26-05-2011, 12:35 AM
(This post was last modified: 26-05-2011, 12:50 AM by redcorolla95.)
(26-05-2011, 12:02 AM)guru Wrote: Hi my friend,
I'm also new to the game and learning and formulating thoughts all the time. I'm actually not too concerned when the Group as a whole has controlling interest in the subsidiaries.
I'll be more concerned when the Company relies more on associates and JVs to bring in the cash as they can't control the affairs, the Company will have limited power to control the use of cash from its associates and JVs and using DCF as a valuation method may not be as good.
(25-05-2011, 08:35 PM)valuestalker Wrote: Hi Guru,
Noted with thanks.
I think applying higher discount might be the only way to secure sufficient margin of safety.
1. If the group doesn't have a controlling interest (like under 50%), they will not consolidate the balance sheet, so the issue of controlling cash from minority JVs is less of an issue.
The reverse is not necessarily true; just because the subsidiary is not on the balance sheet doesn't mean that that the group does not control it or is not liable for the debts. E.g.s Bear Sterns before bankruptcy had to shell out cold hard cash to bail out some of their funds, or Ezra which as of Aug 2010 had guarantees for their subsidiaries, JVs etc that were worth was as much as the financial debt on their consolidated balance sheet (in other words, the balance sheet understated their true financial obligations by about half) .
2. With consolidated cash flows statements, we don't have the data to split between the subsidiaries. From the income statement (using accruals rather than cash) the adjustments for minority interests is as close as you get.
That said, there is a whole class of HK companies like Kingboard & Goldlion, which consist of a manufacturing / retailing arm together with a property arm, and if you look closely enough at the line items and cross check with the footnotes for how the company defines 'inventory' and other balance sheet items, you can make guess at the cash flow sources.
3. Even when the group has a controlling interest in the subsidiary (or JV), things can go quite wrong. Tat Hong is a well-managed family company, where the management feels the losses far more acutely than the average shareholder. The recent case where the manager was mishandling the funds involved a subsidiary that was 55% owned.