The Big Picture - Phillip Securities Pte Ltd

Transcription

The Big Picture - Phillip Securities Pte Ltd
The Big Picture
Does value investing work in Singapore?
SINGAPORE | EQUITIES | STRATEGY
25 March 2015
 Large caps rule. 72% of the SGX-listed stocks since 2004 have underperformed STI
 Don’t forget cyclicals. Low PE and PB portfolios outperformed broader market partly due
to cyclicals
 Low PB/high ROE stocks did best. Time to look at Roxy, Civmec (Buy), Wee Hur,
SinoGrandness, Valuetronics, 800 Super (Buy), China Sunsine, Penguin, Dutech, and Hock
Lian Seng?
What is value investing?
It seems that a lot of our clients and co-workers anecdotally prefer “value”
stocks. This is understandable as it is human nature to prefer buying
“cheap” and selling “expensive”.
Simply investing in stocks with low valuation ratios (eg, price/earnings,
price/book, EV/EBITDA) is a naïve way to approach value investing, which
overlooks many issues:



Efficient market hypothesis. Equity markets are quite efficient. Markets
do not reflect what every investor thinks, just what the last investor
thought. Often, it only takes a single trade for the markets to price in the
latest information about a company. The good news is that markets are
not perfectly efficient; otherwise legendary investor Warren Buffett, who
has a system that starts with screening for low PE stocks, would not
consistently beat the market.
Value traps. Some cheap stocks are cheap for a reason. They may have
weakening fundamentals, increasing competition, technology shifts that
are threatening their core business, or other factors that may adversely
affect their future. Cheap stocks can always decline in price, and often do.
Cheap does not mean a stock price will rise. These are called “value
traps”.
Not back-tested. Does value investing work? Many investors have
confidence in their ability to find good stocks – including us. But how
many investors back-test their approach? We decided to back-test value
investing.
Back-testing value investing. Singapore’s equity benchmark is the Straits
Times Index, which is a market-cap weighted index of large cap stocks. Did
value stocks outperform the STI over the long-term?
We took a long time period to avoid short-term sentiment. Year 2014 just
ended, so we looked at 2004 to now. 2004 was after SARS-affected market
sell-off, so value stocks were plentiful. Also, it was the beginning of a four
year economic bull-run, so value stocks would have the opportunity to
Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
MCI (P) 022/11/2014
Ref. No.: SG2015_0105
Analyst
Phillip Research Team
(+65 6531 1240)
[email protected]
The Big Picture Does value investing work in Singapore?
recover. We analyzed every stock that was listed at the end of 2004 and
noted their stock performance from the beginning of the year (or
whenever it was listed) to now.
Straits Times Index
Source: POEMS 2.0
A few caveats. We are stock analysts, not academics. We wanted to test a
hypothesis without it consuming too much time. We excluded dividends
and return of capital pay-outs, except for final return of capital pay-outs for
those stocks that dissolved. We also assumed that investors were able to
sell on the last day of trading on those stocks that did not have a final
capital return. However, we found that nearly all the companies that were
de-listed had suffered over 90% losses in the value of their stocks over the
11 years, so the impact of this assumption was small. We also worked fast
and relied upon Bloomberg data, so there is probably some errors in our
data and calculations. That is, one should see this as a “quick and dirty”
analysis, not a PhD dissertation.
Snapshot of the 2004 Straits Times Index
For many people, 2004 did not seem like that long ago. There were 577
primary equities listed on the SGX at the end of 2004. In 2004, the Straits
Times Index had 45 members, of which only a third are still members in the
current index. S-Chip stocks were rapidly listing on SGX, but REITs were not
yet the the rage. Hong Kong Exchange was also listing numerous mainlandbased companies.
Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
The Big Picture Does value investing work in Singapore?
Figure: Primary equities listed on SGX vs. HKEX
Source: Bloomberg
Our test samples: low PE & low PB
We took two populations of “value stocks”, one with a low PE and one with
a low price/book. We identified 82 stocks that had a single digit PE (ie, year
end price divided by trailing EPS of between zero and 9.5) plus 27x stocks
below 0.7x PBR.
