Contents

What is Value Investing? 5

The Birth of Value Investing 6

The Popularisation of Value Investing 7

Why You Should Not Be Trying To Invest Like Warren Buffett 8

2 Approaches to Value Investing 11

Essential Terms That Every Value Investor Must Know 15

8 Financial Ratios That Every Value Investor Absolutely Must Know 19

Characteristics of Value Investing 24

How Does Value Investing Work In A Nutshell 26

5 ​Value Investing Valuation Strategies 27

How to get started? 34

How is Value Investing Like? 36

Useful Resources for the Value Investor 41

3 Bonus Value Investing Case Studies 44

Case Study #1: Can A Metal Stamper Bring Significant Profits to Your Portfolio? 44
Case Study #2: Local Steel Trader Available at a Steal 48
Case Study #3: Best Value Stock – 3 Undervalued Companies for the Price of 1 50

About Dr Wealth 60

   

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 Disclaimer 
 
All  information  in  this  book  is  purely  for  educational  purposes.  The  Information  in  this  book  is  not  intended  to be and does not 
constitute financial advice. It is general in nature and not specific to you. 
 
You  are  responsible  for  your  own  investment  research  and  investment  decisions.  In  no  event  will  Dr  Wealth  be  liable  for  any 
damages.  Under  no  circumstances  will  the  Dr  Wealth  be  liable  for  any  loss  or  damage  caused  by  a  reader’s  reliance  on  the 
Information in this report. 
 
Readers should seek the advice of a qualified and registered securities professional or do their own research and due diligence. 

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"Buy Low, Sell High";  
This epitome of Value Investing is easier said than done.  
 
While the pros and superstars (ie Warren Buffett) make millions with it, retail 
investors are left struggling to make it work for them. 
 
This guide was created for you, the individual investor who wants to grow your 
wealth through investing.  
 
It will give you a complete introduction to Value Investing by covering its genesis, 
the various Value Investing Strategies that are commonly used, some common 
terms that you should know as a Value Investor and much more.  
 
This guide is a compilation of the knowledge and wisdom from various iconic 
and successful value investors. 
 
Now, let’s get into it: 

What is Value Investing? 

Definition of Value Investing: 
“Value Investing is an investment strategy where investors aim to invest in stocks 
that are deemed to be "undervalued" (aka under-priced) by the market.” 
 
Value investors aim to invest in stocks that are deemed to be under-priced by 
the market.  
 
The concept of value investing has been accorded to the brainchild of Graham 
and Dodd. Since then, many value investing methods have been created and 
tested by investors around the world.  
 
There are 2 key areas to Value Investing that allow value investors to make profit 
in the stock market: 
1. Stock Analysis: Determine the value of a stock 

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 2. Buy Low and Sell High: Using the results from #1, value investors will buy 
when the stock price is below the value and sell when the stock price is 
above the value 
 
This guide will give you a complete introduction to Value Investing by covering its 
genesis, the various Value Investing Strategies that are commonly used, some 
common terms that you should know as a Value Investor and much more.  
 
Do note that this guide is a compilation of the knowledge and wisdom from 
various iconic and successful value investors. None of the information in this 
guide should be taken as investing advice. Please refer to the disclaimer. 

The Birth of Value Investing 

Value Investing was coined in the 1920s by Benjamin Graham and David Dodd 
and explored in their book, Security Analysis. You can read the e
​ ntire history of 
Value Investing​ here. 
 
It was revolutionary when proposed by Graham and Dodd as investors in the 
1920s were selecting stocks mostly by speculation. Graham and Dodd provided 
methods to research the value of a company. Graham also shares his investing 
strategies in his subsequent book, ​The Intelligent Investor​. 
 
Over the years, value investing had been learnt, practiced and modified by many 
distinguished investors such as Warren Buffett. 

5
The Popularisation of Value 
Investing 
Warren Buffett is largely known as one of the richest men who had made his 
fortunes from investing. (Interesting facts: ​The moment when Warren Buffett 
Became Famous​ and ​Warren Buffett’s Journey to Riches​) 
 
Because of his reputation, many investors have taken an interest in Value 
Investing. And because of this increase interest in Value Investing, many have 
written best-selling books on Warren Buffett and his investing philosophy.  
 
However, it is interesting to note that most of these books were not endorsed 
nor written by Warren Buffett himself. Despite having this much information 
around, no one is sure of the exact strategy that Warren Buffett uses.  
 
What we can be sure of is that he has ​modified his investing strategies​ from his 
days under Benjamin Graham. And he admits this directly as he shares about his 
experience in the ​2014 Berkshire Hathaway Shareholders letters​: 

“​My cigar-butt strategy worked very well while I was managing small sums.
Indeed, the many dozens of free puffs I obtained in the 1950s made that
decade by far the best of my life for both relative and absolute investment
performance.

Even then, however, I made a few exceptions to cigar butts, the most
important being GEICO. Thanks to a 1951 conversation I had with Lorimer
Davidson, a wonderful man who later became CEO of the company, I learned
that GEICO was a terrific business and promptly put 65% of my $9,800 net
worth into its shares. Most of my gains in those early years, though, came from
investments in mediocre companies that traded at bargain prices. Ben Graham
had taught me that technique, and it worked.

But a major weakness in this approach gradually became apparent: Cigar-butt

investing was scalable only to a point. With large sums, it would never work
well​.​”

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Why You Should Not Be 
Trying To Invest Like Warren 
Buffett 
Warren Buffett has NEVER encouraged investors to invest like him. Neither has 
he written any official book about investing. The only literature he has written 
are the shareholders letters that Berkshire Hathaway publishes annually.  

This is our warning to all who are still trying to invest like Warren Buffett. 

As Warren Buffett’s capital grew, he realised that he had to modify his investing 
strategy to suit his capital size. Around the same time, he got to know Charlie 
Munger, his current partner at Berkshire Hathaway.  

Charlie Munger is a smart investor who studies the market. Under his influence, 
Warren Buffett’s investing strategy shifted towards that of Philip Fisher’s.  

You can watch this video where Alvin explains the s​ tory of Value Investing​. 

Figure 1: Summary of the story of Value Investing

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Who is Philip Fisher? 

The author of another famous investment book, “Common Stocks and 

Uncommon Profits”, Fisher is an influential investor of his time. Unlike Benjamin 
Graham who looks for stocks that are highly discounted on the stock market, 
Fisher would invest in stocks which he thinks are going to be way more valuable 
in the future.  
 
Here’s a simple example.  
 
Imagine if you could invest in a big company like Facebook before it was well 
known.  
 
If you were following Benjamin Graham’s investing philosophy, you would not 
invest in Facebook because its assets are not ‘valuable’ in your eyes. 
 
If you were following Philip Fisher’s investing philosophy, you may see that it has 
a potential to grow in the future as more people are open to using digital 
technology to connect, and the advertising revenue has been growing. Hence, 
you would likely invest in Facebook. 
 
That being said, you will be taking a huge risk because if Facebook didn’t 
perform up to expectation, you would lose part of your investment capital. 
 
Instead of looking at growth stocks and projecting their value into the future, 
Benjamin Graham looks at stocks that are already trading cheaper than the 
value today. 

Warren Buffett’s advice to the small value investors 

Don’t lose hope yet.  

 
Because Warren Buffett did share how he would invest if he were a retail 
investor like us. He shared this key information in a Berkshire Hathaway 
shareholder meeting. You can watch the ​video here​.  

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Alvin had decoded Warren Buffett’s reply in this article: “​How Would Warren 
Buffett Invest If He Were You​” or watch the video explanation by Alvin here: 
“​How Would Warren Buffett Invest With Less Money​” 
 

These are the 3 key points that Alvin had picked up. 

If he were a small investor, he would pick Graham type stocks: 

“​If I were working with small sum, I certainly would be much more inclined to look 
among, what you might call the classic Graham stocks.​” 
 
Buffett acknowledged that he would be more likely to invest in Benjamin 
Graham’s stock picking principles. These stocks tend to be small companies, 
in unsexy businesses and may even have problems attached. This is a far cry 
from the big, glamorous companies with competitive advantage which Buffett as 
known for investing in. 

If he were a small investor, he would have more advantage: 

“​I would be doing far better percentage wise if I am working with small sums, there 
are just way too many opportunities.​” 
 
The reason to use Graham’s approach was because Buffett would be able to get 
a higher percentage gains, than he would if he stuck with the big companies he 
usually invests in. There are a lot more small companies he could buy and make 
money. But he cannot efficiently invest in small companies when his capital 
becomes much larger. 

If he were a small investor, he would diversify across many 

stocks: 

“​I bought a large number of stocks in small amounts, in companies whose names I 
couldn’t pronounce. But the stocks as a group were so cheap, you have to make 
money out of it, it was Graham’s kind of stocks.​” 

9
 
Graham’s principle was to invest small amounts in many companies. It doesn’t 
matter what businesses they are in as you do not need to do in depth research. 
In Buffett’s words, he didn’t even know how to pronounce the names, lest to say 
what the companies do. Due to the large number of stocks, it no longer matters 
if a few of these companies eventually go bust, but there will be some winners 
that would more than cover the losses. As a group, or as a portfolio of stocks, it 
would be an overall gain for the Graham investor. 

Since Graham and Fisher, there have been various other forms of Value 
Investing Strategies and philosophy. We will look at some of these in the ​Value 
Investing Strategies section​. 
 
