Hyflux Revisited


Today’s Gary Scott message looks at Jyske Bank’s strategic review of China. If you have not read this message take a look because it suggests that
investors may be more worried about China than they should be. Chinese growth has slowed, but is still strong compared to economics in most countries. Plus China is the most populated nation on earth racing into middle class capitalism.

The Shanghai stock market is down 67% in less than a year. Yet foreign trade, retail trade and fixed investments in China are beating expectations.

This is the type of multi currency distortion that value investors look for.

China, according to the analysis of Michael Keppler, remains a low value market but let’s review the specifics of Hyflux Water, a Singapore listed company that generates more than half its sales in China.

Hyflux provides water services in China. Keppler ranks Singapore as a low value major market as well, but Hyflux shares may offer good value now.

We are looking at Hyflux even though Singapore and China are still poor value markets because this company is engaged in solving big problems (purifying water) in two big areas (China and the Middle East).

I first wrote about Hyflux in 2004.

We invested $51,000 of our Model Green Portfolio in Hyflux in November 2007. This investment has dropped to $40,193.

Has this drop in share price created value? Let’s use our seven step value selection process to review Hyflux shares as a case study.

We’ll blend this value process with market timing in this lesson…not to decide when to buy or sell shares in a market or to buy and sell specific shares. We’ll use market timing to decide when and where to focus our search for value.

This lesson focuses on an investment in water more than an investment in China or any particular stock market. Water shortages are almost a universal problem so water businesses offer opportunity almost everywhere.

This is a huge problem.

Problems create opportunity.

Here we study Hyflux…not to decide whether to invest or not, but to study the process of choosing investments in shares.

If after this review, Hyflux is interesting to you, then discuss this with your banker or stockbroker.

The good value filter we use, asks seven questions about any share we are considering. So we begin:

#1: Is Hyflux a well managed company?

I have liked the management team for years. The group is headed by Olivia Lum who has proven to be an astute leader. Hyflux Limited SGX: 600 began in 1989 as Hydrochem (S) Private Limited, a trading company selling water treatment systems in Singapore, Malaysia and Indonesia and later, China. Lum has been progressive. She added a team of scientists and engineers that created technology for Singapore’s water recycling plants that filter and treat waste water.

These technologies are based on semipermeable membranes and reverse osmosis that is capable of extracting potable water from residual, sewage and salt waters.

Hyflux was the first water treatment system company to be listed on Singapore’s equivalent of NADAQ in 2001 and the first to be upgraded to Singapore’s main exchange in 2003, again making history.

The group has been expanding geographically first to China, then lucrative Middle Eastern markets and is now entering India, Southeast Asia and Africa.

#2: Is the company in a growth industry?

There are few sectors with as much potential as water. China, the Middle east and India offer special opportunity.

#3: Are the shares available at a good value?

The shares are certainly a better value than a few months ago. Here is the share price over the last year.

hyflux graph

Shares are selling in the S$2.80 range way down from the 52 week high of S$3.72 but up from the 52 week Low of S$2.30, but about where they were a year ago. Price earnings are still high at 26.17 but the growth prospects that have been reported enhance the potential value.

Earlier in 2008, a Credit Suisse report said:

China continues to be the key driver – contributing over 70 per cent of total revenue, and noting that about two-thirds of China’s 660 cities are experiencing severe water shortages.

To combat this, China has set aside a total investment of one trillion yuan for waste water, south-north water transportation and water’, and companies like Hyflux should benefit from this.

The firm recently secured three municipal water treatment plant projects in China totalling some 207 million yuan (S$40.8 million) in value, the largest of which is a potable water plant in Taoyuan City in Hunan province.

Credit Suisse also sees synergies between Hyflux and its water business trust.

The report adds: ‘With improved financial flexibility from the initial and subsequent injection of plants into the trust, we expect Hyflux to continue its projects’ securitisation in China through acquisitions of existing plants, larger-sized projects, water recycling and desalination projects. For the third quarter ended Sept 30, 2007, Hyflux more than doubled its net profit to $4.2 million, while sales rose 76 per cent to $51.9 million

#4: Are the shares traded in a good value equity market?

