08/2015-
In my recent trip to Dubai, I took the world’s longest elevator ride up the world’s tallest building, the grandiose Burj Khalifa which stands a proud 830 metres tall. The Burj Khalifa is almost magnificent in all fronts – it anchors what is now known as Downtown Dubai with integrated office towers, five-star hotels and a massive shopping mall.
I must confess that when I first visited Dubai 15 years ago for an interview with a prestigious asset management firm, where the Burj Khalifa currently stands, was actually on the wrong side of town. However the tallest building in the world has changed all that and has garnered further fame through Tom Cruise’s Mission Impossible – Ghost Protocol which had the Burj Khalifa as its focus point of action.
As I stood on the world’s highest observatory deck on the 124th floor of the grand Burj, I couldn’t help but wonder if indeed the Burj, like most supertall buildings, is profitable.
Stripped off its bragging rights as the world’s tallest building and the vanity of human’s ego, is the Burj a symbol of what most listed companies try to emulate?
To readers of my investment letters, I have always advocated a rigorous assessment and analysis of a company’s cashflow as a starting point.
I remembered 15 years ago when I established a major stake in Osim International (which listed on SGX in year 2000), the company was a steady grower with net profits up almost 20 – 30% annually, yet the share price remained below its IPO price of 52 cents from Year 2000 to Year 2003. The company was deriving the bulk of its profits from growing China, yet most analysts refused to cover the stock or had a SELL recommendation on it. The common misconception then was that - if you had walked into any of its stores in Singapore, it was clear that the number of Osim’s sales staff outnumbered its potential customers. So where were the profits from?
It was not until end-2003 when the share price started to roar above $0.80 when it attracted the attention of some funds (which in turn attracted positive coverage from analysts). By then, Osim had acquired the vitamins-supplement company GNC and intended to expand to 1,000 stores in Asia-Pacific. I was delighted when my suggestion to its founder, Mr Ron Sim for Osim to pay a more respectable dividend rate was heeded and proudly recommended Osim in my various media interviews with CNBC and Channel News Asia.
However, those delight soon evaporated to anguish when Osim announced in 2005, that it would partner Singapore’s Soverign Wealth Fund, Temasek Holdings and US fund manager JW Childs to buy over US-listed Brookstone.
When I analysed all the key parameters pertaining to that acquisition, it was clear that Brookstone was not going to be the lynchpin or sky scraper that will power Osim to the sky, but would instead impede on its performance.
Of course, no listed companies have ever said that its acquisition would be a failure from the start. Mr Market likewise, responded positively, sending the share price to a new high above $2 in Oct 2006.
For me, it was a case of the market missing the sky for the sky scraper (similar to missing the woods for the trees) and I happily sold Osim stocks down to zero holdings.
It was not until 2008 that Osim finally admitted that Brookstone was not going to contribute positively. By then, the share price has been hammered down severely and it spiraled to a low of 5.5 cts (from above $2 in Oct 2006).
At 5.5 cts, the share price had discounted its profitable China operations and I gleefully went in to buy some.
It took another 5 years for Osim to recover to $2 in mid-2013.
To me, this topsy turvy ride could have been avoided if investors had paid close attention to expensive business acquisitions, which by no means, help companies step closer to reach the sky. However, to me, when companies expand aggressively and try to reach for the sky like the super-fast elevator at the Burj Khalifa, it is warning for me to step a pedal away from the stock. I would not want to miss the sky for the sky scrapper.
This has been one of my best investment lessons.
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