But first up, let’s cover the fundamentals of Value Investing in the next three 
sections. 
 

2 Approaches to Value 
Investing 
 
Not many people are aware of the existence of the two approaches to Value 
Investing. 
 
Most investors understand the qualitative method, but few have heard about 
the quantitative method. 
 
It isn't the fault of investors but rather, the success of Warren Buffett that puts 
the qualitative approach to the fore. Alvin wrote about investing in assets versus 
investing in earnings previously, this section goes deeper into that discussion. 
 
 
 
   

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Benjamin Graham coined the terms "Qualitative" and "Quantitative" approach to 
investing in his book, "The Intelligent Investor". We quote; 
 
Our statement that the current price reflects both known facts and future 
expectations was intended to emphasize the double basis for market 
valuations. ​Corresponding with these two kinds of value elements are two 
basically different approaches to security analysis.​ To be sure, every 
competent analyst looks forward to the future rather than backward to the 
past, and he realizes that his work will prove good or bad depending on 
what will happen and not on what has happened. Nevertheless, the future 
itself can be approached in two different ways, which may be called the 
way of prediction (or projection) and the way of protection​. 
 
Those who emphasize ​prediction w
​ ill endeavor to​ anticipate fairly 
accurately just what the company will accomplish in future years​ - in 
particular whether earnings will show pronounced and persistent growth. 
These conclusions may be based on a very careful study of such factors as 
supply and demand in the industry - or volume, price, and costs - or else 
they may be derived from a rather naive projection of the line of past 
growth into the future. If these authorities are convinced that the fairly 
long-term prospects are unusually favorable, they will almost always 
recommend the stock for purchase without paying too much regard to the 
level at which it is selling... 
 
By contrast, those who emphasize p ​ rotection​ are always especially 
concerned with the price of the issue at the time of study. Their main 
effort is to a
​ ssure themselves of a substantial margin of indicated present 
value above the market price​ - which margin could absorb unfavorable 
developments in the future. Generally speaking, therefore, it is not so 
necessary for them to be enthusiastic over the company's long-run 

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 prospects as it is to be reasonably confident that the enterprise will get 
along. 

The​ first, or predictive, approach could also be called the qualitative 

approach​, since it emphasizes prospects, management, and other non 
measurable, albeit highly important, factors that go under the heading of 
quality. The​ second, or protective, approach may be called 
quantitative or statistical approach,​ since it emphasizes the 
measurable relationships between selling price and earnings, assets, 
dividends, and so forth." 

Qualitative Value Investing 

● The certainty with which the long-term economic characteristics of the 
business can be evaluated; 
● The certainty with which management can be evaluated, both as to its 
ability to realize the full potential of the business and to wisely employ its 
cash flows; 
● The certainty with which management can be counted on to channel the 
reward from the business to the shareholders rather than to itself; 
● The purchase price of the business; 
● The levels of taxation and inflation that will be experienced and that will 
determine the degree by which an investor’s purchasing-power return is 
reduced from his gross return. 
 
Such evaluations definitely require more guesswork and most people will fail 
terribly at it. Warren Buffett has a knack of getting it right in the businesses he 
understands. But most retail investors are not Warren Buffett. We do not have 
his skills and insights to project the future with a certain degree of certainty. 
 
Even our highly intelligent and knowledgeable financial analysts aren’t able to do 
it well enough. 
 
Without a doubt, the future returns are high with the qualitative approach. 
However, there is no point fantasizing about mouth-watering returns if we 
cannot do it accurately enough. 
 

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It will often backfire with disappointing returns, even worse than the stock index 
returns. 
 

Quantitative Value Investing 

 
Quantitative approach entails the analysis of the current state of the business. 
 
While the ​qualitative approach​ buys a business less than what it is worth in 
the ​future​, the ​quantitative approach pays less than what the business is 
worth today​. 
 
This requires the use of financial ratios such as Price-to-Book and 
Price-to-Earnings to evaluate the strength of the company. 
 
Quantitaive approach’s risk management​ centralises on margin of safety​ as 
well as diversification; 
● Buy as low as possible below the value of the company. 
● Diversify into many undervalued stocks.  
●  
Below is a list of rules that Walter Schloss advocated (not exhaustive, he has 
more rules than these): 
● Diversify into many stocks 
● Stocks trading below book value 
● Stocks with little to no debt 
● Stocks trading at new price lows 
 
Most of these rules are ​quantifiable​.  
 
They are less subjective than the qualitative approach. 
 
Quantitative value investing also doesn’t require the investor to know a company 
deeply to ascertain her future prospects. 
 
The analysis of a company can be completed within minutes just by the 
numbers. Hence, the quantitative approach suits the investor with a full-time 

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job, and he is unable to intimately keep up with in depth company research and 
developments. 
 
Qualitative or Quantitative? 
 
As authors of this guide, we are biased towards the quantitative approach. 
 
It is our opinion that Quantitative Investing is more suited to investors who have 
not much time and experience, and yet it can yield decent returns of 12-15% per 
annum. 
 
You will find that the financial ratios and value investing strategies that we share 
later in this guide are all tilted towards Quantitative analysis of Value Stocks. This 
is because the quantitative approach allows us to transfer the ability of 
profitable stock analysis to others.  
 
This is more difficult when it comes to the qualitative approach.  
 
Of course, there is nothing wrong if an investor wishes to pursue the qualitative 
approach and aims for a higher return than a quantitative approach could. 
However, the success rate of the former isn’t high. 

Essential Terms That Every 

Value Investor Must Know 
As you study about Value Investing, you will encounter “technical” terms or lingo 
that are usually used by Value Investors. Don’t be alarmed, here’s what they 
mean. We have arranged this list alphabetically. 
 
Intrinsic value 
This is determined by the perceived value of the company. It could be valued 
based on the underlying assets or potential earnings. Value investors use a 
range of financial figures and ratios to determine the intrinsic value of a 

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company. We share some examples of these financial figures and ratios i​ n a 
later section of this guide​. 
 
Margin of Safety 
Once a value investor determines the intrinsic value based on a set of rules and 
financial figures, he will compare the intrinsic value with the stock price. This 
difference is also known as the ‘​Margin of Safety​’. The wider the positive 
difference between the intrinsic value and the stock’s current market price, the 
greater the margin of safety. 
 
Undervalued or Overvalued 
If the intrinsic value is greater than the market value, the stock is said to be 
‘​undervalued​’. Vice versa, if the intrinsic value is lower than the market value, 
the stock is said to be ‘​overvalued​’. 
 
Alpha 
The ratio used to measure your investment performance in comparison to 
market returns.  
A positive alpha suggests that the investor has outperformed the market that he 
is comparing against.  

Beta 
The ratio used to measure volatility or systematic risk of your investment in 
comparison to the market. A beta of 1 suggests that the volatility of your 
investment(s) is the same as that of the market. A beta of less than 1 suggests 
that the volatility of your investment(s) is lower compared to the market, and 
vice versa.  
 
EBIT 
Abbreviation for Earnings Before Interest and Tax. EBIT is also known as 
“operating income” or “operating profit”. 
 
It gives investors an idea of the company’s ability to generate profits by ignoring 
factors such as taxes and interest. You can calculate EBIT by taking Total 
Revenue – Operating Expenses 

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EBITDA 
Abbreviation for Earnings Before Interest, Taxes, Depreciation and Amortization.  
 
On top of Interest and Taxes, EBITA looks at the earnings of a company by 
ignoring additional debt related factors.  
 
CAPEX 
Abbreviation for Capital Expenditure.  
 
This refers to the company’s expenses used to upgrade or purchase physical 
assets which include equipment, properties or industrial buildings. 
 
CAPEX gives investors a rough idea of how much the company’s newly acquired 
asset cost.

Common Terms Used in Financial Statements 

As a value investor, you will need to refer to annual reports or financial 
statements to analyse a stock. Here are the common terms that are found in 
annual reports. This was originally compiled at “​3 Important Financial 
Statements for Investors​”. 
 
You will find these terms in the I​ ncome Statement​ of a financial statement:  
 
Revenue or Sales 
Amount of money earned by the company. 
 
Expenses 
Cost of running the company and business. 
 
Profits 
Difference between revenue and expenses 
 
You will find these terms in the B
​ alance Sheet​ of a financial statement:  
 

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Current assets 
Assets that the company can use up or liquidate within the year of assessment. 
Non-current assets are the opposite. 
 
Current liabilities 
Debts that the company needs to return within the year of assessment. 
Non-current liabilities are debts that the company takes more than the current 
assessment year to pay back. 
 
Equity 
Difference between total assets and total liabilities. Also known as the book 
value or net asset value. 
 
Paid in capital 
The amount of money raised during the company’s Initial Public Offering. 
 
Retained earnings 
Cumulative profits earned by the company after subtraction of dividends 
payouts. 
 
You will find these terms in the C
​ ash Flow Statement​ of a financial statement:  
 
Cash flow from operations 
Cash generated from the company's core business. 
 
Cash flow from investments 
Cash spent on capital investment or other activities in investment vehicles. 
 
Cash flow from financing activities 
Record of activities involved in debts, loans and dividends. 
 

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8 Financial Ratios That Every 
Value Investor Absolutely 
Must Know 
There are too many financial ratios available and this leads to “paralysis by 
analysis”. Here are 8
​ essential financial ratios​ that value investors should focus 
on.  

