Wednesday, August 27, 2008

How to Start Investing

I have frequently been approached by my friends and colleagues on what stocks to buy and how to start investing. Then I realised that an element is missing in this blog that has not been addressed: that is, how to start investing in businesses via the Stock Exchange.


1. Go for the low lying fruits lying just above and around you

Start by looking around you and keeping a keen eye to identify which products and services are provided by companies that are listed in Singapore's Stock Exchange. Perhaps it will never occur to you that so many products and services you experience in your daily life all belong to listed companies:
- a can of green tea from Pokka, or canned drinks from F&N
- massage chairs by OSIM
- traditional chinese medicine by Eu Yan Sang
- nice Jap restaurants like Sakae Sushi that are operated by Apex Pal
- famous brands like Raoul managed by a company called FJ Benjamin
- niche watchshops like Hour Glass that sell watches that are horological art
- our favourite family bookstores like MPH and Popular
- Singapore's newspaper monopoly by Singapore Press Holdings
- our favourite 1st Class, World Class Singapore Airlines
- "Eng Seng" sprayed on some temporary roadblocks come from the construction company Chip Eng Seng
- banks like OCBC, DBS, UOB, etc.

(The mention of these listed companies does not constitute a recommendation from me...)

And the list goes on.

2.  Target businesses that have a geographical proximity to you

There's always this question: what about companies listed on New York Stock Exchange like Intel, Dell, Microsoft - why not consider them too? You could, but do you remember what sages like Sun Tze and Clausewitz said about the principles of conducting a warfare? Always fight a battle on grounds where you have a good grasp on the terrain. Likewise, companies listed on New York Stock Exchange are geographically very far from home ground and this also meant that the information sources are confined to the internet. If I have to invest my money, like how I will wage a war, the entire operation will be conducted on grounds that I am most familiar with. Risks are lower, and my confidence of success is much higher.

(For more info on how Sun Tze's war principles can apply to investing, read the following articles written by another fellow investment blogger, Sun Tze: Chapter 1 - Deliberation, Chapter 2 - Planning, Chapter 4 - Tactics.)

3. Doing your due diligence: Performing the different levels of business analysis

After looking around you, pick one area that you have a specific interest, it is best if is a product that you can relate to tangibly and you have an active interest to find out more. Then read up on it from reports and announcements found on, sift through posts in forums in, Talk to your friends - ask what they think of Sakae Sushi (as an example) food and service quality. Ask employees or ex-staff about how they find their bosses. Make your research as exhaustive and complete as possible. All these will give you a pretty good idea on the nature of the business and the prospects of the industry.

The framework for analysing the business is clearly laid out in the various articles I have written on investment methodology.

4. "Inactivity strikes as intelligent behaviour" - Warren Buffett

The next step after conducting all analysis is to take one step back. Briefly sense what the stock market climate is like and observe. Is there an immense sense of euphoria where people believe that the market will be shooting through the roofs tomorrow? Do you read of articles about university students are suddenly all investing, and aunties throwing in their life savings into the market? These are signs, but never act base on them. What you have to do is to take note of all these observations and remain inactive in trading activity, and continue reading up and finding out more about your companies. Inactivity is intelligent behaviour.

When the time comes where you can take advantage of bargain prices of listed companies, act swiftly and decisively to swoop in, because such opportunities are rare.

Monday, August 25, 2008

Gold: Insurance for your wealth

Investment in gold deserves a mention in this blog, because gold is an important asset class from the perspective of a wealth insurance, but usually this is not known and not considered by people generally.

Disclaimer: This article merely expresses the authors views and are not recommendations for action by the reader. YMMV.

Concept of money as a medium of exchange
Before we talk about gold investment, allow me to talk a little on background of money. Some explain money as "Money is what money does", which means that money is a medium of exchange. In the good old days, money notes is designated to be a promissory note of guarantee and as a means of convenience to replace physical gold as the currency. It was a medium of exchange that allows one to trade between different items using a common denominator of value, and over time, the entire world economy grew to depend on money as its lifeblood.

The Bretton Woods system
As the world progressed into modern times and global trade and commerce started to bloom, it was recognised that there's a need to establish a common policy for international monetary management. The Bretton Woods system was established in 1944 as a set of rules of commercial and financial relations among the major industrial nations. It was also in the same time period that an international regulatory financial body like International Monetary Fund (IMF) was established. The primary feature of the Bretton Woods system is that the nations are obliged to peg their currency at a certain fixed rate to gold with a 1% spread between the buy and sell rates. It was a good and stable system that is in a way backed by physical gold. For the world's dominant leader, the US dollar was pegged at USD35 per ounce of gold.

