Sim Lian Group [Stock Analysis]

This is my first written stock analysis report. Any constructive feedback are welcomed. Special thanks to my mentor (you know who you are).

SIM LIAN GROUP LTD STOCK ANALYSIS

PREPARED BY MELVIN ANG (2 MARCH 2014)

BACKGROUND

Sim Lian is a residential (luxury private condo and executive condo) and commercial property developer in Singapore (A Treasure Trove, The Tampines Trilliant, UB.One, Clover by the Park, Rochelle at Newton, The Lincoln Residences and Executive Condos) and Malaysia (KL Trillion in the heart of KL , Taman Bukit Bayu, Desa Baiduri in Johor). Its construction business also involves in BTO projects from HDB.

CONSISTENT EARNING POWER

Sim Lian ($0.82) has a consistently high ROE of more than 15% since 2003. 10 year ROE averages at 25% and 5 year ROE averages at 29%. Compare this result to the much larger players in the property sector such as City Development ($9.33) and CapitaLand ($2.82) which has a 5 year ROE average of 10% and 7% respectively. Take a look at the consistent earning power of Sim Lian in the table below.

Sim Lian has a huge potential upside movement since it is a small market cap company at 800 million that grows at 27% on average per annum for past 5 years. The high growth will result in acceleration of earnings that will consequently drives the stock price up. The return on capital is a healthy 20% in 2013.

LOW DEBT

Sim Lian did not over leverage to sustain its high growth. In fact, debt to equity declines from 2.69 in 2009 to only 0.4 in 2013. Total debt decreased from $546.2 million in 2009 to $319.1 million in 2013. In fact, its cash on hand has risen from $69 million in 2009 to $343 million in 2013. Cash per share is 0.34. This means that at current market price of 0.89, you are actually only paying 0.55 (0.89-0.34) for 0.89 per share.

BUSINESS ENVIRONMENT

Despite several cooling measures by the government that are mostly targeted on second home buyers, the very low interest rate environment, continued income growth and increasing population in Singapore will continue to guarantee the buoyancy of the property market in the future. In fact, interest loan for housing has gone down from 5.40% in 2004 to 3.02% in 2013. To hedge against future market uncertainties, Sim Lian is making a concerted effort to expand their  portfolio to include more mixed-use commercial and residential properties especially into the executive condo opportunities (about 80% of Singaporeans live in HDB), as well as capitalise on investment opportunities. In the long run, demand for housing will always be there in Singapore.

 

EXCELLENT MANAGEMENT

Sim Lian is a family business with the family owning 78% of all outstanding shares. When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority. This is good news since common stockholders could either profit from privatization or from excellent management that thinks and acts like a business owner.

OTHER FINANCIAL RATIOS

Current P/E is only 4.64. Compare this to City Developments and CapitaLand's P/E of 13 and 15 respectively, Sim Lian looks like a really good bargain. Moreover, the P/B is 0.90. P/B below 1.00 usually indicates an undervalue stock.

DOWNSIDE

Currently, only 12.4% of the outstanding shares are in public hands. This means low liquidity and low volume movement. Thus, potential investors are advised to have a long term holding in mind with this stock.

TARGET PRICE

$1.30 per share.

DISCLAIMER

This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities.  Privileged / confidential information may be contained in this document. If you are not the addressee indicated in this document (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone.

So what does it take?

After working for close to 8 months, I observed that the qualities to succeed in school and in workplace are about as opposite as they can get.

Success in school (in terms of academic performance)
1. Hard work, hard work, hard work - Even if you're not the fastest to pick up a subject, you can always compensate it by putting in more hours of study than the smartest kid. It is your own effort that counts. In work, there's no way you can solo your way to the top just by being hardworking.

2. Dare to make mistakes - Learn enough from your mistakes so that you do not repeat them in your final exams.

3. Follow status quo - Stand on the shoulders of giant. It is okay to follow the well threaded path to success of your seniors. Learn from them how they do it. Be like a croc, not seen until the moment that you are ready to pounce.

