PE Moving On To Pre-IPO; TTI’s Projected Returns: 1,000% Within 10 years.

As usual, I’d start off with some non investment related stuff first.

First up, for those who have emailed me for complimentary tickets to SGX Bull Charge, please be patient, I’ve just submitted your contacts, SGX will contact you guys directly via email. I’ve given out, I think 7 or 8 entries, so there’s still 2 more if anyone wants them.

A couple of weeks ago, someone showed me this:

http://happinessnotebook.com/finding-happiness-against-the-odds/

It’s a really heart warming video about this guy who has survived and even thrived against all odds.

The world is an unfair place, we are all born with a different deck of hands. We don’t get to choose. Some get it better, some get it worse. Some get it really really really good, some get it really really really bad.

I know at least a thousand pairs of eyeballs will see this post, if everyone buys Wesley Wee’s book, I’m sure it’d easily surpass his targeted sales. Take it as payment for me sharing my research thus far in my posts. You might benefit from it, you might not, but come on, there’s no doubting that it does take a lot of effort to compile and write out the reports and data, right?

I’ve no ads or sponsorships thus far, and all I am asking for is for readers to spend $20 to buy a book. TTI is real cheap huh.

Now, I don’t know him personally, neither was I contacted to write this for him. I just thought that this guy deserves to tell his story, and everyone deserves to read it. Let me explain further.

When it comes to charitable causes, there are always causes to support. I don’t necessarily support all. I have 3 basic criteria that I strongly feel are important.

1. The beneficiaries must help themselves

This is easy to understand. Some people may be unfortunate, but if you aren’t going to help yourself, why should others help you? Wesley Wee isn’t asking for a donation. He’s doing a book sale. So he’s doing all he can to help himself, isn’t it? And it’s obviously not easy for him to write a book, I’m typing all this furiously on my lap top and it takes me prob 5mins to write all this so far. It’d probably take him a day. Come on, if that’s not helping himself, what is?

2. Every dollar donated should be used maximally to benefit the beneficiary

OK, let me divert with a little story.

I have never had pocket money to save up my entire life. When I was young, mum would only give me enough for daily expenses, and anything not used up for food or transport or whatever, has to be returned to my parents. Mum would say that if you want savings, do it yourself after you earn your own keep. We didn’t have much to go around. So, I used to do odd jobs as a kid/student to earn some money to save up.

One of the early jobs I did was to be a door to door notepad salesman. And it was for a charitable organization. I responded to a newspaper ad, and when I turned up, I was told to go sell packs of writing notepads (complete with pencils etc) for a charitable organization. Each pack would be sold for $10, and I’d get to keep $2 out of the $10. I would assume the company that employed me gets to keep a chunk too, and the remainder goes to the charity. The company that employed me wasn’t the charitable organization themselves, it was a fund raising company engaged by the charity to raise funds.

So very early on, I learnt that a lot of money donated, doesn’t really go to the beneficiaries.

So in this case, out of every $10 donated…

$2 went to TTI

$X (I am guessing maybe $3?) goes to the fund raising company

Of the maybe $5 remaining, a certain proportion will go to the staff of the charitable organization to run their operations, their rental blah blah blah.

The amount that REALLY goes to helping the people who needs help, is easily a fraction of the amount donated.

But the people who bought notepads from me as a youngster, DIDN’T KNOW THAT.

In fact, many thought that I was a volunteer. Many bought notepads from me, and even gave me elusive praise. They were none the wiser.

I make no apologies though. I responded to a job ad, and it was tough work. I wanted to be maximally efficient, so I’d start the day with literally, 500 packs which I’d lug in a haversack and 2 large hand held bags, taking public transport, to housing estates to sell. I started with private landed housing estates, as I thought that well, these guys would be able to afford it, and I’d get a higher hit rate.

As it turns out, that was a bad mistake, as the households are sparsely distributed, and it’s usually their helpers that answer the door, and I’d waste a long time trying to explain what I’m selling. And it’s so much easier to reject me when all they have to do is get their helpers to say nobody’s at home. (It’s not all bad; I vividly remember a kind old lady who gave me $22 for 2 notepads and asked me to keep the $2 to buy drinks cos I was sweating profusely.)

It’s only when I switched to selling at HDBs that I had a much easier time. Take the lift with my 500 notepads to the top floor, and walk down each level and press doorbells and knock. To this date, 2 decades later, I can still remember my opening speech, having repeated it at least maybe 1000 times in all.

