Chip Eng Seng

[Teletubby]

So how do you propose we adjust the assets? And if you use the ROA as an approximation, doesn't that bring us back to where we started? How is your ROA different from ROIC? I better clarify, since your definition of these terms might well be different from convention. Using the segmental breakdown would reveal little conclusively as well, since the asset base attributable to the property development segment is also questionable. Not to mention the timing and amount of the cash flows too. Of course, carrying out the analysis on a per project basis would make the most sense, but isn't that the RNAV approach?

The main idea behind the RNAV approach is due the the rules of accounting, which forbid developers from recognising profits on certain projects until they TOP, even if they are almost sold out. Therefore, it wouldn't make sense to lump a REIT together with a property developer, since the business model is complelety different, and therefore the valuation methodologies differ as well.

Definitely I agree with your point that developers in general have a much higher capital base, since property development is capital intensive. However, to completely disregard the capital structure using the ROIC method would ignore the benefit of taking a suitable amount of debt to finance the development.

Indeed, you are not remunerated to answer my questions, but neither am I remunerated to point out the flaws in your valuation methodology. But all these is done in the spirit of learning, so we can benefit collectively as an investing community.

As the base you can use adjusted asset and ROA as an approximation, or segmental breakdown, or some VB uses on a per project basis. Other clues include the capitalisation of the subsidiaries that are used to perform these projects. Depends how precise you want your analysis to be

Neither have you answer nor agree that developers have a much high capital base due to higher working capital which is why the huge discount is valid. Once you understand the business model then your MOS will have to adjust accordingly. But saying a discount should be 20 or 50% has no real fundamental basis except as relative to peers until you understand the cashflow impact

We can have a discussion on the investment merits but i am not remunerated to answer your questions. There is a difference and the tone has to be set properly.

I brought out the REIT to let u understand the difference in business model and working capital has a huge impact on the "discount to RNAV". The regulators know that and is also why there is a restriction on development business and leverage for REIT

If you read my previous posts again carefully, I never mentioned that you were a theorist. What I said was that the method of valuing all businesses based on their ROIC is not a practical approach. Of course, theory has to fit observations, and theory is derived from observations, such as your comment on the 15% discount for cash companies.

For a property development company, it doesn't take good management to have a working knowledge of their cashflow projections, as properties sold are subjected to the standard S&P agreement payment schedule. However, it is very difficult for the layman investor to estimate this, primarily due to timing issues and development cost estimation uncertanties. And also, what do we use as the asset base to calculate ROIC? I'm still waiting for the answer.

All these issues make the ROIC approach impractical when using it on a developer. Which is why estimating the RNAV and then applying a reasonable discount would make more sense with regards to valuation. I notice that you agree with me, so it seems this issue is settled.

A REIT is a totally different creature from a property developer (with caps on gearing, limits on capital allocated for property development, minimum distribution requirements etc), so why bring it into our discussion? Not that relevant IMO. In any case, the RNAV approach would not be suitable for valuing a REIT. In fact, the RNAV is unlikely to be materially different from the NAV for a REIT. Rather, a more sensible approach would be to value the REIT based on your ROIC approach, as the cashflow is more predictable and easier to quantify.

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).

[specuvestor]

Cashflow on a project basis is not RNAV method. ROA is a shortcut but not similar to ROIC cause you have to adjust out items not required for the business operation including goodwill and fixed depo

The RNAV "short-cut" has been there long before the completion method from an accounting point of view, which is a relatively recent thing in Singapore. REITS are increasing the development business and stapled securities can potentially do development biz. They are getting lumped together because the developers know the issues very well and are trying to transfer risk and capital call to investors, and pushing the envelope with the regulators.

ROIC is based on an unleverage basis because either debt or equity is considered invested capital. Like we all know ROE can be engineered. Thats why Buffett is always cautious on using debt. (In case u ask, insurance and banking are leverage driven model, hence so will Buffett's insurance entities)

I have quoted you examples from Venture to memstar to ocean sky. You have yet to point out an example for the flaw of my methodology except saying it is difficult (indeed that is why people use short cuts), thus when you demand an answer it's not the right tone that I am expecting. Another example for you like this example of Goldman's valuation of Yanlord would fit your "methodolgy". Ever since i started on investment i have been asking people when do we use 20% discount or 50% discount? VBs all know the truth to that question
http://www.valuebuddies.com/thread-1473-...#pid113160

"We raise our 12-m NAV based price target to S$1.60 (from S$1.14) by narrowing TP NAV disc. to 30% from previous 50%, implying 0.9X 2015E P/B (excl. revaluation gains)." - you probably understand the magic behind this hocus pocus better than me.

[Curiousparty]

http://www.businesstimes.com.sg/real-est...sold-units

is this the news that caused property counters to adjust recently, especially those with many units left unsold (e.g. Fulcrum) and those in the midst of launching new projects (e.g. High Park Residences at Fernvale)?

[mslee888]

This is not something new...grandma must have forgotten this completely when keep doing the projected NAV...?

http://www.businesstimes.com.sg/real-est...sold-units

is this the news that caused property counters to adjust recently, especially those with many units left unsold (e.g. Fulcrum) and those in the midst of launching new projects (e.g. High Park Residences at Fernvale)?

[CityFarmer]

I do understand the frustration, but it should be sub-sided by now. Keeping the "grandma" in future posting, is not helpful for a constructive discussion.

