Blackstone - Will it Be A Wise Investment?

Private Equity (PE) has been the hottest topic in global financial industry recently. At its center is the IPO of Blackstone Group (NYSE symbol : BX) at the end of June, 2007. It is rather strange that both Forbes and New York Times have issued analysis with negative comments on this PE group after its IPO. Is Blackstone really a poor investment option for investors??? Personally, I don't think so!

The first point which draws my attention to Blackstone is that it has attracted the not yet established China State Investment Company to launch its first ever investment by purchasing its shares with an amount of US$3 billion. With an over-subscription of its IPO shares, it seems that everyone is expecting a great share price performance of the group when listed. However, after its IPO, its share price is really disappointing which are majorly due to the negative comments from the media just after its IPO. But why is the media post such comments just after the IPO which to all will know it will hurt the share price of Blackstone? I may think of some possiblities :

1. The investment of China State Investment may has positive impacts on Blackstone but also have negatives from the political side. Right now the major investment of Chinese foreign reserve is US Government Bond. If it diversifies its investments, who and what will be harmed most? Its successful intial investment may lead to a more diversified profile in this foreign reserve investment. This may also be one of the major reasons why the tax issues have been raised during its IPO which surely have negative impacts on its stock price performance.

2. If Blackstone is a good investment, it will be a good target for institutional investors as well as other central banks. They are more willing to buy its shares at a cheaper price. It is rather strange that media issue such negatives just after the IPO and why not before its IPO as their disclosed information has already been available when Blackstone published its prospectus. Don't they know that such publications will have negative impact on its share prices?

3. Nowadays major investment banks are all getting a close eye on the asset management work from Chinese government. These banks may not want a good performance of Blackstone share price which means a successful investment of China State Investment Company and putting a closer relationship between Blackstone and the Chinese. Such relationship will have an influence in their chances of getting asset management works from China State Investment Company.

All the above are just some thoughts from myself as alternative explanations for the poor performance of Blackstone share price. They may be right and also may be wrong.

However, I still believe Blackstone (BX) is a good investment opportunity for investors. My reasons are as follows :

1. The major incomes of PE company are from asset management and buy-outs. Blackstone will be benefited from its strategic partner, Chinese State Investment Company in both ways :

a) A stake of shares from Chinese Government have paved the way for Blackstone to get asset management works for the Chinese State Investment Company. To a PE company, more assets under management means more profit in the coming future. Chinese government is more willing to make Blackstone more profitable due to the issue of "face". This is also why the Hong Kong Stock market flying high during its 10th anniversary of establishment of HKSAR. The recent decline of Blackstone's share price has led to fierce discussions on the investment strategy of China State Investment Company. Therefore, decision makers of the State Investment company need to find ways to drive up the share price in order to reduce internal pressure. This in turn puts pressure on the Blackstone side. Blackstone will also work harder to raise up its share prices as they also don't want to harm the relationships with the Chinese.

b) Greater chance to do business in China which is one of the fastest growing economy in the world. One of the examples is the closing in of Blackstone on its first direct investment in China, a $400 million stake in state-owned chemical company China National BlueStar Group. There will be less obstacles to get into the major business in China and the take over of state owned enterprise.

2. The tax increase issue may only turn into effect on 2012 which is 5 years away. However, this may not be an issue that really matters as nowadays, it doesn't matter much on locations for financial business. There are a lot of locations with enough supports to become headquarter for a PE company and these cities also welcome huge PE group like Blackstone to come. Additional tax burden may force PE to move out of New York which will in turn hurt the finanicial industry of USA. Many financial institutes have already commented that the strict, rigid and complicated regulations in USA is the major reason for its loss of market share to London. Therefore, politicians may need to think twice before they bring critics into actions.

3. Financial service industry relies hugely on great talents. From the great track record of Blackstone, it shows that the company has been great in getting talents to achieve great results and its business model has been proved to be a great and successful one.

From the above, I truly believe that Blackstone is a good company to invest.

PS. I have turned my thoughts into actions and have bought stocks of Blackstone Group.

