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How to Find Winning Companies – Part 2

Hey there! Welcome to the second part of the series on using an annual report to find a winning investment.

As a recap: In order to find the best share to invest in, the first thing an investor has to do is gain an understanding of the company. And, one way to gain that understanding is by reading the company’s annual report.

The first article of the series had me covering how we can get a sense of the business. You can catch up on it here. For the second article, let’s dive a little deeper.

We’ll continue to use land transport giant ComfortDelGro Corporation Limited (SGX: C52) as an example. You can find the company’s latest (2013) annual report here. Let’s get cracking.

Be inquisitive

The Chairman’s letter to shareholders in ComfortDelGro’s annual report had a column dedicated to Information Technology – as a land transport company, that emphasis on IT is interesting to note.

This may be due to future threats to ComfortDelGro’s business from mobile apps such as GrabTaxi (in this case, GrabTaxi may pose a challenge to the company’s taxi-related revenue). We can dig into this issue further.

On another note – I had read a recent article on the Economist on the huge scale of Chinese cities. The following are snippets from the article:

“Breakneck urban growth has propelled China’s rise in the past three decades. Migration from the countryside has helped expand the urban population by 500m—the biggest movement of humanity the planet has seen in such a short time.

At the end of last year the government at last acknowledged the special nature of these, introducing the term “megacity” to describe those whose populations, including that of their satellite towns, exceed 10m.

Of the 30 cities worldwide that match this definition, six are in China: Shanghai (23m), Beijing (19.5m), Chongqing (13m), Guangzhou (12m), Shenzhen (11m) and Tianjin (11m). A further ten Chinese cities contain 5m-10m people. At least one of these, Wuhan, will pass 10m within a decade.”

Such unprecedented scale may offer future growth opportunities in China for ComfortDelGro. However, a quick peek into the historical trends in revenue and operating profit for the country (Page 12 to 13) indicate that ComfortDelGro has yet to gain any real traction when it comes to growth in China.

That said, ComfortDelGro does have a presence in four of the six megacities named (Shanghai, Beijing, ChongQing, and Guangzhou) and so, the developments of the company’s business in China may still be something to observe in the future.

There are more topics to notice, but the above are just a few. The point here is, be inquisitive.

Zero in on your observations

From page 31 onwards, ComfortDelGro goes through its operations by country. From our previous observations, there may be a couple of things we should zero in on.

For instance: What actions are taken by the company to head off the threat of mobile apps? I had noted about the topic in a previous article:

“Take ComfortDelgro for instance. The company’s bus subsidiary SBS Transit Ltd. (SGX: S61) launched its Intelligent Route Information System (iris) app on 11 April 2011. By the end of 2013, ComfortDelgro reported that the iris app (together with other apps) collectively received an average of five million queries a day for the next bus arrival timings. This was a two-and-a-half fold increase from two million daily hits in 2012.

Furthermore, ComfortDelgro’s Taxi Booking app registered a total of 2.13 million downloads, and recorded 13.3 million app bookings for 2013. This made up 41% of its total bookings received. Considering the population of Singapore is 5.4 million, all these are stunning statistics.”

In another instance: By virtue of the revenue contributions in 2013 from the United Kingdom and Australia to ComfortDelGro’s total revenue, we may want to familiarize ourselves with the operations in both countries. Meanwhile, by virtue of market potential, the China segment is also worth focusing on.

I will end part two here. Stick around for Part 3 tomorrow!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.