Sin Ghee Huat Corp.

[dydx]

Just reviewed the latest FY10 (ended 30Jun10) AR which makes interesting reading.....
http://info.sgx.com/listprosp.nsf/6c6be9...f001605ee/$FILE/SGH%20AR%202010%20final.pdf

Apart from its long some 30 years' (since 1977) operating history with the founding Kua family at the helm, Sin Ghee Huat's established business as an expert stockist/distributor of stainless steel materials does have a high knowledge content. Based on its strong B/S - including a huge $39.0m nett cash reserve! - and the establishment of a subsidiary in Suzhou, PRC, recently, Sin Ghee Huat is poised to grow its business further given more time.

To reward shareholders, for FY10, Sin Ghee Hat has declared a total $0.02/share in dividends - comprising a $0.01/share Final, and a $0.01/share Special - which are payable on 15Nov10, with ex-date fixed on 1Nov10.

With a NAV/share of $0.3886 and Nett Cash/share of $0.1793 (as at 30Jun10), based on the last done share price of $0.28, it is quite clear that this counter still provides ample cushion, even though it may take sometime before Sin Ghee Huat's business and profit to shine again.

[cif5000]

Is it common for auditors not to seek reappointment?

[dydx]

Is it common for auditors not to seek reappointment?

I suppose an auditor may choose to leave a client if the audit fee is too little, or the work involved is too much, too difficult, or simply not worthwhile; or it could be that there is something not right or improper in the client's business affairs that may hurt the auditor's own reputation.

In this case, the official reasons for the proposed change of auditors from LTC to KPMG are clearly spelled out in an Appendix to the Notice of AGM.....
http://info.sgx.com/listprosp.nsf/6c6be9...f001605ee/$FILE/SGH%20Circular%202010%20final.pdf

I would venture to guess that the unofficial reasons could be that the new CEO or some of the new directors may not like the service level or people from LTC, or they may have a preference for KPMG being a "Big 4", or KPMG has offered a much lower fee quotation.

Based on Sin Ghee Huat's rock-solid B/S, the proposed change of auditors should not be an issue.

[kazukirai]

Just to add on to the debate,

I'm not sure how the corporate world out there really works but a few points:

1) LTC LLP may not be seeking re-appointment but they have given their opinion that the financial statements were drawn up properly. If this set of financial statements or those that were audited by them (i.e from 2006) turn out to have some major form of error, wouldn't it still reflect badly on their ability to discharge their duty?

2) Sin Ghee Huat, having appointed a 'big four' auditor, must also know that if any of their previous statements are dodgy, then having a new auditor will not help them in the upcoming year. So assuming there is some hanky-panky going on, unless all the insiders plan on making a big escape in the coming year, why would they hire a big four auditor or a new auditor for that matter? Isn't better to keep the 'show' going?

Am I right to think along these lines?

[dydx]

It may be useful to also review the IPO prospectus.....
http://info.sgx.com/webipo.nsf/ddd103e44...b0011bfc9/$FILE/SinGheeHuat-Prospectus.pdf

Sin Ghee Huat's IPO in 2007 was sponsored by UOB, and LTC was the reporting auditors. The IPO raised $17.13m in gross new capital, and the related cash is still substantially in the company's 30Jun10 B/S. The super profits earned in FY07 and FY08 have also strengthened the company's equity and B/S.

I suppose LTC would not have signed off each of the last 5 years' accounts if they were not satisfied with the numbers and Sin Ghee Huat's business affairs. And I guess we can reasonably expect the same from KPMG, going forward.

[Drizzt]

sin ghee huat looks really great at this price. but longer term, if the capex is so low, why aren't competitors coming in to take a piece of this fat pie?

[d.o.g.]

sin ghee huat looks really great at this price. but longer term, if the capex is so low, why aren't competitors coming in to take a piece of this fat pie?

