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Saturday, 27 October 2018

MeGroup Ltd.

MeGroup Ltd ("MeG" or the "Company") is offering 16.5m shares for its IPO on Catalist for which 15m shares will be via placement and 1.5m shares via public offering. The IPO will close on 29 Oct 2018 at 12pm and starts trading two days later. The market cap based on the IPO price is $27.3m

Principal Business

MeGroup manufactures noise, vibration and harshness components primarily for the automobile industry in Malaysia. It also owns and operates automobile dealerships in parts of Singapore. The dealerships include Honda, Mazda and Peugeot brands. 

Financial Performance

While the dealership business forms the bulk of the revenue, it terms of profitability, it is a stable but low margin business with a gross profit of only 6.7% (see table below). On the other hand, while the manufacturing enjoys high gross profit margins, its performance can be inconsistent, where it suffered a loss in FY2017 due to fire incident.

The Company is listing at at PE ratio of around 9.2x based on the enlarged share capital.

What I Like About the Company
  • Growing car hub with lower cost base - being located in Malaysia, the labor cost is still relatively lower than other regions and that can be advantageous if the car manufacturing industry grow in Malaysia. While the political uncertainty in Malaysia can weigh down on the industry, Mahathir is a big advocate for a new national car! See link here. This bodes well for the manufacturing business but probably detrimental to its car dealership business 
  • Growing economy bodes well for car ownership - If the new government can eradicate corruption and improve the economy, then it will bode well for the Company as car sales will likely improve as sentiments improve
  • Relatively stable business - Other than the dip in revenue and profitability in FY2017 due to a fire incident, the business of MeGroup seemed pretty stable. 
Some of my concerns
  • Family run business - The Wong family comprises the CEO, Mr. Wong Cheong Chee who is 70 years old, and the 3 children, Wong Keat Yee, Wong Sai Hou and Wong Sai Keat. The Wong family will continue to control and run the company post listing but family run business always run the risk of internal squabbles and not hiring the best person needed for the role 
  • Small cap and Thinly traded - The company will have a low market cap of $27m and the ownership is tightly held by the founders and a handful of investors. As such, only 13.9% of the Company will be held by public investors. Investors who subscribe to this IPO will probably need to be wary of the thin liquidity in future
  • Malaysia exposure - the entire business is derived from Malaysia, hence the political stability and business environment is critical. Given the listing in Singapore, investors here will be having a direct exposure to the Malaysian ringgit as the revenue and dividends (if any) will be translated from MYR to SGD.  
Mr IPO ratings

The weak market sentiments and looking at IPO performances for the last 12 months, i think investors are probably better off giving the IPO market a miss. The listings from Malaysia such as Jawala, Aspen as well as the recent listings are all in the red. I would give this Company a miss (zero chilli) and keep my cash in bank till sentiments improve. 

Polling time

You can access the poll here

Saturday, 20 October 2018

Temasek T2023 - S$ Bond

Temasek is issuing a 5 year S$ bond at a fixed interest rate of 2.7% p.a. S$200m is available for the public tranche and investors can start applying from S$1,000. The bonds pay interest twice a year and will mature in 2023. The offer will close on 23 Oct 2018 at 12pm. For more information, you can visit

Not sure why Temasek need to show the 4 big ethical groups (Chinese, Malay, India, Others) with "HDB" as backdrop in its offering circular given that it is not a political entity. This is probably to indicate that the retail bonds is for everyone in Singapore (especially those from heartlands?).... In any case, this is the first time the long "over-due" Temasek bonds is available to retail investors here. 

I applaud Temasek's efforts to do this for the retail investors, frankly they don't have to do this as it is much easier and faster just to have an institutional offering (if they really need cash, which they don't). In fact, even HDB is not issuing bonds to retail investors! My own view is that the government or MAS should encourage and make it easier for local T-related corporations to issue bonds to retail investors. 

I will not elaborate on who Temasek is and what they do as these information are easily available. In one short sentence - Temasek was formed by the government in 1974 to manage its investments and its portfolio value has grown significantly since inception to S$308b as of March 2018.

 Default Rates of Corporates

If you look at the table above, Temasek's bonds are rated AAA by both S&P and Moody's. This rating is better than many sovereign ratings! The risk of default, per the table above, is zero. Hence, investors who buy in this bond and basically sleep super soundly at night. 💤 (if insomnia is a problem)

If you are still not convinced about its credit worthiness, the key credit ratios looked pretty healthy from all angles.

Conclusion- they don't really need to issue the retail bonds. 

What type of investors would be suitable?

Given we have determined that default rate is nil, the AAA rated bond is suitable for retail investors with zero risk tolerance and is currently investing in government-linked securities or Singapore Savings Bonds.

Singapore Saving Bonds ("SSB")

The Oct 2018 SSB is paying an average of 2.22% if you hold it for 5 years. In this regard, the 2.7% offered by T2023 is slightly better. Hence if you are considering putting money into the SSB, you might want to try your luck at Temasek T2023 bond.

Investors with higher risk tolerance and is willing to accept a higher return for a lower rating should look at other options. If they are accredited investors, they should look at bonds issued by Temasek-linked companies such as Singapore Airlines or if they can't afford the $250,000 per pop, they can evaluate the Astrea IV Class A-1 bonds that has a face value interest rate of 4.25%. You can refer to the write up on Astrea IV here

For investors who die die must subscribe to T2023, what would be the other considerations?

What are the considerations for investors in T2023 Bonds?
  • You can use your CPF to apply for the bonds - Investors who have no use of the CPF money can use them to apply for the bonds from the CPF OA and "arbitrage" the difference. I will consider doing this since i have a lot of cash sitting inside the CPF Ordinary Account doing nothing anyway
  • You are unlikely to get full allocation - Similar to Astrea IV, you are unlikely to get full allocation as the issue will be over-subscribed. You should get something if you apply but you are unlikely to get full allotment. I would hazard a guess that if you apply for $5,000 or less, you may get what you asked for but anything in excess of $5,000 will likely be cut back
  • Post market liquidity will be marginal - If you have no use for the cash for 5 years, then this will not be a concern, However, if you think that you may need the cash a few years down the road, then you will need to be aware that liquidity may be low as most bond investors are "buy-and-hold" type of investors. The trading volume is likely to be low post issuance
  • A rising interest rate environment may result falling bond prices and US Fed is likely to increase rates in the coming months. Will that have a knock-on effect on interest rates here remained to be seen but the risk is there
Will Mr. IPO be subscribing and what is the chilli ratings?

The placement tranche was "hot" and oversubscribed. I will give it a 3 chillis for the risk-free status but 1 chilli for the 2.7% return as the return is too low for my risk profile

My cash can be put to better use but i may consider using CPF to apply since it is earning a better return than 2.5%

How to enhance my "return" if i intend to apply for the T-Bond?

My friends attended the public seminar on Friday and it was well attended. While there was no refreshment, the "door gift' was a $20 Suntec voucher. That alone is worth 74% of the bond interest of $27 if you intend to apply for $1,000 T-bond. 😂

I have already told you how to "enhance" your bond returns, so now it is polling time! You can poll here.

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