Creo Medical Share Discussion Threads

[gucci101] 31/10/2010 21:01

Also the October news letter.

[longsight] 29/10/2010 11:14

A lot of press coverage on the website as well as updated notes from JP Morgan & CIMB

[longsight] 29/10/2010 01:18

Eddie - I am not entirely consistent in my views because I am learning more as I go along.

You are completely right - I was very bearish - at least sceptical - about CREO. There were reasons for this since, in particular, I thought the fee structure was a total rip off & I thought the yields were (& indeed still are, though improving) pitiful. TCT however changed the fess completely to those which apply through the sector. Other issues are improving, as noted by me before.

I also posted bearishly at that time to prod other posters into stating the bull argument as best they could.

I accept I was - or at least so far it appears - quite wrong to suppose that TCT wd see its share price close to NAV within a year.

Nonetheless, having sharpened up my understanding, I am now very bullish. I have put together a spreadsheet which assumes that the portfolio increases in value at 6.5% pa & the SG$ & RMB both appreciate at the rate of 3%pa against the £ & US$. I assume that the discount to NAV reduces from 58% currently to 50% by March 2011 & then ultimately to 15% by March 2015. My calculations produce SPs of £1.02 by March 2011 & £3.26 by March 2015. Annual Dividends are 10c / 10c / 12c / 13c & 15c by March 2015.

Who knows if I am right but I am confident that the actual outcome might be better. I have a present investment in a share which I think has stunning prospects & is crying out for more funds to put into it. If I remain invested here it is because I believe in the prospects for yield & cap gains.

[eddie1980] 28/10/2010 22:58

I do recall you being very bearish on CREO before changing opinion close to the relist!

I bought in as it was a play on an undervalued AIM company accordiing to management who claimed they should be valued close to their peers trading at/near NAV. As we now know, that was not the case - it is not the listing that was the issue, it is their underperformance relative to peers.

Other property co's make money, TCT does not. They are valued at NAV, TCT is not. They do not need an upturn in rents and macro growth to make money, they already do. Lets hope TCT follows suit

(and i am sure you have claimed these will be close to NAV in 12 months in past posts! For your sake then, I hope they control costs/fees and make money from the rents as they will need to do this to really close the gap.)

[longsight] 28/10/2010 22:47

Eddie - I'm not upset. I was happy with the results since they exceeded expectations.

I fully anticipated that they wd not make much or any profit.

As to the reasons why - these have already been discussed & are totally obvious from both the listing docs & previous accounts.

It is only you who is deluded in imagining that the shares will be trading close to NAV - of course they won't. But the Co is not a static frozen business. Rents are rising, occupancy rates are rising & property values in Shanghai are rising & loan costs are halving & the divi yield exceeded expectations. So I think the shares will do well over the next 6 months & beyond. If the shares ultimately close to 20% disc to NAV & NAV increases thru Property value increase & loan decrease thru US$ depreciation against the RMB then the shares can easily rise to SGD5 & beyond over the next few years. Meanwhile I get 6.5% yield.

So why shd I be upset? If I was upset - as you appear to be having failed to acquaint yourself with the Co before buying the shares - then I wd sell my shares. I am very happy to hold them. A fantastic investment opportunity, imho.

Eddie, I honestly believe you shd only hold shares you think will do really well. There are thousands of opportunities out there. I have perhaps 100 Companies I am interested in investing in that I have failed to find the time to fully investigate. If you are so negative about TCT then you shd do yourself a favour & sell & put the money in a Co you believe in. Good luck & cheer up!

[eddie1980] 28/10/2010 22:21

Simple question - why is company at such a discount to peers?

It is because they have historically/currently failed to make a return on assets. I am also betting they will improve and hence the share price will rise. But their current (non) performance is relevant. You get upset whenever I analyse the current performance as if tainting the company. They produced the results, not me.

They clearly need to prove they can make a return before the market will take note, because the shares are stil at a discount. Their peers have managed to make money from Property - TCT has not. That has given all an opportunity to purchase assets at a discount. Now lets hope they impress not only you, but the market, as that is what matters.

I am also not saying the shares will not be a lot higher. But analysis/critism of costs is valid - if they were better, then the share price would already be higher.

One part is macro factors such as growth of shanghai, the other is company specific. Lets hope improvements in both are reflected in the full year results.