#1  – Price-Earnings (PE) 
PE ratio is the most common financial ratio to investors. The numerator is the 
price of the stocks while the denominator is the earnings of the company.  

This shows how many times of earnings you are paying for the stocks. For 
example, if the PE is 10, it means that you are paying 10 years’ worth of earnings.  

The lower the PE, the better.  

Let’s use an example to illustrate this. You saw a house selling for $1m and the 
owner said it is tenanted. The owner tells you the rental is worth $5k a month. 
After you have factored all the costs in owning and maintaining the house, your 
net profit is $2k a month or $24k a year. So the PE ratio for the house will be 
about 42. It will take 42 years for you to get back the worth of the house through 
a positive cashflow of $2k per month. 

Although PE is a favourite ratio, it is ​ever changing​.  

Firstly, ​price can change​. No one can predict how high the stock prices can go 
and although the PE can be high in your opinion, it can continue to go higher 
beyond your imagination.  

The other factor that causes PE to change is the s​ ignificant rise and fall in 
earnings​. A company can be making a lot of money for the past 10 years but 
because of competition, they may lose market share and suffer a decline in 
earnings.  

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Hence, PE ratio is at best a view of the company’s and its stock’s historical 
performance. It does not tell you the future.  

You would need to assess the quality aspect of the company – Can it sustain it’s 
earnings? Will the earnings grow? 

#2 – Price / Free Cash Flow (FCF) 

There is a belief that while it is possible to fake the income statement, it is 
harder to fake cash flow. Hence, besides looking at the PE ratio, you can 
examine the P/FCF Ratio. 

FCF is calculated based on the values from the cash flow statement, which is the 
statement that shows the movement of money in and out of the company. FCF is 
defined as, Cash Flow from Operations – Capital Expenditures. If the number is 
positive, it tells us that the company is taking in money even after expenditures 
on replacing or buying more equipment.  

PE and P/FCF should tell the same story. Y

​ ou can use either or use both to 
detect any anomaly/divergence. 

#3 – Price Earnings Growth Rate (PEG) 

We recognise the deficiency of PE ratio; it is plainly historical performance. Is 
there a better way to look into the future to get a sense if the company is a good 
buy?  

The house example assumed the rental does not grow over time. But you and I 
know that it is not totally true. Rental may go up due to inflation. Likewise, 
growing companies are likely to increase their earnings in the future.  

One of the ways to factor this growth is to look at PEG ratio. It is simply PE / 
Annual Earnings Per Share (EPS) Growth Rate. Yes, it is a mouthful.  

Let’s break it down.  

EPS is simply earnings divided by the number of shares. But we need to look at 
the growth of earnings. So we have to average out the growth in EPS for the past 
few years.  

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For example, if the company has been growing at a rate of 10% per year, and its 
PE is 10, the PEG would be 1. ​In general, PEG ratio less than 1 is deem as 
undervalued.  

However, it is important to understand that we are ASSUMING the company 

would continue to grow at this rate. No one can forecast earnings accurately.  

Warren Buffett is smart in this area because he buys into companies with 
competitive advantage. Only this way, he can be more certain that the earnings 
will continue to grow, or at least remain the same. 

#4 – Price-to-Book (PB) or Price-to-Net Asset Value 

PB ratio is the second most common ratio. Some people call it price to net asset 
value (NAV) instead. Net asset is the difference between the value of the assets 
the company possessed and the liabilities the company assumed.  

Let’s revisit the house example. Your house is worth $1m dollars and you owe 
the bank $500k, so your net asset value of the house is $500k.  

If the stock’s PB ratio is​ less than 1​, it means that you are ​paying less​ than the 
net asset value of the company – think along the lines that you can buy a house 
below market value. 

There is a word of caution when you look at NAV. These numbers are what the 
companies report and ​they may overstate or understate​ the value of assets 
and liabilities. In fact, not all assets are equal.  

For example, a piece of real estate is more precious than product inventory. 
Rising inventory is a sign the company is not making sales and earnings may 
drop. Hence, rising assets or NAV may not always be a good thing.  

You have to assess the asset of the company. The worst assets to hold are 
products with expiry, like agricultural crops etc. Also, during property booms, the 
assets may go up significantly as the properties are revalued. The NAV may tank 
if the property market crashes. 

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#5 – Debt-to-Asset or Debt-to-Equity 
Sometimes you wondered if you should be looking at Debt-to-Asset (D/A) or 
Debt-to-Equity (D/E) ratios. E
​ ither one of them is fine​ because both are just 
trying to measure the debt level of the company.  

Most importantly, use the same metric to make comparisons. Do not compare a 
stock’s D/A with another stock’s D/E!  

Let’s go back to the example of your $1m house and remember you still owe the 
bank $500k, what would your D/A and D/E look like? Your D/A will follow the 
formula, Total Liabilities / Total Assets, which will give you a value of 50% in this 
case (assuming you only have this house and no other assets or liabilities for the 
sake of this example). Your D/E, which is defined as Total Liabilities / Net Asset 
Value, will give you a value of 100%. Hence, for D/A at 50%, it should mean 
something like this to you: 50% of my house is serviced through debt. And for 
D/E at 100%, you should read it as: if I sell my house now, I can repay 100% of 
the debt without having to top up. 

As you can see, it is just a matter of preference and there is no difference to 
which ratio you should use.  

Most importantly, the value of D/A or D/E is to understand how much debts the 
company is assuming. The company may be earning record profits but the 
performance may largely be supported by leverage. You should not be happy to 
see D/A and D/E rising. Leveraged performance is impressive during the good 
times. But during bad times, companies run the risk of bankruptcy. 

#6 – Current Ratio or Quick Ratio 

Long term debts usually take up the majority of the total liabilities. Although the 
company may have a manageable long-term debt level, it may not have 
sufficient liquidity to meet short term debts. This is important as​ cash in the 
short term​ is the lifeline of a business. One way to assess this is to look at the 
Current Ratio or Quick Ratio.  

Again, it doesn't really matter which one you are looking at. In investing and in 
life, nothing is 100% accurate. Close enough is good enough.  

Current Ratio is simply C

​ urrent Assets / Current Liabilities​.  

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‘Current’ in accounting means less than 1 year. Current assets are examples like 
cash and fixed deposits. Current liabilities are loans that are due within one 
year.  

Quick Ratio is, Current Assets – Inventory / Current Liabilities, and it is slightly 
more stringent than Current ratio. Quick ratio is more apt for companies that 
sell products where inventory can take up a large part of their assets. It does not 
make a difference to companies selling a service. 

#7 – Payout Ratio 
A company can do two things to their earnings: (1) distribute dividends to 
shareholders and/or (2) retain earnings for company’s usage.  

Payout ratio is to measure the percentage of earnings given out as 

dividends.  

You will understand how much the company is keeping the earnings and you 
should ask the management what they intend to do with the money.  

Are they expanding the business geographically or production capacity? Are they 
acquiring other businesses? Or are they just keeping the money without having 
knowing what to do with it? There is nothing wrong for the company to retain 
earnings if the management is going to make good use of the money.  

Otherwise, they should give out a higher percentage of dividends to 

shareholders. This is a good ratio to question the management and judge if they 
really care about the shareholders. 

#8 – Management Ownership Percentage 

This is not a financial ratio per se but it is important to look at.  

It is unlikely the CEO or Chairman would own more than 50% of a large 
corporation. Hence, this is more applicable to small companies. Some investors 
prefer to buy into small and profitable companies where their CEO/Chairman is 
a majority shareholder. This is to ensure his ​interests are aligned to the 
shareholders​. It is natural for humans to be selfish to a certain extent and if you 
have the CEO/Chairman having more stake in the company, you are certain he 
will look after you (and himself).

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Characteristics of Value 
Investing 
There are several ​characteristics or assumptions​ that Value Investors will have to 
understand and make. These characteristics help to explain why certain stocks 
are said to be undervalued while others are not. Here, we list 5 key 
characteristics that value investors should know.  

Irrational Market 
We believe that the market is made up of ​irrational investors​. Hence, prices on 
the stock market do not accurately reflect the true value of a stock. 
 
A stock may be under-priced or overpriced mainly due to its 
investors’ ​sentiments​. And this creates opportunities for value investors who 
look to invest in undervalued stocks. 

Intrinsic Value 
As value investors, we believe that every stock has its intrinsic value. This is 
the ​value of the stock​ and it is not related to the price that it is currently trading 
at. 
 
We aim to look for stocks that are trading at a price below its intrinsic value. 
Pretty much like going into a store to look for items sold at a bargain. 
 
If our research and analysis are done right, there is a chance for the stock price 
to rise to its intrinsic value over time. 
 
Margin of Safety 
There is risk involved in any type of investing. It is no different in Value Investing. 

No matter how in-depth your analysis is, you can never guarantee that a stock’s 
price will move in the way you’d predict it to. Especially because of #1, some 
stocks’ true value will just never get realised on the stock market. 

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Hence, to minimise our potential loss, value investors always look for a margin 
of safety; which is determined by the difference between its intrinsic value and 
its current price in the market. 

Basically, we want a wider gap between the stock’s intrinsic value and its current 
price in the market. For example, Benjamin Graham was known to only invest in 
stocks that were trading at 2/3 of their intrinsic value. 