Reminder: compound average ≠ arithmetic average. One should consider
the power of compound annual growth rates. For example, a S$100
investment at 5% CAGR over 10 years will earn 62.9%. If you double that
CAGR to 10%, the 10 year return is 159.4%, which is more than double the
returns.
Reminder: asymmetry of returns. One should also consider asymmetry of
growth rates. One can only lose 100% of an investment on the downside.
So an original S$100 investment at negative 30% CAGR would mean that
S$97.2 would be lost in 10 years, whereas a positive 30% return would
equal a gain of S$1,278.6.
Page | 3 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
The Big Picture Does value investing work in Singapore?
The results…
Fast forward to the current day. The Straits Times Index has risen from
1,730 to 3,378 as of 11 March 2015. This equals a compound annual
growth rate of about 6.1%.Of the 577 stocks from 2004, 409 (71%) have
survived from the 577 at the end of 2004. Some were acquired at
significant premiums to their prices in 2004 and some delisted worthless.
Some observations of the 577 stocks from 2004:




72% underperformed the STI (ie, had a CAGR below the STI’s 6.1%).
54% had capital depreciation (less than 0% return, excluding dividends)
16% “blew up”, which we define as having worse than negative 20% CAGR
(ie, equal about 90% loss after 11.2 years).
19% were “home runs”, which we define as having >17.5% CAGR, which
would equal 400% returns in 11.2 years. Four bags = homerun.
Value stock portfolio performance
# of stocks
Straits Times Index (market weighted, dynamic investing)
10 year CAGR (mean, %) 10 year CAGR (median, %)
Std dev
30-45
6.1
n.a.
n.a.
45
7.2
7.7
12.5
577
(3.5)
(1.3)
17.2
PE < 9.5 (equal weight)
82
(2.3)
(0.6)
18.6
Price/book < 0.7
27
(1.4)
0.2
9.1
STI members (equal weighted, fixed investment)
All stocks (equal weighted)
Source: Bloomberg, PSR
Low PB & PE portfolios did:



Worse than STI. Both low PB and low PE portfolios significantly
underperformed the STI both on a mean and median average. The Straits
Times Index members were much financially stronger and competitively
positioned. The STI’s contract manufacturing sector did not perform well,
but it still had far fewer and less acute problems. And as professional
investors know, good performance perhaps is based more upon avoiding
problem stocks than picking superstars.
Better than broader market. Low PB/PE stocks modestly outperformed
the broader market on mean and median average. The broader market
did worse for numerous reason, but we highlight that expectations for SChips were still high and they had not yet suffered the problems that
would later come.
Cyclicals. Another reason for the superior performance of the low PB/PE
portfolio to the broader market is that it tended to have more cyclicals.
The market tends to be somewhat short-sighted and will avoid stocks that
have weak near-term outlooks. The key take-away point for investors is to
Page | 4 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
The Big Picture Does value investing work in Singapore?
consistently look at cyclicals that have weak outlooks, but are probably
not in any danger of going bankrupt (eg, the commodity sectors, shipping,
Singapore residential property developers, energy producers).
Further analysis:
The following chart is a bit complicated, but it is still quite interesting. The
X-axis is net profit divided by common equity (which is analogous to ROE).
The Y-axis is price/book. Price/book divided by (net profit/common) is
equal to price/earnings ratio. The size of the bubble has to do with the
CAGR of the stocks, with blue bubbles being positive returns and noncolored bubbles being negative. One should ignore the data points that sit
on the X-axis, which are zero because of incomplete data from Bloomberg.
But we move forward with our analaysis.
SGX stocks: Price/Book vs. ROE (2004 to YTD 2015)
5.0
4.0
Price/Book
3.0
2.0
1.0
-
(1.0)
(20)
(15)
(10)
(5)
0
5
10
15
20
ROE (2004)
Source: Bloomberg, PSR



Loss making companies did poorly. Sometimes the obvious is true.
Sometimes loss making companies’ stocks perform poorly. In several
cases, losses were continued until the stocks were forced to delist.
Value for money. Famous screeners like Buffett and Greenblatt
emphasize that stocks should be not just be cheap, but also generate high
returns. The quadrant with high ROE and low price/book (bottom right of
chart) generally performed quite well. This is an argument for value, not
just cheap stocks.
