Friday, December 21, 2007

Singapore's Population Statistics - The Rise of Foreign Talent

Singapore adopts an open immigration policy with a strong belief in attracting “foreign talent” to drive the country's economic growth. As shown below, this has contributed to a consistent growth in the number of non-residents in Singapore since 2003, rising from 748 million to about 1,005 million in 2007, for an annual growth rate of about 7.7%.

The % of the Singapore Population who are non-residents has also been on the rise, recently breaking through the 20% mark in 2007 to 21.48%.

At the current rate, the % of foreigners in Singapore looks set to rise significantly, as the country continues to import "foreign talent" - both cheap foreign labour and senior executives - to boost the population and to drive the country towards a knowledge-based economy, and target wealthy foreigners to grow its tourism, private banking and premium real estate businesses.

The % of foreigners in the country could easily rise to 25%, and even 30-35% in the coming years.

All statistics are publicly available from SingStat.

Friday, October 26, 2007

Two Videos on Private Equity

World Economic Forum Davos: The Globalization of Private Equity

Berkeley China Initiative: Private Equity in China

Saturday, October 13, 2007

Two Videos on Oil

Recently I wrote two posts on companies operating in China's Oil industry, China Oilfield Technology and RH Energy.

For those who are interested in this sector, below are two lengthy videos on the global oil industry: its business, economics, politics.

China vs US: The Battle for Oil (50mins)

Securing the International Oil Supply - Conference at Univ. of Chicago (1.5hrs)

Friday, October 12, 2007

Even Central Americans Want to Learn Mandarin

I previously blogged about the increasing importance of the Mandarin language, due to China's economic ascension. Now, even the people of Panama are considering making it compulsory for their children to learn Mandarin as a 3rd language.
Mandatory Mandarin lessons for Panama kids?

PANAMA CITY - LEARNING Mandarin could soon be compulsory for schoolchildren in Panama, in a bid to prepare the Spanish-speaking nation for China's growing importance as a trading partner.

Panama's National Assembly will next week debate a Bill to make Mandarin lessons obligatory in all government-run primary schools in the trade-dependent nation.

Mandarin is the official language of both China and Taiwan, and though Panama has no diplomatic relations with Beijing, China has major interests in its transport and shipping sectors.

Congressman Arturo Arauz, who drafted the proposal, said it would help prepare Panama for a 'new linguistic order' prompted by spectacular economic growth in China.

'We cannot ignore that a lot of our trade is with Asia,' he said. 'In 20 years' time, the world is going to be a very different place.'

Under the proposal, children aged between six and 11 would learn Mandarin for a trial period of 10 years.

English would continue to be taught in schools as a second language.


If you are Singaporean Chinese and you don't speak fluent Mandarin, you better start working on it!

Wednesday, October 10, 2007

Temasek Watch: Indonesia Accuses Temasek Of Monopoly

Indonesia Accuses Temasek Of Monopoly

(RTTNews) - Singapore investment company Temasek Holdings has been accused of violating Indonesia's anti-monopoly laws through its subsidiaries' shareholdings in two of Indonesia's largest mobile telecommunication operators, according to the Singapore News.

Following a 120-day probe, Indonesia's Anti-Monopoly Commission (KPPU) issued a 109-page report that stated that Temasek subsidiaries Indosat and Telkomsel, which dominate Indonesia's mobile sector, represent a conflict of interest.

Temasek subsidiaries own a 42 percent stake in Indosat and a 35 percent stake in Telkomsel. A total of 10 companies compete for shares of the Indonesian market worth US$5 billion.

Temasek has denied the charges, replying that Indosat and Telkomsel both have their own boards and function independently.

The charges have been submitted to an independent council that will deliver a verdict next month.

Original source is here

Business Times - 10 Oct 2007

Temasek to defend against Indonesia's ruling

SINGAPORE - Singapore's state investment firm Temasek Holdings said on Wednesday that it would defend itself against the findings by Indonesia's anti-trust body KPPU that it had violated the country's anti-monopoly laws.

'Temasek Holdings will vigorously defend its legal rights at all opportunities and in all available legal forums. As legal counsel for Temasek Holdings, I will be seeking clarification from KPPU on this matter,' Temasek said in a statement to Reuters, quoting its lawyer Todung Mulya Lubis.

'The claims against Temasek Holdings are baseless and without merit,' the email said.

Singapore's state TV reported late on Tuesday that Indonesia's anti-monopoly body KPPU had found that Singapore's Temasek violated the country's anti-monopoly laws through its stakes in two Indonesian telecommunications firms.

For rest of story, click here (subscription may be required)

Intangible Asset Valuation: The Value of Female Beauty

I found the article below on one of my readers' blogs.

I think it is a very funny post that properly applies the principles of intangible asset valuation, including accelerating depreciation and present value.

It also discusses how to properly finance a rapidly depreciating intangible asset - leasing might be better than an outright acquisition.

Enjoy :)

What am I doing wrong?

Okay, I'm tired of beating around the bush. I'm a beautiful (spectacularly beautiful) 25 year old girl. I'm articulate and classy. I'm not from New York. I'm looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don't think I'm overreaching at all.

Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 - 250. But that's where I seem to hit a roadblock. 250,000 won't get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she's not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level?

Here are my questions specifically:

- Where do you single rich men hang out? Give me specifics- bars, restaurants, gyms

- What are you looking for in a mate? Be honest guys, you won't hurt my feelings

-Is there an age range I should be targeting (I'm 25)?

- Why are some of the women living lavish lifestyles on the upper east side so plain? I've seen really 'plain jane' boring types who have nothing to offer married to incredibly wealthy guys. I've seen drop
dead gorgeous girls in singles bars in the east village. What's the story there?

- Jobs I should look out for? Everyone knows - lawyer, investment banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?

