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Isaac Chan

interested to learn much more about investing!

Isaac Chan

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Top Contributor (May)

Business at NUS

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interested to learn much more about investing!

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Business at NUS

Isaac Chan

Top Contributor

Top Contributor (May)

Business at NUS

516Upvotes
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! I did a DCF valuation for this stock, which I admit was more for experimental purposes. I was wondering how I could structure the valuation such that I would require minimal inputs. Here is AEM Holdings historical results. As the different metrics show, AEM has experienced quite a few changes over the last few years. Given that AEM has had strong growth, I grant that AEM would continue to grow, but at a slower pace over the next few years. Hence, I allowed 5 years of high growth, before tapering off into the stable period. This is the first variable input. I calculated the Cost of Capital the same manner as other DCF which I have shared about. During the stable growth period, I assumed that COC would equal the Return on Capital (ROC), which is a fair assumption. Once I had the final year ROC, I computed the CAGR from last year's ROC, and reduced the ROC at a constant rate from 2018's figures. The second variable input I used is the growth rate in the stable period. I let this figure be 1%, lower than the inflation rate which demonstrates the low growth that would likely occur from such a mature company. I calculated the reinvestment rate from this figure, and similarly used the "CAGR" method to estimate the reinvestment rate for each year. With these 2 simple inputs, I computed the target price to be $1.025, less than 3 cents higher than the current trading price of $0.995. This represents an upside of only 3%. The targer price should be lower though, as I had not factored in the value of equity options since the annual report had not disclosed the exercise price. Thus, my target price should be even closer to the current trading price. My DCF, though very simplistic, seems to point towards the shares being fairly valued.
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TL;DR The company does look like they have strong financials and priced at a cheap valuation. However, EPS growth was negative and the company does have a high beta. ! ! Business Profile AEM provides handling and test solutions to advanced manufacturers in the world. They help deliver different products in the 5G economy such as microprocessors, high-speed communications, IOT devices, and solar cells. They have developed valuable and long-term partnerships with their customers. They also serve them 24/7 and across the entire manufacturing lifecycle using their network of factories and field support locations worldwide. Financials Income Statement ! AEM had total revenue of $262m in 2018, which was almost 20% higher than the previous year. Hence, all the other profitability metric had improved as well, such as EBIT and Net Profit. However, earnings per share had decreased slightly due to an increase in the number of shares outstanding. However, it seemed that the business had weaker profitability over time as all their margins had weakened. This shows that with improved revenue, profitability had dropped although overall profits rose. Overall, the company still has quite a healthy income statement. Their net profit margin of almost 13% is still quite high. The company also has small Depreciation and Amortization, which is surprising for a more capital intensive business. Balance Sheet ! AEM has a very strong balance sheet with very high liquidity ratios and very low debt metrics, relative to earnings and cash. It seems that overall, the company's balance sheet had improved over time. The short-term liquidity of the business had improved, as seen from the table. Their balance sheet had also improved with less debt on their balance sheet and earnings being more than sufficient to cover debt and interest payments. The company has much more cash than debt. Cashflows ! Overall, the company does have quite strong cash flows as well. This is evidenced by their high cash flow from operating activities and low capital expenditures that have generated significant free cash flows. However, this had worsened in 2018, due to weaker working capital conditions and higher capital expenditrues. 2018's free cash flow figures were more than 2 times lesser than 2017 figures. The business does pay out a good amount of dividends as well, as the dividends paid out had almost doubled. The business also looks like they have a relatively low dividend payout ratio. With high free cash flows and cash balance, I do believe that the company can sustain or even pay out more dividends. Efficiency Metrics ! The company does look that they are very efficient in their use of capital, as compared to other businesses. However, these figures had weakened over time significantly, although the figures are still quite good. Market Metrics ! AEM does look like they are trading at a discount based on their P/E ratios. However, their P/B ratio look rather high. This could perhaps be explained by the high Net Asset Value the company has based on strong earnings from previous years and low debt levels. Even their EV multiples look attractive as well. However, I would add 2 caveats. First, is how their PEG was negative due to negative EPS growth in the previous year from an increase in shares outstanding, which had diluted the EPS of shareholders. Secondly, the company does have a very high beta of 2.43. This suggests that the company has significant market risk associated with it. With such higher risk, their shares may thus be valued at a lower level than their peers. Share Price Performance ! Against the STI, AEM shares have underperformed the stock market with a return of almost -40%. As you can see, their share prices are a lot more volatile than the market, which is shown through their high beta. However, AEM's overall return over the past 5 years was more than 600%! This is a wide contrast to the very low returns of the STI. Currently, the shares are trading at 52% of their 52-week high.
