Mall REITs - CapitaRetail China, Fortune, and Frasers Centrepoint

Introduction

This research note is on three of the pure-retail commercial REITs listed on the SGX, Frasers Centrepoint Trust, Fortune REIT and CapitaRetail China Trust. They are all in the business of acquiring and managing retail properties within their respective geographical mandates and paying out 90% or more of their distributable income, as per standard REIT rules. This note will be the first of a series analysing the commercial REITs in Singapore

The charts below give us an idea of how the respective REITs have performed in the stock market.

Competitive Comparison

These three trusts operate in different geographical jurisdictions and do not compete directly against each other. They compete with other trusts and retail malls within their respective geographical areas. Because the market for retail space is relatively fragmented on the supply side, lease and occupancy rates depend on the macroeconomic performance of the region.

CapitaRChina – The majority of CapitaRetail China’s retail properties, Wangjing, Jiulong and Anzhen mall, are in Beijing. Together, they account for 77% of CapitaR’s net property income for 2Q 2007. The performance of the REIT will therefore depend largely on the Beijing commercial property market. A recent research piece on the Greater China property market by Jones Lang Lasalle has a positive outlook on Beijing:

“Some pessimists may point to the fact that Beijing’s double-digit vacancy rate of 15.5% in 2Q07 is already a clear indication of an over-supply condition. We hold a different opinion, viewing this as a structural problem, due to the existence of a pool of stock that cannot meet the requirement of tenants, and as such contributing to the high tenancy levels. … The implication from this is that new quality buildings with the right specifications should not have a problem finding tenants to fill the space.” – Lee Wee Liat of Jones Lang Lasalle

Fortune REIT – A recent report by Colliers on Hong Kong’s property market gives the following commentary. The general economic sentiment in Hong Kong, as in Greater China, is positive, and this has had the effect of causing rents to rise:

“Essentially, asking rentals were raised by vendors in view of the positive market sentiment attributed to the record-breaking stock market prices and the positive consumption sentiment. Meanwhile, retailers were impressed by the stronger-than-expected business volume registered in late 2006, thus becoming even more aggressive in securing their outlets. Individual retailers were found to raise their rental offer for a shopping unit in the prime districts by as much as 40% in an attempt to outbid rivals during 1Q 2007.”

Frasers CT – 3 main retail malls in Singapore all connected through MRT and bus routes and in populated housing areas. A recent Colliers’ report on the real estate market in Singapore indicates that the retail rates as a whole grew slightly due to growth in the tourism market and the expansion of the presence of retailers in Singapore. However, Frasers’ retail properties are mainly in residential areas and not in the prime shopping districts so the impact of the expansion of the upscale retail industry and tourism industry is likely to have a muted impact on Frasers’ performance. Nevertheless the general economic condition in Singapore remains positive and Frasers is expected to experience the benefits of the economic expansion as announced by PM Lee Hsien Loong in his latest NDP Rally Speech.

Quality of Accounting

CapitaRetail China – The first thing confronting the analyst is the page long note explaining the lack of historical comparative statements for various reasons such as “ownership period is too short,” “period of operations is too short,” and “relevant information to prepare the historical pro forma financial information is unavailable to the manager.” While these are valid reasons to exclude comparative preceding year statements, the lack of comparatives makes it slightly difficult to gauge the performance of CapitaR relative to its peers.

Another thing to note is that in the cashflow statement CapitaR starts the calculation of CFO using net income after tax, instead of using net income before tax as is usually the case for the other REITs. CapitaR also does not exclude the asset revaluation figure from its starting net income after tax, making it harder for the analyst to make comparisons while excluding non-recurring items. The Fraser CT financial statement is much more investor-friendly in this respect.

The quality of disclosure of CapitaR is quite high, although not as detailed as Frasers CT, which is considered below.

Fortune REIT - Shortest report of the 3, by far. While length of disclosure is not necessarily indicative of quality of disclosure, this is still a point of notice. However, compared to the CapitaR financial statements, the footnotes are more detailed than CapitaR.

