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Author: Choivo Capital   |   Latest post: Mon, 25 May 2020, 8:40 PM

 

(CHOIVO CAPITAL) Why Highways are a Gruesome Industry – WCE Holdings Berhad (3565)

Author: Choivo Capital   |  Publish date: Mon, 25 May 2020, 8:40 PM


 

For a copy with better formatting, go here, its alot easier on the eyes.

(CHOIVO CAPITAL) Why Highways are a Gruesome Industry – WCE Holdings Berhad (3565)

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Over the last year or so, i’ve gotten relatively familiar with the highway industry in general, and given what I know today, i can’t help but think back to one of my earlier research.

 

A brief analysis and valuation of WCE Holdings Berhad (WCEHB).

 

Quite frankly, I couldn’t be more wrong.

 

Even if one forgave my superficial knowledge of the highway industry then, what was unforgivable in that bit of research, was two things.

 

  • Assumption of a certain IRR without a deep understanding of the factors that need to happen to give rise to that IRR.

 

  • To be a bit laxer in my own research and understanding of the company because people I admire hold some of the shares.

 

The thing that was really bugging me about that research, is that it was quite frankly one of my more popular pieces, in terms of views, comments, likes etc on the I3 Malaysian Investment Forum. And i therefore felt a certain sense of responsibility to try and remedy that.

 

Personally, for me, it was one of my bigger mistakes. I can only thank that small part of my brain that refused to take it beyond a minor position in my portfolio.

 

Now, in order to understand WCE Holdings Berhad, we need to first understand the Highway Industry.

 

Lets Begin.

 

Allow me to warn you, this will be a very long piece.

 

If you want a summary, highway industries is a gruesome business and i think each share is worth around RM0.25.

 

The main reason for this is that traffic growth for the last 5 years have been extremely low at 1-2%, while when this concession agreement was signed in 2015, it likely projected 3-4%. This severely impaired the economics of the business.

 

But i am being quite conservative, and there are a multitude of factors that can bring its fair value up very very significantly.

 

 

 

 

 

Overview of the Malaysian Highway Industry

One of the biggest misconceptions that people have in terms of the highway industry, is that it is a very lucrative one.

 

A lot of it stems from us constantly seeing the alleged cronies who are usually taking up highway concession contracts, and from the general observation of people paying tolls every day.

 

I mean, if you see traffic jams every morning and evening, and the long queues in front of the toll plaza.

 

It only makes sense they are all very profitable right?

 

Having gone through the 5 year annual reports of every highway concession company in Malaysia, and every major highway company globally (for some companies, I’ve read more than 20 years’ worth of annual reports), this cannot be further from the truth.

 

Here are some of certain factors and risks, intrinsic on the highway industry.

 

 

 

 

Huge Initial Capital Expenditure, 10-15 year Gestation Period (Ie, Bleeding Period)

Like most concession type companies, such as power generation etc. Highway concessions require a huge initial capital outlay.

 

During the construction period, retail investors who are not familiar with the accounting standards, would think that it is profitable, and would be profitable when it opens and start toll collections.

 

This is a very grave misconception.

 

During the construction period, any interest expense, is capitalized into the balance sheet under the Concession Assets (or any other similar terms). Once the highway is opened and toll collections begin, these interest expense can no longer be capitalized, and will now flow out through the income statements.

 

For most if not all highways, the initial toll collections will be far from enough to cover the interest expense, resulting in losses in the income statement.

 

Depending on the highway, for great highways, the losses may only be for 5 years before it makes enough money to pay the interest. For average ones, it may take around 10 years.

 

For the mediocre ones (which consist of most of them), the losses will never end, the only thing you have ahead of you, is the constantly deteriorating equity and an endless stream of restructurings. (I will expand on the economics of these highway companies in later section)

 

So how do highways get built?

 

 

 

 

Government Funding (Implicit & Explicit) and Creative Financing

Like many other public infrastructure works (especially those in the transportation industry), it is almost fundamentally impossible for them to survive without government funding or subsidies (think trains etc)

 

There are some edge cases such as the Hong Kong MTR Train Systems (Read ThisThis), but these are few and far in between.

 

So how does these highway projects get funded? They usually consist of a combination of,

 

  • Government Grants (rare);

 

  • Government Supported Loans (more common, with super creative loan repayment schedules);

 

  • Government Shareholding (more uncommon, but the Government usually either hold a Golden Share, or have various clauses in the Concession Agreements that effectively give certain Government Agencies the ability to dictate terms);

 

  • Government Guaranteed Sukuk/Bonds (most popular, you can be very creative with this. For example, make the Guranteed Sukuk junior to the Non-Guaranteed One, and now the implicitly guaranteed by the government, enabling lower interest rates to be obtained, while it stays off the books for the government since its implicit. Really very cute.)

 

  • Nominal investment by Private Party of 0% to 30% (most are in the range of 10-20%)

 

Now, some of you may think, if highways are not such gruesome business, why on earth would private individual decide to invest in them (short of idiocy, which undoubtedly exists) ?

 

 

 

 

The Meat is not in the Toll Collection

As stated in the point above, in terms of private money, the amount put up in terms of financing the project, is usually not that much, ranging from 0% (pass the completed  highway to the private individual to operate and maintain) to 20 or even 30%.

 

Now often, the reason why private parties are willing to take this on, is because the real meat of the highway business is not in the toll collection, but in the construction of the highway, and its maintenance.

 

If done right (very rare), you can technically make back your investment even before the highway construction is finished! And after the construction is done, you can now get recurring income from maintaining it.

 

The trick here is, to have the government and the banks/bond holders, hold most of the debt, while the private individual holds most of the equity (close to 100%), despite only financing 0%-30% of the project.

 

And because the highway is kept in a separate company, while the construction and maintenance company are held in another company.

 

This way, you can keep extracting money from that highway concession despite it being loss making entity, via maintenance etc. In fact, companies like UEM Edgenta Berhad and Touch & Go are such companies for the North South Expressway (Though this highway ended up being profitable and turning into the crown jewel then).

 

And for those who are really smart, they can even structure their investment such that 10% of it is in Ordinary Shares, while the other 90% is in Convertible Preference Shares with a fixed dividend, enabling them to take out any excess cash (even if the Retained earnings is negative, for those who don't know, when a company has negative retained earnings, dividends cannot be paid on the Ordinary Shares.)

 

For most highway concession companies, the future toll collections are more of a pseudo-lottery ticket. They expect/hope for it to make enough to cover maintenance, and dream that it may actually be successful and take them to the moon. (I will go in depth on traffic projections in my next point).

 

As the private investor would have close to 100% equity on the project, this means if that if the actual traffic far exceeds the projected traffic, they would have hit the jackpot.

 

Imagine this, government funds at least 80% of the project (via explicit or implicit guarantees), and their return is capped, while the downside risks belong to the Government and whoever (foolish enough, at least for bonds that are not explicitly guaranteed by the government) buy highway bonds.

 

As for the upside, they all belong to the private investor.

 

Ie, privatize the profits, democratize the loss.

 

This situation is common worldwide. (To be fair, these days governments are a bit smarter and require a profit-sharing clause in their concession agreements. WCE’s concession agreement contains one)

 

Now, why would any government decide to do this?

 

 

 

 

The Disincentives of the Highway Concessions Industries

As Charlie Munger always says,

 

“Track the Incentives! Show me the incentive and I’ll show you the outcome”

 

Incentives are the iron law of nature; at the end of the day you get what you incentivize for. If you put out honey, you get ants.

 

Most Governments around the are incentivized to show a lighter balance sheet.

 

However, everyone also wants to do more public infrastructure (Unprofitable but necessary, why else we pay tax for?).

 

The solution therefore for most governments is to use mostly use implicit guarantees and if necessary government guaranteed loans or explicit guarantees for bonds.

 

Now, the really cute thing about implicit guarantees is, other than in very select scenarios, where it’s a national asset, or the counter-party is someone who, you simply cannot piss off, the government can often choose to not act on that implicit guarantee.

 

This is because they are so many things can be done to effectively still hold control of the highway, even if it’s now bankrupt and belongs to the creditors (who usually consist of some random institution or rich individuals elsewhere).

 

This has happened before elsewhere in the world (I have no idea if it happened in Malaysia before).

 

However, in most highway concession agreements worldwide, there is a clause allowing the respective country’s Highway Authority to set the toll rate to be charged (this can be different than what is in the concession agreement), effectively still granting control to the government, with the difference to be paid as compensation.

 

And the compensation usually needs to be jointly certified with the government agency.

 

Now, if that government agency wants to have you jump through numerous fire hoops, and take their sweet time with the decisions, make last minute changes or requirements that basically require you to redo everything.

 

What are you going to do?

 

Are you willing to sue the government and sour this relationship forever (especially applicable in countries where there isn't a strong democratic process)?

 

In addition, compensation is often capped to a certain traffic amount each year.

 

If you happened to own a highway that makes super-normal profits and the government did not allow you to increase toll rates (due to political pressure), and instead opt to pay compensation, your compensation will usually be less than what you can collect.

 

Now, for some of my sharper readers, you will now be thinking,

 

"You know, government's wanting a lighter balance sheet does not seem like a strong enough argument."

 

You're right.

 

Here is a bell curve of the Corruption Index performed by Transparency International on 180 countries.

 

It’s not all 500 countries in the world (as stated by one Malaysian Minister), however, it consists of most of them. As for those who are not in the list, chances are, they probably scored extremely low.

The Index scored out of 100 Marks. Assuming the passing mark is 60, about 146 countries would not make the grade, this consist of about 81% of the 180 countries. No prize for guessing which part of the curve Malaysia falls on.

 

Needless to say, concession agreements like these (especially when structured right) and very lucrative and convenient things to dole out as reward to cronies.

 

 

 

 

The Lottery Ticket - Traffic Projections

Now, lets talk about traffic projections.

 

Among all type of government concessions (power, telecommunications, highways, petroleum etc), there is particularly lottery like nature when it comes to highway concessions.

 

Why?

 

Because everything hinges on the projected demand, which you will not know, other than based off your own gut instinct, or some traffic consultants gut instinct.

 

(To be frank, traffic consultants are a zero-value add job whose purpose is to put on some veneer of acceptability on traffic projections which will likely be inaccurate to a large degree.

 

It’s not their fault though, try projecting something for 30 years and see.

 

 

Just a matter of supply and demand.)

 

For example, when it comes to power generation concessions, it is a very clear and flexible commodity, whose supply and demand you can see clearly.

 

All you need to do is sign a concession agreement with the government who will agree to buy most of your power at market price, build the power plant, and then connect it to the transmission lines.

 

The only real risk is pricing risk, which can backfire spectacularly, as you can see in Hyflux who did not predict that Natural Gas prices would fall by more than 50%, causing power prices to fall, resulting in their Power Plant which does not use Natural Gas to basically die.

 

When it comes to traffic projection, the number of factors that impact traffic projections is numerous, and thus its complexity is higher by several orders of magnitude.

 

The questions consist of,

 

  • What is the impact of GDP to Traffic? How elastic/inelastic is it? What is the local GDP?
  • What are the plans for new expressways or roads around your highway, what are the alternative routes?
  • What will demographics trends look like?
  • What about trains and other modes of transports?
  • Cars vs Motorcycles demographics?
  • Travelling trends? Saturation points?
  • Given the above as well as cost of constructing the highway, what price to charge?

 

The list of questions goes on and on and on.

 

To paraphrase Howard Marks,

 

"Who can respond to this many questions, come up with valid answers, consider their interaction, appropriately weight the various considerations on the basis of their important, process them for a useful conclusion regarding the expected traffic and the right price to charge?"

 

You are either to going to get it very right or very wrong. And given the economics and history, you will likely get it very very wrong.

 

However, predict they must.

 

(At the end of the day, the highway project must go on, as the meat of the highway industry is in the construction and maintenance, not the toll collection.)

 

Now, for most, including myself it would seem perfectly reasonable for traffic growth to be around 4-5% per year, in line with Malaysia’s GDP.

 

However, this thought process have stopped holding true since 2015, unless you have a new highway in urban areas or do capacity expansion (extremely expensive).

 

These days, looking at the Bond Rating Reports from MARC, the North South Expressways (largest highway of Malaysia) is only seeing growth of 1-2% per year. This is not the news any current or future highway concessionaire would like to hear.

 

Still, a free lottery ticket (depending on which part of the deal you’re at), why not?

 

And for those who actually get a winning lottery ticket, you now have the opportunity to use these traffic projections to do some financialization, ie borrow more money and take it out as dividends etc.

 

For the more recent deals, you can look at the RM1.35bil bonds raised by Bright Focus (A Maju Holdings Subsidiary) using Maju Expressways as collateral.

 

Around of half of the bonds were then paid to the Maju Holdings. The bonds listed at a AA Rating and have since then turned to BB1 Rating (ie Junk Status)

 

Still, i don’t blame them for wanting to do so.

 

Top off deteriorating demand and highways being such a politically charged matter in Malaysia, it makes sense to take out as much money from your highway concession as humanly possible.

 

 

 

 

The Malaysia Political Factor

Why do politics matter so much for the highways industry in Malaysia?

 

Well, unlike in other countries, both our governments have decided to shoot themselves in the foot by making toll roads such a highly charged political issue (this is really quite unique to Malaysia).

 

Despite having one of the lowest toll rates in the world (back of envelope calculation), the sheer political pressure and attention on this issue have resulted in there being no toll rate increase in all highways in Malaysia since 2011. The government would rather just pay compensation than incur the public wrath.

 

As a highway toll concessionaire, this is not a good thing.

 

If you have a highway concession, due to the previously explained traffic caps, the toll compensation you receive is likely to be less than what you can collect.

 

In addition, you now must go through the process of jointly certifying toll compensation and claiming such compensation, which require additional cost to be borne by you, and if there are any delays through no fault of your own, good luck having the government pay you interest on the toll compensation.

 

And if you have a bad toll road (which will likely be the case), with huge cash-flow issues, well, good luck to you.

 

In Malaysia, we are also home to one of the most incredible restructuring deals. Yes, im talking about the planned planned restructuring for PLUS Berhad, whose highways have some of the lowest toll rates on earth (by a wide margin i might add) and in Malaysia.

 

The toll concession will be increased by 20 years, with no additional increase in toll rates (after the 18% discount).

 

Well, name me one other product whose prices have not increased in the last 30 years in terms of nominal value (ie, don’t account for inflation). I cannot think of even one thing to be honest.

 

I'm not privy to the additional details, but if that is all there is to that restructuring, i imagine they would literally rather take the shorter toll concession period and maintain the current toll rate schedule in their concession agreement.

 

 

 

 

Overview of Malaysian Highway Companies Profits/Losses

During the year, I had an opportunity to go through the accounts of all the highway companies in Malaysia (I made a friend in SSM who has sadly left the place).

 

Profitable Years are highlighted in “Green”. Loss-making Years are highlighted in “Red”. And as for the cells highlighted in “Orange”, the accounts couldn't be found or was not released at that time.

 

For the highways in "Red", those concession have ended or have been terminated.

 

 

Making sense of the numbers

In order to understand the context of these numbers, we need to be aware of the accounting treatments of certain items that are specific to Highway Concessions.

 

 

Provision For Heavy Repairs

For highway concession companies, they are required to handover the highways and all associated equipment back to the government at the end of the concession period in good condition.

 

Therefore, in their accounts, the highway concession companies will make an estimate of all future heavy repairs from now till the end of concession, using current cost estimates, traffic projections and expected inflation.

 

This amount is then discounted back to present value using the nearest available matching risk free rate.

 

For example, if you had a concession that is expected end in 10 years, you would use the 10-year MGS interest rate.

 

Changes in any of the items above, can result in very significant variance when it comes to the profit for the year.

 

 

Concession Assets (or other similar terms)

This basically consist of the cost of building the highway. If it was purchased from a third party, you may then have goodwill baked into it as well.

 

This item sits on the balance sheet and is amortized using a rate which is calculated as follows.

 

[(Actual traffic for the year) / (Actual Traffic for the year + Projected Future Traffic till end of Concession)] X Concession Asset

 

Now this is different from the usual straight line or reducing balance method of calculating depreciation.

 

In a way, this is a utilization kind of amortization. This means that assuming projected future traffic is unchanged, if the traffic this year is less, the amortization is less.

 

However, every year, the toll companies are required to procure a traffic projection report, which means that the “Projected Future Traffic till End of Concession” also changes from year to year. Which can give rise to a very significant swings in profit.

 

In addition, a discounted cash-flow needs to be performed each year in order to see if the future earnings can still support the value of this asset on the books. If it is insufficient, an impairment will be needed, which again gives rise to very significant swings in profit.

 

 

 

Restructuring, Restructuring, Restructuring

Being a gruesome business that is subject to a lot of political pressure , there is no surprise that that these companies usually go through plenty of restructuring in their lifetime.

 

This restructuring also often result in wild swings in the profit numbers.

 

 

 

Cashflow Not Earnings

Now, the 3 items (Restructuring, when it happens) above usually constitute the among the top 3 costs to the company, now as some of you you might have noticed, those are just accounting entries, and not real cash items.

 

These provisions or changes just move the numbers in the Income Statement but have no real impact on the real cashflow.

 

This is correct, however, as I am looking at it in terms of the industries economics, all these numbers matter.

 

If you were to build a new highway, amortization constitutes the worst of expenses, as instead of paying your expenses as you use, you will now need to pay the expenses of the next 30 years today.

 

 

 

 

Notes on Malaysian Concession Companies

Well, I think the numbers in the table speaks for itself.

 

However, there are a few common trends I think I need to elaborate on.

  • Around the word (this also applies to Malaysian ones) the only highways that make money are the ones that are in Urban areas. and except for 1 or 2 exceptions, they are also in high density, high traffic jam areas in Kuala Lumpur or Selangor. Having said that, just because you are in these areas, does not mean you will make money, due to the reason below.

 

  • Elevated Highways, Bridges and Tunnels cost the most money to build, and are therefore extremely unlikely for those companies to ever recoup their investments the usual style (dividends). There isn’t a single bridge in Malaysia that is making money. Not in Penang, not even the Singapore ones that are jammed like crazy every morning and evening. (There is also other problems like soil etc, but not as major)

 

  • For Intercity Highways in Malaysia, only North South Expressways is making money, as it was the first with no viable alternatives as the federal roads usually takes 3 times longer. For a Northern Interstate Highway, Anih Berhad is doing an amazing job though keeping theirs alive for so long.

 

For some of the highways, there are some differences in the numbers that I feel I should give some color (the favorite "Atas" word of every western investment analyst) on.

 

(A) Ampang–Kuala Lumpur Elevated Highway - Projek Lintasan Kota Sdn Bhd (AKLEH-  Prolintas)

This company is typically profit making, however it made losses in 2017 due to impairments in the Concession  Asset.

 

These things are quite common in highways for the reason described above.

 

 

(B) Stormwater Management and Road Tunnel - Syarikat Mengurus Air Banjir dan Terowong Sdn Bhd

It turned to a major loss in 2017 due to impairments in the Concession Asset, again, very common.

 

Fun fact. It is also the highway with the highest toll rate per km in the Malaysia, as it costs the most money per km to build, with it being located its deep underground and including its famous storm water features etc.

 

Personally, I'm in awe at Gamuda's ability to build it within budget (mostly) and keep it alive till today.

 

 

(C) DUKE 1 and 2 - Konsortium Lebuhraya Utara-Timur (Kuala Lumpur) Sdn Bhd (EKOVEST)

Well, this is still a very young highway, so numbers are a touch lumpy.

 

Having said that, actual traffic vs traffic projections are quite good, which is why it is able to make a profit much earlier than expected, despite only opening in 2010 or so and have a lot of elevated structures.

 

 

(D) Kuala Lumpur–Karak Expressway & East Coast Expressway Phase 1 (ECE1) – Anih Berhad

The year 2015 would be loss-making if not for a bond restructuring.

 

The income statement remained positive in 2016, before nosediving in 2017 and 2018 as they caught up on their Heavy Repair Provisions (should be this item as its cash-flow did not change much).

 

 

(E) Kemuning – Shah Alam Highway - Projek Lintasan Shah Alam Sdn Bhd (LKSA - Prolintas)

Highway was too expensive with a lot of elevated structures, and the multitude of free options available around it, which is why it is loss making despite being in a high-density urban area.

 

 

(F) Senai–Desaru Expressway - Senai-Desaru Expressway Berhad

It would still be in loss making in 2015 if not for the restructuring of the ICULS (Basically a loan with equity kicker).

 

This highway concession is a gigantic elevated structure / Bridge from Senai to Desaru. It was incredibly expensive to build and its basically impossible for it to ever turn over a profit, unless you forgive 80-90% of the debt.

 

 

(G) Sprint Expressway - Sistem Penyuraian Trafik KL Barat Sdn Bhd

It turned into a profit in 2015 and 2016, however, there was a strong increase in heavy repair provision (likely due to under-provision in prior years), which resulted it making losses again in 2017 and 2018.

 

Having said that, it is very close to making a profit, should turn green soon once the loan is low enough.

 

 

(H) Sultan Abdul Halim Muadzam Shah Bridge - Jambatan Kedua Sdn Bhd

It would still be loss-making in 2017 if not for Forex gains.

 

Huh? Why forex gains you ask?

 

Well this is a very cute company.

 

I’m not sure which fool or investment banker suggested it, however, it has about RM1.5 billion to RM1.7 billion in USD denominated loans.

 

This is also the reason behind the huge losses in 2014 to 2016, and the large turnaround in 2017. Given the increase in USD in 2018 and 2019, i expect massive losses for these years.

 

It also has a very interesting/creative structure.

 

The government basically told the company that in exchange for building it, they will pay the company RM7.51 billion in 2031, which is why they have unwinding of non-current receivable on their balance sheets.

 

And this is also why, despite it currently being in negative equity situation, the bond holders have not gone crazy yet, as the loan amount RM6.4bil is technically still below the amount payable by the government by 2031.

 

I would actually consider taking bets on there being a restructuring on this company within the next 2 years.

 

 

 

 

 

WCE Holdings Berhad (WCEHB: 3565)

And so, after the long grandmother stories (Mark Spitznagel of Universa Investments will be proud), we come to the meat of this article.

 

What is the equity of WCE Holdings Berhad worth?

 

To find out, we have to ask two questions, the first one being,

 

Do equity holders of WCE Holdings Berhad get to participate in the meat of this highway concession, ie the construction and maintenance of this highway?

 

Well, the construction is done by IJM, and I would imagine that as the majority shareholder of the highway (Direct 20% stake in the highway, and 28% stake in WCE Holdings Berhad), they would ensure that any major maintenance or upgrading work, is also done by IJM or its subcontractors.

 

As IJM and WCE Holdings Berhad minority equity holders are very different entities who benefit from this highway very differently, I think the answer is a “No”.

 

As minority shareholders, you are unlikely to be benefiting from the meat of this investment.

 

In this case, the second question is this.

 

 

 

 

What is the value of your WCE Berhad lottery ticket?

The lucky thing minority investors have going for you, is that the Mamee Family and Surin Upatkoon (the father in law of one of the members of the Mamee Family, also owner of Magnum) is in this together with you, in your exact position.

 

Also, as equity holders, you are actually contributing the higher end of the scale in terms of funding for the project (almost 30%).

 

Both of which seem to indicate that these people have really really done their homework, which helps you chances abit.

 

Now, lets do our homework.

 

To do this, we will use a simple and high level discounted cashflow.

 

They are a multitude of various different factors and scenarios such as,

 

  • The highway opening in stages;
  • Duration of concession likely mismatching by one or two years due to opening in stages;
  • Increase in opening loan amounts from interest accumulated during the construction stage;
  • Changes in maintenance cost % as the highway gets older;
  • Expected upgrading works;
  • Loan repayment schedules;
  • Potential toll compensation issues messing up the cash flow and incurring opportunity cost.

 

Etc, etc, the list goes on.

 

However, the goal here is to roughly correct, not to be precisely wrong. As Warren Buffet once said,

 

“You don’t need to know the weight of a man to know if he’s fat, nor the age of a women to know if she’s old”

 

The goal here is to be roughly correct, and err on the conservative side.

 

If the numbers don’t look obviously good when done from this perspective, well, forme i'll throwing it to the too hard pile,and let whoever is left to figure this out.

 

To calculate this high level discounted cash-flows, we need to come with reasonable estimates and assumptions.

 

  • Expected Operating Costs or EBITDA%
  • Expected Financing Cost
  • Traffic Projections
  • Expected Concession Asset Value and Expected Income Tax
  • Dividend and Discount Rate
  • Value of Investment

 

 

Expected Operating Costs

Depending on the type of highway, geographic profile, the kind of maintenance agreed in the concession agreement, the age of the highway as well as the efficiency of management involved, the cost of operating a highway when translated to EBITDA is usually around 60-90%.

 

For WCE, it is an Intrastate highway, which means that they usually have higher maintenance cost due to lower economies of scale (a long highway means a lot of mobilization costs).

 

In addition, Intrastate highways tend to have a higher (Class 2 and 3 – Lorries and Trucks) demographic from long distance shipping. According to conversations to various people, despite these two classes being around 20% of the traffic, they contribute to around 80% of damage done to the pavement due to overloading for these lorries and trucks.

 

Having said that, a young highway is also cheaper to maintain than an old one.

 

Now, the operators of Interstate Highways in Malaysia are Anih Berhad and PLUS Berhad, the highways are relatively old (20 - 40 years old), and they record EBITDA of around 60-70%.

 

For reference, top Urban Highways such as DUKE, KESAS etc can record EBITDA of 80-90% relatively easily.

 

For WCE, we will assume 80% of the first 10 years, 75% for the next 10 years, and 70% till the end of concession.

 

This is somewhere in higher end as the other two highways usually use subcontractors to maintain their high. IJM should be able to get the cost slightly lower in view of their deep expertise in construction and road maintenance.

 

 

 

 

Expected Financing Costs

From what I can see in the latest annual reports and right issue documents, by the time the highway is completed, WCE would have used up a borrowing facility amounting to RM4.74 billion.

 

This consist of 3 kinds of loans,

 

  • RM2.24 bil Government Soft Loan (“GSL”) at 4% per annum. Repayment starts 6 years from first drawdown, in 108 equal quarterly installments. First Drawdown was in 2016. Therefore first repayment will be in 2022.

 

  • RM1.00 bil Sukuk issued in 2015. Interest rate is around 6.8%. Repayment starts 12 years from first drawdown, in 10 equal yearly installments.

 

  • RM1.50 bil Syndicated Term Loan. Interest is around 6.7%. Repayment is in 2028 bullet style.

 

This translates to the table below and a blended rate of 5.45%

Looking at the table above, considering that interest expense is likely to be around RM 290 million per year, i don't think they will generate enough cash flow to meet interest cost for at least the first 10 years.

 

However, given the long concession period, refinancing is probably possible as long as the traffic is not too bad (we will go into this later).

 

To make things simple, we will ignore the schedule above, and just assume that all excess cash would go to interest and principal payments (after accounting for a reasonable dividend policy) and that any lumps in the cash-flow will be handled while refinancing.

 

The goal is to completely repay the borrowings by the last year of the concession period.

 

Do note, they are also a multitude for covenants (FSCR Ratios, Debt to Equity Ratios etc), as well as making sure the equity is positive in order to pay dividends etc.

 

But these would really massively complicate things, as i will then need to create a sample balance sheet. Therefore i decided to go with the above method.

 

Having said that, if the final numbers looked fantastic and it looks viable investment, i would probably proceed to do a full fledged discounted cash-flow, with a balance sheet component in order to better understand the numbers. In this case however, it did not.

 

 

 

 

Traffic Projections

In WCE’s latest Bond Rating Report by RAM Rating, they provided some information on the traffic projections used by WCE Holdings Berhad. (If you want one you need to pay RM500 for one copy, i happened to have a friend, so that helps).

 

 

Looking at the numbers, they appear to be projecting a long-term traffic growth of around 2.4 – 3.2%.

 

If you notice, revenue growth is actually about double that of projected traffic growth, this is likely due to toll rate increase. Using some back of envelope calculation, it appears that the toll rates are increased by 10% every 5 years. Initial revenue is expected to be between RM275 million to RM461 million.

 

Do these numbers look accurate?

 

Well, lets compare them with North South Expressways, whose highway is parallel to WCE's.

 

 

Looking at PLUS Berhad’s projected traffic growth, as per their latest MARC Bond Rating Report (Again RM 500 to buy, I love my friends), for the North South Expressways, traffic growth for 2019 is only 1%.

 

As I understand, the 2019-2023 traffic projections is lower as it includes impact from the West Coast Expressways (WCE). Looking at the rest of the years, it looks like 1.5% is probably a reasonable long-term estimate for North South Expressways.

 

Now, just by comparing the traffic projections for both WCE and PLUS, there is clearly a huge difference.

 

There both used different traffic consultants, this means one of these consultants is much more wrong than the other.

 

Why is this the case you may ask?

 

Because in truth, projections says more about the people projecting it than that of the underlying reality.

 

Again, listen to Charlie Munger, track the incentives.

 

Traffic consultants are not governed by any strict supervisory body (unlike Auditors) and they are hired by the management.

 

Whose bread I eat, his song I sing (to a point, in general).

 

Having said that, North South Expressway's traffic projection is backed by 20 years of traffic data, while WCE’s is basically castle on the clouds.

 

Therefore, we will be using North South Expressway's traffic projections as a base.

 

Now, it is important to note that this 1.5% traffic growth, includes Selangor, Kuala Lumpur, as well as Johor Bahru, which are likely have traffic growth that is higher than the average for North South Expressways.

 

To simplify things, we will just split the highway into three portions, called Northern, Southern and Central.

 

In addition, in PLUS’s annual report (they are not listed by the way), they announced RM3.7 billion in toll revenue (excluding toll compensations), as the revenue is not split by concession (they own 5 highways altogether), we need to think of a reasonable estimate.

 

As two of the concessions are basically intertwined (North South Expressway & North South Expressway Central Link.), I’m just going to make a high level projection, and say that both of them amount is about RM3 billion (this proportion also makes sense in terms of what was seen in terms of traffic volumes stated in the report).

 

Now, we will now do a high-level estimate and try to obtain the growth and revenue by region. This is where it becomes more speculative, but we will try to be as reasonable as we can, and err on the side of conservatism.

 

We start by identifying the characteristics of each region, before coming up with some assumptions and estimates.

 

 

 

Characteristics of Each Region.

 

Central Region
This region holds the bulk of Malaysia’s economic development and thus should logically have the highest traffic growth and toll revenue.

 

Look at it from economic development wise, car ownership in each region etc,  it would be reasonable to say it’s toll revenue is the combined of both Southern and Northern Regions.

 

 

Northern Region
Other than Penang, which is a really small island, in terms of economic development, it should be the lowest of all regions.

 

Perak, Kedah, Kelantan etc are not known for their economic prowess after all. Therefore, we can say that traffic growth and toll revenue should be the lowest among the 3.

 

 

Southern Region
This area includes Johor Bahru, which due to its closeness with Singapore, should do better.

 

However, it also includes areas like Negeri Sembilan and Melaka and the other parts of Johor, which are not exactly economic powerhouses.

 

On net basis, it should at minimum do better than the Northern Region, but not by much. Let’s say 20% better.

 

All this translates to the following assumptions.

 

 

I think this is a relatively reasonable one and if it errs, its probably on the side of conservatism.

 

Now that we have our long-term growth, we now need to really think about its initial growth rates (as a new highway grows faster at the first few years before stabilizing), as well as the Initial Revenue.

 

For Initial Traffic Growth, I decided to use the following,

 

Again, it seems conservative enough for me, i think a stronger initial pop may happen as it is about 50km from NSE, despite being parallel, however, again we strive to err on the side of conservatism.

 

What about the Initial Revenue then?

 

Well, as per the table above, Northern Revenue for North South Expressways is around RM675 million per year.

 

According to RAM Rating, WCE’s traffic consultants projected RM471 million (RAM sensitized it to RM 275 million) in revenue per year.

 

This represents somewhere between 40% (RAM Sensitized) - 70% of North South Expressways Northern Revenue.

 

Since WCE is expected to take away some traffic from North South Expressways, this amount seems a little high to me, especially since PLUS have lowered the toll rates by 18%, bringing it to around 11.45 sen per km in the article above. 

 

How much is WCE’s toll rate then?

 

The information is not public, however, according to the article above, it is estimated to be 13.7 sen to 15.53 sen per km.

 

This appears to be corroborated by this article at the end of 2018, stating that it should be in line with PLUS’s 13.96 sen per km, according to a minister.

 

My guess is that it’s probably somewhat higher that North South Expressways. As if it was lower, they would have answered it clearly.

 

This is not good news.

 

However, to be fair, WCE is also banking on vehicles that uses the free federal roads to use their highways as well, as its likely to be more convenient and a better drive.

 

However, one should also note that the Northern Federal Roads are actually quite well maintained, without much traffic jam, in which case i'm not sure how much traffic will transition to WCE's more expensive highway.

 

So, what’s the right number?

 

I have no idea, but if I to put some money on it, a predict a number that is within 30% lower of the actual future traffic, i would say around RM 200 million, which is far lower than what was represented by management and sensitized by RAM Rating.

 

 

 

 

Expected Concession Asset Value and Expected Income Tax

Now back to the other assumptions, we also need to calculate the Expected Income Tax. As the income tax is likely to be determined by the profit for the year, which will need to include the expected amortization rate, we will need to derive it by identifying the Expected Concession Asset Value.

 

And then amortize it using the revenue for the year, against the total projected revenue.

 

 

For the project cost/ highway cost, i'll be using this amount. The interest capitalized is around 3% of the entire project cost from 2015 to 2023. This is about half of the current interest rate.

 

I did this to account for the fact that the loan is progressively drawn down.

 

For the tax rate, we will use the current corporate income tax, which is 24%.

 

For losses brought forward (to be used to reduce tax), i will assume that the current 7 year law applies till the end of concession.

 

 

 

 

Dividend and Discount Rate

For the dividend, we will just massage it to have it fit such that the all borrowings is paid off at the end of the concession period.

 

Discount rate of 4% is used. This is the current 30 year MGS (not sure if it changed with).

 

Some will think its a little, low, but for me, i am already adjusting in the margin of safety via all the other assumptions, and we will also compared it against the current share price later (difference is the margin pf safety).

 

I'd rather do it this way than make my life unnecessarily complicated.

 

 

 

Value of Investment

Now for value of investment, this is to identify out what is will be the NPV per share. Again for this, we will go the most conservative route.

 

To identify our number of shares, we refer to the right issue prospectus. According to the prospectus, under the maximum scenario, the maximum number of shares is ~3,509,575,000 shares.

 

This assumes that all RCPS currently held by shareholders will be fully converted to new WCE Holdings Berhad shares, by surrendering one RCPS together with the required cash payment, for one new share of WCE Holdings Berhad.

 

It also assumes that the Warrants currently held by the shareholders will be fully exercised in the First Exercise Period at RM0.39 per warrant.

 

This expands the number of shares to ~3,509,575,000 shares from the current ~1,297,000,000 shares.

 

This expands the number of shares by around 171%. Dropping the final valuation by that amount.

 

In any event, if as an investor you think the shares are valuable, you would want to exercise the warrants, and in this case, all of them thought so and did so.

 

I accounted for the cash inflow as a positive in the Cash-flow workings, as we are already dividing it over the maximum number of shares.

 

 

 

 

WCE Highway High Level Cashflow

Given all of the above assumptions, what does the cash-flow look like?

Using realistic assumptions (that err somewhat on the side of being conservative, in terms of your Initial Revenue and Number of Shares), your lottery ticket is worth about RM0.25 sen per share.

 

This is about 2.18% lower than the current market price.

 

Having said that, these numbers hinges on one very important thing, which is that toll rate increases at 10% every 5 years. I think this accurate, but we need actual confirmation on this.

 

Even then, it does not look that attractive to me.

 

Also, remember, these numbers does not consider the possibility of toll compensations being lower than what is supposed to be received (traffic caps) and delays in toll compensation etc.

 

Having said that, my guess is that the traffic caps will not come into play when toll compensation is calculated as my projected traffic used is so much lower than that of management’s, which would have been used in negotiating the toll concession.

 

I think considering the conservatism I took in calculating this, this fair value should more than account for toll compensation delays etc.

 

Now, if you were to decide to use managements traffic projection, and instead of RM200 million and 1% growth, and replace it with RM471 million and 3% growth.

 

 

Your lottery ticket will be worth about 13 times more or RM3.26.

 

But these numbers would be a real stretch and quite frankly, I don’t think it’s possible in this world.

 

If this was another reality where for some reason, Singapore did not separate from Malaysia, and this new Malaysia was didn't have Race, Religion and Royalty completely baked into our culture, enabling the kind of economic development across the Northern Region that can give rise to this kind of traffic growths, this may be possible.