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Business Profile ! Source: Next Insight Sino Grandness is an integrated manufacturer and distributor of own-branded juices as well as canned fruits and vegetables in China. They produce loquat fruit juice in China as well as export canned asparagus, long beans and mushrooms. The Group’s products are distributed globally across Europe, North America and in Asia, in renowned supermarkets, discount stores and convenience stores including as Lidl, Rewe, Carrefour, Walmart, Harpenden, Coles, Jusco and Metro. The production plants in China are strategically located in four provinces. Interestingly, the production bases straddle different climatic regions so that production activities can be carried throughout the year. ! Source: The Straits Times Forecasts and Estimates ! I forecasted that Sino Grandness will enjoy high growth in earnings over the next few years. This is supported by higher than industry average ROC historically but lowered to reflect more intense competition over the years. I grant that Sino Grandees will continue to have to some leeway in growing its revenue over the next few years as it had strong revenue growth previously. However as the company matures and the industry becomes more saturated, Sino Grandness will probably find it much tougher to retain customers and its competitive advantage. Leading to pricing pressures and high expenses. During the stable growth period, I project that Sino Grandness will reflect the growth of 1% revenue per year. I believe that this industry will continue to grow and expand, as the global population increases and the need for such staples increase. Sino Grandness just has to ensure that it grows with the industry. However, during the stable growth period, I predict that newer entrants into the market will erode ROC such that the ROC would equal the COC. I don't believe that Sino Grandness has a firm competitive advantage that helps to stave off competition, and thus their advantage over competitors might decrease over time. Hence, growth would not add value to the company's investors through time. The COC is on the lower end due to low cost of debt and high leverage. Cost of Equity is higher however due to the high levered Beta and risk premium from operating in China. Valuation ! Based on this simple DCF, it seems that the shares of the firm could be undervalued. This stock was also singled out by Motley Fool as one of the top few stocks to buy in June based on the Magic Formula.
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Business Profile ! Sembcorp has come into the light again with Sembcorp Power in place. Outside of the electricity market they also provide essential energy and water solutions to both industrial and municipal customers. They are also a brand name in urban development in Vietnam, China and Indonesia. Financials ! Income Statement Despite a 30% increase in revenue, gross profit fell by 26% due to a 38% increase in cost of sales. Profit Before Tax as a result also fell, but was buffered by higher operting income, lower non-operating expense and higher finance income. Balance Sheet The company has strong short-term liquidity with a current ratio of close to 5. Morevoer, current assets mainly comprise of cash (75%), which leads to a cash ratio of more than 3 times. The business also seems to have very low leverage with a D/E ratio of 1.35. Due to worsened profitability, Return on Assets, Return on Equity and Interest Coverage had worsened from FY17 to FY18. Cashflow Statements Despite reductions in profit, operating cashflows had improved due to stronger working capital conditions. However, in FY18, Sembcorp had made substantial acquisitions of subsidiaries, associates and joint ventures which led to a 12X increase in cashflow from investing activities. Additionally, capital expenditures of PPE increased by 1.5X as well. Cashflow from financing activities was also negative due to redemption of perpetual securities and payment for non-controlling interest acquired in FY17. Growth Opportunities ! Utilities Performance in India India remains a key growth driver, accounting for 15-20% of earnings of Sembcorp. Utilities earnings achieved grew 23% YOY from improvement in India operations. This expected to continue into 2019 along with the resumption