Lastest Analysis of KB Laminates (1888) Annual Result

Kingboard Laminates Holdings Ltd (1888) has announced its annual result for 2006 on 28th March, 2007. Let's have a close review of this company to see whether the company has any improvements over the past year. Figures obtained from its result announcements were summarized as below with a comparison with the figures from 2005 :

Summary of key figures in 2006 vs key figures in 2005 :

Revenue : HK$8.47 billion (2006) vs HK$ 6.13 billion (2005) +38%
Profit : HK$1.74 billion (2006) vs HK$1.14 billion (2005) +52.6%
ROE : 30.85%(2006) vs 22.62% (2005) +8.23% (simple subtraction)
Gross Profit : 28.45% (2006) vs 28.22% (2005) Similar
Debt to Equity Ratio : 81.74% vs 162.3% (2005) Dropped
Shareholders Equity : HK$5.64 billion (2006) vs HK$5.05 billion +11.68%
PE (2006) : 13.14
(Based on HK$7.53 closing price on 31/03/2007)

Analysis

1. The overall performance of the company is quite satisfactory as the growth of revenue and profit is 38% and 52.6% respectively. ROE also increases to 30.85% from 22.62% which means the management has made use of shareholders equity quite efficiently.

2. The management is set to increase its production capacity by around 35% in 2007 and right now the production is run at about its full capacity which quite encouraging.

3. Increase in shareholder's equity is not quite good as the increase is only around 11% from which it needs around 9 years to double the existing shareholders equity. The company should be more focused on increasing the shareholders equity.

4. Debt to equity ratio is still quite high though it has been dropped from 162.3% of 2005. Such high ratio is due to a 5-year term loan of HK$2.54 billion in December 2006 after the IPO. Without such loan, the debt to equity ratio of the company is only 36.7% which is much more healthy. The management's action of getting loans after the IPO is clearly to avoid the dilution of share interest of major shareholders for giving up too many shares during the IPO and KB Laminate after IPO is a company which can get loans from the bank more easier. However, such action has increased the debt of the company and in turn increase the risk of the company.

Future Risks
1. Price of Copper is rising quickly recently which will increase the cost pressure of KB Laminates.

2. Demand of laminates slow down a bit during the first quarter of 2007 as stated by its management in its result announcement.

3. High debt to equity ratio increases the risk of investment in the company which is led by the loan decision of the management after the IPO. It is no doubt that the Kingboard Laminate (1888) is a better performed company than Kingboard Chemical Group (148) as we have predicted before. However, if the management continued with the mindset (which is common within many major shareholders of Hong Kong listed comanies) of getting easy money from loans through a better company, the company will be harmed finally. This is also one of the reason why the share price performance of KB Laminate is worse than that of KB Chemical.

Conclusion

KB Laminate's performance in 2006 is good and I still recommend this stock as my recommendation of 2007. Many people have been very disappointed with the share performance of this company and it is time for the management to be more focused on increasing shareholders equity at a higher rate and decrease the high debt to equity ratio in order to maximize the interest of shareholders. As long as these aspects are improved, the share price will reflect the true value of the company.

REMEMBER : PATIENCE IS AN ESSENCE OF INVESTMENT

2007 Hong Kong Stock Recommendation - Kingboard Laminates Holdings Ltd (1888)

Kingboard Laminates Holdings Ltd (1888)

Background :
Kingboard Laminates Holdings Ltd is a subsidiary spinned off from Kingboard Chemical Group (148) which focuses in manufacture and sales of laminates and upstream component materials.

1. Is the industry has a growing demand? What is the relationship between demand and supply in the industry?
Ans : The demand for laminates is driven by the demand for PCB. The global laminates market was estimated to have a growth rate of 6~8% in the coming 2 years. The growth rate of China laminates market is around 20~30% in the past 3 years. This means the industry is still in a growing state. With the launch of Microsoft Vista and 3G in China, the demand for PCB is expected to increase in the coming years which in turn will increase the demand for laminates. Kingboard was rated no 1 in 2005 with 9.9% market share in global market and 31.7% in China market. With the large scale of economy, the company can achieve the cost competitive advantage stated by Michael Porter and gain greater market share in the future. In its growth to a larger capacity, it also creates greater barrier for new competitors to enter this industry.

2. Is the company profitable over a period of time and what are their average revenue and profit growth rates?
Ans : The company is profitable for the year 2003~2005 with a profit growth of 158%, 5.8% respectively. The half year result of 2006 has a growth of 58.4% over 2005. The revenue growth for the year 2003~2005 is 56.8% and 31.6% repectively. The company has experienced hard time in 2005 but the growth will continue in the coming future which is reflected in the half year result of it. The gross profit margins from 2003~2005 are maintained in a healthy state with figures of 23.9%, 33.1%, 28.3% respectively. The half year 2006 GP margin is 29.6%.

3. What is the company raising money for? Paying debts? Future development? etc
ANS: 60% of fund raised used for further development of factory production capacity in China. 30% of fund used for paying loans. 10% for working capital.

