Bull Stock: Raffles Education 1 comments

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Over the last five years, the top performer on the SGX has to be Raffles Education. It is a prime example of the bargains that one can pick up among the small caps which are always badly hit in a recession, and illustrates the wisdom of those timeless adages "buy-and-hold" (when done intelligently) and "let your profits run". It has opened my eyes to the massive rewards and long-term competitiveness that a strong position in a niche industry can bring.

Raffles Education, formerly known as Raffles Lasalle, enjoys that dominant niche in the China creative design education industry. It derives about 60% of its education revenue from North Asia, primarily China, where it operates eight design institutes in major cities like Shanghai and Beijing, up from four in 2002 when it listed on the Sesdaq (from which it has obviously moved out into the Mainboard since). In Singapore it now operates 5 design institutes, up from 1 in 2002. It also has grown its footprint into new Asian regions Malaysia, Thailand, India and Australia (the last via acquisition), and through its acquisition of locally-listed Hartford now derives about a quarter of its overall revenue from management courses.

If the numerical growth in the number of design institutes (ie. revenue centres) has been impressive (5 to 13 within 4 years or an annual compounded 25%), the financial performance has been even more impressive. Revenue has grown from S$15M to S$60M, an annual compounded 40% (and suggesting increasing student numbers at every institute every year), while profit has grown from S$4M to S$20M, an annual compounded 50% (suggesting increasing margins on base revenue ie. pricing power). That is simply breathtaking.

And yet there is something even more impressive than its financial performance, and that is its share price performance. Raffles Lasalle IPOed at 21 cents in Jan 2002; today it is trading at 1.80. But that is a massive understatement of price growth. Look at all the share splits/bonuses it has undergone over the years. 2:1 share split in Jan 2003, 1:2 bonus issue in Oct 2003, 2:1 share split in Oct 2004: that means outstanding shares has multiplied 6 times. An IPO investor who had held tightly to his Raffles Lasalle shares these four years would have multiplied his initial investment about 50 times, or an annual compounded 260%.

Well, this is the classic Philip Fisher growth stock. Not only did its strong business model earn it impressive year-on-year profit growth, but the market has kept on revaluing its fair trading P/E multiple. In 2002, the company was IPOed at 7 times trailing PE. Over the years the market has increased this to a current >40X P/E today. That is the reason why share price performance has outperformed profit growth by so much.

One cannot help but compare the fortunes of Raffles Education with that of a former market favourite in the same industry, Informatics. The failures of Informatics, of course, has been well-documented. Its IT education model slowed after the dot-com boom and it was followed by bad debts and aggressive accounting which ultimately dragged its hard-built brand equity through the mud. Reputation, more than anything, is what makes or breaks a service provider in service-oreinted industries such as healthcare or education. But Raffles Education is one stock I wouldn't dare to put on my hotstocksnot blogsite anytime soon, simply by virtue of its great track record as documented above. But then again, they say that the most unexpected decline starts when the last bear is gored. So let's play it by ear.

Personalities: George Soros 0 comments

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After Warren Buffett, George Soros is probably the most well-known market player in the world today. He has been in Singapore these past few days following a visit in Indonesia, and has given a few talks widely covered in the local papers (where he predicted a burst of the US property bubble), so it's an opportune time to cover him now.

Soros and the Quantum Fund that he used to run has been known widely in financial circles since probably the 1970s. Quantum, the hedge fund, was set up in 1969 with Jim Rogers, another legend who recently also visited Singapore (he was cited widely for his bullishness on China), and the fund engages in speculation in commodities, currencies, stocks, bonds, derivatives ie. the whole spectrum of investment instruments, with the employment of massive margin in the case of currencies and derivatives. That use of margin, partly, explains why the fund was able to achieve 33% per annum compounded returns for ~30 years ie. a 5000-bagger for an investor who stuck with the fund through thick and thin.

But the man would probably not have entered Asian consciousness in such a pervasive way if not for his alleged role in precipitating and exacerbating the 1997 Asian currency crisis by shorting several Asian currencies, as accused by Dr Mahathir. In the Western world, he probably acquired his infamy in his successful shorting of the British pound in 1992 (he believed, correctly, that Britain's currency position in the new European system was untenable) which reaped him a one-day gain of US$1B, and later in 1998 for his comments on the need for currency reform in Russia which set off a 25% collapse in the rouble within a week (Soros himself lost heavily as a result of that).

First and foremost, George Soros is a currency speculator -- that was where he made most of his big bets and big money. He is also a macro trader, which means he observes macroeconomic trends taking place in the global markets and takes positions based on his analysis and insights of their implications. This is opposed to investors like Warren Buffett who typically assess industry trends and perform detailed company analysis. Macroeconomic trends (eg. state of the economy, interest rates, fluctuations in currency markets, commodities, stocks) are often inter-related and Soros' ability to comprehend the abstruse links between them is legendary; he even has a term for it: reflexivity, which is basically a description for the feedback process that a change in one factor affects the input factors that caused the change in the first place. His bets also often take on a multi-asset approach, similar to the combined arms approach in modern warfare I guess. For example, for the 1991 British pound attack, he shorted British bonds together with the pound, and longed German marks (to protect the falling pound, the Bank of England would raise interest rates which would cause bond prices to drop; in this European crisis, German marks would be the safe haven and appreciate accordingly, ie. a convergence in value between British pound and German mark).

There are several defining qualities of George Soros' trading style, in addition to his macro-analysis approach in generating trading ideas. The first is his use of heavy margins, especially in currencies and derivatives. Such leverage can produce huge rewards when the market position moves favourably but can wipe out the trader if not: it necessitates a short-term trading approach (for if one bases his decisions on the long-term, he might not be able to see it through as short-term fluctuations clear off his margins), and also one that requires trading with the (price and market) trend. Soros constantly analyses his position real-time as the market always re-adjusts, a consequence of "reflexivity". The second quality is a consequence of the first: Soros is able to switch his position at a moment's notice as he observes the macroeconomic, corporate or price developments unfolding before him. This is not easy for we typically condition our beliefs according to our incumbent investments, when in fact it should be the opposite. As Soros himself says, ""Its not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." Typical mental framework of a successful speculator, and George Soros is the best there is.

Today the Quantum Fund is converted to an endowment fund in the wake of the Y2000 dot-com crash which slaughtered the long stock positions held by the fund; it now adopts a more conservative investment policy. Soros the billionaire is now active in philanthoropy, particularly in Eastern Europe but also in his adopted homeland of the US. Now apparently he has established one in Indonesia as well; that was the purpose of his visit to the exotic contraption that is Southeast-Asia. I wonder if Malaysia, and in particular a visit to former PM Mahathir, might be on his itinerary this time round? Maybe they'll just laugh off the Jewish conspiracy theory that was so popular during the financial equivalent of a nuclear fallout in 1997-98.

References:
(1) Money Masters of Our Time (John Train)
(2) The 1997 "Asia Crisis" (Peter Myers, July 1, 2003)