of a plant which had 50% capacity due to technical issues. The power market there is also recovering which can increase tariffs. Marine Sector Improvement The marine subsidiary had attained a surprising net profit in 4Q18, which led to the overall net profit for FY18 being better than expected. With improvement capex, this has led to more contract enquiries which may lead to improving financials, although the gestation period for this might be long. Risks Competitive Power Market ! The opening up of the electricity market had led to a much more competitive environment. The carbon tax could also result in a cost of $15-20m which might be passed on to customers. Profits for this segment had fallen quite a fair bit compared to before in 2013. Find out more about Sembcorp Power here.(http://snip.ly/wl9nuz#https://www.sembcorppower.com/Pages/Home.aspx) Execution of Strategy in India With strong growth potential in India, Sembcorp needs to focus on execution to deliver the results it has promised to shareholders. This venture might be more risky, since India is still a relatively new market and strategies applied in Singapore can't be replicated wholesale there.
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Business Profile The Hour Glass is a luxury watch retail groups with an established presence of 40 boutiques in 11 key cities in the Asia Pacific region. The Hour Glass’ network of multi-brand and standalone boutiques are all strategically located in the key luxury retail corridors of Singapore, Kuala Lumpur, Bangkok, Phuket, Ho Chi Minh, Hanoi, Hong Kong, Tokyo, Sydney, Melbourne and Brisbane. Growth Profile I have a few concerns regarding this company. Firstly, luxury watches have taken to online retailing, which The Hour Glass has not explored yet. This could be due to the exclusive distribution agreement they have with the different watchmakers. Secondly, the demand for luxury watches has been propped up by Chinese consumers. However, The Hour Glass does not have a physical retail presence in China yet. Thirdly, there seems to be a change in consumer taste for watches, as smartwatches and fitness watches are increasingly popular, as cited by several studies. My fourth reasons are similar to that of the second and third. I'm worried that The Hour Glass has not responded to such changes in the retail environment yet. This could either reflect the lack of management foresight or the restrictions by placed on The Hour Glass. The reasons I mentioned probably led to the low revenue growth that The Hour Glass has. In fact, revenue CAGR since 2015 was less than 1%. Estimates ! Moving forward, I project that CAGR for the next 5 years would be negative 2%, due to the reasons I mentioned earlier. I also don't believe that The Hour Glass has strong competitive advantages, that set it apart from other luxury watch retailers. Part of it could be due to the nature of the business that it is in since there doesn't seem to be much value add that they bring to customers. I project that operating margins would also decrease, mainly due to the reduced economies of scales but also due to high fixed costs involved. I also lowered the Sales/Capital ratio to reflect the fact that the same amount of capital is still required to support declining sales. The cost of capital for the firm due to the slightly lower cost of debt and low leverage. As the firm matures, I leave the cost of capital lower during the later years to reflect the servicing of debt and lower cost of equity. During the stable period, I gave the revenue zero growth rate. I still think that there is a place for luxury watches in the offline retail space. I gave the firm a 30% probability of failure, in which case 50% of the current book value of capital will proceed to shareholders. I gave this probability as there is a chance that Valuation ! I thought that I was pessimistic enough with such a valuation, but the target price that I received was still showed that the shares were undervalued! I am not entirely sure how the market has been pricing the shares, but given a very conservative outlook I took, I might be buying The Hour Glass. Piotroski F-Score The F-Score for this stock is 8 out of 9! Hence, it has also attained a positive rating independent from my valuation. It also has a Price/Book ratio of less than 1 (0.98).
