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16 November 2012
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).
(Bloomberg)Financial Times
CNBC,
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
Basic structure of a typical financial statements
Cover page
Financial highlights
Narrative statements
Financial statements
Appendices and references
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
Standard operating procedures (SOPs) for analysis
Sources of intelligence
Analysis strategies
Revenue drivers
Cost drivers
Liquidity drivers
Efficiency drivers
Solvency drivers
Valuations pointers
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
Sources of intelligence
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
Sources of intelligence
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
Sources of intelligence
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 1
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 2
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis 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?
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 2
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 2
Answers:
Underlying earning potential
Perceived earning potential
Perceived accounting irregularity
Investment horizon mismatch
Irrationality
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 2
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 2
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 2
Something special about price to book ratio!
*** 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);
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Financial Statements Analysis Part 2
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
Investment Fundamentals Forum Copyright CFA Singapore, Sabio Global and SGX. All rights reserved.
Adjourned: Q & A