Tuesday, 15 May 2018

Education Series - Financial Statement: A Layman Overview

I will be having a talk on market outlook and investment insights, on 25 May (Fri), 730pm. I will also share stocks in my watch list, and how to structure a resilient stock portfolio. Register your attendance here

95% of investors, or my clients, shun financial statements like some kind of poison.

The truth is successful investment cant run away from Financial Statements. As Warren Buffet puts it, accounting is the language of business, presented in the form of Financial Statements. They are important documents that communicate to us investors, how well the business is doing.
But reading financial statements need not be such a painful experience. We do not need to know how statements are prepared, just like we don't have to know how a car engine works in order to drive one. With a little effort and some common sense, we can understand the gist of it, and interpret key numbers that illustrate the health of a business. 

In this article I would try to give an overview, a primer, on the Financial Statements, using plain simple English for a layman's understanding. 

Income Statement 
Think of it as a student's quarterly report card after term exam. This is the first statement an investor should look at.

This is also known as Profit and Loss Statement (P&L).

Companies sell products or services, bring in revenue (topline). In the process, it incurs expenses: raw material, machines, hardware, factory rental, marketing costs, workers salary etc. Taking away all these, gets you the earnings (bottom line). 

For those companies which require much raw materials in for goods production, the raw material cost would usually be grouped under Cost of Goods Sold. These are the expenses most directly related to production.

Other cost components that are not directly linked to production, but equally important in the company's operation, are termed as operation cost. Examples are marketing, advertising, rental, manpower.  

Sometimes a company can be huge, with many subsidiary and associates. The profit or loss of these subsidiaries are also consolidated under Income Statement. 

Balance Sheet
Think of it as a report documenting all the items in your home after a huge spring-cleaning. These items can be self-owned, or borrowed from friends.

Now apply this idea to a company. Similarly, Balance Sheet represents what the company owns and owes.

The gist of Balance Sheet is that Assets equal Equity plus Liability which is Accounting 101. It would be helpful if we think about these from the perspective of company.

As a company, you would have two sources/forms of funding to purchase all the required materials and equipment to start operation. You can either get loans from bank, or seek funding from shareholders which include individuals or other entities.

All the items bought using bank loans are liability, because technically the company does not own them. The bank does.

All items bought using shareholders' money are equity, owned by shareholders.

Putting both together, all things are assets that the company can make use of to get its business running. Thats the reason Assets always equal to Equity plus Liability - either purchased using bank loan or shareholders' money. 

Cashflow Statement
Most layman have big big question mark when it comes to Cashflow Statement. Why do we have P&L yet cashflow statement exist?  

One main reason is timing of payment or debt collection. As most of a company's business is done on credit terms, meaning customers do not pay immediately upon receiving an invoice, but instead make payment 1 mth or 3 mths later. Hence there is a time lag between recognising the revenue at point of invoicing, and receiving the payment (cash inflow) 3 mths later.

There are many other reasons but they are not within the scope of this article. And I would not want to bore readers with accounting terms. 

So the cashflow statement aims to provide a more accurate picture to the health of a company, from the cashflow perspective. After all, cash is king. 

What we should pay attention to in the Cashflow Statement is the Net Cashflow from Operations, ie actual amount of cash that company brings in through its day-to-day operating activities.

There are other parts such as Net Cashflow from Investing and Financing. Lets leave them for future pieces when we delve deep into each statements. 

There you go. a very brief but layman description of the three Financial Statements.

Saturday, 12 May 2018

Market Outlook and Investment Insights Sharing

Were you taken aback by the recent market swing as opposed to the smooth-sailing market we had in 2017?

Were you unsure of how to react when your portfolio share price falls sharply?

Would you like to gain valuable knowledge about current market situation to better position yourself for next movement?

If your answer to the above is yes, then this seminar is for you.

In this session, I will cover

  • Global Market Insights
  • Singapore Market Insights
  • Selected Singapore Stocks Fundamental Analysis
  • How to Structure a Resilient Portfolio
In addition, I will also share my investment watchlist, and how to derive a stock's fair valuation using a simple calculator

Do register your attendance at the following link:

Register now!

