dollar of today’s earnings must be expecting substantial growth in future earnings of the company.
 
The fly in their ointment is the realization of that growth. For the stock price to appreciate, the company has to achieve the growth expectations, failing which stock price would fall, and investors who have “overpaid” for the shares would suffer.
 
To avoid “overpaying” for “growth”, GARP (Growth At a Reasonable Price) investing that uses PEG ratio, popularized by Peter Lynch, is worth looking into.
 
Growth At A Reasonable Price – GARP
http://www.investopedia.com/terms/g/garp.asp
 
 Stock-Picking Strategies: GARP Investing
http://www.investopedia.com/university/s...cking5.asp
 
Conclusion:
GARP might sound like the perfect strategy, but combining growth and value investing isn't as easy as it sounds. If you don't master both strategies, you could find yourself buying mediocre rather than good GARP stocks. But as many great investors such as Peter Lynch himself have proven, the returns are definitely worth the time it takes to learn the GARP techniques.
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For BWI/BWL: Is 15% earning growth achievable over the next 5 years?
 
FY2016: (Projection)
NPAT = 22m
EPS = 10 cent
DPS = 5 cent (50% of NPAT)
Current share price = 1.215
PE = 12
Assume earning growth rate of 15 % over the next 5 years.
ðPEG = 12 /15 = 0.8 ( < 1)
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[mslee888]

Hi Boon

My forecast for this stock is relatively simpler.
1Q/2016, EPS=2.7ct and this is typically the slowest qtr.
Just annualising it will give 10.8ct conservatively.
Singapore market PE is around 12.
So IMO,price at current levels is deemed reasonable to me.

The fact that Taiwan is going extremely well is as added buffer to my estimates. China DS is just another catalyst that I do not factor in since it is still an unsure thing. Even with current export model, I am also happy with the results they are achieving.

Happily vested.

[Boon]

http://bestworld.listedcompany.com/news.html/id/531071

Third query from SGX in two months on "unusual price movements", issued yesterday, to which the Company has yet to reply.
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http://infopub.sgx.com/FileOpen/2016%200...eID=407879

The company has responded with "not aware of any other possible explanation" 
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[Boon]

Best World has a consumer base already in China which is buying its products imported through agents. Many of these users are apparently being educated that they can become distributors when the direct-selling licence is awarded. There is little gestation time needed for Best World to set up a direct-selling network. Hangzhou has about 10 m population, thus it is a good start for Best World. It's potential to boost the company's bottomline is clear.  However, it's unclear what the numbers will be since this is uncharted territory in many ways. The share price is factoring in growth but only time will tell if this growth is over-rated or under-rated by the market currently. And I think its unclear 'what the risks of operating in China are and the unknown unknowns.  (Boon, btw, I have PM-ed you. Pls check yr inbox)

Hi Coco,
 
BWI/BWL/BWZ
-      Already have a consumer base for their products.
-      Already have agents and its network of beauty salon owners readily convertible into DS network distributors.
-      Already have all importing licenses of its products approved – otherwise could not export.
-      Already have Best World Lifestyle (Shanghai) Co., Ltd standby – a subsidiary of BWZ with principal activities of import and distribution of cosmetics, skin care, nutritional
supplements, personal care products and healthcare equipment.
-      And so on…………………
 
In short, “万事具备,只欠东风", if a DS selling license could be granted today, they could start the DS business tomorrow………………
 
The debate on whether the share price has factored in more than what the company could deliver would continue……………………….
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