Let's refrain from using the "grandma" analogy, for the benefit of all VB buddies.

Again, I would remind the feature of ignore-list. You have choices.

Thanks

Regards
Moderator

This is not something new...grandma must have forgotten this completely when keep doing the projected NAV...?

http://www.businesstimes.com.sg/real-est...sold-units

is this the news that caused property counters to adjust recently, especially those with many units left unsold (e.g. Fulcrum) and those in the midst of launching new projects (e.g. High Park Residences at Fernvale)?

[Teletubby]

Of course the RNAV shortcut has been there long before, but what is the most material adjustment to the NAV of a property developer? It should be the development properties account.

When you mentioned REITs, one would logically think of the property investment model with restrictions, rather than the grey areas of stapled securities you were referring to. How about we discuss business trusts as well then? Those push the boundary even further.

Being cautious with debt is definitely a plus point, but to be averse to debt would not be very wise, since debt used suitably can boost shareholder returns. This is one of the flaws of using the ROIC approach, which ignores the beneficial effect of debt.

And since you brought out your examples, you have to pardon my stupidity again but examples should serve to illustrate a certain point you are making. In your case, I fail to see the point you were trying to make by comparing Venture Corp with CES, and how the 2 penny stocks Memstar and Ocean Sky show that a pure cash company would trade at a discount of 15% to it's NAV. And why have I not been able to point out an example to show the flaw of your methodology? It is because of its limitations, so much so that I have not seen one valuation using such a method that makes sense. If indeed what you say is feasible, the onus is on you to show it.

Cashflow on a project basis is not RNAV method. ROA is a shortcut but not similar to ROIC cause you have to adjust out items not required for the business operation including goodwill and fixed depo

The RNAV "short-cut" has been there long before the completion method from an accounting point of view, which is a relatively recent thing in Singapore. REITS are increasing the development business and stapled securities can potentially do development biz. They are getting lumped together because the developers know the issues very well and are trying to transfer risk and capital call to investors, and pushing the envelope with the regulators.

ROIC is based on an unleverage basis because either debt or equity is considered invested capital. Like we all know ROE can be engineered. Thats why Buffett is always cautious on using debt. (In case u ask, insurance and banking are leverage driven model, hence so will Buffett's insurance entities)

I have quoted you examples from Venture to memstar to ocean sky. You have yet to point out an example for the flaw of my methodology except saying it is difficult (indeed that is why people use short cuts), thus when you demand an answer it's not the right tone that I am expecting. Another example for you like this example of Goldman's valuation of Yanlord would fit your "methodolgy". Ever since i started on investment i have been asking people when do we use 20% discount or 50% discount? VBs all know the truth to that question
http://www.valuebuddies.com/thread-1473-...#pid113160

"We raise our 12-m NAV based price target to S$1.60 (from S$1.14) by narrowing TP NAV disc. to 30% from previous 50%, implying 0.9X 2015E P/B (excl. revaluation gains)." - you probably understand the magic behind this hocus pocus better than me.

[Oldman9]

Key at the end of the day is the management.

Problem now is CES is "headless" at the moment...sigh...no CEO...

Hi CuriousParty

Just browsing and a bit kaypoh. But this situation of having no head has been there for months. Cannot be that the reaction comes months after he left. Funny right?

cheers
Oldman.

[specuvestor]

Most business trust are not property related

As you grow older I'm sure your view about debt will change. Sure there are some instances where careful management of debt is helpful or it is structural in the industry, but the textbook idea of debt is a numbers game which businessmen or financial structurer know. OTOH investors who are not long term vested love debt. Most if not all financial crisis i know of is about leverage and debt. Asset prices and mismanagement, greed etc are just the symptoms. Just look locally and recently on how Singapore manages the property "bubble". SEVEN measures more or less dont work until they adjust the lending.

I bothered to dig out Venture numbers to compare with CES to demonstrate my point about developers being capital intensive hence "discount to RNAV" is for sure cause they need to recycle capital to produce their widgets. Production companies dont need to recycle capital. Another reason why old production companies tend to sit on old land banks thats never been revalued for decades. Memstar is an example to learn from history and Ocean Sky is to observe history live. 闭门造车 is not advisable. After a cycle you can draw your conclusion if what I said about discount to cash makes sense.

So if we say PTBV is bad way to value a tech company, the onus is on the detractor? To me what is most important is what makes sense. If arbitrarily pulling out a number as the discount, and then changing it as and when, makes sense to you then so be it

In any case I'm actually referring to another forumer who keep promoting CES RNAV, which i dont think is sending the right message in a value forum

[Curiousparty]

this is with hindsight after AGM. During AGM, Chairman explained that they needed time to find the right candidate.

this suggested that CES might continue to be "CEO-less" for quite a while..

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

Key at the end of the day is the management.

Problem now is CES is "headless" at the moment...sigh...no CEO...

Hi CuriousParty

Just browsing and a bit kaypoh. But this situation of having no head has been there for months. Cannot be that the reaction comes months after he left. Funny right?

cheers
Oldman.

[BlueKelah]

downplaying the issue, something must have happened within the top management such that they were not prepared for the departure of their ceo. Imagine Tim cook suddenly left apple with no sucessor. Heh

sent from my Galaxy Tab S