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TL;DR The firm has surprisingly strong financials, and there is a good chance the shares could be undervalued. I think that it is worth a closer look. Business Profile ! Source: Yangzijiang Group YZJ is a large corporate group, with shipbuilding and offshore engineering as its core business. They also have four additional sections: financial investment, metal trading, real estate and shipping combined ship-leasing as supplementary businesses. Interestingly, shipbuilding output from 2009 was continuously ranked top 5 of the Chinese shipbuilding industry. The average output, profit and tax were also impressively ranked at the top of Chinese shipbuilding companies. ! Source: Singapore Business Review Income Statement ! The profitability of the firm is very strong, with a net margin of more than 15%. Moreover, these margins have also substantially improved over time as well. The revenue and earnings of the firm also had quite a growth over the past few years, with the most significant change being for net profit. As a result, earnings per share have also risen. Balance Sheet ! The firm also has quite a strong balance sheet, with both very good short-term liquidity metrics as well as debt ratios. These ratios have also improved over time, which is a testament to the strength of their balance sheet. Free Cashflow ! Free Cashflow to the firm for 2018 was quite high, with the FCF margin being a high of 23.2%. This was a result of several factors. The NOPAT of the firm had improved over the last few years, while a decrease in working capital also result in more free cash flow. With lower debt levels, there is also more free cash flow available for shareholders. Given their strong cash flow position, I do believe that the firm will be able to sustain their dividends in the long run with a stable payout ratio. Efficiency Metrics ! The firm's efficiency is also surprisingly good. These metrics have also improved quite a bit since 2016. The high ROE can be attributed primarily to the high net profit margin, but also due to the good asset turnover as well. As the change in net working capital had been negative, the reinvestment rate was negative for the year. If we hold ROC as constant, this would lead to a decrease in the earnings for the firm the next year. Valuation ! The P/E ratio of the firm is on the lower end, which could be good indicator for value investors. For slightly higher multiples, such as P/B ratio, have good companion variables such as the ROE that might justify a higher valuation. For firm value multiples, the companion variables also support the different forms of valuation. All in all, there could be a chance that the shares of these firm are undervalued. Cost of Capital ! The cost of capital for the firm is high due to the company being more exposed to higher country-specific risk (China). This leads to a high cost of equity which then results in a higher cost of capital despite a low cost of debt. However, due to the company's high ROIC, the ROIC exceeds the cost of capital significantly. This suggests that the firm is generating much more capital than it costs for investors. Global Market-Wide Regression ! As the title suggests, a regression had been carried out on the different multiples based on each multiples fundamentals. Interestingly the shares of the firm seem undervalued when we look at both P/B and P/S ratio. Conversely, the firm seems potentially undervalued when we pay attention to the EV/Invest Capital ratio. The other multiples seem to fall quite neatly near the range of their estimates.
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TL;DR The business looks quite strong with good profitability, balance sheet and asset efficiency. Their valuation looks good too, but US-China trade relations might dampen growth. ! Business Profile ! Source: Hi-P International Limited Hi-P provides one-stop solutions such as product development, component manufacturing to complete product assembly. Their products can be classified into three broad categories: Wireless (smartphones), Computer Peripherals (Internet of Things) and Consumer Electronics. Financials ! Income Statement Revenue has been increasing steadily over the past few years, while net profit has been increasing as well. Net profit margins have also increased over time, which suggests that profitability has improved. The segment which contributes the highest revenue is precision plastic injection moulding at 67% of total revenue, followed by Assembly. Most of the revenue also originates from China (50%), followed by the Americas (28%). Hence, there seems to be more concentration risk in China and in precision plastic injection moulding. Balance Sheet Overall, their balance sheet seems quite healthy as shown by their very low debt levels and high cash balance. However, the firm's short-term liquidity don't seem very high. Overall, the balance sheet of the firm still is strong. Cashflows The firm's cash flow seems quite strong as well. This is evidenced by their high free cash flow derived from good cash flow from operating