Sunday, April 26, 2009

Fundamental Analysis is Useless without Integrity

'Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy., -Warren Buffett

One thing good about this crisis is that it gives people a chance to learn things. Having received that mass circulated email as published in the previous article, we just decided to take a look at a randomly chosen certain textile S- share company that has its shares suspended lately. Below is a snippet of announcement issued by the company on 13 March 2009 where it states that Fibrechem is in default of a loan of US$26,365,581 to a consortuim of local and international banks. So who are these banks?

See below for a snippet of the annoucement made on 22 Aug 2006 by Fibrechem.

What really amazes us is that there was little or no clue based on publicly available information that could have led to somebody predicting this could have happened. By looking at their financial statements, both audited and non-audited that were released, leading up to this default, it seemed that this company was flush with cash and settling bank loans were a non-issue.

See below for the financial statements leading up to the event.

Audited Annual Report 2007 ( By One of the Big Four Audit Firms )

The Cash and Cash Equivalent is enough to pay more than twice the bank loans owed!!

29 April 2008 - Unaudited First Quarter Financial Statement

The Cash and Cash Equivalents are again more than enough to cover 2 times the Bank loan!

4 August 2008 - Unaudited 2nd Quarter Financial Statement

Ok maybe now the Cash and cash equivalent is not able to pay twice the bank loan...but it still looks pretty decent. (Maybe the astute analyst might notice the sudden decline in excess cash over bank loan due to the huge jump in non current bank loan and question it..but we don't think we would have noticed it ....heng ah..luckily never look at this counter.)

3 Nov 2008 - Unaudited 3rd Quarter Financial Statement

The Cash and Cash Equivalent is nearly twice the bank loan...a huge jump in cash and cash equivalent amount this time.

So thats the last financial statement Fibrechem released. So who would have suspected that Fibrechem would have difficulty repaying the bank loan of a mere US$26,365,581 since they have HKD1,166,140,000 in Cash or USD$151,598,200 ( 1HKD = USD0.13) based on the last statement released??

Where did this cash go? Is it real in the first place? Which bank did Fibrechem stash this cash in? Did the big four auditor verify this cash in year 2007? What is going on!...This proves that fundamental analysis is useless if given rubbish data. Warren Buffet is right...Integrity of management is the most important! All else is secondary. S shares can go eat shit.

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Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

2 comments:

  1. That's why I go for only blue chips or midcaps that have been around at least 10yrs.
    They have weathered the crisis meaning they have real operating businesses able to tide htem thru tough times.

    Mgmt quality should be of no issue too since it can last for 10yrs without any funny business.

    I know I do not have an edge in terms of accessing mgmt quality. So I can only trust records of a good company going thru a crisis. That one don't lie..Mgmt do..

    I am still amazed people can analysed penny stocks and claimed to have intimate knowledge of the business and believed themselve to have an edge.. Com'on.. unless you are the insider.. you have no edge. Don't deceived yourself otherwise.

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  2. Sgdividends,

    Hmm, that's very scary. You're right, I wouldn't have guessed the loan to come at all. Luckily I didn't own this company...but traded on it once in the past.

    No ass-shares for me anymore.

    ReplyDelete