 

But there is a price for everything.

 

 

 

 

Conclusion

With that i end this piece.

 

Having said that, for the current shareholders, my assumptions are probably quite conservative, and if its only 2% below market price given these very strong assumptions, its not all bad.

 

In addition, you have a relatively decent property development arm in WCE Holdings Berhad.

 

With some luck, the RCPS will not be fully converted, enabling the fair value per share to go up. And that the warrant expire in 2024 and 2029 mostly unconverted, enabling your per share value to increase significantly.

 

Of course, this is all predicated the current cash being sufficient, and that there is no additional cash calls.

 

I hope this is the case.

 

One thing i did find particular impressive about when writing this article, is the fact that this highway concession is not completely underwater when using my assumptions. It's actually still likely to be profitable, just severely impaired.

 

This for me speaks volume about how good a deal this was back in 2015.

 

Of course, an alternative explanation is that the low traffic growth for the last 4-5 years is just cyclical.

 

Though i would struggle to think of any reason why its mostly cyclical, as we've had boom years in that period.

 

If i had to make a guess, i would say that this is from income for the middle and bottom half of society having not as grown much in the last 5-10 years.

 

This resulted in many people deciding to use Motorcycles instead of Cars. (In exchange, this particular trend gave rise to companies like AEON Credit, who are now recording super-normal profits)

 

As always, if you feel i'm wrong, or missed out on anything, please let me know.

 

Disclaimers: Refer here.

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: WCEHB
  KevinL likes this.
 
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ If you cannot tell me the core story in 2 minutes why this company is or is not a good investment, all the other extra information do not aid my decision making.
25/05/2020 8:51 PM
Choivo Capital Patience my young padawan.

無爲
25/05/2020 9:38 PM
Booyeah great article
25/05/2020 11:00 PM
Philip ( buy what you understand) Progress of 3% was done for the pan Borneo highway in the writing and reading of this article.

But I still don't get it.
25/05/2020 11:07 PM
Trust Salute you for an impressive thesis and analysis..
26/05/2020 5:57 AM
abang_misai Luckily i saw this article and I managed to sell all at 0.250
10/06/2020 6:20 PM
lcwin yep final word, you make money in the maintenance not the tol collection directly as its politically unfeasible. Look at PLUS n u know the maintenance costs is daylight robbery. Its also why they delist the highway maintenance cpy when they realized their mistake.
29/06/2020 4:25 PM

(CHOIVO CAPITAL) Perak Transit Berhad – The Peculiar RM3.2bil – RM4.8bil Bus Terminal Boom In Malaysia (PTRANS – 0186)

Author: Choivo Capital   |  Publish date: Sat, 23 May 2020, 4:55 PM


For a copy with better formatting, go here, its alot easier on the eyes.

Perak Transit Berhad – The Peculiar RM3.2bil – RM4.8bil Bus Terminal Boom In Malaysia (PTRANS – 0186)

========================================================================

One of the companies I’ve always been interested in is Perak Transit Berhad.

 

So much has been said about their Amanahjaya Bus Terminal in Perak, and its apparently monopoly like position when it comes to bus travel in Perak.

 

In addition, with the soon to be completed Kampar Bus Terminal, it seemed plausible for earnings to double, and thus the price of the stock as well (at least according to some analyst).

 

In fact, I actually bought a small position during the March bottom, before selling it off after finishing up my research.

 

The thing is, i don’t think it is as simple as that, as they are quite a few things that don’t seem to line up/make sense for me numbers wise.

 

Well, lets begin.

 

 

 

Overview of the Business

Perak Transit is involved in 3 main business lines,

  • Operation of Petrol Stations
  • Operation of Public Transportation
  • Operation of Integrated Public Transportation Terminal

 

 

Operation of Petrol Stations

Fairly standard business, makes about RM 1 million per year. No real surprises here.

 

 

Operation Of Public Transportation

Well, the thing about operating bus routes, is that it is fundamentally a loss making business, that requires government subsidies to survive. The subsidies given are as follows.

 

  • RM10 million given by the Public Private Partnership Unit of the Prime Ministers Department in 2012 for the construction of their current Amanjaya Bus Terminal.

 

  • Interim Stage Bus Support Fund. A fund to address the shortfalls of revenues for certain unprofitable routes. This translates to around RM 2 million a year. The contracts run for 2 years before renewal.

 

  • Stage Bus Service Transformation ("SBST") Program, which basically turns it into a cost plus contract. As a network operator, they will be paid cost per km for each vehicle in the 16 stage bus routes in Ipoh, with the fares collected and repaid to Suruhanjaya Pengangkutan Awam Darat ("SPAD") (The Land Transport Government Agency) . The contract runs for 8 years before renewal is needed. This particular program has grown to become a major part of the bus operations.

 

 

And as we can see here, subsidies/cost plus contract have grown to become approximately 43% of the business from the initial 23%.

 

And despite costs plus contracts being a major part of this division, margins is still relatively lackluster (which is a good thing from a citizen perspective I guess?)

 

Having said that, from my experience in working with the government on things that require them to subsidize and make payment, i personally don’t particularly like the experience.

 

This is because the government service is usually run by little Napoleons, with whom you have to really jaga the relationship etc, as at the end of the day, they will do what they (while giving reasonable sounding explanations).

 

I still remember Ekovest bosses making sure to show their face on a random update meeting with the Malaysian Highway Authority on 2 hour notices.

 

At the end of the day, when the chips are down, nobody dares to sue the government (in Malaysia) at least, to fully enforce their contracts.

 

Having said, this is not a particularly politically sensitive kind of subsidy, so i'm not too worried.

 

I don’t particularly like this part of the business, but then again, nobody really does. It also does not contribute much in terms of profit anyway.

 

 

 

Operation of Integrated Public Transportation Terminal

And now, we come to the real meat of the business, which includes their “Monopolistic” Amanahjaya Bus Terminal and soon to be completed Kampar Bus Terminal.

 

 

At first glance, the numbers look absolutely incredible!

 

I mean, it almost looks as if Surgical Glove companies should just pack up shop and go into the business of opening bus terminals.

 

However, one thing Perak Transit includes in their numbers here, is something called a “Project Facilitation Fee”.

 

In their prospectus, it is stated that these are generally one off items, that should not constitute a major part of their income.

 

So lets try and extract it out and look at the normalized numbers.

 

 

Well, it looks a bit more logical, however, do note this is a segment reporting number, and it does not include any consolidation set offs.

 

And yes, the margins really are 80% (I’ll explain later)

 

Lets account for the consolidation adjustments, and take a look at how the company’s annual results will look like excluding the PFF’s (since it is paid by third parties only anyway).

 

 

From what we can see here, it appears these “One Off”, “Non Recurring” and “Icing on the Cake” items, are not just continuously recurring, they have also consistently increased in size, that they now take the cake when it comes to company’s earnings by contributing to more than 50% of it in 2019.

 

Its almost as if, Perak Transit Berhad is not primarily a Bus Terminal company that gives advice to others on how to open their own Bus Terminals.

 

Instead, it is a company that specializes in giving advice to others on how to open a Bus Terminal, and also happens to have a Bus Terminal of their own!

 

 

 

What are these “Project Facilitation Fees” (“PFF”) ?!

So, we now have the million dollar question, what are these fees?

 

They detailed out the nature of these fees in their Prospectus and Annual Reports, it can get quite lengthy, however, they all revolve around saying the same thing.

 

PFF’s are when the company provides advisory services to third parties who want to build their own Bus Terminals.

 

What they do is they rent out Terminal Amanjaya’s equipment, utilities and facilities, prepare preliminary concept paper for the proposed project, discussion and sharing of knowledge on design, planning and construction of terminal and attending all meetings organised by the third party with SPAD and other relevant governmental departments.

 

And all of this is due to their their experience with Terminal Amanjaya and the management’s long-term expertise in public bus services.

 

Basically, if you are interested in opening a bus terminal, we will help you with your proposals, talk to government and settle everything.

 

According to management, this there is very little incremental cost relating to the Project Facilitation Fees, its basically all profit (Prospectus indicates margins of 80%), and that these fees usually consist of 2-3% of the Bus Terminal Project’s Gross Development Value.

 

During their IPO in 2016, they were even kind enough to provide the breakdown of the fees for the year 2015.

 

 

Well it looks very reasonable, except.

 

 

Except, these amounts have continually increased, and as of FYE 2019, they have received almost RM96.9 million in project facilitation fee’s.

 

Now to be fair, on the surface, this is a very good thing for the Company and its shareholders. However, we do need to really understand what this item and its nature.

 

I mean, if your children, started coming home from school with RM10,000 a day from whatever he is doing outside, i would imagine that as a parent, you would be more worried rather than happy. (But if you found out he's doing some weird software stuff that is doing extremely well, you would be very very happy)

 

So, back to the topic at hand.

 

Depending on whether it is 2% or 3% of the Gross Development Value, this indicates proposal for new Bus Terminals in Malaysian since 2014 totaling RM4.8 billion or RM3.2 billion. With the bulk of it happening in 2019.

 

To put things in perspective.

 

For RM4.8 billion, you can buy the entire Sunway Pyramid or even One Utama, the biggest shopping malls in Malaysia, with some of the best locations and still get change.

 

It does not make sense to me that they are RM4.8 billion worth of bus terminals proposal in Malaysia in the last 5 years.

 

This is bus terminals, not Highways or Airports.

 

And to make things really interesting, all these payments since 2014, came from a single party.

 

Maksima Timur Sdn Bhd.  (They also happen to own around 1% of Perak Transit shares).

 

So who are they?

 

 

 

About Maksima Timur Sdn Bhd (Perak Transit 50% Profit Contribution Machine)

Now, according to their annual financial statements, Maksima Timur is an operator of transportation business, property development and investment holding, whilst its property development activities include acting as a project manager for construction of new integrated public transportation terminal complexes.

 

Now, let me be clear. So far things are a little fishy. However, it does not appear to be fraud. As the most important Red Flags are not there. This is not the new episode of China Hustle (Malaysia Edition).

 

The PFF's are actually paid, and they are no long outstanding amounts in Perak Transit receivables (Though if i'm honest, as an ex-auditor, if these two companies are related and want to play with the numbers a bit, its not that difficult).

 

By the way, the company is audited by a small audit firm in Ipoh called, CWC & Company.

 

For the most part, I think the numbers should still be accurate, but for a fee of less than RM10k, I doubt the auditors will goreng them too much into the numbers, especially since Audit Oversight Board Reviews are usually on listed companies, and i doubt this firm has any listed clients.

 

Now, looking at Maksima Timur’s annual financial statements and annual returns.

 

They are no overlapping directors and shareholders with Perak Transit Berhad, which seem to lend credence that it really is a third party company.

 

However, they are a few interesting things in the annual financial statements that don’t seem to make sense for me.

 

 

 

Building Contractor with ~ RM50m Revenue (Without Any Construction Equipment)


 

 

In 2018, this property contractor generated more than RM45 million worth of contract works revenue.

 

 

However, they did it with only RM1.1 million in Plant and Equipment and RM2.2 million in Investment Property (I imagine this is their office, and also property rented out to third parties).

 

 

And if you look at their Plant and Equipment, they generated that almost RM50 million worth of Contract Works Revenue with nothing but RM0.33 million worth of cars, and RM0.001 million in Computer and Office Equipement. Very impressive!

 

Look Ma, No Hands!

 

 

In fact, their “Investments” which consist wholly of quoted shares in Malaysia (and their shareholding in Perak Transit I imagine), at RM10 million (2017: RM18 million), is 3 times more than their Property Plant & Equipment and Investment Property combined (2017: 6 times).

 

Ok, to be fair, maybe they are just a weird pseudo project manager, that for some reason, only recognize a very small part of the project .

 

Honestly, it would be the first time I see something like this.

 

 

 

RM3.2 – RM4.8 billion worth of Terminal Proposals, Contract Work in Progress less than RM60mil

And here is something very interesting as well, for a company that have done proposals for RM3.2 billion to RM4.8 billion worth of bus terminal proposal.

 

The amount of contract works in progress is less than RM60 million.

 

 

Ok, to be fair, just because a proposals is completed, does not mean the project actually gets through.

 

In addition, many of the projects may already have been completed by this property project manager that does not have building equipment.

 

And to make things even more interesting, we can see that their additions in Contract Work In Progress in 2018 and 2017 is RM17.7 million and RM36.6 million respectively.

 

While the amount of Project Facilitation Fees paid by the Maksima Tinur (therefore added to Contract Work In Progress) to Perak Transit amounted to RM18.5 million in 2018 and RM21.7 million in 2017.

 

( I imagine there is some differences in the amount recognized during the year as Perak Transit year end is December, while Maksima Timur's year end is September.)

 

Looking at their numbers, its almost as if their projects consist solely of handling proposals on Bus Terminals from third parties, and paying fees to Perak Transit.

 

One wonders, why do these third parties need to go through Maksima Timur, instead of going to Perak Transit directly?

 

Ok, to be fair, it could really just be those few guys sitting there and managing subcontractors, but even then, the numbers is still a little funny.

 

 

 

Zero Profit (Excluding Gain/Profit from Investment in Quoted Shares)

In 2018 and 2017, the company made RM6.0 million and RM18.6 million in profit.

 

 

Except, if you were to exclude the Fair Value Gain/ Gain on Disposal on quoted shares, which are not taxed (Malaysia does not have Capital Gains Tax), the profit will be zero.

 

Which would make sense of this was a company that is related in some way and in the business of moving around numbers (legally).

 

Or it could just be coincidental.

 

 

 

Conclusion and Valuation

Having done my research, in terms of valuation, I now understand why the price of this company barely moved, despite so many analyst talking about doubling of earnings (and thus price) when the Kampar Bus Terminal is completed.

 

PFF’s contribute more than 50% of the company’s earnings, and the real nature of these things, how recurring are they etc, is all in doubt.

 

In addition, even if all those questions are answered, one major question remains.

 

This bus terminal expertise, does it lie with the company, or the top management of the company.

 

If it lies with the top management of the company, they can very simply just decide to open an Advisory Firm separate from the company and provide these consulting services, and thus keep 50% of Perak Transit's profits all to themselves.

 

As for the relationship between Perak Transit and Maksima Timur (the Number One Profit Generator for Perak Transit).

 

Who knows?

 

It is probably legal, and being an ex-auditor, to paraphrase Shakespeare,
“There are more things in Corporate Structures, Perak Transit Minority Shareholder; than are dreamt of in your philosophy”

 

There is probably some kind of corporate structure, that is kept in line via verbal agreement, handshakes, and honor.

 

In any event, there is a little too much speculation for my taste, and i'm not too keen to spend more money (beyond buying one copy of Maksima Timur's accounts) to find out more.

 

Well,Good luck!

 

And as always if you think i missed out on anything, have a different perspective, or think i am wrong, period. Let me know.

 

Disclaimers: Refer here.

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: PTRANS
  3 people like this.
 
kalteh Interesting case study. Seems like those analyst need to at least dig in as deep as you.
23/05/2020 10:18 PM
Alex™ kantoi. learn scuttlebutt. come see the bus terminal yourself.
23/05/2020 10:20 PM
Choivo Capital 用手子算够了
23/05/2020 10:28 PM
plainer can ask during agm about the maksima timur
23/05/2020 10:28 PM
Choivo Capital One question your should probably ask is on the advertising etc. I dunno how to get rm2m a month lah, if you go visit the amanjaya terminal.
23/05/2020 10:30 PM
robot888 Choivo Capital, why u never mention about Ptrans Debts?
23/05/2020 10:36 PM
plainer where can find the advertising 2m per month info?annual report stated bus charter and advertising income for about 8m
23/05/2020 10:57 PM
Sslee I hope one day SC will have many more people like Choivo in their fraud investigation team so that tough measures can be taken to correct market aberrations, punishing the culpable/fraudster, delisting the failing companies, and cleaning out the riffraff. And make sure whoever breaks the rules will pay a heavy price
23/05/2020 10:59 PM

(CHOIVO CAPITAL) Ragret Del Luna: 10 PE Glove Companies (SUPERMX - 7106)

Author: Choivo Capital   |  Publish date: Fri, 22 May 2020, 9:49 PM


 

For a copy with better formatting, go here, its alot easier on the eyes.

Ragret Del Luna: 10 PE Glove Companies (SUPERMX - 7106)

========================================================================

 

 

Well, the picture is self-explanatory. No prizes for guessing the "Del Luna".

 

Looking at history, missing out on some major bull and goreng runs, appears to be a real talent of mine.

 

Lets list them out.

 

Construction, Technology and Petroleum Refining (2017 Bull Run)
Semiconductors and Steel (2017-2018 Bull Run)
Oil & Gas Supporting (2019 Bull Run)
FAANG & SP500 (2016 to 2019 Bull Run)
And now, the Gloves and Covid-19 (2020 Bull Run)

 

For some of them, I either buy way too little (less than 5%) or sold far too early. I guess some reflection is in order.

 

So, how do we begin? Well, I guess I’ll talk about 3 things.

  • The Bull Run for Rubber Gloves.
  • The Nuances of the Various Factors that really drove prices.
  • Why Glove stocks are at 1X Forward PE.

 

(As many of you may notice by now, talking/writing is a specialty of mine, while making the decisive decision to sell some of some of my other holdings and leverage up to buy Glove Stocks, is clearly not.

 

 

And this is despite understanding the factors I’m about to explain to you, being privy to certain information’s from a Top Glove management meeting 2 weeks before results came out, as well as confirming things with my friends in Top Glove and Hartalega.

 

Its really a talent I tell you)

 

 

The Bull Run for Rubber Gloves

Well, if you’re one of those who are wholly unaware of what has been happening in the KLSE in terms of rubber glove companies, well, you must be one hell of an investor.

 

If you never really understood the meaning of “MooNing” as often used in the cryptocurrency space, well, the rubber stocks such as Supermax, Careplus and Comfort (along with their structured warrants) have risen far faster in the last month that Bitcoin etc ever did in a one month period.

 

Its ascension is quite literally a rocket shooting vertically towards the moon.
(Again, aihhh)

 

Quadrupling or more in less than 1 month.

 

I could elaborate, but that would be the equivalent of explaining water to fishes. There is quite simply no need to.

 

 

The Nuances of the Various Factors that drove Prices

 

 

  • Unprecedented Level of Demand for Rubber Gloves

Not much needs to be said here, every time someone gets swabbed for a COVID 19 test, one pair of gloves will be thrown away, and this applies to even mass testing’s, house visits, contract tracing etc.

 

Demand became so strong, that glove companies today take a 20% deposit (this is unprecedented) on any orders made today, with delivery only happening 1 year from now (earliest).

 

 

 

  • Structural Capacity Constraints

Unlike Personal Protective Equipment (“PPE”), Face Masks, or Sanitizers, there are some very structural constraints built into the supply for Rubber Gloves.

 

In the last few weeks, we would be reading news of some Tom Dick Or Harry, making all of the above items (except for Rubber Gloves) every other day.

 

There is that little girl helping to weave PPE (along with many other textile companies), alcohol companies that have decided to pivot and create hand sanitizers, Louis Vuitton and Razer (a computer accessory company) now produce face masks, and car companies like Ford now create ventilators.

 

The list goes on.

 

But we don’t hear news like these for gloves. Why is this the case?

 

Why don’t I hear rubber tappers or condom manufacturers going into glove manufacturing?

 

Its simple, in order to qualify for surgical gloves, you need FDA approval, a process which can take longer than a year for new companies.

 

In addition, in order to produce these gloves at an economical level, you need machinery and factories that can produce at least a few billion of them per year.

 

This means any additional capacity, can only come from the incumbents like Top Glove, Hartalega, Supermax etc

 

And these additional capacities can only arrive earliest by year end, with the additional supply likely to be nowhere near enough.

 

In the case of increasing production capacity of rubber gloves, its one of those things that just take time, no matter how much money you have to pour into it.

 

Like making a child, one cannot impregnate 9 women in order to have a baby born within 1 month.

 

 

 

  • Price Increases

So limited supply, meets unprecedented demand, coupled it inability to increase capacity quickly.

 

What does this mean?

 

Price increases for OEM surgical gloves at the rate of 5% or so PER WEEK. With own brand prices increasing by 200%-400%.

 

 

 

  • Lower Costs

Due to the virus, demand everywhere else is much lower. Which means much lower costs for the glove companies.

 

Rubber Prices are down 30% from the start of the year.

 

Butadiene (For Nitrile Gloves) are down 50% from the start of the year.

 

Labour Costs is down or even as people have no other jobs to go to. Staff are also a very easy to train unlike the textile industry.

 

Gas prices are down still down around 40% from the start of the year due to lower demand.

 

 

 

  • Everything else is shit.

There is a phrase in a Leonard Cohen song I quite like,

 

“There is no decent place to stand in a massacre.”

 

Well Leonard Cohen have not met rubber glove companies during a virus caused global economic shutdown.

 

They don’t just survive or maintain earnings, they actually thrive!

 

If what you’re looking for, is potential for upward price movements in the short, mid (or, at a stretch) long term, there is quite simply very little else to look at in the market today.

 

Even hospital revenues are technically down, as other surgeries are all down from people either delaying their surgery out of fear, or reduced by management in order to make capacity for Covid Testing.

 

Needless to say, whether you’re a fund manager, retailer or institutions, everyone piled into the rubber glove companies

 

 

 

  • Record KLSE Transaction Volume, Record Retailer Participation

One thing our broker or banker friends would have noticed the last one of two months, is record draw-down of personal loans, house refinancing (a lot of them are for investment into stocks according to a friend at RinggitPlus) and new account creation for new brokerage accounts.

 

In the day for "Work From Home", gambling/trading in stocks have proven to be a popular hobby.

 

Even the best of them like MPLUS is lagging a little, with Maybank's brokerage accounts being close to unusable.

 

In any event, these new retail participants are more than able observe the meteoric rise of the rubber glove companies, and are certainly more than capable of doing first level analysis of the business and share prices.

 

 

 

And thus, we have today.  Share price increases of 5X or more for some of the companies.

 

 

 

 

Why Glove Stocks are at 10 forward PE

Now, the answer behind the clickbait title.

 

Many of you may be wondering, he siao liao?

 

Heart pain until don't know how to read already?

 

Isn’t Supermax etc all more than 70PE?

 

Well, quick question.

 

What happens to the bottom-line when increase in revenue is due to Margin Expansion versus Increase in Volume?

 

Lets do a very high level analysis with SUPERMX's numbers.

And there you go, 10PE. A real bargain (depending on how you look at it).

 

So, what is the market pricing in now for Glove Stocks?

 

Well, the market is basically saying that COVID 19 and its other mutations will be with us for the next 2-5 years at minimum, and that demand for everything will be low, except for rubber gloves and a few other select industries.

 

A stagflation or depression basically.

 

Well, if you think that is the case, it may even be at a slight discount.

 

Again, do note "Target Price" and "Intrinsic Value" are two very different things.

 

 

 

Conclusion

Personally, I do wonder how i failed properly identify and consider the above factors. The information is all there and i even gave some thought to it in March.

 

How did i airball so badly and fail to purchase even 5% for myself?

 

Well, after some consideration, i think the main reason for it is that i tend to instantly discount/ignore stocks that are rising, especially if they are popular and Koon Yew Yin is talking about it.

 

This has also been one of the fundamental reasons why it took me so long to buy companies like Google, Facebook, or even the SP500 index/ Investing Overseas.

 

And so, by error of omission instead of commission (the favorite excuse of every value investor when he fails) , here goes another fortune slipping from my fingers.

 

Aihhhhh. Oh well, at least I’m still young.

 

 

Additional Anecdote 

In the week before the quarterly results, me and an acquaintance (he is a trader) were discussing on glove companies and the above 10PE scenario.

 

We were discussing it as a trade, and this excerpt of our conversation was quite illuminating for me.

 

Choivo: Well, it looks like the market is not pricing in the fact that earnings may be double or quadruple. There appears to be a significant enough gap. So, what’s your trading plan? I think i may actually put 20% on it.

 

Acquaintance: Well, buy up to about 30% of portfolio over the next few days.

 

Choivo: Are you sticking to the 10% Cut loss?

 

Acquaintance: Yes. Gambling must have a cut loss.

 

Choivo: You know, I’m curious, is it even possible for you to be an investor?

 

Acquaintance: You know, i don’t think so. If prices drop by 10%, I cannot tahan and will cut loss instantly. In addition, if price does not move up within one or two days, I also cannot tahan and will cut straight.

 

Choivo: I wonder, if market drop 10% the next day, despite how right this thesis sounds, would you still cut?

 

Acquaintance: Yes. I will cut. If price drops 10%, it means market is telling me I’m wrong, so I will cut.

 

Choivo: And if it goes up 5% after it drops?

 

Acquaintance: I will buy back straight away.

 

Choivo: Why?

 

Acquaintance: Because Market is always right. Market is telling me now that my rule in that case was wrong, and I should not have cut loss, so i will buy back. I have no problems chasing back.

 

Choivo: And if it keeps doing that?

 

Acquaintance: Well, I’ll keep doing it, key thing is to minimize the loss and maximize the gain. If it’s going up, I won’t cut, unless I think everyone is way too happy, and everything that I know, the public also know.

 

Choivo: You know, I really wish I was your broker.

 

 

You know, one thing i did last year was to read the entire Market Wizard series on Traders. I can definitely see some niche that i think i am capable of doing.

 

However, I do wonder if its possible for me to buy something for more than its worth, in order to sell it to someone for a higher price.

 

Ie: Buy High and Sell Higher.

 

I’m not sure if I was capable of buying it at RM4.6.

 

But, in any event, I should have been more than capable of reading into the situation enough to buy a 10% - 15% position when Supermax was RM1.5 or so.

 

Oh well, you live you learn. I hope it sticks this time.

 

Disclaimers: Refer here.

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: SUPERMX
  5 people like this.
 
qqq33333333 hottest thing in town...all welcome to speculate............
23/05/2020 1:48 AM
Choivo Capital Glad it was useful for you.


====
probability Good info which i was actually trying hard to figure out earlier. Thanks Jon!
23/05/2020 3:28 AM
CharlesT It took me a long while to adjust my mentallity towards koon bee play..

U r younger than me i hope u r less stubborn than me too

Making money is rule no 1 in stock mkt
23/05/2020 6:43 AM
Philip ( buy what you understand) I hope your post is not saying what I think it is sharing. That everyone should be buying more glove stocks with made up numbers of suddenly pe10. The ability to rationalize is to know when to go against the herd, and when they are leading you to water. This requires you to put ego out the door.

In any case, I have sold my entire long term holdings in topglove, my second longest holding. When everyone is asking silly prices for my stock, it is time to head out, and find out where everyone is forgetting.

You are welcome to join a telegram group my daughter set up for me, tme/philipcapitalmanagement
23/05/2020 7:10 AM
Sslee Haha Ahchoi is saying he spends night and day reading all the foreign companies annual report and bought:
1) Google
2) FB
3) Stoneco
4) Berkshire
5) Master
6) Visa
7) Aercap
8) Netflix
And day-dreaming “Should I talk about yesterday? When I found out that it was that precise moment, where I made the correct decisions to not to throw all caution to the wind, and jump in with nothing but my underwear left, was the absolute bottom? (My thesis was that margin and forced sales are over, and its time to buy, it appeared to be accurate). And that if I had done so, i would likely not need to head back to the office come the end of the movement restriction, with so many of my high conviction purchases up by 200-300%.”

But miss our “Jaguh Kampung” glove stocks that actually went up 200-300% in 1 month. So he still heading back to the office after the MCO
23/05/2020 8:55 AM
probability I think Philip did the the right thing to sell Topglove........but he should be buying Supermax
23/05/2020 9:09 AM
supersaiyan3 Eh, it depends on its a one off event or a permanent change. For some companies i believe its a permanent change, for others is only a one off event. When this is over, who will still be running at full capacity?
23/05/2020 9:20 AM
CharlesT can last for 2 FYs
23/05/2020 9:20 AM
probability If you go to any pharmacy (my experience in overseas), they sell you gloves in boxes, if you check the brand, it has a local company name.

The name is something that you have not heard of - no connection to Malaysia, but the gloves are definitely from Malaysia.

This shows the distributors buy from Malaysian glove makers and hike up with a significant margin to make money themself (likely much higher margin than the manufacturers).

As such, if you can have your own brand (OBM) like Supermax, it would certainly make a huge difference on profit.

Most importantly, it means Supermax has the competitive advantage of killing other distributors (competitors) being the manufacturer themself.

This vertical integration is indeed very powerful.

There would be no reason for PE rating of Supermax to be not comparable to other big players like HARTA
23/05/2020 9:23 AM
probability May be Supermax should buy a Rubber plantation too, so that they can have their own latex - will be useful to gain competitive advantage at times when oil price shoots up raising raw material Butadiene price (synthetic rubber)
23/05/2020 9:37 AM
Philip ( buy what you understand) This post below is the reason why I'm holding on to QL and selling topglove. Is you opinion that I should be buying Supermax based on greed and fomo? Or based on intrinsic value and looking term growth.

The prices now are speculative prices with future earnings baked hard into current prices.

I prefer to buy companies selling at a nice relative valuation to future prospects.

Or you believe the prices, volume and demand will go higher and at the same rate 5 years from now? That earnings will continue to quintuple next year and stay that way, and shortage will still be unresolved years from now?

>>>>>>>
supersaiyan3 Eh, it depends on its a one off event or a permanent change. For some companies i believe its a permanent change, for others is only a one off event. When this is over, who will still be running at full capacity?
23/05/2020 9:20 AM

>>>>>>>
probability I think Philip did the the right thing to sell Topglove........but he should be buying Supermax
23/05/2020 9:09 AM
23/05/2020 9:42 AM
Philip ( buy what you understand) This level of speculation and greed is horrifying. Can you really think that harta performance and Supermax performance over time is comparable?

>>>>>>>>>>

probability If you go to any pharmacy (my experience in overseas), they sell you gloves in boxes, if you check the brand, it has a local company name.

The name is something that you have not heard of - no connection to Malaysia, but the gloves are definitely from Malaysia.

This shows the distributors buy from Malaysian glove makers and hike up with a significant margin to make money themself (likely much higher margin than the manufacturers).

As such, if you can have your own brand (OBM) like Supermax, it would certainly make a huge difference on profit.

Most importantly, it means Supermax has the competitive advantage of killing other distributors (competitors) being the manufacturer themself.

This vertical integration is indeed very powerful.

There would be no reason for PE rating of Supermax to be not comparable to other big players like HARTA
23/05/2020 9:23 AM
23/05/2020 9:44 AM
freetospeak Thanks Chovio for a great writeup. Got more info from your article. For others, a 2 year bumper profit run is enuff to propel supermax to another level. And move supermax from a 30 million /qtr to a 70 million/qtr business even covid is over. With the next propelling move coming from its contact lens business. i am confident it will keep supermax in the 90 million profit /qtr in 3 yrs time.that is enuff to mantain its price at rm6 at pe 20.even after covid is over.

for how high supermax can run during this covid fever.

to match current topglove marketcap since they might b earning same profit for coming qtr...supermax will hav to reach rm21. or topglove price need to adjust down to supermax price. or they will meet halfway.
23/05/2020 9:47 AM
freetospeak the above assumption is unique to supermax only...other glove counter i am not confident.
23/05/2020 9:52 AM
Philip ( buy what you understand) If you didn't know Supermax well enough 1 year ago to invest in it, what makes you think you suddenly know supermax well enough today to give such glowing opinions? You are basing multiple years of performance off a singular black swan event.

Wouldn't it be more rational to invest carefully, and to buy it when it was at reasonable valuation rather than heavy speculation?
23/05/2020 10:05 AM
lazycat phiip ur recent stock pick kinda no good --> pchem , yinson , gkent

i wanted to ask you what you plan to buy next, but no bother la
23/05/2020 10:09 AM
lazycat i kinda wanted to recommend you some stocks , but you sure pijak my stock pick 1 , so i oso no bother do it lol
23/05/2020 10:13 AM
freetospeak philip..yes i am limited on my knowledge and is craving for more information as well. Whether it is valuable or not is a developing event. my reasonable valuation keeps changing from 1 yr ago until covid strikes, when it develops into pandemic, the valuation keeps changing.
With more information unfolds, the market is more intelligent in keeping the correct valuation.I am jus investing ahead of market and sharing my insight on this.Since most fund invest based on past information and is slow in action. Forward earning is the way to outpaced them.I do not recommend ppl to follow me, but i am just a learner.
23/05/2020 10:15 AM
CharlesT Value investors prefer to look for good stocks which can post 20% growth a year for next 10 years.

They dont like cyclical stock which can go up 200% a year
23/05/2020 10:21 AM
Sslee haha CharlesT now also know how to play KoonBee stocks.

Philip recent bought HKG China Feihe also on the down trend as China moves to impose controversial Hong Kong security law.
23/05/2020 10:27 AM
CharlesT I knew KB games since many years ago...only recently managed to convince myself to join the game
23/05/2020 10:31 AM
CharlesT Money is innocent
23/05/2020 10:31 AM
Sslee Haha CharlesT,
If you can’t beat them join them. Welcome to the music chair club but remember don’t be caught without a chair when the music stop.
23/05/2020 10:37 AM
probability Philip sifu, kindly enlighten all of us here what special characteristics that a company like Harta has against Supermax to cause such difference in PE.

Exclude the recent effects of Covid 19, i believe it boils down to competitive advantage concept you had introduced in i3

please break it down for us to digest...

TQ
23/05/2020 10:58 AM
CCCL The company founder vision.
23/05/2020 1:06 PM
qqq33333333 Kenanga latest projection of $ 230 m and $ 400 M for FY6/2020 and FY6/2021, very aggressive already.......................and then of course, the appropriate PE for abnormal profits............lol............
23/05/2020 1:16 PM
qqq33333333 for all the last 10 years Harta has always had the best metrics in terms of costs, margin, ROCE, cluster, first in nitrile........and I guess IR..........
23/05/2020 1:20 PM
probability Supermax Outlook:
==========

Plant 12 consists of Block A and Block B, each consisting of 8 double former lines with 2.2b pieces each (total 4.4b pieces).

As of now, for Block A, its remaining 3 lines started commissioning in end March 2020 on top of the 5 lines already in commercial production.

For Block B, all 8 lines are expected to be fully commissioned by 2H 2020. Upon full commercial production by 2H 2020, installed capacity will rise 13.4% to 26.2b pieces per annum.

............

Recall, it had completed the acquisition of a piece of land in Meru, Klang on which it plans to build three plants namely Plant 13,14 and 15 which will contribute another 12bn pieces of gloves to its total installed capacity over the next few years.

The 3 plants would add 12.0 billion pieces per annum to the Group‟s installed capacity from 26.18 billion gloves to 38.18 billion gloves when these 3 plants have completed commissioning and in commercial production fully by CY2022.

............

On March 11th , 2020, the Company had also entered into an agreement to purchase another piece of industrial land in Meru, Klang, on which the Company plans to build plant #16. Construction work has already commenced on 2 plants and work on a 3rd plant would commence soon.

............

Total = 42 Billion gloves/annum
23/05/2020 1:46 PM
Philip ( buy what you understand) Ok. There is an option in i3 to maintain your portfolio so as to compare your recommendation versus your results, do you use that?

FYI based on my 2019 started portfolio I have been holding 25% of my portfolio in topglove , and sold it recently as well as star media, documented transactions.

I do not do stock picks, I just share the stocks that I do buy.

I would say my performance is ok,

As I also bought:

Pchem at 4.09
Serba at 1.12
Gkent at 0.46
Yinson at 4.56

At huge volumes on margin. You know that the transactions cannot be deleted or edited right? It's all up there you can check individual transactions.

So looking at the results based on these averaged down figures, do you think I did well or not? When everyone is frozen and scared to buy, I bought when blood was on the streets. And I bought just these few stocks instead of 50 stock picks.

So, how did you do during this period? More importantly how did your recommended stocks do during this period?

>>>>>>>>>>


Posted by lazycat > May 23, 2020 10:09 AM | Report Abuse

phiip ur recent stock pick kinda no good --> pchem , yinson , gkent


i kinda wanted to recommend you some stocks , but you sure pijak my stock pick 1 , so i oso no bother do it lol
23/05/2020 2:02 PM
Philip ( buy what you understand) In a simple word: patents.

Let me bring up an article from 2010 that caught my attention, and caused the rise of Hartalega huge profit margins.


https://www.theedgemarkets.com/article/hartalega-bullish-after-tillotson-suit-dismissal

https://www.theedgemarkets.com/article/hartalega-bullish-after-tillotson-suit-dismissal

Have you been to Hartalega glove factory before? I went in 2015,
and topglove one in 2009 to understand what makes them different from kossan and supermax and comfort etc.

Basically for medical nitrile gloves they have to meet certain size and quality specifications for US supply.
Hartalega has a patented production processes method that allows them to meet those specifications and yet produce commercially at a cheaper rate than all of its competitors, even topglove, and sell at a higher price.

