Tat Hong Fundamental Analysis

Below are the basic qualitiative analysis I have done for Tat Hong and based on the factors, I will consider buying between the range from 0.52 to 0.55.

Summary

Quantitative Analysis

	Discount Rate (Lower the better)	Grade
Profitability	2/4	B
Growth	1/3	A
Financial Health	2/5	A
Cash Flow	4/8	B
Effiency	2/5	A

 

Detailed Quantitative Analysis

Profitability

1. Has the company been generating free cash flow consistently.
Tat Hong has had a pretty good history of generating free cash flow. Free cash flow is negative in year 2003 and 2004 but has recorded a good growth on the
following years. It is still not consistent as they are still plowing most of their money back to capital expanding and this is not a good sign that the firm has much of an economic moat.

2.Has the company generated a consistant increase of operating profit margin and net profit margin 
Company' net profit/operating profit margin has decreased from 21% to 20% but prior to that, they have been increasing consistently.

3. Is the company's ROE more than 10%
Tat Hong's 2008 ROE is 27% and has been increased consistently.

4. Did the company increase financial leverage agressively to get a high ROE
Tat Hong's financial leverage has decreased from 2.08 to 1.88 therefore the ROE is of highest quality. 

5. Is the company's ROA more than 8%
Tat Hong's 2008 ROA is 13% and has been increased consstently.

6. Has the company's operating expense increased drastically over the years
The company total expense is steady at 16 to 17% of sales until year 2008 when it increased to 19%.

7. Is the company's inventory rising faster than sales
Inventory has increased 26 % from last year while sales increased 32%. Although there are exceptions but on the safe side, its better to take this point into consideration
because when a company produces more than its selling, either demand has dried up or the company has been overly ambitious in forecasting demand. Unsold goods will have to get sold eventually, 

8. Has the company's receivables percentage of sales increased more than 20%
Account receivables increased from 11 percent of sales to 13 percent which is a growth of 18%. 

Conclusion : With the likely downturn of the economy, it will definitely affect the crane business therefore I will conservatively grade the profitability as B due to the inconsistent generation of free cash flow and also inreasing of total expense.

Growth

1. Is the company's sales growth more than 15% 
Tat hong's sales has grown at an annual growth rate of 27% over 7 years. 

2. Is the company's operating income growth more tha 15% 
Tat hong's operating income has grown at an exploding rate of 68% over 7 years.

3. Is the company's net profit growth more than 15% 
Tat hong's net income has grow at an exploding rate of 79% over 7 years.

Conclusion : Will expect a decline in growth due to the possible demand crunch but looking on a longer time horizon, I will still grade the growth A.


Financial Health

1. Is the company's financial leveage more than 3
Tat hong's financial leverage has been decreasing consistently over the past 7 years and it is at 1.88 in year 2008. This means that for every dollar in equity, the firm had $1.88 in assets. It borrowed the other 0.88. This is fairly conservative for a company which generates such high ROE.

2. Is the company's debt to equity between 0.5 to 1.5 or smaller. 
Tat Hong's debt to equity is at 0.88 and been decreasing consistently over the years too. 

3. Is the interest coverage more than 5 and been increasing consistently 
Tat Hong's interest coverage has been improving over the years and it is at 12.99 in year 2008. In other words, Tat Hong has earned enough money to cover its interest
obligation 13 times over, which is a pretty safe margin.

4. Is the company's current ratio more than 1.5 and less than 6 
If a company has an excessive high current ratio, it can probably sound some alarm bells because it indicates that the company has a large amount of current assets that
could - and probably should - be invested back into the company . Tat Hong's current ratio is at 1.39 in year 2009 and they have managed to maintain it above one over the past 5 years. Even though the 1.5 mark is not met but this level is still relatively safe.

5. Is the company's quick ratio more than 1
This figure is not really meaningful if used alone as it needs to be compared with other companies in the same industry but generally, a quck ratio higher than 1 puts a company in fine shape. 

Cash Flow 

1. Is the company able to generate improving/consistent operating cash flow to sales 
Tat Hong's ocf/sales for Fy06,07,08 is 6.51%, 6.27% and 10.12%. They have show improvement but it is still not consistent.

2. Is the company able to generate improving/consistent free cash flow to operating cash flow 
Tat hong's free cash flow to operating cash flow for Fy06,07 and 08 is 17%, 68% and 38%. The recent plunge is due to the increased of capital expenditure. There is no 
guideline for this but generally, the higher percentage of free cash flow, the greater the financial strength of the company.

