Disappointment, Denial, and Acceptance (an Update on SGI)

SGI released their 1Q report on 2013 and the figures are disappointing. Revenues decline by 37%, selling and distribution costs increased by 34%, and inventories soared by 144% all because of the disappointing sales of myPhone.

I did my usual due diligence, being aware with what is happening around, talking with friends, looking at myPhone booths pretending to be an interested buyer and all points to the myPhone brand on a decline. They were attracted to myPhone’s nearest competitor, Cherry mobile, specifically, Cherry mobile Flare.

I noticed it but was on denial. I guess that is what they say: “Never marry a stock.” Lesson learned.

And so I accept my mistake and lightened on my position on SGI.

There will be an upcoming annual stockholder’s meeting for SGI on June 27 to be held at the Fairways Dinning Room, Manila Golf & Country Club, Harvard Road, Forbes Park, Makati City, 3 PM. I would like to attend if only I live near the area.

I have many questions for the management:

  1. What are your plans for myHouse? Are you planning to participate in any PPP’s considering the lack of classrooms?
  2. What are the updates for Golden Hill project in Nanning China? How many % sold is the project in pre-sales?
  3. Starworld has a 118 ha. development project in Calamba Premier International Park, how many % sold is the project? Average selling price per lot?
  4. Does SGI have plans to acquire more debt to leverage myHouse and Golden Hill project?

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: See Portfolio page for my holdings.

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SGI Update

I finally read SGI’s 2012 financial statements and the figures are as expected. No surprises but below are the details that might interest you.

SGI’s High Inventory Turnover Rate

SGI1

An inventory turnover of 6x suggests that SGI replenishes their inventory 6x within the year.

 

myHouse Brand’s Aggressive Sales Growth

One of the catalysts mentioned in my buying of SGI is the possible robust sales of their modular houses under the myHouse brand. myHouse sales jumped from 13 million in 2011 to 39 million in 2012 or an increase of 200%. As good as it sounds, myHouse’s contribution to SGI’s total sales is still negligible. A hint on the demand of the myHouse brand is the 31 million advances that are paid by customers for the product. The P31 million advances were computed as follows:

SGI2

The 31 million is a sure sale for SGI this 2013. Again the amount is negligible but assuming that SGI will boost their marketing campaign for the product, myHouse has a high probability of driving SGI’s revenue growth in the future.

 

Presentation of the Financial Statements of Guangxi Fil-Dragon Real Estate Development Limited

The presentation of the Guangxi Fil-Dragon financial statements enlightened me on SGI’s source of real estate revenues. It appears that the only contributing real estate project of SGI is their joint venture (JV) with Samsung Corporation for the development and sale of industrial estates. However, there were no details regarding the JV with Samsung in SGI’s financial statements or PSE disclosures.

That said SGI’s P850 million customer’s deposit will eventually be recognized as revenues as soon as their Golden Hill project in Nanning, China will begin construction.

Also worth noting is Guangxi Fil-Dragon’s low debt levels. I expect SGI to acquire more debt this 2013 to fund the Golden Hill project and take advantage of the strong real estate industry in China.

Coursera, MVP’s message to Graduates, Stock Thoughts: APM, SGI

Coursera, MVP’s message to Graduates, Stock Thoughts: APM, SGI

Coursera

Last few months, I recommended a course in coursera: “A Beginners Guide to Irrational Behavior”

Believe me, it would not be a waste of time. It also includes how to manage your time well.

Promotional Video here:

http://vimeo.com/channels/guidetoirrationality

Sign-up here:

https://www.coursera.org/course/behavioralecon

 

MVP’s Message to Graduates

Worth the read:

http://www.interaksyon.com/article/57913/mvp-to-class-of-2013-kristel-reminds-that-education-is-a-right-and-blessing-use-it-for-our-people

 

APM

Profiling: Alcorn Gold Resources Corporation:

https://fundamentalenthusiast.wordpress.com/2013/03/26/profiling-alcorn-gold-resources-corporation/

 

SGI

Solid Group, Inc.:

https://fundamentalenthusiast.wordpress.com/2013/03/26/solid-group-inc-pse-sgi-2/

 

Solid Group, Inc. (PSE: SGI)

The Company’s main source of revenue is its sale of mobile phone, broadcast/professional equipment & accessories, and prefabricated modular houses which contributed 76% of total revenues in 2011. Below is the breakdown of SGI’s sales account:

SGI1

The Company sells the mobile phone brand Myphone. Myphone is distributed by a wholly owned subsidiary Mytel Mobility Solutions, Inc. (Mytel) through 260 independent dealer networks. Effective The Company exhibited double digit growth since its venture in Myphone distribution on August 2007.

