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John Besant-Jones

John Besant-Jones
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  • Where To Find Value In Emerging Asia [View article]
    There are a few issues here that still need to be considered:

    1) It is likely that an increase in the value of China's stockmarkets may be met with a wave of share issues as banks and property companies in particular seek to raise new capital to strengthen their balance sheets. Thus share price recoveries may be diluted. This has been a historic problem.

    2) Book value is not a good relative measure of share price value. It is not clear what the underlying price to book value may be if there were substantial bank loan write downs or property write downs, or what proportion of book value consists of a high content of account receivables, etc. A better measure of value would be price to cash flow multiples-the cash generative ability of the company. In addition to the fact that a low price to cash flow multiple indicates that companies' shares may be cheap, it also suggests that companies may be generating enough cash to grow or sustain their business without raising new capital and thus diluting share price recoveries

    3) There is no mention of where the new money will come in to the stockmarket to fuel this recovery-a simple flow of funds argument. Shares may look cheap, but there needs to be buyers who are convinced that this is now a better investment asset classes than the alternatives. Since foreign investors are not allowed to invest in the China "A" shares (except for a limited few), then the flow of funds has to directly or indirectly originate from the Chinese consumer. In other words the Chinese consumer must be convinced that it is no longer better to hold cash, keep their money in property or invest in gold. It is possible that such a change of attitude may occur, but this needs to be mentioned and explained why. A very substantial proportion of the Chinese stockmarket performance is driven by the Chinese consumer.
    Feb 7 03:58 PM | 2 Likes Like |Link to Comment
  • China Medical Technologies: Does Missed Coupon Mean Company Will Go Dark? [View article]
    Even if there is a credible explanation for the default in the convertible bond payment, there is still a serious failure of communication by the company.

    On the subject of substantial accounts receivables, it could be possible that the company’s business contains a greater proportion of products sold direct to hospitals, instead of indirectly through a distributor. Local authority establishments in China are known for taking longer to pay bills compared to private entities. Nevertheless, it is fair to say that unusually high levels of accounts receivables can also be an indicator of cooked books, and the case of Yinguanxia, China’s most famous fraud, is testament to that.

    It is also worth mentioning that the company has recorded 2,943,624RMB of unpatented technology assets on its balance sheet, which equates to some 60% of its total assets. This is a very large amount. Moreover, this “unpatented technology” has been assigned a weighted average amortization period (equivalent to depreciation period) of 20 years. This seems like a very long life for unpatented technology, especially in China, and again an explanation is needed. Such a large proportion of intangibles may explain why the company needed to issue unsecured convertible bonds to raise finance, since it would have been difficult to obtain cheaper bank lending secured against these assets.
    Feb 2 03:07 PM | 1 Like Like |Link to Comment
  • Don't Fall For This China Head Fake [View article]
    Indices such as the Skyscraper Index have historically been reasonably reliable measures of cyclical swings in Western economies. Another example would be the number of construction cranes one can see from your office window. The general thinking is that such indices are "lag" indicators of economic prosperity, and there are various reasons for this.

    However this theory may not hold so strongly when applied to the Chinese economy, since there is still a strong current of structural growth under-pinning apparent cyclical swings in certain sub-sectors. Moreover, it has been the stated intention of the PRC to slow down the rate of the speculative property boom, which is precisely why bank lending for Chinese property development has been restricted. The intention is to divert cash lending to other industries, for example, manufacturing, and infrastructure developments such as roads and bridges inland, instead of shopping malls and commercial office blocks in large coastal cities. Effectively short term sub-sector cyclical growth is being sacrificed for longer term structural growth in the general economy.

    Hence applying a Western model of economic analysis to China may not lead to the same correct conclusion. Up until last year, a similar mistake was made when economists managed to totally mess up their forecasts of inflation in the Chinese economy by completely ignoring the effects of non-bank lending in the grey market. They applied a Western economic model without any consideration for some of the unique characteristics of the Chinese economy.

    Nevertheless the fall in the Shanghai Index does represent some concern about the wider effects of a fall out in the Chinese property market, which is fed by bank lending, and that eventually could indirectly affect the wider economy. Property and banks form a major part of the Shanghai Index. In this respect the market sees potential risk and is waiting to see if the government can effectively manage down the property boom, and rebalance growth to other areas of the economy. So a better assessment of the Shanghai Index would be to say that the market is retrenching whilst waiting to see what happens next-it is too early to say much else. Moreover, there are other concerns affecting the Shanghai Index, such as the impact of a slowdown in export growth, although again it is a debatable issue on how significant this impact would actually be.
    Jan 27 12:23 PM | 2 Likes Like |Link to Comment
  • Ctrip.com: Is This Risky Stock Worth It? [View article]
    1) You quoted " the company fell into a tailspin in the fall of 2011".

    However in the recent Q3 2011 results it was reported:

    "• Net revenues were RMB975 million (US$153 million) for the third quarter of 2011, up 20% year-on-year.