3. Is the company's cash flow coverage improving
The following are the various cash flow coverage I'm covering.

	FY05	FY06	FY07	FY08
Short term Debt Coverage	0.06	0.15	0.14	0.23
Capital Expenditure Coverage	0.64	1.21	3.28	1.63
Dividend Coverage	1.20	2.93	0.83	2.23
Capex + Cash Dividend Coverage	0.42	0.85	0.67	0.67

he short-term debt coverage ratio compares the sum of a company's short-term borrowings and the current portion of its long-term debt to operating cash flow. Tat Hong's short term debt coverage has been improving consistenly thorughout the past 4 years and this is a good sign. 

The capital expenditure coverage ratio compares a company's outlays for its property, plant and equipemtn(PP&E) to operating cash flow. Tat Hong's capital expenditure coverage has been increasing for the past 3 years till last year where it plunged quite substaintally due to increase of capital expenditure. 

For conservative investors focused on cash flow coverage, comparing the sum of a company's capital expenditures and cash dividends to its operating cash flow is a stringent measurement that puts cash flow to the ultimate test. If a company is able to cover both of these outlays of funds from internal sources and still have cash left over, it is producing what might be called "free cash flow on steroids". This circumstance is a highly favorable investment quality. Tat Hong's ratio has been hovering at the level below 1 which tells us that they are not able to fully coverage the capex and divided with the generated operating cash flow but nevertheless, the ratio is still at a decent level. 

Conclusion : Based on the above, Tat Hong has a good record of generating free cash flow and also its cash flow coverage ratio has been improving over the years but still, its coverage is not at the ideal range and also the free cash growth is inconsistent therefore to be conservative, I will give a B grade. 

Effiency

1. Is the company's cash conversion cycle inproving consistently over the last few years

It is a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.

	FY05	FY06	FY07	FY08
Days Sales Outstanding (days)	72	58	51	53
Days Inventory (days)	198	177	168	174
Payables Period (days)	162	156	159	175
Cash Conversion Cycle	107	79	61	52

Company's CCC has improved consistently over the years and by looking at each of the figure, Tat Hong is quicker at collecting what is owed, better job at moving inventory and also keeps its own money a bit longer. This consistency indicates the management's effiency in using short term assets and liabilities to generate cash.

2. Is the company's turnover ratios improving consistently over the last few years

	FY05	FY06	FY07	FY08
Receivable Turnover	5.08	6.29	7.09	6.89
Inventory Turnover	1.84	2.06	2.17	2.10
Fixed Asset Turnover	1.98	2.34	2.02	2.03
Asset Turnover	0.74	0.85	0.77	0.76

Like most ratios, the true value of the information isn't really there unless you make a comparison across the industry but generally, the higher, the better.

Conclusion : Based on the ratios above, it shows that Tat Hong has improved on its effiecncy consistently, indicating the management's ability therefore I will give a A grade in this aspect.

Valuation

Multiples

	Current	Target	Target Price
Book Value per share	0.63	0.5	0.44
Operating Cash Flow per share	4.38	4.00	0.51
Free Cash Flow per share	11.36	11.00	0.54
Price Earnings per share	2.79	2.50	0.50
Price sales per share	0.44	0.40	0.51

A target price of $ 0.50 is derived based on the average of the multiples above. 

Cash flow growth rate	0.05	0.08
Margin Of safety	0.15
Overselling rate	0.13
Discount rate	0.14	0.12

Discount rate of 0.11 derived based on the quantitative fators. Given today's uncertainty, i will set the discount rate as 0.14 from year 1 to year 5 following by 0.12 from year 6 to year 10.

Per Share Value	0.62
Margin of Safety	0.53
Consider Selling	0.70

TAT Hong Financial Statement Analysis Part 2C (Financial Health)

A company's financial health is one area that investors should not overlook and underestimate especially when a company are having increasing profits over years. It is important to keep their financial heath in check because they may be leveraging or borrowing excessively to achieve this result. If for an instance, recession is on the way, having a weak balance sheet may not see them through this tough period and in worst cases, the company may go bankrupt. In this section, I will attempt to analyse Tat Hong's financial health using some ratios and figures.