That is why harta is worth 30 billion.

And a very simple question. What is asp for harta vs asp of other nitrile gloves producers.

That is a competitive advantage that supermax does not have. For it to be valued at 8 billion is an exercise in speculation.

I have held topglove for over 10 years and even I have never seen such speculation. Do you really think supermax is worth that much, or this fervour is sustainable?

>>>>>>>>

Posted by probability > May 23, 2020 10:58 AM | Report Abuse

Philip sifu, kindly enlighten all of us here what special characteristics that a company like Harta has against Supermax to cause such difference in PE.

Exclude the recent effects of Covid 19, i believe it boils down to competitive advantage concept you had introduced in i3

please break it down for us to digest...

TQ
23/05/2020 2:21 PM
lazycat this is my 2020 stock pick competition lists

https://klse.i3investor.com/servlets/pfs/131542.jsp

but in real life i only holding 3 stocks , myeg , scomnet , atrium
the reason i split 50/50 , 50% for the 3 stocks , 50% for 5 stocks , 10% each in the competition is because ... i dono .. diversify more , don't concentrate too much , i copy TKW style, 10% for each stocks

but turn out, the stock i hold in real life rebound nicely , i think it will continue going up, what do u think?
23/05/2020 2:33 PM
probability Thanks for the discussion Philip. More clarification below:

.................

Q1:

'Hartalega has a patented production processes method that allows them to meet those specifications and yet produce commercially at a cheaper rate than all of its competitors'


This means the product is the same, but the production method is different. Do let us know the magnitude of the reduction in production cost/margin expansion due to this if you are aware. My guesstimate says 95% of the COP can only be the raw material which should be the same for all competitors.


Q2:

'Basically for medical nitrile gloves they have to meet certain size and quality specifications for US supply.'


Guess the above is the reason why ASP of Hartalega higher than its competitors - for having a niche market. This could be the better explanation for the higher profit margin, unlike COP. Do let me know if there are other reasons you are aware.
23/05/2020 2:43 PM
Philip ( buy what you understand) I will not comment on what I think, as you seem to think I, will pijak your stocks pick. But the more important question is, did you have confidence in your 3 stocks to buy even more when the big discounts came? Or did you hold, wait and see what was going to happen? Or did you take out margin, sell father mother and go all in your 3 stocks during the super discount fear day.

How you buy is just as important as what you buy.

Look at Jon Choi, looking for alpha overseas, when he could have made huge gains in Malaysia by investing in stocks that he knew well locally.

But fear and worry and thumb-sucking is what really separates profitable investors from article writers.

Not only stock picks, but volume, position size and sell picks.

When you see most gurus don't post their portfolio, hide behind xx stocks and XX stocks, then you know they don't actually do as well buying stocks and give excuses as to why they don't maintain a portfolio. Because a trackable portfolio will reveal how well they manage equity, how much risk they are bearing, how they cut losses, and how they ride winners.
23/05/2020 2:45 PM
Sslee Dear Philip,
Result speak for itself so let us compare the past 4 quarter results of Supermax at RM5.75 VS Hartalage at RM 10
Quarter: Revenue: PBT: NP: NP to shareholder: NP margin: ROE: EPS

Supermax:
31-Mar-2020 447,247 95,277 72,349 71,056 16.18% 5.90% 5.42
31-Dec-2019 385,497 41,829 30,022 30,165 7.79% 2.69% 2.31
30-Sep-2019 369,941 32,443 24,960 24,747 6.75% 2.14% 1.89
30-Jun-2019 375,964 16,198 14,004 15,059 3.72% 1.38% 1.15

Hartalage:
31-Mar-2020 777,898 137,575 115,711 115,579 14.87% 4.58% 3.43
31-Dec-2019 796,550 159,697 121,661 121,273 15.27% 4.94% 3.60
30-Sep-2019 709,424 137,327 104,206 103,867 14.69% 4.42% 3.09
30-Jun-2019 640,101 121,654 94,254 94,063 14.72% 4.07% 2.81

So any particular reason why Supermax quarter end 31-March 2020 NP margin jump from 7.79% to 16.18% and EPS 5.42 overtook Hartalage 3.43.

Topgrove
29-Feb-2020 1,229,777 130,374 116,012 115,683 9.43% 2.92% 4.52
30-Nov-2019 1,209,100 125,452 111,757 111,426 9.24% 4.32% 4.36
31-Aug-2019 1,189,594 81,160 80,076 80,052 6.73% 3.29% 3.13
31-May-2019 1,190,235 82,239 75,188 74,665 6.32% 3.01% 2.92
23/05/2020 3:08 PM
probability Perhaps the recent covid outbreak, forced U.S to use Supermax gloves though it had not met the special specification needed earlier..

Who knows, this may catalyze a new breakthrough market for Supermax permanently...

Perhaps we can look it at it another way, Harta has the risk of losing the margin in the future if Supermax is able to penetrate the same niche market
23/05/2020 3:13 PM
qqq33333333 why the sudden jump in profits in supermax not harta?

I guess it has to do with consignment stocks...

OBM stocks overseas stocks are considered sold in period....

whereas Harta sales are to agents.......

different timing
23/05/2020 3:28 PM
lazycat ya man , i have high confidence at the 3 stocks i hold, i did buy more during price plunging hahahaha..
23/05/2020 3:49 PM
Lanesra Good article, for young ones in the forum.
23/05/2020 5:08 PM
EngineeringProfit Enough of poster, research data and advertisement for season one.....

......(pause first and start writing for articles to be posted when its price in tge range of RM10-15, i.e. Calvin's calf turns a little cow - giving milk, bonuses, biggest dividend ever, eyc)
23/05/2020 5:13 PM
PureBULL ... son Choivo ,
u do have high passion in equity investment.

u do know a lot a lot.
most importantly learn from the v BEST, the 1st ancient guru from wall street u must to excel every yr.
there r 2 cycles on klse.
every cycle u n we must catch the Ms u stocks early !?!
23/05/2020 5:35 PM
myongcc5 U r young talented n honest!
Experiences will gets U far one day.
Honestly, I bot 100% into comfort n made double returns. However, ti's did not happen in my young days.
Do not b dismay, there r plenty opportunities ahead of u.
23/05/2020 5:47 PM
willie88 https://klse.i3investor.com/servlets/ptres/55259.jsp


based on this cimb recommendation still hv room to profit, wld u even consider to trade supermax. Another opportunity now ???
23/05/2020 11:03 PM
newbie911 Analyse a lot...but cant earn.
Can see cannot eat.
24/05/2020 10:28 AM
freetospeak seems many here still surprised by the high margin for supermax. My calculation shows supermax margin for next qtr is 31%. Hope will raise anyone attention.

My projection for qtr 3 with profit from 75 mil to 100 mil. my projection was off a bit becoz supermax sold old stock at cheaper pricing n bumper profit appears only in march onwards. Supermax starts backward billing now which commands highest price getting stock first will boost margin many fold.New lines online since march will further boost sales as well.
24/05/2020 10:46 AM
probability when we hear the word vaccine - we need to understand two things:

(1) How good is the vaccine - 100% effective?

Can the vaccine has 100% effectiveness? Even if 1% is not effective, Considering this - would FDA allow it to be used worldwide?
Dont forget its mutating rapidly. Vaccine for current virus may not be effective for the mutated version.

(2) Does the vaccine has - 0% side effects?

Almost all vaccines has side effects and you cannot know what is the side effects till you use it and see the effects after a year.

Say the side effects is minor. Would u still get yourself immunised? After all, the cases are not that high and the risk for young and healthy is almost nil.

..............

Considering the above, would the world quickly implement a newly discovered vaccine without thorough long terms side effects studies and enforce it?

the risk vs gains would not justify such enforcement easily unless they are absolutely 100% sure it is effective and has ZERO side effects.

In my opinion, the above is the reality and you would not hear vaccination enforced for the next 2 years at the least.

Governments would rather encourage self protection measures till then.
24/05/2020 2:10 PM
samheong78 For supermax to invest RM50 million in share buy back tell us something we don't know.
25/05/2020 9:09 AM
Alex™ alex watch comfort from 60sen to rm3...

why no buyyyyyyy
25/05/2020 9:16 AM
Alex™ if sailang all in x3 sell car sell house comfort....wah....can retire d
25/05/2020 9:17 AM
Investor Seriously, PE 10 ???

By going 95% now, they probably have to cut ties with some existing customers. Question is what they will do post Covid19 or several years from now (when their additional capacity comes in).. The competitors will not be HARTA, TOPGLOVE, KOSSAN but the big international names. If SUPERMAX can compete then it's re-rating and game changer.
25/05/2020 2:01 PM
Joon Chan You/Me/We have huge case of cognitive dissonance.

But there are few rational answers, just that some are more rational than the other, depending on tolerance,position size & ideology.

The past few days, 240m ringgit greedy money heading to the moon.

On one had, you argue with Ms.Market, though you are right, it's only in the future you're exonerated.

I'm taking Ms.Market to dinner, making her pay for my meal, then ghosting via stop-loss.

Which is more accurate?
QL will increase in value 98% probability in 3 years.
Supermax will increase in value, 98% probability in 18 hours.
29/05/2020 6:57 AM

(CHOIVO CAPITAL) Hot Potatoes (Hidden Structural Risks in Insurance Companies and Banks)

Author: Choivo Capital   |  Publish date: Sun, 10 May 2020, 11:41 AM


For a copy with better formatting, go here, its alot easier on the eyes.

Hot Potatoes (Hidden Structural Risks in Insurance Companies and Banks)

========================================================================

Here is an interesting statistic.

Across the world, out of the 196 countries in the world, only around 50 or less countries run a budget surplus or balanced budget, ie the country's revenue exceed/equal its expenses consistently.

The rest of the world runs on a deficit and needs to borrow money in order to cover the shortfall in government revenue.

And out of the 50 or less countries that balance their budgets or have surpluses, the significant economies (large enough) are,

  • Macau
  • Hong Kong
  • Norway
  • Singapore
  • Jamaica
  • South Korea
  • Sweden
  • Iceland
  • Bulgaria
  • New Zealand
  • Germany
  • Berlarus
  • Luxembourg
  • Netherlands
  • Czechia
  • Uzbekistan
  • Switzerland
  • Taiwan

Combined, these countries barely consist of 10% of global GDP. In addition, their total surpluses also does not exceed even 3% of the total deficits of the rest of the countries.

And thus the question, who are the ones borrowing money to these countries?

Enabling them spend far beyond their means, and allowing huge fixed costs to build up in economies around the world.

Well, allow me to introduce you to "Basel III" (New Regulation for Banks since 2009) and "Solvency II" (New Regulations for Insurance Companies since 2009).

Both of these two regulations were given rise via directives from the European Union after the 2008 Great Financial Crisis and subsequently adopted worldwide.

 

 

Banks (Basel III)

For banks, Under the new Basel III regulations, there is something called the Liquidity Coverage Ratio, which requires banks to maintain lots of very safe liquid assets like government bonds to cover funding stress.

This ratio also categorizes certain deposits as “non‐operating” and assigns them punitive haircuts when calculating the ratio.

These deposits include deposits received from the retail market, Which includes fixed deposits or current accounts placed by individuals or companies.

In response to these regulations, banks are therefore incentivized to purchase and  hold sovereign debt sold by all these countries running fiscal deficits, while looking for loopholes enabling them to more profitably carry these non‐operating deposits.

These methods include:

  • Asking customers to switch unwanted deposits into sovereign bonds the bank can hold in custody
  • Asking customers to take out loans to buy sovereign bonds and replace the cash.
  • Asking customers to transact through off‐balance sheet derivatives such as
    swaps
  • Asking customers to replace physical cash positions with synthetic look‐alikes, collateralized with sovereign bonds.

All of which drives up the demand for sovereign bonds.

 

 

 Insurance Companies (Solvency II)

The Insurance Companies are also under a similar situation when it comes to their Portfolio they hold and the Capital Charges/Haircuts required for each asset class in order to calculate Solvency Ratios.

Now, its probably not that easy to imagine the above scenarios, so lets put some numbers to it.

 

 

Illustrating Distortions cased by Basel III and Solvency II

Imagine a Bank/Insurance Company, lets call it "Baka-Surance Bank".

Now, for reference, here is a sample Capital Charge/Haircut table. For simplicity sake, we assume that the Capital Charge/Haircuts are the same for both the Bank and Insurance Company.

 

 

Now, a "Standalone Charge", is the Charge for the asset class on its own, while the "All-In Charge" includes other factors such as diversification and duration matching which should theoretically bring down risk, which is why its slightly lower.

Now one thing you will find very interesting here, is that EU Government Debt, or Sovereign Debt actually have a negative All-In Charge, which gives rise to the distortion.

To illustrate, lets use the following example. For our example, we will be using the All-In Charge figures.

 

 

Now "Baka-Surance Bank" holds a portfolio as above, and when calculating Solvency or Liquidity, its asset amounted to ("Original Asset Value"  Less "Capital Charge/Haircut"), (EUR170 Billion less EUR0.8 Billion) EUR 169.2 Billion.

Now, after reviewing their portfolio, it noted that all of its "EU Government Debt 10 Years" are negative yielding. By investing money into these bonds, they are basically guaranteeing that they will lose money.

As the sovereign debt trades to a negative yield, it would be wise to sell it in order to hold cash.

Selling the debt would increase Baka-Surance Bank's liquidity, raise its portfolio’s return, lower duration risk, reduce market risk, and even reduce credit risk, as government debt can default.

Baka-Surance Bank therefore decided to sell all of it and to the "Money Market" ie, they basically chose to hold cash instead.

After the portfolio readjustment, the Portfolio now looks like this.

 

However, if they did this, the Capital Charge/Haircut is now EUR 3.7 Billion, having increased from EUR 0.8 Billion

When calculating Solvency or Liquidity, Baka-Surance Bank's asset now amounted to EUR 166.3 Billion, which is now lower than when it previously held negative yielding sovereign debt (EUR169.2 Billion).

From this, you can see how Basel III and Solvency II practically forces Bank and Insurance Companies to hold sovereign debt.

 

 

Hot Potatoes and what does this mean?

And so, we now have the question.

As governments around the world continue to borrow money to fund ever-escalating budget deficits, and Banks/Insurance Companies are constantly incentivized to keep purchasing these Sovereign Bonds.

Given the size of the persistent deficits of these nations and the size of their hidden liabilities (17 Nobel Laurates on USD200 Trillion Deficit), which over time will inevitably result in the inability of a nation to pay its debts, and require debt forgiveness.

Well, governments around the world today are bailing out the public by selling the future and devaluing their own currency. (By printing money, you basically reduce the value off all the currencies already in the market, ie the value of everyone's cash drops a little.)

Who will bail the bailors?

Where can these Government go for bailouts when its their turn?

Is it even possible to bail out a government?

At one point does an entity becomes too big to bail? What happens next?

Just how much more Malaysian Government Securities can EPF and PNB continue to buy?

And if inflation happens, could we even increase interest rates with worldwide debt at an all time high?

Well, these are questions so big, that i have no idea how to answer it.

There are some topics (like this one) so complex and opaque, that one needs to be highly educated and well versed in the subject, in order to be unclear about the conclusions and be unable to come to an opinion.

“There are decades where nothing happens, and there are weeks where decades happen.” — Vladimir Lenin

I have a feeling that everything will just keep chugging along, until that one moment when we cross the Rubicon, and everything happens all at once.

Fun times are ahead somewhere.

And those young enough are may be to be lucky enough to see the answer to the question above.

 

 

Conclusion

Here's an interesting question.

If cash is trash, bonds are shit and inflation (supply side or demand side, well probably combination of both) is coming.

What do you hold?

Commodities or stocks?

Gold or Google?

What about deflation?

If COVID 19 persists, and continues to kill demand and supply for the next 5 years or so, what do you hold then?

 

Disclaimers: Refer here.

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

  Be the first to like this.
 
Sslee Haha
Hold Top Glove and GL. One for safety and one for food.
My HSBC bank keep asking me to convert by FD to bond as bond give better yield than FD interest.
10/05/2020 1:37 PM
Sslee Sorry typo error QL not GL
10/05/2020 1:38 PM
stockraider Just go and buy banks for long term, even if u take a hit, in long term it will turn out to be just find loh...!!

The banks business model and balance sheet right now are very solid mah....!!

Do not worry loh....!!
10/05/2020 1:54 PM
Yu_and_Mee Calvin, mind to share what do you hold after your article sharing? It seems to be holding anything also useless....?
11/05/2020 7:53 AM
Philip ( buy what you understand) I have never held fixed deposit in my entire life, as I believe the returns from stocks in Bursa is far too great.

One thing you have to realize is that there is no double taxation of dividends from companies. Meaning when you receive dividends locally, there is no 30% tax on dividends unlike in USA stocks.

This makes it far more useful to hold stocks that fixed deposits.

Even when I loss everything during the 90s, I still believed this was true. I put my money in leveraging on ASB by dealing with my bumi staff and friends and converting it to real stock certificates that I held and taking out yearly dividends and splitting it with them.

In my opinion even with the risk of volatility and fraud, holding stocks in the long run will always be better than commodities.

It's not like holding a barrel of oil or bar of gold will multiply itself for you over time. But choosing a company with excellent management and cash that is able to navigate out of this crisis, we will see wonderful growth and returns in the future.

As for holding cash, holding a portion of it as insurance ( and paying the premium that is devaluation) is ok to take advantage of the market. However being all in cash over the long term is silly. I have lived for many decades, and I have seen huge almost every decade. Noodles used to cost 20 cents, and I remember paying 15 cents for a bottle of cola. Imagine holding cash hoard over 60 years, you would be wiped out.

In the end, all I can say is: buy what you understand.
11/05/2020 9:44 AM
Simonalibaba Hold on to GOD. May GOD Bless us all.
11/05/2020 9:48 AM
Lyo82 1 sentence: Invest at your own risk.
11/05/2020 9:50 AM
Choivo Capital I can't say it better.

====
Philip ( buy what you understand) I have never held fixed deposit in my entire life, as I believe the returns from stocks in Bursa is far too great.

One thing you have to realize is that there is no double taxation of dividends from companies. Meaning when you receive dividends locally, there is no 30% tax on dividends unlike in USA stocks.

This makes it far more useful to hold stocks that fixed deposits.

Even when I loss everything during the 90s, I still believed this was true. I put my money in leveraging on ASB by dealing with my bumi staff and friends and converting it to real stock certificates that I held and taking out yearly dividends and splitting it with them.

In my opinion even with the risk of volatility and fraud, holding stocks in the long run will always be better than commodities.

It's not like holding a barrel of oil or bar of gold will multiply itself for you over time. But choosing a company with excellent management and cash that is able to navigate out of this crisis, we will see wonderful growth and returns in the future.

As for holding cash, holding a portion of it as insurance ( and paying the premium that is devaluation) is ok to take advantage of the market. However being all in cash over the long term is silly. I have lived for many decades, and I have seen huge almost every decade. Noodles used to cost 20 cents, and I remember paying 15 cents for a bottle of cola. Imagine holding cash hoard over 60 years, you would be wiped out.

In the end, all I can say is: buy what you understand.
11/05/2020 9:44 AM
12/05/2020 6:18 PM

(CHOIVO CAPITAL) Nuts and Bolts of Investing Overseas (Opening a Foreign Brokerage Account – Interactive Brokers)

Author: Choivo Capital   |  Publish date: Sun, 3 May 2020, 2:37 PM


For a copy with better formatting, go here, its alot easier on the eyes.

Nuts and Bolts of Investing Overseas (Opening a Foreign Brokerage Account – Interactive Brokers)

========================================================================

Over the last month, given the incredible discounts seen in mid-late March to early-mid April, I have been very active in purchasing foreign shares, with foreign equities going from less than 1% of portfolio, to approximately 50% of portfolio.

I had previously planned to make foreign holdings approximately 20% of the portfolio by the end of 2020 organically, via new deposits and disposal of maturing positions.

So much for these plans.

One of the questions I get asked quite often these days by both friends and other investors, is how does one go about investing in foreign shares?

Which broker? Can trust one anot? How do i deposit in money? How do i withdraw money? etc.

Well, this was a topic I studied for some time in order to find (and procrastinated a lot),  in order to find what I would consider to be the best solution for a long-term investor, in terms of price (people close to me would know my love of penny pinching and its occasional and expensive detriment) and option.

This will not be an extremely comprehensive piece as much of of details can be done via your own reading of the processes in the brokerage website.

However, i think it helps answer the important questions on why you should use a foreign broker versus a local one, which broker to use and why, and also the most cost efficient way of transferring money.

Lets begin.

 

Local vs Foreign Brokerages

As many of the uncle and aunties here will ask, Why not just get access via our local brokerages such as CIMB, Maybank Kim Eng etc?

Well,

Fees!

For our local markets, depending of which Exchange/Country you’re looking at, the fees range from 0.4% to 0.7%, with extremely high minimum order prices.

For example:

Transaction Fees Local Brokerage Interactive Brokers
NYSE 0.4%, minimum USD25 +SST 6% USD 0.005 per share, min USD 1
SGX 0.42%, minimum SGD28 +SST 6% 0.08%, min SGD 2.5
HKEX 0.42%, minimum HKD150 +SST 6% 0.08%, min HKD 18

All of this build up to a very significant amount even after just a few transactions.

And the biggest difference in cost for the ikan bilis retail investors like us, is the Dividend Handling Fees and Corporate Exercises fees.

On average, local brokers charge RM50 or so each time they collect dividends on your behalf, while companies like Interactive Brokers don’t charge anything for this.

For a list of the fees in Interactive Brokers, refer below.

Interactive Brokers Fee Listing

There is quite simply no comparison.

 

Options!

Overall, foreign brokerages like Interactive Brokers offer far more flexibility in terms of the kind of instruments available, as well as the amount of markets covered.

Using Interactive Brokers, you have access to Options, CFD’s, Shorting and Futures, which you can use for hedging, or expressing a certain view on the markets or each stock. And you can do it in a very transparent, intuitive and convenient manner.

The only downside is that certain markets (which I like) such as Thailand, Indonesia, Korea, Taiwan, Vietnam and Malaysia are not available on it.

Why? Their fees are too low, if these Exchanges were to allow them to operate in these markets, the local brokerages will go bankrupt.

Even in Singapore, they are not allowed to give Singaporean’s access to Singapore markets via Interactive Brokers, instead Singaporeans when buying shares must go through local brokerages.

 

Why Interactive Brokers?

Which brings us to the second question.

Who is this Interactive Broker and why do you constantly recommend them?

Well, those more familiar with my writings, will note that i actually considered them a wonderful company in a speech i made in March 2019. I didn’t recommend it as a buy then due to the very expensive price, however, the economics of the business is fantastic.

So, back to the question, why Interactive Brokers? Why not E*Trade, TD Ameritrade, Fidelity, Charles Schwab etc?

 

Market Reach

None of the other brokerages offer the width and breath of Interactive Brokers period.

Interactive Brokers Covered Markets and Products

And when they do offer it, they require you to either call the brokerage desk like local brokers, or charge you far higher commission rates.

This one is quite key for me.

 

Fees

Talking about rates, you may now ask, but wait, isn’t E-Trade, TD Ameritrade etc offering “Zero Commission”?

Well, like “Free Shipping”, there is no such thing as “Zero Commission”.

Like “Free Shipping”, “Zero Commission” means the commissions is included in the price you pay for the stock.

How?

Very simple.

These brokerages sell your order flows to high frequency traders like Virtu Financials and Citadel Securities, who in those split seconds, know the price you are willing to pay for the stock, buy it off the market before you and sell it to you at a slightly higher price you would have otherwise paid for it.

At the end of the day, its been shown that on average, including fees etc, Interactive Brokers get you a far better final price.

Now, recently the company started a “Lite” version, where it is zero commission and employs similar methods as other brokers to hide the price, but this option is not available Non-US Residents.

Personally, I prefer and use the “Pro” version anyway as its just better and cheaper.

 

Margin Rates

 

As a comparison, these are the USD margin rates offered by Interactive Brokers.

Not much more needs to be said.

Interactive Brokers also offer margin at very competitive or the best rates across different currencies.

EDIT: Do Note that if you open your account via Tradestation, your margin Rates are similar to those of the other Brokers. Its an error on my part, i apologize.

 

 

Can I Trust Interactive Brokers?

Well, among other things, your account at Interactive Broker is protected by SIPC, up to USD500,000 and a cash sublimit of USD250,000.

More details available here.

They are also one of the most conservative brokers in terms of the reserves.

If after reading the above and you’re still unsure, well, all I can say is, the company is founded 42 years ago, was the first to come out with electronic/online trading for shares and other financial instruments in the world.

It is also listed on the NYSE, and the market capitalization of the company is larger that of Maybank.

If you don’t trust Interactive Brokers, what makes you think you can trust Maybank Investment Bank?

 

 

Opening your Interactive Brokers Account (and other Nuts and Bolts)

Do you intend to deposit, more than USD100K or less than USD100k?

For account with average equity balances of less than USD100k in a calendar month, Interactive Brokers charges at USD10 monthly maintenance fees, which can be netted off against whatever transaction cost during the month.

For inactive investors like me (who is also very kiamsiap), this amount is likely higher than my monthly transaction costs.

(If you’re an active trader on the other hand and expect to spend more than USD10 in brokerage fees per month, you should open your account directly with Interactive Brokers.)

Therefore, in cases like these, what you should go for is an Interactive Broker’s white label account.

A white-label account is where an independent broker uses the Interactive Broker to provide trading services, however, in exchange for the USD10 per month maintenance being waived, the transaction fees charged are slightly higher.

The white label broker i personally use, is TradeStation.

In short,

Amount Broker Links
Less than USD100k Trade Station – Interactive Brokers White Label Account
More than USD100K Interactive Brokers Account

Now, one thing to note is that when you create an Interactive Brokers account, it can be domiciled in different countries, depending on where you are.

For example, if you entered Interactive Brokers website from Malaysia, it may lead you to the HK or Australian site, and if you create it from that website, your account will now be domiciled in HK or Australia.

Usually most people do not notice it, and for most cases, its does not really matter where your account is domiciled.

However, if you want an account serviced by Trade Station, it can only accept those of certain countries, such as UK. In which case, what you need to do is to create it from the Trade Station website, and it will automatically domicile it in UK.

One thing to be clear here, regardless of where your account is domiciled, or under which broker, your account access and benefits is the same, you still use the same platform, have the same reach, get the same margin rates.

When your equity balance starts to exceed USD100k, you can directly remove Trade-Station as a broker from your account, it usually takes less than 30 seconds to do so and about a day to be finalized.

The process of registering for an account is fully online, and all you need to do is follow instructions, click, click, click, click until you reach “Confirm”.

Do note that in order to trade in certain financial instruments, you need to have a certain net worth and income, these are self-declared. Its up to you to be as honest as you want.

There is no difference in the commission rates for cash and margin account unlike Malaysia.

It’s also very easy to activate margin finance in the future (if you choose Cash Account during the registration). Its just a click and 1 day for approval, unlike in Malaysia where you need to sign/pay for stamp duties etc etc.

Kindly read up on their margin calculation very clearly in the event you plan to use their margin finance, you can also email/ask them on any questions your have).

After your complete your registration, it typically takes 3 days to 1 week to confirm your account.

Now, this may take longer these days due to high volumes of people opening their accounts.

 

How do I deposit in money to Interactive Brokers

Interactive Brokers accepts deposit in a multitude of currencies in account all around the world, however, Malaysia and RM is not one of them.

SGD and HKD however does happen to be one of them.

Whenever you transfer money into Interactive Brokers, you will be given a special account number for whichever bank account Interactive Brokers have in whichever country.

The moment the money it arrives in the account, your account is usually updated within 30 minutes.

The question here is cost.

If you are to do an international bank transfer from your Malaysian account to their SG, HK or US etc accounts, you are likely to get chopped your bank around 2-3%, on a combination and of transfer fees, and forex rates given. This is a very significant amount especially over time.

There are a few ways to do international bank transfers cheaply for Malaysians.

  • Open a foreign bank account in Singapore (specifically a Maybank one, or CIMB if necessary).

For Maybank, if you open an ISavvy account, they give you very close to spot rates for Maybank Msia to Maybank Sg Transfers. (RM to SGD). The same goes for (SGD to RM).

For CIMB, if you open a Fastsaver account, they give relatively decent rates for SGD to RM, but horrible rates for RM to SGD.

In any event, whichever account you hold it does not really matter, as the account is mainly fow withdrawing money from Interactive Brokers, for international transfers, a far cheaper way is via money transfer fintech services like Instarem or Transferwise.

  • Use money transfer fintech services like Instarem or Transferwise

One major thing to note here, you cannot transfer money to the US Interactive Brokers account using Instarem or Transferwise. However, you can do so for EUR, HKD, SGD. I have not tried for other denominations. I typically transfer in HKD or SGD as these are the two currencies i like, and i also buy stock in currencies denominated in these currencies.

Just to get it out the way, these two services providers are regulated by BNM. The money transferred to them goes into a “Trust Account” held by a Local Bank.

This means your money cannot be used for any other reason for these companies and that they are safe.

The way these two companies get cheap rates is by not actually transferring money across borders — instead, it matches up payments with those going the opposite direction. So “your” money never actually leaves the country — it’s just rerouted to someone who’s being sent a similar amount by someone overseas. Your foreign recipient, meanwhile, receives their funds from someone trying to send money out of their own country.

Its quite like the Islamic “Hawala” system.

And because of this, the transfers can be done very cheaply as there is no need to pay the numerous types of fees when it comes to international transfers.

A comparison is below.

As you can see, there is quite frankly, no comparison.

On average, Maybank’s international transfer fees are 3 times higher than that of Instarem and Transferwise.

One thing to note, is that sometimes, Instarem is cheaper, sometimes Transferwise is cheaper. (On the day I did this comparison, Transferwise just happened to be cheaper.

This is due to Instarem locking in rates for 24 hours, while Transferwise locks in rates at 44 hours. There are other little things like Instarem not charging for FPX transfers, while Transferwise charges RM1.1 (Both charge nothing for Bank Transfers).

They also give rebates albeit at different rates and the fixed fees do change (usually downwards).

Personally, I have accounts in both and usually check both for prices before transferring.

You can register by clicking the links below.

 

Transferwise

(This is my invite link, if you use it to register, I get a discount on my future transfers and so will you.)

 

Instarem

 (My invite code is, XHkWTn , by using this when you register and make your transfer, i will get a discount on my future transfers and so will you.)

 

Now, some of you may now ask, why not BigPay?

Well, I personally don’t use BigPay for things like these because it’s a loss-making company.

End of the day, as my money is held in a trust account, if the provider goes down, I will still get my money back.

However, its going to be a hassle regardless. As BigPay is also not a better provider, i’d rather just not bother with it.

Additional Note: It does not matter which currency you fund your account in, as you can do foreign exchange for pretty much any currency within the Interactive Broker account itself. The exchange rate used is spot rate, with USD 1 fee.

 

Withdrawing Money from Interactive Brokers.

One thing to note is that Interactive Brokers will only allow your to withdraw money into a bank account with your name on it.

Now as it is very expensive to transfer to a local Malaysian bank account, as the local bank will again chop you on the fee and forex rate.

Now, do note I have not withdrawn money, as quite frankly, I’ve never withdrawn any money from my investment accounts since I started investing. In fact, as around 80% of my salary goes into my investment accounts, i sometimes wonder if i’m working for the sake of enjoying the money or just to buy shares.

However, the process is quite straight forward, open a Singaporean Bank account, whether CIMB or Maybank.

Why these two banks? Its the easiest and they have some perks.

The registration forms is below.

CIMB Registration Form

Maybank Registration Form

The pre-requisite is that you need a Malaysian Accounts in those banks in order to open the Singaporean ones. You need to maintain about SGD500- SGD1,000 in those accounts to avoid maintenance fees.

You can try opening the bank account using other Banks in Singapore, however, its very hard or close to impossible these days for people who are not working there, unless you want to buy Insurance Products, or is a Premier client.

You then withdraw your money from Interactive Brokers to the Singaporean Bank Account, and then use Transferwise to transfer the Money from Singapore to Malaysia. In terms of fintechs, you can only use Transferwise as other fintech’s require a Singaporean Address.

Alternatively, you can use CIMB SG, to transfer from your CIMB SG account to CIMB MY account. Its still relatively cheap.

 

 

Conclusion

All the best, I hope this was helpful. I know I wish I had this before when I was thinking of investing overseas.

In addition, personally I far prefer overseas markets. Malaysian stocks are usually very overpriced, especially for great/wonderful companies, due to PNB and EPF needing to invest the bulk of their money locally. Even the mediocre ones are overpriced tbh.

And to be frank, when it comes to investing, the macroeconomics of the country matter to quite a large extent.

Malaysia as a country, that will forever be beholden to religious, racial and royal considerations, which will slow its economic growth. If I want to invest my money, I want it to be in a place where it is packed with people who are very focused on making money, pragmatic, logical and very hardworking in this regard.

This is a very simple rule to applies across all asset classes, for a simple comparison, just look at property in Malaysia.

Where are the places where property prices have skyrocketed over the last 30 years?

Selangor (Specifically Sunway, Parts of Petaling Jaya, Small Parts of Shah Alam, Subang, Mont Kiara, Damansara, Bangsar), Penang, Johor Bahru.

What does these places have in common?

It is packed with people who are very focused on making money, pragmatic, logical and very hardworking in this regard. (I don’t want to be more specific than this, but you are logical and have imagination, you can come to your own deeper conclusions.)

If you had bought property in Kelantan 30 years ago instead, I doubt the price have even moved.

In fact, if you had bought property in Putrajaya, (where the government tried so hard to make it a good place economically by making it the center of government,  except without attracting people who are very focused on making money), you may even be underwater today.

Good luck.

Disclaimers: Refer here.

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

  5 people like this.
 
hpcp Hi Choivo. Thanks for the very informative write-up. By the way, how do we participate in rights issue? And where does the dividend go? Into trust account? Thanks
03/05/2020 8:36 PM
Choivo Capital Yep.

For rights issue, I'm not sure, but as I understand it should give you the option.
03/05/2020 8:44 PM
Alex™ kk summary

1) instarem KL interbiew
2) tradestation global acc ready
3) instarem wire MYR/USD (kantoi cannot), go EUR then IBKR internal convert
4) ??
5) profit
03/05/2020 8:45 PM
Alex™ ah jon why u no warn ppl that usa eat 30% div?
03/05/2020 8:46 PM
Alex™ tradestation global charges US stock trading $1 per trade ya..

remember, $1 per trade ya....

if you hoot 2 trades in one day, same stock e.g., Gilead buy 50 and buy 10 again, IBKR eat $2

sekian
03/05/2020 8:47 PM
Choivo Capital Yeah this tax all kena, but i make sure to focus on non div paying co's. most co's in US focus on buybacks anyway.

But hmm i definitely need to raise this in terms of ETF's. For SP500 ETF, you guys would want to buy the one listed in London, not in the US, or you will kena with holding tax.

Also one thing to note, there is 30% estate tax if you die, so make sure your family members know how to sell everything in the event of your passing and withdraw the cash quickly.

===
Alex™ ah jon why u no warn ppl that usa eat 30% div?
03/05/2020 8:46 PM
04/05/2020 12:13 PM
Flintstones Jon, which US stocks do you hold?
07/05/2020 10:22 AM
Philip ( buy what you understand) I invest using td ameritrade, as I like being in control of when and how I buy. I don't like being forced to buy/sell every month and being charged $10 a pmonth as a fee.

Yes it is a small amount, around RM45 after conversion. but imagine being forced to spend RM600 a year to use this service? I'm a cheap guy, as there is no way there is a good deal to buy and sell every month, I buy when it is needed, not because I have to.

TD ameritrade suits me better, they also have an office in singapore, and I can choose not to buy any stocks for 2 years and not have to pay any "penalty".


>>>>>>>>>>>

Accounts with balances of $100,000 or less must meet a minimum of $10 a month in trade commissions, or Interactive Brokers will charge the difference as a monthly fee. Accounts with an equity balance of $2,000 or less must meet minimum trade commissions of $20.
07/05/2020 10:35 AM
popo92 Tdameritrade sg charges more than $10 commission per trade. I don’t see why it is a preference choice. Philip securities is a better choice than tdameritade as they offer multi markets with similar charges. IB has the most competitive margin rates I have encountered and their service center are prompted. Commission per trade are very competitive as well. Webull is one good choice too, in aspects they are quite close to IB. They offer free real data quote. Maybe Jon sifu can have a look with webull too
07/05/2020 5:24 PM
blood7 hi Choivo, thanks for writing the article i found it very useful, in fact i am trying to open an account with them now. I have a few questions, in the application the use 'First Name, Last Name' order but our naming system is the opposite. What is the format you submitted in your application? Did you encounter any problem with the identity verification process? Did you encountered any problems with transferring and receiving funds, since our banks in Malaysia and Singapore using 'last Name, first Name' format that will be different from InteractiveBrokers or TradeStation's record?
08/05/2020 2:47 AM
Philip ( buy what you understand) I only bought foreign stocks twice in the past 1 years. So I only paid 20 USD in commissions for 1 years.