Time and Effort 

This is not exactly the characteristic of Value Investing. However, all value 
investors who want to do well in value investing must be prepared to spend 
some time and effort.  
 
To determine a stock’s ​intrinsic value​, value investors carry out analysis based on 
their strategy. This process requires time and effort (​and more patience and 
nerves​). 
 
Many value investors make use of ​fundamental factors​ to evaluate stocks, and 
there are little to no good fundamental stock screeners available. Even with a 
stock screener, value investors would still need to carry out their own due 
diligence to look beyond the numbers. 
 
The market is irrational. It could take a while for a stock’s true value to be 
realised in the stock market. A value investor may need to wait for months or 
years before a stock can realise its true value for a positive return. 

The waiting time for a positive ROI is something that most average investors find 
difficult to adhere to. 

Contrarian 
As mentioned, the market is irrational and it is driven by investors’ sentiments. 
This means that the price you see on the stock market and the performance of a 
stock in the market reflects how investors feel about the stock. 

Value investors tend not to make investment decisions according to what 

everyone else is doing. In fact, we believe that you have to be a contrarian to 
succeed as a value investor. 

And it is not easy. 

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To buy when the rest of the market is selling (​i.e. when the market is plummeting​), 
or to sell when the rest of the market is buying (​i.e when the market is booming​) 
This process can be eased if you have a strategy with clear buy and sell 
guidelines. 

How Does Value Investing 

Work In A Nutshell 
In short, the aim of Value Investors is to “Buy Low, Sell High”. Most people would 
have heard of this age old advice. But implementing it is not as straightforward. 

“​What price is considered low?​” and “​What price is considered high?​” These are the 
two key questions that every investor seeks to answer.  

In value investing, we use the ‘intrinsic value’ to determine if a stock price is 
considered ‘high’ or ‘low’.  

Ultimately, this is what we want to do: 

Figure 2: What Value Investors aim to do 

 
We want to identify the intrinsic value or true value of a stock. And then, buy 
when the stock price is below the intrinsic value and sell when the stock price 
goes above its intrinsic value.  

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The greater the difference between the buy and sell points, the better because 
this difference is your return on investment. 

In the next section, we share several methods that value investors use to 
determine the intrinsic value of a stock.   

Value Investing Valuation 

Strategies 
Value Investing is a large field. There are many groups of value investors using 
different valuation methods in their attempts to determine the intrinsic value of 
a stock. Most of the time, the different valuation methods do not agree on the 
intrinsic value.  
 
However, each of these valuation methods have their pros and cons, and tend to 
work better for a smaller subset of value stocks.  
 
It is wise for a value investor to be well-equipped with different valuation 
methods before deciding if he should stick to any one method.  
 
In this section, we list the different valuation methods that value investors use.  
 
One important rule to remember when investing using any one method is that 
you should use the same method to make the buy and sell decision for any 1 
investment.  
i.e. If you decide that stock A is worth investing using method 1, you should be 
using method 1 to decide when you should be selling stock A subsequently. 

Net Net Strategy (Benjamin Graham’s Investing 

Strategy) 

Benjamin Graham invested during the dark days of the Great Depression where 
many companies were going bankrupt each day. To enhance his possibility of 

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success in the stock market, the Net Net Strategy was designed with a focus on 
safety.  
 
Graham had to ensure that even if the company he invested in were to go bust, 
he would still ‘win’. He looked for companies with excess liquid assets that could 
cover all their liabilities and still payout to their shareholders, even if they were 
to go bust. Hence, Graham used ‘Current Asset’ instead of ‘Total Asset’ when 
looking for Net Net stocks. 
 

With that in mind, the value of a Net Net Stock is determined by this formula: 

 
 
You would want to take profit once your gains hit 50% or cut loss after 2 years 
regardless of the stock price.  
 
Some features of Net Net Stocks we have noticed: 
● Unfamiliar stocks: As they are unfamiliar, most investors shun them. Hence, 
they tend to be undervalued. 
● Low liquidity: Insufficient sellers too, hence discourage buyers to participate.  
● Small company: Most Net Net stocks are small companies and investors 
generally view them as risky. However, some of them could be debt free and 
financially stronger than bigger companies.  
● Problems: Net Net stocks are usually companies which are facing short term 
issues that lead to a drop in their prices. Once the issue is resolved, we would 
expect the stock price to increase. 
 
To learn more about Net Net Investing, w
​ atch our in-depth interview with Evan 
Bleker​, founder of NetNetHunter. He uses the principles of Benjamin Graham’s 
Net Net strategy to find undervalued stocks in any market today.  

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Net Asset Value (NAV) Valuation 
The Net Asset Value (NAV) method is less conservative compared to Graham’s 
Net Net Strategy. NAV or the book value is commonly used by many investors to 
get an idea of a company’s worth.  
 
Net Asset Value of a stock can be determined by the following formula: 

 
Discounted Cash Flow (DCF) Valuation 
With the Discounted Cash Flow (DCF) method, investors discount future cash 
flow projections to get an estimated present value of a stock. 
 
To get the Discounted Cash Flow value of a stock, use this formula: 

 
We do not prefer this valuation method as there are 2 vague variables that we 
find difficult to determine; predicting future cash flow and determining a 
discount rate many years into the future.  
 
However, DCF valuation remains widely used. Many investors tend to get their 
estimates from professional analysts. It is easier to use DCF to evaluate 
companies with consistent free cash flow. 
 
Concepts similar to DCF, one example is the Discounted Earnings Per Share 
(EPS). 
 
For a quick video explanation of Discounted Cash Flow, watch this video: ​Discounted 
Cash Flow: How it works 

28
 
To help you with DCF calculations, we have created an intrinsic value calculator. 
You can download it here​. 
 
Price/Earnings to Growth (PEG) Ratio (Peter Lynch’s 
Investing Strategy) 
Made popular by Peter Lynch, author of the book ‘One Up on Wall Street’.  
 
This valuation is useful for growth stocks. Peter Lynch mentioned that "the P/E 
ratio of any company that's fairly priced will equal its growth rate." 
 
The Price / Earnings to Growth (PEG) ratio is depicted as:  

 
 
A stock with a PEG ratio of 1 is said to be fairly valued. Below 1 is undervalued 
and above 1 is overvalued. 
 

Conservative Net Asset Value (CNAV) (Dr Wealth’s 

Investing Strategy) 

We share about the CNAV strategy and our performance here: T

​ he CNAV 
Strategy​. 
 
The CNAV strategy is a form of ​value investing strategy​, focusing on stocks 
with their price trading below their asset value (less liabilities). It is a quantitative 
method to keep our biases at bay in the process of stock selection. The strategy 
consists of two key metrics and 3-step qualitative analysis. 
 

29
 
Metric 1: Conservative Net Asset Value (CNAV) 
We focus on the asset value of a stock and aim to pay a very low price for a very 
high value of assets. 
 
Hence, we only count the full value of cash and properties, and half the value for 
equipment, receivables, investments, inventories and intangibles (income 
generating intangibles such as operating rights and customer relationships. 
Goodwill and other non-income generating intangibles are excluded). 
  
This means that the CNAV will always be lower than the NAV of the stock. This 
additional conservativeness adds to our margin of safety. 
  
It is easy to find many stocks trading at low multiples of their book value but 
many of them deserve to be due to their poor fundamentals. Hence, we need to 
further filter this pool of cheap stocks to enhance our probability of success. 
 
Metric 2: POF Score 
A 3-point system based on Dr Joseph Piotroski’s F-score to f​ ind fundamentally 
strong low price-to-book stocks that are worth investing into. 
 
Profitability 
While we emphasised on asset-based valuation, we look at earnings as well. The 
company should be making profits with its assets, indicated by a low 
Price-To-Earnings Multiple. Since we did not pay a single cent for earnings, the 
earnings need not be outstanding. Companies making huge losses would 
definitely not qualify for this criteria. 
 
Operating Efficiency 
We have to look at the cash flow to ensure the profits declared are received in 
cash. A positive operating cash flow will ensure the company is not bleeding 
cash while running its business. The operating cash flow gives us a better 
indication if the products and services are still in demand by the society. If not, 
the business should not stand to exist. A negative operating cash flow would 
mean that the company needs to dip into their cash to fund their current 
operations, which lowers the company’s NAV and CNAV. The company may even 

30
need to borrow money if their cash is insufficient and this raises further 
concerns for the investors. 
 
Financial Position 
Lastly, we will look at the amount of debt assumed by the company. We do not 
want the company to have to repay a mountain of debts going forward, 
especially if interest rate rises, it may dip into their operating cash flow, or 
worse, depleting their assets. Equity holders carry the cost of debt at the end of 
the day and hence the lower debt the better. 
 
3-Step Qualitative Assessment 

Step 1 – Check announcements and corporate actions since the data of 
Annual Report 

Each annual report is dated and usually only available to investors three to four 
months after the reported date. The delay is to facilitate the auditing of the 
financial statements. 

The figures of the company could have changed in a big way during the time 
difference between the day you look at the financial data and the date the 
statements were reported. Hence you need to go through the company 
announcements to ensure nothing major event has happened that could change 
your calculations. 