2 Financial Health

2a) Is the company's long term liability more than the equity
Debt to Equity ratio can be used to answer this. In 2005, 2006 and 2007, Tat hong's d/e ratio is at 0.43, 0.32 and 0.34 respectively. Quite simply, the higher the figure, the higher the leverage the company employs. Tat Hong's d/e ratio has increased in 2007 but it is still maintained at a safe level below 0.50. (Passed)

2b) Can the company pay off their long term liability with just earnings
The above metioned ratio has its weekness because some assets are never a source of funds unless the company is in bankruptcy. The best then, of a company's financial power is it's abilityto pay off its debt out of its earnings. In 2005,2006 and 2007, Tat hong has a net income of 20.77 million, 46.09 million and 84.17 million and long term liability of 76 million, 73 million and 100 million respectively. This tells us that Tat Hong can clear its long term debt at 2005,2006, 2007 in approximately 3 years, 1.5 years and 1.15 year respectively. This concludes that Tat Hong has a durable competitve advantage which enables them to pay off their long term debt within just few years with strong enough earnings. (Passed)

2c) Is the company leveraging excessively on their equity
A common measure of leverage is simply the financial leverage that is used in calculating ROE (a term which I will describe in later posts) , equal to assets divided by equity. In 2005, 2006 and 2007, Tat Hong's financial leverage is 2.34, 2.08 and 2.07 . What do all these numbers mean? Taking the 2005 ratio which is 2.34 to illustrate the example, it simply means a dollar in equity, Tat Hong has $2.34 in total assets which tells us it borrows the other $1.10. Over these 3 years, Tat Hong financial leverage has been decreasing steadily and profits soaring and this shows us that the the capital is well managed. A financial ratio of 2.1 is fairly conservative and its when we see ratios of 4 , 5 , or more, companies start to get really risk. (Passed)

2d) Can the company pay interest easily with their earnings before interest and taxes
Borrowing money comes at a cost: the interest that is payable month after month, year after year. Interest payments affect the company's profitability and for this reason, the comany's ability to meet interest obligations is one of the most important factor in analysing the company's financial health. In 2005, 2006 and 2007, Tat Hong interest coverage ratio is at 5.30, 7.77 and 11.74. The more times the company can pay its interest expense, the less likely that it will run into difficulty if earnings fall unexpectedly and as you can see, Tat Hong's ratio has been increasing steadily and in 2007, it's coverage ratio is at 11.74. In other words, Tat Hong has earned enough money in 2007 to cover it's interest obligation 11 times over which is pretty safe. The benchmark for construction industy is 3. where tat hong has surpassed it extensively. (Passed)

Financial Health : (5/5)
I will rate Tat Hong financial health full marks because as you can see the checks that I have made above, they have surpassed the expectations and this shows that it has the stability to get through unexpected problems . Although its true you might miss out companies with great potential of making astronomical profits with such stringent test but how difficult it is to find another microsoft in the making.. Out of 100, 99 failed so in my opinion, its better to play safe by sticking to companies with good financial health. In the next section, I will analyse Tat Hong's cash flow cycle by using some activity ratios.

TAT Hong Financial Statement Analysis Part 2B (Liquidity)

When it comes to analyzing of financial statements, it is easier if a systematic approach in interpreting different ratios and numbers is adopted because there are simply just too much information and if there isn't a certain "template", it will be very difficult to start. First, I will start from the company's liquidity which is their ability to meet up current obligations with ease in the event of bad times.

1 Liquidity

1a) Current Ratio
Tat Hong's current ratio in 2005,2006,2007 is 1.36,1.44 and 1.27 respectively. An increase in current ratio signifies the company's improvement in liquidity because they have more assets than liablities. A ratio below one indicates that a company will not be able to pay off it's debt. A decrease in current ratio is worth to take note of especially if it happens frequently. We will take a look at more ratios to give us a clearer picture. Even though Tat Hong's current ratio decreased in 2007 but it is currently still in an expanding phase so some leeway can be given as long as its ratio don't go below one! (Failed)

1b) Quick Ratio
It is similar to current except it excludes inventory from the current assets because as compared to cash and receivables, this is most difficult to convert into cash. Tat Hong's Quick ratio in 2005,2006,2007 is 0.52,0.64,0.53 respectively. Similar to current ratio, the higher the ratio, the better the position of the company. (Failed)

1c) Dynamic Ratio
The dynamic current ratio tells us a more accurate way of assessing short term liquidities than any of the ratios above because it takes into account the company's respective liquidity with regard to both inventory, accounts receivable and accounts payable instead of the full amount. Tat Hong's Dynamic ratio in 2006,2007 is 1.46 and 1.28 respectively. (Failed)

