Baltic Dry Index Plunges As Warned!

Previously: Could This Be The Start Of The New Leg Down For BDI?

That posting was posted on 28th Jan 2009, Baltic Dry Index then was at 3118.

Here's how the Index has been doing since then.

Time to bring out the goats again from the farm and start gloating eh?

As highlighted in the earlier posting Could This Be The Start Of The New Leg Down For BDI?

• The industry expects further weakening with the approaching Chinese New Year
• K S Nair, director of Shipping Corporation of India said, “There will be no trade to China now, and unless economies like the US and Europe open up to see more exports out of China, there will be a lull.”Besides, monetary tightening in China may also curb demand for more imports.
• Meanwhile, a slew of new ship deliveries in the next two to three years also loom hard on any expected revival in the shipping market and till economies like the US and Europe open up, shippers will face the heat of volatility.

The 'slew of new ship deliveries in the next two to three years' is rather interesting because as mentioned before this could "potentially equate to supply of ships more than the demand for the shipping."

Here's an article published on 25th Jan The Baltic Dry Index Is About To Be Crushed Once Again

• FTAlphaville highlights that broker Icap expects 1,400 vessels to be delivered in 2010, which equates to 120 vessels per month on average. (Even if in reality they won't be spread out evenly) How bad is 120 ships per month relative to what the market has had to deal with so far?
  
  At no point during 2009 did the rate of delivery exceed 60 vessels in one month – but even if this rate of delivery were maintained throughout 2010 it would still equate to slippage of around 50 per cent. However, in light of the sheer size of the orderbook, and despite high levels of slippage, the market still faces the prospect of continued tonnage growth.
  
  This doesn't mean every dry bulk company is toast, but it does mean that the Baltic Dry Index's strength can't be sustained forever, especially with China beginning to tighten its monetary policy and restrict economic growth. (China, as half of global steel demand, is the major driver for bulk shipping rates).
  
  If a shipping stock makes sense after plugging-in half the rates it earns today, then it could be a decent value, but if it requires current rates to be sustained then it's a highly speculative bet going forward, where the odds are stacked against you.

120 new vessels is a lot, yes? One has also to consider the number of existing vessels too. And from the same article, the following chart of dry bulk carriers orderbook is another worry.

The Receivables Issue, MaeMode, Mems And Megan

Comments from the posting MaeMode And Its Receivables Again!

• solomon said...
  With receivables 1.5x of shareholder equities and the company's RM300 million loans, I think this company financial is very very weak.
  
  From the company cashflow statement, interest paid per quarter is RM7million x 4 quarters = RM30mil annually. The cash balance of RM31mil is only managed to pay off the one year interest.
  
  Brother Moolah, "pi po pi po" I think this company need a financial doctor ASAP.///If the bankers pull the brake, could it be the next LCL? Please advise me.

I actually feel that it's difficult to predict if any company would be the next company 'like' LCL. Nothing in life is ever truly certain and in the corporate anything that might happen could happen. And the unexpected could certainly happen too.

So would MaeMode turn into a LCL?

The issue of trade receivables is so simple for me. Company makes sales, company should collect them sales. All of it. A sale is never a sale until ALL the money is collected.

Which is why when I look at a company's balance sheet, I would not like to see high receivables increasing.

Obviously this would suggest to me that 'most likely' the management is either lousy because the company is not able to collect the money due to them. (yes, I would not complicate things here by suggesting fake sales - so for simplicity sake, let's assume all sales and receivables are legit).

And to make matters even illogical is when I see the company's debts increasing at the same time too.

It just does not make sense.

Why borrow more from the bankers when there are already so much money owed to the company?

Why can't the company collect these money instead of borrowing more?

And from a business point of view, if one is offered to be a co-owner of such a business, would such a business proposition appeal? Won't the logical answer be NO? Why would one want to be a co-owner in a business which requires more and more funding when it cannot collect the money owed to them?

And since I equate investing to owning a business, I would always, always shy away from such business opportunity. No matter what future prospect the company says it could achieve because in the long run, for me, without collection, such a business would most likely go no where.

Of course, having said that, I understand I could miss out on one or two opportunities! Such mindset is never 100% fool proof because because sometimes the wheel of fortune could really turn for such a company but this is something I would not want to bet on it because I am merely speculating that changes out of the blue could happen. I would rather forgo such an opportunity and invest in a company which has no such risks.

