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The Big Picture
Does value investing work in Singapore?
SINGAPORE | EQUITIES | STRATEGY
25 March 2015
 Large caps rule. 72% of the SGX-listed stocks since 2004 have underperformed STI
 Don’t forget cyclicals. Low PE and PB portfolios outperformed broader market partly due
to cyclicals
 Low PB/high ROE stocks did best. Time to look at Roxy, Civmec (Buy), Wee Hur,
SinoGrandness, Valuetronics, 800 Super (Buy), China Sunsine, Penguin, Dutech, and Hock
Lian Seng?
What is value investing?
It seems that a lot of our clients and co-workers anecdotally prefer “value”
stocks. This is understandable as it is human nature to prefer buying
“cheap” and selling “expensive”.
Simply investing in stocks with low valuation ratios (eg, price/earnings,
price/book, EV/EBITDA) is a naïve way to approach value investing, which
overlooks many issues:



Efficient market hypothesis. Equity markets are quite efficient. Markets
do not reflect what every investor thinks, just what the last investor
thought. Often, it only takes a single trade for the markets to price in the
latest information about a company. The good news is that markets are
not perfectly efficient; otherwise legendary investor Warren Buffett, who
has a system that starts with screening for low PE stocks, would not
consistently beat the market.
Value traps. Some cheap stocks are cheap for a reason. They may have
weakening fundamentals, increasing competition, technology shifts that
are threatening their core business, or other factors that may adversely
affect their future. Cheap stocks can always decline in price, and often do.
Cheap does not mean a stock price will rise. These are called “value
traps”.
Not back-tested. Does value investing work? Many investors have
confidence in their ability to find good stocks – including us. But how
many investors back-test their approach? We decided to back-test value
investing.
Back-testing value investing. Singapore’s equity benchmark is the Straits
Times Index, which is a market-cap weighted index of large cap stocks. Did
value stocks outperform the STI over the long-term?
We took a long time period to avoid short-term sentiment. Year 2014 just
ended, so we looked at 2004 to now. 2004 was after SARS-affected market
sell-off, so value stocks were plentiful. Also, it was the beginning of a four
year economic bull-run, so value stocks would have the opportunity to
Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE)
MCI (P) 022/11/2014
Ref. No.: SG2015_0105
Analyst
Phillip Research Team
(+65 6531 1240)
[email protected]
The Big Picture Does value investing work in Singapore?
recover. We analyzed every stock that was listed at the end of 2004 and
noted their stock performance from the beginning of the year (or
whenever it was listed) to now.
Straits Times Index
Source: POEMS 2.0
A few caveats. We are stock analysts, not academics. We wanted to test a
hypothesis without it consuming too much time. We excluded dividends
and return of capital pay-outs, except for final return of capital pay-outs for
those stocks that dissolved. We also assumed that investors were able to
sell on the last day of trading on those stocks that did not have a final
capital return. However, we found that nearly all the companies that were
de-listed had suffered over 90% losses in the value of their stocks over the
11 years, so the impact of this assumption was small. We also worked fast
and relied upon Bloomberg data, so there is probably some errors in our
data and calculations. That is, one should see this as a “quick and dirty”
analysis, not a PhD dissertation.
Snapshot of the 2004 Straits Times Index
For many people, 2004 did not seem like that long ago. There were 577
primary equities listed on the SGX at the end of 2004. In 2004, the Straits
Times Index had 45 members, of which only a third are still members in the
current index. S-Chip stocks were rapidly listing on SGX, but REITs were not
yet the the rage. Hong Kong Exchange was also listing numerous mainlandbased companies.
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The Big Picture Does value investing work in Singapore?
Figure: Primary equities listed on SGX vs. HKEX
Source: Bloomberg
Our test samples: low PE & low PB
We took two populations of “value stocks”, one with a low PE and one with
a low price/book. We identified 82 stocks that had a single digit PE (ie, year
end price divided by trailing EPS of between zero and 9.5) plus 27x stocks
below 0.7x PBR.
Reminder: compound average ≠ arithmetic average. One should consider
the power of compound annual growth rates. For example, a S$100
investment at 5% CAGR over 10 years will earn 62.9%. If you double that
CAGR to 10%, the 10 year return is 159.4%, which is more than double the
returns.
Reminder: asymmetry of returns. One should also consider asymmetry of
growth rates. One can only lose 100% of an investment on the downside.
So an original S$100 investment at negative 30% CAGR would mean that
S$97.2 would be lost in 10 years, whereas a positive 30% return would
equal a gain of S$1,278.6.
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The Big Picture Does value investing work in Singapore?
The results…
Fast forward to the current day. The Straits Times Index has risen from
1,730 to 3,378 as of 11 March 2015. This equals a compound annual
growth rate of about 6.1%.Of the 577 stocks from 2004, 409 (71%) have
survived from the 577 at the end of 2004. Some were acquired at
significant premiums to their prices in 2004 and some delisted worthless.
Some observations of the 577 stocks from 2004:




72% underperformed the STI (ie, had a CAGR below the STI’s 6.1%).
54% had capital depreciation (less than 0% return, excluding dividends)
16% “blew up”, which we define as having worse than negative 20% CAGR
(ie, equal about 90% loss after 11.2 years).
19% were “home runs”, which we define as having >17.5% CAGR, which
would equal 400% returns in 11.2 years. Four bags = homerun.
Value stock portfolio performance
# of stocks
Straits Times Index (market weighted, dynamic investing)
10 year CAGR (mean, %) 10 year CAGR (median, %)
Std dev
30-45
6.1
n.a.
n.a.
45
7.2
7.7
12.5
577
(3.5)
(1.3)
17.2
PE < 9.5 (equal weight)
82
(2.3)
(0.6)
18.6
Price/book < 0.7
27
(1.4)
0.2
9.1
STI members (equal weighted, fixed investment)
All stocks (equal weighted)
Source: Bloomberg, PSR
Low PB & PE portfolios did:



