It was just another day for me but to the bondholders of Nam Cheong, they must be having a bad day.  Yet again, another company within the marine sector hit by financial woes.

Now, if I may say so in a way that does not mock, the problem with most investors is that they chase yield without looking at the underlying issuer’s finances. And to tell you truthfully, my heart goes out  to those affected by Nam Cheong’s Bonds.  I think, maybe, this is one of those instances that I could talk about as I have some ideas regarding the analysis of bonds.

Do note that this is just a “back of the envelope” sort of analysis and we won’t be going into a full on in depth credit analysis here. In fact, these sorts of “rough” calculations do shed some light on these matters.

One of the main issues was that Nam Cheong was highlighted by BDO LLP, its auditors, that there is material uncertainty as to whether Nam Cheong could continue to exist as a going concern.

If you are interested in reading the fine print, read the section above on “Material Uncertainty Related to Going Concern”. And this is something that we really should take note of. Especially when the auditor speaks.

And this was what the chairman said in the 2016 annual report.

Well, the headlines say it all. They have confidence in longer term prospects. What would you expect them to say anyway? That they were heading into insolvency? So very early on in my investing life, I learnt to be vary wary of management. Because so very often as I have seen, the managers that I have met have been very good story tellers.

Anyway let us come to the meat of the discussion here. They have a debt to equity ratio of 140%. Falling revenues and an operating income of negative 19 million MYR in 2016.

It’s reported debt of $1.84 billion MYR, even if you just slap a 5% coupon or interest on it would amount the interest payment to be $92 million MYR, a figure which the operating income can’t cover.

And with regards to its revenue, this is what we have here.

Amazingly its interest expenses are really low, when compared to its operating income. I suspect that it has misreported the level of interest expenses within its income statement.

So we see several forces at work here. Falling revenues. Increasing debt. And yet interest expenses are decreasing. Isn’t that weird if you think about it.

And this is the story of its debt.

The debt has been increasing.

So let me conclude if you have been following me thus far. I am going to generalize on this one to protect investors from another such instance. If a company has falling revenues and a debt to equity of greater than 100%, both bondholders and equity investors should pass on it as an investment opportunity. Because more likely than not, bondholders and investors will lose money in such instances.

If you are interested in another case of a failure, read the case study on Swiber.

May all readers be prosperous and happy!


I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

Leave a Reply