Investment Fundamentals Forum: 16 November 2012

Investment Fundamentals Forum
16 November 2012
Some quick thoughts on Financial

Statements analysis
Alan Lok, FRM, CFA
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Profile of Alan Lok
Alan Lok is the Director of Sabio Global Singapore and has 10 years experience in the finance and strategic
consulting industry spanning across Australia, China, Hong Kong, Malaysia and Singapore.
Alan joined Sabio Global Singapore in 2009 and successfully spear headed the equity research and
corporate training divisions. As the anchor speaker for Sabio Global, Alan appears regularly on media such as
CNBC and The Straits Times where he expresses his views on issues related to behavioral finance and
macroeconomics.
Prior to joining Sabio Global, Alan was an Investment Analyst with SIAS (Security Investment Association of
Singapore) Research, the largest independent research house in South East Asia with over 120 Singapore
Exchange and Bursa Malaysia-listed companies under coverage.
To date, Alan has conducted training for clients from Bank of Tokyo Mitsubishi: UFJ, BNP Paribas, Credit
Agricole CIB (Singapore), DBS, DNB Nor Bank, JL Capital, HSBC, Munich RE and Zen Technology in areas of
asset valuation, derivative accounting, leadership, profiling, strategy economics as well as team building.
Alan also served as an adjunct lecturer () at Xi An Jiaotong University () as well as the
Singapore Stock Exchange (SGX).
Alan currently reads his Master Degree in Business Administration (MBA), conferred by the University of
Manchester in UK. He also holds the title of Chartered Financial Analyst (CFA) as well as Certified Financial
Risk Manager (FRM).
Alan Lok Choon Tong, CFA, FRM 2

(Mr. Alan Lok)CFA()FRM()

Sabio Global
London business school, University of Wales,

Singapore Stock Exchange, DBS, HSBC
(Bloomberg)Financial Times
CNBC,
Alan Lok Choon Tong, CFA, FRM 3

Financial Statements Analysis
Two portions
Part 1 deals with Basic standard operating procedure
(SOP) for financial statement analysis
Pat 2 illustrates how to apply the frame work during time
constraint situation as well as doing so with a knock out
punch
Financial Statements Analysis Part 1
Basic structure of a typical financial statements
Cover page
Financial highlights
Narrative statements
Financial statements
Appendices and references
Standard operating procedures (SOPs) for analysis
Sources of intelligence
Analysis strategies
Revenue drivers
Cost drivers
Liquidity drivers
Efficiency drivers
Solvency drivers
Valuations pointers
IPO prospectus
Industry overview
Historical performance
Share structure
Class A versus Class B shares
Annual report
Consolidated statement of comprehensive income
Statements of financial position (commonly known as balance sheet in the past)
Consolidated statement of changes in equity
Consolidated statements of cash flows
Notes to financial statements
Statistics of shareholdings
Statistics of warrantholdings
Quarterly report
Consolidated statement of comprehensive income
Statements of financial position (commonly known as balance sheet in the past)
Consolidated statements of cash flows
Special announcements
Analyst report
Economic
Industry
Company result update
Company event update
3rd party forum
Elite traders http://www.elitetrader.com/
Channelnewsasia http://forum.channelnewsasia.com/
Hardwarezone.com http://forums.hardwarezone.com.sg/
Alan Loks VALUE investing blog http://geckochart.com/
Alan Loks TWITTER alan.lok@sabioglobal.com
Professional services
Factiva
Shareinvestor.com
Euromonitor
Analysis strategies
Time regression analysis
Five years
Financial shenanigans cannot hide themselves for too long
Beware of change in volatility regime
Global financial crisis is an exception; where we witness REIT yielding +20%
Ratio analysis
Cross sectional analysis
Comparable companies are hard to find
Pure play companies are difficult to pinpoint
P&G versus Unilever
Need to adjust for differences in capital structure
Starhub versus Singtel
Ratio analysis
Revenue drivers
Average selling price
Volume changes
Breakdown of revenue sources: via geography
Breakdown of revenue sources: via product category
Time regression analysis 5 years
Cross sectional analysis
Cost drivers
Cost of goods sold
Administrative cost
Transport & distribution cost
Other operating expenses
Interest cost
One time disposal gain/loss
Extraordinary income/loss
Liquidity drivers
Current ratio
Quick ratio
Interest coverage ratio accrual based
Interest coverage ratio cash flow based
Basically measuring how the company is financing its short term obligation
Efficiency drivers
Inventory days
Receivable days
Payable days
Cash conversion days
Asset turnover
Basically measuring how hard is the company wiping its assets
Solvency drivers
Net gearing ratio
Financial leverage
Basically measuring how the company is financing debt obligation
Valuation pointers
Gross profit margin
Operating profit margin
Net profit margin
Price to book ratio
Price to earnings ratio
Enterprise value to EBITDA ratio
Price to sales ratio
Tell-tale signals on financial statements
Income statements: revenue drivers
Income statements: margin analytics
Income statements: COGS drivers
Income statements: extra-ordinary items
Balance sheet: current assets
Balance sheet: fixed assets
Balance sheet: liabilities
Balance sheet: shareholders equity
Off balance sheet analysis
Lets move on to implementation in part 2
Knowing what you are after and whether is it practical in reality
What is a company?
What does a share represents?
What are you actually buying?
Activities: Lets go through a hypothetical example for clearer illustration:
MACRO HARD: The company starts up with a starting capital of $400; went on to
borrow $600 from the bank. With the proceeds, Macrohard went on to purchase some
fixed assets costing $700. The rest remained as cash. The balance sheet will appeared
as follow:
Assets Liabilities
Cash $300 Bank Loan $600
Fixed assets $700 Equity $400