However, by early 1970s, US's participation in the Vietnam war accelerated inflation, and for the first time in modern history, the nation as a whole began running a trade deficit. The reasons for an accelerated inflation can be attributed to a massive consumption of resources and the government began to finance this consumption by printing more money notes. As this war went on, people started to swap their dollars for physical gold. Because of excess printing of money by the US government, nations began demanding US to fulfil its promise to pay, by a conversion of dollars into gold. This came to a tipping point where US's gold coverage deteriorates from 55% to 22% and it represented the point where holders of the dollar lost faith in US's ability to cut it's budget and trade deficits.

Collapse of the Bretton Woods system and emergence of the floating currency
In 1971, the United States devalued its currency from USD35 per ounce of gold, to USD38 per ounce of gold. In 1972, it reached USD70 per ounce. In 1973, the Bretton Woods currency markets closed and subsequently reopened as a floating currency regime where the dollar is no longer pegged at a fixed rate to gold. Today, the exchange rate stands at startling rate of USD823 per ounce of gold and this is expected to rise further.

Fiat money and the risks of hyperinflation
As United States grew to became the modern day economic powerhouse, the dollar became the de facto currency that many countries view as gold. The dollars became a favourite denomination for countries to keep in their vaults as foreign currency deposits.

And as the circumstances in the world evolved, it somehow becomes apparent to me that our world's economy now hinges on fiat money - money is designated as a medium of exchange because the government said so. It runs purely on the confidence in the government, and holds no intrinsic value. For the world's economy to fall apart, all it takes is for a critical mass of people to lose faith in their government's currency and began collectively raising prices mindlessly. Humans have the herd instinct, once the confidence is shaken, things can spiral out beyond control like what happened in Zimbabwe, where money completely loses its effectiveness as a medium of exchange. (read here)

Gold: insurance of wealth against runaway inflation
Gold is an asset class that will not lose its effectiveness as a medium of exchange because of the underlying intrinsic value and limited global supply. It is an excellent form of liquid asset class that can help insure us against a currency fallout. The risk of a currency fallout is remote, but it is there and as a rational human being, I will want to guard against such a catastrophic situation. Let me draw an analogy: we buy life insurance even though the risks of death and critical illness are statistically remote - for the simple reason that we want to preserve our state of wealth and minimise impact on our loved ones if something unfortunate strikes. Likewise, buying some gold can help to preserve our hard earned wealth and standard of living should an unfortunate case of currency fallout strikes. Although very unlikely, I do not completely rule out that possibility. And if ever a currency fallout does happen, I want to know that I can still use ounces of physical gold to sustain my daily needs.

Buying how much gold is enough then?
Historically, when hyperinflation occurs and prices rise beyond 1000%, gold prices will also rise more than 1000%. A good rule of thumb to start with is that we should probably strive to build 10% of our net worth in gold. So in the event of hyperinflation, gold price can be expected to rise such that we can still retain 100% of our current net worth.

Methods on investing in gold
We can invest in gold in basically 3 different forms. Either physical bullion, paper gold certificates, or Exchange Traded Funds. If you think of buying gold, it can be acquired in the form of physical bullion from official websites like The online market also allows one to sell off gold. Just a comment on physical bullion: the bigger the gold bar, the cheaper it is in terms of per ounce, but also less liquid. Gold is much more liquid in forms of widely recognised coins like the Canadian Mapleleaf coin (see picture above)

A fellow forumer, who is incidentally my brother, has written excellent articles on gold investing. (Read How to Invest in Gold, History and going forward, Investing in Gold)

For further information and open forums on investments in gold, you can go to

Other interesting points about gold:
Market movements have shown that crude oil prices and gold are in many ways correlated. It has been widely recognised that oil and gold have one of the strongest historical commodities relationship. It is even more interesting to note that back in 1975, oil was pegged at USD75 per barrel, as compared today's prices of USD113 per barrel. Now, compare that against the gold exchange rates: in 1975, USD40 per ounce of gold. Today, it is USD823 per ounce of gold.

I shall leave you at this thought. For further reading, see here.

Saturday, August 16, 2008

Analysis of Adampak (Part II)

Comments on 1HFY08 Results Released on 15th August

(Updated as at 19 August 08, after a release of new information found in 1H08 briefing slides)

(Following a few valid points raised by a fellow investment blogger donmihaihai, I relooked and amended to reflect greater clarity.)

Revenue at US$28m for 1H08 as compared to earlier year (1H07) grew by 49%, cost of sales grew by 57.8%, reducing the gross profit margin by 4 percentage points (as compared to 1H07). Given an estimated inventory turnover ratio (cost of sales = US$19m / Inventory = US$7m) of 2.7, the raw material inventory (est. to take up 62% of all inventory, from FY07 AR) is not expected to last beyond 3 months. From this, it can be infered that inflationary pressure on material prices over the last 6 months have been factored into the rise in cost of sales.