Wednesday, 2 May 2018

5 Points I Learned from HRnetGroup AGM

HRnetGroup is the largest human resource recruitment agency in Asia (excluding Japan), with operations across 10 key cities such as Hong Kong, Beijing, Shanghai, Seoul, Taipei etc. It is also the largest player in Singapore according to Frost & Sullivan analysis in 2017. Its revenue and net profit derived from Singapore for FY17 is $298m and $37m respectively, while the second largest player Adecco, had revenue of $144m and net profit of $5.7m.

As a newly listed company that just IPO-ed last June, it recently held its first ever AGM just last week. As a shareholder intrigued by its business model and growth prospect, I attended its AGM at SGX auditorium to find out more.

Here are five key points that I learned from HRnetGroup FY17 AGM.

2017 Drop in NPAT Due to One Off Events
HRnetGroup has been growing its Net Profit After Tax (NPAT) at a Compounded Annual Growth Rate (CAGR) of 18.4% during the period of 2006 to 2016. In fact, management has got used to such a growth rate, and were surprised to see NPAT dropped 4.1% in 2017.

Management clarified that the negative growth of 2017 NPAT is due to one-off events that would not happen this year: a one-time IPO expense, fall of government subsidy, and China clients holding off recruitment activity before China's legislative national congress. Excluding the effect of these events, NPAT would have grown 15.4%.

Management is confident that the group would attain similar growth this year.

Indonesia Operations Would Commence Soon
HRnetGroup announced acquisition of PT Rimbun job agency in Jakarta earlier, which is a key market with big recruitment demand bolstered by strong economic growth.  During the meeting, management shared that the Indonesia operations would start very soon and it is expected to contribute to the company's top and bottom line.

It Covers Full Spectrum of Recruitment
HRnetGroup’s operations cover both the professional recruitment and flexible staffing that are complementary. During economic growth, it can ride on increase professional hiring that has a higher profit margin. During a downturn, recruitment activities may shift to contract-based flexible staffing that has a more stable demand. It gives rise to a business that is more resilient and less susceptible to economic seasonality. 

Management further shared that they typically earns 30% of a candidate's first year salary for professional recruitment. As for flexible staffing, margin is around 8%.

The Group is Heavy on Employees' Company Ownership
Prior to listing, HRnetGroup encourage employee ownership in company growth by encouraging them to develop the 'subsidiaries' in different cities using their own capital. This in large part contributed to strong interest alignment between staff and company, bringing about profitability in all 10 cities that the group operated in. 

Upon IPO, 22 of these co-owners saw 20% of their stake in the subsidiaries converted and elevated to common shares of the group as a listed entities. 80% of the remaining stakes continue to reside with the subsidiaries. 

Shareholders are Concerned about Employee Share Option Resulting in Share Dilution
The group is implementing the new 123GROW Plan, an employee share award scheme to spur higher staff performance. It is reserved for productive headcount, defined as staff that brings in gross profit in excess of three times of their payroll cost. And the staff has to be a productive headcount for 3 years, before company shares are given. To achieve this, management is exploring various methods including share buy back, issuing rights and convertible securities. 

Some shareholders are concerned about equity stake dilution from rights issue or convertible securities, even when management explained this has shown to be effective in encouraging larger employee sales and retaining good employees - the long term benefit for company development. 

Correspondingly, this resolution had a significant portion of shareholders voting against - 33.77%. Nevertheless, the resolution was still passed eventually. 

Lastly, there were plenty of employees present at the AGM as co-owners. Majority of them look young, vibrant and exude strong professionalism, very much the corporate-consultant look. Much of the shareholders were relatively young too, which I am guessing around the age of late 30s to early 50s. This is certainly a refreshing and unique AGM experience different from the blue chip companies with many more senior shareholders.

Education Series - Financial Statement: A Layman Overview

I will be having a talk on market outlook and investment insights, on 25 May (Fri), 730pm. I will also share stocks in my watch list, and h...