Never Judge A Book By Its Covers, In This Case Book Value!


In investment, it’s wise to never take things at face value! Judging a book by its eye-catching cover might not reveal the mundane story inside and a book with a bland cover might have treasures awaiting you!

In the world, there are various industries and businesses with every line being unique. Different businesses are affected by different factors, leading to a whole different ball game.

That is why we have different valuation tools (P/E, P/B and EV) to work with! If you are looking for a one-fit-all universal valuation method, I am sorry to break it to you that it’s as elusive as the proverbial pot-of-gold-at-the-end-of-the-rainbow.

Let’s Check Out What Is P/B Good For!

P/B valuation is more applicable to asset-heavy firms, the higher the transparency, the better. As at FY2013, Haw Par Corp Ltd (SGX:H02) had S$1.5bil in Available-for-sale financial assets, this alone was 60% of Total Assets! But we should never throw caution into the wind, but instead adopt a sceptical mentality with the first question being, “What exactly are these assets made up of?

Upon their disclosure, S$1.4bil was attributed to shareholdings of United Overseas Bank Limited (SGX:U11). This should go a fair bit in assuring us of the quality of the assets in place! Some reasons why Haw Par doesn’t trade at Fair Value of its Assets (1x P/B) would be the issue that it’s given a Holding Company discount as well as the chance that these gains would not be realised and may be taxed even if they were realised. But this is a tale for another time!

The More Liquid Assets Are, The Closer To Book Value It Should Trade At?

Essentially that is the case, for example when you are trying to value an engineering firm, you might not take their Equipment at face in the event that the demand for it isn’t high. Hence a discount might be applied to entice buyers.

But No Matter What Cash Is Cash Right? Right?

Most of the time, Cash is valued at 1x P/B, Cash is fungible; it’s the most liquid form of asset.

Well in most parts of the world, that would be the case, but here in Asia with rat meat masquerading as lamb meat, nothing is safe! A case in point would be S-Chips with their reputation preceding them. With their operations in China, the first question to ask would be, “Why would they want to list in Singapore when Hong Kong is just in their backyard?

When Is Cash Not Cash? Presenting Eratat Lifestyle Ltd!

For Eratat Lifestyle Limited (SGX:FO8), some questions that pop to mind after a glance at their 3Q2013 Balance Sheets before they were suspended in Jan-2014 would be:

1)    Given their huge cash pile, why do they even need to issue a RMB103mil Bond

2)    Why is their Trade Receivables so high, close to their 9M2013 Rev


In FY2013, they fluctuated around S$0.10/share, with 474,912,514 shares outstanding; this would give them a market cap of S$48mil or RMB239mil. They were trading at 0.23x P/b and was priced at lower than their Cash Less Total Liabilities of RMB409mil!!!

Value In Action

This really puts Eratat’s Nov-13 SIAS Investors’ Choice Award for Corporate Governance in question. Just 2 months later, they were suspended for corporate governance issues. How ironic.

Even though what we presented was a rather extreme example, it pays in investing to be extra cautious and like we said, never take anything at face value!

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.

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