Suntech Power Holdings (STP)– Part 2 – Balancing Global Sourcing & Delivery

Recently in an interview with Motley Fool’s Rich Smith, Suntech CEO Zhengrong Shi confirmed that the company is on track to achieve a production capacity of 1GW by 2010. This translates to a growth rate of about 28% in production capacity in the upcoming 3 years. Further, lowest-cost production and the best relative technology were touted as competitive advantages. Shi was especially bullish in the company’s long-term prospects. His vision of Suntech claiming 2% of China’s energy needs by the year 2020 is indeed high octane. Based on that, SunTech’s revenue from China alone in the 2020 timeframe will be in the $12 Billion range. These claims are overly optimistic given China’s energy strategy is all but clear. Hydroelectric power generation might turn out to be a big part of renewable energy strategy, per the indications from the National Development and Reform Commission (NDRC) in China. A bear-case scenario zeroing in on the potential overcapacity and demand slowdown in Germany following reduction in subsidies is available at cbsmarketwatch.

The following table is a look at the geographical mix of Suntech’s revenues:

Rest of Europe15.318.47.3NC
Rest of the world2.83.77.95

*2007 numbers are as of 2nd quarter.

At the EOY 2006, Germany accounted for 42.5% of the revenues and SolarWorld AG singly accounted for 21% of it. German sales based on a percentage of total revenue are down from 72.1% in 2004. Sales in Spain picked up significantly to compensate for part of the German slowdown. The 2nd quarter 2007 financials available at call transcript at SeekingAlpha indicates of a further shift in the revenue base. Germany and Spain together accounts for 88%, USA accounts for 7% and the rest of the world including China accounts for the remaining 5%. The constant shifting is a result of the company attempting to track government subsidies globally.

Pricing power is a big issue for Suntech because the industry relies on government subsidies. Customers largely base buying decisions on the economic feasibility of installing the PV module. The installed cost of the company’s PV modules is upwards of 35¢ per KWh. This is well above the local utility rates in most areas with a few exceptions (e.g Hawaii). Another factor impacting Suntech’s pricing power is the average sunlight. For the business model to remain viable, Suntech needs to factor in these variables when deciding on global expansion initiatives.

Silicon wafer shortage coupled with the company’s dependency on it as the base raw material is another challenge for Suntech. To its credit, Suntech has been aggressive in securing long-term supply contracts. Currently 50% of the supply comes from supply contracts and the remaining 50% from the spot market. This supply is projected to grow to 80% from supply contracts by 2010. This strategy works very well in an environment of increasing raw material prices, but can prove disastrous once the trend reverses. Wafer shortage is expected to ease with the acceleration in large scale production in China. The following table summarizes the projected minimum obligations from supply contracts (taken from Suntech’s 2006 annual report) and is an indication of the significant risk associated with the strategy:

YearMinimum Obligation

The MSK acquisition in July 2006 was expected to pave way for Suntech’s entry into the BIPV (Building Integrated Photo Voltaic) space globally as well as for its expansion in Japan. The 2nd quarter 2007 report indicates that BIPV revenues along with sales in Japan are insignificant. The global revenue from BIPV has the potential to accelerate in the coming years, but growth in Japan is a moot point.

Given the magnitude of the issues, it is reasonable to conclude that there is above average risk in the business. The significant role of external factors should not be ignored when making a long-term commitment.

The last part of this article will focus on Suntech’s investment outlook.

Suntech Power Holdings Analysis:
  1. Part 1 - A Solar Industry Behemoth In The Making.
  2. Part 2 - Business Issues.
  3. Part 3 - Preferring Manufacturing Expertise Over R&D.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

Solar Green Power – Should you install a Photo Voltaic (PV) module in your house?

A couple of factors need to be considered to help decide whether it makes sense to install a PV solar panel:
  • Are you really going greener by doing so?
  • Does it make economic sense and if not, should you still go for it?

In most cases, the answer to the first question will be in the affirmative. However, there are areas where the local utility actively discourages use of solar PV panels. Their motivation is three-fold:
  • It may be prohibitively expensive in certain areas when compared with the rate the utility charges, especially in areas where sunlight is a premium. This has the unsavory effect of the utility reimbursing you only a small portion of the cost encountered to “sell” the excess power you generated back to the grid – a no-win situation,
  • The local utility may already have a green power strategy in place that is more cost-effective and greener than residential PV panels, and
  • Local utilities may not participate in state rebate programs making you ineligible for state sponsored buyback rebates.

The second question requires playing with a bunch of numbers in order to arrive at an informed decision. Knowing the numbers for each of the following is key to that measure:

a) Your yearly energy usage in Kilowatt-hours (KWh). This can be obtained from your utility bill.
b) The cost per KWh the utility charges for your electricity. This can also be obtained from your utility bill. The calculation can get a little tricky if the rate is tiered. Dividing the total amount you paid the utility in the last year by the Kilowatt-hours used will be ample for most cases.
c) Expected output in KWh per installed Kilowatt-peak (KWp). Your local utility website or the PV installers should be able to provide this information.
d) Cost per installed Kilowatt-peak from a PV installer in your neighborhood. Ensure that the installer does not take into consideration the federal and state rebates.
e) The size of the PV system needed to meet all your electricity needs. Dividing the number from (a) above by the number in (c) gives you this number in KWp.
f) The dollar value of the federal and state rebates you may be eligible for.
g) Interest rate and the associated closing costs for a loan to fund the amount.

