Author: Jun Hao

In continuing with the series, I like to draw attention to the valuations of the STI Index, which notoriously received the dubious distinction of having as bad a year as Greece.


It’s probably worthwhile to note that the last 5 years have not been by any measure a particularly exuberant time in the stock market (especially in comparison to 2005 – 2007).

This lower valuations have also resulted in a corresponding surge in the dividend yield of the STI to close to 4%, a near record high.

Some large capitalization stocks are extremely cheap, trading at close to 2008 levels.

Can stocks go lower?


But I would argue that hoping for the bottom in 2008 valuations is a case of being penny wise pound foolish. Risk reward ratios are skewed towards risking 10 cents on the dollar to make 50 cents to a $1.

We should probably bear in mind that the 2008-2009 crisis was a crisis that it rivalled the Great Depression, so whether one should expect that kind of valuation levels to materialize is up to debate.

Personally, we haven’t seen the mad excesses of the 2005 – 2007 period, and certainly none of those seen in the run up to the 1997 crisis.

Source : Emerging Perspectives

And how about the rise of interest rates in the US which is widely believed to bring about the ruin for corporates? Well… the available data we have on instances where interest rates have risen do not actually support that conclusion.

Source : Emerging Perspectives
Source : Emerging Perspectives

In the end valuations are what drives the long run stock market returns. And by this measure, emerging markets are cheap (Singapore stocks are priced similarly).

JP Morgan Market Insights

Final Thoughts:

All that is required now is patience and fortitude of character. Markets have always been volatile – something that investors in stocks must come to terms with one way or the other.

Cheap valuations do not mean stock prices go up straight away.

However, in my view, investors have the odds stacked heavily in their favour. If investors can be calm and cool-headed as others panic in the next few months, than they can look forward to satisfactory returns in the coming years.

There’s plenty of noise in the markets at the moment. Plenty of market manipulation (whether true or perceived!).

It reminds me of the time that Asia went through its own “learning lessons” in the 1990s. That’s just part and parcel of the capital markets.

But ultimately, valuations are what really drives stock market returns in the long run.

The below charts serve as a signpost to know where we are in terms of market valuations.
1 PetroChina

2 Industrial and Commercial Bank of China Ltd

3 Agricultural Bank of China Co Ltd

4 Bank of China

5 China Life Insurance

6 China Petroleum & Chemical Corporation

7 Ping An Insurance

8 China Merchant Ban

9 China Shenhua Energy

10 Citic

** Data from Thomson Reuters

The previous two months have been one of the busiest on record, with us selling holdings that had reached close to their fair values, and switching out to companies which were far more attractively priced.

The upcoming 2016 will be an exciting one. We have one last interview with a well known fund manager based in Singapore that will be released shortly (as time permits!) this month.

An exciting partnership is also in the works, and more details will be disclosed soon.

One new segment of the site will be journal entries which are curated from my own investment records. They will normally be embargoed for anywhere up to 2 months before I release them on the site.

The plan is that they will give some time for us to digest the events of that day in a more objective manner. The content has been preserved as it was written, and only some minor editing will be planned to correct any grammatical errors.

Investment Journal Entry Dated 26/12/2015

It’s Christmas Eve and I find myself reminiscing about the current state of affairs. It’s been almost six years since I started investing. How time flies!

I am grateful that I had a good start getting a solid foundation. Unwittingly, I started at a great time, and mistakes have been kept to a minimum by following some basic principles that I have never deviated from:

  1. Focusing on the ability of a business to generate sustained free cash flow
  2. Conservative balance sheets and management
  3. The alignment of interests between management and shareholders

There is I think a distinction to be made from the success of a business, and the success of minority investors. Many great businesses have turned out to be terrible investments. Likewise, distressed businesses can turn out to be great investments – albeit at the right price.

The key in my view, is to be selective.