And sometimes, being safe, does work. Ok, I am not bringing out the goats from the farmville and let them gloat all over this posting but let me show an incident where investing using such a mindset did work out. It did prevent the investor from losing their money.

Here's my most famous example written way back on Oct 2005, Megan

• And then their trade receivables increased by some 17 million to an unbelievable 270 million! Holy moo-moo cow! What kind of business is Megan running? Selling without collection?

Yup, the classical selling without collection and debts increased soared too. Rest were history as Megan turned into one massive accounting fraud!

Or how about Mems technology. Yet another deeply troubled company too. From the posting Mems Tech Directors Charged!!

• A couple of months later, I wrote A Brief Look at Mems Latest Quarterly Earnings
  
  It was astonishing! All the warnings signs were lit. Trade receivables were insanely high when compared to its sales revenue. Cash depleted to a mere 3.191 million and loans increased by 7.441 million to 50.796 million!

Now coincidentally Mems reported its earnings last night.

It lost an incredible 21.1 million!

And the main culprit? A 20.9 million provision for doubtful debts!!!

Yup, as mentioned in yesterday's posting MaeMode And Its Receivables Again!

• And I wonder, since it's the receivables are in MaeModes books for so long, what if these receivables are scrutinised and review in depth? What if a huge portion needs to be reclassified as doubtful debts??? And when this happens, due to size of the receivables, won't MaeMode get hit by huge loss provision for these doubtful debts??

Again this is a possibility yes?

Maemode's receivables is at a totally unreal 355 million!

It's simply way too much!

And for the long term investor the risk has got to be what if these debts needs to be reclassified as doubtful debts??? Won't MaeMode get hit by huge loss provision for these debts???

MaeMode And Its Receivables Again!

It's almost an year since I wrote on Malaysian AE Mode or MaeMode.

21st Jan 2009, I wrote Update Again On MaeMode

Let me copy and past what I wrote a year ago.

---------------------------------------
Here's an update to the posting: Would You Buy MaeMode?

MaeMode announced its earnings tonight.

And as you can see, the key yardsticks simply got weaker and weaker!

The margins is still thin. Net debt post increased yet again and the trade receivables are still ballooning at an extremely alarming rate!

Past postings on MaeMode:

1. A look at MaeMode again
2. Mae, I hope I am not WRONG!
3. Reply to Mae, I hope I am not WRONG!
4. MaeMode Again
5. The Trade Receivables In MaeMode
6. Would You Buy MaeMode?

--------------------------------------

My issues on MaeMode were simple. Razor thin margins, high debts and an insanely high receivables in its books.

MaeMode announced its earnings last night. Here's a news article from the Edge Financial: MAE 2Q net profit plunges to RM26K

• MAE 2Q net profit plunges to RM26K
  Written by The Edge Financial Daily
  Thursday, 28 January 2010 23:35
  
  KUALA LUMPUR: MALAYSIAN AE MODELS HOLDINGS [] Bhd's (MAE) net profit for the second quarter (2Q) ended Nov 30, 2009 plunged to RM26,000 from RM6.38 million a year earlier mainly due to lower turnover and lower profit margin from projects.
  
  MAE said on Jan 28 customers' delay in taking delivery of the projects was also a contributing factor.
  
  Revenue dipped 10% to RM115.12 million from RM128.43 million while basic earnings per share fell to 0.02 sen from 5.96 sen previously.
  
  For the six months ended Nov 30, 2009, net profit fell to RM503,000 from RM11.55 million a year earlier while revenue fell 23% to RM196.62 million from RM256.22 million. EPS fell to 0.47 sen from 10.8 sen.
  
  MAE said its board remained cautious about the weak global economic environment which might impact its future performance but was optimistic it would remain profitable in the remaining quarters of the financial year ending May 31, 2010.

Here's how MaeMode's numbers are stacking up.

Look at the size of the receivables!!!

It's 355 million!!!

Forget about investing for a moment and just use some normal business common sense. Don't you wonder about such a company? How could they run a business where you have amount due to the company snowballing each year? The table says it all. In 2002, receivables were only at some 56 million. It's now 2010 and receivables have blown to 355 million!