It might be a good idea to do a peer comparison. Sin Ghee Huat is a steel stockist, and there are at least 4 other stockists listed on SGX:

AnnAik
Asia Enterprises
HG Metal
HupSteel

All 5 of the stockists are currently selling for 60-75% of NAV. Some things to think about:

1. Why is there a discount?
2. Is the discount justified?
3. How might the discount be eliminated?
4. Are there better places to put the money?

The 5 stockists are all about the same size. AnnAik is the smallest ($50m book value), HupSteel the largest ($200m book value). The others are about $100m book value. So they have essentially the same economics with regard to buying power, pricing power etc. They differ slightly in customer mix of course, and in capital structure (debt vs equity). But otherwise they should get similar returns in their businesses.

A simple view would be to assume that the businesses are selling below liquidation value (as measured by book value), so there is a margin of safety. But remember that a steel stockist's book value consists almost entirely of inventory. Liquidating a stockist would flood the market with inventory and depress prices. Which means liquidation value is actually materially below book value. So buying below book value is not good enough.

What about earnings? Look at the earnings of all 5 stockists and plot them against steel prices. The correlation will be obvious. So if you want to buy them on the basis of earnings you first need to know what steel prices are going to be.

And remember that steel prices have an asymmetric effect on stockists' margins, because the customers are generally much larger than the stockists. Steel products are ultimately commodities sold by the ton, even when they are cast/forged/machined into special shapes.

When steel prices drop, customers demand lower prices and the stockists' margins fall. They also take a revaluation hit on existing inventory. When prices rise, stockists' costs for new goods go up but customers don't let the stockists capture the full upside on existing inventory, so margins go up only a little.

As usual, YMMV.

[dydx]

I have taken a look at the respective full-year/interim results for the latest period ended 30Jun10 of Sin Ghee Huat, HUPSteel, Asia Enterprises, and Annaik. It is noteworthy that Sin Ghee Huat's GP Margin of 19.8% is highest among the 4, and compares favourably against HUPSteel's 16.6% and Asia Enterprises' 16.7%. So it appears that Sin Ghee Huat's stainless steel stockist trade - likely because of the higher degree of technical differences in the products, or other characteristics - is a more profitable trade.

It is to be noted that like other traders/stockists of commodity-type products, Sin Ghee Huat's overall profitability will be moderated by short-term fluctuation of steel and nickel prices, and by the company's stock holding and purchasing policies/strategies, which are influenced by the competence, experience and combined wisdom of the management team.

In FY07 and FY08 (ended 30Jun08), Sin Ghee Huat recorded super profits. In FY09 (ended 30Jun09), during which demand and prices nosedived, the company drastically cut stock level and managed to avoid a loss. From the depth of 2H-FY09, the company has so far recorded 2 consecutive half-year periods of steady revenue and profit increases in FY10 (ended 30Jun10). Demand is poised to increase further, with prices holding steady or tending higher as well.

Mr Market tends to value steel stockists below their NAV/share likely because of the fluctuating commodity price risk inherent in the business, which will impact the value of the stock holding and a portion of the equity in such companies. In the longer term, a steel stockist's business growth and profitability will be determined as much by the quality, competence, experience, and drive of its management.

[Drizzt]

thanks for the analysis i guess when u invest in a company like this, u should take it that cashflow is consistent. u always have to factor in 2 - 3 years of bad results.

Asia Enterprise holdings look a better bet. they have a track record of really good cashflow.

both have a ev/operating cashflow of 2.89 times and 2.46 times respectively. which means we are buying roughly 3 years of current cashflow.

[pianist]

Hi forumers for me i have hupsteel holdings and i like stockist companies despite a bulk of their current asset are volatile inventory however they also tend to have a strong balance sheet to support their kind of business

thanks forumers for introducing sin ghee huat, i made some purchases today..cos feel is a bargain

i googled thr a ocbc report back in 2007 that SGH ipo debut price was 0.33 with 222,000,000 floating shares and it once shot to 0.65 i guess that was before the credit crisis.