[longsight] 28/10/2010 17:25

Eddie - TCT is a play on Shanghai commercial property. 97% of the portfolio is in Shanghai. If the portfolio was in Luton then I don't think I wd be a shareholder. As they say with property, 3 things matter: location, ... etc.

Remind me again - why are you invested here? If you think the Co is a dud now - then what was it as CREO? A total dud - so just why did you buy?

As to the share price performance, you will be correct if it is still round these levels next June. If the share price goes up by 50% or more then I will have done wonderfully well. This is my expectation. In the meantime I am earning over 6% to hold the shares.

As to return on assets, this was evident before they listed in Singapore. Are they addressing this? Yes they are. I think Shanghai comm property does have fairly low yields but rents are climbing, loan costs are halving. Only on the performance over the next 2 years & beyond, will TCT ultimately be a success or a failure. I like what they are doing & I like Shanghai comm property.

Eddie, are you really unaware of Jing Ulrich & Churchouse - if you intend to remain invested here, I strongly recommend checking up on their views.

[vondutch] 28/10/2010 17:21

Eddie and Longsight keep it up! It is actually good to see 2 different perspectives; both knowledgeable enough to be interesting and at different ends of the spectrum.

I suppose I agree partly with both of you.

Because rents and therefore income are low, investors ignore the 'actual' value of the properties to better reflect their value based on income. But I equally agree that the value of the property itself is clearly much higher - if an investor is patient enough to wait until the returns prove it.

Where I think everyone (and the management) agrees is that in this situation any disposal that proves the valuations, and shows the market TCT can make a profit will be transformational in people's view of TCT's value.

[eddie1980] 28/10/2010 17:13

Think Shanghai is a good play. But I am not buying Shanghai, I am buying TCT.

At full NAV, shares do not look so attractive as an entry point, so the value here is in the reduction in NAV gap. If other property shares trade at nav, then it is TCT specific factors that are the cause of the discount. Do you agree on that?

Sort those, share price goes up. Simple. Clearly the macro factors are not a catalyst for the share price to grow, as the share price has not grown. So the focus must be on why they are currently producing zero return.

TCT themselves wanted to move exchanges to reduce the discount. That shows it is company specific factors which cause the discount (they assumed it was being on AIM.) well that wasn't as it still persists. But the difference between TCT and its peers are that the peers make money on their assets.

I want TCT to go up, but saying Shanghai is amazing doesn't do that - the proof is in the pudding. Make money on their investments, and I think the share price will go up.

China interest rate is about 5.5%. Imagine, if they sold the property at NAV and just received interest on $4 a share - they could pay us $0.2 dividend a share every year, and our shares would be worth close to $4 as there would just be cash. Now that would be a good capital gain, and recurring income!

(ah, but management would lose out, as their income of $m's a year would disappear.)

Cannot understand why the return on the capital it produces is of so little relevance to you. That is why there is a 60% discount to the quoted NAV. You see value in a 60% discount, but then just assume macro factors will close it. If the market shared your view, then there would not be such a discount.

You are saying macro factors will push up rents, which will push up share price. maybe, but if yield stays low, a discount will persist. What if costs continue as the same percentage? So, if the current discount persisted, we would only benefit 40% of the growth.

[longsight] 28/10/2010 09:33

Eddie - what do you think of Churchouse's view that Shanghai represents a great long term Comm property play?

What do you think of Ulrich's view that PRC stands on the brink of massive growth in the financial services sector?

Which PRC city do you think will benefit from this growth?

What did you think of the FT survey showing Shanghai's explosive growth as a world financial centre - up from 11 to 5 in the table of world cities?

How do you see the phenomenal growth in consumer spending impacting on Shanghai's retail property sector?

[longsight] 28/10/2010 09:28

Eddie - another factor is that I think the probability is that the £ will depreciate against the SGD and the US$ will depreciate against the CNY. If that proves correct then value of the loans will drop & NAV will rise and the £ value of the shares will also rise. TCT is something of a currency play.

[longsight] 28/10/2010 09:25

Eddie - of course I wouldn't buy the shares at SGD4. But you can buy them at SGD1.67 & I am confident that they will go up from here. If they can get to SGD2.50 by mid next year then that will be over 50% appreciation. Meanwhile I am earning 6.5% yield. Very happy.

[eddie1980] 28/10/2010 07:51

Its the market that need to be convinced, and and as yet, they are not, hence the (apparent) discount to NAV.

