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.

[CCUV]

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.

Possible for a cash company to be trading up to 15 percent discount,most cash company need to look for a business,there is a cost for looking for a business and secondly even if the company want to delist a cash company,there will be a discount due to the factor you need to pay the rest of staffs a compension for asking them to go and all the legal and corporate fees are payable,there is always a cost in delisting or closing down a company,tele don't ask me for eg

[Curiousparty]

If technical analysis were to be so "effective", many people would have been millionaires by now.

The fact that stop level is set means that there will be another group of traders who like to "run the stops"...

It seems that CES is drifting down to 80cents soon, despite its fundamentals...

Thanks jjlim84 .... if ces is so good, price wont stay stagnant like this.... look at ho bee to see how low it can go....

it just happen jeff also posted on chip eng seng for a technical potential buy in his website for the last 2 days

http://singaporestockstrading.com/2015/0...up-part-2/

I wonder if the TA guru and their followers will cut loss if the 85-84.5c level broken?n trail stop at 84.5c?

[westin1]

Never expect this to fall so badly.... im flabbergasted... though so many gurus expected this to be an undervalued gem.

It falling like nobody business and company is not doing share buy back... this is getting worrying... sigh...

[specuvestor]

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.

It's the same boring fundamental stuff but the real truth: ROIC is how much cashflow (to be precise FCF) is it being generated from the asset based on how much cash investment needed for the business including working capital. The capital outlay is the price you pay for that asset and how it is being funded is the capital structure which has nothing to do with ROIC. An asset can be negative PnL but if you pay for it in secondary market at much lower price the ROIC will be worth it even when PnL remains negative. Anyone in real business will know what I mean. Businessmen are concerned about cashflow until they get listed they get CFOs to be concern about PnL.

That's why you need to know what is Business and what is Structure. People can play with non cash items or even capex like PE funds.

All the ROA to P/E to EBITDA are actually trying to approximate a dirty shortcut on this intrinsic cashflow return so that even my 13 year old kid can compare the numbers off a chart.

And no a true value investor only value based on this simple boring metric as a principle. We may also take shortcuts in discussions and projections but this is the underlying principle. But using different shortcuts for different industry is obviously true. Using RNAV shortcut to value say tech stocks make no sense cause the business model is different.

Just to be clear: Are you saying RNAV valuation for a developer is correct, or reasonable DISCOUNT to RNAV is correct?

A simple example with a production company called Venture:

Equity of Venture in 1996 $173.4m
Asset of Venture in 1996 $306m
Equity of Venture in 2003 $$1349m
Asset of Venture in 2003 $1809m

Equity of CES in 2007 $160.5 <- similar equity base with Venture above
Asset of CES in 2007 $332m
Equity of CES in 2014 $736m
Asset of CES in 2014 $2008m

You draw your own conclusion. But if we arrive at same conclusion does it mean we should always prefer Venture vs CES since ROA is better? That's where price comes in.

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.

Ya because history is too long for me to bother with remembering delisted companies.

That is a big "if". And "if" the major shareholder is a nice guy. You probably value companies based on "ex-cash" or "ex-bad business segment" basis like some analysts do. It's only true "if" you are not an OPMI. Most of VBs here not big time enough or bothered enough to control companies.

Put in another way: with so many privatisation that had happened past few years in SGX... you think they privatise for 15% return?

Anyway I'm only interested to point out that using RNAV as a target is not the right approach for developers.

[CCUV]

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.

It's the same boring fundamental stuff but the real truth: ROIC is how much cashflow (to be precise FCF) is it being generated from the asset based on how much cash investment needed for the business including working capital. The capital outlay is the price you pay for that asset and how it is being funded is the capital structure which has nothing to do with ROIC. An asset can be negative PnL but if you pay for it in secondary market at much lower price the ROIC will be worth it even when PnL remains negative. Anyone in real business will know what I mean. Businessmen are concerned about cashflow until they get listed they get CFOs to be concern about PnL.

That's why you need to know what is Business and what is Structure. People can play with non cash items or even capex like PE funds.

All the ROA to P/E to EBITDA are actually trying to approximate a dirty shortcut on this intrinsic cashflow return so that even my 13 year old kid can compare the numbers off a chart.

And no a true value investor only value based on this simple boring metric as a principle. We may also take shortcuts in discussions and projections but this is the underlying principle. But using different shortcuts for different industry is obviously true. Using RNAV shortcut to value say tech stocks make no sense cause the business model is different.

Just to be clear: Are you saying RNAV valuation for a developer is correct, or reasonable DISCOUNT to RNAV is correct?