- How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY

Please hold your insults - I'm putting myself out there in an honest way. Most beautiful women are superficial; at least I'm being up front about it. I wouldn't be searching for these kind of guys if I wasn't able to match them - in looks, culture, sophistication, and keeping a nice home and hearth.

it's NOT ok to contact this poster with services or other commercial interests
PostingID: 432279810


Dear Pers-431649184:

I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament. Firstly, I'm not wasting your time, I qualify as a guy who fits your bill; that is I make more than $500K per year. That said here's how I see it.

Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here's why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here's the rub, your looks will fade and my money will likely continue into fact, it is very likely that my income increases but it is an absolute certainty that you won't be getting any more beautiful!

So, in economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain, you're 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you!

So in Wall Street terms, we would call you a trading position, not a buy and hold...hence the rub...marriage. It doesn't make good business sense to "buy you" (which is what you're asking) so I'd rather lease. In case you think I'm being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It's as simple as that. So a deal that makes sense is dating, not marriage.

Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as "articulate, classy and spectacularly beautiful" as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn't found you, if not only for a tryout.

By the way, you could always find a way to make your own money and then we wouldn't need to have this difficult conversation.

With all that said, I must say you're going about it the right way. Classic "pump and dump." I hope this is helpful, and if you want to enter into some sort of lease, let me know.

Update: This article has made the world news on the BBC, and on the New York Times.

Mermaid Maritime: IPO Summary and Valuation

Business Overview

Mermaid Maritime (MM) is a leading provider of drilling and sub-sea engineering services for the oil and gas industry in South East Asia. Over the last five years, MM has grown significantly in the areas of sub-sea engineering, and, more recently, drilling services for the offshore oil and gas industry as well as in training and technical services. MM has established ourselves as a company recognized by the industry for high quality services, delivered safely and efficiently. MM has developed a strong blue chip client base that includes some of the world’s largest oil and gas-related companies. Clients such as Chevron, CUEL and PTT Exploration and Production PCL each accounted for 5.0% or more of MM’s sales in any one of the periods under review. Some of MM’s other clients include BP, Shell, ExxonMobil, Saipem, Transocean, Petronas and Amerada Hess. MM operates throughout South East Asia, primarily in Thailand, Indonesia, Malaysia and Vietnam.
MM provides drilling services through its majority-owned (95.0%) subsidiary, Mermaid Drilling Ltd. (“MDL”), which currently has two tender rigs. MM provides sub-sea engineering services through its wholly owned subsidiary, Mermaid Offshore Services Ltd. (“MOS”). MOS provides sub-sea inspection, repair and maintenance services, light construction services and emergency repair and call out services in South East Asia. MOS’ fleet consists of four vessels which it owns, in addition to one DP construction vessel and one ROV/air dive support vessel, both of which it charters. The flagship vessel in its fleet is the DP DSV Mermaid Commander, which has an in-built saturation diving system and rough weather capabilities. In addition, MOS owns one portable saturation diving system, seven air diving systems and seven ROVs.

MM has built and now operate a world class facility at our operational base in Chonburi, Thailand. This facility allows MM to control its own maintenance and refurbishment requirements of equipment and, more importantly, the facility’s geographical location allows us to mobilize expeditiously and efficiently to MM clients’ locations. MM has also established shore base support functions in (i) Kuala Lumpur, Malaysia; (ii) Songkhla, Thailand; and (iii) Jakarta, Indonesia to support our geographical expansion. To support MM’s mobile operations, these shore base support functions can be moved at short notice.

Major Risk – Tiny Fleet

MM only has two tender rigs, and downtime of one or both of these rigs could adversely affect MM’s results of operations. For example, MTR-2 is experiencing a period of downtime that commenced in July 2007 as a result of an agreement with Chevron Thailand Exploration and Production Ltd (“Chevron Thailand”) to meet certain technical specifications upon the transfer of MTR-2 from its previous client. To meet these specifications, MM relocated MTR-2 to inland facilities in July 2007. In addition to completing these specifications, MM also decided to commence the dry-docking and SPS for MTR-2. MTR-2 is expected to resume operations in November 2007. Further, MM’s tender rigs may experience downtime for other reasons, such as the crane boom incident on MTR-1 in September 2006 and the fire on MTR-1 in June 2007


The market segments and region in which MM operates are highly competitive. Pricing is often the primary factor in determining which contractor is awarded a contract. Some of MM’s competitors are larger than it is, have more diverse fleets or fleets with generally higher specifications, have greater resources, have greater brand recognition and greater geographic reach and/or lower capital costs than MM has. This allows them to withstand industry downturns better, compete on the basis of price or relocate, build and/or acquire additional assets, all of which may affect MM’s sales or profitability. If other companies in MM’s industry relocate or acquire vessels for operations in South East Asia, levels of competition in South East Asia may increase and MM’s business could be adversely affected. Local oil and gas services competitors in each country MM operates in may have more domestic experience and better relationships with clients.


MM’s business is dependent upon the conditions of the oil and gas industry, in particular the level of activity in oil and gas exploration, development and production and sub-sea inspection and maintenance programs in South East Asia where we are active. The level of capital expenditures for oil and gas exploration, development and production largely depends on prevailing oil and gas prices and our clients’ expectations of prices in the future, each of which is influenced by a variety of factors, including the actual and anticipated production, supply and demand for oil and gas, and worldwide economic conditions. Oil and gas prices are volatile, which have historically led to significant fluctuations in expenditures by clients for oil and gas drilling and related services. A sustained period of low drilling and production activity or the return of lower oil and gas prices could impact the level of oil and gas exploration, development and production, as well as result in the cancellation of current and planned projects and impact MM's business and results of operations.

The niche market in which MM operates is less sensitive to slowdowns in the industry as compared to oil and gas exploration activities. Even in the event of a slowdown in oil and gas exploration activities, MM clients’ planned projects may not be curtailed. Further, our sub-sea engineering services also perform inspection and maintenance services. MM anticipates that there would be a continued demand for such services even during periods of low drilling and production activity as many of MM’s clients would have to continue to meet their committed production levels under their supply contracts as well as comply with subsea infrastructure inspections requirements.