The following example using fictional numbers looks at how to use the above information to get to a cost estimate for any home:

a) Yearly Electricity Consumption: 3,200 KWh.
b) Cost/KWh: 13¢
c) Expected output per Kilowatt-peak: 1600KWh.
d) Cost per installed Kilowatt-peak: $9000
e) Size of the PV system: (a)/(c) = 2 KWp.
f) Total cost before rebates: (e)*(d) = $18000.
g) Total rebates ($2.8 per KWp State + $2K Federal) = $7600.
h) Total cost after rebates: (f)-(g) = $10,400.
i) Interest rate for a Home Equity Loan for $10,400: 8%.
j) Amortized cost/month of the loan over the expected life (assumes 25 years which is the standard warranty period) of the PV panel (Hint: Use an online amortization schedule calculator): $80.27.
k) Cost/KWh: (j)*12/(a) = 30¢.

The cost of solar panels in this example came out twice as expensive as the local utility rate. But, after the 25th year in operation, the power is virtually free till the solar panel reaches its end of life. Though from a peripheral point of view it might not make economic sense to install solar panels per the example cited, it might still be worthwhile to consider paying more especially if the utility is not using renewable sources to generate power. The cost will deviate from the number cited above, as the effect of the federal rebate is reduced if energy consumption is higher.

Here are several links to get educated on residential solar panels:

  1. Portal to the world of solar energy.
  2. Google Solar Panel Project (the picture on the side is of GooglePlex).
  3. Solar Electric Power Association.
  4. Wiki entry on Solar Cells.
  5. Vote Solar.
01/2015 Update: Solar panel costs have come down tremendously over the last five years. Also, other intriguing options have become available as well. One very cost-effective option that helps reduce the higher marginal energy rates is a hybrid option whereby household lighting needs are met using DC LED light bulbs (much more affordable compared to AC LED bulbs that have the AC-to-DC conversion circuitry inside them)  connected to a low-power low-cost battery (a small 30AH battery can satisfy eight 10W LED bulbs easily) which in-turn is charged from a low-power low-cost solar panel. The overall cost of installation could be as low as one-tenth compared to a larger setup hooked up to existing AC wiring.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis.
2. LDK Solar (LDK) - Stock Analysis.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ).
4. Suntech Power Holdings (STP) - Stock Analysis.

Last Updated: 01//2015. 

Suntech Power Holdings (STP)– Part 1 – A Solar Cell Industry Behemoth In The Making

Suntech Power (STP) is in the business of manufacturing and distributing solar modules. It is the largest provider of such modules globally. As illustrated below, the operating niche for STP is in the middle of the Photo-Voltaic (PV) supply chain. STP is dependent on suppliers to provide Ingots and Wafers, which are essential components in building its modules. The Ingot suppliers in turn depend on solar grade silicon suppliers. The modules produced at STP are then distributed to a variety of business partners including electric utilities, system integrators, installers, and distributors. These modules are used in the On-grid and Off-grid applications of PV systems.

STP is headquartered in Jiangsu Province in China with production sites in Wuxi, Luoyang, Qinghai and Shanghai (under construction). They manufacture both monocrystalline and polycrystalline cells. Monocrystalline cells are more expensive but the additional cost is offset by 4% better conversion efficiency. STP also produces building-integrated photovoltaic (BIPV) cells, which can replace existing roofing materials with solar panel roofs, enabling an integrated look with savings on building materials and installation.

In January 2007, the company announced commercial adoption of the ‘Semiconductor Finger’ technology that has a conversion efficiency of 18%. The major benefits of this technology include
  • Use of lower grade silicon wafers
  • Use of a smaller number of metal contact strips on the surface of the PV cells, which reduces shading from the sun leading to, increased conversion efficiency.

The 2nd quarter 2007 financial transcript at SeekingAlpha indicates an upcoming advancement in the same area nicknamed Pluto replacing the ‘Semiconductor Finger’ technology as quickly as possible.

In May 2007, the company announced the construction of a solar cell plant that will use microcrystalline silicon thin film on a glass substrate. The major advantage of this technology is that it is expected to use only about 2% of the solar grade silicon used by existing mono and polycrystalline cell manufacturing technologies. The compromise is on the conversion ratio of the end product. It is expected to be in the 6-9% range, which is significantly below the 14-18% conversion ratios of the existing mono and polycrystalline cells. This product will then be used in the BIPV cells manufacturing process essentially increasing its stake in the BIPV value chain. BIPV currently holds only a negligible percentage of SunTech’s sales. Its growth is expected to accelerate as adoption in the residential market picks up in inverse relation to the Average Selling Price (ASP) coming down.

On the wafer supply side, the company entered into a pivotal $6 billion contract over 10 years with MEMC in July 2006. In its wake, the company has been actively signing smaller contracts with other suppliers including the one with Hoku Scientific in June 2007.

With the supply contracts in place, STP is in command to meet its supply needs. The new technologies being introduced should enable it to remain price competitive. Further, from STP’s press releases, it is obvious that there is high-demand for its products. Suntech should continue growing at a reasonable pace for the foreseeable future.