(Effects of exchange rate between USD and SGD on profit margin are more fuzzy here to draw direct relations, so I shall not comment on it)

The administrative/distribution expenses rose in tandem (approx. 49%) with the revenue growth - this is reasonable from a retrospective point of view because historical trends have shown that Adampak's admin/distribution expenses growth correlates to revenue growth on a 1:1 ratio. Balance sheet is healthy with a current ratio of (46mil/12mil) of 3.8.

Comparatively, Brady, the global market leader for labelling, is doing much worse and has only registered a 1% growth in revenue for Apr 08 in the Asia-Pacific region (as compared to similar quarter in 2007), and 10% overall sales growth.

Revenue Structure

Examining the revenue structure reveals that Adampak has an inherent business vulnerability that must be addressed in the longer run. i.e. over-dependence on the HDD market. The management acknowledged that efforts must be made to expand their scope of business into other sectors like pharmaceuticals, telecommunications, etc. But it remains to be seen if Adampak can achieve diversification into other sectors and reduce its exposure in the HDD industry. For 1H08, 45% (compared to 49% in 1H07) of the revenue was derived from sales to HDD manufacturers like Seagate.

n overly focused revenue structure is a double edged sword: on one hand, the company is able to ride on the rapid expansion of the HDD industry; but on the other hand, it is definitely not healthy in the long run as Adampak's performance will be half (literally) dependent on the HDD industry.

For RFID sales, revenue registered a growth of 57% from US$0.5m to US$0.8m. By absolute figures, this is a modest figure but definitely not sluggish. While there are serious challenges for RFID to achieve a ubiquitous status, it will definitely come. Let's maintain a close watch on this.

Pre-Aident consolidation versus Post-Aident merger
From the 1H08 results briefing slides, if we assume that Aident was already fully merged with Adampak in 1H07 as a single entity, then compare the sales against that of 1H08 when they have fully merged, we see that sales to telecom products fell by 46% from US$4.2m to US$2.3m. Sales to other electronics sector shrunk by 6% from US$9.7m to US$9.1m. Are this as a result of slowing demand in the electronics products? Does this imply that there were some inherent inefficiencies in Aident's business that brought about the decision of the management to shut down their plant in Shanghai?

It is also noteworthy that it was mentioned that Adampak accrued the lower net profit margin due to the consolidation of Aident's results, as compared to the earlier year which was based on a 1 month equity accounting (i.e. apportioning the results of Aident by the percentage of Adampak's ownership). Such a statement necessarily implies that management acquired Aident, which is a company that is less profitable.

There are many questions that needs answers. But I believe that Adampak's management made this strategic acquisition for good reasons of expanding fast to rapidly penetrate Asian markets like Malaysia and China by leveraging on the established processes and infrastructure of Aident. And all the time, the management is fully aware of the need to restructure and streamline Aident's operations for greater efficiency.

A financially prudent and candid management
The management has also demonstrated financial prudence by curtailing their purchases on plant and equipment (1H08 US$0.2m compared to 1H07 US$1.2m) to conserve cash holdings, brace for a slowdown in global demand, and prevent built up of excess production capacity.

What consistently struck me in my entire analysis was the candid nature of the management about areas of their business that was not doing so well.

Final remarks
Adampak has so far done extremely well in light of the inflationary pressures and slowdown in global demand. Profit margins may be slightly squeezed in view of rough times ahead, but given an efficient cost structure and strong balance sheet, the company will definitely be able to continue to inch forward and expand their market share. Also, management and the business development personnel must continue to aggressively expand sales to other industry sectors to minimise their risk exposure.

Let's wait and see if this gem will ultimately shine in time to come. In the meantime, I will just enjoy the generous dividends. YMMV.

Monday, August 11, 2008

A Precursor to Investment - Adequate Insurance Planning

Insurance planning deserves a special mention in this investment blog, because it underpins all good personal investments. This is perhaps one underlying aspect that is usually overlooked when one talks about investment. When struck with a unforeseen crisis, without adequate insurance planning, even the most outstanding investor will have to liquidate his precious golden egg and all gains will vanish before his very eyes. Therefore, it is of utmost importance that one ensures that he has arranged for sufficient coverage before embarking on any investing venture to build his nest egg.

I will briefly cover a few key aspects and share my perspectives on insurance and basic financial planning. I do not claim to be a financial planning or insurance expert, but I believe the below pointers I have to share are what experts will probably advise you too.

Disclaimer: What will be expressed here are the views of an author, who is definitely not a financial planner or insurance agent. The views are not completely exhaustive and only to the best of the author's knowledge. Readers are strongly advised to seek the services of a specialised insurance agent or financial planner.