Negative returns everywhere– Those stocks with clear circles were
everywhere, some with high ROE, low ROE, high price/book, low
price/book. The dispersal to the far extremes means that blow-ups are
going to happen. But there were less stocks on the extremes of valuation,
which means that capital losses were more common for low ROE stocks
and mid-return ROE stocks, but less frequently for high ROE stocks.
Page | 5 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
The Big Picture Does value investing work in Singapore?
Looking forward…
While we don’t cover most of these stocks and do not recommend
investment into them, we do highlight the following stocks as needing
more due diligence because they currently have low PB and high ROE.
While these companies are not all saints, the ones highlighted in blue seem
like they might be worth a second look.
Stocks with low PB (less than 1x) and high ROE (>20%) currently listed on SGX
Stock
PSR Rating
Ezion Holdings
Hong Fok Corp
Roxy-Pacific
Nam Cheong
Centurion Corp
Hiap Hoe
Wee Hur
Rotary Engineer
Lian Beng Group
Civmec
Buy
Hock Lian Seng
Sino Grandness
China Sunsine
Valuetronics
Penguin Int'l
Dutech
Kim Heng Offshore
Keong Hong
Nobel Design
800 Super
Buy
Ticker
EZI SP
HFC SP
ROXY SP
NCL SP
CENT SP
HIAP SP
WHUR SP
RTRY SP
LBG SP
CVL SP
HLSH SP
SFGI SP
CSSC SP
VALUE SP
PBS SP
DTECH SP
KHOM SP
KHHL SP
NBL SP
ESH SP
Mkt cap (S$ m) Normalized ROE (%) Price/book (x)
1,650
22.2
1.1
681
23.6
0.5
633
25.5
1.6
639
27.6
1.4
397
22.1
1.2
390
63.0
0.6
345
43.0
1.1
315
21.5
1.2
278
21.4
0.7
213
27.9
1.4
207
44.1
1.0
192
32.9
0.4
178
20.9
0.8
172
20.7
1.3
129
24.1
1.0
98
40.0
0.8
95
34.3
1.3
91
27.3
1.1
85
21.2
0.7
79
23.8
1.9
Source: Bloomberg
Page | 6 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
The Big Picture Does value investing work in Singapore?
Contact Information (Singapore Research Team)
Management
Chan Wai Chee
(CEO, Research - Special Opportunities)
[email protected]
Research Operations Officer
Jaelyn Chin
[email protected]
Macro | Equities
Soh Lin Sin
[email protected]
Bakhteyar
[email protected]
Osama
Market Analyst | Equities
Kenneth Koh
[email protected]
US Equities
Wong Yong Kai
Finance | Offshore Marine
Benjamin
Ong
[email protected]
Real Estate
REITs
Telecoms | Technology
Transport & Logistics
Richard Leow,
[email protected]
CFTe
Contact Information (Regional Member Companies)
MALAYSIA
Phillip Capital Management Sdn Bhd
B-3-6 Block B Level 3 Megan Avenue II,
No. 12, Jalan Yap Kwan Seng, 50450
Kuala Lumpur
Tel +603 2162 8841
Fax +603 2166 5099
Website: www.poems.com.my
Colin Tan
[email protected]
SINGAPORE
Phillip Securities Pte Ltd
Raffles City Tower
250, North Bridge Road #06-00
Singapore 179101
Tel +65 6533 6001
Fax +65 6535 6631
Website: www.poems.com.sg
Caroline Tay
[email protected]
Dehong Tan
[email protected]
[email protected]
Consumer
Shane Goh
[email protected]
HONG KONG
Phillip Securities (HK) Ltd
11/F United Centre 95 Queensway
Hong Kong
Tel +852 2277 6600
Fax +852 2868 5307
Websites: www.phillip.com.hk
JAPAN
Phillip Securities Japan, Ltd.