Suntech Power Holdings Analysis:
  1. Part 1 - A Solar Industry Behemoth In The Making.
  2. Part 2 - Business Issues.
  3. Part 3 - Preferring Manufacturing Expertise Over R&D.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

GPS Review - Garmin StreetPilot C series (C310, C320, C330, C340, C510, C530, C550, C580)

After a reasonable amount of research online, we purchased the Garmin C320 Global Positioning System (GPS), about a year ago from for $279.99 shipped. Like most electronic goods, the price of the C series has come down and now starts from the low 200’s. keeps several of the Garmin StreetPilot models in stock and is a good place to do further research.

We did encounter a few glitches with the GPS over the last year:

1. C320 did not turn ON after 2 months of use. The support folks asked us to try turning off the reset button hidden under the blue faceplate. Since that did not work we were asked to send it in. The unit was replaced in a couple of weeks and it has been getting us to places since then. Our contention is that the GPS has poor heat tolerance and keeping the GPS inside the car on hot days could cause damage to internal circuitry or battery.
2. We took it to Chicago this year. Once there, it had a hard time figuring out that it was in Chicago. Fiddling with the menus and the power switch a few times finally helped it get its bearings right.
3. The suction cup mount loses the vacuum grip after about two hours on the road.

GPS products work by using a receiver that tracks position information from satellites. It also uses a database to determine the exact location. The database consists of detailed maps and Points Of Interests (POI) such as gas stations, shopping areas, restaurants etc. This database comes pre-loaded for all the models except the C320, which requires loading the map through the USB interface on a computer.

One caveat with the Garmin C series is that in the states of California and Minnesota, the law prohibits using these mounts on the windshield thus diminishing its value.

On the Garmin website, the C320 and C340 are discontinued. There is some controversy over the C330 and C530 as they are shipped with the older version (v8) of the map. Hence, it is better to not buy these products . Upgrading older versions of the map can set you back upwards of $50 effectively diminishing any benefits of a bargain deal.

The C310 and C510 are sold exclusively in Europe, but the C310 is discontinued. They ship with a 256MB SD Card pre-loaded with a European region (not the whole of Europe). At the UK Amazon website, the pricing for C510 seem reasonable at £106.99.

Following table compares the features and pricing of the C550 & C580:

FeatureGarmin Streetpilot C550Garmin Streetpilot C580
FM Traffic Compatible


Routing OptionsFaster Time, Shorter DistanceFaster Time, Shorter Distance, Offroad
MSN Direct for US CompatibleNoYes
Hands Free Calling (BlueTooth)YesYes
Picture viewerNoYes
Voice PromptsYesNo


The above two products have the following very useful features: Anitglare screen, Antitheft feature, Hands Free Calling (Blue Tooth), Latest Version (2008) of City Navigator North America NT maps preloaded, nearly six million Points of Interests (POI) Database, Automatic Route Recalculation if a turn is missed, accepts SD Cards, Portable, Route Avoidance interface, and Turn by Turn Voice Prompts. The C580 has the MSN Direct Interface that require additional subscription with the initial few months being free while the C550 has the FM traffic receiver.

Another Garmin product competing at the low end of the market is the Garmin GPS 18 USB. This line, targeted mostly towards business travelers, is priced in the low 100’s and functions only with a laptop.

Bear in mind that even the latest 2008 Garmin maps that ships with these products are about a year out-of-date. If your travel is mostly in areas with a lot of new infrastructure, the database may not have them listed and you might find the device less useful.

Overall, we love the enhanced travel experience with the Garmin GPS. The Points of Interest (POI) Database is a very handy feature indeed. If we were to purchase the product right now, our choice would be the Garmin Streetpilot C550 - we would much rather prefer the FM traffic receiver in place of MSN Direct interface which requires a subscription. Given the suction mount that comes with these products cannot be used on the wind shield in California and the suspected lack of heat tolerance, we do not find use for the antiglare and antitheft features - we place the GPS on our vehicle’s cup-holder and keep it home after every use to avoid heat exposure and theft.

Related Posts:
  1. GPS Review - Garmin StreetPilot C series (C310, C320, C330, C340, C510, C530, C550, C580).
  2. Garmin Nuvi GPS - Review & Best Value (250, 270, 760, 770) Feature/Price Comparison.

 Last Updated: 01/2008.

Central Europe & Russia Fund (CEE) Part 3 - A Matter Of Timing

Investment in CEE is a bet on the economic prospects of Russia, Poland, Turkey, Hungary, and the Czech Republic. For an understanding on how the allocation relate to valuations a look at the GDP growth projection, the overall market P/E ratios, and the Market-cap to GDP ratio of the countries concerned is required.

CountryProjected GDP GrowthProjected P/EMarket-Cap to GDP ratio
Czech Republic625N/C

GDP growth in Russia is projected to be in the 7% range, which makes it the leader in the countries under consideration. Poland, Turkey, and the Czech Republic also flaunt a projected GDP growth close to the 6-7% range, with Hungary coming in as the damper with a 3% projected growth. All these are less than the fast pace set by China (11%) and India (9%). On P/E ratio basis, Czech republic is richly valued at 25, while Poland shows fair valuation with 17. Russia, Turkey, and Hungary are undervalued with P/E between 11 & 12. Market-Cap to GDP ratio is considered a good measure for evaluating a country’s market as a whole. Note that anything above 100 is considered overvaluation. By this measure, both Poland and Turkey comes out as being undervalued while Russia shows up as being fairly valued.