Insurance: Intent
The primary intent of insurance is about the preservation of you and your family's state of financial well being when something unfortunate strikes. Preservation of financial well being meant you will not have the need to vastly alter your state of finances, i.e. liquidate stocks/funds, take loans, or worse still, sell your physical assets to pay for medical bills or to sustain the expenses required to maintain your family's current quality of life. The bottomline for preservation of financial well being is that your finances must not be unduly stressed when crisis strikes.

Now, the secondary intent of insurance is that it can also serve as a form of low risk savings planning. For basic life insurance, the yearly premiums that you have paid will accumulate a cash value within your policy. At a certain stage in your life, you can choose to surrender the policy for a lump sum of cash if you feel that you are more than sufficiently covered. In addition, there are more complex insurance products like endowment/savings policies, which you can pay a regular annual sum towards a plan to distribute either a steady stream of income, or allow you to encash a lump sum at different stages in your life. For example, you can get an insurance that gives you a lump sum, or activate a steady stream of income when you hit 40, 50 and 60 years old. You can also look out for insurance instruments that are like savings plans for you to encash an amount when your child needs a lump sum for his tertiary studies.

The question is: do you want to see insurance as purely an expense, or a form of savings as well? Usually, the general public's answer (which makes sense) is a middle between both extremes: they normally view insurance as a form of retirement planning which provides a certain amount of coverage still.

Scope of insurance coverage
The four key areas that must be covered are: death, disability, critical illnesses, hospitalization. These are four areas that will deal the biggest blow to anyone's finances if not appropriately covered. I think it is of paramount importance that anyone make sures that these four areas are well covered.

The fifth area of 'accident coverage' is optional and dependent on whether you operate in an environment that constantly exposes you to a range of possible work related injuries. And if your agent advises you that there will be no way that you will be able to claim under any current insurance plan, and you have some spare cash, you might want to consider putting away any possible financial worries arising from such little accidents. These injuries should not be life threatening or require you to undergo intensive operations, but significant and frequent enough to frustrate you from saving up to build that lovely golden nest egg.

Assured Amount: the Four dimensions
The next consideration about insurance is on the assured amount. What is the rule of thumb to decide on the sum assured? If you pass on, what is the amount you want to leave behind for your loved ones? If you turn disabled, what is the income you want to regularly generate for your family? If struck with a critical illness, what is the lump sum you need to cover for all the medical fees?

Death: Ideally, we hope to be able to maintain our family's quality of life for the next 20 years, this timeframe is definitely good enough to finance my children towards independence and my family to adapt to my absence. But to the average Joe (which is me) who earns the average income, this is unrealistic. We may want to revise our targets down then, 10 years worth of expenses probably? Let's look at a few case studies on how you can compute your sum assured: for the singles like me (ladies, you are welcomed to drop me a message), who contribute a monthly 'piety' sum to my parents, I will want to preserve this monthly payout for a good 15 years if I have to pass on. Then I use this to work backwards to determine on my desired total sum assured, and work out a sum that my current income will be able to sustain. If I have a family to feed, I will estimate an average annualised expense and project it for 'X' years ahead, X being a variable that depends on how much I can reasonably afford to fork out now.

Disability: Now let's take another perspective on sum assured: What if the person enters a situation whereby life deals a blow that leaves him income-less, but fully conscious and disabled? Well, he is still there, and his family needs money and he needs money to go on. Insurance plans with disability income comes in here. It is hard to pin a figure on how much is enough, because the family will have to be realistic and adjust downwards their quality of life. Given current standards of living, a good figure to grasp with is S$10,000 per annum (or about 1k per month) of disability annual income with probably a one lump sum payout. I think with this sum of disability income, one will be able to sustain a very basic standard of living without putting undue strain on the family.

Critical Illness: Statistics reveal that usually the median of the cost of one time medical cost for the the most common critical illness is around S$50,000. Critical illnesses strike hard on finances and when it comes, the bills come fast and furious in immense sums. No one will want to have to sell their family's dwelling or take on a bank loan to pay for those bills.

Hospitalisation: These fees do not kill your finances; but the monthly bills of 2k or 3k and more due to treatment and long term hospitalisation will bleed anyone's bank dry. The Singapore Government provides us with a Medishield that is partly and mandatory funded by our monthly income. This is a good plan, but the amount and coverage is somewhat lacking. It is good to consider hospitalisation insurance plans that enhance your coverage further. The costs are affordable, and recommended to ensure you do not sell away a Warren Buffett share to pay for these hospitalisation bills.

