SIIC Environment

[donmihaihai]

Loss making isn't the problem as long as you know it is temporary but isn’t it a lousy ecosystem when the company has to keep making losses for years. And so many ecosystems around nowadays, some got to be fakes or lousy. 
 
placing money in fixed deposit also generate recurring income. Who want it? It is the safest. Trading above book isn't the problem especially when the return justify it. Frequent rights is another thing. Recurring income by itself mean nothing more than getting interest from FD, it is the quality of the recurring income that matter. 

[CY09]

In SIIC's case, there is no ecosystem etc.

Its purely a utilities company. However, due to its high gearing, its trading at 0.2x PB. In my view, this industry thrives on its future projections on service concessions receiving from bidding of new plants. Its similar to the RNAV model of property developers (however RNAV has been recognized upfront in their accounting)

Hence if everything goes well for them, the value of the company on balance sheet should reach slightly more than 1x PB after including the future discount rate inputs. If something goes wrong in its inputs assumptions, it will go horribly wrong such as Hyflux's case. So as an investor, we have to consider their execution.

For me, I am interested in SIIC and China Everbright because of these seemingly low P/B and high dividends because ppl believe their execution has some errors and it is unlikely they will reach close to 1x stated PB (e.g impairments are going to happen). They are not turnarounds as the reported earnings are there. Its more of a question of will they be able to realise their service concessions receivables.

Not invested in any yet, just thinking if the risk is worth it. And also finding it hard to choose between the 2; if i were to buy, think i will split my allocation across both

[karlmarx]

Not commenting specifically on SIIC, but I like what is written in this article here and I think it provides another perspective to investors who are looking at quantitatively cheap stocks and are considering if they are worth the risk:

https://sabercapitalmgt.com/warren-buffe...microsoft/

Price is important, but maybe what is more important is putting your money on future events which you have no doubt about.

[owq]

I was also looking at SIIC and China Everbright and wondering whether the risk is worth it. As buddies have pointed out, these stocks have negative cashflow and high debt. Hence they probably rightly deserve the current low valuation. However, they also managed to increase their profits at quite a good rate over the past few years by clinching more projects. The sustainability is a cause for concern and if financing dries up shareholders will bear the brunt of it so I'm not too comfortable investing large amounts.

Since SIIC is also HK listed, maybe can also compare with its HK peers as well. I like CK Infrastructure for its positive operating cashflow (I'm vested indirectly through CKH) and relatively low debt, although its exposure is more towards UK assets and not Chinese assets.

[ghchua]

Hence if everything goes well for them, the value of the company on balance sheet should reach slightly more than 1x PB after including the future discount rate inputs. If something goes wrong in its inputs assumptions, it will go horribly wrong such as Hyflux's case. So as an investor, we have to consider their execution.

For me, I am interested in SIIC and China Everbright because of these seemingly low P/B and high dividends because ppl believe their execution has some errors and it is unlikely they will reach close to 1x stated PB (e.g impairments are going to happen). They are not turnarounds as the reported earnings are there. Its more of a question of will they be able to realise their service concessions receivables.

Hi CY09,

It is not about low P/B and high dividends only.

I think Hyflux case had been mentioned a few times here. You talk about execution, but you also missed out an important point - who is the financial backer and controlling shareholder of the company? Temasek had long ago sold out before they went into problems.

Hyflux could be saved even with poor execution if they have a financial backer to provide funds to continue operations. Their assets are worth something. Unfortunately, they could not find someone eventually to put in more money.

I have mentioned before that both SIIC and China Everbright are backed by China government related entities, China Everbright by central government while SIIC Environment is regional one. This is an important consideration in case they went into funding issues and burn a lot of cash.

[weijian]

Of course, nowadays "ecosystem" or "recurring income" are hot buzz words and I can't deny that I have fallen in love with those words as well.

Then my question back to you is - Are you willing to pay for a "ecosystem" that is still making losses? Are you willing to pay for "recurring income", but comes with frequent rights issues, and also trading at above book value?

hi ghchua,
I started investing closer to the tenets of value investing. Such "businesses you described above" in general are out of my circle of competence nor temperament. But I keep an open mind and try learning the other side of the argument. The basis been the fact since I expect the Mgt of the companies I invest in to keep innovating, I need to keep up as well. So, I do not have an answer to your questions above yet

Not commenting specifically on SIIC, but I like what is written in this article here and I think it provides another perspective to investors who are looking at quantitatively cheap stocks and are considering if they are worth the risk:

https://sabercapitalmgt.com/warren-buffe...microsoft/

Price is important, but maybe what is more important is putting your money on future events which you have no doubt about.

hi Karlmarx,
I would love to think both are important
As the saying goes "To the man with a hammer, everything looks like a nail". I would love to equip myself with a swiss army knife one day. When Mr Market forgets about price (in a bull market), I would want to emphasize on price. When Mr Market forgets about quality (in a bear market), I would want to emphasize on quality.