Would you buy the shares at $4 right now? I don't think so, if you were paying 'full' value for the assets, I think you would expect them to make a better return. Therefore it is the discount to NAV which will give the share price growth you want, and for that to change the market needs to be shown that they can make a return on their assets, otherwise why bother.

I am not bearish - I am stating the current position (historically zero/negative return on their assets) and waiting till they can show that they can actually produce a return from property.

If I bought a propery right now, with only 30% debt, and let it, I would expect to make a profit. If not,were the assets overpriced?, or maybe the costs are too high?

yes, the dividend gives certain downside protection at these levels because of the yield, but it is short term (in years) as they are just distributing reserves.

[longsight] 27/10/2010 21:51

Since interest charges are set to almost halve, then I think management are addressing the issues you highlight & very effectively.

I think TCT is great value because the shares are so discounted to NAV.

As to your assumption that NAV is calulated on future rents - I think this is repeating an error of JP Morgan. Simply repeating it doesn't however make it correct! The basis for NAV valuation is set out in the listing doc. In fact the NAV appears conservative in relation to actual comparable sales of Office space in Shanghai - from what I have heard. Certainly the previous 2 disposals achieved sale prices in excess of book values. I mentioned to you before that Central Plaza is valued at RMB42,000 psm [from memory] yet a comparable recent sale nearby was for RMB56,000.

I think the team at TCT are getting this right. They have a portfolio where they can add value & they are doing this.

I admire your relentless negativity - as I said before whereever I have come across your posts i.e. here, WCC & PMHL you always post bearishly. I post bullishly because I believe in the prospects & I hold the shares.

[eddie1980] 27/10/2010 20:45

Off top of my head, one of the trust fees is 0.5% and another 0.02%, but cannot be certain until check.

How can statement that Co has not made operating profit for current period not be news? its certainly not clear from the summary.

The main headings to announcement is Gross Revenue, Net Property Income, Net Profit after Tax. They include the forex gains in Net profit, so it is not clear they make no operating profit.

Still don't understand why you seem to have no interest in what cash the company makes. I assume you think that because rents will go up they must make money in future, but it is how much they make which is important, and that is down to the costs as well.

If you had £100m, you would surely choose to allocate to resources that can create the greatest return on your investment, no? well TCT have chosen to invest their resources in property and therefore should be trying to get the greatest return on that investment, which ultimately means generating cash returns. Otherwise why not invest it in assets which can make a greater return - cement (don't they have something like 40% return on capital)?

As shareholders/potential shareholders, we make similar decisions - where will we get the greatest return? We are lucky that we can buy the £100m of assets at60% discount. But why are they at such discount - because the underlying assets (i.e TCT's property) are making no returns. So we are looking for exactly the same thing. When the assets start making a return, investors will start valuing those assets, and the share price goes up. And as it is currently at such a discount to underlying assets, it is like having a geared investment.

Why would you pay 100 for an asset producing less than 1? when they can produce a better yield, then investors will be pay more for that asset.

As the NAV already seems to be calculated based on future income (i.e incorporated the expected uplift in rents from the legacy leases extensions and rental growth) I don't think there will be an equivalent uplift in asset values when forecast rents have doubled, what I think they will be is a smaller gap in the share price to the asset values (assuming they make a better margin) - and that is what will drive the share price, so the ability to generate cash and yield is the most important thing to drive the gap in the NAV for me.

Another way of thinking about this - would you think S$4 a share right now is good value?

So I want the same thing as you - only I see it that it is poor/nil margins that is the problem, hence my focus on items which lower this.


(Just to note the dividend yield is not supported by the money it makes, it is just paying out reserves, effectively its capital. Am fine with this policy, but why not extend it and sell all the assets and pay out the cash!)

[longsight] 27/10/2010 19:33

Eddie - where do you get the idea that fees are based on asset values? They are in fact based on a mixture of NAV & net income. The base fee is .5% & the Trustee fee is .02% of the value of the Trust Property. The performance fee is 4% of the net property income. These fees were examined by Ernst & Young who produced a series of comparatives that showed they were in line with industry practice.

[longsight] 27/10/2010 19:28

Eddie - I expected you to emphasise the lo yields but of course this has been explained repeatedly on here i.e. a lot of the leases are legacy leases. Of course if you read the listing doc this was obvious. Also surely any investor here wd have done some minimal research & discovered that TCT were not making an operational profit? So Eddie, why repeat what we all know - I don't think it is news. On expenses, interest costs & fees, the news is that these have fallen substantially in % terms continue to fall. Sorry to post on the positives - but these are facts.