Compare that to if I was with interactive brokers. Whether or not I bought stocks, if I did the same thing I would need to pay 120 USD in commissions or capacity payments even if I did not buy stocks at all.

For me as someone who only has 2 stocks in their portfolio ( both which do not pay dividends).

But one thing too be definitely sure of. The capital protection limit is the same 200k usd, so it might be a good idea to spread your accounts around to protect yourself.

In the end just get whatever makes you feel comfortable. But one thing I do not recommend, never overtrade. One of the big problems with new investors is that they buy and sell too many stocks, and they lose out of the hidden costs of trading.

IB system is designed to make you trade more.
Thinkorswim is more suitable for my investing style as I don't have to keep buying and selling every month. Last year when I bought stoneco I bought 200k shares in one afternoon. After that 1+ year of inactivity.

Fyi I use tdameritrade USA. Cheaper rates, not as low as IB, but acceptable for me.

>>>>>>>>

Posted by popo92 > May 7, 2020 5:24 PM | Report Abuse

Tdameritrade sg charges more than $10 commission per trade. I don’t see why it is a preference choice. Philip securities is a better choice than tdameritade as they offer multi markets with similar charges. IB has the most competitive margin rates I have encountered and their service center are prompted. Commission per trade are very competitive as well. Webull is one good choice too, in aspects they are quite close to IB. They offer free real data quote. Maybe Jon sifu can have a look with webull too
08/05/2020 5:54 AM
bursatrader2018 tq for useful info, not sure abt prospects in Overseas, meaning US ?
pls share your insights, any potential market down in the pipeline n what to do then?
newbie here,haiz...
08/05/2020 8:46 AM
David the transaction fees is negligible if you just buy and hold. one of the reasons i use local broker (HL) is because it is easier to structure the will/inheritance.
08/05/2020 8:54 AM
Choivo Capital Didnt you buy a few million USD worth of Stonco before this?

Only USD20 fees ah?

Is it TD Ameritrade ah?

IB if you're above 100k, you wont kena the fees.

====
Philip ( buy what you understand) I only bought foreign stocks twice in the past 1 years. So I only paid 20 USD in commissions for 1 years.

Compare that to if I was with interactive brokers. Whether or not I bought stocks, if I did the same thing I would need to pay 120 USD in commissions or capacity payments even if I did not buy stocks at all.
08/05/2020 2:54 PM
Choivo Capital Nope, dont have a problem with that.

Any verification is with real human beings. So its fine.

===
blood7 hi Choivo, thanks for writing the article i found it very useful, in fact i am trying to open an account with them now. I have a few questions, in the application the use 'First Name, Last Name' order but our naming system is the opposite. What is the format you submitted in your application? Did you encounter any problem with the identity verification process? Did you encountered any problems with transferring and receiving funds, since our banks in Malaysia and Singapore using 'last Name, first Name' format that will be different from InteractiveBrokers or TradeStation's record?
08/05/2020 2:47 AM
08/05/2020 2:55 PM
Choivo Capital By Size

1) Google
2) FB
3) Stoneco
4) Berkshire
5) Master
6) Visa
7) Aercap
8) Netflix

Got a few co's like Credit Acceptance, Synchrony Financials, Ulta Beauty, Collectors Universe, Discovery, Disney etc that i'm stills studying, but it just seems to much simpler to buy more FB or Goog instead.

===
Flintstones Jon, which US stocks do you hold?
07/05/2020 10:22 AM
08/05/2020 3:00 PM
popo92 Philip sifu, i had one account used to be tdameritrade USA too, but they transfer my account to tdameritrade sg now. Not sure why they didn't transfer yours but mine instead. I personally like thinkorswim trading platform better than IB. But most of my portfolio is with IB now as I am using IB margin facility which is incredibly cheap (below 1%). Also IB waived USD 10 monthly maintenance fees if our equity balances are more than USD 100k. I believe its not a problem for you as well.

>>>>>>>>>>>>>>>>>>>>>
Posted by Philip ( buy what you understand) > May 8, 2020 5:54 AM | Report Abuse

I only bought foreign stocks twice in the past 1 years. So I only paid 20 USD in commissions for 1 years.

Compare that to if I was with interactive brokers. Whether or not I bought stocks, if I did the same thing I would need to pay 120 USD in commissions or capacity payments even if I did not buy stocks at all.

For me as someone who only has 2 stocks in their portfolio ( both which do not pay dividends).

But one thing too be definitely sure of. The capital protection limit is the same 200k usd, so it might be a good idea to spread your accounts around to protect yourself.

In the end just get whatever makes you feel comfortable. But one thing I do not recommend, never overtrade. One of the big problems with new investors is that they buy and sell too many stocks, and they lose out of the hidden costs of trading.

IB system is designed to make you trade more.
Thinkorswim is more suitable for my investing style as I don't have to keep buying and selling every month. Last year when I bought stoneco I bought 200k shares in one afternoon. After that 1+ year of inactivity.

Fyi I use tdameritrade USA. Cheaper rates, not as low as IB, but acceptable for me.
08/05/2020 9:32 PM
BatmanGMT Foreign brokerage are offering very attractive rates. The trouble seems to be withdrawing funds from the brokerage account into local bank account. Maybank and CIMB has tightened criteria and no longer accept singapore account application without employer pass or education proof (please correct me if I am wrong)
09/05/2020 1:53 PM
Alex™ 1) Google - p/fcf > 30...apu....
2) FB - ads...
3) Stoneco - warren punya
4) Berkshire - recent after agm kena
5) Master - no comment
6) Visa
7) Aercap
8) Netflix

follow me SEIC (10%), confirm u like. Buy lower than me $52
11/05/2020 3:21 PM
Alex™ OTCM confirm u like x2
11/05/2020 3:22 PM

(CHOIVO CAPITAL) Lessons from Golconda – A Reflection & On Moving Forward.

Author: Choivo Capital   |  Publish date: Sat, 28 Mar 2020, 5:36 AM


For a copy with better formatting, go here, its alot easier on the eyes.

Lessons from Golconda – A Reflection & On Moving Forward.

========================================================================

Well, what an eventful month it has been to say the least.

 

This was something I’ve been thinking about writing and reflecting on for the last few days, but I could never really put my finger on what I should write about. Especially since there is that possibility where i may publish this.

 

Should I talk about my fund falling by almost thirty something percent before recovering somewhat?

 

That odd feeling of utter calmness, as I watch my net-worth fall by the equivalent of almost 2 years’ salary, and instead of feeling despair, i’m just sitting there wondering what should i be buying , when should i be buying and how aggressive should i be in buying?

 

Or,

 

Should I talk about the frantic drawing down my credit lines to about 40% - 50% of my equity size then to pour them into foreign equities for the first time? And the trepidation i felt wondering if i drew down too much, and if i’ve left enough buffers to prevent margin calls or forced selling?

 

Or,

 

Should I talk about some of the most amazing deals I have ever seen and bought?

 

AER Capital at USD10.5 (The best aircraft leasing company in the world at 1.5PE). Park Resorts & Hotel Inc at USD4 (The company holds the hotel portfolios of Hilton, with low leverage and 20% dividend yield at that price). BOC Aviation, Synchrony Capital, Credit Acceptance, Booking Holdings, Google, Dart Group?

 

And the stress I felt buying them as I could only do a quick analysis before buying them in order to not miss the opportunities.

 

Or,

 

Should i talk about the moment right after i first used all my excess cash and initial credit lines, when prices decided to instantly dive down by another 50%?

 

Or,

 

Should i talk about those sleepless, restless nights, as i pour over the accounts, desperately trying to read thousands of pages, or at least 5 years worth of annual reports for each company and any accompanying research, whilst the Dow Jones nosedived another 12%, representing both an increasingly attractive opportunity and an chance this opportunity will no longer exist.

 

To be torn between the urge to study more and be prudent, whilst looking at what was already a wonderful deal become so much more incredible, that i wondered if i would ever see one like that again?

 

Or,

 

Should I talk about that moment when i was infected by the mood of a Malaysian Value Investing Whatsapp Group I co-founded, the inevitable outcome of discussing about CoViD-19 with a group of people desperately trying to get our doctorate in epidemiology within a few days.

 

Or,

 

Should I talk about the 2 days, where i went from from emulating my heroes Warren Buffet, Charlie Munger etc, to desperately trying to divine the trading and timing secrets of Victor Niederhoffer (a two time bankrupt) and Jesse Livermore (who died bankrupt), constantly wondering how to time the exact bottom, in order to dive into it with nothing but my underpants, and make enough to retire after these few months?

 

To in those 2 days, momentarily turn back into a market addict, watching the markets every 30 minutes and reading market analysis done by idiots (tend to be market talking heads, journalists or economists), instead of tuning all the market noises out and focusing solely on the fundamentals.

 

And then going cold turkey from any exposure to market news, returning to my center, and focus on staying at that profitable yet safe balance between greed and fear.

 

Or,

 

Should I talk about yesterday? When I found out that it was that precise moment, where I made the correct decisions to not to throw all caution to the wind, and jump in with nothing but my underwear left, was the absolute bottom? (My thesis was that margin and forced sales are over, and its time to buy, it appeared to be accurate).

 

And that if I had done so, i would likely not need to head back to the office come the end of the movement restriction, with so many of my high conviction purchases up by 200-300%.

 

Or,

 

Should I instead talk about how i find myself now writing this piece, to better reflect over the hectic and dramatic occurrences over the last few days and my actions during that period?

 

Well, I guess, I’ll talk about 3 things.

 

  • COVID-19, The Market & This Recession
  • A few companies I find compelling given current valuations.
  • How i plan to move forward.

 

 

 

COVID-19, The Market & The Economy/Recession

 

COVID-19

Much has been said about COVID 19, and so I don’t intend to elaborate too much on it, as i imagine that is all everyone have been reading about the last few days.

 

However, I would just like to raise two points, especially to people comparing it to the Spanish Flu (1918-1920) which killed roughly 100 million, or the Bubonic Plague, Cholera, Black Death etc.

 

Antibiotics were only really discovered in 1929 (Penicillin) and Antivirals was only properly understood in the 1980’s.

 

Such tools were not available previously. Humans had two options, either survive long enough for herd immunity to take root, or die.

 

Having said that, based on the statistics below, this virus is significantly worse than H1N1.

 

COVID 19

H1N1

R0 - Basic Reproduction Number*

*How infectious it is. The higher the number, the more infectious it is

1.45 2.5
Mortality Rate 0.02% 0.8%-21%
(Depending on treatment available, age, blood type, and any preconditions)

By the end of H1N1, about 1.4 billion people were infected with 200-500 thousand deaths. Given the above numbers, it appears that COVID will be much much worse.

 

And given the initial response, especially in countries like America, Europe, India, Pakistan, Africa etc, things could have definitely been much worse, especially if we handled it the way we handled H1N1, which really only affected Asia.

 

However, when thinking about the future, we need to do more than just extrapolate the “Now” into the future.

 

We must also account for natural feedbacks.

 

The more serious and drastic the situation, the more serious and drastic the response.

 

Couple that with the fact, we are much more connected these days when compared to 2009 due the sheer proliferation of the internet and the sheer size of our amygdala’s which is especially attuned to danger and threats, this resulted in the the entire world (other than a few countries) quickly taking very drastic actions.

 

As of today, more than 101 countries have closed their borders, or implemented movement restrictions / lockdowns.

 

1-27. 27 members states of EU
28. United States
29. China
30. Albania
31. Angola
32. Australia
33. Bolivia
34. Cameroon
35. Canada
36. Cape Verde
37. Chile
38. Colombia
39. Congo
40. Costa Rice
41. Cyprus
42. Denmark
43. Djibouti
44. Ecuador
45. Egypt
46. El Salvador
47. Georgia
48. Ghana
49. Guatemala
50. Guyana
51. Haiti
52. Honduras
53. Hungary
54. India
55. Kazakhstan
56. Kenya
57. Kuwait
58. Kyrgyzstan
59. Latvia
60. Lebanon
61. Libya
62. Lithuania
63. Malaysia
64. Mali
65. Moldova
66. Nepal
67. New Zealand
68. Norway
69. Oman
70. Pakistan
71. Panama
72. Peru
73. Philippines
74. Poland
75. Portugal
76. Qatar
77. Romania
78. Russia
79. Rwanda
80. Saudi Arabia
81. Serbia
82. Singapore
83. Somalia
84. South Africa
85. Spain
86. Sri Lanka
87. Sudan
88. Suriname
89. Sweden
90. Tajikistan
91. Trinidad and Tobago
92. Tunisia
93. Turkey
94. Turkmenistan
95. Uganda
96. Ukraine
97. United Arab Emirates
98. Uzbekistan
99. Vietnam
100. Yemen
101. Zimbabwe

 

More countries are expected to start closing borders, and existing countries with closed borders will extend those travel ban until May, especially now that Boris Johnson as well as Prince Charles are both victims to the disease.

 

I don’t think anybody expected governments to just shut down. Never in the history of the world have humanity just shut down like this.

 

Even during the Spanish Flu that killed 100 million, people still went on with their lives, albeit in extreme fear.

 

It also helps that it took China only 42 days to map the CoVid-19 Genome (versus 3-4 months for H1N1), and that there is this incredible global urgency pushing the FDA to quickly approve testing etc.

 

Having said that, I think that China will be the first to come out with a vaccine, and whether the FDA gives approval for it, the rest of the world will be using that vaccine.

 

We will be entering a new age where people take medicine manufactured in China.

 

My own opinion is that peak infections should be within the next 2-4 weeks, with subsequent increases mainly due to more testing being done and updating the numbers.

 

Don't take my word for it though, i have not passed my epidemiology exams yet.

 

 

 

The Market

During this period, as many would have noticed (you’d be one hell of an investor if you hadn’t), and repeated ad-nauseum throughout, the market has fallen by about 35-40% (depending on which market you mean), at a record pace not even seen during the 2008 Great Financial Recession.

 

Why is this so, there are probably as many opinions as they are words in this article, but i can't help but take a stab at it too.

 

I think it is due to a confluence of various factors, all of which were operating in the same direction, at the same time, while feeding off each other, that caused, as what Charlie Munger would call, a Lollapallooza effect.

 

The factors are as below.

 

  •  COVID 19

 

  •  Oil Price crashing from Saudi Arabia going on a price war with Russia.

 

(This is the external view.  I don’t think this is really the case.

 

I think this is more of Saudi Arabia and Russia taking the only logical route of crashing oil prices when demand are at an all time low to try and either bankrupt US’s oil production companies, or bring US to the bargaining table.

 

What’s the point in supporting prices, if it only results in subsidizing the US shale industry which continues to pump increasingly larger amounts?

 

And what point is there in attempting to control oil prices when the US is the biggest producer of oil in the world right now, and pumping however much they want.

 

It’s a lose-lose situation, and this is the most logical outcome).

 

  • The Saudi’s pulling out money from the biggest hedge funds (Bridgewater, Citadel, 2 Sigma, AQR and Renaissance) in the world to fund themselves while prices are low.

 

And these hedge funds are all running risk parity strategy, which requires significant leverage, and the resulting sells off’s created dramatic moves across all asset classes; Gold, Equities, Bonds and Forex. Imagine this, even Gold went down, and this was supposed to the safe hedge.

 

  • Volcker rules, which were reenacted post 2008, that requires risk limits to be cut significantly when volatility increases.

 

This means, when you have a large position with a limit of say USD500mil, when volatility happens and you intend to prove your liquidity, the Volcker Rules now says your limit is USD100mil. Instead of now proving liquidity, you now must reduce position size.

 

  • Increased volatility means, that banks have to now increase lending rates to compensate for higher risks, from say Libor +35 to Libor +90 for Secured Treasury Repurchase Agreements

 

(This is where people currently borrow through a process called sponsored repo, in which they ask a large bank to act as a middleman, pairing their government bonds with money-market funds willing to lend cash.

 

The bank then guarantees that the parties will fulfill their obligations — repaying the cash or returning the securities. Firms trading through the FICC contribute to a fund that would cover a borrower’s default. This is also known as Repo’s).

 

Most hedge funds rely on Overnight Repo’s for funding. Except this time there is was not enough cash, and with COVID turning large amount of people in the world risk off, and increasing demand for cash, liquidity instantly dried off.

 

  • And here is where it gets interesting, corporate borrowing also gets screwed up here. When a bank borrows money to a corporation in the US, due to regulations, the must hedge this by shorting the stock, or buying Credit Default Swap (CDS).

 

Now CDS’s are essentially insurance on the bonds of a company against default. And it is calculated taking into account the price of the Bond and volatility. The price of a CDS’s also affect the price of a bond somewhat.

 

Now, when you had the situation 2-3 weeks ago, where volatility was so high that there was no offers in Singapore Bond Markets, you get very interesting scenarios when it comes to the prices of the CDS’s.

 

And banks need to constantly short the stock and buy CDS’s, which increases pressure on the market.

 

  • As prices fall and sovereign funds around the world see this, they too start pulling out funds and running from the hills, cause even more pressure and more sell down.

 

  • And as prices even fall further, the rich get hit first, as they are usually far more leveraged given their access to the "valuable" advice of private wealth consultants.

 

The sheer amounts of margin calls in Singapore Private Banking 2 weeks ago will boggle your mind. These forced selling and margin calls result in prices falling even faster.

 

  • As all these is going on, the retailers themselves see prices falling, and catches the first red herring they see, COVID-19 and its increasing infection counts, they themselves start selling, and as prices fall further everyone is now getting margin called.
    And through this all, we have algorithm funds, which by some estimates contribute about 50-80% of the daily transaction volume in the stock market, giving rise to greater volatility.

 

And so, we now have the situation from 23 March 2020, where it hits the absolute bottom at 30% - 40% down. Whoever is supposed to get margin call and have their shares forced sold, have been called and their shares sold, or collateral provided, resulting in selling pressure being greatly diminished.

 

Before long, markets start shooting up as they see the sheer discounts available, and positive news become available, which indicated that the markets priced in a depression, while it appears that we are only in for a recession.

 

As a friend said,

 

“When I was stocking up on food due to COVID 19, it never struck me that, if I actually needed to eat this food, chances are I would not want to be in the market then”.

 

Me too bud, me too.

 

 

 

The Economy/Recession

And so, comes the question, what does this mean for the economy. How would these shutdowns affect it?

 

Well, not good, at least for the short to mid (maybe) term.

 

But long term wise, we are right on track. This is a recession and not a depression.

 

One thing about the economy, is that significant parts of it are due to the emotional response of the participants on hand.

 

A prolonged depression/recession happens when sentiment becomes so bad, that people quite simply do not want to spend money, instead all they can think about is saving money or paying back debt (if the world consisted of people like me, we would be in for a permanent depression).

 

There are a few key things that are very different in the previous recessions and depressions.

 

  • Governments (it really applies a lot more to reserve currency type countries) often did not really know how to handle it.Instead of printing money or jump starting the economy by taking on huge infrastructure projects, they decided to take on austerity measures, which destroys the sentiment even further, and may even make it a semi-permanent mode of mind, resulting in what is either a depression, or a balance sheet recession.

 

And for those that wanted to print money/give liquidity but couldn’t/shouldn’t, well hyperinflation till you die lah, but that’s another story.

 

  • This time, the key fear of all recessions is simply not there anymore. There is quite simply, zero fear of bankruptcy in the markets now, as the governments around the world have simply agreed to cover some of your losses and provide all the liquidity needed to ensure your survival.

 

What does this all mean?

 

Well it means that short to mid-term, you are fine, and what you see in the markets now is pretty close to the deals of a decade (especially since there isn’t any right issue kind of deals, especially in the US, instead it’s a flat out loan).

 

It may go down another 10-15% from the economic numbers being worse than expected, but this is very close to the bottom.

 

But what does it really mean, long term wise in terms of inflation? Well that is a question for another day.

 

And is the current bailout/stimulus enough?

 

No idea, but whatever additional stimulus or bailout needed, it will be done. I do wonder a bit more about consumer credit’s and how it will be affected if people do not pull a salary for two weeks and instead lived off handouts, but we will see I guess.

 

The bigger question for me now is this, will this experience cauterize the experience of this generation to start saving money a lot more, and thus slowdown the recovery?

 

I quote,

“Growth in consumer credit has stalled. In February, China’s short-term loans to households dropped 450.4 billion yuan ($64.5 billion), the biggest monthly decline since February 2007. Longer-term household loans, including mortgages, added just 37.1 billion yuan, the weakest growth since February 2012, according to data from Wind Co.

 

The coronavirus epidemic has caused “China’s first credit demand disruption in history,” said Richard Xu, a Morgan Stanley analyst. While the disruption is expected to be temporary, he said, its duration is uncertain and will depend on income growth. Still, China’s overall credit demand could start to rebound in the second quarter assuming the virus is contained, he added.

 

Zhang Yu, a property-firm employee in the central Chinese city of Zhengzhou, said he stopped taking taxis after he returned to last month work and walks instead.

 

Vanessa Hu, a 31-year-old brand manager for a condom maker, said she would splurge on several overseas trips a year. She sometimes took out short-term consumer loans offered by Chinese mobile payments giant Alipay to cover costs. Not anymore.

 

“My generation has never been through a major crisis before and most believed China’s economy will only keep growing,” she said.

 

She plans to skip all trips abroad this year and canceled her private Thai boxing and yoga classes. “Even when the coronavirus pandemic is over, I have no interest in overspending,” she said. “I want to save like crazy.”

 

It does appear that demand growth will not be as V shaped as we would like. I guess we'll find out soon enough.

 

 

A few companies I find compelling given current valuations.

 

KLSE

  1. Petron Malaysia Refining & Marketing BerhadI wrote about it before and I don’t think I need to explain further.
  2. Magni-Tech Industries Berhad – (ROE excl Net Cash: 40%), (EV/Earnings: 3 times)
  3. Favelle Favco Berhad – (ROE excl Net Cash: 15%), (EV/Earnings: 2.3 times)
  4. Lii Hen Industries Berhad – (ROE excl Net Cash: 28%), (EV/Earnings: 3.2 times)
  5. Poh Huat Resources Holdings Berhad – (ROE excl Net Cash: 16%), (EV/Earnings: 3 times)
  6. Hong Leong Industries Berhad – (ROE excl Net Cash: 30%), (EV/Earnings: 3 times)
  7. Homeritz Corporation Berhad - (ROE excl Net Cash: 30%), (EV/Earnings: 2.5 times)
  8. Uchi Technologies Berhad - (ROE excl Net Cash: 250%), (EV/Earnings: 10.5 times)

 

These are companies who i think their earning power will not be diminished after this virus blows over, and have a strong history of paying out earnings, and have good/decent capital allocation abilities (ie no unnecessary ventures).

 

They are others I did not include in this list, such as RCECAP, ALLIANZ, AEONCR, TIMECOM, MUHIBBAH, LCTITAN, GKENT, PCHEM etc.

 

This is mainly because I don’t find them as attractive given the current opportunities in the market.

 

And as for TIMECOM, despite me thinking it has one of the best business models in Malaysia, given the current opportunities, its just too expensive.

 

At 25 times earnings (what I think its priced now after adjustments for tax), they are better businesses at better prices with better growth rates out there.

 

 

HKSE

  • Tianyun International Holdings Ltd

China based Processed food and jam maker. Listed in HK, 20% growth topline and bottomline for a long time. Net cash, 4.5PE, pays dividends.

 

  • IGG Inc

Maker and owner of some of the most popular android games. Net cash, 5PE, pays dividends.

 

 

HKSE Shanghai

  • Shanghai International Airport Co. Ltd.

Only airport in Shanghai. This company is net cash and grew topline, bottomline and traffic at 15-20% per annum for the last 3-4 years.

 

Very simple question, right now china is building an unbelievable amount of goodwill with the rest of the world by giving aid during this CoVid crisis.

 

This country also turned 71Bil GDP in 1970 to 14.3 trillion in 2019 (a 200X / 200,000%) gain in 49 years, a compounded growth rate of 11.5%, and is also packed full of Chinese who love to make money and ruled by a system engineered to create competent and preferably benevolent dictators.

 

10 - 20 years from now, do you think China will be much richer than today?

 

Do you think more people will be going to Shanghai?

 

Do you think similar growth rates can be maintained for passenger growth?

 

I think yes for all three.

 

Especially since the major shareholder is the Shanghai Government, who has every incentive to make sure traffic growth, revenue and profitability increases. Its very rare to have a Government who wants the same thing as you.

 

And this is Shanghai, some of the most expensive piece of land in the world, do you think you can find another big patch of land to build airport?

 

And if you do, do you think it will be more convenient than the current one?

 

I think not for both.

 

And what is the valuation given for this wonderful business that can grow 15% to 20% per annum comfortably for the next 10 years at minimum?

 

Enterprise Value/Earnings: 21 times. And its in Renminbi too, not Ringgit Malaysia. Why do people (more accurately, why did i) bother with KLSE.

 

 

NYSE/NASDAQ

 

  • Google

Doubled earnings in 3 years, and grew 15% year on year for 5 years.

 

This company literally forms the backbone of the internet and has more than 97% market share in every country except for China (China Wall), Japan (75% Market Share, Yahoo Japan 21%) and Korea (60% share Market Share, Naver 20%).

 

Maybe I’m stupid, but after studying it for quite a while, i noticed that in the last two they are taking a lot of initiatives to stop giving free organic results to businesses that survive mostly on Google.

 

Look at Tripadvisor, Trivago etc, their profit dropped like a rock in 2018 and 2019, why?

 

Google created google hotels, a better of tool to present paid ads, which make people much more inclined to click on paid ads instead of organic ads, instantly driving up cost for people who rely on google for their business.

 

This is also the backbone of the internet.

 

There is a saying I remembered, To keep a loyal and great follower, you must spend gold and silver. But to find a great person and have them follow you, gold and silver is not enough.

 

It is far far far easier for Google to maintain their market position, than for you to displace it.

 

Right now Google has a market capitalization of USD750 billion, if someone gave me USD1 Trillion and asked me to replace Google, i wouldn’t even know where to start, and the money is not even close to being enough.

 

I may be a bit stupid for this, but honestly, for many businesses, give me enough money, and I know how to replace it.

 

It may not be profitable or as profitable as the previous one, but I think I can get very significant market share given enough money, but when it comes to Google, I honestly have no idea how to even go about.

 

The only idea I can think of is, somehow get a product as good as google’s, and it needs to pervade every part of the internet.

 

And instead of having people pay you to put ads, you now pay people to put ads on your search engine, and you also pay people for using your search engine etc. And you pray to god, however much money you have is enough to burn google out and gain enough market share, to enable you to start charging.

 

I wonder if there is even enough liquid cash to in the world to make this happen.

 

And the price for this wonderful business that doubled earnings in 3 year, and grew 15% year on year for 5 years.

 

Enterprise Value/Earnings: 17 times.

 

Honestly, don’t even need to think.

 

10 years from now, I guarantee at minimum 80% of ad revenue will flow through Google and Facebook.

 

 

  • Facebook

There is only one way to beat Google, which is too have people know your site name directly and visit it directly.

 

And Facebook is number 1 on this.

 

There is quite frankly no better aggregator of information than Facebook.

 

I don’t know how to make this any clearer. You want a place to be able to keep updated with friends, family, news, articles, hobbies, whatever it is, as long as its not illegal or too damn controversial, this is it. You really only need just Facebook and Instagram.

 

Facebook is also the reason why new YouTuber’s are getting a lot less these days, with many of them operating directly on Facebook. They are now the Kings of Short Videos, with Youtube focusing on the long ones.

 

With the gigantic wealth of information of they have on your life (and the fact they use your Whatsapp chats to identify what your interested in at this moment in time), they can deliver perfectly targeted ads to you.

 

In South East Asian countries, ads on Facebook actually give way better returns than ads on Google. Literally the only scenario where Google loses on ads.

 

And the price of this great business that grew topline and bottom line at 20% per year for 5 years?

 

Enterprise Value/Profit: 17 times (excluding 5bil one off legal cost in 2019).

 

Don’t need think so much.

 

Honestly with this kind of prices for these kinds of businesses, I don’t know why we even need to bother with KLSE markets. Our glove-makers cost 3 times more than Facebook or Google, and the business is nowhere near as good, look at Hartalega's (amazing management) profit margin go down every year.

 

 

  • Berkshire Hathaway

Warren Buffet's company.

 

Enterprise Value (exclude investment portfolio)/Earnings: 10-13 times.

 

Why bother with KLSE really.

 

 

 

How I plan to move forward

Last year, I decided to slowly start the process of moving most of my portfolio to foreign markets over time.

 

I estimated that I could move maybe 20-25% to foreign markets in 2020, by unwinding some of the positions that I expected to go up (joke of the year), and moving in all new cash to it directly.

 

However, the events that transpired in the last month, resulted in me drawing down credit lines and additional cash very quickly and pouring it all into the foreign markets.

 

Today, it is currently 35% plus of my portfolio and growing quite swiftly I would think.

 

 

Long Term
Malaysia as a country, that will forever be beholden to religious, racial and royal considerations, which will slow its economic growth.

 

Nice place to live, cheap cost of living if you’re earning foreign currency, but not a good place to make or invest money.

 

I want to invest my money, in a place where it is packed with people who are very focused on making money, pragmatic, logical and very hardworking in this regard.

 

This means China, Taiwan, Hong Kong (mostly China companies that are listed in HK) and Singapore.

 

And in terms of currency, i do not see any future increase in demand for our currencies, nor do the size of our debt give me any comfort (we are not reserve currency of the world, so any increase in debt is not a good thing).

 

Long term wise, I would rather keep my money in Singaporean Dollars.

 

Singapore runs a fiscal surplus every year except in special situations and have more than USD 1 trillion in reserves. To overcome this COVID19 recession, they merely needed to dip a little into that reserves.

 

Malaysia on the other hand, probably need to increase government debt by at least 15%.

 

And in terms of investment, I think I’m going to be much pickier about the companies I invest in.

 

Coming into this recession, I had about 15% of my portfolio in net-nets etc. They did not hold up in price, nor was I inclined to top up given the other opportunities on hand, which speaks volumes.

 

I would have rather they be cash.

 

Its probably time for me to get a “You’re not a liquidator” tattoo, to really carve this into my brain.

 

There is little point in buying net-nets, especially property companies (where you will likely get privatized at far below RNAV or even Net Asset), unless you know you can hold at least 30-50% of the votes and get your own Board of Director seat, and liquidate / financialize the company.

 

 

Short Term

Well, as I said earlier, i had a real struggle with this, trying desperately to time the bottom for a grand total of 2 days before coming to my senses.

 

In the end, I managed to calm my head down by remembering that knowing where markets will go to, is important, but unknowable.

 

The goal is to know what is important and knowable, and to work on that.

 

Then, I proceeded to take Charlie Munger’s advice and invert.

 

I decided to find out, what would I regret 3 years from now about these few weeks / months and, to avoid doing that.

 

What i know is this, 3 years from now, i will regret 3 things.

 

  1. I did not buy enough or aggressively enough.
  2. I bought too much, over-leveraged and ruined myself.
  3. I was extremely wrong about my analysis, that even such depressed prices were not enough to prevent a permanent loss of capital.

 

I’ll just try and avoid all 3.

 

And if this recession turns out to be a depression, and it lasted for 3 years along with the virus.

 

Well, I don’t think cash is what I wish I was holding, it would be a basement full of food.

 

And so, I’ll buy a bit more canned food or dried food than usual each time, sharpen that big parang, and exercise more so that I’m not useless and can defend myself, my family and my food during a zombie apocalypse.

 

Probably should find a way to buy a gun if I see even a hint of a semi-zombie. I kid, i kid.

 

 

 

Conclusions

I paraphrased the title of this piece, with the title of a book from John Brooks.

It was called “Once in Golconda” and was about the rise and fall of the 1930 Great Depression.

John Brooks also happened to have written "Business Adventures", which Warren Buffet and Bill Gates called the best business books they have ever read.

Its pretty good, here is a link to a copy.

Disclaimers: Refer here.

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

 

  WaKaLuGong likes this.
 
Philip ( buy what you understand) What use for titles, ideas without conviction and concrete results is nothing more than dreams.

What is the difference between Calvin tan and choivo? Nothing. Both write good articles, and both say wonderful things.

But would you buy rcecap? Or pay rm5000 for a "research" into rcecap?

>>>>>>>>>

Posted by Sslee > Mar 28, 2020 10:41 AM | Report Abuse

Haha,
Thinkers value ideas
Egoistic value his own opinion
Rich people value the length of his sausage
And super rich people value title
So when Philip going to get a Dato, Dato’ Sri, Tan Sri or Tun title?
28/03/2020 10:57 AM
Philip ( buy what you understand) The thing is, many so called super "wannabe" investors Trainers like to talk about being like Charlie and warren etc, but fall to the wayside when push comes to shove. They like to talk about value investing, how they made 100% on this and that, and how they know how to value and buy.

But the one constant which none of them have despite all the post and comments, none have it except for Koon yew yin and ooi Tek bee,

Jonathan Choi yi kit does not have it.
Ricky yeoh does not have it.
Calvin tan eng yet does not have it.
Icon8888 does not have it.
Kcchongz does not have it. ( He however has a book, how useful I don't know).
Stockraider definitely does not have it.
Louisinvesting does not have it.
Greentrades does not have it.

What all of these people who comment so much on i3 forums is the lack transparent, trackable portfolio ( its a free simple tool that exists on i3 forum, funny how very few people use it.)

Why? They will give you excuses like how they don't want people to frontrun them ( which is silly when you really think about it, they can buy first then update), but the fact of the matter is: once keyed in they will be unable to delete the portfolio entries or replace it with fake entries, but must constantly be on the public eye to see if their blogs and writings jive with their market results.

Choivo tries to do it, buy half heartedly. He kind of tells you what he buys, buy hides it behind xx and XX stocks, and makes you guess what he holds. But he did not tell your boss positions, or when he sells.

But the thing is, what you bought is not so much as important as what you sell. More important that what you bought and sold, is your conviction and the total amounts of each stock that you bought or sold.

They like to talk the talk, but when it comes to walking the walk, they somehow fall apart.

And the first thing they dive into is the quarterly results of warrens Berkshire reports.

https://www.berkshirehathaway.com/reports.html

I find it very tiresome( because I see it all the time), but my belief is this: if you want to be a public figure and write all sorts of articles and promotionals, you need to be accredited. If I wrote a medical journal, but never having spent a day in medical school, I could convince a lot a random idiots into taking my words verbatim acting wrongly on my "advice".

Financial "education" has the same effect on that EVERYONE is suddenly an expert on the companies that they buy. EVERYONE! Trust me. Calvin tan is as expert on networking infrastructure, choivo is an expert on petroleum refineries. This has a lot of potential for destruction, especially for eager young investors out to make a quick buck.

Who do you believe? In the real world, they would not be able to publish such things without a financial advisor license, a prospectus of their 5 year results and a full disclosure on their fund size.

But here in the internet, they can hide behind blogs and write whatever they want.

Here is the real guide: you trust Warren buffet and Charles munger not because of what they say or do, but the financial reports that show their results and the acumen.

So I tell you: listen with one ear. If they don't have financials or a history of results, treat it as fantasy and do not buy anything based on simple recommendations. Instead listen to them for a few years, build their portfolio for them ( they will always tell you when they buy, but never when they sell. Period.) Then you will quickly realize what quacks they really are.

I put KYY and OTB on a different scale though ( KYY when he buys you WILL know it, but you when he sells you will ALSO know it, albeit when the stock crashes). OTB makes money from classes and subscription, so he has to maintain a transparent form of investing. I can respect that.
28/03/2020 11:00 AM
Philip ( buy what you understand) I remember this article you wrote long ago, but failed to realize the truth, beautiful words and wonderful articles do not make an investor. You would have been better off having access to choivo, OTB and koon portfolio and long term performance before you had jumped into hengyuan, xinquan and many of the stocks that was bought.

But, again hard to teach an old dog new tricks.