Investment-Linked Plans
There are also many insurance linked plans. These plans provide you with a certain coverage, but your cash premiums are invested in mutual fund products e.g. "Asia Pacific Growth Fund". These plans can probably yield higher returns. If you ask me as a matter of opinion, I would recommend for anyone to have a clean segregation between what is meant for insurance and what is meant for investment. For insurance, you want a fuss free, low risk and high confidence on a strong shield for your finances. For investment, you are looking at higher risk, for higher returns. Mixing both up in mumbo-jumbo plans complicate anyone's financial planning.

Term Life Insurance
Term life insurance is a cheap form of life insurance. The difference being that it holds no cash value. It only provides coverage for a specified term (say 1 year, 5 years, etc), therafter, the insured personnel can choose to renew the policy but pay much higher premiums. The intent is a pure death benefit to provide coverage for the insured, so the immediate premium price is much lower. If you talk to an insurance agent, and compare the premiums against that of a whole life insurance, it is generally true that the premium for term life will escalate significantly compared to a whole life over a period of time. If you ask me, I would recommend from a layman's perspective that one should go for a whole life insurance, where the annual premiums are fixed and correlative to your age (i.e. lower your age, cheaper the annual premium, and have a cash value at the end, with a similar coverage).

However, there can be situations where term life insurance fits your insurance planning. For example, SAF offers a Group Term Life insurance that covers until 70 years old, where a S$600 annual premium can provide you approx. S$100k coverage. You may decide to have a clear segregation between your retirement planning and insurance, and you see your insurance as a form of expense. In addition, you do not desire to have a death benefit beyond 70 years old because you believe that your dependents' quality of life will no longer depend on you anymore then. In this situation, buying a term insurance fits your designated outcome.

For the experts and insurance savvy ones, you may hold a different view. YMMV.

Completing your 'shield'
In addition to insurance, it is highly recommended for anyone to set aside a sum that is worth at least 6 months of income to buffer against any change to your current level of income. We function in a global economy where matters are eternally in a state of flux; there's no way we are able to guarantee that our current income level will not be disrupted by a loss of employment or loss of income. I think 6 months is a reasonable timeframe for anyone to pick himself up after enduring such a blow. And once you are done with all these preparation work, you can say that you shield is more or less complete, and that you can start embarking on your investing venture.

Final Remarks
I have broadly covered on aspects in insurance planning and building a strong shield in finances. It's not exhaustive, but I have shared will probably rev up the layman with a good ground to start with.

If you have thought nothing about insurance and have been obsessed with investing every single penny to surpass Warren Buffett, (like I was in University days), my dear friend, it is time to rethink again.

Saturday, August 9, 2008

Analysis of Adampak (Part I)

Over the last few days, I applied Buffett principles and Fisher's concept of 'scuttlebutt' to deeply understand my investment holdings. So I went and approached two companies Adampak and Zephyr as a potential client. By conversing with various senior executives in both companies, I managed to glean a lot of insights that are otherwise not found on financial reports or the internet. For the lay reader, from this blog entry you will be able to gain a much better understanding into the business of labelling and RFIDs.

I would like to thank a fellow forumer named dydx in who surfaced this gemlike company listed on SGX to everyone (read thread and

Disclaimer: The author is vested in Adampak. YMMV.

1. Overview

Products and Services
Adampak products and services are in the area of manufacturing labels for any products that requires some form of labeling. Their labels range from serialized barcodes, generic paste-on labels, tamper-proof labels, labels and seals for use in electronic circuit boards (clean-room 100 and 1000 requirements), insertion of Radio Frequency Identification Tags (RFID) onto labels.

In recent years, Adampak acquired 100% stake in Aident, and hence expanded its business laterally into precision die-cut components, as well as enlarged the manufacturing base to reach into Malaysia.

Industry analysis
Product labels have grown to become ubiquitous and indispensable in our daily lives. And as human’s insatiable need for more products grow indefinitely, the demand for labels will also grow in pace. The global market size for labels is estimated to be worth US$2.0 billion in terms of sales

From a manufacturing perspective, labeling services are critical in the entire product value chain. Companies rely heavily on the labeling services to firstly, perform effective inventory management (using barcodes or RFID), secondly, to communicate key information visually (e.g. from manufacturer to distributor to suppliers to front line sales).

Dividing the pie for service redundancy
In view of the criticality in the entire value chain, companies are cautious in awarding their contracts to the label manufacturers. They will normally adopt a policy distributing the required number of labels amongst the shortlisted manufacturers. This prevents a single point of failure in the entire value chain by building in a layer of service redundancy. For instance, say HP requires 1,000,000 labels for their entire series of printers, if there are three competitors, they will split the pie accordingly and award each label manufacturer a part of the entire contract. Should one label manufacturer’s operations suspend, the customers will be able to fall back on another substituting firm and prevent a catastrophic disruption of the product value chain.