activities. This also had been supported by their working capital management. Despite having high capital expenditures, the firm still managed to produced healthy cashflows. I do believe that their dividend payments are sustainable by looking at their high free cash flow to equity, low debt levels and high cash balance. Efficiency Metrics These metrics look pretty good as well. ROIC looks particularly high because of their high cash balance. Overall, these metrics show that the firm is making good use of its assets and capital to grow earnings. Valuation Just looking at their multiples, the shares seem to be trading at quite a good price. This is probably why these shares were picked up by Motley Fool when he used the Magic Formula. Although profitability metrics don't seem particularly outstanding, their cashflows do look particularly healthy and sustainable. Furthermore, the firm looks quite efficient in utilising its capital as well. However, I do worry about the risks that this business faces. It could be that investors had priced the expected risks into their valuations as already, which may explain the stock's cheapness. Future Outlook ! Source: Knowledge at Wharton One of the strengths that Hi-P has is that revenue has been maintained amid trade-war tensions. Even with downward pricing pressure from its customers, they have been also able to enhance operational efficiencies to minimise the drop in margins. Going forward, the outlook remains cloudy and margin pressure is expected to persist. The industry is also quite volatile and product life cycles have become shorter. This presents risks where margins might be thinned to keep products more competitive ! Source: TripSavvy There is also a wide Forex exposure since 90% of Hi-P’s total revenues are in USD, but costs are mainly in RMB. Finally, the need to report their currency in SGD. Changes in these exchange rates can lead to different performances. The firm faces high pressure from US-China trade relations. This might result in earnings being dampened and reduce growth potential.
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TL;DR The business possesses strong earnings, cashflows and balance sheet. However, earnings have fallen over time. The company looks like they might have interesting developments over the next 2 years. ! Source: Klook Business Profile ! Source: Shanghai Ocean Aquarium Straco Corporation Limited runs high-quality tourism-related projects, incorporating entertainment, education and culture to create a unique experience for visitors and audiences. These projects include giant observation wheels, large-scale public aquariums, cable-car facilities, the protection and redevelopment of historical sites. For Singaporeans, their most notable project would probably be the Singapore Flyer. SWOT Analysis ! Strength The company has very strong earnings and cash flows, although earnings have decreased over time. Such strong cash flows have allowed the company to pay consistent dividends over time. Straco reminds me of Genting Singapore, which also has strong earnings and cashflow. For such tourist sites, the initial capital outlay is probably huge, but future earnings tend to be more stable and high. Their strategic positioning in key cities and locations such as the Flyer, Shanghai and Xiamen may allow them to tap on tourist footfall as these cities grow. Weakness Similar to Genting Singapore, their earnings have decreased over time as well. This could be due to the novelty factor wearing off, as more tourists have visited such sites before. Singaporeans may have felt this with the Flyer too. I recall the hype surrounding the Flyer when it first opened, but it had lost its appeal to many Singaporeans over time. To sustain earnings, Straco probably has to reinvest or upgrade their attractions. This, however, will require huge capital injections, as with Genting Singapore. Opportunities Chao Yuan Ge will be constructed over the next 2 years, while the Singapore Flyer will most probably undergo renovations soon. Additionally, the mid-sized attraction called the Time Capsule will be launched in the last quarter of this year to coincide with the Singapore Bicenttinel. Such new developments might lead to greater growth over time. Threats The US-China trade relations had affected the performance of Straco as well. Tenser international standoffs in the future may also affect Straco significantly. Management had also mentioned the rather weak tourism industry that had affected overall earnings. Furthermore, with a more competitive tourism landscape in Singapore and China, Straco might face greater headwinds in the future. Financials ! Income Statement ! Source: Straco Corporation Ltd Annual Report 2018 Worryingly, revenue has decreased consistently over the last few years, while costs has increased conversely. As a result, profit have fallen and the company has become less profitable over time. Despite such developments, the company is still quite profitable, maintaining an astounding net profit margin of 34%. With decreasing earnings, future prospects don't look good for the