Some of the key events that will affect CNAV calculations are: 

● Changes in number of shares (rights issue or convertibles that dilutes 

shareholders’ interests) 
● Large dividend distribution (significant cash is removed and lowers CNAV 
+ NAV) 
● Large acquisition (above NAV) or divestment of assets (below NAV) 
● Issue of debt securities like corporate bonds (increase debt and lowers 
NAV) 

Step 2 – Determine the major assets that you are buying 

As our focus in CNAV strategy is to buy assets cheaply, it is thus important to 
know what assets we are actually buying. 

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The calculation of CNAV would classify the assets into the following 6 types, 
shown in the diagram below: 

 
Figure 3: Types of assets a company can own 

After you have determined the assets that you are buying, dig further into the 
details of these assets. For example, if it is properties that you are buying, find 
the locations of these properties and note the valuation dates. If the valuation of 
these properties coincide with a property boom, you may want to discount these 
properties further. 

If the company has high receivables, it is good to question whether they have an 
issue chasing their customers to pay. It is also crucial to make sure if a company 
has lots of inventories, they should not have short lifespan like perishables. 

Bottomline, this step is to check if the assets are justifiable as the numbers 
presented them to be. 

Step 3 – Establish the Trustworthiness of the Management 

Our investment decisions hinged on the calculations and our calculations 

depend on the accuracy of the numbers reported in the annual reports. Hence, 
by inductive reasoning, our investment success depends on the management’s 
honesty in reporting these numbers.  

This is a difficult item to measure and the best way we have found is to evaluate 
the management’s ‘Skin in the Game’. This simply means that we would check 
the management’s ownership of the company. A significant ownership in the 

32
company speaks louder than the words in their letters and their interest should 
be more aligned with shareholders since they are the biggest shareholders if 
they own more than 50%.  

However, there have been cases whereby owner-cum-management short 

changed the minority shareholders by offering a very low price to buy up the 
remaining shares and delist the company. To minimise this risk is to consider a 
controlling shareholder who does not own more than 70% of the company.   
How to get started? 
Now that you have a basic understanding of how Value Investing works, all that 
is left is to take action and start looking for undervalued stocks in the market.  

The Most Common Mistake of an average Investor 

In investing, there are many strategies that work.  

Some of these strategies work better in certain market conditions. Some 

strategies work better for certain types of stocks. (​i.e. the CNAV strategy is efficient 
at finding undervalued stocks​) 

Most investors find themselves shopping for strategies from various mentors. 
And at the end of the day, have invested in a bunch of stocks that were analysed 
using different strategies.  

Their portfolio ends up like a messy patch work of stocks.  

And when the market drops as a whole, they are not able to determine which 
stocks to sell or keep.  

#1 rule of thumb 
When investing in stocks, always make sure that your buying and selling 
decisions are made using the same strategy.  

Because the same stock can appear to have ‘Great Potential” using strategy A 
while appearing to be a “Bad buy” using Strategy B if the philosophy behind 
these 2 strategies are different.  

Learn a complete value investing strategy and stick to it 

The CNAV strategy that we use is just one of many value investing strategies that 
work. Dr Wealth does not believe in using leverage as it increases risk as well.  

33
Instead, we aim to become functional ‘part-time’ investors who are able to pick 
undervalued stocks and grow our portfolio at a consistent rate of 10-15% every 
year.  

This means that we free up a lot of our time – since there is no need to 
constantly monitor the stock market - to be able to go on with our daily lives. 

Thus far, the Conservative Net Asset Value (CNAV) strategy has allowed us to 
beat the market since 2014 by tapping into stocks with Value and Size ‘factors’.  

We share more about our Value Investing Strategy at our FREE live course. We 
run these courses occasionally, y
​ ou can check the latest availability here​. 

It doesn’t cost thousands of dollars to gain the ability to invest successfully. In 
fact, our Introductory Investing Course is free and was created to give new 
beginners an overview of successful value investing and investing in general.   

34
How is Value Investing Like? 
Value investing is not all roses. It is not likely for a stock price to immediately 
surge the moment you invest in it. Some stocks take years to realise their true 
value.  

Here’s a case study of our experience in value investing. You can find more of 
these case studies at w
​ ww.drwealth.com/blog​. 

This is ‘​How Value Investing Felt Like, before a 67% Gain​’. 

Buy stocks cheap and sell them dear. 

How difficult can it be? 

Simple doesn’t mean it is easy. 

Value stocks are very uncomfortable to buy. An unprepared investor would 

have a lot of self-doubt and might lose confidence when bad events arise. 

The case in point revolves around TSH, a stock listed on the Catalist (the 

secondary board of the SGX). TSH’s market capitalisation was about S$30 million 
when we first looked at the stock in 2014. It was a very small cap stock which 
most professionals would not even take a glance at. 

35
Though a small company, TSH had 4 business streams. 

Homeland security arm served the Defence sector, disposing ammunition and 
constructing civil defence shelters. This business segment also supplied and 
choreographed fireworks displays. 

Consumer electronics arm designed headphones, earphones, speakers and 

accessories for mobile phones and tablets. These products were made in China 
and sold in the U.S. through a distributor. 

The property arm developed properties in Australia. 

Lastly, the consulting arm organised sports event such as POSB PAssion Run for 
Kids, PAssion Fun Around the Bay, Home TeamNS-New Balance REAL Run, 
Orange Ribbon Walk, Run for Hope, Green Corridor Run, Jardine’s MINDSET 
Challenge (Vertical Marathon), and Love Your Heart Run. 

It appeared to me that the Company was not focused. A small company 

shouldn’t be doing so many unrelated businesses because there weren’t enough 
resources to do everything well. 

Why Invest? 
We practise a version of value investing known as the Conservative Net Asset 
Value (CNAV) strategy. The approach focused on ​buying companies below their 
asset value, as opposed to valuing companies based on their earnings​. 
Slightly more than 2 years ago, the Net Asset Value (NAV) of TSH was $44.6m. 
The assets included $23.8m cash and a freehold building worth $8.8m. 

Market capitalisation was only $30m, less than the NAV of $44.6m. An 
undervalued stock indeed. 

Graduates of our ​course​ would understand that TSH had a CNAV2 discount of 
19% and a POF Score of 3. We bought some TSH shares at S$0.124 on 31 Jul 
2014. 
 
A String Of Negative Events 
An undervalued stock doesn’t mean it can only go up in price. 

On the contrary, the share price fell after we invested in TSH. 

36
We had a paper loss of 30% as the share price dropped to $0.086. 

What happened? 

What should we do? 

Some investors may panic. Some may be in denial. 

We actually added our position in TSH on 15 Feb 2015 because the assets were 
still intact and the shares just got cheaper. Moreover, the CEO of TSH added a 
large position in Dec 2014. We do not usually average down though and we 
believe most investors shouldn’t do it. 

The annual report for FY14 was released in Apr 2015. Operating cash flow was 
negative and we should have cut loss given our quantitative criteria. We 
analysed the situation and decided not to because the operating cash flow was 
impacted by a one-off large purchase of development property. Without this, the 
operating cash flow would remain positive. 

On 4 Aug 2015, TSH invested $5m into an oil & gas company listed on the Bursa 
Malaysia. The Company was Hibiscus. It was a bad timing as we know that the 
crude oil prices tumbled in end-2015. 

It was not easy for most investors to swallow one bad news after another. It 
would be normal to start thinking that you have made a mistake and indulge 
in self-blame for not identifying the risks in advance. How many investors would 
have given up hopes on the stock and suffer in silence? 

The series of events are plotted on the following stock chart after the investment 
was made. 

37
 Figure 4: Sequence of events after TSH investment. ​Stock chart from ShareInvestor.com

The Change Of Fortune 

Somehow, all of a sudden, the management seemed to be enlightened and took 
a series of actions that benefitted the shareholders. 

On 23 Dec 2015, the management sold away all the Australian properties and 
decided to close down this business segment. They made a small loss from this. 

This kicked off the liquidation of other businesses and assets of TSH, unlocking 
value for the shareholders. The management declared a $0.03 dividend per 
share, which was a 27% dividend yield based on our average buy price of $0.108. 

Of note, the homeland security business was sold to the CEO of TSH and the 
consumer electronics was sold to a third party. The freehold building was sold 
for $16m at the prevailing market value. The gain was around $7m. 

TSH became a cash company without any business operations. The 

management declared a special dividend and capital reduction of $0.1232 per 
share. This would return 82% of the NAV to the shareholders. With such a large 
distribution, I believe it is unlikely the management is going to buy a business 
and stay listed. Eventually all the money would be returned to the shareholders. 

The revised NAV per share was S$0.15 and we decided to sell off at this 
price with a total percentage gain of 67%. 

38
Below is the summary of asset disposal and value unlocking sequence. 

Figure 5: Sequence of events that unlocked TSH value. S

​ tock chart from ShareInvestor.com

Value investing is unnatural. You have to go against the herd. Most of the really 
cheap stocks are small caps and many would find them uncomfortable to buy. It 
is also counter-intuitive to buy into problems. But it is the presence of problems 
that resulted in cheap stock prices. 

To make it even tougher, the stock price may continue to disappoint after you 
have invested in a value stock and result in a large loss, albeit on paper. It makes 
you doubt your investment position. You need a lot of confidence and conviction 
to stick to your investment process. One day, things might just turn rosy and 
allow you to sell for a handsome profit. 