Now in this case, every book that Wesley sells, goes directly to him. (sure, some bit of it goes to covering his costs of printing the book etc), but it sure as hell is a lot more efficient than sending it to a charitable organization with a rented office with employees to support.

3. The bad situation that the beneficiaries are in, should not be of their own doing.

Self explanatory.

If you’re a compulsive gambler who’s in dire straits and comes to TTI for help…. do you think you deserve it?

Wesley Wee was born with a bad hand. (not literally, I mean a bad hand like in poker)

Shit happens. And there’s nothing more that he could’ve done to bring himself to a better place, so for that he got TTI’s respect.

Which is why I’m devoting half this post to him

So, please help Wesley help himself.

---

In an earlier post, I talked about my personal experience in investing in private equity:

Today, I’m Going To Talk About Private Equity – TTI’s Personal Experience

Of late, things have been moving fast and furious. One of my PE investments, is currently on track for IPO, slated to be sometime in mid 2019, on the catalist board of SGX.

It’s the healthcare company that I work in, and my shares in one of the subsidiaries will be converted to the parent company pre-IPO, before listing.

This is great news to me, as it’s been a long time coming (10 years to be exact!). In ROI terms, it’d easily be the single greatest investment for TTI if things pan out.

I’ve long realized that private equity going to IPO is where the REAL fortunes are made. The PE multiple jump is just simply amazing. Just read about Razer in my previous post.

Now, I seldom (or in fact, never) talk about healthcare companies even though I’m probably most qualified to do so, simply because I’d have to watch what I write and I kinda don’t like to do that.

But right now, I shall share some insights from an insider about the nature and happenings in the industry.

I am projecting a 1000% return within the next decade for this investment. At a minimum.

No, it’s not some crap headline grabbing statement. Let me substantiate.

In SG, one can buy a typical, single general practitioner type of practice for perhaps… 2-3 times earnings. And that’s being generous. Why?

This type of practice has little competitive advantage. There is usually zero branding for the practice, so goodwill is zero, even if the dr claims otherwise, and oh boy, they sure as hell will. LOL!

This is because patients will follow the dr. The goodwill resides in the dr, not the business. The patients care primarily about the clinician, not so much about the business branding (in this type of practice). So if you buy such a practice, and the dr retires the next day, you are screwed. You have basically purchased an empty shell of a bunch of auxillary staff and stocks, and have overpaid for it.

Our industry is strife with stories of businesses who have purchased a practice, only to have the primary clinician go next door and set up another practice, leaving the purchaser with an empty shell. (Read the life story of Healthway, which IMO, is one of the most poorly run healthcare businesses currently listed)

Which is why almost all purchases now come with a minimum lock in period for the primary drs, during which they’ve to guarantee a yearly profit for X number of years. During this X number of years, the entity acquiring the practice, has to try to build it up to be self sufficient, by bringing in other drs to take over the earnings of the retiring dr.

Practices with multiple branches get sold for a higher value, because of economies of scale, more opportunities for branding and certain efficiencies operationally. For eg, with multiple branches, one can keep staff overheads per clinic lower, by moving the staff around depending on demand. Suppliers would be more willing to bend over backwards for larger practices. Also, your advertising dollar goes a longer way with more practices.

These 5-10 mid sized chains can be sold for perhaps 8-12 times PE? Depending on how nice a growth story you have, the reputation and clinical ability of the drs in the practice, the seller’s personal “kum qing” with the acquirer etc…

Now if the business is adequately sized and goes for an IPO, healthcare companies can be listed on SGX for anywhere between 15 – 25 times. SGX has given us a rough approximate PE listing price, but I don’t think I should reveal that here. It’d be likely within that range.

But that range is just at IPO.

Look at the healthcare companies listed on SGX. Many are trading at much higher multiples. I’ve even seen (and shook my head too!) 1 such company that was for a brief moment, trading at 70 times! Yet, there were still dummies dying to buy it then.

Now, having read what I said, let’s do a mental exercise. How many newly listed healthcare related companies are there of late? I mean within the last say, 5 years.

A lot! I won’t write the names here, but in the past several years, many healthcare companies have gone IPO. We are probably late to the game, but I’m confident we’ll be a star performer. I don’t say this casually, I say this because I know the game plan, I know the people executing it, and I know what we’re in for.