company. According to the company's disclosure, the almost all of the revenue flows from ticketing, whereas retail and F&B comprise very little of revenue. Ticketing is the segment that was worst hit over the years, which explains the big dip in revenue. ! Source: Straco Corporation Ltd Annual Report 2018 Balance Sheet The company has a very strong balance sheet. They have extremely high short-term liquidity and have low debt levels. However, the company might have been hoarding too much cash, as evidenced by their very high cash ratio and expensive share buy-backs. The company seems to be quite efficient as well, as shown by high ROA, ROE and ROIC. Such high figures are primarily due to very strong earnings and the company being able to sustain their own growth internally. Cashflows The company possesses very strong cash flows as well. Their operating cash flow relative to sales and capital expenditure is quite high. This has resulted in quite high free cash flow as well, even when compared to revenue. This has resulted in a dividend payout that I think it's quite stable, especially when compared to their free cash flow. Moreover, with low debt levels, their Free Cashflow to Equity is high too. Share Price Performance ! For its one year return, when compared to the STI for, Draco's shares seem to have performed better. However, the shares still returned a negative. Despite earnings decreasing over time, the market probably recognised its strong earnings and cash flows over time. I believe this is so because they had a 5 year annualised return of 26%. Since the start of this year, the share prices returned a value of 8.6%. Just visually, the shares seem to track the STI quite closely as well and seem to be quite correlated to the STI.
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The setting of the AGM... ! I just attended Sheng Siong’s AGM this morning! This one of the most unique AGMs I had attended so far, for a couple of reasons. Firstly, unlike most other AGMs, this one was held at Sheng Siong’s own premises, in what seems like one of their conference rooms. The size of the entire room was actually quite small, as compared to other AGMs, with much fewer people attending this one (about 50 pax). ! Next, the Q&A, which was actually just one question, was done in Mandarin, which really took me by surprise. I managed to roughly understand what management was talking about, though my mandarin really leaves much to be desired. ! Lastly, the AGM actually had a mini-buffet counter at the end, unlike all the other AGMs I had attended which did not have buffets at all. Although this was a nice touch for the attendees, the “buffet” was really just a spread of pastry from Polar. Some background about Sheng Siong… ! Source: Singapore Business Review Sheng Siong is one of the largest retailers here, with 54 stores located over the island. The stores both focus on “wet” and “dry” shopping options, with a wide variety of groceries and household items available for us. They have also developed their own selection of products, which currently has 1,200 products under 18 house brands. ! Source: www.shengsiong.com.sg As some of you might know, they also started their online shopping platform and delivery services to compete with the e-commerce space, which is quite convenient as well. They also have their own centralised warehousing and distribution centre in Mandai, which was where this AGM was held. Sheng Siong’s Financial Results Revenue ! Source: Sheng Siong Group Ltd Annual Report 2018 Management had mentioned that the retail environment in Singapore for 2018 was tough, which was a point cited by other retail businesses as well that I had covered. Regardless, revenue still increased by 7.4% to 891m that year. This was driven mostly by the opening of 10 new stores in Singapore, and with some small increase in revenue from same store sales. Management did mention that this growth was dampened by increasing e-commerce competition and the closing of 2 stores in 2017. ! Source: Wikipedia As I had mentioned in a previous post, I do believe that the opening of new stores can’t always be a source of revenue growth locally. As of date, with 54 stores locally, I believe that the grocery market in Singapore is already quite saturated, and that future growth will be quite limited due to the strong competition and lack of population growth. ! Source: Inside Retail Asia Additionally, Sheng Siong is also more popular among the older generation, but as their population bracket shrinks over the next few decades, Sheng Siong’s competitive advantage of being a “dry” and “wet” market may become weaker. Management also had the foresight to recognise this, which is why they have expanded into China as well. Costs and Expenses ! Source: Sheng Siong Group Ltd Annual Report 2018 Overall, costs and expenses have increased from 2017 to 2018. This was mainly driven by the increase in operating expenses from the opening of new stores. For example, admin expenses increased by $16.1mn due to higher staff costs, rent, depreciation and utilities. However, cost of sales as a percentage