Worse than STI. Both low PB and low PE portfolios significantly
underperformed the STI both on a mean and median average. The Straits
Times Index members were much financially stronger and competitively
positioned. The STI’s contract manufacturing sector did not perform well,
but it still had far fewer and less acute problems. And as professional
investors know, good performance perhaps is based more upon avoiding
problem stocks than picking superstars.
Better than broader market. Low PB/PE stocks modestly outperformed
the broader market on mean and median average. The broader market
did worse for numerous reason, but we highlight that expectations for SChips were still high and they had not yet suffered the problems that
would later come.
Cyclicals. Another reason for the superior performance of the low PB/PE
portfolio to the broader market is that it tended to have more cyclicals.
The market tends to be somewhat short-sighted and will avoid stocks that
have weak near-term outlooks. The key take-away point for investors is to
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The Big Picture Does value investing work in Singapore?
consistently look at cyclicals that have weak outlooks, but are probably
not in any danger of going bankrupt (eg, the commodity sectors, shipping,
Singapore residential property developers, energy producers).
Further analysis:
The following chart is a bit complicated, but it is still quite interesting. The
X-axis is net profit divided by common equity (which is analogous to ROE).
The Y-axis is price/book. Price/book divided by (net profit/common) is
equal to price/earnings ratio. The size of the bubble has to do with the
CAGR of the stocks, with blue bubbles being positive returns and noncolored bubbles being negative. One should ignore the data points that sit
on the X-axis, which are zero because of incomplete data from Bloomberg.
But we move forward with our analaysis.
SGX stocks: Price/Book vs. ROE (2004 to YTD 2015)
5.0
4.0
Price/Book
3.0
2.0
1.0
-
(1.0)
(20)
(15)
(10)
(5)
0
5
10
15
20
ROE (2004)
Source: Bloomberg, PSR
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

Loss making companies did poorly. Sometimes the obvious is true.
Sometimes loss making companies’ stocks perform poorly. In several
cases, losses were continued until the stocks were forced to delist.
Value for money. Famous screeners like Buffett and Greenblatt
emphasize that stocks should be not just be cheap, but also generate high
returns. The quadrant with high ROE and low price/book (bottom right of
chart) generally performed quite well. This is an argument for value, not
just cheap stocks.
Negative returns everywhere– Those stocks with clear circles were
everywhere, some with high ROE, low ROE, high price/book, low
price/book. The dispersal to the far extremes means that blow-ups are
going to happen. But there were less stocks on the extremes of valuation,
which means that capital losses were more common for low ROE stocks
and mid-return ROE stocks, but less frequently for high ROE stocks.
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The Big Picture Does value investing work in Singapore?
Looking forward…
While we don’t cover most of these stocks and do not recommend
investment into them, we do highlight the following stocks as needing
more due diligence because they currently have low PB and high ROE.
While these companies are not all saints, the ones highlighted in blue seem
like they might be worth a second look.
Stocks with low PB (less than 1x) and high ROE (>20%) currently listed on SGX
Stock
PSR Rating
Ezion Holdings
Hong Fok Corp
Roxy-Pacific
Nam Cheong
Centurion Corp
Hiap Hoe
Wee Hur
Rotary Engineer
Lian Beng Group
Civmec
Buy
Hock Lian Seng
Sino Grandness
China Sunsine
Valuetronics
Penguin Int'l
Dutech
Kim Heng Offshore
Keong Hong
Nobel Design
800 Super
Buy
Ticker
EZI SP
HFC SP
ROXY SP
NCL SP
CENT SP
HIAP SP
WHUR SP
RTRY SP
LBG SP
CVL SP
HLSH SP
SFGI SP
CSSC SP
VALUE SP
PBS SP
DTECH SP
KHOM SP
KHHL SP
NBL SP
ESH SP
Mkt cap (S$ m) Normalized ROE (%) Price/book (x)
1,650
22.2
1.1
681
23.6
0.5
633
25.5
1.6
639
27.6
1.4
397
22.1
1.2
390
63.0
0.6
345
43.0
1.1
315
21.5
1.2
278
21.4
0.7
213
27.9
1.4
207
44.1
1.0
192
32.9
0.4
178
20.9
0.8
172
20.7
1.3
129
24.1
1.0
98
40.0
0.8
95
34.3
1.3
91
27.3
1.1
85
21.2
0.7
79
23.8
1.9
Source: Bloomberg
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The Big Picture Does value investing work in Singapore?
Contact Information (Singapore Research Team)
Management
Chan Wai Chee
(CEO, Research - Special Opportunities)
[email protected]
Research Operations Officer
Jaelyn Chin
[email protected]
Macro | Equities
Soh Lin Sin
[email protected]
Bakhteyar
[email protected]
Osama
Market Analyst | Equities
Kenneth Koh
[email protected]
US Equities
Wong Yong Kai
Finance | Offshore Marine
Benjamin
Ong
[email protected]
Real Estate
REITs
Telecoms | Technology
Transport & Logistics
Richard Leow,
[email protected]
CFTe
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The Big Picture Does value investing work in Singapore?
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