>>>>>>>>

https://klse.i3investor.com/blogs/Sslee_blog/2018-12-02-story184767-My_response_to_CHOIVO_CAPITAL_Remember_Croesus.jsp
28/03/2020 11:07 AM
qqq33333333 making money is all about attitude........

confidence and being proactive goes a long way.


the other big problem is the ability to avoid train wrecks.....some people do it very well................
28/03/2020 11:20 AM
Ayoyo One can say Phillip is arrogant but he's entitled to it for he has a single conviction and stands by it... Too many analysts have muddle thoughts and a long list of disclaimers

Sure, the markets are volatile and reacting to the slightest of Information.. Your analysis would have factored these in and as long as it's happening within your realm of possibilities, that conviction stays

Choivo's article is good and reflects that one is only human and the nature of fear and uncertainties are gripping everyone else

From a behavioral analysis standpoint, my anticipation would be
-a sharp correction from now, testing recent or breaking recent lows as more news of infection comes in
- when it settles down, another relief rally ensues
- then a correction of a higher low, as markets grapple with how the stimulus would trickle down or implemented effectively
- a ding dong of sorts and then boom

In all scenarios, pay attention to news flows, when bad news no longer bring down prices, watch for rebound and vice versa
28/03/2020 11:24 AM
Philip ( buy what you understand) Sslee,

Too bad you know nothing about me. But if you did know, you would understand that engineers love the process of doing something rather than only the results. Only businessman like you want 1 year 100% results rather than learning the art of investment.

My question is still relevant and important. I am looking for a true teacher to learn from, not a publicist.

All the great investors have a public portfolio with transparent results.

Warren has one.
Munger has one.
Howard marks has one.
Peter lunch has one.
Carl Icahn has one.
Even bill ackman has one.

Documented and tracked.

A garbage disposal guy working in New Zealand could write a book and plagiarize all of the value investing concepts out there into a book. But who would read it if that garbage disposal guy did not have results?

It's like asking a zunar to write a book about governing a nation.

Yeah right.
28/03/2020 11:26 AM
qqq33333333 writing skills is not a prerequisite for making the right decisions...............


the two skills are unrelated.
28/03/2020 11:27 AM
qqq33333333 Posted by Philip ( Dr. Fauci my Hero) > Mar 28, 2020 11:26 AM | Report Abuse

the process of doing something
==============


that is what it is all about..........


rising tides lifts all boats...............at the right time, everyone is a genius.



but....the process is also not a fixed thing. I don't know how long it takes to have a process but surely a long long time .......and yet, the process also can change any time ...........should change in the light new circumstances.



yes, its the process that counts....but not other people process that counts but the own process that counts.
28/03/2020 11:39 AM
qqq33333333 the history of Bursa 2020............make more lose more, ............make less lose less.


That is the real history of bursa 2020.
28/03/2020 11:46 AM
qqq33333333 whether got writing skill or no writing skill............none can escape from the real history of bursa 2020..............make more lose more, ...........make less lose less.
28/03/2020 11:48 AM
Sslee Dear Philip,
You earned my trust but not my respect and below are the reasons why:
https://klse.i3investor.com/blogs/Sslee_blog/2018-02-13-story147404-CNY_SHARING_RESPECT.jsp

Thank you.
P/S: By the way the title thing is a sarcastic way to tell you perhaps you should seek one to fit your ego.
28/03/2020 12:14 PM
Philip ( buy what you understand) I'm sorry. I don't need your trust or your respect. I am just here to share my investing results, what I learn from REAL investors in the bursa forum, and what scams and information are being run around by fake sifus.

I am not here to make friends, or share my phone number, or sell classes or subscriptions or my latest book.

I call it as I see fit. This is a free forum after all, where comments and opinions are shared around like toilet paper. But the value of the comments and opinions can only work if there are results to back it up.

There are many real investors around in the forums which I am learning from everyday (I have bought more new stocks in the last year than I have in the last 5). These are thanks to many of them quietly offering up very good information and comments without the "mumbo jumbo" that many of them love. What does religion, chedet, communication blogs have to do with stockpicking.

Sadly, the ones that talk the most have the least to offer. (in your 144 blog post, choivo 64 blogs, versus my 34 blog posts, what have we learned?)

Your insas bet and choivo rcecap bet has the same results for the last 2+ years, and I find I have neither respect nor trust for both of your stock picks. I'm sorry if you feel offended and you think this is egoistic/arrogant, but I am just pointing out a simple fact.

If you held insas and rcecap for the last 3-5 years, you would not have made sufficient profit to make up for the risk you bear in buying a stock. You may not have understood what I am telling you back in 2019, but in 2020 when the 3 black swan events hit, you finally learn what RISK is.

I'm sorry you had to learn it the hard way, but the world is not out to gain your trust or respect. It just shows you what real world investing is like. As I myself am still learning, maybe you should stop trying to learn how to make friends on the forum, but instead learn how to buy stocks well.

>>>>>>>>

Dear Philip,
You earned my trust but not my respect and below are the reasons why:
https://klse.i3investor.com/blogs/Sslee_blog/2018-02-13-story147404-CN...

Thank you.
P/S: By the way the title thing is a sarcastic way to tell you perhaps you should seek one to fit your ego.
28/03/2020 2:37 PM
Choivo Capital Philip,

If you bought my RCE instead of your PCHEM, you would be much better off now.

Did you manage to buy more StoneCo or Pasegmono this round? I tripled my position on both on the very bottom.
====



Well, i do think i write far better than my investment results. And whether this means that i'm a good writer, or just a bad investor, well , i don't know.

Either way, given my current returns, i would take whatever investment advice given by myself with a healthy amount of salt.

In any event, my friends, what you buy or sell this year is very likely to determine your investment return for the next 10-15 years, make it count.

And if i cannot obtain above average returns despite being able to be a position to buy so many good companies at rock bottom prices.

Well, i would likely wind down my fund as outsider investments mature, put 75% of my own money into US, GLOBAL and CHINA index funds, and invest the rest on my own picks.

I still love this process of investing too much. Its just so enjoyable digging into the companies and trying to understand how the world works.

===

I won't be replying here anymore as i just don't want to be caught up in arguing with people or doing zero value activities.

Send me an email if you guys have any questions that you want my personal response to.
28/03/2020 2:47 PM
Choivo Capital Posted by vesting > Mar 28, 2020 8:02 AM | Report Abuse

What platform you are using to invest in SG, HK, China and US?

=====

Interactive brokers
28/03/2020 2:49 PM
Choivo Capital Phillip,

You're smarter than me.

You know how to pay 50PE for a chicken, egg, fish products, palm oil and 24/7 mart company that make ROE of 12%, and grow earnings at 5% per annum for the last 5 years.

The future you can see with such certainty for this company, i am not good enough to see.

I'm only smart enough to pay 17PE for google, the backbone of the internet, which grew 20% per annum for the last 5 years, and can give you ROE of 35%.

On having a trackable portfolio, well that's a fair point phillip.

If i ever stop running my fund, i'll make mine public.

Or you can just put RM500k with me, and i'll send you a copy of the letter with all my positions.
28/03/2020 3:01 PM
Philip ( buy what you understand) That is disgusting. Why would I even do that? Knowing your returns? I might as well give 500K as a donation to the Covid-19 fund.

In fact, sorry, I already have. I have no wish to put money with frauds.

>>>>>>

Or you can just put RM500k with me, and i'll send you a copy of the letter with all my positions.
28/03/2020 3:12 PM
Philip ( buy what you understand) Sure thing kid, sure thing. In the last 5 years zero mention of Google. Now suddenly he says he bought Google which grew for the last 5 years. Which part of the portfolio was this? xx stock? Or XX stock?

Too bad. I dont believe you are smart, and I dont believe you bought google 5 years ago.

>>>>>>>

I'm only smart enough to pay 17PE for google, the backbone of the internet, which grew 20% per annum for the last 5 years, and can give you ROE of 35%.
28/03/2020 3:14 PM
probability same old stories here...dizzying long write up...with some recommendation without are compelling reason.....and the sifus keep arguing without a clear direction...

i agree with ayoyo comments above..

the question now is...shall we go for stocks like Harta or greatly depressed due to covid like GenM?

both are good companies...but the answer depends on WHEN (not will) a cure to covid-19 will be discovered and implemented..

its a difficult question, but wish some young scientist are available in i3 instead of young accountants....to figure this out.
28/03/2020 3:17 PM
Philip ( buy what you understand) Wow, on top of working late every night? And running a second business with your girlfriend? And doing auditing? and so much? Oh gosh, no wonder you have to hide your results. The lack of focus must be debilitating.

See, this is what I mean. ALL frauds talk a good story,goes on stage and talks in public, but when push comes to shove, they really do have very little to show for it.

I think I will stop here. You have no idea how many investors fell into your trap of rcecap over the years. Maybe you should owe it to them instead.

>>>>>>

If i ever stop running my fund, i'll make mine public.
28/03/2020 3:17 PM
Philip ( buy what you understand) first asking for MYR5000 for research into RCECAP which you subsequently sold. Now asking an old man for his MYR500K to put into your loss making "fund"? it's not a fund until you start making money my young friend. Until you do, it's called a SCAM.
28/03/2020 3:20 PM
probability sslee, please help with your research...how fast a cure will be likely found and how the world and market be by then

TQ
28/03/2020 3:20 PM
probability i think the cheap and quick test kits...like the below, might end the pandemic very fast...

https://www.theguardian.com/world/2020/mar/26/covid-19-self-test-could-allow-return-to-work-says-public-health-england

Self-testing at home to find out whether somebody has had Covid-19 is an efficient way to find out if they are safe to return to work, a senior health official has said.

Prof Yvonne Doyle, the medical director of Public Health England, told the health select committee that finger-prick home tests would be available very soon. “We expect that to come within a couple of weeks, but I wouldn’t want to promise on that,” she said.
28/03/2020 3:24 PM
Philip ( buy what you understand) Researches have found a somewhat effective cure (ask dr fauci) and pushing to phase 2 of clinical trials. The estimation is between 6 months to 24 months. I believe it will usually be in the middle: aka 12 months.

Harta and topglove will not go down (in fact guaranteed to go up as worldwide shortage of gloves, and capacity filled to the brim and still supply is not met). GENM 31-DEC-19 results have not factored into the emptiness of 31-MAC-20 quarter, and the next 3 months as no one will be in the mood to go on a holiday. Expect if a cure is found and market belief is up that things will recover by christmas DEC-20, and return of full results by 21', as predicted by Dr. Fauci.

In either case, don't trust my words, as I dont write beautiful prose like Choivo. Take my predictions with a huge block of salt, but compare it with my portfolio investment results to see how I respond to my predictions and how I invest accordingly.

That is the only thing we can do. Hope we all survive the journey together, instead of listening to blind prophets who are suddenly in OWNERSHIP of GOOGLE 5 years ago while never mentioning it once.



>>>>>>>

Posted by probability > Mar 28, 2020 3:17 PM | Report Abuse

same old stories here...dizzying long write up...with some recommendation without are compelling reason.....and the sifus keep arguing without a clear direction...

i agree with ayoyo comments above..

the question now is...shall we go for stocks like Harta or greatly depressed due to covid like GenM?

both are good companies...but the answer depends on WHEN (not will) a cure to covid-19 will be discovered and implemented..

its a difficult question, but wish some young scientist are available in i3 instead of young accountants....to figure this out.
28/03/2020 3:27 PM
probability thanks for the well reasoned opinion Philip..sounds very logical

let me find out who is this Dr.Fauci..
28/03/2020 3:33 PM
Philip ( buy what you understand) His concurrent theme is all on EXPORTS. With markets shutting down the world over, supplies of materials delays (and the inevitable price increases when demand is over supply), ability to keep contract obligations (when faced with ability to churn out product) , and the market demand for products abroad versus locally sourced products (virus changing globalisation mindsets), will make a lot of countries think deep and realize the value of a homegrown support industry instead of relying overseas. I believe he is in for a huge huge shock as the 2020 results will clearly show.

He doesn't realize what is cheap, can go oh-so-much-cheaper.

Many businesses that do not have a direct monopoly in the market will suffer as everyone will be selling at cut throat prices to survive, and export markets will be closed for year to come.


>>>>>>

KLSE

Petron Malaysia Refining & Marketing Berhad – I wrote about it before and I don’t think I need to explain further.
Magni-Tech Industries Berhad – (ROE excl Net Cash: 40%), (EV/Earnings: 3 times)
Favelle Favco Berhad – (ROE excl Net Cash: 15%), (EV/Earnings: 2.3 times)
Lii Hen Industries Berhad – (ROE excl Net Cash: 28%), (EV/Earnings: 3.2 times)
Poh Huat Resources Holdings Berhad – (ROE excl Net Cash: 16%), (EV/Earnings: 3 times)
Hong Leong Industries Berhad – (ROE excl Net Cash: 30%), (EV/Earnings: 3 times)
Homeritz Corporation Berhad - (ROE excl Net Cash: 30%), (EV/Earnings: 2.5 times)
Uchi Technologies Berhad - (ROE excl Net Cash: 250%), (EV/Earnings: 10.5 times)


These are companies who i think their earning power will not be diminished after this virus blows over, and have a strong history of paying out earnings, and have good/decent capital allocation abilities (ie no unnecessary ventures).
28/03/2020 3:39 PM
Choivo Capital Yeap,

Because the world will shut down forever.

And these companies are heavily in debt and won't be able to survive.
28/03/2020 3:44 PM
probability Larry Brilliant, The man who wrote the movie Contagion - The Doctor Who Helped Defeat Smallpox Explains What's Coming

https://www.wired.com/story/coronavirus-interview-larry-brilliant-smallpox-epidemiologist/

If you were the president for one day, what would you say in the daily briefing?

I would begin the press conference by saying "Ladies and gentlemen, let me introduce you to Ron Klain—he was the Ebola czar [under President Barack Obama], and now I’ve called him back and made him Covid czar. Everything will be centralized under one person who has the respect of both the public health community and the political community." We're a divided country right now.

Right now, Tony Fauci [head of the National Institute of Allergy and Infectious Diseases] is the closest that we come to that.
.......................................................

personally i hope rapid test kits coupled with mobile monitoring of patients locations will enable control like how south korea did everywhere in the world soon..
28/03/2020 3:48 PM
probability the above means we can overcome the virus via technology even without a vaccine much earlier
28/03/2020 3:49 PM
Philip ( buy what you understand) One thing where this kid is right on Google, AND why I dont buy Apple NOR google, is the concept of addresable market.

There is a simple reason why Google and Apple is below PE30 (no longer the Tech darlings), this is because they have already gone past the growth stage (understand the term TOTAL ADDRESABLE MARKET). Google is everywhere, Apple smartphones is already losing market share (https://marketrealist.com/2019/08/iphone-loses-global-smartphone-market-share/).

Where else can Google grow to? Google is like a public utility, if it demands too much, it will face repercussions from USA, EU (and it already has). Therefore, there are many restrictions already to what Google is allowed or not allowed to do. If he thinks it can continue to expand (to MARS maybe?) at previous speeds, then he should probably listen to more berkshire meetings. Choivo seems to think he knows a lot, but unfortunately he is way outside his circle of competence.

FYI the backbone of the internet is not Google, its is Amazon AWS. IF it disappeared, half of the websites in the world will go down. Google has already thrown a lot of money into every nook and cranny to find success, with some mixed and others losses. IT has been unable to create a demand for its hardware (from google glass, to google nexus, etc) similar to microsoft, and although I will grant you waymo is going to change the world, it still remains to be seen.

I would respect Choivo more if he bought google 10 years ago, or even 5 years ago.

But despite his wild claims, I doubt he had the investing acument to value or buy google when the googling was good.

If he had clearly shown his portfolio, we would have known it was true or false, and I would have had more respect for his investing skills then.

But now? He can create whatever stories he wants, it just sounds like fake news.

>>>>>>>>

Google
Doubled earnings in 3 years, and grew 15% year on year for 5 years.



This company literally forms the backbone of the internet and has more than 97% market share in every country except for China (China Wall), Japan (75% Market Share, Yahoo Japan 21%) and Korea (60% share Market Share, Naver 20%).
28/03/2020 3:51 PM
ahbah Pak Din oredi bunuh the mkt killer bear with his Stimulus Plan.

Our whole mkt now is very chip.

Masuk.

And U will not be left behind !
28/03/2020 3:57 PM
Philip ( buy what you understand) And funnily enough, how do I know that? It is not because I am some form of brilliant investor, but because I listen a lot, and scuttlebutt. My daughter works for amzn AWS division in US, and I believe her more than some kid who spent a few hours reading some tech journals and annual reports and suddenly believes he is an expert on Google.

>>>>>>>>

FYI the backbone of the internet is not Google, its is Amazon AWS. IF it disappeared, half of the websites in the world will go down.
28/03/2020 3:59 PM
Ayoyo Phillip, Dr fauci is pro big pharma.. He is suppressing or refusing to consider many top orthomolecular scientists and physicians, who tout our immune system response is the best cure for covid-19

You should follow the works of Dr Andrew cheng (who used vitamin C to successfully treat covid-19 patients in China), Dr Shiva Ayyadurai, brilliant MIT scientist and biologist who is chastising fauci - Dr Shiva recommends vitamin A, C, and D.... Also Dr Andrew Saul, Dr John Bergman, Dr Bruce Lipton etc...

This is the perplexing part - you have no cure, you start toying with some malaria, hiv drugs to treat patients but yet refuse to consider the only thing that's keeping humanity alive up to now - how to boost up our weakened immune system response
28/03/2020 4:04 PM
ahbah ,the markets will come back, they always do.. You just need to be there to see it happens.. This is 100% mkt truth with no dispute !

Masukkkkk first.

And U will not be left behind !
28/03/2020 4:06 PM
Philip ( buy what you understand) I think you have been watching too many TV shows. Do you really think Vitamin C is going to treat covid-19 patients?

In any case, anyone that is willing to try to take the mic from donald trump is good in my books.

>>>>>>>>

Dr Andrew cheng (who used vitamin C to successfully treat covid-19 patients in China), Dr Shiva Ayyadurai, brilliant MIT scientist and biologist who is chastising fauci - Dr Shiva recommends vitamin A, C, and D.... Also Dr Andrew Saul, Dr John Bergman, Dr Bruce Lipton etc...
28/03/2020 4:06 PM
Philip ( buy what you understand) If you think bear market is that easy, you still have a thing or two to learn.

>>>>>>>>

ahbah Pak Din oredi bunuh the mkt killer bear with his Stimulus Plan.

Our whole mkt now is very chip.

Masuk.

And U will not be left behind !
28/03/2020 3:57 PM
28/03/2020 4:08 PM
Ayoyo Phillip, just a reminder - you are taking in millions of pathogens everyday - just by breathing and the only thing that is keeping you alive today is your immune system response

Don't have to believe me.. Just google up Dr Richard Cheng, his work was published in a respected science journal two days ago, worked with Shanghai hospitals to admister IVC successfully to 50 covid-19 patients and Dr Shiva Ayyadurai - he is openly chastising fauci now...

Two days ago, new York post reported a hospital has started vitamin C treatment protocol on covid-19 patients but they way short on supplies

This is not fiction.. Every one of them is available online

The mind is like a parachute, it only works when it's open
28/03/2020 4:12 PM
ahbah Please tell us what is 'a thing or two to learn'. Thanks.
28/03/2020 4:20 PM
Flintstones Philip is a gods send in this forum. This is a man with results. Unlike kc chong who only knows how to write beautiful articles with business english or icon8888 who only knows how to punt here and punt there.
28/03/2020 4:20 PM
ahbah We all welcome mkt gods here to guide us. Thanks.
28/03/2020 4:24 PM
samyew1234 wah, u all talk so much, conclusion is ? no conclusion
28/03/2020 4:50 PM
ahbah Verdict : masuk first

If later, another pandemic will come n infect us here n the pandemic is FOMO ! And FOMO is even more deadly than covid-19 !
28/03/2020 4:58 PM
Philip ( buy what you understand) https://www.nutraingredients.com/Article/2020/03/25/Hospital-turns-to-high-dose-vitamin-C-to-fight-coronavirus#

You mean this vitamin c intravenous?

This Dr Cheng has been pushing vitamin c for everything from cancer cure to ICU stays since 2018 on Twitter. How many doctors do you know are so active online on Twitter? He even has a company that produces vc intravenously. I don't know about you, if vitamin c was such a wonder drug, im sure it would have been tried out in huge dosage by now.

But the fact is vitamin c is being used in conjunction with other anti inflammatory and control drugs so you cannot just say vitamin c is the cure all end all for covid19 and cancer....

https://twitter.com/drrichardcheng1?lang=en

>>>>>>>>>>

Posted by Ayoyo > Mar 28, 2020 4:12 PM | Report Abuse

Phillip, just a reminder - you are taking in millions of pathogens everyday - just by breathing and the only thing that is keeping you alive today is your immune system response

Don't have to believe me.. Just google up Dr Richard Cheng, his work was published in a respected science journal two days ago, worked with Shanghai hospitals to admister IVC successfully to 50 covid-19 patients and Dr Shiva Ayyadurai - he is openly chastising fauci now...

Two days ago, new York post reported a hospital has started vitamin C treatment protocol on covid-19 patients but they way short on supplies

This is not fiction.. Every one of them is available online

The mind is like a parachute, it only works when it's open
28/03/2020 5:56 PM
qqq33333333 wallen the bufalo cannot stand aside but I can...........
28/03/2020 6:01 PM
qqq33333333 virus vs capitalism................

throw money away , problem magically solved...............

Malaysia $ 260 billion...............

who don't know how to spend money? Malay unity government know how to spend money, know how to earn money or not?


big difference between spending money and spending money wisely...............
28/03/2020 6:04 PM
Sslee Dear all,
Is Philip real?

https://klse.i3investor.com/blogs/Sslee_blog/2020-03-28-story-h1485698175-IS_PHILIP_REAL.jsp
28/03/2020 9:01 PM
Ayoyo Phillip,

No one is saying vitamin C is the only cure.. Are you saying your body is made of a single nutrient? Of course not.. That's plain dumb..

If you read the works of orthomolecular physicists on covid-19, the few vitamins and supplements that are recommended by them, which they seemed to collectively agree on, is vitamin A, C, D, zinc - some combine other antioxidants to reduce inflammation while others push antimicrobial solution like Lugol's iodine..

The use of it in combination will stimulate the immune system activate the white blood cells to fight the infection, reduce inflammation - patients die from the inflammation and secondary infections than covid-19 itself - plus good sleep, lots of water and reduced stress all helps

Read Dr Shiva Ayyadurai letter to Trump.. It's online.. He details clearly the working of the immune system and why he recommended those supplements.. He's an double PhD MIT scientist and biologist, running for senate now...

And just because some doctor is on Twitter, he's not qualified? And then we have trump

Take a BIG note of this - the supplements mentioned above is NOT patentable and they are available cheaply hence is of little value for mainstream medicine to push for

You may be competent on many things but your ignorance shows when it comes to natural health... I have not seen a doctor nor taken a single pill for the past 7 years...

One tip for you - the body is lacking in nutrients, not medicine - give your body the nutrients and nutrition it needs and you'll be amazed by how well it can heal itself

Read more of Dr Shiva's work - he sees a systems based approach to healing than simply isolating a disease and then treating it with medicine

This is my last post on this topic for I do not wish to pollute this forum.... If you still think medicine is your only cure, so be it.. Whatever floats your boat

Cheers
28/03/2020 9:31 PM
Philip ( buy what you understand) Ok you seem to be an expert epidemiologist. I shall bow to your expertise and your proposal that intravenous high dosage of vitamin c can cure covid19. With the entire world eager to try anything, the anti malarial drug chloroquine should stop being on phase 2 of clinical trials and should push IVC to phase 1 instead.

I wonder if CDC is aware of this treatment? I guess we can go check.


>>>>>>>>>>

https://www.factcheck.org/2020/02/fake-coronavirus-cures-part-3-vitamin-c-isnt-a-shield/
28/03/2020 10:01 PM
Ayoyo Yes, you are always right! :)
28/03/2020 10:07 PM
Choivo Capital Phillip,

On Google and Facebook

Why didnt i buy it 10 years ago? I was 17 then, my allowance used to be RM30 a month, when i worked during school holiday for RM900 for 12 hours a day, 6 days a week. I had to save that up to try and pay for A levels as my family didnt have much money then. Did STPM instead and spend that money on my chartered accountancy papers.

Why didnt i buy it in 2016, when i first started? i procrastinated about opening a foreign account, and i wanted to focus on Malaysian ones first. Stupid decision i know.
======

Too lazy to reply all your comments, but let me touch on the total addressable market (TAM) for google and facebook.

Very simple statistics for me to give you.

Internet penetration of global population 10 years ago is 25%, today it is 50%.

Digital ad spending share of the total 10 years ago is 30-35% (depending on stats) today it is 50.1%

Let me ask you, 10-20 years from now, that percentage will be up or down? The size of the pie as a whole will be up or down? And how much more up or down leh?

=====

If based on those statistics, you think Google and FB got TAM problem, i suggest you look much much deeper into all of your picks.

This one is like kettle calling the snow black.

Lets place a bet, EPS basis, 5 years from now, i think FB and GOOG's will grow much more than QL's.

And these two co's are 17PE vs your 50PE one.
01/04/2020 3:15 AM
Choivo Capital In any event, at today's price, im only paying 30% more for goog compared to 3 years ago, an 15% more compared to 2 years ago.

So not all is lost.
01/04/2020 3:26 AM

(CHOIVO CAPITAL) (Li Lu) Book Review : The Other Half of Macroeconomics and the Fate of Globalization

Author: Choivo Capital   |  Publish date: Fri, 6 Mar 2020, 8:56 PM


For a copy with better formatting, go here, its alot easier on the eyes.

(Li Lu) Book Review : The Other Half of Macroeconomics and the Fate of Globalization

========================================================================

Last week, i found this wonderful translation of a book review by Li Lu, one of the three people Berkshire Hathaway have said they would consider to take over the Berkshire Hathaway portfolio in the event of the death of Charlie Munger and Warren Buffet.

 

He also happens to be the only person whom Charlier Munger trust with investing his money, other than Berkshire Hathaway.

 

https://www.thegoodinvestors.sg/chinas-future-thoughts-from-li-lu-a-china-super-investor/

 

The link is above, but i've also extracted it here for your easy reading.

 

http://www.himalayacapital.com/chinese/20191119.htm

 

This is the link to the original Chinese version.

 

 

The Review

This year, the book I want to recommend to everyone is The Great Recession Era: The Other Half of Macroeconomics and The Fate of Globalisation, written by Gu Chao Ming.

 

The book discusses the biggest problems the world is currently facing.

 

First: Monetary policy.

 

In today’s environment, essentially all the major economies of today – such as Japan, the US, Europe, and China – are oversupplying currencies. The oversupply of these base currencies has reached astronomical levels, resulting in the global phenomena of low interest rates, zero interest rates, and even negative interest rates (in the case of the Eurozone).

 

These phenomena have never happened in history. At the same time, the increase in the currency supply has contributed very little to economic growth. Except for the US, the economies of most of the developed nations have experienced minimal or zero growth. Another consequence of this situation is that each country’s debt level relative to its GDP is increasing; concurrently, prices of all assets, from stocks to bonds, and even real estate, are at historical highs.

 

How long will this abnormal monetary phenomenon last? How will it end? What does it mean for global asset prices when it ends? No one has the answers, but practically all of our wealth is tied to these issues.

 

Second: Globalisation.

 

The fates of many countries, each at different stages of development, have been intertwined because of the rising trend of globalisation over the past few decades. But global trade and capital flows are completely separate from the monetary and fiscal policies that are individually implemented in each country. There are two consequences to this issue.

 

Firstly, significant conflicts have developed between globalisation and global capital flows on one end, and each country’s economic and domestic policies on the other. Secondly, international relations are increasingly strained. For instance, we’re currently witnessing an escalation of the trade conflict between the US and China. There’s also rising domestic unrest – particularly political protests on the streets – in many parts of the world, from Hong Kong to Paris and Chile. At the same time, far-left and far-right political factions are increasingly dominating the political scene of these countries at the expense of more moderate parties, leading to heightened uncertainties in the world. Under these circumstances, no one can predict the future for global trade and capital flows.

 

Third: How should each country’s macroeconomic and fiscal policies respond to the above international trends? Should there be differences in the policies for each country depending on the stage of development they are at?

 

The three problems are some of the most pressing issues the world is facing today. The ability to answer even just one of them will probably be an incredible scholarly achievement – to simultaneously answer all three of them is practically impossible.

 

In his book, Gu Chao Ming provided convincing perspectives, basic concepts, and a theoretical framework with sound internal logic for dealing with the three big problems. I can’t really say that Gu has given us answers to the problems. But at the very least, he provides inspiration for us to think through them. His theories are deeply thought-provoking, whether you agree with them or not.

 

Now let’s talk about the author, Gu Chao Ming [Richard C. Koo]. He is the Chief Economist of Nomura Research Institute and has had a strong influence on the Japanese government over the past 30 years. I first heard of him tens of years ago, at a YPO international conference held in Japan. He delivered a keynote speech at the event, explaining Japan’s then “lost decade” (it’s now probably a “lost two decades” or even “lost three deacdes”). Gu Chao Ming explained the various economic phenomena that appeared in Japan after its bubble burst. These include zero economic growth, an oversupply of currency, zero interest rates, massive government deficit, high debt, and more. The West has many different views on the causes for Japan’s experience, but a common thread is that they resulted from the failure of Japan’s macroeconomic policies.

 

Gu Chao Ming was the first to provide a completely opposite viewpoint that was also convincing. He introduced his unique and new economic concept: A balance sheet recession.

 

After the bursting of Japan’s asset-price bubble, the balance sheet of the Japanese private sector (businesses and households) switched from rapid expansion to a mode of rapid contraction – he attributed Japan’s economic recession to the switch. Gu provided a unique view, that driving the balance sheet recession was a radical change in the fundamental goal of the entire Japanese private sector from maximising profits to minimising debts. In such an environment, the first thing the private sector and individuals will do when they receive money is not to invest and expand business activities, but to repay debt – it does not matter how much currency is issued by the government.

 

The sharp decline in Japanese asset prices at that time placed the entire Japanese private sector and households into a state of technical bankruptcy. Because of this, what they had to do, and the way they repaired their balance sheets, was to keep saving and paying off their debts. This scenario inevitably caused a large-scale contraction in the economy. The Japanese experience is similar to the US economic crisis in the 1930s. Once the economy begins to shrink, a vicious cycle forms to accelerate the downward momentum. During the Great Depression in the 1930s, the entire US economy shrank by nearly 46% within a few years.

 

The Japanese government dealt with the problem by issuing currency on a large scale, and then borrowing heavily to make direct infrastructure investments to digest the massive savings of Japanese residents. Through this solution, the Japanese government managed to maintain the economy at the same level for decades. There’s no growth, but the economy has not declined either. In Gu Chao Ming’s view, the Japan government’s macroeconomic policies were the only right choices.

 

The policies prevented the Japanese economy from experiencing the 46% decline in economic activity that the US did in the 1930s. At the same time, the Japanese private sector was given the time needed to slowly repair their balance sheets. This is why Japan’s private sector and households have gradually returned to normalcy today.

 

Of course, there was a price to pay – the Japanese government’s own balance sheet was hurt badly. Japanese government debt is the highest in the world today. Nonetheless, the Japanese government’s policies were the best option compared to the other choices. At that time, that was the most unique view on Japan that I had come across. Subsequently, my observations on Japan’s economy have also confirmed his ideas to a certain extent.

 

The Western world was always critical of Japan’s policies. Their stance on Japan started to change only after they encountered the Great Recession of 2008-2009. This is because the Western world’s experience during the Great Recession was very similar to what Japan went through in the late 1980s after its big asset-bubble burst. At the time, prices of major assets in the West were falling sharply, leading to technical bankruptcy for the entire private sector – this was why the subsequent experience for the West was eerily similar to Japan’s.

 

To deal with the problem, the main policy implemented by the key Western countries was the large-scale issuance of currency, and they did so without any form of prior agreement. At the time, the experience of the Great Depression of the 1930s was the main influence on the actions of the central banks in the West. The consensus among the economic fraternity after evaluating the policies implemented to handle the Great Depression of the 1930s was based predominantly on Milton Friedman’s views, that major mistakes were made in monetary policies in that era. Ben Bernanke, the chairperson of the US Federal Reserve in 2008, is a strong proponent of this view. In fact, Bernanke thinks that distributing money from helicopters is an acceptable course of action in extreme circumstances.

 

Consequently, Western governments started issuing currency at a large scale to deal with the 2008 crisis. But the currency issuance did not lead to the intended effect of a rapid recovery in economic growth. The money received by the private sector was being saved and used to repay debts. This is why economic growth remains sluggish. In fact, the economy of the Eurozone is bordering on zero growth; in the US economy, there are only pockets of weak growth.

 

The first response by Western governments to the problem is to continue with their large-scale currency issuance. Western central banks have even invented a new way to do so: Quantitative easing (QE). Traditionally, central banks have regulated the money supply by adjusting reserves (the most important component of a base currency). After implementing QE, the US Federal Reserve’s excess reserves have grown to 12.5 times the statutory amount. The major central banks in the West have followed the US’s lead in implementing QE, resulting in the selfsame ratio reaching 9.6 times in the Eurozone, 15.3 times in the UK, 30.5 times in Switzerland, and 32.5 times in Japan!

 

In other words, under normal economic conditions, inflation could reach a similar magnitude (for example, 1,250% in the US) if the private sector could effectively deploy newly issued currency. Put another way, if the newly issued currency were invested in assets, it could lead to asset prices rising manifold to reach bubble levels or provide strong stimulus to GDP growth.

 

But the reality is that economic growth is anaemic while prices for certain assets have been rising. The greatest consequence of this policy is that interest rates are close to zero. In fact, the Eurozone has around US$15 trillion worth of debt with negative rates today. This has caused questions to be raised about the fundamental assumptions underpinning the entire capitalistic market system. At the same time, it has also not produced the hoped-for economic growth. Right now, the situation in Europe is starting to resemble what Japan experienced back then. People are starting to rethink the episode in Japan. Interest in Gu Chao Ming’s viewpoints on Japan and its fiscal policies are being reignited in the important Western countries.

 

Gu Chao Ming used a relatively simple framework to explain the phenomena in Japan. He said that an economy will always be in one of the following four regimes, depending on the actions of savers and investors:

 

Under normal circumstances, an economy should have savers as well as borrowers /investors. This places the economy in a positive state of growth. When an ordinary economic crisis arrives, savers tend to run out of capital but borrowers and investing opportunities are still present.

 

In this scenario, it’s crucial that a central bank plays the role of supplier of capital of the last resort. This viewpoint – of the central bank having to be the lender and supplier of capital of the last resort – is the conclusion that the economic fraternity has from studying the Great Depression of the 1930s. Central banks provide the capital, which is then lent to the private sector.

 

But nobody thought about what happens to an economy when the third and fourth regimes appear. These regimes are unprecedented and characterized by the absence of borrowers (investors).

 

For instance, there have been savers in Japan for the past few decades, but the private sector has no motivation to borrow for investments. What can be done in this case?

 

In the 2008-2009 crisis, there were no savers as well as borrowers in the Western economies. Savers were already absent when the crisis happened. In the US, the private sector was mired in a state of technical bankruptcy because asset prices were falling heavily while there were essentially no savers. At the same time, there were no investment opportunities in Europe. Even after a few rounds of QE and the massive supply of base currencies, nobody was willing to invest – there were simply no opportunities to invest in the economy. When people got hold of capital, they in essence returned the capital to banks via negative interest rates. This situation was unprecedented.

 

The key contributions to the body of economic knowledge by Gu Chao Ming’s framework relates to a better understanding of what happens in the third and fourth regimes where borrowers are absent.

 

Let’s take Japan for example. It is in the third regime, where there are savers but no borrowers. He thinks that the Japanese government should take up the mantle of being the borrower of last resort in this situation and use fiscal policy to conduct direct investments. A failure to do so will lead to a contraction in the economy, since the private sector is unwilling to borrow. And once the economy contracts, a vicious cycle will form, potentially causing widespread unemployment and economic activity to decline by half. The societal consequences are unthinkable. We know that Hitler’s rise to power in the 1930s and a revival in Japanese militarism in the same era both had direct links to the economic depression prevalent back then.

 

The fourth regime, one where savers and borrowers are both absent, describes the 2008-2009 crisis. When a fourth regime arises, the government should assume the roles of both provider of capital of last resort, and borrower of last resort. In the US during the 2008-2009 crisis, the Federal Reserve issued currency while the Treasury department used the TARP (Troubled Asset Relief Program) Act to directly inject capital into systematically important commercial and investment banks.

 

The actions of both the Fed and the Treasury stabilised the economy by simultaneously solving the problems of a lack of savers and borrowers. Till this day, Western Europe is possibly still trapped in the third or maybe even the fourth regime. There are no savers or borrowers. Structural issues in the Eurozone make matters worse. Countries in the Eurozone can only make use of monetary policy, since they – especially the countries in Southern Europe – are restricted from using fiscal policy to boost domestic demand. These constraints within Europe could lead to catastrophic consequences in the future.

 

Gu Chao Ming used the aforementioned framework to analyse the unique problems facing the global economy today (the appearance of the third and fourth regimes). He also provided his own views on the current economic policies of developed nations.