4. What are the major risk factors when investing in this company?
ANS:
a) The capacity of the company has reached nearly full operation. Its future growth relies on the increase of its capacity.
b) Rise in cost of raw material will damage its profit margin.
c) The tax examptions from Chinese government for some of its subsidiaries will expire in the coming years.
d) Management issues happen to Ocean Grands Chemicals Holdings Ltd may also happen to this company.

5. Are there any odd numbers in their financial statements?
ANS: Not yet find any odd numbers. But the debt rate is high in the past which can be improved after its IPO.

6. Is the IPO price reasonable when compared to its expected profits and dividends? Is it valuable when compared to those companies already get listed?
Ans : The IPO PE is a bit high when compared with other industrial company but it is quite difficult to compare with other companies in the same industry as many of the large competitors in the industry are subsidiaries of large electronics companies for which the results of individual subsidiary is not presented separately. For the dividend, Kingboard is expected to pay not less than 30% of its profits as dividend each year. With the forcast provided by the company for 2006 will not be less than 1623.8 million, the dividend yield will be around 1.95% at minimum. Not very attractive from dividend yield.

7. Find out some key ratios for study such as ROE, ROA, PE, PB, Debt to Equity ratio etc.

Ans:
ROE : 22.62% (2005)
ROA : 8.62% (2005)
PE : 15.4 (estimated 2006 PE based on HK$8.32 closing price on 29/12/2006)
(Assumption : Full 2006 profit : HK$0.54)
Debt to Equity Ratio : 162.3% (2005)
Gross Profit Margin : 29.6% (half year 2006)

As stated before, the debt ratio is quite high before IPO.

8. Any strategic investors? Which investment bank is the underwriter?
Ans : Two rich people in Hong Kong Mr. Cheng Yu Tung and Mr Lau Luen Hung have expressed intersts in buying the IPOs but no further information are disclosed that they have holdings in the company. Goldman Sachs is the underwriter and coordinator which has a good track record in the past.

9. Other Considered Factory

a) The company management have a good track record in managing the parent company of Kingboard Laminates. The chairman has stated the management target for Kingboard laminates is to double its revenues in the coming 5 years and seek proper acquisition opportunites to expand.
b) Kingboard Laminates is the most profitable part of Kingboard Chemical Group, its parent company. Its spin off for one reason is to lower the debt of Kingboard Chemical Group which provides a good opportunity for the market to have a more profitable investment. Spin off of subsidiary is one of the good factor as stated by Peter Lynch in investment.
c) The IPO price is set at HK$7.73 which is around US$1 for which it is clear to set the target for institutional investor holdings.
d) The Kingboard Chemical Group still holds 72.5% of Kingboard Laminates and the shares in the market after over-allocation is 825 million shares representing a market value of hong kong dollar 6.864 billion (calculated based on the closing price of HK$8.32 on 29/12/2006) which is not huge when institutional investors starting to buy its shares. However, the attitude of institutional investors to invest in such small medium enterprise may be affected by the issues happened to Ocean Grand Chemical Holdings Ltd. in 2006.

Conclusion :
After weighing the pros and cons of the company, I still believe that Kingboard Laminates Holdings Ltd (1888) is a company suitable for LONG TERM BUY and HOLD. See if it can be a "tenbagger" in the long run!

Response to Comment on the Analysis of Chinese Banks

Thanks for the comment of an anonymous reader in my blog "Analysis of Chinese Banks Listed in Hong Kong".

The analysis of this blog is a general discussion of the banking industry of China. Agreed that more in-depth discussions needed for better understanding of those Chinese banks.
The reform of Chinese banks has just been started for several years and the historical data for a thorough analysis may not be enough. However, analysis should be based on historical data such that we have a better ground in predicting the future development. CCB had its IPO in Oct 2004 for which its performance in 2005 has mostly truly reflected the actual performance of this bank. I don't agree that the figures are solely for higher IPO valuation.

In the short run, the stock price can be affected by certain reasons such as the market atmosphere, demand and supply of stock during the time period etc. BoComm receives higher multiples in the stock market may be due to the following reasons :
1. HSBC as a strategic investor of BoComm has hold nearly 20% of its stock for which the supply in the market is more limited.
2. HK investors are very familiar with HSBC and trusted its management ability in partnering BoComm but not solely for BoComm's own management.
3. Beliefs that smaller companies may generate better growth in future.
However, the stock price in long run should reflect the effeciency and profitability of a company. 1~2 year does not mean too much in investment. Large size companies in banking industry in the long run should be able to outperform smaller size ones as banking is a capital intensive industry. Of course we need to make sure that the bank is well managed. CCB also has a strategic partner of Bank of America and BOA has also sent a team of personnel to CCB to help to improve their management but this is seldom mentioned by the media. Therefore, I believe that CCB will be able to improve their management to achieve better success.

