Like the rising and ebbing of tides, companies’ fortune changes. King Wan Corporation is a perfect example of the vicissitude. Having previously been a shareholder of theirs, I am already conveniently familiar with their history.
King Wan of the Past
I first invested into King Wan in late 2012 at a share price of $0.195. Their 2011 balance sheet looked something like this.
At a market cap of SGD68.1mn, it had net cash holdings of SGD18.1mn.
In addition, they had stable and growing profits which were backed by a strong order book in their core mechanical engineering operations.
Based on these factors alone, King Wan would be considered cheap; but what made King Wan stand out was their announced disposal of their Thai sugar associates. These were recorded at SGD45.3mn on the balance sheet. The deal was a gain of SGD22.5mn (about 30% of market cap) in a form of cash and shares in a newly listed company (KTIS) on the Thailand bourse. Moreover, this gain excluded the SGD17.9mn of dividends that was paid out by the associates during 2012.
Divestment in Early 2015
We added more to our position between late 2012 and our time of divestment in early 2015. Besides reaching our fair value, we also saw a gradual shift in the structure and conditions of the business. The confluence of these factors simply meant that there was minimal upside and greater risk in the company.
Unlike in 2012, we saw a lot of downside risks for King Wan in 2015 – some of it industry-wide, but more so due to management actions. For one, the mechanical engineering industry became more challenging in 2015 with significant increase in labour cost. Gross profit margins fell consistently from 23.8% in 2012 to 14.8% in 2014. Perhaps emboldened by their previous investment success, and to mitigate the slowdown in their core operations, the management made a slew of investment decisions which we felt to be disconcerting. They invested in numerous projects across various industries beyond their expertise. These included property developments in China and Singapore, a dormitory venture in Tuas and a bulk carrier. Worse still, they decided to retain the shares in KTIS instead of disposing them. Lastly, borrowings also increased from SGD7.6mn in 2013 to SGD12.7mn in 2014 and the company swung into a net debt position.
King Wan Today
From its peak of SGD0.34 in 2015, King Wan shares now trade at SGD0.172. Their latest balance sheet is as follows.
Clearly, the King Wan of today is a different monster altogether. Its net debt position has deteriorated even further and they had to book impairment losses on their KTIS stake while their China properties look increasingly like a financial blackhole. King Wan also recently disposed 23 unsold units in a Singapore property at a loss.
In all, the company booked a net loss of SGD17.9mn for FY16. It is evident the losses are solely due to their failed investments. Management has overestimated their investment prowess.
The buy-and-hold strategy of investing is a popular one, but let’s not forget that it is not a buy-and-forget strategy. As the case study of King Wan attests, fortunes change and there should be no room for sentiment or laziness when an investment decision should be made.