Projected Distribution:

Historically the fund announces distributions in December. The mid-year realized gain (as per the investor update) stands at about $80M making the distribution on that portion to be likely in the $5.5/share range, conditional to no further trading in the last 4 months. Last year, the payout was $5.58/share and the payout for this year is expected to be similar with realized gains already in that range. The dividend distributions are also comparable to the year-ago period. This amount is well above 10% and can be labeled as a large payout. The fact sheet indicates that the first 2 months of the third quarter was relatively quiet for the fund with no sizeable change in the top-10 holdings. It is not easy to foresee the amount of trading (and thereby realized gain) that will happen in the last 4 months of the fiscal year. But, given that the fund manager has indicated a preference to move out of energy & metals into consumer sectors, it is likely to have more trades realizing further gains that will have to be distributed to shareholders in December.

The distribution is taxable to shareholders. As indicated in the mid-year investor update, last year's distribution was as follows: Ordinary Income: 0.58, Short-Term gain: 1.94, Long-Term gain: 2.99. Of these, the long-term gain is the most desirable type of distribution for shareholders because it is taxed at the relatively low long-term capital gains rates. For this year, the distribution ratio among the three classes should follow last year’s since the fund has held most of its energy and metal stocks for more than a year.


Geopolitical risks, certain systemic factors, and reliance on growth in world economy are the major risk areas for stocks in the Russian & Central European markets.

The major geopolitical risk factor is the Russian election scheduled for March 9, 2008. Given the popularity of President Vladimir Putin within Russia and also that the political power base in Russia revolves around a few key people close to President Putin, it is likely for one of the Kremlin backed candidates to win the election in a landslide. Should this happen, the risk will largely turn out to be a non-event. Any other scenario can be categorized as a major political event with serious ramifications for the stock market. The political tension with the West is always a wild-card risk factor.

Low individual participation, increasing wages, liquidity issues, and poor governance form the major systemic risks in the area. Individual participation in the stock market is still in the single digits, which is very low. Until this situation changes, global perception of the area will remain the strongest predictor of the direction of the stock market. The increase in wages will be a damper to growth industries in the areas of Technology & Outsourcing. The rise in the local currencies against the US dollar is another risk factor. The liquidity problems include concentration of market capitalization in a handful of energy related businesses and low volumes outside of the top few stocks in the energy sector. Also, as a result of low stock market participation and the nascent state of the mutual fund industry, there is heavy reliance on foreign volume.
Oil and gas related businesses account for about 40% of the market capitalization of the stock markets in Central Europe & Russia. Metals and Timber related businesses account for another 10%. %. These businesses are big suppliers to the global market place and so rely heavily on global prices for these commodities. It is no surprise that a recession in the global economy will translate directly onto these markets. The reliance is more prominent for Russia, making the impact more pronounced on the Russian stock market than Central Europe.


A new investor should pay attention to the Distribution effect and the Geopolitical factors. As the shareholders are inline for a large distribution in December, it makes sense to consider purchasing the fund after the distribution date to avoid taxes. Such an event will be especially painful for new investors: They did not get to participate in the funds gain in market value in the years prior to their purchase. But, since the fund is realizing sizeable gains this year by trading out of many of their holdings, current investors have to pay taxes on the gains the fund realizes. Further, Russia has elections coming up next March and the stock market is holding back due to the associated political risk. For this reason, a prudent investor could consider entering the position as the election outcome becomes clear.

For an investor who purchased the fund sometime this year, the unrealized return is roughly in the range from –10% to 10% depending on the timing of the purchase. Sitting tight is indeed the best option as the short-term risks and the distribution effect are not sizeable enough to justify exiting the position.

Lastly, for a long-term investor, the guiding criterion is the likelihood for out-performance in the future. Central European and Russian markets are still undervalued by most measures. As detailed above there are many risks, but the odds are low. So, there is no reason to consider exiting the position.

The fund has relatively low expense ratios, is one of the largest funds specializing in Central Europe & Russia, and maintains a low turnover ratio while also being aggressive about shifting allocations to growth areas as such opportunities arise. The stocks listed in the Central European & Russian markets are generally not available to US investors as they are not listed in the NYSE or Nasdaq markets. For this reason, funds that specialize in those markets are the best bet to participate in the growth in those areas and Central Europe & Russian Fund (CEE) is a good choice.

Central Europe & Russia Fund Analysis:
  1. Part 1 - Attractive Discount To NAV.
  2. Part 2 - Prudent Allocation Shifts.
  3. Part 3 - A Matter Of Timing.

St. Joe's Defense: Weak At Best

St. Joe Company (JOE) saw its stock price bottoming at $30.5 three weeks ago before rebounding to $36 as of today. Even now the stock price is trailing by about 15% from its August 8th high of $41.21. This fluctuation, all within a timeframe spanning three weeks piqued our interest, since we had made a trade in the recent past. During this period, there were three different press releases, all on the company’s land development operations. The combined outlook from all of them can be labeled as mildly positive.

In May this year, at the Ira Sohn Research Conference, David Einhorn, a hedge fund manager at Greenlight Capital pinned the value of JOE at $15 per share. Clyde Milton, a fellow blogger published a bullish report on JOE in August paving way for a debate with David Einhorn who defended his position. SeekingAlpha published both these articles and the unwelcome attention caused the company to come up with its own defense on September 13th. It was in the form of a very odd press release. The release structured as an FAQ portrays North West Florida as a growth area, defends the value of wetlands, and touts JOE’s experience in getting land-use entitlements as a competitive advantage.