Where are we now & where are we going. The answer is higher occupancy rates & increasing rentals. Rents are anticipated to have more than doubled by 2013. Legacy leases like Parkson will go up by a factor of 8x [conservatively]. In the meantime we have to "suffer" with a dividend yield of 6.5% - very surprising that since JP Morgan etc assumed that they were not going to pay a divi at all in 2011 & 2012. Shame they didn't do some research before writig the note.

Look at the Balance Sheet & add 7.%5 increase in assets pa [below the historic rate of growth in comm prperty values in Shanghai] & see the impact on NAV by 2013, 2014. If Shanghai does as well as I & many analysts suppose then the potential uplift in NAV, rents & lowered disc to NAV suggest that TCT's share price might be 3 to 4 times the current level over the next 3 to 4 years.

[gucci101] 27/10/2010 17:25

I suppose the counter argument is that TCT is aiming to add value through capital gain rather than a positive level of rental income. If (and this is an if) TCT can sell Central Plaza at the current valuation then it does not matter whether operationally TCT is not profitable. They would have realised a significant gain through developing the asset. Similarly with City Centre in 2012.

I think management tried to emphasise the above in their accounts as investors where ignoring the underlying value of the assets and instead just looking at the operational performance.

[eddie1980] 27/10/2010 17:18

Not critisising the results. It is good news re dividend.

My only point is that is it clear the current ability of the company to make a profit rests on the level of costs and fees. Other listed property co's have net margin of c40%, TCT is about 4.5% for the period.

These are facts, not opinions, so it is right to consider why lower.

Was looking at the Co's yield. NCA are 1,867k, they state 22.8% re development, so 1,441k is value of income producing assets. Period covered 4.5 months, so say 4months. Annualised income based on these results is therefore 57.4k.

This gives Co gross yield of c4%. Then I considered fees. Believe some of these were some based on the asset values. With a low yield, this impacts the net income by a greater proportion.

Fees may well be in line with others, but if rental yield is lower with TCT, they are taking a far higher proportion that other companies (if based on asset value, rather than income.)

[longsight] 27/10/2010 13:45

Eddie, the minimum 10c divi for 2011 was not in the listing doc. The Co also told me that they wd pay a minimum of 10c again in 2012.

The expenses are completelt transparant i.e. they are set out in detail in the listing doc. Furthermore, they are completely in line with peer groups, as has been verified by the auditors [or valuers?] with copious examples.

TCT made unrealised forex gains because the management were astute enough to borrow mainly in US$.

In every respect the Accounts exceeded expectations.

[eddie1980] 27/10/2010 12:41

Well well, results out, and they have obviously been well received by the market! Impressed by the detail in the announcement as well for only a Q3 release. Lots to get involved with.

Pleased with the occupancy rates (particulary Central Plaza up to 97%!).

Looks like these results are from May - Sept so not quite just 3rd quarter, so won't be expecting quite the same performance in Q4 (tho may have uplift in rents plus final loans reneg'ed in Q4)

My grumps - Net profit is still basically zero before unrealised forex gains - only 845 before forex (and other small adjustments).

which leads me to the expenses - other property operating expenses are 24% of rents (but maybe this includes the relisting fees and other costs I would call 'non property' op costs.)

And property mgmt and trust mgmt fees total another 24% of rents - 25% of rents to mgmt seems v.high.

I only gripe because I can see what a reduction in these could do for earnings.

Dividend announcements seem bullish from Co (but can't recall if same targets as on listing, just b/fwd to this quarter.)

Still, enough good information in the announcement to play around with figures to see what might be.

[flip101] 26/10/2010 19:27

To be fair the lower gearing is to due them not counting the CC development loan as it has not been drawn down. Obviously this will have to be relied upon over the next year or so and therefore it is slightly unclear how they plan to fund further acquisitions.

[longsight] 26/10/2010 19:04

"we expect to announce further partnerships and resultant transactional activities before the year end"

I think the Management team are showing an impressive determination to wring performance out of the portfolio, refurb & redevop the properties, refinance debts at far superior rates, get in hi quality tenants & enter into partnerships like TRO to participate in comm property opportunities in PRC - & pay shareholders a hi divi.

I think they are doing a great job.