SGI2

An interesting development in the Company is the restructuring of its corporate structure to focus on real estate business and sale of mobile phones under the brand name Myphone. On May 11, 2012, SGI sold the assets of its wholly owned subsidiary Solid Broadband Corporation (SBC) for a consideration of P 1 billion cash to Skycable Corporation. [1]

The Company’s real estate investments include the Golden Hill Project, a property within the ASEAN Commercial Park in Nanning City, Guangxi Province, PRC. The Company, through Fil-Dragon, pre-sold the multi-storey residential and commercial condominium of Golden Hill Project. The Company received P29 million and P686.3 million in 2010 and 2011 respectively in the pre-sale.

Comments:

SGI’s attraction is from the following:

  1. Ability to take advantage of the Philippines’ strong domestic consumption
  2. Strong balance sheet.

SGI is well positioned to take advantage of the Philippines’ strong domestic consumption. Other than SGI’s MyPhone brand, SGI is capable of exploiting the low cost housing in the Philippines under the MyHouse brand. Similar to myPhone, myHouse is a product designed to appeal to the masses.

SGI’s MyHouse brand is a modular housing technology that can be set-up for as fast as 30 days. MyHouse has the following models:

SGI3

SGI has a very strong balance sheet. Other than the fact that SGI’s 12 billion assets in the 3rd quarter of 2012 is 25% cash, SGI has a debt to equity ratio of .39x which means that debt is only 39% of SGI’s capital. However, closer scrutiny of the quality of these debts will bring more insights to an investor.

SGI has these notable liabilities:

SGI4

The nature of SGI’s customer deposits are cash received from pre-selling their condominium project in Nanning City, Guangxi Province, PRC. The bulk of SGI’s deferred tax liabilities arise from the unrealized gain from investment properties. Deferred tax liabilities will only be paid if SGI will sell the investment properties and the customer deposit will be reclassified as revenues as the construction of the condominium project in China progresses.

These liabilities are called “float.” These are liabilities that have negligible chance that a third party will require SGI to pay on demand. That said, SGI’s “true” liability is only 1,508,308,604 or a debt to equity ratio of .16x which means that SGI has more capacity to raise debt without posing much threat in the company’s liquidity or ability to pay.

Valuation

I expect SGI to report an EPS of P0.62 but normalized earnings should only be at P0.27. I expect SGI’s MyHouse brand will be well accepted by the masses and MyPhone will continue to grow its sales in high double digit growth. Considering SGI’s position to take advantage to the Philippines’ strong domestic consumption, SGI’s position to take advantage of the low-cost housing through myHouse and SGI’s financial capacity to seize these opportunities, SGI’s value should be at 10x its normalized EPS or P2.70.

Catalysts:

  1. Strong sales of SGI’s MyPhone brand.
  2. Reception of SGI’s MyHouse brand might be positive.
  3. Possible entry of SGI in the real estate industry under the low-cost segment.

 

Risks:

SGI’s myHouse may not replicate the success of myPhone.

Sources:

  1. Additional information re: Agreement between Solid Broadband Corporation and Skycable Corporation http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-3906_SGI.pdf
  2. SGI Sec filings

Other data:

SGI5

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Case Study: Solid Group, Inc. (PSE: SGI)

The investment thesis is simple: SGI’s one time gain would generate SGI an EPS of above P.51 for 2012 which suggest an intrinsic value of P5.10 [.51 x 10 PE ratio].

SGI sold its subsidiary Solid Broadband Corporation (SBC) to Skycable Corporation for P1 billion cash on May 11, 2012 generating a one-time gain of P450 million and an EPS of .51 on the third quarter of 2012.

A similar case is JG Summit Holdings, Inc. (JGS). JGS sold Digital Telecommunications Philippines, Inc. (DGTL) to Philippine Long Distance Telephone Company (TEL) resulting to a one-time gain of P11 billion and an EPS of P3.19 for the year 2011. Using a price to earnings multiple of 10, JGS intrinsic value should be at P31.90 (P3.19 x 10) at that time.

On the date that the financial statements were released JGS’ stock price traced its intrinsic value.

SGI1

The reason for this event could be the Market’s confidence JGS management has the capacity to utilize excess cash. The Market believes that the Management can utilize excess cash to add shareholder value.

SGI with its additional cash flow from sale of its subsidiary may utilize the excess cash to take advantage of the weakened peso and participate in the strong domestic spending of the Philippines. SGI’s business model is mainly the importation and sale of mobile phones here in the Philippines.

SGI’s revenue growth is mainly driven by their distribution of the Myphone brand. A business opportunity for SGI’s excess cash is their possible participation in the construction industry through its subsidiary SolidGroup Technologies Corporation (SGTC). SGTC signed an exclusive 3-year Distribution Agreement with Yahgee Modular House Co., Ltd. in 2011 under the MyHouse brand. SGTC will import and sell prefabricated modular house and office units opening the doors for SGI in the construction industry.

Red flags:

Increasing inventory obsolescence:

SGI2 SGI3

Comments:

Red flags are not that red and investment thesis is very plausible with the MyHouse brand starting to introduce their product to the masses by sponsoring shows like Kanta Pilipinas of TV5.