Frasers CT – Of all the 3 financial statements, I found Frasers’ to be the most comfortable to navigate. It is the longest of the three, and there are very detailed footnotes to every financial statement.

A couple of things to note regarding Frasers CT is that it has a relatively high proportion of gross revenues coming from “other revenues.” This will be dealt with below in the financial & profitability analysis. Another thing to note is that is has recorded a significant surplus on revaluation of properties of $44.5m. This is not a problem because the surplus is appropriately recorded below the investment income as a non-recurring item and is not included above the bottom line unlike HMI.

Financial & Profitability Analysis

The table above shows key comparative ratios between the three REITs.

Operating Efficiency – Fortune REIT appears to have the greatest operating efficiency amonst the three REITs by a substantial margin, while CapitaR has the lowest operating margin. However, due to taxation, Fortune REIT yields a lower net margin compared to FrasersCT, with CapitaR having the worst performance.

Cash Flow Quality – The numbers show that CapitaR has the worst cash flow quality of the three REITs, by a substantial margin. There has been a marked increase in accounts receivable and this has had the effect of lowering operating cash flows. The CFO numbers for the other REITs are quite normal, with FrasersCT having the best cash flow quality.

Leverage – In terms of leverage, CapitaR has the greatest amount of debt, at 37% of assets. Fortune at 27% has the greatest capacity to take on debt in order to make yield-accretive acquisitions. Frasers is somewhere between the two.

Relative Valuation

The numbers clearly show that CapitaR is the worst performer, from a financial analysis standpoint. It has the highest leverage, the lowest margins, and the poorest cash flow quality. Yet the bizarre thing is that it has the highest valuation, by a mile. The projected payout ratio based on latest share prices is a mere 2.52%. Yet it has the highest leverage. Furthermore, it has a P/B of 2.48. This looks like an insane valuation.

Fortune REIT appears to be the most reasonably priced of the three. With a yield of 6.16% and a P/B of 0.67, it looks like a relative bargain. Furthermore, its balance sheet has much greater room to take on debt for accretive acquisitions

FrasersCT is somewhere in the middle, and looks fairly priced on a comparative basis. It’s yield of 4.18% is somewhat below what you would expect from a REIT, but is not too low as compared to CapitaR

What is keeping CapitaR up high in the sky? Is it the expectation that the REIT will find an opportunity to unload assets at a significant gain? Or is it because rentals are expected to soar overnight? I really don’t understand.

As far as I’m concerned, I’m staying away from CapitaR for the time being, and I’ll keep Fortune on my watchlist.

Compulsory Annuity Scheme: Around the Blogosphere

The compulsory annuity scheme tweak to the CPF system to deal with the aging population was recently announced by PM Lee Hsien Loong in his NDP Rally Speech 2007. It has drawn heated discussion from many quadrants of Singapore's society, not least in the blogosphere. Here is a collection of links on the subject:

My first link is that from Bart JP, who is pursuing his PhD in Economics in LSE and will be later joining the government as an Economist. I list his view at the top because it is one of the few voices openly lauding PM Lee's announcement to implement "longevity insurance."

• A Right Step Towards Risk Pooling
  from Perspective Unlimited

A second voice supporting the proposed compulsory annuity is that from Singapore Angle, by Teh Ci. He thinks that "the compulsory annuity is a good thing for Singaporeans."

• Good Compulsory Annuity, More Welfare?
  from Singapore Angle

The next is a balanced viewpoint from veteran journalist Seah Chiang Nee: "With the rising cost of living, senior citizens who have little education, money or family support are becoming the city state’s rising disenchanted."