I am afterall, in a unique position: I’m both an insider, and an investor. Both a clinician, and a value hunter.

Think back say a decade ago, how many healthcare companies do we have on SGX? Aside from the usual ones like Raffles Medical, SMG, Healthway, Thomson Medical, Pacific Healthcare (delisted now) etc, there weren’t all the newer outfits then like Singapore O&G, IHH Healthcare, Q&M Dental etc.

In recent years (again, recent years meaning in the past 5 years), many funds flowed in SG to invest in private healthcare outfits. Simply because SG healthcare is an attractive story: Asia, with its fast growing economies. Healthcare, which is an attractive theme because of ageing population blah blah. SG, which is an attractive place because of the well regarded healthcare expertise, and reliable regulatory framework and stable political environment for investments.

We all know the reasons.

And it makes perfect sense. I’ve already described the PE disparities. The playbook for many of these outfits is simple: Buy up all these private healthcare practices and amalgamate them into 1 entity, and go for IPO. For many of these PE funds backed businesses, the IPO is their exit. Their golden handshake.

Upon IPO, the multiple jumps from your single digit to a high double digits.

If one is diligent enough to just go read the history of all these healthcare practices, you’d see the pattern that I’ve painted. Trust me, I should know.

Now, back to my projected 1000% returns within a decade, or less.

It’s not a far fetched claim. Aside from conversion of my existing PE shares for listing, I’m also offered the chance to buy X number of shares at pre-IPO valuations.

This would of course, be a bit more expensive than the initial shares that I currently hold, but it’d still be a damn fine piece of business. The PE should still be in the high single digits, so I am expecting a 2-3 fold return upon IPO.

But that’s not all, I also have the chance to invest in convertible bonds of the company. The details are sketchy right now, but upon IPO, they’d likely be converted at a multiple that’s closer to the IPO multiple after a certain vesting period of X number of years.

So taking into account 1) my current shares invested at start up phase, 2) pre-IPO shares and 3) convertible bonds at IPO multiple, and projecting that the multiple increases to say the 30-40 times range, it’s not far fetched for it to be 10 times.

Why do I incorporate a decade as the time frame? Well, in all likelihood, if we do things right and of course, if I’m lucky, we might even hit that PE range within the 1st year of listing.

But I know the long term plans. If they come true, the IPO multiple will look disgustingly cheap! (Actually, knowing the long term plans, I’m secretly expecting a ROI of even >1,000% but, let’s be conservative…)

As with all things business, execution is the key. Everyone makes plans. Execution is the tough part. Still, I have literally, a front row seat. If the execution is not ideal, I’m pretty sure I’d know it before anyone else in the markets do.

So all in, this is a very exciting development for me.

To top it off, Heliconia is confirmed going to be a cornerstone investor. (Heliconia is a subsidiary of Temasek Holdings)

With their talented scholars and all that, I’m sure they too, see the merits of what we’re doing. And my MOS is even wider cos they’d look at all the figures and listen to the growth story/plans blah blah, but surely they wouldn’t know the qualitative aspects and the intricate workings like I do.

Like I said, I’m uniquely placed this time, cos most doctors are not good investors and most investors are not doctors. I’ve a foot in both groups.

As with any good deal, there’s always a flip side. There always is.

Here it is: At least for my pre-IPO shares and my convertible bonds, I’m likely to be subjected to a moratorium. No mention about that right now, but I’m pretty sure that’s in the works. (Moratorium = lock in period where I can’t sell) It’s a way to show investors that hey, these guys are locked in with you, we’re on the same boat.

I don’t know how long it’d be, but if it’s like 10 years, then I’d seriously have to reconsider. It’s foolhardy to think anyone can predict stuff happening in 10 years.

Anyone remembers the Nokia 6610? Compare that to the iPhone 7. Yup, that’s what 10 years can do.

The other flip side, is the capital needed. The bond offering needs a MINIMUM of $500k, up to a certain maximum that I shan’t reveal. I don’t have $500K to say maybe $2mil of cash sitting around, so if I do participate, it does mean I’ve to sit down and look at my current holdings and assets, and decide which goes on the chopping board to raise funds.

This is the equivalent of show-hand in poker terms.

Yet if my projections are correct… $500K becomes $5mil, $2mil invested now, becomes $20mil within the next decade or less.