Success in workplace
1. Communication - It's all about how smooth you talk, how you sell your case, how you present in front of people, how you defend your ideas, how you persuade others to rally alongside you, how you sell yourself, how you appear more confident than you are and how you trash out politically correct sentences. Sometimes I also wonder, is it about how loud you talk ? Which reminds me of leadership by loudership.



2. Do not make any mistakes at all cost - No matter how stellar your performance might be, one serious cock up and your reputation goes down the drain instantly. Thus, you usually see people scrambling to cover their own backside first before anything else. And oh, the far too common tai chi of pushing responsibilities around.

3. Be innovative - One simply does not get spotted if one follows status quo here. You gotta bring in fresh and bold ideas to the table, even though it might not be the best. You got to challenge the current way of doing things. Shake up the system. Stand out among the crowd. Risky yes, but no risk no gain.

What do you think ?

Happiness

Happiness is what everyone seek for. We only have one life  and everything that we do everyday is motivated largely by happiness. To achieve happiness, we need to know that happiness consists of a few very important ingredients. Basically, being happy is to eliminate the 2 major enemies of happiness, loneliness and boredom. Here is a list sorted by the importance:

1. Family and Siblings - A broken family and the only child combo is by far the worse you can ever get. If you are in a happy family and having strong bonds with your brothers and sisters, you have a good start in life. Unfortunately, this most important factor is not within our control. You are born with it.

2. Marriage - This you can control. Many research shows that married couples are happier than singles. You have someone that you can trust, can talk to, can relate to, can enjoy activities together and so on. 

3. Friends - Being social is being happy. Humans as we know are very social creatures. Loneliness and boredom are two main factors that contribute to sadness. Thus, having more CLOSE friends = more happy. You have no time for loneliness and boredom. Fortunately, this is well within our control. Introverts have a small disadvantage in this aspect. However, we can definitely try our best to be friendly and be genuine in our friendships.

4. Career - Part of how career contributes to happiness is money. However, the more important part is that a good career takes away our boredom and loneliness. You gain a sense of purpose in life. You felt that you did something productive and being useful. Too much free time such as those unemployed leads to stray thoughts and loneliness and boredom. 

5. Religion - Just a tool for us to be more social. We get to know more friends which relates to point 3. We think that we have a sense of purpose in life. We have something to do in the weekend. Even a cult could serve the same purpose. Just look at how people got high and happy in mega church workships. Basically, it is an additional commitment that we chose to take up to eliminate our loneliness and boredom.

6. Money - Once you have all the basic ingredients in place, then money comes in to boost your baseline happiness further. If you lack of the above basic ingredients, no amount of money can truly bring you happiness in life. Money is merely a booster. Think of it like alcohol which helps to boost your experience in a party or social events. 

So in the end, to sum up, a person can be said to be one of the most unhappy people in the world if he or she came from a broken family and have no siblings, perhaps leading to introvertedness, has fewer friends, has no religion and no purposeful career or nothing major to do in life. 

Buddha is totally of a different league. He doesn't seem to require socialness to be happy. How Buddha stays happy in his own solitude, in his own mind, is another story to be told. 

Genesis

Science (from Latin scientia, meaning "knowledge") is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe. It is repeatable. If F=ma results in 100N, with the same mass and acceleration, anywhere on Earth, it will still gives us 100N. Regardless of religion and race, science is absolute and I am sure you, certainly agree with science. If you believe in science, then let's proceed.


Earth as we know it today is approximately 4.5 billion years old (given to us accurately by science of course) and the universe is certainly much older no doubt. So if we believe in Christianity and that the Bible is the word of God, we would have to believe that when Earth was created, it consist of a few animals and two humans. However, fossil evidence and ancient plants dated back millions of years ago show otherwise. Why no mention of these creatures in the Genesis? Humans did not even walk on the planet Earth before a few hundred thousand years ago. If Genesis is true, does it mean that our Earth is a few hundred thousand years old? What about all the fossils of dinosaurs and plants? Even if we accept that God created Earth and all its living inhabitants, why did God created dinosaurs and all the prehistoric creatures, then chose to destroy all of them and then started to re design a whole new range of mammals and insects and then only a few hundred thousand years ago chose to create humans? And when he/she did created humans, why chose a select tribe in the middle east to hand down the Words of God in a specific Hebrew language that could only be understand by that little region of the Earth? What about other religions that preceed Christianity? If we find those religions obviously rubbish and man made, what gives Christianity and other newer religions that special right that they are true? We can even witness it today the branching of major religions in sect like the Mormons, many sects of Islams etc. How man made can it be? And how ignorant are we to continue to believe?