Market Dominance and Barriers to Entry
The prior paragraph implies that the industry will never allow the creation of a monopoly. One manufacturer may be able to eat a majority of the pie, but it will never be able to swallow it complete; in the longer run, many will perish and at the same time, none will be able to achieve complete market dominance; the competition will always taper out to an equilibrium comprising several key players in the industry.

At first glance, the labeling business appears to be a commodity-like industry, with low barriers to entry for potential competitors. But a closer look reveals otherwise. For those companies that have an impressive clientele of most global clients, with 30 to 40 years of industry experience, with consistent delivery of high quality products – these are invisible barriers to entry. For instance, HP will naturally be disinclined to switch to a new China label manufacturer entrant that has not yet been tried tested and proven, and avoid any risk of their product labels fading or falling off at the consumer’s end; they will prefer to stay with the reliable incumbents like Adampak. In addition, for any competitor to take on Adampak in terms of being the lowest cost producer, it must be able to achieve a significant scale of operation to derive economies of scales. It is also quite apparent that extensive experience is required in terms of running a labeling business and managing the technicalities of operations.

As long as the incumbents continue to consistently deliver quality labels at the lowest possible cost, I do not see why product companies like HP will take a risk and perform a switch on such critical services.

Exposure to economic cycles of boom and bust
Adampak and Zephyr currently derive a majority of their sales from pharmaceuticals, electronics, hard drives, telecommunication products. Therefore their businesses are inadvertently driven by demand in the various sectors. While they are making efforts to expand into other industries like 3rd Party Logistics, it will be inadvertent that their sales and profits will depend on the expansion and contraction of the various sectors during economic cycles of boom of bust.

Competitor Analysis: History of the Three Kingdoms
For industrial applications, Adampak, Zephyr and Brady – all these three companies hail as the giants who take up majority of the global pie of labeling services. In the South-East-Asia region, Adampak & Zephyr hail as the two industry leaders. This is based on the fact that their clientele include an impressive list of MNCs like HP, Fed-Ex, DHL, Merck, Seagate, Maxtor, etc. etc. While on the international arena, all three of them compete for contracts from the big companies. There are other labelers, but judging at the Adampak and Brady’s ability to grow sales so consistently and rapidly over the last few years, it does seem that they are gradually scalping sales from the smaller competitors.

Zephyr (pronounced as Zef-fee) is a privately held company based in Singapore. It has 2 factories in Malaysia and 1 in Singapore, as compared to Adampak’s 8 multi-national factories spread over Philippines, China, Thailand, Malaysia and Singapore. Sources from industry insiders revealed that Adampak started out as a sub-contractor of Zephyr. When Zephyr is not able to fully satisfy the sales due to production capacity, the spillover deals went to Adampak. Adampak subsequently cut the umbilical cord, moved forward and went public in 2002. Adampak took the bold move and seized the opportunity to launch into China, while at the same time, Zephyr was cautious of operations in China, so it stayed within the confines of Singapore and Malaysia.

Now, Brady is a US based company with a very extensive range of label services. It has a global outreach with offices and factories spread across Europe, America and Asia. For FY07, it has achieved sales of US$1.3 billion, with 25% of the sales of some US$520m from Asia Pacific countries. In recent years, it has been trying to make attempts to secure its foothold in the Asian region. To break into the Asian markets, Brady took a move to setup factories and offices in Asia, and once attempted mounted a takeover bid on Zephyr.

Competitors Analysis: Financials
From comparisons from FY06 and FY07 annual reports, Zephyr’s revenue dipped slightly by 5% from S$44m to S$42m[2], while Adampak has been fast soaring ahead with revenues growing by 50% from US$31.8m to US$47.8m. Zephyr’s profit margin for FY07 is 26.7%, while Adampak’s gross profit margin is 33%.

In addition, profit/sales ratio for Zephyr is 13.3%, Brady’s is 8%, and Adampak leads with a profit/sales ratio of 15%. In terms of efficiency in cost structure, Adampak emerges as the clear winner here. In terms of Return on Assets (as a measure of profit per dollar of asset), Zephyr has ROA of 13.4%, Brady's is 6%, Adampak leads the pack with an ROA of 16%.

Comparatively in terms of growth, Zephyr is languishing (-5% growth for FY07, and only a total 12% growth since 2003 from then S$39m to FY07 S$44m) as it watches Adampak rapidly expand into Asian markets. If Adampak can continue to sustain its current rate of growth, it is only a matter of time that Adampak will overtake Zephyr to become the South-East Asia’s industry leader. Adampak is well anchored in the Asian markets but the company faces stiff challenges from the goliath incumbent Brady. Given Adampak’s well established network and factories well positioned in South East Asia, I do not rule out a possibility that Brady will extend a takeover bid for Adampak for it to leapfrog and expand its presence in Asian countries.