The bullish article projects the company as an asset play and justifies the valuation by indicating that $9000 per acre is a reasonable valuation for North West Florida land alongside the ocean. The bear on the other hand uses the divide and conquer approach. Its evaluation splits up the company’s portfolio into developed and undeveloped acreages and values each asset separately. The bear’s calculation gets more credit for accuracy as it takes into consideration not only the cost of selling the land but also the time value of money.

There is merit in considering JOE as a real business as opposed to an asset play and coming up with a net present value (NPV). At the minimum, JOE’s business can be considered as realizing cash flow from a depleting asset. Giving a disposal rate of 40,000 acres per annum for the undeveloped acreage, the life expectancy of the business is 18 years. Assuming a sale price around $2000 per acre in the first year, the revenue would be $80M. For such a business, the margins will be very high as there is not much value added. An estimate of 80% is reasonable and the business will realize $64M free cash flow for 18 years. This is on the assumption that additional incomes and expenses over the years cancel each other out. The present value of this cash flow from an NPV calculator is $513M or around $7 per share (taking 7% as the discount rate). For the developed acreage, the book value is $800M. Assuming JOE can sell this acreage at 1.5 times book value (net of all expenses) over a period of 5 years, the NPV of this cash flow stands at 1.05B or $14 per share. JOE has debt of $400M or around $5.5 per share. This essentially brings the total value of the business to around $15.5 per share. This is less than half of today’s closing price. A factor that has to be considered is whether management can add value by better asset management. Given that the margins realized by active management is fairly low, any value added should be considered negligible or negative.

All this leads to the fact that JOE as a long-term investment is not a good option!

CFL light bulb humming or Digital Clock running fast – household alert!

This story starts with us noticing that the digital clock in our bedroom was always getting ahead in time. It did not occur to us at first that the problem was not with the clock. After getting a fancier model we were surprised that the new clock was ticking faster as well. At this point we realized that this anomaly happens only when the light is turned on. We had replaced our lighting in the bedroom with CFL bulbs shortly before and it was on a dimmer switch. We had not noticed anything significant with the CFLs, except for a background humming.

From a layman’s point of view, the dimmer works by turning power on and off at a very high frequency. The CFL (Compact Fluorescent Light) humming occurs when the electronic ballast inside the bulb that regulates energy flow malfunctions due to the lack of consistent power because of the dimmer. The humming can also occur even when there is no dimmer, if the electronic ballast is faulty. This is a a fire hazard and replacing the bulbs is the only solution – bulbs compatible with dimmer switches are now available. The marking in the package clearly indicates compatibility with dimmer switches.

The reason for the digital clock running too fast can sound rather strange. Turns out that the AC powered digital clocks use the line frequency of the power line instead of a quartz crystal to calculate time. Any variation in line frequency, will affect the digital clock’s accuracy. The malfunctioning of the electronic ballast in the CFL causes variations in the line frequency. Couple of scenarios where AC digital clock accuracy could go awry are
  • It is used at a different line frequency than it is designed for – this can happen if you travel with an AC line clock and your destination country uses a different line frequency than your home country.
  • The AC digital clock is on an inverter circuit.

Another aspect of CFL’s that everyone needs to be aware of is the existence of 5mg mercury in the bulb. Practicing safe disposal is paramount!!

Last Updated: 01/2015.

Central Europe & Russia Fund (CEE) Part 2 - Prudent Allocation Shifts

The table below summarizes CEE’s current Top Ten investment allocations along with historical comparisons:

Stock% 6/2007% 4/2006% 4/2003
Gazprom RU Gas utilities9.79.8NITT
Lukoil RU Oil and Gas7.310.74.6
JSC MMC Norilsk Nickel RU Metals and Mining7.04.5NITT
United Energy RU Electric utilities5.25.5NITT
Sberbank RU Commercial banks4.6NITTNITT
Bank Polska PL Commercial banks4.6NITTNITT
Ceske Energticke CZ3.93.2NITT
Bank Pekao PL3.6NITT8.4
Telekomunikacja Polska PL3.63.110.5
OAO Rosneft Ru Oil and gas3.1NITTNITT

  • NITT – Not in Top 10.
  • In 2003, CEE had 4.7% allocated to Yukos which was later auctioned and the assets ended up with Gazprom & Rosneft.

The big change from a year-ago is the shift away from oil and gas. (Surgutneftegaz, which had accounted for 11% allocation in 2006, is no longer in the top 10 holdings). The realized funds were channeled into investments in the banking sector. There was also a minor geographical shift in allocation during this period, which was the shifting of about 5% of assets from Turkey to Poland.

Compared to allocations from 4 years ago, the change is more dramatic. Telecoms, Banks, and Oil & Gas each accounted for about 30% of allocations then with sizable investments in Telekomunikacja Polska (11.5%), OTP Bank (8.3%), and Matav (7.8%). Many of these have since then been liquidated. Geographically speaking, Poland (40%), Hungary (30%), and the Czech Republic (13%), which together had accounted for more than 80% of the allocations then, now accounts for only 30% (Poland – 20%, Hungary – 5%, Czech Republic – 5%). Russia, which had accounted for 16% of the allocations then now accounts for 57%.