Besides, the Bible was handcrafted, short stories selected and compiled into a book. Some stories that does not fit the taste of the time, were disown and not included. How obvious is it that Bible was made made? Precisely, made by those who have power in the Church during that era. So why did the revelation from John of Patmos make it into the Bible, but not the others? From CNN Belief Blog, the 4 big myths of the Book of Revelation:


Athanasius was so fiery that during his 46 years as bishop he was deposed and exiled five times. He was primarily responsible for shaping the New Testament while excluding books he labeled as hearsay, Pagels says.

To me, Revelation is a really great tool to be included in the last chapter since it instill that scary thought that hey you might not make it to heaven if you choose to disbelieve. 

Mugging

During the study week, we can observe many different styles of mugging. Some outright ineffective, some are too hardcore while some are just hilarious. To score, efficiency is the key ingredient. Of course, we still need to have the discipline and focus to go with it. During the last holiday, I happened to stumble upon this book "How to become a straight-A student : the unconventional strategies real college students use to score high while studying less" by Cal Newport. Note "while studying less". The author interviewed a whole bunch of top students from the Ivy League and specifically compiled a series of mugging techniques that they have in common. These top tier students were not those who mug hard. They mug efficiently. You will seldom spot them mugging in the library. A short 1 hour burst of full concentration is much more efficient than spending hours staring at the notes with mind wandering around.

So let me share some of my observation of mugging styles from my 3 years experience in NUS. First, there are those people who totally gave up. They may pretend sick and take MC just to skip the finals and then redo the entire module again the next semester. These people are beyond the F grade. They left us speechless. Next are the pretenders. The Hokkien phrase "Lau Ka Ki" sums it all up pretty well.The pretenders suddenly find mundane things interesting in the study week. They do what ever that are possible to NOT read their notes. They dare not face the truth that they can't solve the tutorials or the past year papers. They read random articles online, always refresh their Facebook and be the first to Like, study in a group when they know that they will end up talking more than they study, goes all the way to Starbucks to study for 1 or 2 hours, reasons that the temperature in the room is too hot, reasons that it is too noisy to study and thus must go to the library although the library is probably much noisier. Every condition must be set to perfection before they are willing to begin. Third, we have the hardcore muggers. These people freaks you out when you discover how much they actually study. They pull all nighters just to console themselves that they tried their best. They try to multitask by reading their notes while eating. This people panic and study randomly without any strategy. They study by brute force, repetitions and pure memorization. But in the end, when the results are out, you won't see them at the top. Then, we have the closet muggers. They are the heroes who solo all the way to the final Boss. Soloing works best for courses like Science and Engineering. These muggers only come out for meals and shower. They are like the modern day Buddha who tries to achieve enlightenment in the their own caves. A typical study schedule is 9-12, 2 hours lunch break+nap,2-6, another 2 hours dinner break and then 8-12. They can squeeze in an entire module in 2 days if they have been consistent throughout the semester. Last, we have people who we see playing games, watching videos and doing many other things and yet in the end they triumph all of us. I have personally heard of one such legendary senior who scored A+*, topping the module, while others claimed seeing him playing DOTA instead of studying in the final few days before the exam. Respect. 

The list is not entirely exhaustive but the point is, we should be truthful to ourselves and be efficient. Adopt the motto " JUST DO IT ". No matter how high the inertia is to start, just do it. Just open that damn book and start reading. 