It is true not all stocks would turn out as well as TSH. Some may become a 
permanent loss. Hence, we must manage our portfolio properly – diversify 
sufficiently, cut loss when necessary. Having a time stop to exit is also important 
to avoid value traps. 

39
Useful Resources for the Value 
Investor 
This section lists additional useful resources that are catered for the value 
investor. All resources are listed alphabetically. For more investing and trading 
resources from financial commentary, economic data to charting tools, 
download our U ​ ltimate Investing Resource​. 

Company Announcements 
Singapore 
http://www.sgx.com/wps/portal/sgxweb/home/company_disclosure/company_annou
ncements 
 
Malaysia 
http://www.bursamalaysia.com/market/listed-companies/company-announcements/ 
 
Hong Kong 
http://www.hkexnews.hk/index.htm 

Stock Screeners 
Acquirer’s Multiple 
http://acquirersmultiple.com 
Deep Value Stock Screener. Find undervalued activist and takeover targets 
 
FINVIZ 
http://finviz.com/screener.ashx 
Stock screener for investors and traders, financial visualizations. 
 
Google Stock Screener 
https://www.google.com/finance/stockscreener 
Quickly and easily select stocks based on key metrics like share price, market 
cap, P/E ratio, dividend yield and more. 

40
GuruFocus 
http://www.gurufocus.com/screener/ 
The All-In-One Guru Stock Screener. The screener now has more than 120 filters 
for you to screen your favorite stocks. 
 
Jitta 
https://www.jitta.com 
Rank stocks based on Jitta Score and Jitta Line to give you the opportunity to 
“Buy a Wonderful Company at a Fair Price”. 
 
Share Investor 
http://www.shareinvestor.com/sg 
Get real-time stock quotes, stock charts, company fundamentals, financial 
results and market moving financial news. 
 
Stockopedia 
http://www.stockopedia.com/ 
Comes with a free 14 days trial. You can screen stocks using the strategies from 
different gurus inside Stockopedia.  

Portfolio Tracker 
Dr​ Wealth Portfolio Tracker 
 
https://www.drwealth.com/ 
Free mobile app that allows you to track your portfolio returns over the years. 
Know how well your investments are doing, track the growth of your dividend 
income and become a better investor. 

41
Intelligent Investors Immersive 
Introductory Course 
The Intelligent Investors Immersive Introductory Course is a live,​ free ​course that 
will equip you with: 
 
● How we marry ​2 contrasting investing strategies​ to build a balanced 
portfolio that’ll grow while paying us dividends, at the same time. 
● The insights to finding Undervalued and Growth stocks in today’s market - 
post Covid-19​.  
● How to use a free stock screener to​ identify opportunities​ in today’s 
market (​and how it can be done w ​ ithin a couple of clicks​) 
● 7 key financial figures​ to focus on, so that you can cut through the fluff 
of annual reports and analyse companies within 15minutes. 
● 2 main criteria​ t​ hat’ll help you pick safe Growth stocks with huge 
potential (we’re looking at at least 100% growth). 
 
The Intelligent Investors Immersive Introductory Course is free and we run it 
occasionally, c​ heck this page​ for latest updates. 

42
3 Bonus Value Investing Case 
Studies 
 

At Dr Wealth, we invest our own money using our Conservative Net Asset Value 
(CNAV) strategy covered above. We use it alongside a dividend investing strategy 
as part of our ​Investing methodology​. 

Factor-Based Investing allows us to exploit proven stock profit factors like Value, 
Size and Profitability to pinpoint stocks that are more likely to give us higher 
returns.  

After all, it’s a no-brainer that we’d want to put our money only in stocks that can 
give us better and higher returns.  

Here are 3 case studies of stocks analysed using the CNAV strategy.  

We hope that you’ll become more familiar with the stock analysis and thought 
process of a value investor, through these case studies. 

Case Study #1: Can A Metal Stamper Bring Significant 

Profits to Your Portfolio? 
All data accurate as of Nov 2016.

Why does this stock deserve our attention?

A CNAV2 discount of 44% and POF score of 2, that’s why. 

Miyoshi (SGX:M03) has numerous properties and land in Asia. We believed the 
value is much higher today as many of these owner-occupied properties were 
quoted at cost in the balance sheet.  

During our meetup with the management, the key office holders have shown 
their drive in creating value for the business by investing in new growth areas, 
and diversifying away from the reliance on a declining but still profitable Hard 
Disk Drive market. 

What Does The Company Do?

Miyoshi Precision Limited was established in Singapore in 1987 starting as a 
mere tool-and-die and metal stamping company. 4 years later, Sin Kwong Wah, 

43
Andew joined the Company as CEO and Chairman. Since then he has been the 
driving force behind Miyoshi’s growth and expansion.  

In Dec 2014, Miyoshi Precision Limited changed its name to Miyoshi Limited. 
They dropped the word “Precision” as a recognition that they have to do more 
than just providing metal stamping service in order to survive in a tough 
engineering market. Hence, they positioned themselves to provide an integrated 
engineering solution to fit the market demands.  

They have also changed their Company’s logo from its previous Japanese looking 
design as a pragmatic move to avoid possible antagonising customers in China.   

Today, Miyoshi is headquartered in Singapore with 900 employees in 

manufacturing plants across Asia.  

Core service  

Miyoshi provides Integrated Engineering Services (IES) for manufacturers which 

includes product design and prototyping for precision components and 
assemblies in the data storage, consumer electronics and automotive markets. 
And also precision metal stamping, progressive cold forging, mechanical 
joining/laser welding, electroplating, manual assembly and testing. 

Their key markets are data storage, Hard Disk Drive (HDD), consumer 
electronics, photocopiers, scanners and printers manufacturers.  

What Are The Assets?

Properties represent the largest pie followed by Investments which comprised 
15% stake in Coal Power (Fujian) and others, and receivables. The Properties 
were made up of $7.5 Million in investment properties and $19 Million in Land 
and Building.  

Land and Building  

The Singapore building is located at No.5 Second Chin Bee Road and is where 
Miyoshi is headquartered. It used to be their core metal stamping operation for 
the HDD market which was a major revenue contributor in its heyday. The 
management decided to close down the Singapore manufacturing plant in 2014 
due to poor business viability. 

The property is a leasehold two-storey factory cum office building. In 2014, they 
extended the leasehold by another 30 years.  

44
$20 million worth of land and buildings in the balance sheet was quoted at cost 
less depreciation. Given that the plants are in good working condition it is likely 
that the valuation has increased over time.  

Investment properties 

Miyoshi built two industrial buildings on the empty land in the Philippines and 
turned it into investment properties. The rental yield was 10%% based on the 
past 12 months August 2016 quarterly report. This is one of the examples in 
which the management has been trying to create value with existing assets and 
expand the streams of income. 

Receivables 

The Company has approximately 44% out of $14 million in Trade and other 
receivables that have passed due. The amount is significant but not alarming. As 
we have sufficient buffer through discounting the value by 50%.  

Why is the stock undervalued?

In hindsight, Miyoshi was barely profitable over the past 5 years and even had a 
few years of losses. During profitable years, their net profit margin was a 
meagre 1 – 2%. Their factories and supply chain have also been damaged and 
disrupted from the flood in Thailand and the earthquake in Japan. The declining 
HDD market further pressured Miyoshi’s business performance and stock price.  

The market tends to price stocks based on their earnings and growth prospect. 
For the case of Miyoshi, earnings have dropped significantly and a boring 
industry like metal stamping meant that it is likely to be neglected and priced 
pessimistically by the market. 

What are the main risks for this stock?

Data Storage and Consumer Electronics are the main revenue contributors. 
However, the latter was not profitable and was loss-making for the past 3 years. 
Data Storage and Automotive segments were profitable but with profit margin of 
10% and 3%, respectively. 

The main risk for Miyoshi is probably whether they would be quick enough to 
diversify their declining Data Storage segment to other market segments like 
Automotive, Microshaft and others.  

45
The venture in Light Electric Vehicle (LEV) via Core Power would unlikely be a 
major contributor to Miyoshi’s earnings in future, mainly, it was a 15% 
investment. Hence, it does not add to her revenue.  

Secondly, even if the venture proves to be a success, Miyoshi would still require 
to increase her stake to leverage on the growth, which could be refused by Core 
Power. Even if we assumed that Core Power is willing, Miyoshi would still face 
financing constraints. Due to this the Company does not have significant cash to 
make bigger investments. 

What are the positive signs for this stock?

Although revenue in the HDD market is falling and their days are numbered. 
Metal stamping continues to play an important role in making metal 
components for industries like consumer electronics, medical devices, 
automotive and etc. Hence, there is a chance for Miyoshi to turn around a 
loss-making business if they manage to secure more contracts in these areas. 
The Chairman mentioned that there are fewer players now and competition has 
eased. In fact, Miyoshi is rejecting businesses if they do not bring in sufficient 
profit margin. 

Their investment in Light Electric Vehicles may turn out to be a success and 
create value for the Company. They could also shut down some of the less 
profitable plants and turn it into investment properties to unlock value. 

The market seemed to react positively on their recent dividend announcement, 

the price has almost doubled. The dividend yield is around 9% at today’s price.  

Does the management have skin in the game?

Sin Kwong Wah Andrew is the largest shareholder of Miyoshi with a total interest 
of 31.79%. He is the Group’s CEO and Chairman. 