Compared to the benchmark (CECE-45%, RTX – 45%, ICE-30 – 10%), the Turkish allocation (10%) is very much inline. There is roughly a 10% divergence in the CECE and the Russian allocations – Russia accounts for 57% of the assets while the benchmark allocation is only 45% and CECE accounts for 30% while the benchmark allocation is 45%. This divergence is a fairly recent phenomenon within this fund. The fund had followed the benchmark, which was established in April 2003, closely in the years through 2005. The divergence happened early in 2006 and since then the allocations have been steady at those levels. Generally, such divergence happens when the fund manager seeks benchmark out-performance by moving away from the index or if the fund plans to switch to another benchmark going forward. Looking at the history of CEE, it is likely that the fund will announce a new benchmark (CECE – 35%, RTX – 55%, ICE-30 – 10%) in the future.

The shift away from oil and gas into the financial sector is very much in accordance with the fund manager’s stated goal to diversify into consumer sectors. The other major shift for CEE, away from CEE-3 (Poland, Hungary, and the Czech Repulic) into Russia is also in accordance with the fund’s long-term shift in focus to Russia that was initiated 4 years ago. Also, the shift away from Telecoms over the years is a result of the fund acting on the projected slow growth in that sector.

All in all, given the allocation shifts and the current investments, CEE is a good proxy for growth in the consumer sector and general economies of Russia & Central Europe.

Central Europe & Russia Fund Analysis:
  1. Part 1 - Attractive Discount To NAV.
  2. Part 2 - Prudent Allocation Shifts.
  3. Part 3 - A Matter Of Timing.

Teaching Kids The Three R's


Majority of the kids love being read to. For most kids reading on their own happens around the Kindergarten time, which is in par with the state's expectation. For a kid who does not love being read to, it is a rough ride for the parents. Our older kid belongs to this minority group. Surrounding such kids in a wide variety of books will help for some. For some a theme might help. Others might find picture books more helpful. Repetition is useful for some. Fantasy might help some while for others it might be way out of their league. There are numerous articles and books written on this topic, but the fundamental truth is every child is different.

For our older kid, fantasy had no role. However, she could relate more to everyday scenarios theme based on animal characters. She especially found 'Franklin the Turtle' series to her liking and these were the basis for most of the book reports for Grade 1. Her kindergarten teacher got her access to more books from the same series. The younger one loves Franklin, but is receptive to a variety of others too. Other favorites are Berenstain bears, Arthur and DW, Curious George, Henry and Mudge, and Frog and Toad. The library plays a vital role in fostering a love for reading. In addition to their choices, we try to supplement with variety. Kids do not shy away from poetry and so we make it a point to include them whenever possible.

Getting a kid to comprehend what they read is dependent on the child's maturity level. Building a repertoire of words helps immensely. You know you have it nailed when they can gather information from the context and continue on with the reading.
Though both our kids we are not quite there yet, we do see the horizon now and then.

Since we both read a lot we expected our kids to get the habit as second nature. Alas! Little did we know that all the reading we did after the kids slept was not helping them. It is imperative that you model it when they are awake.


The ability to write words with the correct spelling does not come naturally for most kids. We do make the kids spell out words that were hard for them three times over whenever possible. We quickly learnt three was the magic number. Anything more prolonged the agony. Help in sounding out each syllable phonically goes a long way. Also, some kids get a special kick in trying to spell out harder words correctly.

The first time the kids were able to get a page copied down without major mistakes, we celebrated it by letting them mail it to their grandparents. The unadulterated joy on the grandparent's part on receiving the letter had a positive effect on the kids to better their effort. En route home from their first ski trip on Dad's birthday they made four sentences to write to their grandparents on how they marked the day. That was their first own letter and we let them mail it out too.

Writing is enforced a lot at the schools too, with special attention devoted to grammar, punctuation and usage. We follow along on those lines at home too.


Of the three R's arithmetic is indeed the hardest for many. Getting the kid to visualize the concept of having two pencils in one hand, three in the other and combining them is a corner stone for addition. Patience is key! Also, new concepts when introduced had a tendency to overwrite existing concepts. Repetition is essential for enforcing concepts. We had on numerous occasions turned to the web for worksheets and had also subscribed to an online educational tool. We were late in realizing that abstract concepts became crystal clear if they were based on food.

The unwritten rule in our house is that we do not offer rewards for learning. That said, we do need to admit that when we bought an analog watch for our niece we got a second one too for our older one at the same shipping fee. The kid learnt to tell time in two days flat and earned herself a 'real' watch. The cool factor associated with it had our younger one scorn digital watches completely.

Another concept that went in fairly easily was the currency concept. The tooth fairy was generous by leaving two dollars per tooth and the kids quickly learned how to stretch it by quantifying and dividing things beyond our expectations. Money speak is universal.

Chutes and ladders is one of the fun games that anchored addition concepts. Others have suggested the beneficial effects of chess to an intelligent mind. We are yet to explore that venue. Monopoly is another game that was suggested, but we are yet to open score there as well.

Sibling rivalry plays a positive role in that the kids are hawkeyed when it comes to dividing treats and counting seconds when it comes to waiting for turns.