And the even more incredible thing about this receivables comparison between MaeMode's fy 2002 numbers and current is that in fy 2002, MaeMode made 8 million. Now? It's less than one million but people owing MaeMode has snowballed to 355 million!

Yeah holy cow!

How could a company be run in such a manner???

And I wonder, since it's the receivables are in MaeModes books for so long, what if these receivables are scrutinised and review in depth? What if a huge portion needs to be reclassified as doubtful debts??? And when this happens, due to size of the receivables, won't MaeMode get hit by huge loss provision for these doubtful debts??

How?

Could This Be The Start Of The New Leg Down For BDI?

Had not made any update on the Baltic Dry Index for quite some time already.

My last posting was on 12 Nov 2009, The Baltic Dry Index Continues To Surge But Is it Sustainable?. BDI then closed at 3748 and the posting questions the sustainability of the surge.

Since then BDI had corrected quite significantly.

Yesterday I noted a stronger downward movement in the index. The Index closed at 3118, down some 2.7% and yes, I am wondering, would this be the start of a new downtrend movement?

The following news article was rather interesting: Shipping industry in choppy waters

• ... While large ships like Capesizes have lost sheen, the decline in the last few days was led by a 6.7 per cent drop in medium sized Supramax hiring rates.
  
  The industry expects further weakening with the approaching Chinese New Year.
  
  K S Nair, director of Shipping Corporation of India said, “There will be no trade to China now, and unless economies like the US and Europe open up to see more exports out of China, there will be a lull.”
  
  Besides, monetary tightening in China may also curb demand for more imports.
  
  Although analysts feel correction in short term may not be dramatic, any fall further from this level could be a cause of worry.
  
  Vikram Vilas Suryavanshi, an analyst at Karvy Broking said, “There will not be too much left for shippers below 3,000 levels and then again dry bulk ships could be laid up.”
  
  Meanwhile, a slew of new ship deliveries in the next two to three years also loom hard on any expected revival in the shipping market and till economies like the US and Europe open up, shippers will face the heat of volatility.

The Chinese New Year should indeed a factor but I found two interesting points being mentioned.

The monetary tightening in China is already considered to be an issue for the shipping industry. Hmmm... rather fast, eh?

And not helping.... a slew of new ship deliveries.... which would 'could' potentially equate to supply of ships more than the demand for the shipping.

How?

Offer For Hume Industries Is Way Too Low

Wrote this the other day: Taking Of Hume Industries 1,2,3!

I took a wild guess and assumed that Hume Industries could ring in some 30 million in earnings.

Well Hume Industries reported its earnings tonight and guess what, I was little short. Hume Industries earnings came in at 34 million instead!

Anyway, look at the EPS for half year, it's 32.7 sen. How much do you think Hume Industries eps for the fiscal year to be? Annualised at 65 sen per share? Or perhaps at some be a bit more optimistic and assume an eps of 80 sen? Not possible.

And based on current prices, won't Hume Industries be the perfect investing gem?

Of course no.

The owners want to take this stock private at 4.30!!!!

Sigh!

Let's cheer for the investing and the great investing prospects where companies like Hume Industries can be taken private as per owners fancy.

The offer for Hume Industries to be taken private is not only seriously under valued but it makes a total mockery of the share market too!

Dali San On BFM!!!

Congratulations to Dali San :D

If you miss out, you can catch the interview here again.

Part 2

The Delisting Of Englotechs

I had always paid attention to Trade Receivables in a company's account.

In the posting The Receivables Issue And Megan

• Point is .. when trade receivables keeps on increasing each single quarter, then it is utmost prudent that the investor be on the alert... for these trade receivables can easily be re-classified as doubtful debts!

Or how about Transmile Receivables?

Anyway on Sept 2007, I wrote on Englotechs Trade Receivables. I found it so incredible because I was looking at a company which said it had "gone on a exercise to boost sales revenue by offering easier credit terms!" The company was so financially weak, loans kept on increasing and the company wanted to offer easier credit terms??!!

May 2008, on the Edge Financial Daily.

• 02-05-2008: 12 report accounts deviations in a day
  by Sharmila Ganapathy
  
  KUALA LUMPUR: As many as 12 companies, the majority of which are listed on the Second Board, reported deviations between their unaudited and audited accounts for the financial year ended Dec 31, 2007 on Wednesday.
  