4-2 Nihonbashi Kabuto-cho Chuo-ku,
Tokyo 103-0026
Tel +81-3 3666 2101
Fax +81-3 3666 6090
Website: www.phillip.co.jp
INDONESIA
PT Phillip Securities Indonesia
ANZ Tower Level 23B,
Jl Jend Sudirman Kav 33A
Jakarta 10220 – Indonesia
Tel +62-21 5790 0800
Fax +62-21 5790 0809
Website: www.phillip.co.id
CHINA
Phillip Financial Advisory (Shanghai) Co Ltd
No 550 Yan An East Road,
Ocean Tower Unit 2318,
Postal code 200001
Tel +86-21 5169 9200
Fax +86-21 6351 2940
Website: www.phillip.com.cn
THAILAND
Phillip Securities (Thailand) Public Co. Ltd
15th Floor, Vorawat Building,
849 Silom Road, Silom, Bangrak,
Bangkok 10500 Thailand
Tel +66-2 6351700 / 22680999
Fax +66-2 22680921
Website www.phillip.co.th
FRANCE
King & Shaxson Capital Limited
3rd Floor, 35 Rue de la Bienfaisance 75008
Paris France
Tel +33-1 45633100
Fax +33-1 45636017
Website: www.kingandshaxson.com
UNITED KINGDOM
King & Shaxson Capital Limited
6th Floor, Candlewick House,
120 Cannon Street,
London, EC4N 6AS
Tel +44-20 7426 5950
Fax +44-20 7626 1757
Website: www.kingandshaxson.com
UNITED STATES
Phillip Futures Inc
141 W Jackson Blvd Ste 3050
The Chicago Board of Trade Building
Chicago, IL 60604 USA
Tel +1-312 356 9000
Fax +1-312 356 9005
Website: www.phillipusa.com
AUSTRALIA
Phillip Capital Limited
Level 12, 15 William Street,
Melbourne, Victoria 3000, Australia
Tel +61-03 9629 8288
Fax +61-03 9629 8882
Website: www.phillipcapital.com.au
SRI LANKA
Asha Phillip Securities Limited
No-10 Prince Alfred Tower,
Alfred House Gardens,
Colombo 03, Sri Lanka
Tel: (94) 11 2429 100
Fax: (94) 11 2429 199
Website: www.ashaphillip.net
TURKEY
PhillipCapital Menkul Degerler
Dr. Cemil Bengü Cad. Hak Is Merkezi
No. 2 Kat. 6A Caglayan
34403 Istanbul, Turkey
Tel: 0212 296 84 84
Fax: 0212 233 69 29
Website: www.phillipcapital.com.tr
DUBAI
Phillip Futures DMCC
Member of the Dubai Gold and
Commodities Exchange (DGCX)
Unit No 601, Plot No 58, White Crown Bldg,
Sheikh Zayed Road, P.O.Box 212291
Dubai-UAE
Tel: +971-4-3325052 / Fax: + 971-4-3328895
Website: www.phillipcapital.in
INDIA
PhillipCapital (India) Private Limited
No.1, 18th Floor
Urmi Estate
95, Ganpatrao Kadam Marg
Lower Parel West, Mumbai 400-013
Maharashtra, India
Tel: +91-22-2300 2999 / Fax: +91-22-2300 2969
Website: www.phillipcapital.in
Page | 7 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
The Big Picture Does value investing work in Singapore?
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence
under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations
may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in
whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained
from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or
warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information
or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information
or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any
time without prior notice.
Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively
or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been
made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is
suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks
and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are
understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with
respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned
in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees
or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide,
including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or
securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its
officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the
securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or
persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the
issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned
in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees
or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures
or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in
respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in
exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect
on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited
to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above
or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report.
Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but
not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities
Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons
involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its
publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors,
employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the
contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country
where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research
to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of
any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek
advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking
into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such
products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip
Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSES
Where the report contains research analyses or reports from a foreign research house, please note:
(i)
recipients of the analyses or reports are to contact Phillip Securities Research (and not the relevant foreign research house) in Singapore at 250 North
Bridge Road, #06-00 Raffles City Tower, Singapore 179101, telephone number +65 6533 6001, in respect of any matters arising from, or in connection
with, the analyses or reports; and
(ii)
to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor,
expert investor or institutional investor, Phillip Securities Research accepts legal responsibility for the contents of the analyses or reports.
Page | 8 | PHILLIP SECURITIES RESEARCH (SINGAPORE)