Proof today that Singapore traders and investors are still suckers for research reports. This time, Jonathan Koh fom UOB KayHian set the cat among the pigeons when he recommended that investors go “overweight” on shares in the regional semiconductor industry because it’s “doing much better at managing inventories compared to previous cycles”.

And the pigeons promptly took off.

UTAC was up 5.2% to S$70.5.
Chartered Semiconductor rose 5.4% to S$1.17.
Global Test up 12.2% to S$0.275.
STATS ChipPAC up 3.8% to S$0.95.

Koh is a respected analyst, and I haven’t seen the research report in which he said this – only the Reuters story that reported on it. He probably has thought his recommendation through thoroughly. But let’s put this story to the test, according to the ratios that really matter: cashflow and valuations.

STATS ChipPAC didn’t generate cash in the last twelve months, yet trades at around 2x book value. It generates a return of 4% and pays no dividend.

Chartered Semi is trading at 1.14x book value. Last financial year, it had cashflow of 22 cents per share. But return on equity was negative 11.4%. And it paid no dividend.

UTAC had cashflow per share of 16 cents last financial year and is trading at around 1.4x book value. It’s not paying dividends either, but at least return on equity hovers around 12%.

Global Test generates cash of about 7 cents per share and is trading at 1.1x book value. No dividend here either but it generates a return on equity of around 16 times.

Here are my thoughts:

First, the sector does not seem to be as overpriced as one might think. We’re certainly not seeing any “irrational exuberance”, with stockprices at 2-3 times earnings.

Second, they’re all dogs where free cashflow – the ultimate measure of a company’s financial health – is concerned. Sure enough, it’s a tough business to be in and I don’t envy management – many of whom I have interviewed and met personally – to be trying to increase margins and make a buck. But I’m not here to sugarcoat management’s abilities. I’m here to talk about investors. And as an investor, I wouldn’t touch these stocks with a barge pole. Except maybe UTAC. JC Lee is a good operator. Experienced. Seems to know what he’s doing. But why wade into a stock that’s not paying dividend at 1.4x book value when you can pick up, say, Magnecomp (if you really wanted to be in tech), which is trading at 0.94x book value. That is, you can buy the stock for less than the company is actually worth? Magnecomp gave guidance this evening of a return to profitability. I’m not too keen on a company whose management misjudges demand so badly that not only does demand not materialise but by their own admission they ramped up staff, inventory and production in anticipation of it. But as I said, it’s a tough business to be in, and I would never claim to be able to do it any better.

And that leads me to my third point: valuations are just too high. What good is an accounting profit if the company’s not paying dividends anyway (dividends are declared based on profit, not cashflow. For that, you would have to go to the Pacific Shipping Trust).

So, I’m delighted for all the traders who made money by following Mr Koh’s advice. I’m also delighted for UOB KayHian’s sales guys, and the sales reps at other brokerages, who earnt a few dollars in commissions courtesy of Mr Koh’s report. But on behalf of the investors who like to buy and hold stocks, there wasn’t much in it for us and my guess is we’re going to see shareprices decline again over the course of the week, once US retail sales data are out.