Accordingly, demand for services is subject to fluctuations that generally affect the oil and gas industry, with periods of high demand, short supply and high rates often followed by periods of low demand, excess supply and low rates. Further, the entry into the market of newly constructed, upgraded or reactivated tender rigs or vessels would increase market supply and may curtail the strengthening of rates or reduce them. Periods of low demand intensify the competition in the industry and often result in assets being idle for periods of time or being utilized at low rates. In addition, in depressed market conditions, a client may no longer need a tender rig or vessel that is currently under long-term contract or may be able to obtain a comparable service at a lower rate. Clients may then seek to renegotiate the terms of their contracts or avoid their obligations under those contracts.


The following information is extracted from the very detailed information provided in the prospectus, with the exception of FY2007E. Assuming the IPO priced at its maximum of $1.56:

(click for full image)

The projection and IPO pricing gives a pre-IPO trailing P/E pf 45.01 and P/B of 9.06. The extrapolation of HY07 results to FY07 gives the IPO a pricing a forward P/E of 18.52 and P/B of 8.18.

It should be noted that the 2H07 projection seems quite aggressive. This gives an ROE of about 44% and ROA of about 24%. I am not sure that this is sustainable in the long run. Even with this aggressive projection, the IPO pricing is not cheap at 18.5x forward earnings. The company's investment bankers seem to be extremely confident that Mermaid will continue to grow rapidly in the future.

To be sure, Mermaid is still a small company and has plenty of room for growth. The IPO valuation may come to look conservative in the future. However, significant risks abound for a company with only two drilling rigs.

This looks like a high risk/high reward IPO.

Tuesday, October 09, 2007

RH Energy


RH Energy (RHE) offers a full suite of integrated customised design, engineering, procurement, construction, installation and commissioning services (EPCIC) to the oil and gas pipeline and storage operators and oil companies. Currently, RHE’s main business focus is to fabricate and install equipment and systems which form an integral component of a gas or oil pipeline in the PRC. RHE uses products from reliable and reputable international principals such as Cameron, Goodwin, Siemens and Ruhrpumpen, in order to meet the stringent requirements of RHE’s customers.

Within the PRC, pipelines are used to transport crude oil from the oil fields to the oil refineries for processing. After which, the refined oil is then supplied to the various towns and cities in the PRC via pipelines. Similar method is adopted to transport natural gas to the various towns and cities in the PRC. Pipeline is an economical, efficient (with minimum product loss during transfer) and safe method to transport the oil or gas produced from the oil or gas field to the refinery, and for distribution of the refined product or town gas from refinery and petrochemical plant to consumers. It is one of the main infrastructures that oil companies rely on for product transportation to reduce hazard, improve efficiency and maximise profit. This business connects RHE with both the upstream and downstream players in the oil and gas sector, hence providing RHE with a platform to expand its customer base.

The upstream activities cover exploration and production of oil and gas while the downstream activities include the transportation of oil and gas to the refineries, oil and gas refining activities, storage facilities and managing the distribution and marketing of the refined products to users. Having constant contact with companies involving in the upstream activities increases our chances of receiving more tender invitations and customers’ enquires. On the other hand, RHE also receives jobs referrals from companies engaging in the downstream activities who are satisfied with our products and services.

RHE’s principal activities can be broadly classified as follows:

(a) Equipment integration services – These services include (i) the engineering, procurement, fabrication, installation and commissioning of emergency shut down valve system, directional flow control valve system and flow control valve system; (ii) the design, engineering, procurement, fabrication, installation and commissioning of CNG pressure regulating system, custody transfer metering system and online natural gas analyser system; and (iii) the engineering, fabrication, installation and commissioning of pump and electromotor system;

(b) Manufacture and procurement services – These services comprise the manufacture of coating products (liquid form). The main function of coating products is to protect against corrosion of the surface of oil and gas pipelines and storage tanks, and other industrial metal surface. In addition, at the request of RHE’s customers, RHE may also assist them in sourcing and procuring the requisite equipment and spare parts for their use; and

(c) Consultancy services – RHE provides consultancy services to its principals and suppliers such as Cameron, Siemens International Trading Ltd, Ruhrpumpen, Flowserve Pumps and Emerson. Such consultancy services may include technical advice, on-site installation and commissioning works, and after-sale services.

RHE’s major customers are mainly from or affiliated to the three PRC major oil companies, namely the PetroChina Group, Sinopec Group and CNOOC Group.

(click for full images)


RHE operates in a competitive industry. RHE’s competitors are companies who manufacture and/or supply equipment and systems to the oil and gas industry in the PRC. RHE competes based on pricing, product and service quality, reliability and durability of our products as well as technical competence.

The following are RHE’s main competitors:
• Best Petroleum & Natural Gas Equipment Co., Ltd , a PRC company who is principally engaged in providing equipment integration services for oil and gas projects.
• Sulzer Pumps (China) Limited is an entity of Sulzer Pumps Ltd, a company based in Switzerland. Sulzer Pumps Ltd develops and supplies centrifugal pumps and operates a network of service centres, offering maintenance, repair, spare parts and upgrading services for pumps.
• Schuck Armaturen, a company based in Germany that supplies pipeline and valves.


Growing Oil Demand in the PRC
The demand for oil in the PRC has grown rapidly over the past decade driven by sustainable strong economic growth. Given the strong economic growth in the PRC over the past years, demand for oil has soared. The PRC is now one of the largest oil consuming countries in the world.

Demand and consumption of oil in the PRC is expected to increase in the future, driven by the expected continuing economic growth, industrialisation, urbanisation and growing affluence of the population. It is generally expected that in the next ten years, the daily demand for oil in the PRC will double its present demand and by 2020, more than half of the PRC’s oil demand will have to be met through imports from overseas.