 

He considered the following questions: Why did both Western Europe and the US lumber toward asset bubbles? In addition, why were they unable to discover the path that leads to a return to growth (the US did return to growth, but it is anaemic) after their asset bubbles burst? To answer these questions, Gu Chao Ming provided what I think is his second unique perspective, which is meaningful for the China of today. He shared that an economy will have three different stages of development under the backdrop of globalised trade.

 

Let me first introduce an important concept in development economics –  the Lewis Turning Point. In the early days of urban industrialisation, surplus rural workers are constantly attracted by it. But as industrialisation progresses to a certain scale, the surplus of workers in the rural areas now becomes a shortage, leading to the economy entering a state of full employment. This is the Lewis Turning Point, which was first articulated by British economist W. Arthur Lewis in the 1950s.

 

Gu Chao Ming’s first stage of development refers to the early days of urban industrialisation, before the Lewis Turning Point is reached. The second stage happens when the economy has moved past the Lewis Turning Point and is in a phase where savings, investments, and consumption are all in a state of intertwined growth. This is also known as the Golden Era. In the third stage of development – a unique stage that Gu Chao Ming brought up – the economy enters a state of being chased, after it passes a mature growth phase and becomes an advanced economy. Why does this happen?

 

That’s because investing overseas in developing countries becomes more advantageous as the cost of domestic production reaches a certain level. In the earlier days, the advantages of investing overseas in developing countries are not clear because of cultural and institutional obstacles. But as domestic production costs rises to a certain height, while other countries are simultaneously strengthening their infrastructure to absorb foreign investments, it becomes significantly more attractive to invest overseas compared to domestically. At this point, capital stops being invested in the country, and domestic wages start to stagnate.

 

In the first stage of development (the pre-Lewis Turning Point phase), owners of capital have absolute control. This is because rural areas are still supplying plenty of labour, and so the labour force is generally in a weak position to bargain and does not have much pricing power. Companies tend to exploit workers when there are many people looking for work.

 

In the second stage of development (when the economy is past the Lewis Turning Point and enters a mature growth phase), companies need to rely on investing in productivity to raise their output. At the same time, companies need to satisfy the demands of the labour force, such as increasing their wages, improving their working environment, providing them with better equipment, and more. In this stage, economic growth will lead to higher wages, because shortages are starting to appear in the labour supply. A positive cycle will form, where a rise in wages will lead to higher consumption levels, driving savings and investments higher, and ultimately higher profits for companies. During the second stage, nearly every member of society can enjoy the fruits of economic development. Meanwhile, a consumer society led by the middle class will be formed. Living standards for each level in society are improving – wages are rising even for people with low education levels. This is why the second stage of development is also known as the Golden Era.

 

Changes in society start to appear in the third stage of development. For the labour force, only those in highly-skilled roles (such as in science and technology, finance, and trade etc.) will continue to receive good returns from their jobs. Wages in traditional manufacturing jobs that require low levels of education will gradually decline. Wealth-inequality in society will widen. Domestic economic and investment conditions will deteriorate, and investors will increasingly look to foreign shores for opportunities. At this juncture, GDP growth will rely on continuous improvements in technology. Countries that excel in this area (like the US for example) will continue to enjoy GDP growth, albeit at a low pace; countries with a weaker ability to innovate (such as Europe and Japan) will experience poor economic growth, and investments will shift toward foreign or speculative opportunities.

 

Gu Chao Ming thinks that the Western economies had entered the third stage of development in the 1970s. Back then, they were being chased mainly by Japan and Asia’s Four Dragons. Fast forward to the 1980s and China had started to open itself to the international economy while Japan entered the phase of being chased. While being chased, a country’s domestic economic growth opportunities tend to decrease sharply. At the same time, any pockets of economic growth tend to form into frothy bubbles. It was the case in Japan, the US, and Western Europe. Capital flowed into real estate, stocks, bonds, and financial derivatives, forming massive bubbles and their subsequent bursting.

 

Even after a bubble bursts, the country’s economic growth opportunities and potential remain extremely limited. As a result, the economy’s ultimate goal shifts from maximising profits to minimising liabilities. That’s because on one hand, the private sector has nowhere to invest domestically, while on the other, it wants to repair its balance sheet. In this way, predictions that are based on traditional economic theories will fail.

 

Gu Chao Ming pointed out that the functions of a government’s macro policies should change depending on what stage of development the economy is at. And so, different policy tools are needed. This view has meaningful implications for China today.

 

In the early phases of industrialisation, economic growth will rely heavily on manufacturing, exports, and the formation of capital etc. At this juncture, the government’s fiscal policies can play a huge role. Through fiscal policies, the government can gather scarce resources and invest them into basic infrastructure, resources, and export-related services etc. These help emerging countries to industrialise rapidly. Nearly every country that was in this stage of development saw their governments implement policies that promote active governmental support.

 

In the second stage of development, the twin engines of economic growth are rising wages and consumer spending. The economy is already in a state of full employment, so an increase in wages in any sector or field will inevitably lead to higher wages in other areas. Rising wages lead to higher spending and savings, and companies will use these savings to invest in productivity to improve output. In turn, profits will grow, leading to companies having an even stronger ability to raise wages to attract labour. All these combine to create a positive feedback loop of economic growth. Such growth comes mainly from internal sources in the domestic economy. Entrepreneurs, personal and household investing behaviour, and consumer spending patterns are the decisive players in promoting economic growth, since they are able to nimbly grasp business opportunities in the shifting economic landscape. Monetary policies are the most effective tool in this phase, compared to fiscal policies, for a few reasons. First, fiscal policies and private-sector investing both tap on a finite pool of savings. Second, conflicts could arise between the private sector’s investing activities and the government’s if poorly thought-out fiscal policies are implemented, leading to unnecessary competition for resources and opportunities.

 

When an economy reaches the third stage of development (the stage where it’s being chased), fiscal policy regains its importance. At this stage, domestic savings are high, but the private sector is unwilling to invest domestically because the investing environment has deteriorated – domestic opportunities have dwindled, and investors can get better returns from investing overseas. The government should step in at this juncture, like what Japan did, and invest heavily in infrastructure, education, basic research and more. The returns are not high. But the government-led investments can make up for the lack of private-sector investments and the lack of consumer-spending because of excessive savings. In this way, the government can protect employment in society and prevent the formation of a vicious cycle of a decline in GDP. In contrast, monetary policy is largely ineffective in the third stage.

 

For China’s current development, discussions on the use of macro policies are particularly meaningful. Although there are different viewpoints, the general consensus is that China had passed the Lewis Turning Point a few years ago and entered a mature growth phase. Over the past decade, we’ve seen accelerating growth in the level of wages, consumer spending, savings, and investments. But even when an economy has entered a new stage of development, the economic policies that were in place for the previous stage of development – and that have worked well – tend to remain for some time. The lag in the formulation and implementation of new policies that are more appropriate for the current stage of development comes from the inertia inherent in government bodies. This mismatch between macro policies and the stage of development the economy is at has happened in all countries and stages. For instance, Western economies are still stuck with macro policies that are more appropriate for the Golden Era (fiscal policy). Actual data show that the current policies in the West have worked poorly. Today, many Western countries (including Japan) are issuing currencies on a large scale and have zero or even negative interest rates. But even so, these countries are still facing extremely low inflation and slow economic growth while debt levels are soaring.

 

In the same vein, China’s government is still relying heavily on policies that are appropriate for the first stage of development even when the country’s economy has grown beyond the Lewis Turning Point. In the past few years, we have seen a series of measures for economic reforms. Their intentions are noble, meant to fix issues that have resulted from the industrialisation and manufacturing boom that occured in the previous development stage. But in practice, the reform measures have led to the closures and bankruptcies of private enterprises on a large scale. So from an objective standpoint, the reform measures have, at some level, produced the phenomenon of an advance in the state’s fortunes, but a decline for the private sector. More importantly, it has hurt the confidence of private enterprises and caused a certain degree of societal turmoil and loss of consumer-confidence. All of these have lowered the potential for economic growth in this stage.

 

Today, net exports contribute negatively to China’s GDP growth while consumption has a share of 70% to 80%. Private consumption is particularly important within the consumption category, and will be the key driver for China’s future economic growth. In the Golden Era, the crucial players are entrepreneurs and individual consumers. The focus and starting point for all policies should be on the following: (1) strengthening the confidence of entrepreneurs; (2) establishing market rules that are cleaner, fairer, and more standardised; (3) reducing the control that the government has over the economy; and (4) lowering taxes and economic burdens. Monetary policy will play a crucial role at this juncture, based on the experiences of many other developed countries during their respective Golden Eras.

 

During the first stage of development, China’s main financial policy system was based on an indirect financing model. It’s almost a form of forced savings on a large scale, and relied on government-controlled banks to distribute capital (also at a large scale) at low interest rates to manufacturing, infrastructure, exports and other industries that were important to China’s national interests. This financial policy was successful in helping China to industrialise rapidly.

 

At the second stage of development, the main focus should be this: How can society’s financing direction and methods be changed from one of indirect financing in the first stage to one of direct financing, so that entrepreneurs and individual consumers have the chance to play the key borrower role?

 

We’ve seen such changes happen to some extent in the past few years. For instance, the area of consumer credit has started developing with the help of fintech. There are still questions worth pondering for the long run, such as whether property mortgages can be done better to unleash the potential for secondary mortgages.

 

During this stage, some of the most important tools in macro policy include: Increasing the proportion of direct financing in the system; enhancing the stock market’s ability to provide financing for private enterprises; and establishing bond and equity markets. In addition, the biggest tests for the macro policies are whether the government can further reduce its power in the economy and switch its role from directing the economy to supporting and servicing it.

 

Over the past few years, the actual results of China’s macro policies have been poor despite the initial good intentions when they were implemented. This is because the policies were simply administrative means. The observation of the economic characteristics of China’s second stage of development also gives us new perspectives and lessons. During the Golden Era of the second stage of development, some policies could possibly have better results if they were adjusted spontaneously by market forces. In contrast, directed intervention may do more harm than good. These are the most important subjects for China today.

 

Currently, Japan, Western Europe and the US are all in the third stage of development while China is in the second. This means that China’s potential for future growth is still strong. China’s GDP per capita of around US$10,000 is still a cost-advantage for developed nations in the West. At the same time, other emerging countries (such as India) have yet to form any systemic competitive advantages.

 

It’s possible for China to remain in the Golden Era for an extended period of time. China’s GDP per capita is around US$10,000 today, but there are already more than 100 million people in the country that have a per-capita GDP of over US$20,000. These people mainly reside in the southeast coastal cities of the country. China actually does not require cutting-edge technology to help its GDP per capita make the leap from US$10,000 to US$20,000 – all it needs is to allow the living standards and lifestyles of the people in the southeast coastal cities to spread inward throughout the country.

 

The main driver for consumption growth is the “neighbour effect” – I too want for myself what others eat and possess. Information on the lifestyles of the 100 million people in China’s southeast coastal cities can be easily disseminated to the rest of the country’s 1 billion-plus population through the use of TV, the internet, and other forms of media. In this way, China’s GDP per capita can reach US$20,000.

 

In the years to come, the level of China’s wages, savings, investments, and consumption will all increase and create a positive cycle of growth. Investment opportunities in the country will also remain excellent. Attempts to unleash the growth potential in China’s economy would benefit greatly if China’s government can learn from the monetary policies of the Western nations when they were in their respective Golden Eras, and make some adjustments to the relationship between itself and the market.

 

Meanwhile, Western nations (especially Western Europe) could learn from the positive experiences of the fiscal policies of Japan and China, and allow the government to assume the role of borrower of last resort and invest in infrastructure, education, and basic research at an even larger scale. Doing so will help developed nations in the West to maintain economic growth while they are in the third stage of development (of being chased).

 

The idea of adjusting policies and tools as the economy enters different stages of development is a huge contribution to the world’s body of economic knowledge. Economics is not physics – there are no everlasting axioms and theories. Economics requires the study of constantly-changing economic phenomena in real life to bring forth the best policies for each period. From this viewpoint, the theoretical framework found in Gu Chao Ming’s book is a breakthrough for economic research.

 

Earlier, I mentioned three big questions that the world is facing today and that the book is trying to answer. They are the most intractable and pressing issues, and it is unlikely that there will be perfect answers. Gu Chao Ming has a deep understanding of Japan, so the views found in his book stem from his knowledge of the country’s economic history. But is Japan’s experience really applicable for Europe and the US? This remains to be seen. QE, currency oversupply, zero and negative interest rates, high asset prices, wealth inequality, the rise of populist politics – these phenomena that arose from developed countries will continue to plague policy makers and ordinary citizens in all countries for a long period of time.

 

For China, it has passed the Lewis Turning Point and is in the Golden Era. The economic policies (particularly the fiscal policies) implemented by Japan and other developed countries in the West during their respective Golden Eras represent a rich library of experience for China to learn from. It’s possible for China to unleash its massive inherent economic growth potential during this Golden Era, so long as its policymakers know clearly what stage of development the country is at, and make the appropriate policy adjustments. China’s future is still promising.

 

 

Conclusions

After reading this and seeing the decisiveness that China had in dealing with Covid-19, all i know is i think i should have much more of my networth in chinese companies.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

 

  Be the first to like this.
 
Icon8888 oooi don’t lah like that ... write so long how to read ?

^%#%*+£%#
06/03/2020 9:31 PM
Choivo Capital Haha I wish I wrote this.

But I'm nowhere near li lu level to be able to think and write this out haha.
06/03/2020 9:48 PM
kalteh The Holy Grail of Macroeconomics is another of his great book
06/03/2020 10:03 PM
Fabien "The Efficient Capital Allocater" Li lu is endorsed by Charlie Munger

if he recommended this book, then it's a must-read
06/03/2020 11:04 PM
cheoky Really long half way I surrender. Btm line? How it will benefit my pocket? Lolx
06/03/2020 11:12 PM
Choivo Capital Cheoky,

For me conclusion very simple.

Go long China, focus on China companies.
07/03/2020 3:10 AM
gohkimhock credit has to be given to the author of the translation Mr Chong Ser Jing.

pls do not steal someone's work.

plagiarism is an act of fraud.
07/03/2020 3:48 AM
soojinhou Eh Jon choivo this is plagiarism lah. You either cite ser jing for his work or you take this article down. What you are doing is shameless stealing.
07/03/2020 5:47 AM
Choivo Capital I had linked his original link at the top, so that people can go to site to view it.

If that was not clear enough for some reason, I can put his name as well, and make the font bigger.
07/03/2020 10:43 AM
teoct Welcome to China Jon. I have been doing that since 2018. Never too late.

The (China) demographic is also changing fast, so the window is closing fast. But COVID-19 might cause a baby boom at the end of this year.

Happy investing.
07/03/2020 11:49 AM
Philip ( buy what you understand) Omg now this is plagiarism. Did you copy paste everything word for word?

I was hoping you understood the topic better and could formulate an opinion.

Those who really understand their subject matter should be able to summarize into clarity what you believe the message is.

Sadly, I still don't get it.

Then again I find macroeconomics to be too vague to be of economic use.

I still believe there are gems in business the world over, just as buying a piece of Uniqlo and Toyota during the most decades etc would still be profitable, and buying penny stocks in America during the 2009 turnaround would still have been disastrous.

For me the message is clear, stick to business you understand and can see the long term prospects.

Simply buying things in foreign countries ( like xinquan) just by reading the prospectus will always be a bad move.
07/03/2020 10:08 PM
calvintaneng Post removed. Why?
07/03/2020 11:27 PM
Choivo Capital Phillip, unlike you, i actually quote the original links.

I even linked them at the very top, bolded it and used different colours.

I never said I wrote it, or translated it. Instead, I actively said it was not me. I have no idea why it is still not obvious to some.

Having said that, if you were to still choose to think so highly of me, well, i can't stop you.

Still reading the book and mulling things over.

I've learnt my lesson when it comes to being very sure about certain things, that are so opaque and complex that you need to be very wise and knowledgeable about just to be unsure.

To say me and li lu is like heaven and Earth, would be to underestimate the gap between us.
07/03/2020 11:29 PM

(CHOIVO CAPITAL) A Quantitative Summary of Malaysian Banks (Bench-marked against Singaporean Banks)

Author: Choivo Capital   |  Publish date: Fri, 6 Mar 2020, 8:34 PM


For a copy with better formatting, go here, its alot easier on the eyes.

A Quantitative Summary of Malaysian Banks (Bench-marked against Singaporean Banks)

========================================================================

Introduction

Well, given the fall in prices for Malaysian Banks recently (much of it due to the two recent rate cuts, expected additional cuts in the future, and foreign fund outflows), i decided to embark on a surface level study of the numbers for all the banks in Malaysia, and to benchmark them against those of the Big 3 in Singapore.

As usual, our Malaysian champion Public Bank hits it out of the park when it comes to Cost to Income Ratio (calculated by dividing the operating expenses by the operating income generated i.e.net interest income, net insurance income plus the other income).

However, that is not the be all end all as you will read in my comments below, Public Bank is currently facing serious challenges.

And as usual, Malaysian Banks and Stocks, are valued much higher when compared against Singapore or South East Asia, mainly due to wanton buying by our sovereign funds.

The Risk Free Rate/ FD Rate in Singapore is 1.6%, while in Malaysia it is at least 3.3% - 3.9% in Malaysia. (Ps, for the highest FD rates, go to MBSB, they actually gave me 4.25% before the rat cut).

Despite this DBS, a very well managed bank is only valued at PE10, which in Malaysia, until recently, most banks sold for far higher than that.

In any event, it was fun doing it, let me know what you guys think.

 

 

Summary

 

 

 

Individual Banks

 
Alliance Bank Malaysia Bhd
 

From here, we can see historically, performance of the bank is fairly decent. Cost to Income is largely maintained, which is really good. Profit is maintained despite ongoing deleveraging, mainly from better loan books.

Given the balance of probabilities, i would think the London Biscuit fiasco is a outlier. At the current price of something around 6PE normalized earnings, seems cheap.

In addition, according to an insider in Alliance Bank, they have tightened their credit underwriting across the board since the recent credit loss, which is good for the long term, but also a headwind to loan growth (which i have no problem with).

 

 

AEON Credit Service (M) Berhad

One of the best performer in this bunch, if not the best. Cost to Income for 2019 shot up from new marketing initiatives to better bundle their products.

Seem particularly attractive as given that the recent fall in share prices from adoption of MFRS 9, which had zero impact on the economics of the business.

 

 

Affin Bank Berhad

Just a shit bank, by far the worst in this group.

If you didn't know this from them building a new HQ worth 15% of their market cap, and more than 1 year's earnings.

The numbers just proved it.

 

 

AMMB Holdings Berhad 

 

Well, they definitely got beaten down after the 1MDB scandal erupted. Cost to Income ratio is way up. Their little brother RCECAP is doing more than fine though

 

 

Bank Islam Malaysia Berhad 

Highest leveraged bank in Malaysia. They've been trying to reduce this by doing dividend reinvestment schemes. What i find quite interesting, is that their loan book seems fairly good (based off ROA).

Considering this is owned by Tabung Haji, i can't imagine the management being world beaters, as evidenced by their high Cost to Income Ratio.

My guess is that there must be something in the name Islam, that makes people feel like they definitely have to pay back their debts.

Also most GLC's tend to just buy insurance from Takaful. So there's that.

 

 

CIMB Group Holdings Bhd

Cost to income ratio seem bad, especially given their size. Reading the annual reports and seeing the numbers, i'm not inspired.

 

 

ELK-Desa Resources Berhad

One thing to note, this is not exactly a financial institution, as furniture consist of a relatively large portion of the revenue and cost. So i actually may not make much sense to analyse it this way.

Seems like a weird combination, would prefer them to be separate.

 

 

Hong Leong Bank Berhad 

Loan book quality is great, as evidenced by their ROA, lowest leveraged bank (not counting MBSB which only just became a bank). Very interesting.

 

 

Malayan Banking Berhad 

Malaysia Daikor, given the economy of scale, its no surprise they managed to keep/reduce the Cost to Income ratio.

Insurance division growing, but also making less money. Seems ok, but not inspiring.

 

 

Malaysia Building Society Berhad

Lowest cost to income ratio among all the deposit taking banks. Talk about a surprising result.

I think its mostly from the fact they only just turned into a bank, and quite frankly do not have the same reach as most banks. Which may actually be a good thing.

Still, i would not actually believe their Loan Book quality yet, as the high ROA's in recent year is due to write backs from heavy kitchen sinking in 2016 and 2015.

 

 

Public Bank Berhad

Other than MBSB (which i consider an anomaly), Public Bank has the lowest cost to income ratio. No surprises here. But in recent years, this ratio have crept up. This is mainly due to their loan books being primarily housing, which is in the doldrums, resulting in lower revenue growth. Growth in cost however, did not.

Historically, Public Bank have avoided Corporate Banking (except to chinaman companies who don't need the money), which is one of the reasons their profit's are so great.

However, in days when housing/property loan market is drying up, this is biting them in the ass. I have no idea what PBBANK should do, as i would rather avoid corporate banking, other than to really expand into Cambodia and Vietnam.

Now, one would think that its worth it at the current price, but as you can see later when bench-marked against Singapore.

Malaysian banks and stocks are usually overvalued. You can buy DBS for 20% cheaper valuation wise.

 

 

RCE Capital Berhad

Quite like this one. As I've written here before.

Lets talk about RCE CAPITAL (RCECAP)

The Black Swan Hidden in RCE CAPITAL (RCECAP)

 

 

RHB Bank Berhad

Nothing special, or particularly bad about it. Given the prices of Singaporean banks, i wouldn't say its cheap either.

 

 

Singapore Banks

DBS Bank Ltd

Voted best managed bank in South East Asia, numbers look very good.

ROA is thin as hell, which in retrospect, is not surprising, given that all the banks in Singapore are run by Chinaman/Chinese. So very very strong competition.

Also, its about 10PE.

Considering SGD risk free rate is sub 2%, while our's is about 3.3%, when compared against pretty much any bank in Malaysia, its a bargain.

Worth a deeper study.

 

 

Oversea-Chinese Banking Corporation, Limited,

Also known as Orang China Bukan Cina Bank.

Numbers don't look as good as DBS's. The other 2 of the Big 3 in Sg.

Having said that, both UOB's and OCBS's numbers are not that far off from DBS's.

 

 

United Overseas Bank Limited

Numbers don't look as good as DBS's. The other 2 of the Big 3 in Sg.

Having said that, both UOB's and OCBS's numbers are not that far off from DBS's.

 

 

 

The Real Risk

Over the last few months, they've been much buzz in the Malaysian Markets on how these rate cuts will decimate the earnings of the banks. 

Well, in my opinion, rate cuts don't matter as much to the earnings of the banks over the next 10 years as one would think it would. At most it will effect its earnings for the next 3-6 months, as the fixed deposits paying high rates mature. These fixed deposit rate tenures are quite short most of the time anyway, with the longest being at most one year.

There are two real danger that banks face, they are,

 

 

  • Negative Interest Rates

Thankfully, we are not here yet. At least not for the foreseeable future.

The problem with negative interest rates is that, in the event that actually happens, most banks would be extremely hesitant to actually charge people money for keeping money in their bank accounts, thereby severely dropping Net Interest Margin as interest rates on borrowings fall in tandem with the now negative interest rate.

I'm not going to speak much more about this, as i'm sure many of us here have read multiple articles this by now.

 

 

  • Yield Inversion

Yield inversion happens when long term interest rates actually fall below that of short term interest rates.

Now this is quite an abnormal circumstance in financial markets. Normally, short-term interest rates are below long-term interest rates, indicative of the fact that investors require more return for keeping their money tied up for longer.

But, when investors expect that a slowdown is coming, they don’t care about getting more return for keeping their money tied up. They just want to lock in yield. So, they pile into instruments with the best yields, which are long-term fixed income instruments. That flight into safe-haven assets pushes long-term bond prices up.

Alternatively, investors may be expecting that rates will fall in the short term, and in fear of not being able to renew their current bonds at similar interest rates, they then decide to buy longer dated bonds. 

I won't be elaborating much further on this as i'm sure that most here would have also read a lot on these, as its been happening everywhere around the world. But what many may not know, is that in Malaysia, the yield curve have also inverted.

 

The inversion was particularly severe last week, right before the rate cut, which normalized things somewhat.

Now, why is this a bad thing for banks? Its simple, banks take in short term deposits but give out mid-long term loans. If your short term deposit rate is based on the short term MGS interest rates, while your mid-long term loans is based off the lower mid-long term MGS interest rates, well, that will severely impact your profits.

Thankfully, to an extent, by and large, Malaysian Banks do not really tie their borrowing rates to mid-long term MGS, instead adopting a BLR+XX% policy.

 

 

Still these are two things to ponder about when thinking about banking stocks.

Negative interest rates was almost always considered to be a theoretical scenario, none of the great economist we study, Keynes and Hayek etc, ever thought it could happen or last for a long time, and yet here we are, with most sovereign bonds at negative interest rates (starting with the EURO, SWISS Bonds etc since 2013).

Still, i don't think one should rely on your conclusions (no matter how clear cut you think they) on the above two things when thinking about buying a banking stock. 

There are some topics (like this one) so complex and opaque, that one needs to be highly educated and well versed in the subject, in order to be unclear about the conclusions and be unable to come to an opinion.

The conclusions to the above two scenarios will only seem clear in retrospect. At the end of the day, we need to look back to the fundamentals of the banks.

 

 

Conclusion

At current prices, other than ABMB, RCECAP and AEONCR, the rest quite frankly just don't look that attractive to me.

I'm seriously considering PBBANK and HLBANK, but their prices needs to drop below RM15 and RM12 before it makes sense to me.

As always, do let me know what you think and if you guys have any comments.

Disclaimers: Refer here.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

  5 people like this.
 
teoct Thank you so much for all the hard work and sharing here.

Yes, I am also looking at DBS vs PBB. You have reinforced my conviction that DBS is a good buy. My take is DBS is in China, HK, Taiwan, India and Indonesia while PBB depended on Malaysia, while HK, Vietnam, Cambodia and Sri Lanka are small, very small.

India and Indonesia are still just breaking even to small loss, but the potential of these 2 markets is many time bigger than those of PBB.

And DBS is embracing tech in a big way compared with PBB. This is another plus point that should keep cost at bay going forward.

Thanks again and happy investing.
06/03/2020 8:58 PM
Flintstones Good article.
06/03/2020 9:24 PM
Philip ( buy what you understand) It's interesting how quantitative and qualitative approaches differ. You used pe, income and return on equity to judge the quality of a bank

For me the more important criteria I look for in a bank is the loan impairments ratio and the loan profile. My idea of the perfect bank is a huge savings and fixed deposit accounts, and a every loan protected by solid collateral.

All the criteria you used to define a banks quality leave out the loan profile and the inherent risks in those loans.

During the subprime crises all the investors only looked at how much they made, not the risk they take to make the money. In fact, only a few analysts tracked the loan impairments ratio, and the income group of the individuals making the loans.

When I bought public Bank in 2012, this became the core tender of my investing policy.

In scuttlebutt terms, " how much leverage is the bank giving out to the corporate company in relation to their assets and ability service the debt".

My ex company was able to borrow 25 million in cash and 25 million in overdraft, all with 10 million in assets simply by raising paid up capital to 10m and having a fixed deposit of 5 million and property values at 5 million.

The car loan I have on the other hand, is based on a 5 year loan with a collateral on the car worth 368,000, and where the interest is paid first during the first 1 year, and the principal paid off after that.

If you have ever borrowed money to your friends and family, you will know borrowing money is a risky business. Assuming that your friends will pay you back with interest and expanding out into the next 5-10 years is a very risky risky business indeed.

Maybank had hyflux. Alliance Bank has London biscuit.

You are saying it won't repeat. How do you even know who they loan to?

All I can say is, if you are someone that likes margin of safety, you should find the margin of safety in banks, aka how much profit does the bank gain in relation to the risk it takes from its customer group.

In any case, you should update your graph with their annual impairments of loan profile, their client base breakdown and the growth of those safe loans profile.

It's all there hidden deep in the notes.

Where most of the important things are.
08/03/2020 4:31 PM
Sslee Agree with philip.
Wonder which bank lend money to sapura energy and insist ceo pay by hundred of million?
08/03/2020 4:49 PM
i3lurker you did not manage to get the solution?

coz the ceo owe money to the bank for how much?

Posted by Sslee > Mar 8, 2020 4:49 PM | Report Abuse
Agree with philip.
Wonder which bank lend money to sapura energy and insist ceo pay by hundred of million?
08/03/2020 5:02 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Hallmarks of Success for Banks


What should investors look for when investing in banks and other financiers?

Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits. Here's a list of some major metrics to consider:

1. Strong Capital Base
2. Return on Equity and Return on Assets
3. Efficiency Ratios
4. Net Interest Margins
5. Strong Revenues
6. Price-to-Book

These metrics should serve as a starting point for seeking out quality bank stocks.

Overall, we think the best defense for investors who want to pick their own financial services stocks is patience and a healthy sense of skepticism.

http://myinvestingnotes.blogspot.com/2009/06/hallmarks-of-success-for-banks.html

Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book
08/03/2020 5:04 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Hallmarks of Success for Banks


What should investors look for when investing in banks and other financiers?

Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits. Here's a list of some major metrics to consider:

1. Strong Capital Base
2. Return on Equity and Return on Assets
3. Efficiency Ratios
4. Net Interest Margins
5. Strong Revenues
6. Price-to-Book

These metrics should serve as a starting point for seeking out quality bank stocks.

Overall, we think the best defense for investors who want to pick their own financial services stocks is patience and a healthy sense of skepticism.

http://myinvestingnotes.blogspot.com/2009/06/hallmarks-of-success-for-banks.html

Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book
08/03/2020 5:06 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Hallmarks of Success for Banks:

1. A strong capital base is the number one issue to consider before investing in a lender. The investors can look at several metrics. The simplest is the equity-to-assets ratio; the higher, the better.

2. ROE & ROA: Besides looking for a consistent mid- to high-teen ROE, it is good to see a high level of ROA as well. For banks, a top ROA would be in the 1.2% to 1.4% range.

3. Look for banks with low efficiency ratios as evidence that costs are being kept in check. Many good banks have efficiency ratios under 55% (lower is better).

4. Net interest margins measure lending profitability. There is a wide variety of net interest margins, depending on the type of lending a bank engages in. Most banks' margins fall into the 3% - 4% range. Track margins over time to get a feel for the trend.

5. Above-average revenue growth: Historically, many of the best performing bank investments have been those that have proven capable of above-average revenue growth. Some of the most successful banks have been able to cross-sell new services, which adds to fee income, or pay a slightly lower rate on deposits and charge a slightly higher rate on loans.

6. Book value is a good proxy for the value of a banking stock. A solid bank trading at less than 2x book value is often worth a closer look. Seldom do banks trade for less than book, but if they do, the bank's assets could be distressed.




Because the entire business of banks - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits.

Learn the businesses over time. Get a feel for,
- the kind of lending they do,
- the way that risk is managed,
- the quality of management, and
- the amount of equity capital the bank holds.
08/03/2020 5:23 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Comparing PBB and DBS


1. Strong Capital Base
PBB
Equity 44.7b / Asset 432.8b = 10.33%

DBS
Equity 51.8 b / 578.9b = 8.95%



2. Return on Equity and Return on Assets
PBB
ROE 12.64% (consistent & trending downwards)
ROA 1.31% (consistent & trending downwards)

DBS
ROE 13.3% (not consistent, highest so far, usually less than 12%)
ROA 1.17% (between 0.77% to 1.17%)



3. Efficiency Ratios
PBB
34.4% (The best among the banks)

DBS
43.03%



4. Net Interest Margins
PBB: Net Interest Margin ?
DBS: Net Interest Margin 1.89%

(in lieu of NIM)
PBB
Operating margin 34.24%
Net Margin 26.65%

DBS
Operating margin 36.05%
Net Margin 30.39%



5. Strong Revenues
PBB
Income Growth CAGR 5.28%

DBS
Income Growth CAGR 7.95%



6. Price-to-Book
PBB: 1.73
DBS: 1.35




PE (ttm)
PBB: 12.44
DBS: 5.45
08/03/2020 5:55 PM
Philip ( buy what you understand) You forgot gross loans impairment.

Pbb 0.49%
Dbs 1.5%
08/03/2020 5:56 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ In the realm of lending business, managing risks is most important, especially credit risk.

A bank can grow its business very fast by lending excessively and poorly.

A conservatively managed bank, growing revenues slowly, with high quality assets, managing its costs well and well capitalized will do well over the long run.




I will focus on ROA for these 2 banks:

Return on Equity and Return on Assets
PBB
ROE 12.64% (consistent & trending downwards)
ROA 1.31% (consistent & trending downwards, ranging 1.31% t 1.54%_)

DBS
ROE 13.3% (not consistent, highest so far, usually less than 12%)
ROA 1.17% (between 0.77% to 1.17%)

Banking assets are mainly financial assets and the single data ROA says a lot about how well the bank is generating returns from its assets. The ROA of PBB is consistently higher than DBS every year, and though the ROA is trending downwards for PBB, its ROA is also less volatile than DBS.
08/03/2020 6:02 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ >>>
Philip ( 2.3% fatality rate, 80% recovery rate age 10-40) You forgot gross loans impairment.

Pbb 0.49%
Dbs 1.5%
08/03/2020 5:56 PM

>>>


I was too lazy to look it up. It will be reflected in the NIM. Thanks/
08/03/2020 6:03 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ A case study in point. My friend was invested in CIMB and I, PBB.

For many years, during the tenure of Nazir Razak, CIMB grew very fast. You can always grow a bank very fast by taking more risks and giving out loans with less stringent conditions. Its share price grew fast and PBB was very much a laggard a decade or more ago. However, over the long run, today, PBB has leaped ahead of CIMB. I will go for a bank that is conservatively managed for the long run. It is better to grow richer slowly than to risk what you already have to grow fast. If you are already rich, it is crazy to take these risks. If you are not already rich, you have to be even more smart and careful!
08/03/2020 6:07 PM
Choivo Capital This should be reflected in ROA?

Would be great if i could get the data though. Next time maybe.

===
Posted by Philip ( 2.3% fatality rate, 80% recovery rate age 10-40) > Mar 8, 2020 5:56 PM | Report Abuse

You forgot gross loans impairment.

Pbb 0.49%
Dbs 1.5%
09/03/2020 3:33 PM
Choivo Capital Phillip,

I'm not sure if you're aware. But a high NPL etc will naturally flow to the PL, and the ROA. This is a sieve.

I don't usually do a NPL analysis unless i am doing an in depth study as the data is much harder to extract.

Feel free to do the same if you want.


No further comments on the commercial loans.

Non Privately held banks usually do alot of commercial loans because by doing so, they get to bolster their commercial current accounts and investment banking business. When it comes to commercial loans, if you get your money back its a good thing already.

Blame it on stupid incentives.

This means, for banks like Deutsche, DBS, Maybank, CIMB etc, i would always expect one extremely big surprise now and then.

This means they are usually not a good investment, unless its at the bottom of a crisis, or post a big fat impairment that really murders the stock price.

Having said that, one needs to note that, in some banks the rot runs so deep, that even if it survives the recession and you were to purchase it post right issues and near the bottom etc.

It can quite simply continue to die by a thousand cuts, and require constant right issues etc.

Deutsche Bank is the clearest example of this. If you bought the shares at the bottom of the financial crisis. You get a nice pop after, but if you held you would have still lost money today (even if you reverse covid stock losses)
24/05/2020 4:51 PM
gohku Most of the malaysian banks are well capitalized to withstand the current financial challenges.

Should able to survive & thrive.
25/05/2020 11:35 AM

(CHOIVO CAPITAL) Petron Malaysia Refining & Marketing Berhad (PETRONM: 3042): A Love Letter to Ramon Ang

Author: Choivo Capital   |  Publish date: Mon, 10 Feb 2020, 11:19 AM


For a copy with better formatting, go here, its alot easier on the eyes.

Petron Malaysia Refining & Marketing Berhad (PETRONM: 3042): A Love Letter to Ramon Ang

========================================================================

Well, as you can see from title above, there is clearly no love lost between me and the management of the company despite the falling share price.

 

At the end of the day, lower share prices are very good things for those such as us, who are likely to be net long term buyer of a company’s stocks. It’s very simple, lower prices allow you to buy more stock, while higher prices hurt you as you can now buy less stock.

 

And couple this with a stronger performance by the company (which is hidden due to fluctuations in industry dynamics), the discount one is getting increases.

 

PETRONM was one the first company I *almost* made 100%. This was back in 2017 (when I was a far greater fool), I remember buying it at around RM7.8 and got a front row seat to its meteoric rise to RM15. Back then I considered its fair value about RM15 (To be fair, it’s more like RM12-13) when given a discount versus Petronas Dagangan Berhad.