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2. Feature/Price Comparison of the Best Digital Pianos (Yamaha, Casio, Roland, Kawai, Korg) - Review/Rating.
3. Yamaha Digital Pianos (YPG, DGX, P, N, NP, CP, Arius, YDP, Clavinova CLP & CVP, and MODUS) – A Comparative Review.
4. Shopping for an acoustic piano in the bay area – Experience/Review (Yamaha M-460, Cable Nelson Yamaha CN-116, Kawai K-15, etc.).
5. The Yamaha P65 Digital Piano Review (updated with the new P105 info).
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Last Updated: 04/2017.

Central Europe & Russia Fund (CEE) Part 1 - Attractive Discount to NAV

CEE is categorized as a non-diversified closed-end Exchange Traded Fund (ETF) and is managed by the Deutsche Bank Group. It is non-diversified as its investments are focused in Central Europe & Russia. As a Closed-end ETF (CEF), it has characteristics of both stocks and mutual funds. It trades like a stock but like mutual funds the dividends and the realized capital gains are distributed to shareholders. The benchmark index of the fund is a combination of 3 indexes distributed as - Composite Eastern European Index (CECE) – 45%, Russian Traded Stock Index (RTX) – 45%, and the Istanbul Stock Exchange National – 30 (ISE-30).

Geographical Focus:

Russia, Poland and Turkey together make up about 85% of the investments. The fund’s history reveals that the focus has undergone many changes over the years: In February 1990, it started trading as the United Germany Fund Inc. In July 1992, it was renamed as Future Germany Fund Inc., to reflect diversification out of a focus on German blue chips. Five years later in April 1997, it shifted its focus out of Germany into Central Europe and was promptly renamed again as Central European Equity Fund. At the end 2002 it focused on CEE-3 (Poland, Hungary and the Czech Republic) that together accounted for more than 80% of the assets. This was in an effort to participate in the expected growth in those countries due to EU membership. Russian companies accounted for another 16% of the allocated funds. By August 2003, the fund had shifted its regional focus to Russia and the name was changed again to reflect that - Central Europe & Russia fund. The 2007 semi-annual report hints at a relatively minor change in focus with a hint about shifting out of Poland and the Czech Republic into Turkey and Hungary based on valuation. Further, the report also hints at moving out of the Russian energy sector into consumer-related sectors as an effort to cash in on the growing Russian middle-class spending.

Historical Performance & Premium/Discount to Net Asset Value (NAV):

The following table shows the total annual return, and the end-of-year Premium/Discount to NAV:

YearReturn %Premium/(Discount)%

Annualized 14.85Average - (15)

The fund realized sizable capital gains of 10% and 8% respectively in the last 2 years. Towards the end of 2006, the fund held roughly 20% of its assets as unrealized capital gains. The yields prior to 2005 are well below 1% as the fund maintained a low turnover ratio.

Similar Fund Comparison:

The following table is a comparison of funds that have exposure in Central Europe:

Fund NameRegional Details*Expense RatioCapitalizationPremium/Discount to NAV**
Morgan Stanley Eastern Europe Fund (RNE)Russia - 57, Poland - 18, Turkey - 92.06157M(11.6)
Central Europe & Russia Fund (CEE)Russia – 48%, Poland – 15%, Turkey – 11%1.02871M(13.1)
Templeton Russia & East Europe Fund (TRF)Russia - 931.84369M0.67

  • Regional Details as of 3/31/2007.
  • Premium/Discount data as of 8/31/2007.

TRF returned 50% per annum in the last 5 years out-performing CEE and RNE by almost 5% - TRF is a fund on Russia exclusively and the out-performance correlates well with the country’s own out-performance during the period. However, over the last 10 years, CEE out-performed RNE & TRF by about 2%. The expense ratios of the funds are roughly proportional to the capitalization with CEE being lowest at 1% and RNE highest at 2.06%. CEE and RNE are trading at a discount of about 10% while TRF is trading at a slight premium. All these are inline with their long-term averages.

Given the size of the fund, low expense ratio, and the sizeable discount compared to the NAV, CEE is a good choice among CEFs focused on Central Europe & Russia.

Central Europe & Russia Fund Analysis:
  1. Part 1 - Attractive Discount To NAV.
  2. Part 2 - Prudent Allocation Shifts.
  3. Part 3 - A Matter Of Timing.

Passive Income Opportunities - Part 2 - Royalties

Royalties of all forms are always appealing in that the income is purely passive and so there is potential for huge rewards once one gets it going. There are only a few specific areas where such opportunities exist – writers, singers, and inventors to name a few. Broadly speaking, one has to create something unique. Bear in mind also that not all writers, singers, and inventors earn royalties. Whether one earns royalties is dependent on mainly two factors:
  • How desirable your creation is to others? and
  • whether you had established some sort of an agreement with another entity which could decrease your income potential?
On the assumption that a creation is in place, its desirability is dependent on how well it is marketed and on the level of competition. Singers and writers face steep odds to realize substantial royalties largely because of the expenses associated with getting their creation appreciated by the marketplace. For upcoming singers, the contracts are heavily skewed in favor of the record label company. One should not overlook the role of shrewd marketing, which can get certain songs to command more airtime at radio stations thereby, helping it get popular and on the road to be a hit. The effectiveness of such promotions is also dependent on how intense the competition is from promoters of other similar songs.

Similar odds exist for inventors employed in the field of their expertise. As part of their hiring process, employees are required to sign away rights to patents related to the line of work, making the employer the owner of the invention. To their credit, employers do take the initiative to go through the patent process by using patent lawyers and the inventor is offered a fixed monetary/stock reward. This effectively takes away any chance that employees can realize passive income from royalties.

