In this ocassional series titled JUST ASK, we invite readers to send in questions on stock investing, and personal finance. We will ask an expert (or experts) to provide answers. Below is a question on CPF matters and a question on stock investing, and they are answered by, respectively, Leong Sze Hian, the former President of the Society of Financial Service Professionals, and Ernest Lim, a remisier.

Reader says: My sister, age 58, not working, has about $30k in her CPF Minimum Sum (MSS) account. Recently she received a letter from CPF board asking her to convert to the CPF Life Annuity.

My sister does not have much savings. Please advise if she should take up the offer or not?

I have received conflicting advice from insurance advisers and friends. Some told me it is better to leave the MSS alone and let it draw down till zero. Kindly advice.Thank you.

Leong Sze Hian
Leong Sze Hian says: Dear reader, let me answer your question step by step:-

1) Click on this CPF link to check whether, and how much L-bonus, you qualify (depends on your income and type of home), and the estimated monthly life annuity payout of the four CPF Life plans

2) Contact CPF Board to ask what is the bequest to beneficiaries for each of the four plans.

She may also like to ask CPF - if the monthly payout (which I obtained from the CPF Minimum Sum Payout calculator using her age and amount) is $271, what is the higher amount (if any) that she can request to withdraw monthly, because for people with small CPF balances, they can't survive on the very small payout according to the CPF calculator?

3) Click here to calculate your monthly payout under your existing CPF Minimum Sum, which is the estimated monthly payout for about 20 to 23 years (because the CPF Minimum Sum calculator uses 4 per cent in the calculator, whereas CPF Life uses an estimated 4.75 to 5.25 per cent on the first $60,000, and 3.75 to 4.25 per cent on the amount above $60,000  (the CPF Minimum Sum will also pay the estimated 5 per cent on the first $60,000 and 4 per cent on the excess)

4) Decide based on the dollar amounts obtained going through the above steps.

5)The deadline for you to decide to opt-in to CPF Life in order to get your L-bonus (if any) is 31 December 2010.

Recent story: JUST ASK: 'Should my retiree parents invest in STI ETF?'


Reader: What is book value? Generally, are companies considered 'value plays' if they are trading at below their book value? What are some stocks that are trading way below their book value. Are they justified?

Ernest Lim, CFA, CPA
Ernest Lim says: Dear reader, book value (“BV”) has a couple of definitions. From an investment and “layman” perspective, it refers to the balance left for investors when a business is liquidated and its debts are paid. To calculate book value, one would use assets – liabilities on the balance sheet.

Generally, are companies trading at P/BV < 1 value plays?

For companies which are trading below book value (i.e. P/BV < 1), this technically means that investors will get more than their investments back, assuming that the assets can be sold at the price reflected on the balance sheet.

P/BV is less meaningful in manufacturing companies whose assets mainly constitute expensive equipment which are likely to depreciate rapidly. Furthermore, if these companies have equipment which are very specific to a niche in an industry, it may be difficult to find buyers unless they ascribe a large discount to the equipment. Thus, the P/BV for such companies may be overstated.

Conversely, for companies which have assets (such as land, and natural resources eg. oil reserves) that are likely to appreciate over time, the P/BV for such companies may be understated. Such companies may present true value plays for investors.

Also, note that some of a company’s most valuable assets have no book value, such as its trademark/brand name, patents and copyrights etc that are developed internally in the company and its extensive distribution network. Therefore, focusing only on book value may preclude certain attractive investment opportunities.

What are some stocks that are trading way below their book value. Are they justified?

Fuxing's zippers are ubiquitous. Image: Company
One company, Fuxing China, comes to mind immediately. Based on its 9MFY10 results, its book value per share is approximately SGD24.7 cts (after taking into account the potential conversion of 34.5m conversion notes into shares and the conservative SGD/RMB exchange rate of around 5.20). Thus, at its 3 Dec closing price of $0.160, Fuxing is trading at 0.65x P/BV.

Is this justified? Investors may have ascribed a low valuation to Fuxing as firstly, it is a Chinese company which holds a lot of cash on its balance sheet. Its net cash per share amounts to around S$0.14 which constitutes a hefty 86% of the stock price of $0.16. As with any Chinese company, investors are wary of companies with a large cash hoard as they are uncertain whether this amount of cash really exists.

Secondly, such a large cash holding has a significant drag on Fuxing’s return on equity. Based on the 9MFY10 results, Fuxing’s ROE is 4.4% which is very low.

Nevertheless, management has detailed plans on how to utilize its cash to generate higher returns for shareholders:

i) Capital expenditure - to increase production capacity in view of potentially higher orders;
ii) Acquisition – Fuxing is in talks with three companies providing electroplating services, colour dying services and dyed yarn supplying business so as to be a fully integrated zipper manufacturer;
iii) Share buybacks and dividend distribution of not less than 40% of its net profit.

If management can fulfill these plans to generate higher returns for shareholders, then the low P/BV may not be justified.

Readers who want to know more about Fuxing China can refer to my blog.

Recent stories: 

FUXING: China’s No.2 zipper firm 2Q net nearly triples, 2010 looking good

JUST ASK: Are bonus shares really a reward? What about bonus warrants?

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