Areas of Improvement for Adampak

For Adampak to continue to maintain its edge in this industry, efforts must be continually made to leverage on technology to reduce costs and streamline operations. What is observed from a ground tour is that there are many areas that can be further improved with the aid of technology. For example, quality checks on barcodes are performed to 100% by manual visual checks, and this can be expedited by incorporating computerized image recognition technology to replace labour and speed up such checks. This is perhaps just one of the many possible areas of improvements. In addition, instead of a manufacturer offering labeling services, Adampak can consider forging strong relationships with partner companies in related industries to provide customized turnkey solutions for customers. i.e. Adampak can become the customer’s single point of contact from setting up of a label system to printing of labels.

Adampak's business strategy
It is in my opinion that Adampak adopts a strategy that (1) maintains a niche specialization in label manufacturing, (2) leverage on resources in developing nations to reduce production and labour costs, and (3) grows business aggressively in Asian regions by establishing a localised presence.

Challenges of Industry and growth drivers
It was several years ago that RFID was slated as the next wave in 3rd Party Logistics. However, RFID technology faces immense challenges to attain a status that is as ubiquitous as the barcode. Firstly, cost: the transponders are highly expensive, and firms think twice on adoption of such technology for their inventory management needs. Insiders revealed that current RFID technology costs about 10 times more compared to barcode. Secondly, lack of a common standard. Currently, there is a lack of a common standard in production and RFID technology is still largely proprietary as firms with the know-how closely guard the secrets. Finding substitutes are hard and practically non-existent at the moment. Without readily available substitutes to create service redundancy, the take up rate of RFID is consequently reduced. Liberalization and wide adoption of RFID technology by companies for 3rd Party logistics remains to be seen.

Final Remarks

Quotes from Brady’s FY07 report
“Fiscal 2007 was marked by challenges and progress for Brady. While sales grew 34 percent over last year, we were disappointed by a 5 percent increase in net income, which fell well short of our expectations. This was primarily driven by challenges we faced in our OEM markets, with increased pricing pressure from our customers, a loss of focus due to major acquisition integration efforts and some loss of market share. We responded quickly to correct our cost structure, refocus our OEM sales force in Asia and integrate recent acquisitions.”

Was Brady’s CEO referring to a loss of market share to up and rising competitors like Adampak? I would think so. The deeper I analyze the business; the more I am convinced that Adampak is well poised to become the next Unisteel of labels.

2. Management Quality
Is the management of (a) an unquestionable integrity, (b) holds a vested interest, (c) highly competent and (d) shareholder oriented?

Vested Interest
The executive management has a significant vested interest in the company. Executive Director Mr Anthony Tay Song Seng holds a 32% stake in the company with 85 mil shares, while CEO Mr Chua Cheng Song holds a 2% stake with 6.1 mil shares. In addition, in recent months, the Executive Director has steadily been increasing his holdings through open market purchase. As a minority shareholder, the above facts provide immense confidence that the management will be acting in the best interests of the shareholder.

Management stability & integrity
There is also great stability in the management as there have been no changes in the key appointment holders for the last 7 years of listings. This is a good indication of a good and united leadership core. Management has thus far been forthcoming and candid – be it about the challenges the company faces, or the quality of earnings in light of rough times ahead. Management integrity is also spotless, with no clear signs of inconsistencies.

Management competency
The executive director Mr Anthony Tay Song Seng is the founder of the company with more than 25 years of experience in the industry. CEO Mr Chua has been with the company for a period of 10 years. At the manager level, at least 50% of the appointment holders had experience level ranging from 10 years to 20 years in the industry. The independent directors comprise of two chartered accountants, Mr Goh Siang Khin and Mr Lee Joo Hai, and one lawyer Mr Teo Kiang Kok. In addition, interestingly, both independent directors served a stint in Unisteel, and hence they will definitely be able to add value to Adampak from their experience in Unisteel. All of them have an illustrious professional track record in either accountancy or the law practice. This is a very strong representation, and enhances the shareholder confidence in the accuracy and transparency of the financial statements.

Shareholder oriented
Adampak has consistently and unfailingly made good its promise to share the wealth generated from its operations with the shareholders. Although there’s no formal dividend policy, Adampak has distributed approx. 30% of profits to all shareholders for the last few years. This is not expected to change in the near future as the management will likely remain in operation.

My Impression of Adampak’s staff
I went into Adampak posing as a potential customer. I was greeted with a forthcoming Customer Service Manager, and happened to bump into the Executive Director Anthony dressed in tee-shirt and jeans just stepping out from the production floor, probably after doing his ground walkabout. He gave me the first impression as a very down-to-earth and hands on person who knows his stuff. A casual walkabout at the production floor reveals that several technicians are highly experienced with over 20 years of service in this industry.