  Topping the list by variance size was Main Board-listed Englotechs Holding Bhd, which reported a 720% deviation between its unaudited and audited FY07 profit after tax figures.
  
  Englotechs reported unaudited net profits amounting to RM3.14 million versus the audited RM19.5 million audited net losses reported for the year.
  
  In a filing to Bursa Malaysia, it said the variances were due to a RM14 million provision of doubtful debts and net unrealised foreign exchange losses.

Yup, the nightmare came true as a portion of Englotechs receivables were reclassified as doubtful debts!

March 2009 MARC downgrades Englotech

• MARC said on March 27 the rating action was based on the cotton glove manufacturer’s failure to meet its profit payment of RM1.7 million due on March 26 this year as confirmed by OSK Trustees Bhd...

On today's papers.

• Englotechs to be delisted
  
  Published: 2010/01/27
  
  ENGLOTECHS Holding Bhd will be delisted from the stock exchange on February 8.
  
  Bursa Malaysia Bhd yesterday said it had dismissed Englotechs’ appeal on the delisting.
  
  “After due consideration of all facts and circumstances of the matter, (Bursa Malaysia) decided to dismiss Englotechs’ appeal and to delist the securities of the company,” the regulator said.

How?

Don't you think it's very important to pay attention to this trade receivable issue?

Companies can record sales very easily. As they say locally, 'sell cheap, cheap, sure got people buy one'. Selling cheap ( got profit?) is easy, collection is another story. And when time pass too long without collection, these receivables needs to be reclassified as bad debts.

Just take a look at Englotech today.

Does Anyone Care If It's Really A Bubble In China?

Here's a copy and paste of an interesting posting on Angry Bear website, Is China a Bubble?

• by cactus
  
  Is China a Bubble?
  
  A friend of mine who does just about all of his business providing a very specific service to selling to companies who do business with China. (And yes, that is as specific as I am willing to be, except to say that right at this moment, the service he provides is extremely tailored toward China.) My friend tells me he believes "China is a bubble" which very much resembles the dot com bubble and the housing bubble. According to him, this is the resemblance - there is no due diligence to speak of on any deal involving China, not from the Chinese and not from the Westerners dealing with them, and all the deals are being done with "other people's money" and heavily leveraged.
  
  In most instances, on the Chinese side, everyone is in some way connected - that is to say, they are connected to one of a few key organizations, or more likely, key people in the government. The more such people involved in the deal, the more people there are who are used to big payoffs and have the juice to make sure they will get paid. The Chinese government ends up providing its "blessing" to all sorts of crazy operations based on the simple principle that once enough people who have to get paid are involved,a project cannot be stopped. And its not merely that connected people have leverage; in China there is a feeling that this is China's time, so its not like something can go wrong. Throw in the unlimited pot of money trying to do business in China, and you end up with big projects - half a billion dollars and up - happening simply because they have to happen for the sake of the parties that put them together.
  
  The Westerners also have the sense that it is China's time. So if you ask them about a particular deal they're doing and why they're doing it, if you scratch hard enough, it comes to because "its China." That includes the very biggest private equity funds in the world.
  
  The end result is that a lot of things are happening that make no financial sense and wouldn't pass the laugh test if the magic word "China" wasn't there. Deep down everyone knows it, but nobody cares.
  
  So is my friend planning to get out? Heck no. He simply makes sure on every contract that he gets paid early. Everyone he's dealing with is very happy to comply since the expectation is that China is going to grow forever. Being shortsighted as far as everyone else is concerned has had some big benefits, and so far he's done very, very well. Of course, if he's wrong, he'll lose out on the gravy that comes in the back end. If he's right, he'll move on to servicing the operators of the next bubble when this one bursts, no worse for the wear.
  
  I don't know enough about doing business with China to say much other than I trust my friend's judgement, and if he tells me he's seeing no due diligence on multi-billion dollar projects, it means there are multi-billion dollar projects with no due diligence happening. I do that the demographics are going to get very interesting in China over the coming decade. With my limited knowledge, I'm leaning toward agreeing with my friend. So waddaya think? Is China a bubble?

Well waddaya think?

Doesn't stories like this sounds so ever familiar?

And that phrase " since the expectation is that China is going to grow forever" is so ironic in my flawed opinion. Usually forever simply doesn't even last forever. So what is forever?