All very attractive figures to TTI.

There are also other considerations too, including growth and expansion plans, as well as risks in execution, but those are pretty much P&C and I guess I shouldn’t be talking about that here.

As it stands, I’ve already started trimming my public listed portfolio to raise cash for this. I might not even participate, but if I want to, it’s hard to raise millions over a short period of time so it’s better to be prepared.

I’m trying very very hard not to touch my property fund, cos we really need to shift somewhere nearer for the kids’ school in a couple of years. It’s a real challenge, but that’s the reality for many Singaporean parents. Kids’ schooling is a big shitass topic. Never realized that until I have kids of my own.

BTW, I don’t buy the government propaganda that “every school is a good school”. As I’ve mentioned before, that’s like saying every company is a good company. Every investment is a good investment.

We’re not living in utopia.

As it stands, I’d probably have to sell my other investment property before I’ve the funds to purchase the next one. No biggie, SG taxes for investment properties have now made it less attractive anyway, so I think the long term plan is just to stick to having 2 properties: one for renting out and the other for staying in.

I’m not an expert in property anyway, so it’s counterproductive to compete against all the pros looking in this sector. Like what Sun Tze Bing Fa says, “If a battle cannot be won, do not fight it”

---

I’ve just finished analyzing the latest ERs for the companies that I hold, as well as some of the previous companies that I owned but have since divested.

I may write about those in the coming weeks, but in all likelihood, posts will get few and far in between as I bunker down and try to get more work done productively.

All in, no major surprises were sprung in Q2 results.

I’ve also did some due diligence on some companies that have fallen significantly of late, mainly M1, Comfort Delgro and OKP Holdings, with a view of taking up a position.

M1 and Comfort both have strong reasons why their share price has been totally decimated, and I’d be especially cautious even right now, despite their massive drop in share prices over the past 2 years. I’m still not seeing sufficient MOS open up. We have to remember that a big drop in share price, is a damn poor reason to invest. Things that are cheap can get much much cheaper. Those who vested a year plus ago thinking that a 20% drop is over done, would now be saying the same for a 40% drop.

Very briefly, for M1, I’d take the lazy way out and just cut and paste a reply I made on InvestingNote. It’s self explanatory:

“M1 has been operating with negative working capital for a long time”

That’s a good point. 
Perhaps I am not familiar with the telco industry, is that a norm with Singtel and SH too? 
Having long term negative current ratios? Admittedly, I haven’t done the comparison.

Even if the FCFs can sustain their operations, isn’t it particularly risky that there’s no buffer? So what happens if CFs drop for an extended period of time? For just 1 year? 
More facts to consider: 
I’d also point out that total borrowings as of: 
2013: $250mil 
2014: $302mil 
2015: $354mil 
2016: $401mil 
And now as of FY17Q2, it’s $426mil

Yet cash has gone exactly the other way around 
Cash has always been in the low double digits in recent years: $11mil, 13mil 
But in 2014 it’s $22.8mil and 2013 it’s $54.5mil. 
Again, very disturbing trend isn’t it?

Sure, their debt is cheap, at 2.65% financing costs, but surely anyone can see how this is going to be a problem if total debt keeps rising while cash on hand is a fraction of their debt PLUS current ratio is always negative. 
Again, let me state that I started approaching this since several weeks back, with a view of finding something with value to park some funds in, but these figures made me sit up and hold back. Basic econs 101, if there’s such a small market with so many big players, surely the pressures will drive consolidation, and that’s where it looked like it was headed to. Yet the immense pressures failed to get buyers for M1 at the valuation then.

Does these figures, both the trend of where it’s going, as well as the current figures in the BS, look like that of a company that should be giving out relatively high dividends, and/or doing share buybacks?

I’m hoping those vested can point out something that I’ve missed. And not just talk about dividends dividends dividends. 
If I am Karen, I’d eliminate dividends completely tomorrow to zero. The share price will tank cos the misinformed retail will be gone, but I’d conserve capital for a long extended fight for market share. 
Cos that sure looks like what they’re in for.

(But then again, Karen’s been furiously offloading her own shares so maybe she’d disagree with my statement here)

As for OKP, well, at $0.34, I actually see an opportunity there. If not for the fact that I need to raise funds right now, not deploy them, I’d take a closer look. I’ve put it in the back burner for now.

That’s all I have for now.

As always, happy hunting!