THREE STOCKS were among a bunch that stood out at Sebastian Chong’s investment seminar for the amount of discussion that he devoted and the level of interest shown by the audience, as gauged by the questions raised.
The three are Jardine Cycle & Carriage, Sinotel Technologies, and Guthrie Holdings.
We have an article on them here in the first of two reports on the 2.5 hour seminar held on Saturday (Aug 15) at HDB Hub.
To attend, about 100 people paid either $30 (existing subscribers of Sebastian's www.shareowl.com) or $50 (non-subscribers).
* Jardine C&C ($23.96):
“This is a fantastic stock. It looks like a must-have in every portfolio,” said Sebastian.
His argument is that up to 90% of its earnings are derived from its 50.1% stake in PT Astra International, a Jakarta-listed mega group.
Indonesia has 240 m people, and there is amazing scope for the growth of car ownership, industrialisation and financial services.
The Astra group comprising 130 companies has six core businesses: automotive, financial services, agribusiness, heavy equipment and mining, information technology and infrastructure. The specific gems include:
* distribution of Toyota and other makes of 4-wheel motor vehicles, and Honda motor cycles;
* distribution of Komatsu tractors and other heavy equipment;
* palm oil from Indonesia’s largest listed oil palm plantation company, PT Astra Agro Lestari, which is enjoying rising crude palm oil prices in recent months;
* mining contracting;
* a 44.5% stake in Bank Permata (with Standard Chartered Bank owning another 44.5%). Bank Permata will gradually increase its contribution to the bottom line profit of PT Astra group, as Indonesia expands its middle class and SMEs.
Later, a member of the audience asked: "How do you decide what stocks to buy?"
Sebastian: "It’s the potential for earnings growth and that depends on having the right businessses and geographic markets and most importantly the quality of the management. It was by great design and execution that the Jardine management has succeeded in transforming the former Cycle & Carriage into more than a proxy for the Indonesian economy.
"If you hold Jardine C&C for 10 years, it could be worth $150 easily. Like Tan Chong Motors, if you have held it from its early years, you would have a multi-bagger."
* Sinotel Technologies (38 cents)
“This is a stock that half the market is chasing and the other half is avoiding. You may have made lots of money from it in the last few months and I hope you will make more in the months to come,” said Sebastian.
He had bought the stock at 15-16 cents in March and then taken profit at 24 cents. Subsequently, he attended a SIAS investment conference in July, where Sinotel’s investor relations spokesman Ben Ng made a presentation on the company. There, Sebastian also met one of the executive directors. Sebastian said he was struck by how young the management team is – the founding chairman is 36 as is the CEO.
“They looked dynamic to me. I bought back the shares at 28 cents, fortunately. Yesterday, the stock jumped 5 cents to 38 cents after an announcement that a US boutique fund had become a substantial shareholder of Sinotel.”
At this point, a series of questions popped up from the audience:
Q: “Why did you sell at 24 cents?”
Sebastian: “There was this perception that S-chips could not be trusted. At the SIAS conference, I met some members of the management and they seemed decent. Of course, you can’t judge a book by its cover but it’s better to have met them than not at all. I bought back twice as many Sinotel shares as I had sold. When I bought it at 28 cents, the PE was about 3X. Now, it would be about 4X – still very low.”
Q: What’s their growth potential?
Sebastian: For the second quarter, they were not impressive as the profit went up about 15%. They recognize their profit at the end of projects. China switched to 3G only at the beginning of this year, and the contract awards were given out from Q1 and Q2.
Some of the execution was in Q2 – that's work in progress, so the profit is not recognized in Q2 but will be in Q3 onwards. The full year 09 could be a fantastic result for Sinotel - and of course next year too because there are so many cities and provinces to cover.
Few analysts cover Sinotel and few institutions want to buy Sinotel because the company’s receivables take about six to nine months to be paid. But it’s a common practice – even Dell takes up to five months to pay its component suppliers. But they will get paid.
Q: At 4X PE, is Sinotel really cheap?
Sebastian: It’s cheap, especially now with the American fund going in, it’s some consolation. Although it’s no guarantee they understand Sinotel's industry and the China market exceptionally well.
Q Could it remain at 4X all the way for a long time?
Sebastian: It depends on the market cap. Now, Sinotel’s is more than $100 million, which is still small as many funds only look at stocks with market caps above $300 million. Also, now with the market becoming much more aware of Sinotel, the PE may go up.
Yongnam is an example. Now its market cap is coming to $400 million, and Credit Suisse has finally looked at Yongnam and made a ‘buy’ call recently. This is where we retail investors can have a headstart as the funds have constraints - their head offices in Europe, etc, tell them not to look at companies with market caps below a certain level. So, I am really happy I bought back Sinotel fully aware of the risks and rewards.
Q Could Sinotel be a value trap?
Sebastian: Unlikely, because of the 3G, 3.5G, 4G revolution – you cannot stop it. We are just seeing the tip of the iceberg. The good news is 5 years ago, there were 400-500 players getting small jobs for 2G. Now, there are only 50 players like Sinotel – it’s really much better for their profit margin, which is about 30% net. By the way, I have only 2 S-chips – Yanlord and Sinotel.
* Guthrie Holdings (37.5 cents)
Turning to property stocks, Sebastian highlighted Guthrie as a ‘very safe” investment.
Guthrie owns 50% of the old wing of Jurong Point, 25% of the new wing which is as big as the old wing, and 21% of Tampines One.
“You can see the human traffic in both Jurong Point and Tampines One – it’s amazing, especially in the evenings and weekends.”
Sebastian: “Both developments are 100% tenanted and I am sure when the leases are up for renewal, they can only go up.”
Guthrie will enjoy a major profit recognition from the sale of 6 blocks of the Centris condo, which it had sold completely by May 2007, at the peak of the market, and which it completed constructing this year.
“Guthrie in 2009 will have a very good profit figure. That is why they gave 2 cents in dividend a few months ago. Maybe for the full year, they will pay 3 cents because the new wing was opened in Dec 08, so 09 will see the full year of rental income from the new wing. Tampines One will contribute its maiden revenue as it was opened in April this year,” said Sebastian.
Sebastian said an attraction of this business is the rents are collected at the beginning of the month, or at the start of three months – it’s not like manufacturing companies that often collect receivables months later.
The NTA of Guthrie as at end-March this year was 56 cents, which is much higher than the level the stock is trading at.
While cash based profit increases will be good this year and next year for Guthrie, they may be gradual from 2011 in the absence of new major projects, said Sebastian.
Our second report will appear on Sunday, featuring Sebastian Chong’s comments on a number of other hot stocks.