• Old Age Not A Blessing
  from The Star by Seah Chiang Nee

The Online Citizen is sceptical about the proposed initiative, with couple of their writers having a go. Prolific writer Leong Sze Hian takes the opposition to Bart JP and engages the CPF system directly in three posts, all are definitely worth your time:

• Are there systemic problems in our CPF system?
  from theonlinecitizen
• Unanswered questions about CPF changes
  from theonlinecitizen
• Some concerns about annuities and tweaking the CPF
  from theonlinecitizen

From the same website, Andrew Loh compares the pension that ministers get in comparison to the plight of average Singaporeans.

• Annuities for Singaporeans, pension for ministers?
  from theonlinecitizen

The above discussions have been remarkably civil, let's get down to having more fun. Lucky Tan in his usual sarcastic style tells us why we should "[w]ork longer and harder..and ... help to solve the problem of ageing Singaporeans without burdening the PAP govt." Or should we?

• Wonderful brilliant scheme to help the extremely old....
  from Diary of A Singaporean Mind

Meanwhile, we can never ignore the father of the blogosphere, Mr Brown, as he gives his take in his Mr Brown Show.

• the mrbrown show: annuity schemes
  from the mrbrown show

But what does this issue really boil down to? Perhaps it is just the issue of whether the government should be deciding for us how we should deal with our retirement, or whether we should be left to our own devices to plan for our old age. While the annuity scheme might be a good idea in theoretical economics, forcing it down Singaporeans' throats is politically questionable. Aaron Ng articulates this idea quite nicely.

• “Coerced” annuity and possibly lesser returns on CPF
  from Hear ye! Hear ye!

The main ideas have been expressed above, but there are many other pieces of good commentary on the CPF system, the annuity proposal, and the aging population in general. Take your time to work through them:

• On CPF, Life, Work and Retirement
  from Mr Wang Says So
• PM Lee & The Aging Population
  from Mr Wang Says So
• CPF and its creaky assumptions
  from Yawning Bread
• The Great Annuity Scheme Diss
  from The Void Deck

Don't forget to visit Sei-ji Rakugaki, who has drawn a cartoon for us :)

• CPF overhaul after the national day rally
  from My sketchbook

Update: There has been talk of a planned organised silent protest on sometime soon! Things are getting exciting! Read more:

• Black Sheep
  from Sheep City
• Protest against annuities. Sept 8th, 2007 at 4.00...
  from Singapore Dissident

Goh Meng Seng has expressed his displeasure at the compulsory annuities:

• Say No to Compulsory Annuities
  from Singapore Alternatives

Note: This post will be updated as more content appears. Leave a comment if you think there is a good post that needs to be included

Disclaimer: I neither endorse nor oppose the proposed protest against the compulsory annuities.

Barclays In Trouble, And Temasek Feeling the Heat

Sometime last month, when it was announced that Temasek was taking a stake in Barclays in order to support the British behemoth's bid for ABN, I expressed scepticism about the wisdom of the deal. I thought it was rather unwise to make an investment in a bank that was engaged in a bidding war with a fierce rival, the Royal Bank of Scotland consortium, which would probably mean that Barclays would be paying a premium if it won the bid. About a month later, things are indeed turning out rather poorly for Barclays' bid for ABN, and for Temasek's investment in Barclays.

A senior Barclays banker recently lost his job due to the recent subprime squeeze in the credit markets. Meanwhile, The Times has recently published an article about the problems that the bank as a whole is facing due to sub-prime related losses:

"Barclays Bank was dragged deeper into the sub-prime mortgage crisis last night after Landesbank Sachsen, a major client, had to be rescued by a rival state-owned bank in Germany.

Barclays appears to have been responsible both for designing a complex fund that got Sachsen into difficulty and for helping to pull the plug on the bank by demanding margin calls in respect of another Sachsen investment." read more

As a result of the problems, Barclays' share price has dipped significantly, and this has had the double effect of causing Temasek's investment to dip by about 15%, while at the same time Barclays' bid for ABN has been diluted because part of the bid was made in stock. See this article for more information.