of sales had decreased, mainly from better rebates, strong efficiency in the central distribution and better buying prices.The increase in costs from simply opening new stores as you can see, is actually quite high. As management had mentioned, revenue usually takes quite a while to be reaped after the opening of new stores. This means that there will be significant costs outlay, such as capital expenditures on grocery shelves, equipment, staff costs and rent before the new stores start to generate revenue properly. (more on this later) Strategy and Outlook for 2019 Opening of New Outlets Management is aiming to open new outlets in untapped markets in Singapore, especially in areas that are new or redeveloping as they are looking for more exposure to the millennial segment. ! Source: Time Out As mentioned earlier, I don’t think this can’t be a very sustainable move because of saturation of the local market. Targeting the millennial market is probably the right move, since this population segment is starting to settle down and have their own families, and so the demand from this age group would increase over time. However, I do feel that Sheng Siong thus far has not done enough to reach this segment, based on my own consumer experience as a millennial. For Sheng Siong, their marketing strategy would need to be revolutionised since much of their efforts have been through offline marketing and targeted at older customer segments. Developing E-Commerce Segment Management wants to focus on their “All For You” online grocery segment as well. I believe that this should be one of their key strategies moving forward. Apart from targeting millennials and making it a lot more convenient for customers, there are a lot of costs and efficiencies that might be able to benefit from this move. Firstly, I believe that this strategy as a form of customer acquisition, incurs less fixed costs and upfront costs than opening new stores. Such deliveries can already tap on existing stores and distribution centres, therefore, I think that acquiring customers through this manner would be more profitable. Secondly, as the number of deliveries increase, the costs to perform each delivery would reduce as well, due to economies of scale. For example, one trip by the delivery man can cover multiple deliveries, which reduces cost per delivery. Automation ! Source: The Straits Times Management believes that more automation can be carried out. The most obvious example is the self check-out system when we pay for our items. There will also be some automation done in the warehouse also. This is an important strategy to consider, as management has mentioned that labour costs and issues have troubled the company before. Additionally, over the decade, many of their staff will retire, and labour shortages might become a more acute problem. However, I do believe that with tightening foreign worker levy and quota, this should be an urgent issue that management needs to address. Final thoughts… Overall, I do believe that Sheng Siong’s financials look good so far, especially with strong growth in 2018 despite tougher retail challenges in Singapore. However, I am more concerned with their growth strategy in the future, especially with how topline can be maintained.
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Hello! The magic formula actually represents a reliance on the 2 metrics of Return on Invested Capital (ROIC) and Earnings Yield. There have been a lot of published studies on the results of applying this formula before, with different variations and results received. You can check those out if you are interested in the results. I can share roughly about ROIC and earnings yield. Earnings Yield The formula used in the book is actually EBIT / EV, which is Earnings Before Interest and Taxes divided by Enterprise Value. EBIT actually is a measure of how much the company has earned, before paying interest and taxes, as the name suggests. Enteprise Value is a measure of the how much the business is worth. EBIT / EV thus stands for the returns that the company has earned based on the value of the business. EBIT is used because it can be used to compared between different companies which have different amount of interest costs based on the amount of debt they have and different amount of taxes based on different tax regimes. Enterprise Value is used because it is more representative of the worth of the business, since assets such as cash are excluded which don't typically generate returns for a business. Return on Capital The formula employed here is EBIT / (Net Fixed Assets + Working Capital). Net fixed assets is used because it takes away the effect of depreciation, which is a measure of the life span of how long certain fixed assets can last. Working capital is used because it measures the amount of resources that is available through working capital management. This is because some companies could be tied down by higher working capital needs in the form of liabilities, which my reduce their capacity to generate higher earnings.
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