For the above reasons, the PRC is putting together a comprehensive plan to include the carrying out of more oil exploration, development and production activities in the PRC, setting up of strategic oil reserves, acquisition of overseas oil resources, and the building of a country-wide oil and gas pipeline network. Our Directors believe that, in view of our Group’s competitive strengths, these initiatives will result in an increase in demand for our services and products.

Development of Natural Gas Market in the PRC
In light of the committed effort of the PRC Government to ensure more efficient use of energy and to identify alternative energy sources, the PRC Government has taken initiatives to promote the wider use of natural gas as an alternative form of energy, and its usage in the industrial and power generation, residential and transportation sectors, is expected to grow.

The PRC Government’s initiatives to promote the use of natural gas in the PRC have resulted in rising expenditures in the gas equipment market over the last few years. The substantial investments made by the PRC Government in respect of the construction of gas pipelines and LNG import terminals and port infrastructure are poised to have a significant impact on the supply and thus the widespread usage of natural gas in regions where such source of energy was generally unavailable before.


The following is some information that helps in making forecasts and estimates for RH Energy
Segment Information
Profit Margins (from HY07 report)

Order Book - HY07 Announcement
Order Book - End Aug Announcement

Based on the above announcements i have forecast 7.6m revenues in 2H07 and the remaining outstanding contracts as revenue in FY08. Naturally we expect RH to secure more contracts going forward so the forecast for FY08 will be conservative.

As for profit margins I have taken the average of FY04, 05 and 06. The margins in 06 appear to be anomalously high with some high margin contracts secured. With increasing competition and a different contract mix, margins are expected to drop drastically from FY06 to a more normalised level.
At the current market valuation of $0.70, RH Energy is very aggressive valued. It seems that the market is expecting the company to secure many more contracts going forward and/or secure contracts with high margins. This is a very optimistic scenario for the company because even though the oil extraction/transportation market is robust, RHE's industry is competitive and this is expected to have a negative pressure on margins.

It is interesting to note that market price of $0.70 is more than twice the IPO pricing of $0.32 earlier this year.

At the moment, the market appears to have very aggressive expectations for the 'China' and the 'Oil' stories to have a drastic positive impact on RHE's income statement; this stock is definitely not for the conservative investor.

Monday, October 08, 2007

Kingsmen Creatives

Kingsmen Creatives, Ltd., through its subsidiaries, engages in the design and production of interiors, exhibitions, decorations, and museums in the Asia Pacific region. It has four segments: Exhibitions and Museums, Interiors, Research and Design, and Integrated Marketing Communication. The Exhibitions and Museums segment produces exhibition displays for trade shows and promotional events, as well as interiors and displays for museums and visitor centers. It manufactures and trades interior and exhibition furniture, fixtures, and displays; and offers tables, display items, modular systems, leitner systems, and chairs on rental basis, as well as provides electrical engineering and graphic design services. The Interiors segment provides interior fitting-out services for retail stores, restaurants, banks, department stores, corporate offices, and show rooms. The Research and Design segment offers design works for upmarket specialty stores, departmental stores, eateries, museums, visitors’ centers, corporate offices, showrooms, trade shows, events, promotional functions, and festivals. The Integrated Marketing Communication segment provides advertising, consultancy event management, marketing communication, and interactive promotion services. Kingsmen Creatives was founded in 1976 and is headquartered in Singapore, Singapore with additional offices in the Asia Pacific and the Middle East regions.

The company recently announced the contracts it has secured up to 3Q07:

This allows us to do a rough projection for FY07 results:

Based on 1H07 profitability margins, secured contracts up to Sep 07 and current price of $0.65, the forward P/E of the company is about 11.5. If the company is able to secure a couple of additional contracts in the final 3 months of FY07, this will lower the P/E even further.

Kingsmen is going through a period of economies of scale where its gross profits rise much more quickly than its expenses. The operating leverage is having a significant impact on its bottom line growth. If the strong Asian economic environment persists, Kingsmen will be in a good position to capitalise as it is poised for growth in Asia, such as the conventions business in Singapore IRs and Macau, and the mainland opportunities during the Beijing Olympics.

If Kingsmen's growth continues on its current trajectory, then the current market valuation is very reasonable.

Kingsmen is one of the growth holdings in my portfolio, after I picked it up earlier in August during the market turmoil.

Uni-Asia Finance: Soaring into the Stratosphere!!!

Uni-Asia Finance Corp’s share price has flown into the stratosphere in the last couple of weeks. I previously did some research on the stock in early September. Since then, from trading around $0.60 it has soared to nearly $2 in about two weeks.

What in the world is going on?

The company’s recent HY07 results reveal a 91% jump in net profit. There has been a significant year-on-year jump in both investment income and fee income. However, the Management Discussion & Analysis reveals that a large portion of the increase in income was due to the one-time launch of the Akebono Fund and the one-time disposal of three vessels. In other words, the market seems to be treating the one-time profits as recurring.

The images below, extracted from the latest HY report, illustrate. (Click for full image)
Income Statement

Fee IncomeInvestment Income

Well, well. As for me I'm unable to see the value the market is currently placing on the stock. However, the last couple of weeks certainly look like an exciting ride for the stock price.

For all you know, it might go even higher. To $3, $4, maybe even $10!

Up, up and away......!!!

China Oilfield Technology: IPO Summary and Valuation

China Oilfield Technology (COT) is an IPO in process.


COT provides customised technical solutions for Its customers, incorporating its proprietary technology and techniques in tertiary oil recovery to enhance the extraction of oil. COT is principally engaged in the research, development, manufacture and sales of customised integrated equipment and products, which are used during chemical flooding and during treatment of resultant residual liquids. In addition, COT provides energy saving and other equipment. Its customers are mainly located in the PRC.