Total $1,000 $1,000
Now, Macrohard went listed on SGX and issued 10 shares.
In theory, one share would be worth $40 on book value. That represents the net claim on company
asset shall the company decides to liquidate and assuming the fixed assets can indeed be sold at
the initial purchase price.
If the market price of share is $40, the price to book value is 1.0 time; a seemingly fair value given
that one would be paying for some intrinsic value. Or is it so?
If so, how can one explain stocks that are trading at above 1.0 time book value; stocks such as
GLP and Noble?
GLP (SGD) at 2.64 times & Noble Group (HK) at 2.58 times
On the other hand, how can one explain stocks that are trading below 1.0 time book value; stocks
such as China Eratat and Li Heng?
China Eratat (SGD) at 0.74 time & Li Heng at 0.39 time
Answers:
Underlying earning potential
Perceived earning potential
Perceived accounting irregularity
Investment horizon mismatch
Irrationality
Net profit margin
Net profit divided by revenue
Basically an indirect measure of competitive advantage
In some cases, a direct measure of brand power
Asset turn over
Total sales divided by total asset
Basically measure how hard is the management pressing on the assets available
Financial leverage
Total assets divided by shareholder equity
A direct measure of the company degree of gearing
During credit liquidity crisis, this ratio can be critical
Net profit margin x Asset turn over x Financial leverage = Return on equity
Assuming zero dividend payout
Return on equity (ROE) simply measures the speed in which retained
earnings (henceforth book value) grow
Assuming of course that none of the 3 ratio changes as book value
increases
Which we know in reality is not possible!
With just price to book ratio & a dependable forecast of future ROE figure;
we can get immediate insight on the appropriate VALUATION for a stock
Something special about price to book ratio!
Note: ROE x retention ratio is a very good gauge of the number of

years a company takes to catch up with its targeted book value.
Assuming the ROE and retention figures remain constant during that
period.
*** Now, the same old story can also be generated using Price
Earnings Ratio (Yes, you got it, our old PE ratio friend that many analysts
and analysts used all the time);
Utilizing book value & ROE to function as a comprehensive analyzer
Lets go straight to the spread sheet to demonstrate the ultimate valuators
power!
Bring in AMAZON & Face book
Assumptions behind the models
ROE drivers
Why are comparable benchmarks no longer necessary
Adjourned: Q & A
Alan Lok Choon Tong, CFA, FRM

Email: alan.lok@sabioglobal.com
Blog: http://geckochart.com/
LinkedIn Connection: http://www.linkedin.com/pub/alan-lok-frm-cfa/14/821/50a
Thank You
Alan Lok Choon Tong, CFA, FRM

Email: alan.lok@sabioglobal.com
Blog: http://geckochart.com/
LinkedIn Connection: http://www.linkedin.com/pub/alan-lok-frm-cfa/14/821/50a

Investment Fundamentals Forum: 16 November 2012

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Investment Fundamentals Forum

Some quick thoughts on Financial

Alan Lok, FRM, CFA

Alan Lok Choon Tong, CFA, FRM 2

(Mr. Alan Lok)CFA()FRM()

London business school, University of Wales,

Alan Lok Choon Tong, CFA, FRM 3

Lets move on to implementation in part 2

Activities: Lets go through a hypothetical example for clearer illustration:

Cash $300 Bank Loan $600

Fixed assets $700 Equity $400

Note: ROE x retention ratio is a very good gauge of the number of

Alan Lok Choon Tong, CFA, FRM

Alan Lok Choon Tong, CFA, FRM

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