Our small size allows us an invest-able universe of over ten thousand stocks. As Richard Branson said, business opportunities are like buses, there is always another one around the corner.

Acting in such a manner requires a calculated emotional detachment from it. At every point of time, emotions threaten to overwhelm our logic and reasoning. Knowing what to do does not mean one can do it when the time comes.

Investment opportunities are most abundant in stocks which investors are the most emotional, and have strong vested views in.

Take for example the rise and fall of SingPost this past 5 years. It’s share price had declined from $1.20 to close $1.00, before advancing to an all time high of $2.12.

Sentiment turned negative upon learning that the CEO spearheading its transformation had left, and of corporate governance problems, leading a decline back down to $1.60.

One must express great scepticism that the share price accurately reflects the business reality, as the core business of the company – a monopoly on delivering mail in Singapore has not been eroded.

These mis-pricings create an opportunity for investors to profit – if we can remain rational and cool headed.

Such opportunities are rare, and we must remain selective in our criteria.


Zagro Asia released a formal proposal to seek the voluntary delisting of the Company which I think greatly undervalues the company.

I have sent an open letter to company reflecting my stance that the offer should be revised upwards to reflect the true intrinsic value of the company.

The original letter can be found here.

Open Letter to Zagro Asia about Proposed Voluntary Delisting

The proposed voluntary delisting at 30 cents came as a surprise to us. It deeply undervalues what is an intrinsically high quality business.

In our opinion, a conservative appraisal of Zagro Asia would yield a valuation of at least 35 – 40 cents.

First off, let me congratulate management for running a tight ship. For ten years, you have grown the earnings of the company consistently, even through tough times.

In the FY 2005, you earned $3.14 mil, and in the FY 2014, you earned a profit of $7.23 mil. In those ten preceding years, you have never recorded a loss, and have paid out a dividend in every one of those ten years.

More impressively, you have done so without the excessive use of leverage, and maintained an average Return on Equity (ROE) of over 11%.

These numbers are highly impressive, and few listed companies in Singapore can match your track record in the industry.

Summary of Zagro Asia Financial Results¹

The Offer Grossly Undervalues Zagro Asia



The current offer price of 30 cents pegs the companies P/B ratio at 0.87x.

In the preceding 5 years (Nov 2010 – present), your stock has traded at an average P/B of 0.95x.

In preceding 10 years (Nov 2005 – present), your stock has traded at an average P/B of 1.11x².

It is clear from the above charts that in the last decade, a P/B of 0.87x is close to the lowest end of the valuation range.

Given the sterling business record of Zagro Asia, there is no reason why it should not trade at least at least at book value.

This would imply an offer price of at least 34.58 cents.

A Look at the Underlying Assets
& Business of Zagro Asia

To add to the above point, I would like to highlight the high quality assets that Zagro Asia has.

The financial position of your company is in good shape, with significant amount of cash $27.9 million, representing 31% of your total equity. Furthermore, you also possess a freehold land valued at $5.4 million.

In addition, you have also pared down your borrowings by $4.6 million. There are no significant liabilities, either on or off the balance sheet.

It is safe to say that your balance sheet is at one if its strongest positions since its listing history.

Finally, in your latest half year results, the company recorded a significant improvement in net profits of 18%, from $3.3 million to $3.9 million.


The above points highlight improving business results, a strong unencumbered balance sheet and solid business record.

There is no reason why Zagro Asia should not trade at least at book value, or even a premium of book value indicating a fair value or 35 – 40 cents.

Shareholders who have received notice of your voluntary delisting have already expressed scepticism that the proposed offer of 30 cents reflects the true underlying intrinsic value of your business³.

We have in principle, no objection to a delisting offer, and strongly urge the directors of Zagro Asia to revise their offer as it grossly undervalues what is intrinsically a high quality business.

Tay Jun Hao
Director of Farrer Enterprise, Editor of The Asia Report

[1] Financial Results Summary from
[2] Data from Thomas Reuters