    • Gross margin was 77% for the third quarter of 2011, compared to 78% in the same period in 2010.

    • Income from operations was RMB304 million (US$48 million) for the third quarter of 2011, down 1% year-on-year. Excluding share-based compensation charges (non-GAAP), income from operations was RMB395 million (US$62 million), up 7% year-on-year."

    This does not seem like a "tailspin" to me. Perhaps a slow down in the rate of growth, but not a "tailspin". If you are refering to the share price, then perhaps you should have instead mentioned that in the next paragraph, which directly relates to share price movements, and not the paragraph that relates to your operational concerns of the company.

    2) You also quoted "The final piece of the puzzle is the Chinese economy and the effect that it will have on Ctrip.com as customers continue to slash their budgets and give up their plans for international travel in favor of less expensive domestic options."

    In fact a slowdown in the Chinese economy to 6-8% is not the same as a recesssion; it is still very healthy, strong economic growth-and a lot better than many other places in the world. An easing of Chinese bank lending restrictions may even boost consumer demand in certain sectors. Moreover, If as you say there will be more domestic trips replacing international trips, then Ctrip will also benefit since they are involved with the domestic tourism market. You would then need to compare the profit margins and growth of domestic trips versus the same for international trips.

    3) In fairness, profit margins do appear to be unsustainably high for the longer term, and competitors may well erode profits and reduce growth for Ctrip. However there is no analysis in this article that compares Ctrip's cost per customer via acquiring companies or advertising, versus the cost per customer acquired via advertising for new entrants. Simply stating the overall money spent on acquiring customers is not a like for like comparison. Moreover, there is also no analysis about what margin erosion is already factored in to the consensus future profit forecasts, and how much of this margin erosion is already reflected in the drastic fall in the valuation of Ctrip that you mentioned.

    So I get where you are coming from on this, but I think more detail is required to make a investment conclusion.
    Jan 24 09:00 AM | Likes Like |Link to Comment
  • The Swiss Franc Is The Most Overvalued Currency In The World [View article]
    Clearly, the expensive Swiss Cheese used in the Big Macs for Switzerland has led to premium priced burgers, resulting in the currency over-valuation according to this Economist Big Mac Index he he!

    Lucky for the Swiss that there is not a Chocolate Index as well otherwise their currency may start to melt.....
    Jan 16 12:56 PM | 1 Like Like |Link to Comment
  • The Swiss Franc Is The Most Overvalued Currency In The World [View article]
    For Hong Kong, it's because the value of the Hong Kong Dollar is pegged against the value of the US Dollar, hence fair value currency appreciation/depreciation from free market forces is not possible.
    Jan 16 12:42 PM | 1 Like Like |Link to Comment
  • Long-Term Perspective On Crude Oil And Natural Gas Markets [View article]
    Jeremy,

    If a firm is not generating returns in excess of its Weighted Average Cost of Capital (WACC), then it is not "adding" value to shareholders that are in excess of their cost of capital. Even the Fama document you refer to says:

    Page 1940, second page of the article:

    " To judge whether nonfinancial corporate investments on average generate value in excess of cost, we calculate another internal rate of return, on the cost of corporate invesments. If this IRR on cost exceeds the IRR on value, we infer that corporate investment on average adds value."

    Page 1966, last page of the document:

    "We also estimate the internal rates of returns delivered by the nonfinancial corporate sector on the cost of its investments. These estimates of the return on costs always exceed our estimates of the cost of capital. Thus, on average, corporate investment seems to be profitable."

    Hence when a firm's internal rates of return exceed the cost of capital, the business is considered to be profitable and adding value; this also means that when the the internal rates of return only meet or are below the cost of capital, then the business does not add value to shareholders relative to their costs of investments, which is measured by their cost of capital.

    From this, if an E&P company does not exceed its required rate of return, then it is not adding value to shareholders relative to their costs of investment.

    I think your point is about "creating" value-which is not in dispute, whereas my point is about "adding" value-which is about generating returns in excess of the cost of capital.
    Jan 5 10:15 PM | Likes Like |Link to Comment
  • Long-Term Perspective On Crude Oil And Natural Gas Markets [View article]
    Southern Man,

    It is well known and generally accepted that larger E&P portfolios on average generate higher returns than smaller E&P portfolios. This is one (but not the only) reason why large integrated oil companies on average trade on higher valuation multiples than smaller, independent E&P oil companies. There are always exceptions, but on average this has been the case for many years.

    The reason for this difference in returns is that larger E&P operations (ie global integrated oil companies) have better access to the larger, more profitable hydrocarbon reserves, better technology and expertise, and better financing terms.