COT’s production and research facilities are located in the Hi-Tech Development Zone, Daqing City, Heilongjiang Province, PRC. COT also has research and development facilities in Beijing.

COT’s products can be categorised under the following segments:-

I. Enhanced Oil Recovery
a) Polymer injection equipment
b) ASP injection equipment
II. Environmental Protection
a) ASP residual liquid treatment system
b) Mobile underground water treatment equipment
III. Energy Saving and Others
a) Integrated electrical control station
b) Energy saving equipment for oil pumping units
c) Customised pumps and parts

COT’s direct materials comprise mainly steel plates, steel pipes, pumps, valves, electrical components, meters and spare parts. Some of these components are manufactured in-house, while others are outsourced to third party manufacturers who will produce these components according to COT’s specifications. The various components are fabricated in our Daqing production facility and assembled in accordance with COT’s blueprints and later delivered to the site where they are to be installed. Installation is performed by independent contractors hired by COT's customers and supported on-site during installation by COT’s customer support staff.

Most of COT’s products are sold to customers in the upstream oil industry. COT’s major customers comprise mainly operating units of Daqing Oilfield Co., Ltd., a wholly-owned subsidiary of PetroChina. COT’s production facilities are located in Daqing while our research and development activities are conducted primarily in Beijing.

The revenue breakdown above shows that COT’s business overwhelmingly comes from oil recovery services.


China Oilfield operates in a competitive environment where players in its industry generally compete by providing integrated tertiary oil recovery equipment and technical services to adequately address the needs of PRC’s oil extraction companies. The barrier to entry is relatively high due to high research and development cost, extensive oilfield experience and technological know-how required for the business. As such, there are only a limited number of companies providing integrated tertiary oil recovery equipment and technical services. China Oilfield’s main competitors are:-
(i) for Polymer Injection Equipment, Daqing Long Di Petrochemical Technology Co., Ltd; and
(ii) for ASP Injection Equipment, Daqing City Pu Luo Petroleum Technology Co., Ltd

Increasing demand for tertiary oil recovery technology and equipment in the PRC
• The PRC is one of the largest oil producing countries in the world, but is a net importer of oil because of continued growth in consumption as a result of strong economic growth
• Prolonged use of water injection as a means of secondary oil recovery technique has caused a slowdown in extraction efficiency in some of the major PRC oilfields

Favourable development trend for tertiary oil recovery technology
• Daqing Oilfield Co., Ltd. plans to extend the use of tertiary oil recovery technique in more than 80% of its oil extraction sites in Daqing oilfield in the next 15 to 20 years
• By the end of 2006, tertiary oil recovery in Daqing oilfield had reached an output of more than 10 million tonnes per year, accounting for approximately a quarter of the total crude oil output in Daqing oilfield
• Other PRC oilfields, such as Shengli, Changqing and Xinjiang, have gradually expanded the scale of their tertiary oil recovery processes as their oilfields approach maturity
• Leveraging on Daqing oilfield’s established record in tertiary oil recovery, COT believes it can further enhance its credibility and reputation in the industry to attract potential domestic and overseas customers


China Oilfield has a long accounts receivable period of 225 days, but this is matched by an accounts payable of about 200 days.


A simple extrapolation of FP2007’s performance to FY2007 gives an EPS of RMB 22.62 cents (=2.89/2.08 * 16.28), based on a 15% revenue growth rate and a 39% increase in earnings. It appears that China Oilfield is going through the economies of scale stage where operating leverage increases and profitability per marginal revenue dollar increases.

At 31 May 2007 China Oilfield has net assets of 261044 on 396571 of total assets for a debt/assets ratio of 34.17%.

Rough Valuation

The projected EPS of FY2007 pre-IPO is RMB 22.62 cents = 4.5 sg cents. At the IPO price of $0.60 this gives the pricing a forward pre-IPO P/E of 13.3.

The NAV per share pre-IPO at 31 May 2007 is $0.43 RMB. The $3 RMB offering price is a P/B of 7x. Post offering this translates into a P/B valuation of 300/91 = 3.3.

Post IPO the market cap of the company is RMB$3 * 728595000 = RMB $2185785000. This gives a projected forward P/E of $2185785000/$135935596 = 16.08.

This is not necessarily a cheap valuation, but that should be weighed against the strong growth prospects of the tertiary oil extraction industry in China, and COT's competitive positioning in this industry.

Friday, October 05, 2007

MM Lee on the CPF

In today's Straits Times, MM Lee Kuan Yew was quoted as saying the following:
MM warns of 'dark side' despite economic boom

'We never invested the CPF money in shares or bonds. We always invested the CPF money in Singapore Government bonds where the Singapore Government guarantees a fixed return and you're always going to get it,' said Mr Lee, who is the GIC chairman.

'In other words, you will never lose. And if anybody thinks he can do better, he's welcome to take his money and go to a fund manager and try and do better.
Allow me to take issue with these statements on several counts.

MM Lee is claiming that the best possible return for one's retirement savings is a 3.5% risk-free return. i.e. he is saying that it is unwise for people to invest their monies in assets other than SGS bonds, and that equities, real estate and other investments are bad.

Well, I think that for anybody who has any basic understanding of investments, the absurdity of this claim is clear. In fact, I can just fly southeast to Australia and I can open a bank account and get 5.5% return risk free on Aussie dollar deposits. Plus, the Aussie dollar is appreciating against the Singapore dollar so I would get the benefit of the currency appreciation. On top of that, I get to withdraw the money when I need it, in case of emergency. Furthermore, I dare say that the Aussie economy is more resilient than the Singapore economy.

The 3.5% return on my CPF gives me none of these benefits.

In any case, even if people want to invest in risky assets for the benefit of greater return, I do not see why this is a worse alternative to leaving your money in fixed-return securities. In fact, it is widely regarded that a long term investment in the stock indexes is far superior to bonds. Just ask Jeremy Siegel, or Burton Malkiel, or any other expert on investment economics. It is disappointing to hear MM Lee, chairman of GIC, make such ill-informed statements.