Social Religion

Why is it that you feel satisfied and joyful after attending a religious event such as the Sunday church mass with all its prayers and singing. Is it because you really got closer to God? Is it because in your mind, you think that you had done something great by following your religious beliefs piously? Is it a feeling that cannot possibly be described in words since it is doubt as spiritual? I guess not. The feeling stems from the core of human needs. Humans are very social beings. You ought to observe the same positive effect after a long day of interacting with others. You can expect the same intense feeling from camps, parties, family reunions and vacations. So one simple way to uplift your day instantly is to talk to friends and  get in touch with as many people as you can.  This makes your day social. And social means happy. This is another reason why people crave for religious events as much as family reunions, parties or sleep overs with friends. Religious gatherings are social, not spiritual. Just look at how similar religious gatherings can be to a music concert. Churches are getting bigger, songs of workship are getting more akin to concerts and listening to charismatic preacher is like watching a good stand up comedy show (Go watch Benny Hinn in Youtube). All round fun surrounded by friends and family. No wonder churches attract the young. Church camps are also a good place to mingle around. What is it that is so different from your average scout camps? I don't see much difference. Both are, social events. If you truly believes in god, why care about attending to all these seemingly frivolous events while you should already be able to communicate directly to the omnipotent one. You have already been given the all in one book, all that you need to know about the religion. The rest are unnecessary extras that you do not need, except, maybe, you need the social benefits.

Let's run a thought experiment. If the world that we are living right now has another major religion that does not require any form of pilgrimage, weekly gatherings or any other big events in its spiritual calender. You do not need to sacrifice your time attending any events. You don't even have to pay for anything. It's all free. All you have to do is to read the all-in-one book and make your prayers anytime and anywhere. Say the book is equally as impressive as the others so you do not lose out on any good moral values or teachings. Basically, what you have is a religion on par with the current 2 largest monotheistic religions but minus off all the social aspects of them. Do you think this new religion will be as popular as the other two? Will you be feeling more happy with this new religion than without any religion in the first place? How long do you think you can continue to 'speak' to the one above without ever getting a response before you start to doubt your own sanity? You are all alone in this theoretical religion. Doesn't sound much fun now does it?

If all that you have in a religion is a book, and a book only, then this class of religion should fails to attract its followers mainly because there is no incentive to be in it. There is no sense of belonging and very little social interactions to be derived from besides the communication with the one deity in the book. Religion loses appeal when its social aspect is taken away. Undoubtedly, this partly proves that religion is indeed man made.


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Genius? Or is it more of hard work?

In an interview just few years before his death, Bobby Fischer replied to a question posed to him whether he thinks he is a genius in chess, he casually replied, "Chess is all about theory and memorization". I was a bit stun when I heard that. However, it definitely has some truth to it. Fischer's answer in fact implies that, hard work, more than anything else, is required for one to succeed in something. To be an expert in a field, research showed that we need to put in at least 10,000 hours of hardwork into gaining expertise in that field (Malcolm Gladwell-Outlier). Fischer was no exemption. When he was young, he spent countless of hours, every single day, from morning till late at night, immersing himself into the world of chess. He surrounds himself with chess books and chess only. Nothing else. Part of this is because he has a terribly broken family. No father, a mum who was too busy to spend quality time with him and virtually no friends of the same age. Thus, chess was simply an escape from the harsh reality (in Hokkein='lau ka ki'). Sometimes we may not realize that we are actually in the process of doing so. He began to play chess at the age of six and became really good at it at the age of 14 when he won the US Championship. It would have been at least 7 years of continuous hardcore labour on chess before he became really good at it. He was not born a genius. I believe anybody with enough discipline, passion and time can do that. It was the unfortunate circumstances of his difficult childhood, in that, I think it is wrong to say this, but he has nothing better to do than to play chess. Chess is something that he can at least get control of and get it right in his life. Thus, he was right when he said that it was just a matter of how much more he read and practice that makes him a stronger player than anyone else.

The same principle should apply in many other aspects of life such as studies, sports, etc. (Music can be one extraordinary exception I guess). The more time you spend on a subject, the better you will get. No shortcuts. Same goes to Bill Gates, Mark Zuckerberg, Christiano Ronaldo, ... and the list goes on. We all have 24 hours per day. So use it wisely and one day you might just achieve your 10,000th hours mark.