    Moreover, if the new oil discoveries of the world are the mainly expensive and technologically challenging deepwater or high capital costs oil sands, then in the long term this will favour larger E&P operations. An exception to this is if you expect the oil price to be considerably higher in the future than today's level, since smaller E&P companies tend to be more highly leveraged to the oil price.
    Jan 5 10:15 PM | 2 Likes Like |Link to Comment
  • Long-Term Perspective On Crude Oil And Natural Gas Markets [View article]
    A good general article on the long term macro outlook. Its also worth mentioning: 1) The regional differences in oil demand that have helped keep up the oil price (ie strong demand growth from China). 2) Limitations amongst OPEC members that have prevented them from over-supplying the market. 3) The continued risk premium from potential supply disruptions (this is not short term since there always seem to be supply disruption threats). 4) A major contributor to rising production costs is not just more inaccessible reserves, but also because of higher production taxes from local governments-these may adjust downwards if oil prices fall substantially.

    I will also make the following points about actually investing in the sector:

    A) If, as you say, that the actual returns on capital for E&P companies are equal to their required rate of return, then these E&P companies are not adding value.

    B) The general industry required benchmark return for E&P company financial analysis is about 12% nominal. Compared to the historic 6.5% real rate of return that you mention, this means that even after adjusting for inflation, some E&P companies may on average be destroying value. The companies most likely earning an excess to the required rates of return in the E&P business will be the large global integrated oils, however these suffer offsetting low returns in their downstream refining, marketing and chemicals subsidiaries.

    C) For the purposes of shareholder investment, most of the new oil projects that are invested in by non-state owned oil companies are in the highest part of the CERA production cost curve, close to the current oil price. Moreover, many of these are deepwater projects which carry much higher project risk rates of returns (ie up to 20%). In addition to these factors, there are also exploration write offs to consider, which are huge for some companies and often not included in headline production cost curves.

    D) Many E&P companies are fighting declining production in their rapidly maturing existing fields (which are frequently the bulk of their portfolio). This is favorable for the general oil price since it provides a headwind against global oil production growth from new developments. However this also means that for many E&P companies, production growth is limited and production costs may rise, despite new technology, leading to margin erosion if there was a static oil price environment.

    E) Natural gas supply will certainly grow, but given the growing glut in reserves, it is unclear how much money can be made even if there is strong volume growth.

    F) Refining, Marketing and Chemicals has been, and probably always will be, very low returning businesses.

    With all these points in mind, probably the best place to play the oil sector will be through Oil Field Service companies.
    Jan 5 11:45 AM | 5 Likes Like |Link to Comment
  • 5 Cheap Chinese Companies That Could Go Private In 2012 [View article]
    I have done a lot of work on US listed Chinese companies. Whilst I will not make any specific comment about the companies mentioned in this article, I will make some general points:

    1) If you are going to use valuation benchmarks for potential buy out prospects, then you should use forward underlying Price to Cash Flow multiples (P/CF), or EBITDA multiples, and not trailing P/E ratios. This is particularly important for companies where there is a high level of apparent growth-the forward data is more useful, albeit an estimate. Underlying cash based valuations remove a number of accounting distortions and present a more comparable data set when considering cash financing costs. Hence they are the more common measures used in corporate finance transactions. There are other measures that are used (ie Enterprise value, Market to Book Value, etc etc).

    2) The seductive story that is growing in popularity is to compare valuation multiples of US listed Chinese companies to similar companies listed on the Hong Kong Stock Exchange (HKEx), with a view to de-listing from the US and re-listing in Hong Kong at a higher valuation. However the listing requirements for the main board of the HKEx are much tougher, hence there is a risk that capital providers who help to buy out a US listed Chinese company may be left holding the baby for a very substantial period of time if they cannot re-list it in Hong Kong, or if the HKEx require an extensive, time consuming due diligence process. Re-listing in Singapore is not likely to achieve a substantially higher valuation.

    3) Re-listing in mainland China would also be a very time consuming process, because there is already a backlog of other IPOs waiting to be processed. The Shanghai International Board proposition has been around for a long time and is not some thing that one should hold their breath for. Moreover, the Shanghai International Board will most likely only admit the largest global foreign blue chip companies, and not small to medium sized Chinese companies that are considered to be FIEs.

    4) A number of Chinese companies listed in the US not just because it enabled them to raise capital, but also because a US stock exchange listing carries a substantial amount of prestige. To de-list from the US would mean losing this prestige.

    5) There are a huge number of other very important considerations that need to be made when speculating about which companies may be taken private. For example, elements on the balance sheet, third party risks, corporate structure , customers and vendors, ability to finance, etc etc.

    To be clear, I do believe that there will be an increasing trend of some US listed Chinese companies being taken private, however from the investors' point of view there are vital distinctions that need to be made to choose the most likely candidates. From the point of view of the PE funds and banks wishing to finance such transactions, there are critical levels of due diligence that need to be done that extend far beyond doing field work to verify the legitimacy of the respective company's' businesses.

    At the time of writing, I have no long or short positions in any US Chinese related stocks. I am very interested to get in contact with people who have a PROFESSIONAL interest in this subject-please write to me.
    Jan 2 01:55 PM | 2 Likes Like |Link to Comment
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