 

Logically, I should have sold around RM12-RM13, not chasing the last dollar and all. But I was younger and more foolish. I also really really wanted to see a 100% gain.

 

I never sold it and watched that ~85% plus gain evaporated. It wasn’t a large amount, but it was significant to me then.

 

I rediscovered valued investing in early 2018 and started buying again from RM7 all the way down the current price today.

 

So why am I writing about this?

 

Well other than talking about my book (as my position is large enough that I don’t see myself buying much more), I also wanted to compile everything and put it down on paper officially.

 

All of my research has always been just in my head. From experience, I know writing it down usually shows me something that I’ve missed (this time was no exception, but it was a happy surprise) and help me understand the company a little bit better.

 

I hope you found reading this even a bit as useful/pleasurable as it was for me to write this.

 

 

 

 

Petron Malaysia Refining & Marketing Berhad (PETRONM: 3042)

 

Introduction

PetronM is a Malaysian listed company in the business of,

  1. Refining petroleum products Petron Port Dickson Refinery (PDR) in Negeri Sembilan which has a crude distillation capacity of 88,000 barrels per day.
     
  2. A retail business which operates Petron service stations nationwide and markets fuel and non-fuel products and services to the retail and commercial markets.

 

Prior to 30 March 2012, the company was owned by ExxonMobil International Holdings Inc (ESSO).

 

Prior to the acquisition, the company was under performing for a few years (nothing too serious, a pre-Afzal TIMECOME this is not), when they sold it to PETRON its earnings were close to its all-time best performance then due to the high oil prices.

 

When PETRON bought it over, the market promptly decided to crash (a year plus later).

 

For the purpose of the valuing the company, I will perform my analysis by looking at the two parts separately.

 

Do note that in this case, a significant amount of extrapolation and assumptions is needed, the company does not report its performance by the separate operating segments.

 

In the management’s own words,

 

“Petron’s Refinery is an integral part of the whole business of the Company. Unlike rival listed Companies who are either a marketing company or a Refinery, Petron is a combination of both. Both the Refinery and Marketing arms of Petron exist together, and the Refinery is an integral part of the supply chain that provides products to the Marketing arm of the Company. As the Company’s operations are always seen as a whole, Petron does not do segmental accounting to identify the profits and losses of each segment of the Company’s business.”

 

Let’s begin.

 

 

 

 

The Retail Business

I will be starting with the retail portion, as this is the portion of the business i consider to be more valuable.

 

Industry Dynamics

In Malaysia, there are three kinds of business.

 

The first is your typical business, which is subjected to the full force of the local and global markets and competition. Occasionally, when the global impact is too large and threatens to destroy the entire industry, such as the steel sector. The government may intervene by placing tariffs on imports of those products.

 

Vice Versa, when prices of goods in those industries become too high due to global demand (while costs remain constant), the government may temporarily place export bans/tariffs to slow the overseas demand. This happened in 2017, when the government banned rubberwood exports to help the furniture industry.

 

The second, is the government regulated industries, where the government’s goal is to get prices and costs down as much as possible and prices are fixed by the government.

 

These are industries such as the egg, chicken, vegetables etc. The competition in this business is hellish. For example, in 2018, feed costs for chicken and eggs shot up due to the strength in USD, as well as increased prices for Soybean feedstock etc.

 

Technically, the prices set by the government are supposed to incorporate any increase/decrease in costs. But for industries like this where the product is so widely used and politically sensitive, the government is slow to recognize any increase in costs, while fast to recognize any decrease in costs.

 

There is a reason why companies in industries like these are usually privately owned with minimal government shareholding and run by non-bumiputra’s.

 

The third, is government regulated industries, where for one reason or another, the government regulates it to ensure profitability for the average. These are industries such as Banking, Insurance, Power, Water, Petrochemicals and Concession Assets etc.

 

They are typically run by Government Linked Companies, which due to micro incentives not being lined with macro incentives, require at minimum, an oligopoly to be average, and a monopoly to be above average.

 

And in industries like this, when just being average gets you a profit, being above average or outstanding, gets you super-normal profits. Companies like Public Bank, Hong Leong Bank and LPI etc are great examples.

 

The retail petrochemical industry happens to fall in this category.

 

 

 

Retail Petroleum Industry

In Malaysia, unlike in most countries. The margins obtained by the petrol station operators are determined by the Government.

 

Now, here is the interesting part. We all know that the margin earned by Petrol Dealers in Malaysia are set by the government. Ie: 15 sen per litre for RON 95 (up from 12.19sen in 2019) and 10 Sen per litre for Diesel (from 7 Sen per litre in 2019).

 

However, what most people do not know, is that the margins at which petrol station operators (not just the Petrol Dealers) can profit by are set by the government as well.

 

Here is how the petrol price is derived.

 

Breakdown: Fuel Price In Malaysia

Comments

Cost of Product

Based on Mean of Platts Singapore

Mean of Platts Singapore (MOPS) is the cost is the already refined product, as tracked by S&P Global Platts and is based on the daily average of all trading transactions between buyer and seller of petroleum-based products.

If you also own a refinery, you can earn the profit differential in this portion.

Alpha

Petrol - RON95: 5 sen per litre

Diesel: 4 sen per litre

This is the buffer given by the government to the petrol companies. If the price of the fuel purchased by the petrol station operators is higher than the MOPS price, and the difference is higher than the Alpha, the petrol company will bear the cost. Vice Versa.

Do note that the value of the alpha is from 2009, the amount may be different today (I can’t find the latest). However, the concept is still relevant.

Operational Costs

Peninsular Malaysia – 9.54 sen per litre

Sabah – 8.98 sen per litre

Sarawak – 8.13 sen per litre

Now, here is where you can really make the margin. The government sets the operation costs at which you can allocate to the price of the petrol every week, and this is based on the industry average for each region, the bulk of the industry average is contributed by Shell and Petronas Dagangan.

Again, the numbers shown there is from 2009, the amount may be different today (I can’t find the latest). However, the concept is still relevant.

Oil Company Margin

Petrol – RON95: 5 sen per litre

Diesel: 2.25 sen per litre

This is the profit that the government allocates to all petrol station operator companies.

Petrol Dealer Margin

Petrol – RON95: 15 sen per litre

Diesel: 10 sen per litre

This is the profit allocated to the petrol station dealers. They are two kinds of dealers, they are called CODO (Company Owned Equipment and Site, Dealer Owned Inventory) and DODO (Dealer Owned Equipment and Site and Dealer Owned Inventory).

For CODO Dealers, they are paid the Petrol Dealer Margin as set by the government. For DODO Dealers, they are paid another margin on top of the amount set by the government, this margin is set by the petrol company.

In addition, Petrol Dealers also usually need to pay a licensing fee, as well as 10%-20% of the revenue from the convenience stores.

Sales Tax/Duty or Fuel Subsidy

When the price of fuel is above the fixed price set by the government, a subsidy is given keeping hold everyone’s margins. Conversely, if the government sets pump prices above the cost components, motorists will have to pay duties. And oil companies like Petron, collects subsidies from the Government (or pay

duties to the Government) on behalf of motorists. This is where you will sometimes see amount owing by/to Government on the balance sheet.

 

Needless to say, it is in essence, a cost-plus contract (modified in some ways) which is the only method usable if you want to enable the average to remain profitable.

 

The guarantee profit factor is so prevalent in this third kind of industries, that when the government announced the weekly price mechanism, and was considering allowing petrol stations to set lower prices.

 

The moment this whiff of potential competition happened.

 

The Petrol Dealers Association of Malaysia (PDAM) which represents more than 2000 petrol dealers in Malaysia, argued that the new mechanism will not to bring benefit to consumers in the long run and will create competition among oil companies and potentially can create a monopoly market by large companies with sound financial ability that are able to sell at lower prices over a long period of time, which will result in dealers closing shop.

 

Well.... I guess... thank you for forcing me to sell at a higher price?

 

So, how does an above average performer then obtain super-normal profit in this “guaranteed profit” industry.

 

The answer is two prong (and quite similar to pretty much any other industry).

 

  1. Build market share
  2. Lower cost.

 

 

 

Retail Market Share

When Petron took it over from ESSO back in 2012, its Retail market share was 9%.

 

By 2014, it had risen to 16.4%.

 

Based on management representation during the AGM's. It further increased to 17.7% in 2015, 17% in 2016, 19% in 2017 and 20.5% in 2018.

 

And finally, in 2019, it increased again to 21.1%.

 

Today it is third in the industry. With Shell taking first place with 35% and Petronas a close second at 30%.

 

This is on top of the industry average growth of about 6% per annum from 2012 to 2019.

 

Quite an impressive performance. In addition, due to the average industry growth of around 6%, this translates to growth in the low teens for PetronM to gain the market share it did.

 

This comes off the back of strong marketing performance (most of the gains came in the first 1-2 years after the takeover). Most petrol stations then actually recorded at immediate jump in sales volume after the re-branding.

 

In addition, the company have gotten many cost-efficient wins, that improve experience vastly, while not costing much.

 

It was one of the first to start installing air conditioners in toilets. In fact, in 2017 it won the recognition for having the cleanest toilets in the industry by Ministry of Housing and Local Government.

 

It also offers one of the best “Miles” cards, giving you effectively 0.75% discount on your petrol. And was the first to allow you to convert points directly to petrol, with no expiry date on the points, making customers very sticky.

 

They also focus very much on ensuring high margin products like the RON100 (which they are the first to launch) are available in all important locations and are perfectly marketed. The other RON100 fuel provider is Shell’s V Power Racing. Which to be honest, most people do not know it to be RON100 grade as well, therefore thinking PetronM’s is better.

 

Gross margins on the ROM 100 (this is from back in the day when I was an auditor for a Petron Station Dealer) is about 20%. Those of RON97 is about 10% and RON95 is about 5%.

 

The company is also aggressively expending petrol stations wherever they feel is lacking, in fact if you were to drive into Johor Bahru now, the first sight you see is a sea of Petron Stations.

 

All of which offers RON100 for Singaporean cars (which are usually Continental Cars, that perform much better on RON100 fuel, which is still very cheap for Singaporeans) , as well Kereta Hantu (Singaporean Cars with Cloned Malaysia license plates) the bulk of which are Continental Cars (I mean why not? A 2012 BMW 3 series is only RM8k, the price is about the same for Audit and Mercedes as well).

 

They were also one of the first to allow you to set the amount of petrol you would like to pump, directly at the machine, instead of having to head to the counter. This is unbelievably helpful to most motorcycle users who are also often in the B40 category for whom the RM200 hold on debit cards is very painful.

 

In fact in January 2020, they became to first to not have any holding charge for payments using ATM Debit Cards (and of course was smart enough to start a marketing campaign to make sure everyone knows).

 

All of which are either cheap value wins, or profitable initiatives that also gain you market share.

 

 

 

 

 

Lowest Cost Provider

Now, the second question, are they the lowest cost provider? Allowing them to make the additional margin from the “Operational Costs” component which is set based on industry average.

 

Well, let’s compare them against its listed counterpart, Petronas Dagangan.

 

What we will be using is Cost/Income %.

 

Cost will consist of Other Operating and Administrative cost, which is separate for the Cost of Goods/Fuel sold.

 

The thing about Petrol Companies is, their revenue is often decided by the price of fuel globally, which often outweigh any increase/decrease in volume sold.

 

Which is why we will supplement it by using Cost/Total Gross Income %.

 

For the purpose of this comparison, I’ve also included that of Petron Fuel International Sdn Bhd (“PFI”), which is the company privately held by Petron Corporation.

 

This company’s business consists solely of a portion of its petrol station business in Malaysia.

Now the first thing, you should note, is that what does into categories such as Operating Expenses and Administrative Expenses, may differ significantly for both companies.

 

Having said that, from what we can see here, in terms of cost, whether calculated on the basis of Cost/Income % or Cost/Total Gross Income % is far lower for Petron Malaysia and Petron Fuel International when compared against Petronas Dagangan.

 

Even if we are to ignore those issues due to potential classification issues, in terms of absolute figures, over the last 7 years, costs for Petronas Dagangan have steadily marched upwards at a compounded rate of 6% per year, while that of Petron Malaysia’s have either reduced or stayed largely even. And this is despite the large increase in retail market share.

 

In terms of efficiency and costs, Petron is clearly leading the pack. And this is despite the commercial arm of Petronas Dagangan being far larger and contributing significant amount of additional revenue/gross profit.

 

Having said that, do note that the Operating Costs for 2017 and 2018 for Petronas Dagangan likely did not suddenly increase for business reason, but is likely due to a change in accounting policy resulting in reclassification in cost categories.

 

Having said that, whether under the new classifications or old classifications, cost of Petronas Dagangan steadily marched up.

 

 

 

The Refinery Business

The other part of the PetronM business is its refinery business. For the most part, most people consider this to be a drag on the earnings, with the refinery earning the least money.

 

Lets find out if this is true.

 

Current, the company has roughly 640 petrol stations in Malaysia. Approximately 426 of them belongs to Petron Malaysia, while the other 214 belongs to Petron Fuel International.

 

That is an approximately 2/3 (PetronM) and 1/3 (Petron Fuel International) split.

 

Using the Petron Fuel International financial statements, we will extrapolate their earnings, and deduct it from the PetronM’s financial statements to see if it’s true.

 

 

And tada, no surpise. From the numbers above, that is probably true.

 

The thing to note here is, unlike other refineries in the region, the Port Dickson refinery taken over from ExxonMobil/Esso, can only process very light sweet crude, which is the type typically produced from Malaysia players and is typically more expensive.

 

Since the acquisition of the company and being dealt this bad hand, the company have also moved to improve the economic position of this refinery, by initiating a “Crude Optimization and Refining Improvement Program” to find alternative crudes that can be blended along with the low sulphur Tapis Crude (which is more expensive), while taking into account the finished product yields, such as Gasoline, Diesel, LPG, Jet A-1, Low Sulfur Waxy Residue (Bad) and Naphta (Bad).

 

Upgrades have also been done in order to get it to be able to process higher margin crudes.

 

Since then, the company have found a range of domestic and regional crudes that can be used. One crude companion that was found, had a higher distillate yield value due to being able to produce more Diesel and Jet A-1 while reducing Naptha yields.

 

Due to the fact the refinery is still not fully optimized, it is currently only run at roughly 55%-60% capacity, with about 60% of the finished fuels demand for PetronM being imported.

 

The management have indicated that they can run it at higher rates, but as its not viable economically at higher rates, they are currently not doing so.

 

Interestingly, this also means that turnarounds don’t affect profitability as much as other refinery oil companies. Though to be honest, I would far prefer our refinery being so amazing that any turnaround will drastically impact profitability.

 

The refinery division was also impacted by the fact it needed to undergo EURO 4 and EURO 5 upgrades, which had cost roughly RM500m (this is just an estimate) with the other upgrades and expansion over the years coming in at roughly RM250m. About RM350m of these expenditures came in 2019.

 

Luckily for us, with the government having just upgraded to EURO 4M for Petrol and EURO 5 for Diesel in 2020 (the last time we upgraded our fuel was RON92 which was phased out in 2009). EURO 6 is the next one and this standard is not yet widely adopted worldwide.

 

Given the balance of probabilities, there is unlikely to be any new extraordinary compliance and maintenance capital expenditure requirements, for the next few years (preferably for the next 10 years).

 

Capital expenditures in the future are likely to be more of the “increasing economic benefit” kind, which over the last few years, consisted mainly of installing more storage tanks to hold more fuel especially at the Bagan Luar Terminal , as well as connecting pipelines to the Klang Valley Distribution Terminals and Multi Product Pipeline to lower transportation costs.

 

 

 

As a whole

For the company as a whole, in terms of the numbers, I decided to perform a full Owner’s Earnings Analysis,

 

 

As we can see here, since being taken over by the new management, the company has generated “Owners Earnings” of RM1.35 billion from 2012 to September 2019.

 

This is despite all that onerous EURO4 and EURO5 maintenance capital expenditures, as well as the numerous upgrades needed under the “Crude Optimization and Refining Improvement Program”.

 

Excluding the these capital expenditures needed to meet the higher EURO 4 and EURO 5 requirements, the company would have generated RM2.4 billion in owner’s earnings instead.

 

With the large EURO 4M and EURO 5 capital expenditures expected to be completed by 2020 and most of the cost incurred, i foresee less significant maintenance capital expenditures in the future.

 

The most interesting point for to me to note here is, despite growing their Retail Petroleum market share in Malaysia from 9% in 2013, to roughly 21.1% in 2019, as well as, increasing sales volume from 28.8 million barrels of petrol in 2013 to 35.7 million barrels (extrapolated) in 2019.

 

The net working capital (Working Capital consist of Trade Receivables, Trade Payables and Inventory) required to run the business since 2013, have actually fallen by RM703m or about 30%.

 

Imagine this, since expanding the business significantly, the management actually require 30% less working capital to run it.

 

If this is not a sign of competent and efficient management, I don’t know what is. A Serba Dinamik Berhad, this company is not.

 

And interestingly, despite 2019 being the most challenging year for the company thus far, with extrapolated earnings of only RM200m (maybe less), which is half that of 2017’s profit of RM408m, and capital expenditures at an all time high of RM345m, more than double that of 2018 (the previous all time high).

 

The company still generated an all-time high owner’ earnings of RM602m, more than double that of 2017’s and this is only in the 9 months of 2019.

 

Even when normalized to account for the the RM390m owed by the government for fuel subsidies in 2018 that was paid in 2019. The company still generated roughly RM212m in cash.

 

Utterly Incredible.

 

 

 

 

Valuation

And so, what is the value given to this business by Mr Market?

 

A business that over the long term, can churn out owners’ earnings of roughly RM200m at its cyclical low, with its average over the long term likely to be significantly higher and increasing.

 

Well, as of today, Enterprise Value (Market Capitalization + Net Debt/Cash) of Petron Malaysia is roughly RM940mil, or about 4.4 times cyclical low owners’ earnings.

 

How much do I value this company?

 

Well, due to the fact that I had to extrapolate the retail earnings instead of seeing it properly, I would need to discount the current earnings a little from the current RM216m.

 

Lets say a 20% discount, putting long term earnings at RM170m, and to be conservative, we assume zero growth.

 

Recently, BHP was put up for sale from Boustead, and would have been sold by now if not due to Vitol currently blocking the sale. The valuation being put up was around 12 times earnings to 19 times earnings.

 

Now, I have no idea what the capital structure of that company is like, and I don’t want to buy a copy of the accounts from SSM (if someone here wants to buy one, you’re welcome to do so, and if you wish, update me so I can update this article), but as we are completely debt free (and I’m willing to bet BHP is not, looking at Boustead’s accounts).

 

Even if we are to blindly use the valuation used for BHP by private, we would likely still be undervaluing it.

 

Now, personally, I would like an IRR of 10% minimum when I’m looking at equities due to the additional risk I am taking. Since i'm assuming zero growth to be safe, and ignoring the growth in the low teens for the retail division.

 

It translates nicely to PE10, or RM1.7b.

 

What about the refinery?

 

Well, after the improvements made in 2013 and 2014, based on the extrapolated numbers, the refinery have no longer continued making a loss.

 

Personally, I think the refinery should make, maybe RM50m a year in its current state when normalized over the long term (gut feeling lol).

 

If upgraded (which to be fair , costs money), it should improve. However, its too hard for me, so I’ll just put it as zero.

 

Which puts my fair value at a minimum of RM8.5 and as high as RM12-15, depending on whether or not I want to include growth or refinery earnings (or god forbid, refinery losses).

 

 

 

Risks

Deregulation and Increased Competition

Fat luck of this happening.

 

Petronas Dagangan is a RM22 bil kitty for the government, and Petrol Dealers in Malaysia consist of mostly Bumiputra’s. There is every incentive for the government to not deregulate and increase competition.

 

And even if they did, I doubt any GLC or MNC will be able to compete with Petron. They are just not incentivized to.

 

 

 

Sudden Fall in Fuel Prices and Sudden Increase in USD.

Currently the company holds about half month stock on hand (only slightly above PETDAG’s 0.4 month, despite having to ship in 60% of their finished goods), or about RM560m and Payables of RM1bil (most of which is denominated in USD) at any point in time.

 

Any drop in value of oil and increase in value for the USD will impact their earnings negatively. So this is a question of, if they are doing any hedging.

 

According to the company, for commodity hedging, they hedge about 40 to 60% of our exposure.

 

For currency hedging, they hedge about about 80 to 90% of its dollar-denominated liabilities on crude and product purchases with the balance is covered by the natural hedges or PetronM's export receivable which is denominated in USD.

 

So realistically, given the recent fuel price drop of about 20%, assuming only 40% (low range) of inventory is hedged, net impact to the PL should be about RM70m, and probably a bit higher as they will keep buying stock as prices drop and stabilize.

 

Well, it sucks, but when fuel prices increase, we would see a commensurate gain.

 

Typically, hedging can be considered an insurance policy, and it should cost you roughly 4% (typical option prices) of the value of the items you are hedging over the long term.

 

Having said that, this means that earnings for this company is going to be volatile, at least until the retail and commercial division grows to be the vast majority of the business, minimizing the fluctuations of the refinery end.

 

 

 

 

Is the management over-allocating more of their petrol stations to the 100% owned Petron Fuel International (“PFI”).

As we have seen very clearly from this analysis, the petrol station portion of the business is the most profitable of the two by far, and a natural fear is that the stations from the current portfolio will be sold to the 100% owned PFI, or that new stations will be allocated only to PFI.

 

Well, this is question that have been asked a few times during the AGM, and their answer, verbatim, is as follows.

 

“In determining which of the companies will be assigned ownership station, the key factor would be the logistics efficiency and cost of transport.

 

Thus the determination of assignment of ownership would depend on the the location of the closest distribution terminal and ownership of that terminal.

 

For instance if a new station was to be built in the Southern region of Johor, it is likely that it would be a PFI designated station, considering the nearest terminal in Pasir Gudang is PFI’s.

 

Similarly a new station in the North, eg Kedah would likely be designated to PetronM's due to its proximity to the PetronM's terminal in Bagan Luar.

 

Placing all new stations under PetronM may not be effective as the cost of transportation may not make the station’s operations economically viable. The Company has a stringent process in place to ensure that the process of designating the station is based purely on the factors that make the station viable economically.

 

The fact that PFI is a 100% owned entity does not factor in the equation. It is to be noted that the majority of the Petron stations in Peninsular Malaysia are PetronM's.”

 

Naturally, we cannot blindly believe this.

 

However, during the initial acquisition, 67% of the stations belonged PetronM. Over the years, petrol station additions have largely split according to this ratio as well.

 

Its just unfortunate the Johor Stations are not under PetronM. A real pity.

 

I would be very happy, if the management decides to consolidate its entire Malaysian Operations together.

 

However, considering how shrewd the management is in allocating capital and saving costs, I don’t see why they would do this kind of expensive and unnecessary restructuring exercise.

 

Well, we can always buy Petron Corporation shares I guess, its currently at its 15 year low.

 

However, that is a different animal altogether.

 

In the Philippines, they are currently facing problems from to oil smuggling in the Philippines by the blackmarket to avoid excise tax, which results in Petron’s prices being higher than the black market.

 

A problem we will never have, unless its cigarettes.

 

 

 

 

Other Information

Why the title?

During my study of the company, one of the interesting things i found out was how  Ramon S Ang got to there he is today.

 

For the most part, given the kind of person he was, Ramon was supposed to grow up successful, but a Billionaire, that is a stretch for anyone, no matter how smart or hardworking.

 

Back in the day, Ramon got to know Ambassador Eduardo “Danding” Cojuangco Jr. through his eldest son, car-racing aficionado and ex-Congressman Mark Cojuangco.

 

Eduardo Cojuangco made Ang manager of his Northern Cement business, where he excelled with entrepreneurial vigor.

 

After the 1986 EDSA uprising, when the Cojuangcos were in exile due to the Marco's being overthrown, most of their managers shunned and even stole from them.

 

Ramon Ang, on the other hand,  honestly and loyally managed Northern Cement for the Cojuangco family. After some time, Eduardo Conjuangco eventually returned. He retook control of San Miguel Corporation and entrusted its management to Ramon Ang, who made it more far far successful.

 

He dramatically changed SMC from a beer and foods firm into one of Asia’s biggest, diversified multinational conglomerates. Eduardo Cojuangco eventually chose Ang as his successor and sold the bulk of his SMC shares to him, and helped him pay for it by loaning him the money.

 

Today, San Miguel Corporation is about 6-7% of the GDP of Philippines.

 

Now, the Conjuangco family was very much intertwined with the massively corrupt Marcos family, and despite this kind of environment which should only attract the most Najib like characters, there was someone like Ramon Ang who as the Chinese like to say "出淤泥而不染". Said in english, is represents the the lotus flower which grown from the mud and yet blossoms white.

 

Quite interesting. And precisely the kind of person i want in charge of a company i hold shares in.

 

 

 

 

Conclusion

Crack Spreads, USD Exchange Rates and Oil prices are important items to know, but they are ultimately unknowable.

 

The real question is, how are the economics of the business, the competence of the management and the value you are getting for the price you are paying.

 

I hope this article helps shed some light regarding the above.

 

As always, let me know if you disagree or feel I missed out on anything.

 

Disclaimers: Refer here.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: PETRONM
  4 people like this.
 
Jaack1 Thank you for sharing
10/02/2020 1:07 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ It is better to be approximately right than to be absolutely wrong.

This business was and is outside your circle of competence.

Accept it and move on to a simple business which you can assess and value confidently and easily.
10/02/2020 1:22 PM
Sslee Hahahaha 3iii,
Can you also write some shares recommendation within your circle of competence.
10/02/2020 1:56 PM
Choivo Capital The only recommendation 3ii will accept is Nestle.
10/02/2020 2:04 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ :-) I share my honest opinion. Please read the Hengyuan thread and read my posts on Hengyuan's business.
10/02/2020 2:07 PM
Choivo Capital Thanks. I think we had this discussion way back then in 2017. Its been awhile. Do you mind sending me copies of your posts.
10/02/2020 2:11 PM
10/02/2020 2:14 PM
CharlesT Lately most of 3iii high PE low div yield so called FA stock all went holland..

guess u cant depend on good luck forever
10/02/2020 2:18 PM
Choivo Capital Dutchlady also died recently.

I can't rmbr the last time i drink dutch lady fresh milk. These days i much prefer yarra milk.
10/02/2020 2:20 PM
Sslee Hahahaha 3iii,
If you want to know about HRC you can read my below blog:
https://klse.i3investor.com/blogs/Sslee_blog/2019-07-09-story214178-The_important_of_asking_probing_questions_during_AGM.jsp

Thank you
10/02/2020 2:23 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ SSLee

You too was carried away by the shirt term temporary good profits of Hengyuan. What I posted on Hengyuan all those months turned out to be quite accurate.

Do you now agree that your request for more dividends was irrational? I opined the company did not have the free cash to give dividends as its future capex will be significant.
10/02/2020 3:30 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ >>>>>>

Posted by CharlesT > Feb 10, 2020 2:18 PM | Report Abuse

Lately most of 3iii high PE low div yield so called FA stock all went holland..

guess u cant depend on good luck forever

>>>>>>



Never depend on luck.

My portfolio will be very fine for those with a long term time horizon in their investing.

Short term price fluctuations are expected and do not bother the long term value investor.
10/02/2020 3:35 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Oh my goodness, just noticed Hengyuan is now RM 3.39. That is a far cry from RM 45.00, the fair price given by dishonest raider for this stock.
10/02/2020 4:09 PM
FutureGains those buys dlady from si fool recommendation will be crying lol !!
10/02/2020 4:12 PM
Outliar Yarra milk is actually Farm Fresh milk repackaged whilst Farm Fresh is still selling the same milk under it's own brand at a slightly higher price. Not entirely sure why.
10/02/2020 5:21 PM
untong Thanks for sharing.
The 2 main reasons i bought PETRONM was
1) they expand the market share fast
2) they repaid their borrowings fast
The only things are i not sure about are the calculations on valuation, but here we have a good reference hah!

Currently the few concerns are;
1) hedging cost, is it going up in next few years
2) any huge depreciation coming
3)how soon is EURO 6 compliance coming
4) PENGERANG impact ? i am not sure about this
5) commercial jet fuel demand is hit due to coronavirus, how big is the impact

I always like to relate PCHEM with PETRONM as both are oil downstream, i have both in my portfolio, with PCHEM twice bigger size than PETRONM due to its predictability. But i believe if PETRONM can up their retail market share close to 30% it will hit another level of critical mass. Will add more slowly.
10/02/2020 10:47 PM
stockraider Actually after carefully studying Petron left, right & center...Raider find that Choivo is right, Petron is indeed very efficient in their operations loh....!!

Petron can be a potential bluechip stock for your portfolio loh...!!

VERY GOOD ARTICLE ON PETRON BY CHOIVO....BUT ONE THING RAIDER FIND VERY HARD TO BELIEVE IS PETRON HAS GAIN MARKET SHARE AT THE EXPENSE OF SHELL & PETDAG REACHING MORE THAN 20% MKT SHARE LOH...!!

BUT IF U GO TO THE PETROL STATION, U FIND SHELL AND PETDAG STATIONS MUCH MORE CROWDED THAN PETRON ANYTIME LOH...!!

SO RAIDER VERY PUZZLE H0W PETRON DID IT LEH ??

NEED MORE DUE DILIGENCE HERE LOH..!!
11/02/2020 12:00 AM
Icon8888 Damn, another long article

(Curse first, read later)
11/02/2020 3:22 AM
supersaiyan3 Well written, its perfect.
11/02/2020 5:46 AM
supersaiyan3 You will see, HengYuan will be mysteriously affected by its China operation. Petronas renovation had spent so much money to make the shop smaller and the logo black, something i can't comprehend.
11/02/2020 5:50 AM
Choivo Capital Untong,

Remember, the refinery is to be honest not worth a damn, most of petronm finished goods are imported to begin with.

If Pengerang comes online, well, petronm can now save money by buying direct from Pengerang, not a bad thing.
11/02/2020 9:35 AM
Choivo Capital Stockraider,

Hmm, it interesting that you feel that petronm stations are usually empty. I don't feel that way to be honest from my experience at their stations, though it may be just because i hold their shares. haha.

having said that, their petrol equipment is definitely a step below those of Petronas and Shell.

Whether this is a good or bad kind of cost saving, i have no idea.
11/02/2020 9:37 AM
George Leong Thanks for sharing this article.
12/02/2020 10:20 PM
gohku This situation is unlikely.
The purchase pecking order for petron is to buy from its own refinery first then import from petron oversea parent and the last consideration are sourcing from third party refinery like petronas, hengyuan, singapore petroleum and petrol china.

Petron own local refinery due to being old can only supply 50% to 60% of its overall marketing needs thus the company need to import from the parents for its balance requirement.


Posted by Choivo Capital > Feb 11, 2020 9:35 AM | Report Abuse

Untong,

Remember, the refinery is to be honest not worth a damn, most of petronm finished goods are imported to begin with.

If Pengerang comes online, well, petronm can now save money by buying direct from Pengerang, not a bad thing.
12/02/2020 11:20 PM
Outliar https://www.theedgemarkets.com/article/allowing-more-petrol-operators-will-keep-fuel-prices-competitive
13/02/2020 11:21 PM
TakeProfits Walau, thanks Choivo, I got lost in your above thesis! Hmmm....Hopefully Petron has bottomed out...
14/02/2020 5:11 PM
Outliar New Petrol Station named ‘Five’ will begin operating in March
23/02/2020 5:26 PM

(CHOIVO CAPITAL) Really Understanding Owners Earnings

Author: Choivo Capital   |  Publish date: Mon, 27 Jan 2020, 3:29 PM


For a copy with better formatting, go here, its alot easier on the eyes.

Really Understanding Owners Earnings

========================================================================

One of the things I’ve been really thinking about for the last few weeks “Owners Earnings”, the valuation method detailed by Warren Buffet in Berkshire Hathaways 1986 annual report.

In that report, Warren Buffet stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, minus any reinvestment of earnings.

It was defined by him as such,

“These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges, less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume.

Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (c) must be a guess – and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes.

All of this points up the absurdity of the ‘cash flow’ numbers that are often set forth in Wall Street reports. These numbers routinely include (a) plus (b) – but do not subtract (c).”

In essence, it means,

Owners Earnings =
(a) Reported Earnings
Add: (b) Depreciation and Amortization
Add/Less: (c) Other Non Cash Items
Less: (d) Average Annual Maintenance Capex
Add/Less: (e) Changes in Working Capital

I’ve been using this in my analysis quite a bit, and to be honest, it can be a bit of a drag digging out the non-cash items to put into the my excel sheets, some of it strike me as activity that adds very little value.

And therefore, I’ve been thinking about how to simplify it a little, without affecting the essence of why this tool is used.

Having used this for about 20 companies, with the analysis of each company usually spanning 10 years at minimum, I’ve come to the conclusion, that for me, the main use of this tool, is to determine,

  1. The level of efficiency achieved by the management, based on the amount of net working capital require to run the business.
  2. The ability of the management to reinvest earnings at high rates of return. (or the lack of ability to be honest).

Therefore, for my own analysis, I’ve made some amendments to focus more on the above, and they are as follows.

(Do note, that for me writing is often the process by which i realize i know nothing about what I’ve talking about, and a way of finding more clarity for me.

The main reason I am writing this article is to properly condense my thinking on Owners Earnings, everything else is just gravy. So things may seem a little incoherent at times)

 

 

 

Reported Earnings.

I use “Total Comprehensive Income” for “Reported Earnings”.

Why is this the case? Why not “Profit After Tax” instead? This is because there are many items, that have a real bearing on long term profitability, but is not usually seen in your profit after tax. These consist of items such as, Foreign Currency Translation, Hedging Fair Value Changes/Cost, Pension Fair Value Changes, Fair Value Changes in Investments etc.

Now, if you were to be doing one when you only have data for say 2-3 years, it would potentially make sense to use “Profit After Tax” as the numbers are less volatile and more meaningful.

But if like me, you are using data available as early as 2 years before the IPO, which can often run more than 10-20 years. All these fair value changes when seen over a long period of time, can be quite meaningful, in identifying management’s ability to do hedging, if they are investing in things (in countries) they know little about (foreign currency translation), if they are under-accruing pensions etc.

In addition, these fair value changes etc constitute real profits or losses. Just because they are unrealized this year, does not mean they won’t be realized the next year. And if they are realized, due to the company already taking up these fair value changes in the previous year, the realized losses/profits will not show up in the current year profit/loss (other than the net difference, which is usually much smaller).

Having said that, they are exceptions to the rule.

Berkshire Hathaway are now require to report the fair value changes to their investment holdings (based on the prevailing market price) under their P/L, which can severely change the profit/loss numbers of the company, especially since it only started 2 years ago.

Given that their holdings are usually very long term, it would make more sense to ignore the changes in fair value of investments, but instead create mini financial statements for each holding, and identify the earnings attributable to Berkshire from these holdings.

Having said that, if you knew the fair value changes of Berkshire’s Investment Holdings since inception, and can line them up, it would make sense to consider the changes in fair value of investments to be meaningful (and very much so).

 

 

 

Depreciation and Amortization

Not much comments here (surprise, surprise), a fairly straightforward item, except I usually lump in any loss/gain on disposals, or loss/gain on fair value changes relating to Investment Properties etc.

I look at this in terms of more than just the property plant and equipment, but also in terms of investments in subsidiaries, associates, joint ventures, and shares etc.

My purpose for doing this, is so that, I will be able to see on the net basis, what is the outflow that goes towards new investments, whether in PPE’s or another stakes company, and the results of these, on the owners earnings of the companies, net of capital expenditures.

 

 

 

Other Non Cash Items.

This one is quite interesting. This category, includes items, such as unrealized foreign currency gains/losses, provisions for doubtful debts, other provisions etc

Initially, I used to split them out in a separate line (except for unrealized forex), however, I found it to be a relatively low value activity in that, it rarely gave me new insight into the company. Other than a few scenarios, particularly in Genting’s and RGB’s audited accounts. Where for some years the provision for doubtful debts is very significant, as well the subsequent write backs.

Being able to see it in sequence gave me an idea of the challenges the companies went through, how much of it still applies today.

Having said that, these items usually net off over the long term, if one has the time, you may consider listing them out, if not, you’re not missing out as much.

In addition, as i take comprehensive income, which includes taxes, you do not need to bother about over / under provision of taxes, as if looked over the 10 year timescale, it should be balanced off.

The key item here to consider in this category is this.

Many companies have associates or joint ventures, whose profit is recorded using the equity accounting method. In layman terms, the companies’ proportion of those associates/JV’s profit, is recorded directly in the company’s P/L.

For me, I consider the earnings of these companies just as valuable regardless if dividends were paid out, however, for others they are considered a “non-cash” item and therefore removed and replaced with dividends received from those companies.

