My First Tenbagger

It was almost end of October, 2002, when I bought the book “One Up On Wall Street” and learned the term of “Tenbagger” which was created by Peter Lynch, the author of the book. I said to myself, “Woo, that’s wonderful.” And then forgot about it.

It was in March 2004, when I noticed a Singapore listed company named “Raffles LaSalle Limited” (The name was changed into “Raffles Education” later), which specialized in creative design education. The Company owned and operated a network of private technical schools that focuses on creative design like fashion, interior, graphic, product and multimedia design with supporting business administration and language classes. The Company had ten schools in Asia with six in China and one each in Singapore, Malaysia, Australia and Thailand. The Company also planned to double the number of schools it operates by 2006 with much of the expansion in China.

Its financial figures were perfect with growth of revenue at 56.7% in the latest half year report and profit growth at 139% respectively. Its ROE were over 40% with no debt. With such high growth, it even gave a dividend with 2% yield in the latest financial year! The operation cash flow was healthy and capital expenditure was about 20% of free cash flow. The stock is not cheap with PE around 50.

The very question for me at the time was whether the profit growth of the company would be about 50% in next 5 years, or at least 40% based on my discounted cash flow projection to justify the price.

I heard of a LaSalle College in the Dong Hua University in Shanghai even before I discovered its parent company being listed in the Singapore. The college was established in 1994 and had a very good reputation among fashion design professionals. One of my friends happened to be a graduate major in fashion design from Dong Hua University. She confirmed that the LaSalle College was good. Both of the curriculum and teaching staff of the college were all from western countries. The students had been winning all kinds of fashion design awards for years both in Shanghai and in China. The college filled a niche in education for design professionals in China. After over two decades of reform and opening up, the Chinese wanted more sophisticated products instead of products just providing basic needs. In addition, Chinese companies wanted to have their own brand instead of just being the manufacturer of western companies. Meanwhile, the local public universities could not provide same kind of education as competitive as LaSalle College in the same area. In fact, this phenomenon not only existed in China, but also in most of Asia countries. The On the other hand, due to the fierce competition for the admission of public Universities in China, many high school graduates were left behind for various reasons. The LaSalle College provided an alternative at a time when certain well to do Chinese families were able to afford private school fees.

In short, Raffles LaSalle was doing the right thing at the right time and right places. There were no serious competition. The only limit was the number of students who wanted to enroll in the colleges. Furthermore, the group was renting space from universities in China and kept asset light. This was one of the reasons for higher return on equity and capital, and low capital expenditure. Considering the huge population in China, and vast number of big cities in China and Asia, I had no doubt that there would be high probability of high growth for the company in next 5 years.

Raffles LaSalle was a small company with its market capital at about 254 million Singapore dollars (USD 149.5 million) at the time. The trading volumes were very light and the price was volatile. I kept buying its shares when there was a big drop in the price until it became my largest holding in my portfolio. My average entry prices were 0.3 Singapore dollars (SGD) after share split. The price was cheap with high growth potential in mind and the dividends as extra gift.

In the next 3 years, I happily read its financial reports quarter after quarter with beautiful figures, which made me doubt its accuracy. They looked too good to be true. Luckily, it's not a Chinese company although they conducted majority of their business in China. Knowing cooking financial reports was a quite common practice in Chinese companies, I checked background of Raffles LaSalle and its CEO very carefully before my purchase of its shares. Raffles LaSalle was registered in Singapore and the CEO, Mr. Chew Hua Seng, was a Singaporean and was holding 47% of the company. Singapore is a FINE country, which fines heavily and painfully to people misconducting in the country. The most famous example was its caning sentence against the American teenager Michael P. Fay for his vandalism even after a personal appeal for clemency from President Bill Clinton in May 1994. Singaporeans are famous for "Gia Shu", meaning "afraid of losing".

Then one day in October 2007, I saw the following news,

“Singapore - Raffles Education is expanding in China by purchasing two colleges of Oriental University City in its drive to become Asia's biggest private education provider, chief executive officer Chew Hua Seng said on Thursday.
The 2-billion-yuan (266-million-US-dollar) deal will be financed over four years from external and internal resources in four equal payments, said Raffles, listed on the Singapore Exchange.
"This acquisition provides us with an important vehicle to align ourselves as an important strategic partner in the education sector" in China, Chew said.
Raffles will own and manage two of the 19 colleges under the agreement and is considering joint ventures with the other 17. Oriental University City is near Langfang, Hebei, and covers 3.3 million square metres.
Raffles operates 28 colleges in Singapore, China, Thailand, Malaysia, Vietnam, Australia and New Zealand, among others.
Oriental University City has more than 54,000 students. Raffles is aiming to boost the number to 100,000.
The company plans to add five more colleges and a university in addition to collaborating with other international educational institutions.”

Suddenly, the company would not focus on creative design education because the colleges in the Oriental University City were in other areas, such as business management. In addition, the company would not be asset light in future, because it would own the colleges and even the whole Oriental University City. There were quite number of prestigious universities having business management courses and MBA programs in China. Raffles LaSalle had no competitive edge in these areas.

I really didn’t like the direction the company going and sold all the shares I hold before Nov 5, 2007. The average price I sold at was 3 SGD. I had a tenbagger!

Chart of Raffles Education Corp Ltd from Reuters on July 31, 2012Chart of Raffles Education Corp Ltd from Reuters on July 31, 2012

Looking back, I didn’t sell exactly at the top (4.95 SGD based on the chart available on Reuters.com), which was dated on Oct 31, 2007. The price has been gone down since then.

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