1d) Can the company's operating cash flow cover the total interest bearing debt
The operating cash flow ratio can gauge a company's liquidity in the short term. Using cash flow as opposed to income is sometimes a better indication of liquidity simply because, as we know, cash is how bills are normally paid off. In 2005,2006 and 2007, Tat Hong's coverage is 0.09,0.24 and 0.20 respectively. Comparing with the previous year's ratio, Tat Hong has taken up more interest bearing debt without increasing their operating cash flow to achieve an improved coverage and this is something worth taking note of. (Failed)

Rating Liquidity : (2.5/5)
Tat Hong's dynamic ratio in 2007 has decreased 12% but it is still tolerable as long as the ratio is maintained at a level above 1.2. I will rate it's liquidity level conservatively because it is currently taking up more interest bearing debt without generating sufficient operating cash flow to cover it.

TAT Hong Holdings Financial Statement Analysis Part 2A (Financial Ratios)

In this section, I will be analysing Tat Hong using financial statements. Firstly, I will be using some numbers like revenue from income statements, balance sheet and cash flow and compare it against previous years to have an idea of the company's profitability ,growth and financial health. Secondly ,I will be using two numbers in conjunction to form a ratio where it might tell more about a company's condition. Example, current assets alone dont tell us a lot but using in conjunction with current liabilites, we are able to determine whether the company has enough money to cover short term debts.

Below is a spreadsheet consisting of all the important ratios and figures dervied from their annual reports . In the next section, I will writting in a semi Q&A format analysing their growth, profitability and their financial health using the financial ratios in the spread sheet. Do note that that due to time limitations, my research information is only constrained to 3 years from financial year 2005 - 2007 so to come extent, it may not be really accurate.

Part 1


Part 2

TAT Hong Holdngs Analysis Part 1 (Management)

From today's post onwards, I will attempt to write down my analysis process that I have done prior to the purchasing any stocks. Starting off from Tat Hong, the main reason for choosing it was because I wanted to have an exposure to the construction industry and at then, I forsee a strong demand of crane in the future due to the rapid development of infrastructure locally and globally. I have checked up the sgx market and realised there are only 2 companies in the crane business which are Tiong Woon and Tat Hong.. After doing a 10 minutes test* on both companies, I realised Tat Hong has a competitve edge over Tiong Woon hence I made a decision to do a detailed examination on Tat Hong...

Some background informaton of Tat Hong
The group is principally involved in the rental and sale of cranes and the sale of spare parts for cranes. Apart from cranes, the group is also involved in the rental and sale of other ancillary heavy equipment such as excavators, bulldozers, earth-moving equipment, foundation equipment, piling rigs and generators.

I will first analyze the company's management. It is not really an easy task attempting to analyze a company management but the following pointers can be used as a rough guideline .

1. Does a majoritiy of the board of directiors comprimised of indepent members
The board comprises of ten members, consisting of 5 executive directors, one non-executive non- independent director and four non-executive directors who are also independent from management. (Passed)

2. Is the Chariman of the board also the CEO or a former CEO of the firm
No. (Passed)

3. Are the boards earning an excessive amount of remuneration
No. The boards are paid at a decent amount despite the company having a good performance for the year (Passed)

4. Is the Board of Directors Stacked with Management's Family Members
Yes. All 3 directors are brothers of the MD.. This is hardly a good thing because if they are closely related to the top management, they may not be as hard-nosed when questioning the management's action as it could be. (Failed)

5. Do executives have substantial holders of the company stock
Yes. Mr Ng San Thiong and his brothers are holding a total of 11% of the company stock and CHWEE CHENG & SONGS PTE, which they are related to, holds 42% of the company. (Passed)

6. Length of tenure
It is always preferable to look for solid stable management that stick with their companies for long term and Most of the board members have been with Tat Hong for a relatively long time (10 years odd). (Passed)

7. Performance
They have increasing ROE and ROAs over the years which is not driven by excessive leverage. The company outstanding shares have not been increased substantially which is a positive thing because a agressive approach to issuance of equity will dillute your stake.. (Passed)

8. Strategic decisions
Has management made decisions that will give the film flexibilty in the future which includes simple decision like issuing equites when stock price is high , buy back stocks when price is low. (Unknown)

Rating (Company's management) : 4/5
Although the board are stacked with Management's family members which may not be a good thing but the management has proved their competence in the recent years by earning astronomical profits and making good strategic decisions. Futhermore, one of the most important criteria in analysising a management is to look for solid managements that stick with their company for the long time and they have fulfilled the criteria.