Masayoshi Taira holds 15.36% indirect interest in Miyoshi. He is the Group’s 

Non-Executive Director and also the general manager of Miyoshi Industry Co., 
Ltd., Japan, where Miyoshi was originally from. 

Pek Yee Chew is the wife of Sin Kwong Wah Andrew. Collectively, the family owns 
approximately 30% of Miyoshi. A healthy level as it is not too high or low but just 
good enough to have sufficient skin in the game. 

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There is also bound to have some sentimental value for Andrew as he has spent 
over 25 years in building the Company. He also showed willingness to share 
profits with the shareholders as dividends.  

Conclusion
Miyoshi is an undervalued stock in a boring industry. During our visit, Chairman 
Andrew shared that the metal stamping business has become increasingly 
tough. The market demands higher quality work at lower prices which eats into 
their profit margin.  

It may seem risky to invest in such a stock. As value investors, we invest in stocks 
that are trading cheaply below their assets valuation and wait for positive events 
to happen for the value to be unlocked. There are some potentials given the 
possible earnings turnaround and the investment in LEV. Miyoshi certainly 
qualifies for that. 

Investors should not expect Miyoshi to distribute dividends every year as the 
management has told us that they would try to distribute dividends when they 
managed to generate $3 – 4 million of free cash flow which they have not been 
able to in the past 5 years. 

Case Study #2: Local Steel Trader Available at a Steal 

All data accurate as of Oct 2016.

Why does this stock deserve our attention now?

Sin Ghee Huat (SGX:B7K) was trading with a CNAV2 discount of 25% and POF 
score of 2. The share price has dropped from $0.26 (2014) to $0.19 (0ct 2016) 
due to depressed steel and commodities price. T 

The stock deserved our attention because the CNAV discount has increased to 
25% and cash level has risen after some of the investment bonds were sold. 

The potential profit is approximately 100% based on the NAV of $0.39. It is also a 
net-net stock with 14% discount. In other words, Sin Ghee Huat is trading below 
its liquidation value. 

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What does the company do?
See Ghee Huat machines, processes and supplies stainless steel to various 
business sectors. Trading and machine processing contributed 73% of the 
revenue.  

What are the assets?

As a metal trading firm, it is normal to have a large inventory which accounted 
for almost half of the total assets. There is also a significant amount of cash and 
trade receivables which constituted 29% and 12% of the total assets respectively. 

Why is this stock undervalued?

The business performance has been weak over the past 5 years, mainly dragged 
down by the weak global steel market, which is suffering from weak demand, 
over-capacity and excessive inventories. 

Falling Profits and Dividend Pay Outs 

The Company has been distributing the majority of their net profit as dividends 
over the past few years. As the earnings have not improved, the ability to 
distribute higher dividends was hampered. In April 2016, the Company issued a 
profit guidance in anticipating a 3rd quarter loss.   

The state of affairs for steel and its gloomy outlook are affecting the way 
investors are valuing the steel industry, including this company. 

What are the main risks for this stock?

There is a significant amount of inventory held by the company, which may be 
subjected to write-down risks. The table below shows the inventory levels and 
write down amounts by year. 

The inventory levels have always been stable, ranging from 34% to 47%. This 
shows the ability to maintain the inventories despite changing demands in steel. 
The write down in FY16 was not excessive, as compared to FY09 and FY10. If 
history is indicative of the future, Sin Ghee Huat’s inventory should not pose a 
big risk since write downs have been manageable. 

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The second risk revolves around the uncertainty of steel price recovery. Could 
this be a prolonged period of low steel prices such that this stock becomes a 
value trap? This is possible and we have a time stop of 3 years, should nothing 
positive come out of it during this period. 

As the share price is undervalued at this point, and considering that the Kua 
family is a majority shareholder (67%) of Sin Ghee Huat, there is a chance the 
Family would make an offer to delist the Company. It would rather be easy to 
accumulate enough shares to meet the delisting criteria given their level of 
ownership. The rest of the shareholders may have to give up the shares at 
undervalued prices. 

Does the management have skin in the game?

As mentioned above, the Kua family owns the majority and some of the 
members serve as directors and managers of the Company. There is definitely 
sufficient skin in the game for the Kua family. But shareholders may be 
shortchanged if a delisting scenario unfolds. The positive sign was that the 
Management distributes most of the profits as dividends, and it is a sign that 
they treat shareholders fairly. 

Conclusion
Sin Ghee Huat share price has been beaten down because of their exposure to 
the weak steel market. This is not the first time the Company has experienced 
this as the management has navigated the Company’s survival for nearly 3 
decades of steel cycles. The Company currently has the cash and resources to 
tide through more years and hopefully a steel recovery is in sight in the near 
future.  

Regardless, it is important that investors practice diversification, and make 

investment decisions that are aligned to the individual’s investment horizon and 
risk appetite. 

Case Study #3: Best Value Stock – 3 Undervalued 

Companies for the Price of 1 
All data accurate as of Jul 2017.

 
Why does this stock deserve our attention?
Great  Eagle  (HKSE:0041)  is  trading  at  a  CNAV2  discount  of  46%,  POF  3,  P/E  10, 
and  is  generating  positive  net  operating  cash  flow  over  the  past  two  years.  We 

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chose  this stock because of her globally diversified properties, stable growth and 
enterprising management. 
 
Furthermore,  two  of  her  Hong  Kong  listed  subsidiaries,  Champion  REIT  and 
Langham Hospitality Investments are also traded below their CNAVs.   
 
Besides  having  capital  gain  potential,  Great  Eagle  also  pays  dividends  of around 
1.8%  yield.  The  yield  isn’t  impressive  but  the  stock  presents  an  opportunity  to 
receive some returns while​ waiting for capital gain.

What Does The Company Do?

The  Great  Eagle  Group  is  one  of  Hong  Kong’s  leading  property  companies. They 
manage  and  own  an  extensive  international  hotel  portfolio  branded  under 
“Langham” and other affiliate brands.  
 
The  group  also  develops,  manages  and  invests  in  high  quality  residential, office, 
retail and hotel properties in Asia, North America, Australasia and Europe. 
 
The  company  was  founded  by  the  late  Lo  Ying-Shek  in  1963  and  subsequently 
listed  in  Hong  Kong  Stock  Exchange  in  1972.  Today,  they  are  headquartered  in 
Hong  Kong  and  run  by  the  second generation of Lo’s family. The third son of the 
late  Lo  Ying-Shek,  Dr.  Lo  Ka  Shui,  is  the  Chairman  and  CEO  of  the  Group.  He  is 
also in the Forbes’s billionaire list. 
 
Operating Segments 
The Group derives their earnings largely from three main areas – 
(1) Hotel management under the hotel franchises Langham
(2) Distribution  from  her  three  subsidiaries  (Champion  REIT,  Langham 
Hospital Trust and U.S Fund) and,
(3) Managing fee income from Champion REIT. 
 
It  might  not  be  obvious  how  each  of  these  segments 
contributes  to  the  revenue  and  earnings  of  Great 
Eagle  since  their  numbers  are  consolidated  in  the 
parent  company.  In  terms  of  the  geographical 

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revenue  (bottom  right  table),  we  can see that 46% of the earnings are diversified 
outside of Hong Kong, minimising the concentration risk in one country.

Two Subsidiaries 

*Note: 15 overseas hotels largely come from the brand ‘Langham.’ See below table for the breakdown.

Great  Eagle  holds  66%  and  62%  stakes  in  Champion  REIT  and  Langham 
Hospitality,  respectively.  The  subsidiaries  are  spinoffs  from  the  Great  Eagle’s 
property  portfolio.  This  is  beneficial  since  properties  are  capital  intensive  assets 
and  the  Group’s  capital  could  be  freed  up  by  selling  part  of  these  spinoffs  to 
other  investors.  The  management  can  in  turn  use  the  capital  for  other  property 
development  projects  while  retaining  control  of  the  assets  (more  than  60%  of 
the voting rights in each of the subsidiaries).  
 
Secondly,  the  Group  is  also  entitled  to  the  dividends  and  property  income 
distributed  by  their  subsidiaries  so  that  they  retained  majority  of  the  profits 
from  the  spun-off  properties.  Moreover,  they  could  also  retain  the  lucrative 
property  manager  role  in  the  subsidiaries.  You  would  have  noticed  the  trend 
when  property  managers  such  as  CapitaMallAsia  and  ARA  Asset  Management 
were delisted while the REITs they managed remained listed.  
 
What Are The Assets?
Over 80% of the total assets come from properties.  
 

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Great  Eagle  owns  over  21  asset  properties  globally,  5  of  them  belong  to 
Champion  REIT  and  Langham  Hospitality. And the remaining properties are held 
under  Great  Eagle  either  through  direct  holding  or  partnership.  Most  of  the 
hotels are run under the brand name ‘Langham.’  
 
Champion REIT owns the largest pie followed by Great Eagle and Langham 
Hospitality. We will start with Great Eagle first. 

Great Eagle 
Below is an overview of Great Eagle overseas’ portfolio and properties under 
development (under ‘Pipeline hotels’). On top of these properties, they also own 
an apartment building and Great Eagle Centre in Wanchai, Hong Kong.  

 
Champion REIT (HKSE:2778) | Ownership: 66% 
 
 
 
 
 
 

Champion REIT’s portfolio includes two grade-A office towers and one shopping 
mall. The REIT was listed in 2006 with Three Garden Road as the initial portfolio. 
Subsequently, they acquired Langham Place Office Tower and Langham Place 
Mall in 2008 from the Group.  Two of which are located in Mongkok.  
 