Now, it looks like Temasek's investment will quickly start off as a loser, and it also seems like it has taken a significant stake in a bank that will have a slightly poorer competitive position vis-a-vis the RBS-ABN combination, which looks more likely than not to be consummated sometime soon.

Indeed, as its size continues to grow and assets under management balloon, Temasek seems to be running into problems as it ventures overseas, beyond Singapore's shores. Only time will tell if this investment turns out to be the second major disappointment since the Shin Saga.

Shipping Trusts: Pacific Shipping Trust and First Ship Lease FSL Trust

Introduction

There are two shipping trusts listed on the Singapore Exchange, Pacific Shipping Trust and First Ship Lease (FSL) Trust. Both are in the business of owning, managing and leasing their ships out. Both have a reasonably large portfolio of ships, with FSL’s being somewhat larger than Pacific’s. The charts below show the stock performance of Pacific and FSL Trust respectively.


Competitive Comparison

According to the two prospectus industry reports on the global shipping lease market, the market is highly fragmented and each player can only command a fraction of the market. Lease and utilisation rates therefore depend largely on global supply and demand for shipping transport. Because shipping is the only feasible cost-effective way to transport large quantities of freight from country to country, the demand for shipping has generally exceeded supply enough to cause shipping rates to rise. The Chinese growth engine ensures steady exports out of the Middle Kingdom across the Pacific and westward towards Europe. Meanwhile, China's great demand for natural resources such as coal and oil have ensured imports of the same. The transportation of all these imports and exports requires shipping transport.

The respective fleets of both trusts are leased to their clients on long term leases, which means that it is unlikely that capacity underutilization will be a problem in the near future. Furthermore, the broader shipping capacity of the industry as a whole is near full capacity. This indicates that it is unlikely that there will be a shortfall in demand in the ship leasing market in the near future.

The basis of comparison for this research note between these two trusts is primarily on decomposing their respective financial statements.

Financial & Profitability Analysis

	Pacific Shipping Trust	FSL Trust
Revenues (FY est.)	$34,246	$64,247
Operating Profit (est.)	$19,448	$13,704
Net Profit (est.)	$16,446	$11,637
Total Assets	$266,595	$527,236
Total Liabilities	$116,745	$47,049
Equity	$149,850	$480,187
Liab/Assets	43.79%	8.92%
ROE	10.97%	2.42%
ROA	6.17%	2.21%
Operating Margin	56.79%	21.33%
Net Margin(Persistent)	48.02%	18.11%
CFO/PBT	1.438	5.799
Shares Outstanding ('000)	337000	500000
EPS	$0.049	$0.023
NAV	$0.44	$0.96
Stock Price	$0.43	$0.87
P/E	8.81	37.17
P/B	0.97	0.90
Payout per unit (est.)	$0.0424	$0.0877
Payout Yield	9.86%	10.14%
PBDA	$29,382	$58,254
PBDA Margin	85.80%	90.67%
CFO/PBWC	0.979	1.167
CFO/PBDA	1.093	1.175

The table above shows key comparative ratios for the two trusts. The numbers for revenues and profits are estimates and are used as a guide only. Actual results may differ materially from the estimates. This is because the trust has only recently been listed and there are no FY numbers for analysis. Nevertheless, it is better to be approximately right than precisely wrong, so we use the estimates for analysis.

The first thing to note when comparing the financial statements of the two trusts is that FSL Trust has a much higher depreciation charge in comparison to Pacific. The financial statements do not reveal the details as to the depreciation rates. Thus it is better to use Operating Profit before Depreciation & Amortisation (PBDA) and Operating Profit Before Working Capital Charges (PBWC) as comparative numbers rather than profit before tax or operating profit. This number is calculated in the rows below, along with associated ratios.