Finally, yes, I think I can do better than SGS bonds. And yes, I would like to take my CPF monies and manage it myself. However, MM Lee, his son, and his cabinet have made the CPF compulsory by law. Yet he dares to say,
And if anybody thinks he can do better, he's welcome to take his money and go to a fund manager and try and do better.
MM Lee challenges us to find a more competent fund manager without allowing us the option to withdraw our CPF monies. That's like shackling a person's hands and challenging him to a boxing match. Not only is this statement hypocritical, it is cowardly and tantamount to hitting below the belt.

Well, well, MM Lee, if you really think you are so good at managing people's retirement savings, then I challenge you and your cabinet to make the CPF optional and allow Singaporeans the choice of withdrawing their CPF monies for their own management. If you are really as good as you claim, then people will naturally choose the government to manage their savings over alternative fund managers.

And if you're not willing to liberalise the CPF, I suggest you make less of such bold statements.
Update: See "The Mathematics of Pension Fund Returns" by Lucky Tan for more on this issue.

Thursday, October 04, 2007

Govt Investment De-linked from CPF funds?

In the ST Forum letter appended below, Jacqualine Poh, an executive from the Ministry of Finance, says that the CPF funds are invested in government securities, of which the proceeds go to fund part of Temasek's and GIC's investment activities. Ms Poh calls this "complete de-linking."

Secondly, Ms Poh says that the government is not using CPF as a cheap source of funds because "the Government does not need more funds to invest. Even if it did, it could raise funds more cheaply by issuing treasury bills and government securities, instead of using CPF funds."

Thirdly, she says that "we cannot assume that GIC and Temasek will do as well in future. The past two decades have been an exceptional period for global financial markets. Looking ahead, we cannot rule out protracted market downturns, lasting several years. Most CPF members have small balances and will not welcome these risks. "

Fourthly, Ms Poh says that Temasek's & GIC's returns above the CPF interest rate is not 'earning a spread at the people's expense.' She claims that what the government earns above the CPF interest rate is used for the benefit of the people through the annual government budget.

Well, issuing bonds to the CPF is not 'complete de-linking.' The risk of government default, however small, still exists. CPF members' returns are intrinsically linked to the stability of the Singapore government.

Also, implicit in the current structure of the CPF is the assumption that Singaporeans want to invest their pension monies in government securities. In other words, the government has IMPOSED on Singaporeans that their CPF monies have to go towards purchasing the government securities. The CPF may not be a 'cheap source of funds,' but it is an IMPOSED source of funds. Singaporeans' CPF savings are wrested from them by the force of law into the hands of government and its investment bodies.

Ms Poh also assumes that everyone would automatically choose the fixed-rate interest on their CPF funds. And then she extrapolates that because the majority would choose this, therefore everyone else has to accept the same fate. Talk about the tyranny of the majority. Or maybe it's the tyranny of the handful in power.

Finally, again she assumes that Singaporeans want the spread on the returns to be given back to them through the annual budget, at the government's whim and fancy. Well guess what, Ms Poh, I want my pension returns to be the way I want it. Not the way you and your ministry deem right.

The CPF issue is simple. It's about who retains the power to manage the people's savings. And why should it be the government's by default? Who gives them the right to say what should and should not be done with our pension money?

If Singaporeans don't stand up for their rights to decide how their savings should be managed, then the government will take it from them with glee.

read more about this issue here.


IN 'CPF finances: Clarity needed to clear the cloud of confusion' (ST, Sept 20), Ms Chua Mui Hoong questioned whether the CPF provides a cheap source of funds for the Government's investments. Subsequent Forum letters also raised the matter of how the return on CPF funds is calculated, and what constitutes a fair return.

The interest members receive for their CPF money should reflect what they could earn by investing in the financial markets, in investments which have comparable risk and duration. All CPF balances are guaranteed by the Government and hence free of risk. Hence the Special, Medisave and Retirement Account (SMRA) interest rates will now be pegged to long-term government-bond yields. Furthermore, the first $60,000 of each person's CPF balances, to be held for the long term, will attract an extra 1 percentage point in interest. This means that they will always earn at least 3.5 per cent interest.

No commercial bank or fund manager offers more generous terms on such investments. Members seeking higher returns can take out their funds to invest through the CPF Investment Scheme (CPFIS). However, 83 per cent of CPF members who invested their OA savings in the CPFIS from 2002 to 2006 realised less than 2.5 per cent returns - the base rate of the OA. Half of all members who invested experienced negative returns, losing some part of their capital sum.

The CPF Board invests members' savings in special securities issued by the Government, which pay the CPF Board the same interest rates that its members receive. The Government pools the proceeds from issuing these securities with the rest of its funds, and invests them professionally for long-term returns. This is completely de-linked from the CPF Board and CPF members. Were this not so, CPF members would be exposed to the investment risks and could not receive guaranteed minimum interest rates.

Up to now, both GIC and Temasek Holdings have earned returns that exceeded CPF interest rates, on average over the years. But this does not mean that the Government is making use of the CPF as a 'cheap source of funds', or earning a 'spread at people's expense'.

First, the Government does not need more funds to invest. Even if it did, it could raise funds more cheaply by issuing treasury bills and government securities, instead of using CPF funds.
Second, Temasek and GIC achieve higher returns on average only by taking on more investment risks. Hence these returns are volatile - they can be low or even negative in some years. Furthermore, we cannot assume that GIC and Temasek will do as well in future. The past two decades have been an exceptional period for global financial markets. Looking ahead, we cannot rule out protracted market downturns, lasting several years. Most CPF members have small balances and will not welcome these risks. Neither will older members waiting to withdraw their retirement funds.