For me, I am interested in SIIC and China Everbright because of these seemingly low P/B and high dividends because ppl believe their execution has some errors and it is unlikely they will reach close to 1x stated PB (e.g impairments are going to happen). They are not turnarounds as the reported earnings are there. Its more of a question of will they be able to realise their service concessions receivables.

hi CY09,
I probably over-abused this Peter Lynch-inspired word "turnaround" a tad too much. I think "reversion to the mean" might be a better word?

[karlmarx]

Hi weijian, in the example in the above Saber article, WB rejected MSFT not on valuation but on his low confidence in forecasting MSFT's future earnings. So I'm not actually saying that quality is more important than price.

For example, there may be concerns that ABC pte ltd may not be able to collect on its receivables, may not be able to refinance its debt, and other related cashflow issues. So if an investor does not have an answer to whether ABC is able to collect on its receivables, I will say that it is probably a sign that ABC is outside the investor's circle of competence. And before the investor looks at ABC's valuation, if the investor is conservative, I will also probably advise him/her to stop considering ABC, and move on to other stocks.

It is easy to get tempted if the valuation is really low, which is why WB always looks at the business first, to avoid such biases.

Let's say now you are looking at Chinese tech stocks because they have fallen so much. But if you are thinking to yourself, "Will mobile gaming be banned in China?" "Will further regulation cause Alibaba's e-commerce to lose its competitive advantage?" And if you have no answer you are confident of, then you probably have no competence here, and you should (if you are conservative) walk away.

[opmi]

To add,

My question here is there is a place for tikam-tikam in one's portfolio?

Circle of competence seems like a high bar, with implying high expertise....How about circle of knowledge?
Knowledge as in self-digested information...

Anyway I think it is OK to step outside Circle of Competence...it is called paying tuition fees...
It is not like you will burn like when Dracula see sunlight. Faster way/motivation to learn about company is put some money in.

[CY09]

After some thoughts, today, I invested into SIIC but missed out on China Everbright (as the share prices moved up due to the 1 cent interim dividends announced)

While i understand the concept of a good business being able to tap on other people's network to make profits. These companies tend to command higher P/E due to their quality of business. SIIC and China Everbright have to use debts to build plants but their business is in the environmental segment so don't think its a poor business just that it is capital intensive like utilities

Hoping for the day when SIIC stops getting projects, then we can see the strength of its cashflow

[karlmarx]

1) There are all sorts of clans in the universal pursuit of growing wealth; Wu Dang, Er Mei, Shao Lin, etc. Some will have higher appetite to take chances (like to tikam), while others may not. Which way to go is up to the individual to decide for him or herself.

To me, taking chances means exposing myself to known risks (e.g. receivables may be uncollected but I'm taking chances that it will), and we are not even considering unknown risks yet. Not too long ago, there was a lot of interest in EHT and the bull case was the trust will still be worth significantly more than market value even if the Queen Mary is completely impaired, because, as the argument follows, its hotel properties cannot be worthless. Turns out that assumption broke the hearts of many EHT investors.

Nevertheless, I am certain that there are instances when investors have made a lot of money even when they are filled with uncertainty. Maybe you knew nuts about Tesla but decided to tikam anyway because of all the hype, and you saw it grow 5x, 10x. So long as you are happy with what you are doing, who cares what anyone else says?

2) I agree that the bar is high but maybe that's why doing well over a long period of time is so difficult.

I think most investors do not have this competence, because you need so much knowledge/analysis (breadth, depth, historical) to even understand what you are looking at, not to mention have confidence in your forecasts. To understand a company that is a part of a value chain, you need to understand the whole value chain. And then there are a lot other stuff that is specific to the company to also consider.

3) Agree that one will be more motivated to research when one is vested. 

But I prefer not to buy something unless I have very strong conviction, so as to remain disciplined in my buying. Safety first.

I think very few people actually stay inside their COC. Because if they do, we will probably not have a liquid stock market, very few investors will lose money, stock portfolios are more likely to be concentrated than diversified, and talking heads will lose their jobs, to name a few possible effects.

As for tuition fees, I think that you will gain the most learning only if you have invested a material amount of you time and money into an idea. If the attitude is tikam-buy, where the stake may be small, the investor may not be sufficiently motivated to reflect on what went wrong, and how to do better next time. I think this probably applies to much of every other activity as well.

As John Huber of Saber will say, the feedback loop in investment learning is long.

Anyway, I've not looked at SIIC, so again, my comments here are general and I'm not saying SIIC is not worth looking into.