No. Keppler Asset management ransk Singapore as a bad value market.

#5: Does the company have rising earnings?

Yes. In August 2008 the company reported Key Highlights:

• Record quarterly revenue of S$108.1 million, an increase of 139%
compared to 2Q2007

• Profit After Tax is 290% higher at S$23.9 million compared to
2Q2007

• Earnings per share is 306% higher at 4.30 cents compared to 2Q2007

• Strong growth in municipal sectors in China and MENA

#6: Has the company captured the attention of the market (ie price is already on the rise)?

This looks likely. An August 2008 Reuters report said:

Singapore Hot Stocks-Hyflux up on water trust’s strong earnings

Water treatment firm Hyflux (HYFL.SI: Quote, Profile, Research) rose as much as 5 percent after Hyflux Water Trust Management (HYWT.SI: Quote, Profile, Research) (HWT) posted better-than-expected results for the second quarter due to lower expenses.

Hyflux surged to a high of S$2.54 with over one million shares changing hands.

Shares of HWT, which owns water treatment plants and is about 32 percent held by Hyflux, jumped 3.9 percent to S$0.66.

HWT posted a net profit of S$2.2 million in the April-June period, and wil

#7: Is the currency denomination of the share strong?

The Singapore dollar remains a strong currency. Over the past 20 years the Singapore dollar has steadily and gradually strengthened versus the greenback from about S$2 per dollar to S$1.50 per dollar.  The chart below shows a recent strengthening of the Singapore dollar.

The Singapore government suggests that it will encourage this trend. In August 2008 Singapore’s Trade and Industry Minister Lim Hng Kiang said that “Singapore’s current policy to allow for a stronger Singapore dollar remains appropriate as a way to keep inflation low and allow for sustained economic growth.

He stated that the Monetary Authority of Singapore tries to keep a balance between growth and inflation in crafting its monetary policy.

The de facto central bank has allowed for a stronger appreciation of the local currency since October last year.

“We recognize the strengthening Singapore dollar could have some restraining effect on exports in the short term. There is therefore a limit to how strongly the Singapore dollar can appreciate to offset the effects of global inflation passing through to the Singapore economy.

Fundamentally, Singapore is a strong well managed country with great fiscal restraint.

Here is a comparison of fiscal indicators between Singapore, the US and the Euro Block.

Singapore US Euro Block

Trade Balance Last 12 Mos. + 33 Billion -710 -315 Billion

Trade Balance as % of GDP + 19.8 – 4.8 -0.3

Budget as % of GDP + 1 -4.8 – 2.4

Inflation + 6% +4.2% +3.6%

Each of these indicators reinforces the idea that the Singapore dollar will add strength versus both the dollar and euro. Higher inflation is a downwards indicator of currency strength when the inflation is created by excessive government spending. In this case Singapore’s inflation is created by export success and the natural solution to this inflation is to strengthen the currency.

singapore dollar chart

The overall view of Hyflux is that of a well managed company with shares denominated in a strong currency, that offers a service in a very strong sector dealing mainly in a strongly growing area.

The shares have been volatile as we can see above and this made add to the value. If the Singapore market dips and becomes a good value market this will look quite strong assuming the other factors remains positive.

This lesson ends with a reminder that each lesson is meant to help you learn how to examine your particular wants, needs, desires so you can fit your investments to your needs.

You should review the risk, rewards of any investment we study. Look at whether they fit your circumstances and review this with your investment adviser.

Until next lesson, may all your investments be good!

Do you have question? Please email them to gary@garyascott.com

Add BL in the subject line. We will share them when we can in lessons here.

Gary

Join me and Thomas Fischer from Jyske Global Asset Management in North Carolina to learn more about economic trends.

International Investing and Business Made EZ North Carolina

We’ll have lunch at the farm and enjoy the leaf change.

farm colors

Thomas Fisher speaking to our delegates at the farm.

seminar-roses

orange-roses

multi-currency-meeting

Delegates enjoying a private conversation with Thomas Fischer during a coffee break at the farm.

This is the most beautiful time of the year on the Blue Ridge.

multi-currency-meeting-in-autumn


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