Third, Singaporeans benefit when GIC and Temasek investments do well. Every year, the Government draws part of these investment returns to fund the annual Budget. The revenue is spent on worthwhile investments and social needs, including subsidies for housing, education and health care. And from time to time, the Government distributes accumulated budget surpluses to citizens through CPF top-ups and other schemes.

The Government does not rule out the possibility of introducing private pension plans for those with balances above $60,000 and a higher capacity to take risk. However, it would be unwise for members with low balances to take excessive risks on their basic retirement savings.
The current arrangement thus enables all CPF members to earn fair and risk-free returns on their retirement savings, while benefiting from the good performance of GIC and Temasek through the annual Budget. This is the right way to help Singaporeans save for their old age, and enjoy peace of mind in their golden years.

29 September 2007

Friday, September 28, 2007

The Shin Saga: The Deal That Angered A Nation

'We Complied With the Law'

An executive at Singapore's state-owned investment firm discusses the deal that triggered Thailand's political crisis. The company line: don't blame us.

Ex Chief Investment Officer of Temasek, Jimmy Phoon, gave an interview to newsweek. I must say his comments are quite frank and open. I wonder why Temasek didn't take this sort of attitude earlier.

Read the interview here

Monday, September 24, 2007

Jackson Tai to leave DBS

DBS bank has just announced that CEO Jackson Tai is to leave DBS at the end of the year to return to the USA to be with his family.

Said Tai: “Under my watch, DBS has established a sound platform for growth. Today, DBS has extended its geographic presence beyond Singapore with inroads into Hong Kong, China, India and Indonesia. I am confident the team will build on the strong momentum created in a resurgent Asia to further strengthen our position as a leading bank in this region.”

He added: “For more than eight years, I have dedicated myself to DBS and Singapore, even as my family remained in the States. There’s never a perfect time to leave but having been CEO for five years, I believe it’s now right for me to catch up with my family.”

This is certainly a surprising announcement that must be unexpected to many people. In fact, it seems that it is only now that DBS is starting to get its overseas growth plan going, having just emerged from the legacy of its expensive acquisition of Dao Heng bank and only just begun its official entry into the mainland Chinese banking market.

It is unlikely that Tai's departure has anything to do with the subprime crisis, of which DBS had little exposure. What seems more likely is that managing DBS's future is not exciting nor challenging enough for this former top investment banker to want to stay around in Singapore for the longer term. While it is true that Tai has established a platform for growth for the bank, there still is a lot to be done in terms of expanding the company's businesses in overseas markets; in many ways, Tai's successor will have his work cut out for him, to say the least.

But perhaps Tai's departure underscores DBS's difficulty in selecting the right talent to lead the company. Foreign candidates of Tai's calibre and experience may be lured to Singapore's shores for a period of time, but they will find it difficult to stay for the long term. Hanging around in Singapore for a few years may be an interesting experience, but the novelty wears off after a while.

In pursuing its global exective search for a new CEO, DBS may want to consider sacrificing international experience for someone who is more likely to stick around for the long term in order to give the bank a sense of continuity of leadership at the top. Constantly replacing CEOs without promoting from within makes the leadership disjointed, and top management has to constantly readjust and adapt to a new man or woman at the helm.

Of course, there is no better way to ensure continuity and consistency of leadership than by appointing someone who is homegrown and whom DBS can be sure of having his/her heart in Singapore.

Read DBS' press release here.

Air China may block SIA’s China Eastern purchase

The following describes what may be a competitive counter-move by Cathay Pacific & Air China to thwart SIA's ambitions to expand in the PRC. This is a particularly interesting story because it highlights an explicit move by an international competitor to engage one of Singapore's major GLCs in head-on competition over one of the major airline assets in China, and more importantly for market share in the world's fastest growing airline market.

If the rumours are true that Cathay & Air China are trying to block SIA's acquisition, then it will be interesting to see how Singapore's flagship airline reacts. And it will also be instructive to note that while SIA has a free, dominant reign at home, it receives absolutely no red carpet treatment once it ventures beyond the political influence of the PAP.

Air China may block SIA’s China Eastern purchase

The South China Morning Post reported on Saturday that Air China (753 HK, HK$11.84, NR) has accumulated an 11% stake in China Eastern’s H-shares (670 HK, HK$9.72, NR), from a mere 5% five months ago. Meanwhile, shares of Cathay Pacific (293 HK, NR) rose 10.7% on Friday to a record HK$22.70 before trading was suspended pending an announcement of a price-sensitive proposed transaction. Shares of Air China, China Eastern and China Southern (1055 HK, HK$13.90, NR) also rose.

While there is no official explanation from Air China on the nature of its share purchases in China Eastern, there is growing market talk that Air China and Cathay Pacific, both linked by a 17.5% cross-shareholding in each other, are uniting to block the SIA-Temasek joint bid for a 24% stake in China Eastern. This latest twist came as a surprise. If SIA is thwarted in its China ambitions, it may release cash to shareholders through special dividends, which will be positive for the share price in the near term.

The Air China-Cathay Pacific alliance is probably trying to fend off a potentially strong competitor from emerging in its own backyard. The deal, which will see SIA buy a 15.7% stake for HK$3.80 per H-share and Temasek buy an 8.3% stake, will require the approval of two-thirds of existing minority shareholders.

Impact on long-term growth. If SIA is thwarted, it may be prevented from developing its base in one of the world’s fastest-growing aviation markets, and this could negative implications for its long-term growth. SIA could also be more vulnerable to competition from Middle Eastern carriers on the lucrative kangaroo route as more capacity is deployed. However, SIA may still consider purchasing stakes in smaller privatelyowned airlines in China, and build the business slowly. We believe this is not its preferred strategy.

Read the rest of the CIMB research note here

Monday, September 17, 2007

Mid-September Review

The following is a list of research notes published on this blog for the 1st half of September. Main themes include financial companies (banks/insurers/finance companies) and real estate (REITs/Developers), as well as a couple of miscellaneous stocks.