1. Operating Efficiency

From a comparative standpoint, FSL Trust appears to be operating more efficiently than PST, with PBDA/Revenues of 90.67% compared to PST of 85.8%. Furthermore, PST seems to derive operating profits from “fair value gains on derivatives” (see cash flow statement). This looks like a rather suspicious item, and it is not clear why a shipping trust should have such a significant exposure to derivatives. [see update below for more info on the derivatives]

2. Cash Flow Quality

FSL’s CFO/PBWC is 1.167 compared to PST’s 0.979. FSL’s CFO/PBDA is 1.175 compared to PST’s 1.093. On both counts, FSL appears to have a better quality of cash flow compared to Pacific.

3. Leverage

What really sets the two trusts apart is that Pacific is much more highly leveraged than FSL. Pacific has a liabilities/assets ratio of 43% while FSL’s is 9%. Yet the payout yield for FSL based on latest share prices, is higher than Pacific. If we try to lever FSL’s balance sheet up to Pacific’s level, ceteris paribus,FSL shares will be expected to have a leveraged yield somewhere in the region of 11-12% based on latest share prices.

This is a very attractive number for any business trust. And assuming the market is pricing Pacific efficiently, that means that FSL at its current price of $0.87 is undervalued somewhere around 25-30%.

Evaluation

Based on a comparative valuation between the two, it appears that FSL Trust is clearly the undervalued stock according to latest market price of $0.87. Independently on its own, FSL Trust gives a much better yield than REITs (10% vs 5-6%), and exceptional return for its stability compared to other businesses. Furthermore, FSL has excess credit capacity to make accretive acquisitions which will further add to the yield quality of the stock.

FSL Trust is on my buy watchlist at a price around $0.85-$0.87.

Update: A WallStraits Forum member has replied to my post and has raised a few good points:

Originally posted by tanjm
I did a quick read of your report as I am vested in BOTH.

Some things to note:

1. PST strategy is to highly leverage at the beginning, with a term loan matching the long leased tenures of the ships it rents out. These term loans are amortizing i.e. the principal is paid down evenly over the life of the loan. This means that a part of PST's cash flow is continuously paying down the principal of the loan. At the end of about 10-12 yrs, PST will be debt free. What this means, from a distributable cash flow perspective, is that PST distributions will increase over time EVEN IF PST does nothing. This is because as the loan principal is paid up, the interest costs will decline and its present yield will increase.

2. PST has interest rate swaps in place to hedge its term loans. The actual term loan is actually a floating interest rate. The purpose of the swap would be to effectively lock in a interest rate of about 6% over the entire life of the loan. The nature of this hedge is that any gains on the swap will offset any losses on the interest payments of the loan and vice versa. As an accounting practice, PST has to log any book value gains or losses of the swap, but this practice has no effective bearing on its ability to pay distributions.

3. FSL sponsors have subordinated their distributions from their share of the trust to locked in increases of the distribution up to 2009. Effectively, this means they have "gauranteed" (up to the limit of their own share of the distribution) that distributions will increase for the first couple of years.

First REIT (AW9U.SI) - Ignored Value

First REIT was the first healthcare REIT listed on the Singapore Exchange. Most of its assets are housed in Indonesia (mainly the Siloam Hospital group). Meanwhile, the REIT has been acquiring some hospital assets in Singapore, most recently the Adam Road Hospital. First REIT is one of two healthcare REITs listed on SGX, the other being the recently listed Parkway Life REIT.

This research note considers First REIT a reasonable addition to an investor's portfolio at around $0.75 or less.

Reasonable Competitive Position

The Siloam group of hospitals is one of the main hospital groups in Indonesia. Indonesia might not be the most attractive destination for medical tourists seeking for top quality healthcare. Nevertheless, people still fall ill and need to find care. Amongst the second tier healthcare market serving Indonesia, Siloam is the leading hospital group. The Siloam hospital group was first established in 1996, through joint efforts of PT. Lippoland Development Tbk and Singapore based Gleneagles Development Healthcare Ltd. The partnership with a credible healthcare player (Parkway) and one of the biggest property management groups in Indonesia (Lippo) should ensure that there is reasonably strong competitive strength and quality healthcare provided by the Siloam Hospital group. Furthermore, the acquisitions of Singapore-based healthcare properties should maintain the quality of the First REIT healthcare assets.