NPL provision coverage is a good idea to be investigated. The NPL of Chinese banks has now been amplified by the market for which has become the major concern of investors. However, if you believe that the economy of China will continue with its rapid growth, NPL should not be a major barrier in investing in Chinese banks. In contrast, this provides a better opportunity for you to buy their stocks at cheaper price.

Analysis of Chinese Banks Listed in Hong Kong

Banking is an important industry in modern economy. With the fast economic growth in China, the investment value of banks in China has become a major topic for investors who want to share the economic benefits from the growth of Chinese market. According to the policies in China, the largest banks are still state owned enterprise. The largest stake could be taken up by foreign investors should not be more than 20%. This is why HSBC could only take up a 19.99% share in the Bank of Communications. Up to now, the four major state owned banks are Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, China Construction Bank (CCB) and Bank of China (BOC). The fifth one is Bank of Communications but of much smaller size than the big four. For the top five banks, three of them have been listed in Hong Kong Stock Exchange. Below are the comparisons of the three listed banks for their investing values . Major data was taken from their annual reports and prospectus in 2005. In order to give a more comprehensive idea of their performance, I also abstract some important figures from HSBC annual report 2005 which represent an internation performance standard for banks :

1. Major Business Focus

China Construction Bank (stock code : 939)
CCB develop their major business within China and their major loans are for infrastructure contruction and real estates within China. Therefore, their profits are closely related to the economics development of China.

Bank of China (stock code : 3988)
BOC is the best known chinese bank in the world as their major focus is foreign exchange service. Besides china, they also set up branches around the world. About 40% of their profit is from BOC Hong Kong. Therefore, the bank is expected to be more stable in profit but will face higher exchange risk and gets less benefits from the RMB currency rise.

Bank of Communications (stock code : 3328)
Bank of Communictions is operating in a smaller size than the big four and offers more general and customized banking services to the public. With their strategic cooperation with HSBC, the bank is improving their working effeciencies to give a better performance.

2. Size of Business

Loans / Deposits (RMB in Millions)
China Construction Bank : 2,395,313 / 4,006,046
Bank of China : 2,152,112 / 3,699,464
Bank of Communications : 758,773 / 1,220,839

Note : From the above, the China Construction Bank is operating at a higher loans and deposits from which they are more likely to generate more profits and better economy of scale.

3. Key Operating Figures

ROE (Return of Average Equity)
China Construction Bank : 17.99%
Bank of China : 12.14%
Bank of Communications : 13.68%
HSBC : 16.8%

Note : For the ROE, China Construction Bank gives the best performance which is higher than HSBC. Such outcome is reasonable as China is a fast growing economy. The performance of banks in such market should be better than the banks in mature economy. The performances of BOC and Bank of Comunications are quite unacceptable in such case.

Net Interest Spread / Net Interest Margin
China Construction Bank : 2.7% / 2.78%
Bank of China : 2.21% / 2.33%
Bank of Communications : 2.58% / 2.64%
HSBC : 2.84% / 3.14%

Note : The interest rate in China is controlled by the People's Bank of China which is the central bank. However, under such circumstances, China Construction Bank managed to give the best Net Interest performance within the three. In the coming year, the chinese banks are expected to give a higher Net Interest Spread and Net Interest Margin as the central bank has raised the loan rate but maintain the deposit rate unchanged.

Non-performing Loan Ratio
China Construction Bank : 3.84%
Bank of China : 4.9%
Bank of Communications : 2.8%
HSBC : 1.16%

Note : The non-performing loan ratio is one of the major issues concerned by investors as some of the loans have been political loans which may not be executed according to general economic rules. Therefore, the NLR of the three banks are relatively higher than that of HSBC. But Bank of Communications is the best performer among the three.

Cost to Income Ratio
China Construction Bank : 45.13%
Bank of China : 47.95%
Bank of Communications : 51.24%
HSBC : 51.2%

Note : The two large banks has a better percentage than HSBC due to the lower running cost such as lower salaries for staff and lower rent in China. However, Bank of Communication got a higher figure which may be due to their smaller size in operation. In this aspect, China Construction Bank gives the best performance.

From the above analysis, it is obvious that China Construction Bank gives a better performance than the other two and its share performance is more likely to outperform the other two in the long run.