CapitaCommercial & K-REIT


Capitaland & City Developments

Keppel Land, Wing Tai & Guocoland

Finance Companies: Hong Leong Finance, Singapura Finance, Sing Inv & Fin

Insurers: Great Eastern, UOI, SHC Capital, Sing Re

Babcock & Brown Structured Finance Fund

Uni-Asia Finance Corp

United International Securities

Blackstone Group, in 2 parts

GMG Global (Rubber)

Liang Huat Aluminium

Blackstone Group (BX), Too Good to be True? – Part II

A few days ago I wrote a research note on the Blackstone Group, wondering if it might be an investment opportunity too good to be true. At that time, it seemed like it was trading at a mere 1.6x P/E, and for a company like Blackstone, that would be a steal.

I certainly hope nobody bought the stock based on my calculation of 1.6x P/E, since it turns out that Blackstone is not trading at 1.6x P/E, but instead is trading at something very different. This goes to show you can't just follow other people's opinions, you need to do your own research. Check, check and double check. I can be and am wrong from time to time.

So, why the confusion?

Confusing Pattern of Disclosure

Below the reported income statement of Blackstone’s latest 10-Q, there is an indication of a weighted-average common units of 256m. This was the number used in the calculation of the firm’s P/E to give 1.6

This number, however, is rather misleading.

In order to get to the real number of units that you need to divide the earnings by, you need to look deep into the notes. The following extract was found on page 23 of the same 10-Q. Click for full image.

As we can see, there are another 827m units which will effectively vest themselves over time and which will have an equal claim on Blackstone’s earnings over the next few years. This brings the total effective number of units to 827m + 256m = 1084m which is 4.22x the number of common units.

For more on the same, the analyst will find information in the prospectus, as shown below:

This total of 1084m effective units gives BX an estimated P/E of 6.82, if the profits of the first six months of 07 are replicated in the 2nd half of the same year. This is very different from a P/E of 1.6 based on the 256m common units.

But, even though the company does actually disclose all the number of units actually outstanding, one must ask, why isn’t it more transparent? The number that should effectively be used is the 1b in units, not the 256m. The company could jolly well just state this number up front as it is the important number to be used in calculations. It should be disclosed in the main financial statements and not be left to the footnotes where users of the financial statements have to dig and delve. I can't help but feel a little suspicious over BX's attitude towards disclosure.

Economic Net Income: Superior Measure?

Blackstone in its prospectus and 10-Q, frequently refers to an accounting measure which they call Economic Net Income. ENI represents Net Income excluding the impact of income taxes, non-cash charges related to the amortization of intangibles and the non-cash charges related to vesting of equity-based compensation.

A recent Merrill Lynch research report on BX from Wall Street based analyst Guy Moszkowski (who is supposed to be part of the All-America analyst team) claims, "GAAP earnings will be of very limited usefulness in evaluating BX performance given the massive non-cash Goodwill and compensation amortization costs GAAP will be saddled with for many years. The relevant question is, which of the adjusted figures is the "right" one for valuation of the company? In our view, ENI is best, since it captures the best-available view of the true value of the portfolio and the earnings it will yield over time"

The analyst also uses another measure which he calls distributable cash earnings, and claims the market can 'default' to cash: "Economic Net Income vs. Distributable Cash Earnings: conceptually, this adjusts ENI for non-cash earnings; ENI is conceptually, in our opinion, a better foundation for valuing the company than cash distributions, but for the time being we think the market will default to cash"

I personally have problems with these statements:
a. using a conceptually sound valuation model like the Residual Income model or the Abnormal Earnings Growth model will deal with the amortisation and compensation costs in the valuation
b. the cash based valuation and the accrual based valuation should theoretically converge in the long run, so i don't see how a market can 'default to cash'

In my opinion, ENI is not necessarily a superior measure of value. It is definitely a useful measure of performance, but not a suitable substitute for valuing the company. The prospectus does not go so far to claim that ENI is a superior measure of value for the company. Instead, it makes a sensible disclaimer that “ENI should not be considered in isolation or as an alternative to income before taxes in accordance with GAAP.”

Whither the Credit Crunch?

Disregarding the confusion over the disclosure and the accounting issues surrounding the company, Blackstone still remains a strong business. It has made impressive returns and has an established track record, earning upwards of 30% IRR on its private equity deals before fees. Interestingly, a credit crunch would be a good thing for Blackstone. The IPO will give Blackstone billions of its own capital to finance its deals -- and it could even use its stock. This would certainly give the firm a big competitive advantage over other private equity firms which have chased and closed deals on poorer terms.

However, investors should note that the CEO of Blackstone, Steven Schwarzmann, cashed out on $800m during the IPO. As with any company, the price might be too high; initial investors in Blackstone’s IPO have discovered this to their detriment.

Blackstone will make a sensible investment, but only at a reasonable price. The current price of around $24 does not look too bad, but then again I think it could be cheaper. I’ll keep tabs on this company and write more when I can clarify the meaning of Economic Net Income and other accounting matters later.

Temasek Watch: The Struggle for ABN Continues

Barclays' bid for ABN has become a centre of focus every since Temasek took a stake in the British behemoth. Here's the latest news on the bidding war between Barclays and the RBS consortium.

"The ABN Amro board told shareholders Sunday that although it is formally recommending neither a bid from Barclays nor a bid from a consortium led by Royal Bank of Scotland, it acknowledges the financial superiority of the latter offer. ABN CEO Rijkman Groenink told a Dutch news show he expects the consortium bid to win the day. The board said it views Barclays' all-share offer as more congruent with ABN's strategy but cannot recommend it over the consortium's €70.2 billion ($97.4 billion) bid, which is 19% richer at current prices and contains a cash component." read more @ SeekingAlpha.

Other News: Temasek pares down its stake in China COSCO.