Financial & Profitability Analysis

	First REIT	Parkway Life REIT
Revenues (FY est.)	$24,896	$45,000
Operating Profit (Persistent)	$22,024	$36,930
Net Profit (Persistent)	$17,080	$33,110
Total Assets	$306,660	$786,735
Total Liabilities	$67,582	$36,420
Equity	$239,078	$750,315
Liab/Assets	22.04%	4.63%
ROE	7.14%	4.41%
ROA	5.57%	4.21%
Operating Margin	88.46%	82.07%
Net Margin(Persistent)	68.61%	73.58%
CFO/PBT	NA	NA
Earnings Growth y-o-y
Shares Outstanding ('000)		601669
EPS/Payout Estimate	$0.065	$0.061
NAV	$0.88	$1.25
Stock Price	$0.75	$1.20
P/E	11.54	19.80
P/B	0.85	0.96
Yield	8.67%	5.05%

The table above shows key comparative ratios for the two healthcare REITs listed on the Singapore Exchange. As can be seen, First REIT is yielding a very respectable 8.57% based on a stock price of $0.75. Taking into consideration that the REIT is still quite conservatively leveraged (Liab/Assets = 22.04%), this means that there is still room for the REIT to squeeze out higher returns on shareholders’ funds by taking up leverage to acquire hospital properties.

Furthermore, the REIT seems to be returning a respectable return on assets of 5.57%. Compared to Parkway which is projected to return 4.21%, this is surprising because one would expect a premium collection of hospitals like Mount Elizabeth and Gleneagles to squeeze out a higher return than a supposedly 2^nd tier group of hospitals like the Siloam group. The operating margin of Siloam 88% is also higher than the projected Parkway numbers 82% (operating margins are calculated while excluding finance costs). If anything, this demonstrates that Siloam is able to manage their hospitals effectively and efficiently.

Valuation & Evaluation

At 8.67% yield, First REIT is quite attractive compared to its REIT peers. Other REITs seem to be yielding somewhere in the region of 5%. Furthermore, this yield is created using reasonable leverage. It appears that First REIT is unfairly punished due to the recent subprime sell-down and the perceptions that Indonesia might be a poor healthcare destination.

First REIT looks like a good buy at around $0.75.

For a research note on Parkway Life REIT, click here.

Bankers' Bonuses and Jobs at Risk

The recent subprime debacle and credit squeeze have put the pressure on bankers' salaries and jobs. The freezing up of the collateralised mortgage/debt market and other credit derivatives mean that investment bankers wielding their financial weapons of mass destruction will find much fewer opportunities to ply their trade as asset managers and other investors stay away from credit derivatives, structured finance vehicles, and related financial instruments.

A couple of articles talk more about the impact:

This article talks about a Top Barclays Banker losing his job.

This article talks about bankers being able to expect a much smaller bonus this year, if indeed they manage to keep their jobs.

I wonder what will the impact of the recent financial turmoil on this banker.

Health Management International (HMI) - Sampan in a Rising Tide

Health Management International (HMI) – Sampan in a Rising Tide

Health Management International is a Malaysian healthcare player listed on the Singapore stock exchange.

According to a recent press release by the company following its latest full year results, the company has displayed stellar results. The stock price of the company has soared in recent months, and investors ostensibly are very enthusiastic about the stock. This research note takes a skeptical view of HMI and questions the prudence of making or maintaining an investment in the company.