Acknowledgement: This case study is a product of my conversation with a reader, Nosteng.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Investment Video for Kids, Funny, Social Proof, Stock Thoughts: Strengthening Peso Follow Up, BDO vs BPI

Investment Video for Kids

Will your kids be interested about investing if he/she will be able to watch this 3 min video?

http://www.youtube.com/watch?v=foaYpoH0Fnk&feature=player_detailpage

 

Funny

A BABY doing his own trade!!!!

http://www.youtube.com/watch?feature=player_detailpage&v=l_R4bPGjDTc

Not to mention he’s talking.lol

 

Social Proof

Did you notice social proof in stock investing?

“Oh, Mr. X a super rich guy, is investing in the same stock I am invested in, I should be on the right stock.”

“Mr. A is investing in stock x, mr. B my friend is also in stock x, ms. Y is ALSO in stock x. There should be something wrong with me.”

Be aware on that psychological pitfall. 🙂

Think independently; invest only on stocks that YOU understand.
social proof

Even the angel fell on social proof! lol

Strengthening Peso Follow Up

A follow-up on my Jan 22 post:

https://fundamentalenthusiast.wordpress.com/2013/01/22/funny-stock-thoughts-ore-strengthened-peso/

Strengthening peso will benefit the following importing companies:

PCOR

PNX

SGI

 

Strengthening peso will benefit the following company with large foreign denominated debt:

EDC

 

BDO vs BPI

Is it just here in Bacolod that BPI service is ‘not so good’?

You got to know somebody or you should be what they consider as VIP for you to be accommodated well.

In contrast, BDO employees are very professional. They work fast and respect the time of their clients regardless of their net worth. They seem to be well trained in terms of client relationship. Idle employees had the initiative to accommodate waiting clients if the queue is already too long.

I like BDO’s service much better.
Tell me what you think about BDO or BPI’s service.

Can anyone tell me about china Bank? I only like their valuations, dividend yield, and balance sheet but I have no firsthand experience with their services.

Solid Group, Inc. (PSE: SGI)

Solid Group, Inc. (PSE: SGI)

The Solid Group, Inc. (Company, SGI) is primarily engaged in sale of mobile phonesprefabricated modular house & offices, and real estate. Below are the Company’s subsidiaries:

The Company’s main source of revenue is its sale of mobile phone, broadcast/professional equipment & accessories, and prefabricated modular houses which composed the 76% of the total revenue of 2011. Sale of mobile phone through its subsidiary, My Solid, contributed the most in the Company’s revenue growth. Mobile phone units sold in 2011 jumped to 2 million units from 739,721 units in 2010 or a revenue growth of 94% from P1.4 million in 2010 to P2.9 million in 2011.

The Company sells the mobile phone brand Myphone. Myphone is distributed by a wholly owned subsidiary Mytel Mobility Solutions, Inc. (Mytel) through 260 independent dealer networks. Effective June 1, 2012, My Solid and Mytel will be merged with the former as the surviving entity.

An interesting development in the Company is the restructuring of its corporate structure to focus on real estate business and sale of mobile phones under the brand name Myphone. Except for 2010, the company exhibited double digit growth since its venture in Myphone distribution on 2007.

The Company’s real estate investments include the Golden Hill Project, a property within the ASEAN Commercial Park in Nanning City, Guangxi Province, PRC. The Company, through Fil-Dragon, pre-sold the multi-storey residential and commercial condominium of Golden Hill Project. The Company received P29 million and P686.3 million in 2010 and 2011 respectively in the pre-sale.

The Company, through ZTC, started the construction of Tri Towers condominium building in 2007. The location map of the project is seen below:

Tower 1 was fully completed in 2009 and construction for Tower 2 was started in 2011. The construction of Tower 3 has not yet started.

The Company estimates to spend P650 million capital expenditures for 2012 for real estate and broadband infrastructure. This expenditure shall be lessened as the Company sold the assets of its wholly owned subsidiary Solid Broadband Corporation (SBC) for a consideration of P 1 billion cash on May 11, 2012. The assets are sold to Skycable Corporation. [1] I estimated the company to recognize a gain of 300 million in this transaction since net assets of SBC are recorded in the books of the Company at P667 million as of 2011.

The Company has the following risks on its assets:
1.   Risk of expropriation under the Agrarian Reform Act of its properties in Pililla, Rizal and Pamaldan, Cabanatuan City with a carrying amount of P3.3 and P7.9 million respectively.
2.   A land with a carrying amount of 309 million is subject to claims by third parties.

In 2005, ZTC received notification from Urban Roads Project Office (URPO) of the Department of Public Works and Hughways (DPWH) that the location of the Tri Towers condominium might be affected by the plans of the National Government of the Philippines for the construction of the proposed 2nd Ayala Bridge. However, the URPO stated that it has not yet undertaken the detailed engineering design that will ascertain if the location of the ZTC’s property will be affected by the road’s right-of-way.

Other data:

Sources:

1.   Additional information re: Agreement between Solid Broadband Corporation and Skycable Corporation http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-3906_SGI.pdf

PD. No SGI shares