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The REIT pays an average 3% – 4% dividend yield and is a CNAV stock with 42% 
discount. Their net operating cash flow was positive over the past three years 
and has a POF score of 3.  
 
The share price has risen by 39% from the bottom in early 2016 due to improved 
earnings from higher occupancy rate and positive rental reversion from Three 
Garden Road, Langham Place Office Tower and Langham Place Mall. 
 

Langham Hospitality (HKSE:1270) | Ownership: 62% 

L​angham  Hospitality  is  a  stapled  security  consisting  of  a  REIT  and  a  Business 
Trust.  Their  property  portfolio  includes  two  High  Tariff  A  hotels  also  known  as 
‘5-star’ hotels (The Langham and Cordis) and one High Tariff B hotel (Eaton).  

The Business Trust is trading at a CNAV2 discount of 41% and distributed a 

rather high dividend yield of 7% – 9% over the past three years. Net operating 
cash flow was positive in the past 3 years with a POF score of 2.  

Why Is The Stock Undervalued And What Are The Main Risks

 
The share price has doubled from $20 to $40 since early 2016 but it is still a 
distance away from the NAV per share of $82. It could be a sign that the stock is 
reverting to its value but the possibility seems slim as we do not see any catalyst 
happening.  

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The  undervaluation  could  be  due  to  the  family  tussle  as  investors  tend  to  avoid 
such  stock  with  the  fear  of  uncertainty.  Besides  that,  it  is  important  to 
understand  that  we  could only make educated guesses and may never know the 
real  reason.  One  human  tendency  or  bias  is  to  seek  an  explanation  about  why 
stock  prices  move  in  a  certain  way  and  neglect  that  not  every  price  movement 
has a reason other than randomness.  
 
We  know  from  experience  and  empirical  evidence  that  undervalued stocks tend 
to  revert  to  fundamentals  over  time  and  that  is  good  enough  for  us  to  make 
profitable  investing  decisions.  Furthermore,  our downside will be limited so long 
we do not overinvest in a few stocks and maintain adequate diversification. 
What are the main risks for this stock?
They  are  heavily  exposed  to  the  global  tourism  market  as  the  majority  of  their 
income  is  derived  from  hotel  related  activities. Furthermore, they are also at the 
mercy  of  the  property  market  cycles  since  they  have  property  development 
projects in the U.S, Japan and China. 
 
It  is  also  worth  noting  that their debt to equity ratio of 60% is quite high. But this 
is  understandable  as  they  are  in  a  capital-intensive  business  which  is  perhaps 
the  reason  for  spinning  off  their  properties  to  the REIT and Business Trust. They 
should  be  able  to  refinance  the  loan  given  their  well-located  properties  but  it 
would be at higher interest rates, which would decrease their profits. 
 
In  addition,  the Lo’s family owns approximately 60% of the shareholding in Great 
Eagle  Holdings,  giving  them  considerable power to place their interests ahead of 
shareholders if they desire to. 
 

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What Are The Positive Signs For This Stock?

Great Eagle (HKD '000)

-> Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Revenue 5,135,528 7,454,764 8,405,748 8,438,565 8,704,467

Gross Profit 1,385,111 3,000,541 3,278,975 3,022,455 3,368,624

Gross profit Margin 27% 40% 39% 36% 39%

Net Earnings 3,551,830 2,399,472 2,115,101 3,312,335 2,769,792

Net profit Margin 69% 32% 25% 39% 32%
Net Operating Cash
Flow 1,934,025 2,442,950 -13,341 1,566,368 2,120,905

The  Group’s  revenue,  earnings  and  net  operating  cash  flow  has  been  quite 
stable  over  the  past  5  years.  Dec-14  saw  a  negative  in  net  operating  cash  flow 
but  that  was  due  to  an  acquisition  of  a  property  for  development.  Likewise,  her 
two subsidiaries have stable earnings.  
 
The  management  has  also  proven  to  be  enterprising  by  expanding  to  overseas 
projects,  achieving  considerable  success  in  building  the  Langham brand globally 
and spinning off her asset properties to create value for the Group. 

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Champion REIT (HKD '000) Jun-12 Jun-13 Jun-14 Jun-15 Jun-16
Revenue - 2,208,570 2,288,113 2,288,766 2,556,820
Gross Profit - 1,203,961 1,245,180 1,221,523 1,412,615
Gross profit Margin - 55% 54% 53% 55%
*Net Earnings - 2,198,654 1,928,563 3,305,013 3,181,582
Net profit Margin - 100% 84% 144% 124%
Net Operating Cash Flow - 1,221,354 1,278,752 1,212,118 1,387,142

Langham Hospitality Investments

Ltd
(HKD '000) Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Revenue 1,623,459 476,918 771,051 691,517 708,296
Gross Profit 843,922 399,546 643,397 572,696 595,629
Gross profit Margin 52% 84% 83% 83% 84%
*Net Earnings 397,491 445,275 557,063 1,442,191 409,609
Net profit Margin 24% 93% 72% 209% 58%
Net Operating Cash Flow 498,677 208,491 665,168 448,802 482,327

*The years which have higher net earnings than revenue was due to fair value gain in
property.

56
Does The Management Have Skin In The Game?

The  Lo’s  family  collectively  owns  60%  stake  in  Great  Eagle  Holdings  through  a 
family  trustee.  The  Annual  Report  did  not  indicate  the  exact  breakdown  of each 
family member’s ownership. 
 
We  could  only  estimate  that  the  Group’s  Chairman  and  CEO,  Lo  Ka  Shui,  owns 
the  largest  proportion.  In  addition,  the  Group is currently run by the second and 
third  generation  of  Lo’s  family.  Hence,  we  could  assess  that  the  management 
has sufficient skin in the game.  

Conclusion
Comparision Between Parent And Subsidiaries
(HKSE:0041) (HKSE:2778) (HKSE:1270), biz trust
Champion Real Estate Langham Hospitality
Great Eagle
Investment Trust Investments Ltd.
CNAV2 46% 41% 41%
Net. OCF ++- +++ +++
PE 10 9 17
Potential
109% 72% 70%
Profit
Div Yield 1.80% 4.50% 7.70%
Free Float 33.68% 31.25% 30.21%
Mkt Cap
$26,760,058,483 $29,397,063,248 $6,881
(M)
66% owned by GE 62% owned by GE
Among  the  three  stocks,  we  think  Great  Eagle  offers  the  greatest  value  to 
investor for a couple of reasons: 

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 ● CNAV2  &  Potential  Profi​t  –  Great  Eagle 
has  the  highest  CNAV2 discount of 46% 
compared  to  the  two  subsidiaries  of 
41%  representing  greater  margin  of 
safety.  Great  Eagle  has  a  potential  gain 
of  109%  while  Champion  REIT  has  72% 
and  Langham  has  70%.  hence,  Great 
Eagle  is  evidently  the  winner.  The 
potential profit is measured from current price to the NAV. 
● Diversification  –  Both  subsidiaries  were  incorporated  and  listed  as part of 
Great  Eagle’s  expansion  strategy.  Champion  REIT  focuses  on  high  quality 
office  and  commercial  property.  Whereas  Langham  Hospitality 
concentrates  on  luxury  hotels.  Both  focus  on  the  Hong  Kong  market 
solely,  which  can  be  advantageous  if  the  property  market  sees  a  boom. 
On  the  flip  side,  their  property  portfolios  could  also  become  heavily 
exposed  to  the  volatile  Hong  Kong  tourism industry. We think Great Eagle 
is  more  robust  mainly  because  of  the  majority  property  assets  located 
worldwide.  Besides  that, their controlling stake in the two subsidies allows 
Great Eagle to still benefit from its subsidiaries’ growth.  
● Higher probability of catalytic events ​–Events that may unlock value 
include their overseas expansion in the U.S and China which may lead to a 
new earnings record and potential spinoff from their existing property 
portfolio.  

All factors considered, Great Eagle Holdings offers the greatest value among the 
three companies in this analysis.  

Discover How to Get ​Even 

More​ Returns in Today’s 
Market 
 
Value Investing is great, it allows any investor to find profitable stocks in any 
market. But, it takes time, and most investors want dividends alongside growth.  
 

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We’ve incorporated our CNAV strategy into our Factor-Based Investing 
methodology which allows us to pinpoint stocks using proven profit factors as 
determined by over 40 years of scientific research.  
 
We share more about the CNAV strategy and the Factor-Based Investing 
methodology regularly at our live workshop. ​Grab a seat here. 
 

About Dr Wealth 
We are an investor-centric platform providing ​investor education​ and portfolio 
management tools. We have conducted c​ lasses and workshops​ for close to 
4,000 attendees in the past few years.  
 
The topics include value investing, dividends, REITs, bonds, angel investing and 
other personal finance matters. These lessons were delivered from the 
perspective of a Do-It-Yourself investor. 
 
We changed our name from BigFatPurse to Dr Wealth in 2017 after an 
acquisition of Doctor Wealth Pte Ltd. This marked a new milestone as we 
embark on developing an app for DIY investors to track their investments 
conveniently and enhance their stock picking process. 
 
Learn more here: ​Who is Dr Wealth? 

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