	Raffles Medical	Parkway	HMI
Revenues	$134,248	$221,611	$43,576
Operating Profit (Persistent)			$8,923
Net Profit (Persistent)			$7,371
Earnings Estimate	$19,200	$53,712	$7,371
Total Assets	$224,569	$1,301,535	$90,547
Total Liabilities	$55,416	$842,174	$30,850
Equity	$169,153	$459,361	$59,697
Liab/Assets	24.68%	64.71%	34.07%
ROE	11.35%	11.69%	12.35%
ROA	8.55%	4.13%	8.14%
Operating Margin	15.72%	18.79%	20.48%
Net Margin(Persistent)	13.11%	12.12%	11.13%
CFO/PBT	0.463	1.139	-1.276
Earnings Growth y-o-y	43%	19.58%	90%
Shares Outstanding ('000)	463119	770043	???
EPS Estimate	$0.04	$0.07	$0.02
NAV	$0.37	$0.60	$0.08
Stock Price	$1.46	$4.08	$0.22
P/E	35.22	58.49	10.48
P/B	4.00	6.84	2.62

The table above shows key ratios of HMI and comparable companies in the healthcare sector that are listed on the Singapore Exchange. Profit numbers have been adjusted for non-recurring items.

Unimpressive Competitive Position

The first thing we notice is that HMI is a much smaller company than its comparables. It is only a fraction of the size of the biggest of the three stocks listed above, Parkway. This is not surprising considering that HMI has actually undergone much operating difficulty since its listing. It has closed down some of its original businesses because they were unsuccessful and has tried to enter into other businesses such as running a nurse training school, which is a business with poor competitive moats.

Based on the history of the company, it is difficult to say with any degree of confidence that the HMI management team is capable of slugging it out amongst the big players. Furthermore, it has no entrenched competitive position vis-à-vis the big names and there is no certainty that when operating conditions move against it that it will not return to its history of (un)profitability.

Poor Accounting Quality

Another thing that strikes the analyst is that there is a rather poor quality of accounting lining the company’s financial statements and that management makes no effort to make navigating the numbers easy for investors. In fact, the press releases are downright misleading as to the actual operating conditions of the company.

For instance, a large one-time gain of $3.3m (FY07) derived from an equity interest in Regency Medical Centre is listed above the operating profit line, as if to say this is a recurring item. This is clearly a non-persistent item that should be classified as such on the profit statement but yet is not. Adjusting the statements for this item gives the statements a much less flattering view of the company, than the HMI press release that proclaims a jump in net profit by 90%.

A second point of suspicion is that regarding minority interest. The amount of profit due to minority interests seems to wax and wane without rhyme or reason. Even though this year’s net profit has jumped by 90%, the minority interest paid out is less than the previous year. Yet there is nothing available in the notes to the statements to give the investor an idea of how minority interests are derived.

Thirdly, when comparing the 06-07 HY statements with the 05-06 HY statements, you will realise that there are material differences between the unaudited interim statements and the final audited numbers. When the restated numbers are different from initially reported, it makes me wonder whether I can trust the unaudited half year statements as reported by the company.

Fourthly, some simple reporting conventions are not met. The liabilities are not grouped together and subtotaled separately from shareholders' equity and minority interest. Even the number of outstanding shares is nowhere to be found in the financial statements.

Overall the financial report appears to have been sloppily put together, and one suspects that this is symptomatic of how the company is run as a whole.

Appalling Cash flows

As can be calculated, the CFO/PBT ratio is a negative 1.276, compared to the much better ratios of each peers. I cannot find explanation by management of why there has been such a great jump in current liabilities resulting in the poor operating cash flow numbers.

Sampan in a Rising Tide

As Warren Buffett has famously proclaimed, a rising tide lifts all boats. Health Management International appears to be a sampan which has had its operating and stock performance lifted by the favourable economic conditions and by the rising equity markets as a whole, not because of management’s prowess or prudence.

Punters and gamblers who wish to stay for the risky ride may choose to bet on this stock. However, once the tide goes out, it is likely that HMI will crash into the rocks and its stock price will plummet. Conservative investors will do well to avoid this company, or sell the stock ($0.22-25 is a reasonable price) while the market affords them the opportunity to do so.