3. Business Fundamentals & Valuation

Adampak has excellent business fundamentals. For FY2007, using Owner’s Earnings (3.242 mil) / Share Capital (15.5 mil) ROE = 20.9%. For FY2006, ROE is 25.6%. It has a high current ratio of 4, and runs on low debt to finance its growth. The Net Tangible Asset Value as at FY07 is US$0.14, or S$0.19. Using the FY07 operating cashflow of S$0.0275, and a projected growth rate of 15%, assuming Adampak has no terminal value and stays in business for 7 years, Adampak’s intrinsic value is estimated to be S$0.38, which is actually a very conservative estimate of intrinsic value. Take this value and compare to current share price, there is a significant margin of safety of 1.57.

[1] US$2.0 billion is a figure that is derived based on Brady (market leader) Annual Report sales of US$1.3b. A good ballpark estimate is that Brady has cornered some 60~70% of the global market share, while the rest went to smaller labeling manufacturers.
[2] Information source of private company Zephyr is from downloaded annual reports at

Tuesday, August 5, 2008

Institutional Funds

The institutional fund manager's job is getting immensely difficult these days. With the recent malaise plaguing the financial industry, the fund managers will have an even harder time in future to strive to outperform the benchmark, earn their keep, keep their bosses and financial risk analysts satisfied.

Disclaimer: The below are not directed at any specific funds or agencies; it is merely an expression of the author's opinion on the efficacy of institutional fund management. YMMV.

Institutional fund managers face immense challenges.

Firstly, their portfolio performance is rigourously benchmarked using various indicators across the entire board of fund managers very regularly, like every 3 months. Secondly, they have to maintain a mandatory percentage of cash float for people who may be redeeming their funds. Thirdly, not forgetting, fund managers are increasingly bugged with justifying to a team of risk managers on why certain decisions they make have mitigated financial risks to the benefit of fund holders. Fourthly, they are to invest within the strict bounds of an investment policy that defines what is deemed as a "stable" or "balanced" or "dynamic" portfolio; there are no ways that they can deviate from this policy.

Feels like these measures of investment policy statement, risk managers, quarterly performance ranking, are good for the fund investors eh? Take a closer look and reality reveals otherwise.

A Performance Ranking Induced Myopia in Investment Horizon

The great implication of quarterly performance ranking is that fund managers are forced by circumstances to adopt a very short-term myopic perspective towards managing investments. Structure drives behaviour, the more regular their performance ranking, the more myopic they become. To maintain that mandatory cash float, fund managers will usually look through their list of investments: those investments that are good and have yielded solid gains are the first to be sold, while the losers are retained inside the portfolio. And they have to be careful that there is not too much excess float going around, because they have to invest the excess to obtain good gains.

Influence of Forces and Demand and Supply on Fund Performance

There will also be times when they have made good investments in excellent businesses, but the gains can only realised by the market after an extended period say 12 months, but because they are forced to maintain the float, they often have to sell out prematuredly probably at a loss or break even point. This is a classic case in point that fund performances are in many ways heavily influenced by consumer demand and supply of the fund float. So, sometimes if the funds you bought have performed badly, do not always thumb it on the fund manager, sometimes it is an outcome that is driven by consumer demand.

Portfolio Churning

Normally, what fund managers are 'coerced' into doing is call 'portfolio churning' - they will sell out on good investments to maintain the float, buy back into them when there's excess, keep the lousy ones in the hope of recovery in a bull market, and along the way, incur greater transaction costs that ultimately end up as management fees. Look out for the end-of-year volume on the Singapore Stock Exchange, you will notice unusually high volume of trades, this is because fund managers are near their year end reporting times, and you have large fund investors hopping around.

The Nameless & Faceless Fund Manager

Now, to complicate matters further, fund managers do not always remain in that fund always. Their appointment constantly change. Your returns are in many ways like unpredictable seasons and monsoons, all hinging on the skill of one person, unknown to you, hidden behind the name of a fund. If you get Peter Lynch or John Neff, good for you; but if you get an amateur finance manager, good luck to you then.

If you look across all the funds, there are some of the funds that seem to track the indexes (e.g. Dow, STI, Hang Seng, Kospi, S&P, JCI) pretty closely, well that's because the funds just buy index stocks. Then there are some that outperform the market slight, some that do extremely well, but most of them languish in mediocre gains.

So, is investing in institutional funds, entrusting your money to a group of professional money managers the way to go? I think as a DIY investor, I can probably do as well, if not better than them.

As usual, YMMV.