A simple example with a production company called Venture:

Equity of Venture in 1996 $173.4m
Asset of Venture in 1996 $306m
Equity of Venture in 2003 $$1349m
Asset of Venture in 2003 $1809m

Equity of CES in 2007 $160.5 <- similar equity base with Venture above
Asset of CES in 2007 $332m
Equity of CES in 2014 $736m
Asset of CES in 2014 $2008m

You draw your own conclusion. But if we arrive at same conclusion does it mean we should always prefer Venture vs CES since ROA is better? That's where price comes in.

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.

Ya because history is too long for me to bother with remembering delisted companies.

That is a big "if". And "if" the major shareholder is a nice guy. You probably value companies based on "ex-cash" or "ex-bad business segment" basis like some analysts do. It's only true "if" you are not an OPMI. Most of VBs here not big time enough or bothered enough to control companies.

Put in another way: with so many privatisation that had happened past few years in SGX... you think they privatise for 15% return?

Anyway I'm only interested to point out that using RNAV as a target is not the right approach for developers.

Hmmm...interesting comment on RNAV is not the right approach.

Personally I take a middle ground. If I need to value a company base on RNAV,i will have to apply a bigger discount due to the fact RNAV comprise mostly two main items 1.) GDV(gross development value calculation, project under development ) or 2.) undervalued asset which had not been revalued for years(difference between market price of asset and asset hold under books).

Point 2 lesser discount since we have a market value for the properties held under books(almost sure sure)

Point 1 more discount since the project is under develop so there are risk associated to in progress development.(not so sure sure)

There is seriously no right or wrong in valuing property counters using NAV or RNAV. For the later, I just take a bigger discount as compare to NAV. There are purist who think NAV is the only way to value a company as NAV is a confirmation of value held under books and we have intangible to consider......too much and too big of a topic....that will be for next day.

[Teletubby]

What specuvestor proposes sounds good in theory but hard to execute in practice when valuing companies like CES. Looking at the situation from the perspective of a property developer, how do you estimate the cashflow? Do you use a year's worth of operating cashflow? Or three years? Or five? And what exactly are the "assets" you are talking about that generate this cash flow? Do these include the properties under development? Or also the PPE?

That's why we need to understand the business and structure properly of the company we are valuing, and not apply ROIC blindly, even though the principle might be valid. Of course valuing tech companies using the RNAV approach makes no sense, a more appropriate approach could be the PEG approach.

What I'm suggesting, if you read my previous posts carefully, that you value a developer by first estimating it's RNAV, and then applying an appropriate discount to that RNAV to get an estimate of its fair value. This is the method that makes most sense.

Also, thinking back on the recent waves of privatizations, I cannot recall any one company which was a pure cash company. Perhaps someone can kindly point one out to me.

[westin1]

Guess most traders have cut loss... 0.84 was the key.... a guru states that ces is on a permanent down trend...

Sad mistake that i made on this so called undervalued gem... a total disappointment...

Hope forummers will discern what is truly a gem...

[specuvestor]

What specuvestor proposes sounds good in theory but hard to execute in practice when valuing companies like CES. Looking at the situation from the perspective of a property developer, how do you estimate the cashflow? Do you use a year's worth of operating cashflow? Or three years? Or five? And what exactly are the "assets" you are talking about that generate this cash flow? Do these include the properties under development? Or also the PPE?

That's why we need to understand the business and structure properly of the company we are valuing, and not apply ROIC blindly, even though the principle might be valid. Of course valuing tech companies using the RNAV approach makes no sense, a more appropriate approach could be the PEG approach.

What I'm suggesting, if you read my previous posts carefully, that you value a developer by first estimating it's RNAV, and then applying an appropriate discount to that RNAV to get an estimate of its fair value. This is the method that makes most sense.

Also, thinking back on the recent waves of privatizations, I cannot recall any one company which was a pure cash company. Perhaps someone can kindly point one out to me.

If you read some of my 2000+ posts, I'm not a theorist. Theory has to fit observations, not the other way round. I'm not here to help you analyse but I can say any projections above 3 years is funny numbers. So how does management do it? That's why there are management, and there are good management. Key is to understand business model, the historical track, the moat vis a viz Porter's 5 forces, and how the 3 A-B-S layers interact. People keep thinking it's a science when accounting itself is not even science.

If you put a suitable/ reasonable discount to CES RNAV then it will make more sense. Check out then the discount for other developers and why discount for REITS are much lesser.

Watch Ocean Sky. Cash companies dont get privatised. They get delisted (downside) or RTO (upside).

[Curiousparty]

Just wondering if entire market is just pricing ahead of the impending rate hike?

Seems that other property counters also quite red...

Guess most traders have cut loss... 0.84 was the key.... a guru states that ces is on a permanent down trend...

Sad mistake that i made on this so called undervalued gem... a total disappointment...

Hope forummers will discern what is truly a gem...