As is evident from both the above scenarios, middlemen benefit from the creations of individuals. These arrangements are heavily tilted in favor of the associated corporations. Adding further insult is the heavy lobbying by corporations at the political level. Needless to say, it is extremely hard for individuals who have regular day jobs to realize passive income through royalties with the existing system.

One can envision customers buying songs directly from singers who publish their work thereby eliminating the middleman entirely. This will allow the artist to realize the “true” value of their product. Similar scenarios apply for writers and inventors as well.

Corporations can play a positive role in this by promoting an open marketplace for the associated inventions, songs, book material, etc that came about by an individual’s association with them. The current situation of corporations hoarding songs, books and inventions as IP and media assets will give way to an open marketplace where nobody is shutout completely from a creation. Furthermore, by allowing the income realized through such strategies to filter down to the talented individual, it is bound to be a win-win situation for all involved.

The optimist in us sees its time in the horizon…

Related Posts:
  1. Exiting the Rat Race - Definition.
  2. Rat Race Exit Strategies
  3. Passive Income - Part 1 - Network Marketing.
  4. Passive Income - Part 2 - Royalties
  5. Passive Income - Part 3 - Rental Income
  6. Passive Income - Part 4 - Dividends.
  7. Passive Income - Part 5 - Pension Plans
  8. Passive Income - Part 6 - Employer Plans
  9. Strategies to Beat Inflation.
  10. Strategies to Reduce Expenses.
  11. Frugal Living - A Definition to go by
Last Updated: 01/2015.

Patni (PTI) - Part 3 – Investment Outlook - Indian Software Outsourcer Research

Market capitalization matters big-time in this industry and so consolidation is the name of the game. So far the company is doing the right thing by growing through acquisitions. Further, organic growth may pick up. They should be able to achieve synergies through their Logan-Orviss International (LOI) acquisition. LOI expertise is in the area of IT Services Telecom Verticals where the company already has a strong presence in the US made possible with the acquisition of Cymbal Corporation in 2004. Also, EMEA (Europe, the Middle East, and Africa) is an untapped growth area and the LOI acquisition should get them in the door for many deals. However, given the enterprise value is below the $2B mark, the company has a long way to go before they are able to play in the big leagues.

A private equity (PE) stake, as is rumored, is not in the best interest of shareholders. The philosophy behind PE acquisitions is
  • Acquire undervalued assets at an attractive price,
  • Fund interest payments of the acquisition amount through cash flow from operations,
  • Sell out at a large premium when the market turns and becomes attractive, and
  • Pocket the difference.

PE taking a sizeable stake is considered undesirable since that distracts management. The idea behind big stakes is to influence management in a way that benefits the PE in the short-term. Again, private equity involvement is a bad deal for shareholders and it is no different in Patni's case. The rationale behind this rumor is that it is a relatively easy way for two of the three brothers who are rumored as wanting to cash out their ownership stake. If unloading their stake is indeed their primary concern, then the odds are low for them wanting to wait for a better deal later on.

An acquisition by a US based large consultancy firm, on the other hand, is a far better alternative. For such a firm, Patni has a lot to offer. A majority of these firms are trying to grow their outsourcing operations to realize the benefits of "following the sun", lower wages, decrease time to market, and growth in the third world areas. An established business with reasonable valuation gives such a firm immediate access to all of the above and a large labor pool. Further, a larger US based business can be expected to realize larger revenue per employee from Patni employees than Patni will be able to do on their own. This is so because big US consultancy firms charge more per billable hour.

Given the industry appetite for size, selling out at a sizeable premium is the most likely outcome!

Patni Computer Systems Limited Analysis:
  1. Part 1 - Financials.
  2. Part 2 - Business Issues.
  3. Part 3 - Investment Outlook.

Sears Tower (Willis Tower), Chicago, IL – Review

Chicago traffic on I-90 can be very heavy and so getting there can take a lot more time than one might expect. Also, a GPS may be helpful as the roads can be fairly confusing.

Ticket pricing is $19.50 for adults and $12.50 for ages 3-11 (open all days: April-September 9AM to 10PM, October-March 10AM to 8PM). Ages 2 and under are free. For $5.50 more, one could get an audio tour as well. Parking at Sears Tower (now Willis Tower) is expensive as the place is in the middle of the city - there are several options and pricing starts at around $15 and goes all the way up to $50 depending on time and location.The official tower parking entrance is at at Franklin Street - we were lucky to get a more economical option at the System Parking lot on 321 S.Wacker drive. Even though the outside sign said $18.95, the attendant charged only $10 till mid-night, may be because it was 4 PM on a weekday.

There is a line to purchase tickets, but it doesn’t take very long to get to the front. There is a 15-minute movie for which you may have to wait for up to 15 minutes. The movie explains the history of Sears Tower (now Willis Tower) and its place among the skyscrapers of the world. After the movie, you head to the line for the elevator that takes you to the top of the tower. There are two elevators and each can carry about 50 at a time. It takes about 2 minutes to reach the top. One could spend a good half hour at the top admiring the views, assuming it is a good day.

The kids loved the experience with Lake Michigan providing the perfect backdrop. The best part for them was identifying the different landmarks around the tower using the touch pad in front of some of the windows!

Last Updated: 01/2015.


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