I don’t do this, it may be a good idea, or not.

In addition, as I used “Total Comprehensive Income” as a starting point, without considering if its attributable to shareholders or non-controlling interest (minority shareholders in fully consolidated subsidiaries), I will deduct out dividends paid to unconsolidated subsidiaries when deriving owners earnings.

 

 

 

Average Annual Maintenance Capex

For this, I use the “Total Capital Expenditure & Acquisitions of Companies”. This is mainly because that any average annual maintenance capex calculated will likely be very arbitrary.

The key point here is

“average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume.”

If someone automates their factory, it is considered an effort to maintain competitive position, so does any new usage of technology etc

Very rarely does any new capital expenditure qualify, unless it increases unit volume, and even if it does it is not so clear cut.

For example, PCHEM’s Rapid PIC, how much of the new capex is for the new unit volume, and how much of it is to replace/bolster existing unit volume? Quite a difficult question to answer, even if you’re working in PCHEM.

That is why, for me, I just use the total capital expenditures. (Do note i also consider advances/loans to associates and joint ventures to be a capital expenditure, repayments will be added back).

In exchange, in order to identify if the investments in each new investment result in higher earnings, I created a separate line, “Owners Earnings Ex Capital Expenditure”.

If these investments do give incremental returns, Owners Earnings Ex Capital Expenditure should show an upwards gain over time. Many companies are unable to show this consistently or show above average results.

For example, GENTING invested roughly RM66 billion to capital expenditures and acquisitions from 1997 to 2018 (net of any disposals).

In return, its owners’ earnings have grown from RM1 bil to roughly RM5 bil (when averaged out over 5 years, I did so as its very volatile). That indicates a return of roughly 6% (RM4b/RM66b).

Now, if we assumed depreciation and other charges are equal to the average annual capital expenditure needed to maintain competitive position, this would indicate a return of roughly 8% (RM4b/RM50b), a slightly better figure.

It might almost had been better, if GENTING just took that excess cash since 1997 and put it into fixed deposits or paid them out as dividends. It would definitely had been better, if they just bought an Index Fund with the money.

 

 

 

Working Capital

As positive change indicates either or a combination of

  1. Decrease in inventories and trade receivables
  2. Increase in trade payables

And a negative, vice versa. If a management can reduce the working capital needed to run a business, or ensure that the increase in working capital requirements is slower than revenue or better yet profit growth. It is a pretty strong indicator of competence and efficiency.

The best management almost instantly reduces the working capital required in a business; this is particularly clear especially when a good management takes over from a bad one.

One thing here you can really see, if the working capital in relation to associates, joint ventures etc. Which if its consistently negative, is a pretty big red flag for me, as it can indicate bad governance issues, where a company is basically funding the other party, where the majority owner, may be the main shareholder there as well.

Which basically results in your funding his hobby business, quite common actually.

 

 

 

Conclusion

And that’s it folks.

Having said that, do note, that at the end of the day, the value of an investment is all future cashflows discounted back to present value.

Like all these other ratios/tools like PE, EV/EBITDA, EV/EBIT, ROE, ROA etc. They are all at its best a tool. And these tools are no substitute for understanding the company. But are at best supplemental.

Having said, I do think Owners Earnings are one of the better ones, and the process of filling it out for the 20 year history of a company, sure does give more insight. A natural consequence of spending significantly more time with the financial statements of the company. You will be surprised at the things you feel you would have missed out otherwise.

I’ve also included the “Owners Earnings” of the companies, mentioned in this article for your own reference.

As always, let me know if you disagree or feel I missed out on anything.

Happy Chinese New Year.

 

Disclaimers: Refer here.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

  2 people like this.
 

(CHOIVO CAPITAL) Something is weird in the State of Serba Dinamik Holdings Berhad (SERBADK: 5279)

Author: Choivo Capital   |  Publish date: Sun, 22 Dec 2019, 12:32 AM


For a copy with better formatting, go here, its alot easier on the eyes.

 Something is weird in the State of Serba Dinamik Holdings Berhad (SERBADK: 5279)

========================================================================

A few days ago, a friend of mine was quite excited about Serba Dinamik Holdings Berhad (“SERBADK”) and asked me to look. And having missed out on a few palm oil companies (despite doing research together, I might add. I am this untalented at trading. Thankfully, I held on and topped up my SOP at the bottom), I figured I better take a look.

Serba Dinamik was a company that I kept my eye on for some time. And I quite liked their annual report management explanations, as it seemed relatively clear by Malaysian standards, however, I never really did any analysis before.

The management spoke a lot about very nice sounding things and buzzwords such as, “Smart Maintenance Contracts”, “Project Development”, “IT Projects” etc, and even had a nice 7 part episode on the company on Astro Awani.

https://www.youtube.com/watch?v=aHLHI_EO-po

However, to be honest, it sounded a bit like the typical things that any CEO in the world would say, I mean, how long has it been since Tan Sri Shahril talked about SAPRNG making a profit?

And just after an RM8bil fund injection into it by PNB to save Maybank (they held a big chunk of SAPRNGS loan book), its now looking like it might still go down at any day again, with Current Liabilities again exceeding Current Assets.

And taking a quick look at the numbers of SERBADK, they sure raise some eyebrows.

 

Owners Earnings

Now the tool that we are going to use in our analysis is called “Owners Earnings”. It is a valuation method detailed by Warren Buffet in Berkshire Hathaways 1986 annual report. Warren Buffet stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, minus any reinvestment of earnings.

It is defined by him as such,

 

"These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges, less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume.

Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (c) must be a guess - and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes.

All of this points up the absurdity of the 'cash flow' numbers that are often set forth in Wall Street reports. These numbers routinely include (a) plus (b) - but do not subtract (c)."

 

In essence, it means,

Owners Earnings =

(a) Reported Earnings

Add: (b) Depreciation and Amortization

Add/Less: (c) Other Non Cash Items

Less: (d) Average Annual Maintenance Capex

Add/Less: (e) Changes in Working capital.

 

For the sake of simplicity, we are going to use “Total Comprehensive Income” for “Reported Earnings” and “Capital Expenditure & Acquisitions of Companies” as “Average Annual Maintenance Capital Expenditure”.

For the second, the main reason we use the total expenditure instead of calculating the average annual maintenance capex is due to how difficult it is to get a meaningful number for “Maintenance Capex”.

In addition, the amount they spend on capital expenditures is not the main point, as in terms of accounting profit, they very clearly seem to be putting all that Capex to good use.

Now why owner’s earnings?

Because the P/L can show whatever numbers they want, but at the end of the day, the number that really matters is how much of it goes back into the owner’s pockets, as we have very clearly seen with London Biscuits recent PN17 status.

So, what does it look like for SERBADK?

 

 

 

As you can see, its quite incredible how since 2013 this Company have recorded huge negative Owners Earnings.

Having said that, if we were to exclude Capital Expenditures, on a net basis RM333.2 million in cash have been generated, out of which,  dividends totaling RM284.5 million have been paid since 2014.  

Having said that the cash generated (on a owners earnings basis) is a far cry from the profit reported, and this is from the incredible increase in working capital requirements each year.

When compared against their Revenue and Comprehensive Income,

 

 

Its interesting to note, that the growth in Capital Assets, far exceed that of the growth in Income and Revenue. And considering that these assets are the kind that relies on new projects (which can be very lumpy and irregular) in order to be utilized, It does not seem to bode well.

Look at Sapura Energy etc.

In addition, the increase in Working Capital on the Asset end of the balance sheet have far exceeded the growth in revenue. However, on the liability end, we are looking at a strong drop in working capital.

This indicates that the credit period they obtained from creditors seem to be shortening, while the credit they give to debtors seem to be holding steady or increase.

Easy to pay money to creditors, but collecting money seems to take quite a bit longer. Which is interesting

 

 

Conclusion

I may very well be extremely wrong,  and this may very well just be initial capex cost in their path of world domination, however I digress.

If you were to do an owners earnings analysis of SAPRNG from 2008 to 2019, it looks surprisingly similar. Having said that, so do most extremely ambitious companies planning to expand via aggressive debt and fund raising programmes. 

I hope I’m wrong, as i have no skin in game, it matters not to me if im right.

As usual, feel free to let me know if you think differently or if you feel I’m wrong.

 

Disclaimers: Refer here.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: SERBADK
  2 people like this.
 
vespa Well done Choivo. Just as you I am not invested here but thanks for the heads up with excellent work.
22/12/2019 4:21 AM
Icon8888 I don’t like it too
22/12/2019 7:36 AM
Sslee Hahahaha,
qqq3 as usual live dangerously, love this stock and will be eaten alive like London Biscuit and Sendai.
https://klse.i3investor.com/blogs/qqq3/2019-10-22-story231433-Portfolio_as_at_22_Oct_2019.jsp
22/12/2019 8:27 AM
JensenChin Have Screenshot this post and sent to Serba’s legal counsel again.

Will follow up on the email to legal counsel, police report and report made to MCMC on baseless accusation and fake news spread by Choivo Capital.

Hope Choivo Capital will be sued for spreading fake news

Don’t think you deleted the post you can’t be tracked.
22/12/2019 8:34 AM
Up_down Working capital = Current Assets – Current Liabilities. Figures in Total working capital is seen not correctly presented.
22/12/2019 9:11 AM
i3lurker its ok dun worry

i3 level punya standard is very poor.
Sharks are every where.
Its understood that articles in i3 are ALL FAKES.
Everyone knows the articles in i3 are ALL FAKES
dun lose sleep over it.

dun bother.

Up_down Working capital = Current Assets – Current Liabilities. Figures in Total working capital is seen not correctly presented.
22/12/2019 9:11 AM
22/12/2019 9:41 AM
DK Choivo, thankful for sharing your thoughts.

If I may comment,

I agree that "Owners earnings" gives a better representation of a company's earnings and I also agree that it is extremely difficult to obtain "maintenance capex". However, I find it also difficult to agree with the "simplicity" you proposed below;

[ For the sake of simplicity, we are going to use “Total Comprehensive Income” for “Reported Earnings” and “Capital Expenditure & Acquisitions of Companies” as “Average Annual Maintenance Capital Expenditure”.]

It is dangerous to adopt such approach. You are almost certain to also group "Companies growing through acquisitions" under this category.

WB's idea of subtracting "Maintenance capex" as such expenditures do not increase the value of the assets in term of earnings capability but maintaining the status quo.

However, I think most would agree to take "Acquisition of companies" as acquisition of NEW assets which is suppose to improve future earnings. It is therefore not captured under WB's idea of "Maintenance capex".

Nevertheless, spending on acquisitions especially those that do not require shareholders' approval can raise governance issues. This will most definitely result in future impairment write-offs. As Serbadk is in a very volatile industry, the economic value of its assets can vary greatly. Therefore, management should be wary of excessive expansion through acquisitions during peak. This happened during the last boom and burst oil cycle.

This is only my personal view. I maybe wrong.

Thank you
22/12/2019 9:45 AM
shpg22 It look like, sounds like, smell like SAPSNG back in its glory day. Probably will end up like it soon.
22/12/2019 9:47 AM
i3lurker sometimes sharks want shares to go up

then you will get Go UP articles in i3
22/12/2019 9:50 AM
i3lurker sometimes sharks want shares to go down

then you will get Go DOWN articles in i3
22/12/2019 9:51 AM
Up_down Without shark participation, market would turn into lifelessness. It’s important to equip the skills surfing with the sharks.
22/12/2019 10:11 AM
Sslee Hahahaha
i3 stand for Independent. Intelligent. Informed. So be gratefull for all the 8ndependent writters sharing their article in i3 so that we can use our intelligent to make an informed decision.
22/12/2019 10:21 AM
supersaiyan3 Choivo, good attempt.

I think the key is some company just invest invest invest and never get back their money after so many years. Only a handful does.

What Choivo did is not categorised as fake news or rumours, by the way.

Again, investor education is very important.
22/12/2019 10:26 AM
Up_down I3 is , in fact, a good platform for us to learn improving our skills especially for beginners. Information whether it’s relevant or irrelevant, reliable or unreliable, sharks or Ikan... Some even come here to reveal insider information of the company.
22/12/2019 10:37 AM
Choivo Capital Well, if they can keep all the jobs coming in and growing, the capex may very well be an incredible investment.

Having said that, I recently spoke with a friend who audited saprng and their project finance reporting manager.

In essence, due to the sheer amount of capex they had, which was all backed by borrowings, despite the oil slowdown they have no choice but to take projects. And 70% of them are loss making, even without taking into account financing cost.

Its that hard and risky
22/12/2019 11:20 AM
JensenChin Choivo Capital’s statement outlays the poor quality of sources of information he claims to obtain.

His working capital information is not correct.

If everyone values a business using his so called ‘Owners capital’ model, then shares like Tesla is worth zero.

He is more of an attention seeker trying to promote and demote shares as he likes (i.e. self proclaimed analysts)

He fails to understand the business deeper, speak to people doing the real oil and gas work and Bankers.

Instead he claims to speak to Auditors of Sapnrg. Is the person he spoke to the audit partner of Sapnrg? Or low level auditor?

This type of action is irresponsible and malicious.

I will follow up on my report with:
- Legal counsel
- MCMC
- Securities Commission
22/12/2019 11:46 AM
Shinnzaii https://www.malaysiakini.com/news/504524

lets wait for truth to be surface
22/12/2019 1:15 PM
Choivo Capital Please. You think audit partner actually really know the accounts ?

At the end of the day, the work is done by the senior in charge and the manager who has the trust of the partner.

Well, I don't claim to fully understand this business, I'm just saying the numbers don't look that good

tell me your understanding of the business then. I dont think you understand it beyond every year accounting profit go up.
22/12/2019 2:35 PM
JensenChin Audit manager and audit senior does not know the entire business. The audit partner interacts with the top management and directors, not the audit manager and audit senior.

Don’t think as if you speak to one audit senior, you can assume you know the entire business.

For a start, fix your working capital calculation before even talking as if you are so intelligent and make a judgement that Serba is ‘rotten’ (malicious claim by Choivo Capital that must be penalised).

Your calculation of picking numbers as you like for owner capital calculation shows your immaturity in business.

You need to substantiate your claims in your previous post that you deleted. Otherwise, you must face the consequences before the law.
22/12/2019 3:46 PM
Kukuman Wonder who is this JensenChin.. Only have 11 posts in his lifetime. Out of the blue he is so agitated about things said of the company. Utterly childish to behave so personal for things said in this space. Pity
22/12/2019 4:05 PM
chshzhd i don know very much about Karim n serbadk but i would like to share this peace of article appeared in The Peak on June:
https://e-serbadk.com/wp-content/uploads/2019/08/The-Peak-Serba-Dinamik.pdf
22/12/2019 4:49 PM
chshzhd n i wonder how fair it is to put sapnrg Shahril n serbadk Karim into the same category:)
22/12/2019 4:58 PM
chshzhd to put Choivo Capital article in simple, actually is the doubt about whether serbadk will have cash flow problem in the future since the huge capex n acquisition. n this was concerned n mentioned before in IB reports, that is why Karim said that Serbadk will nurture all their investments at present first b4 further expansion...
22/12/2019 5:21 PM
shpg22 Unless Karim is god why not? Both are human. Shahril was once a high flying CEO too.
22/12/2019 5:31 PM
ccy123 That is why I also don't like serba- serba.
22/12/2019 5:44 PM
shpg22 Should write another article about PESTECH. Another nonsense company with strong revenue and profit growth.
22/12/2019 6:23 PM
chshzhd I don believe in god even:)
22/12/2019 6:33 PM
chshzhd n i don trust karim 100% too n but i invest in serba dinamik:)
22/12/2019 6:39 PM
shpg22 https://www.youtube.com/watch?v=d0FY4xRT_yo
22/12/2019 7:19 PM
kalteh Is there any difference between WB definition of Owners’ earnings and Free cash flow? Both seems like the same to me based on your explanation
22/12/2019 9:47 PM
chshzhd n i don know how Karim easily make kpower scib fly so high suddenly :)
22/12/2019 10:50 PM
chshzhd n how he fool around with top 30 institution investors :)
22/12/2019 10:53 PM
chshzhd hebat Karim:)
22/12/2019 10:58 PM
apple4ver The formula you used fails to capture the essence of WB's "owners earnings". Quoted "..simply the total of the net cash flows (owner earnings) expected to occur over the life of the business".. Equating Capital Expenditure & Acquisitions of Companies as similar to Average Annual Maintenance Capital Expenditure is comparing an orange with an apple. A new acquisition or new capex will generate new flow of revenue and cash flow while maintenance capital is simply to preserve existing revenue and cash flow. Just look at the jump in revenue and profits for the last three years... Similarly, SAPNGR and SERBADK are dissimilar as one invested at the peak while the other at the crest of oil price. Of course, you could be right if oil price drops to $30 per bbls and STAYS there....
22/12/2019 11:35 PM
slts rubbish analysis
23/12/2019 6:59 AM
Icon8888 Got a bit of time year end

Digging out choivo articles to read one by one

Young punk got some useful concepts that I can learn
23/12/2019 7:53 AM
chshzhd i enjoyed reading Choivo articles too..
n i went through all 7 episodes of Serbadk Astro Awani last night.. feeling very good:)
23/12/2019 8:11 AM
chshzhd https://www.youtube.com/watch?v=MEvnOqRGBco
23/12/2019 8:15 AM
Investor 999 Serbadk-wa i see you at 0.600 soon
23/12/2019 8:56 AM
Icon8888 Choivo is not bad

But too academic, just like professor Ricky Yeo

Can be a good writer, not a good investor
23/12/2019 9:23 AM
chshzhd -wa i wait at around 0.35
23/12/2019 9:35 AM
RainT haha

haha
haha
23/12/2019 10:49 AM
RainT funny lo

how come he can said audit partner will not know anything about the biz

this show that this CHOIVO is totally not understand how audit firm works

he thinks audit partner just blindly sign off audit report only

laugh die me
23/12/2019 10:51 AM
chshzhd chicken intestines..quite good lah..academic way of analysis..not wrong
23/12/2019 11:09 AM
JensenChin Why Choivo Capital’s credibility is so low:
- First posted on Friday saying SDK is rotten. Plucked numbers from the sky and said maliciously claim that SDK is rotten. Remove the post and claim is excel formula error and change title from rotten to ‘weird’

- Write about owner earnings as if he is warren buffet, but ends up 58 in stock picking.

- Says that audit partner of SPNRG does not know anything about the business.

- Failed miserably in his RM5,000 paper on RCECAP.

- Operating a ‘capital’ without license
23/12/2019 11:39 AM
slts HE IS MORE LIKE A SOCHAI
ACT SMART WITH LENGTHY INTERPRETATION OF DATA
23/12/2019 12:22 PM
paperplane Shhhh, now, dont talk so much, action?!! Go goreng dsonic, to make back. Kaka
23/12/2019 12:24 PM
TakeProfits Solo looonh the write up arh..haha. Good on you Choivo
23/12/2019 5:05 PM
speakup bila Serbadk limit down?
besok?
23/12/2019 10:22 PM
Sslee Dear Choivo Capital,
May the Year of the Metal Rat bring you Good Luck, Good Health, Good Fortune, Plentiful of Laughter, Happiness, Success and at Peace with Oneself and Others. Happy Chinese New Year 2020

Thank you
P/S: https://klse.i3investor.com/blogs/Sslee_blog/2020-01-22-story-h1482896892-Let_s_celebrate_the_coming_CNY_2020_together_with_well_wishing_of_Unity.jsp
22/01/2020 9:06 PM

(CHOIVO CAPITAL) AEON Credit Service (M) Berhad (AEONCR: 5139): Much Ado About Accounting Standards

Author: Choivo Capital   |  Publish date: Sat, 21 Dec 2019, 5:58 PM


For a copy with better formatting, go here, its alot easier on the eyes.

AEON Credit Service (M) Berhad (AEONCR: 5139): Much Ado About Accounting Standards

===================================================================

Well, it’s been awhile. There are a few reasons, but I’m not here to talk about that.

One of the companies I’ve always admired was AEON Credit Service (M) Berhad (“AEONCR”). I have never done too deep an analysis on this company before, however, its performance and the economics of the business always impressed me.

I remember when I first read the accounts in 2016, my first thought was:

“This company is probably a scam”

Yes, i was that stupid.

It was the first time I had read the “Statement of Cashflows” of a Non Deposit Taking Financial Institution, or that of a financial institution, period. And the constant drawdown of borrowings made me think this company was borrowing money to pay dividends.

I could not have been more wrong.

After a couple hours, I’ve understood it better, and it became the first stock I made a profit of more than 10% on. Unfortunately, due to a temporary suspension of intelligence, I did not hold for long, and instead constantly bought and sold it at increasingly higher prices and paid the transaction fees along the way.

From 2018 onward, due to my deeper understanding of value investing (or perhaps, just my sheer incompetence and lack of talent when it comes to trading), I bought a small position of 1.3% to hold as the valuation was just a bit too rich for me compared to what was available (for the record, it wasn’t really), however, I wanted to keep it around to remind myself to never forget to check again.

A month back, a friend told me the current price of AEONCR and I was quite happily surprised. I did some research, and given my immaculate timing, increased my position to 2% on 25 September 2019, the day before the release of the Q2.

Thank god I knew enough of my own weakness, that I learnt how to size my investments purchases.

I’m writing and sharing this because, I’m currently considering making AEONCR a significant portion of my portfolio. However, this is one of those companies, where despite reading every single annual report, investor presentation and recent analyst pieces, I just can’t seem to shake the feeling that there is something I don’t quite understand about the company.

As an intelligent, honest but abrasive friend told me recently when I asked him about this company, “I’m now certain that you know absolutely nothing about financial institutions or AEONCR”.

Well, I hope to be educated by the people here.

Enough Grandmother story, lets begin.

 

AEON Credit Services (M) Berhad (AEONCR: 5139)

Introduction

Just for a bit of background, 2 years back, I’ve written a little on how to value financial institutions,

The Valuation of Financial Institutions

I’m sharing the link, so that those who are interested, can understand a portion of the perspective I will be analyzing from.

AEONCR is a non-deposit taking financial institution (“NBFC”), that focuses mainly on various forms of personal lending. They consist of the following divisions:

  • Personal Financing (Personal Loans)
  • Car Financing
  • Motorcycle Financing (Both Kapchais and Superbikes)
  • General Easy Payment (But a TV on installment plan for example)
  • SME Financing (Quite Small)
  • Credit Cards

They have the third highest “Return On Asset” among all the financial institutions, at around 5.5% before tax. The highest is Elk-Desa Resources Sdn Bhd at roughly 6.2% and the second, RCE Capital Berhad at around 5.7%-5.8%. Most banks have ROA around 1%-1.3% with the best bank in Malaysia (and probably South East Asia), Public Bank, having ROA of around 1.7%.

Having said that, as most banks typically aim for much “safer” lending, and are able to take deposits, and on average, leverage up around 10 times. While for NBFC’s, due to the fact they cannot take deposits, and will typically face impairment rates triple that of most banks during a recession, can usually only leverage up 5 times or so safely.

As most are likely aware, the financial performance of this company since its listing on 2008, have been nothing short than extraordinary, as we can see in the table below.

AEONCR 1

 

The Business

AEONCR 2

AEONCR started with “General Easy Payment” or as they now call it “Objective Financing” as its bread and butter. This consist of things like installment payments for television, electrical appliances etc.

However, the growth rate (it actually registered a decline from 2016 to 2019) of this segment lagged far behind those of “Personal Financing/ Personal Loans”, “Car Easy Payments”, “Motorcycle Easy Payments” and to some extent Consumer Products/Credit Cards, resulting it in going from 30% of the portfolio in 2009 to only 4% of the portfolio in 2019.

On a compounding basis, these divisions have grown at,

From 2009 to 2019

Personal Financing: 43.53% Per Annum

Vehicle (Cars and Bikes) Easy Payment: 28.93% Per Annum

Consumer Products: 16.89% Per Annum

From 2013 to 2019

Car Easy Payment: 55.56% Per Annum

Motorcycle Easy Payment: 22.53% Per Annum

And this is with profitability increasing roughly in line. So why is this the case?

The first reason is structural gains.

Secondhand cars and motorcycles are an under-served market segment.

Most banks do not offer financing for motorcycles beyond personal loans, whose rates can go as high as 18%. In addition, motorcycles are quite simply by far the cheapest mode of travel. A Honda EX5 can travel 100km on just 1.8 liters, compared to the best-selling budget car Proton Saga, which requires 5.6 liters.

In addition, an EX5 cost less than RM5,000, while a Proton Saga cost more than RM32,800. To top it off, when travelling via motorcycles, you have no need whatsoever to pay tolls.

A recent Khazanah study showed that, on average, the B40 (Bottom 40% income earners in Malaysia by Household) of Malaysia are able to save just RM76 per month, a fall from RM124 in 2014.

Given such a tiny margin of safety, it’s a no brainer that motorcycles have become the only economically viable mode of transport for the B40 and parts of the M40.

This has resulted in motorcycle sales increasing by 20% YOY for 2019. In addition, in terms of motorcycles sales in the world, Malaysia is ranked number 13, despite a small population of less than 30 million.

As for secondhand cars, many banks have stopped providing hire purchase financing for cars older than 3-4 years. However, it is not as great as a business as the motorcycle loans, as they are still many competitors in it. Having said that, this is mostly due to how amazing the motorcycle loan business is in comparison.

AEONCR 3

As you can see based on the above chart, their “Car Easy Payment” records a negative Differential (“Share of Income %” – “Share of Receivable %”), ie its share of income is negatively disproportional to the size of the receivables. However, income yields are is still around 12%, and with interest cost of around 4.9%, its still one hell of a business.

Of course, it also helps that AEONCR typically targets B40 and lower half of M40 loans. According to a study, in terms of financial literacy, Malaysia ranks number 66 in with a score of 36/100, slightly below the global average score of 36.58.

AEONCR 4

However, as many would be aware, the above are all industry economics, that say very little about AEONCR’s edge.

So what is their edge?

The AEONCR Edge

AEONCR 5.PNG

AEONCR’s real edge lies in the sheer quality of their credit assessment and discipline in ensuring good quality assets, the management and their incredible collection processes.

Over the years, despite the large increase in revenue and receivables size, asset quality has largely maintained even or improved with Non-Performing Loan (“NPL”) ratio still holding steady at 2% and have in fact improved over the last 5 years. Since 2007, their NPL have averaged a mere 2.1%.

For the record, Maybank’s NPL is 1.75%, and RCE Capital’s (which obtain repayments via direct salary deduction) is about 4%. As for ELK Desa’s insane NPL of a mere 1%, well, if someone would care to enlighten me as to the reason why this is even possible, i would be incredibly grateful.

In addition, collections ratio of receivables past due for 2-3 months have also increased from 62.73% in 2014 to 71.24% 2019.

The most eye catching of these statistics is their Bad Debts Recovery % (a ratio I derived in order to judge the effectiveness of the collections teams, it’s not perfect, if you have a better one, I’m all ears). This consist of  (Bad Debt Recovered / Bad Debt Written Off During The Year).

Thinking about it, it might be better for it to be, (Bad Debt Recovered / Bad Debt Written Off In The Previous Year), but well, i’m a little lazy, and i don’t think it affects the essence of the point i’m trying to make (except make AEONCR’s numbers look a little better and more consistent).

Their Bad Debts Recovery %, has increased steadily over the years from 6.81% in 2007 to 40.14% in 2019.

This is honestly quite an incredible statistic, considering that these are all mostly unsecured loans given to low income earners.

Much of this is due to the sheer quality of the management and their collections team.

And thus, the big question, how do they compare against their competitors, ie other non-deposit taking financial institutes, such as RCECAP and ELKDESA?

AEONCR 6.PNG

As you can see from the numbers above, AEONCR’s Bad Debt Ratio of (40.14%) in 2019, far exceeds that of RCE Capital (25.82%) and ELK Desa (9.54%). And this is despite companies like RCE Capital having the benefits such as guarantor requirements and direct deductions. Utterly incredible.

And interestingly, this does not come at the cost of overly high cost to income ratio. AEONCR’s cost to income ratio is like that of ELKDESA despite having multiple product lines and far more outlets, with normalized percentage being roughly 29%.

The increase in 2019 to 34% is mainly due to additional marketing expenses for the credit card business and to improve cross selling.

RCECAP has an extremely low Cost to Income ratio of 16% or so, due to the fact they only have one product line, and very little outlets, with most sales done through agents.

If one were to visit the Glassdoor and Jobstreet, and look at the comments by both current and resigned members of the collections team, we can comments by them complaining how the targets are always to high, as well as their bonus being satisfactory. Well, you get what you incentivize for.

Interesting, non profit making cost centers such as accounting etc, complain about the lack of bonuses for the past few years.

Quite interesting, does not sound like the place i want to work at (since i’m in financial reporting), but definitely sounds like the kind of company whose stock i want to purchase.

 

Much Ado About Accounting

As many would have noticed by now, for the last 2-3 quarters, AEONCR have been reporting relatively lackluster results.

Before we talk about it, we first need to understand the new accounting standards being implemented.

Previously the loan book held by AEONCR was recognized based on the accounting standard called IFRS 139. This has been replaced with IFRS 9 for the most recent financial year ended 28 February 2019.

The difference between these two accounting standards are as follows,

  IFRS 139 IFRS 9
Nature Incurred Expected
Timing of Allowance Upon Trigger Point At Inception
Type of Allowance One Off Stage 1, 2 & 3

 

(12 month and lifetime Expected Credit Loss)

IFRS 9 was a new method of recognizing Financial Instruments that was born after the 2008 Financial Crisis. One of the biggest complaints about the crisis then, was that the recognition of credit losses was too little too late.

The previous accounting standard, IFRS 139 used for recognizing credit losses is commonly referred to as an “incurred loss model” as it requires the recording of credit losses that have been incurred as of the balance sheet date, rather than of probable future losses.

This did not allow banks and financial institutions to provision appropriately for credit losses likely to arise from emerging risks prior to the crisis, as it required a trigger point.

And this lack of provisioning effected regulatory capital levels, thus contributing to pro-cyclicality by spurring excessive lending during the boom and forcing a sharp reduction in the subsequent bust.

The reason for this was that loss identification IFRS139 requires a “triggering” events supported by observable evidence (eg borrower loss of employment, decrease in collateral values, past-due status) combined with expert judgment, ie a “Trigger Point” before an allowance or provision can be made.

Under IFRS139, upon the occurrence of a triggering event, the allowance is calculated as such,

Allowance: “Exposure at Default” X “Loss at Default %”

IFRS 9 on the other hand replaces this with a more forward-looking approach that emphasizes shifts to the probability of future credit losses, even if no such triggering events have yet occurred.

Therefore, under IFRS 9, an “Expected Credit Loss” is made upon inception of the financial instrument, as and classified “Stage 1”. And upon any deterioration of the quality of the asset, it is further classified as “Stage 2” and “Stage 3”, and is calculated as such upon inception.

Expected Credit Losses = “Exposure At Default” X “Probability Of Default %” X “Loss Given Default %”

Now, do note that the ”Probability Of Default %” and “Loss Given Default %” changes depending if 12 months is used (Stage 1) or Lifetime is used (Stage 2 & 3).

So, for example,

AEONCR borrows out RM100,000. The probability of default events in the next 12 months is 3%. And in the event of default, they will lose 50%. Therefore

ECL= RM100,000 X 3% X 50%
ECL= RM1,500

Now, the interesting thing to note here is, the “Probability of Default” involves very significant assumptions, one of which is forward looking macroeconomic data.

So, for example, if AEONCR thinks that an economic slowdown is going to occur in the next twelve months, the “Probability of Default” and “Loss Given Default” may very well increase to 5% and 70%, despite no drop in the quality of the loans, resulting in higher allowances.

ECL= RM100,000 X 5% X 70%
ECL= RM3,500

Case in point, in the 2018 accounts, for receivables not past due of RM6.5 billion, an allowance of RM8 million was provided.

While for 2019, for receivables not past due of RM7.8 billion, an allowance of RM203 million was provided. This is despite there being a DECREASE in Non-Performing Loan % from 2.33% to 2.04%.

When investing, one of the things we have to be aware of, is that what is “True and Fair” under the accounting standards, does not necessarily reflect the real economic reality of the company.

For example, Nestle have to spend a huge amount of marketing expenses this year, one can argue that this a capital expenditure for the sake of their Brand name, but this does not change the fact that under accounting standards, it cannot be capitalized, and that the value of their brand, as recorded in the financial statements have not changed since god knows when.

And for good reason, if we could, the numbers would be far worse.

When it comes to accounting standards, it needs to be unfair and inaccurate for a few people, for the betterment of the majority.

As investors, we need to be aware of these differences.

 

Risk and Downsides

  • Defaults during Recessions.

For unsecured loans (I don’t consider cars, motorcycles and fridges an asset), defaults during recessions are typically significantly higher than secured loans. The question is if the higher interest rates charged (reward) is higher than the cost of the risk assumed.

I would think so.

Looking at their numbers from 2007 to 2009, AEONCR were not affected by the crisis and in fact grew and made more money each year.

And since then, their operations have seen a massive improvement of loan quality, and collections processes. I think they would be able to handle any recessions very well.

Of course, past performance is no indicator of future performance.

  • Bullet Loans

For AEONCR, their loans are structured by way of bullet payments. Ie, the principal needs to paid in full during the end of the tenure with no principal payments in between. Typically, they don’t repay it but instead roll it forward.

In times of crisis, if the loan were to mature during that same year, it may make it difficult to roll it forward then. Things would be quite interesting in that case.

This would be the case for most banks as they usually use the same structure.

Having said it, unless your loan book is rubbish (which its not), you should be fine.

 

  • Big Banks Giving Loans For Secondhand Cars and Motorcycles etc

Well, they can, and i’m sure that AEONCR will not longer be as profitable. However, Banks typically have rubbish collections teams, or outsource them. Thus AEONCR’s edge should still largely prevail.

As long as one did not overpay, it should be fine.

 

Conclusion

Personally, I’m quite unsatisfied with this article, and I think it may be due to the fact I don’t understand the business as well as I would like. In addition, the words do not flow as easily, or as well as I would like, probably due to the fact I stopped writing for quite a few months.

My main worry now is if the lower savings rate of the B40 going to affect repayments (it will) in the event of a crisis, and how much?

What is the exact model used to calculate their ECL allowances, and how much of it differs from their previous ones?

Having said that, given the competence and longevity of the senior management (beyond the MD that changes every 5 years or so, as they are not local), such as Ms Lee Tyan Jen who went from Head Of Credit Assessment to Chief Operating Officer.

The focused way of which the management of AEONCR go about in allocating capital (while paying out any excess) efficiently and in a focused manner, without straying far from their circle of competence gives me confidence.

To buy or not to buy?

You decide lah, judge it against the current opportunities you have at hand make your own decision.

In addition, do note that prices and accounting profit may continue to fall for another 2-3 quarters, resulting in potentially more discounts.

Fair value of the company? Currently, its probably somewhat below fair value. However the real value in this company, is that its a great business, and i love business that let me forget about thinking about when to sell.

As always, do let me know if you think differently or feel I have missed out elsewhere.

 

Disclaimers: Refer here.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: AEONCR
  Ricky Yeo likes this.
 
hpcp Hi Choivo, thanks for the article. What do you think of elkdesa, which has better NPL ratio and business has been growing consistently
21/12/2019 7:32 PM
Choivo Capital I quite like the business. The one thing about that co that is not so good was that the management did not leverage up as they should (since its a financial institution they are running) and instead decided to do non stop rights issue.

Recently the management have decided that they would like to leverage up. So that is a good thing.

Second part is that, the payees can't direct transfer in the payments, but have to go to the counter to make payment, which i find very odd.

Of course, this could very well be an edge, if your entire customer base is under banked, but its odd.

===
hpcp Hi Choivo, thanks for the article. What do you think of elkdesa, which has better NPL ratio and business has been growing consistently
21/12/2019 7:32 PM
21/12/2019 9:10 PM
Choivo Capital Sslee,

https://choivocapital.com/2018/11/28/the-art-of-valuing-insurance-companies-and-why-teh-hong-piow-is-a-god-lpi/

The problem with Tunepro for me is,

1) They tried to go into general insurance, which is not their edge, travel insurance division is incredibly profitable.

2) Their fund management for the investment is quite bad, some of it is in unit trust, which are just stupid and inefficient. If you dont know what to do, put it in the S&P500 index or smtg. The rest are in MGS.

3) Everyone sells car insurance online now. But health, life, savings plan etc those are usually not sold online. TUNEPRO is not doing anything in trying to do that. If they did, they can cut the 6% first year, 4% second year commission and cost, giving them a huge edge. But they are not. So..

I recently re-buy some at 0.570, but very small position, mainly because its cheap.

Its not about the visionary of the management, but the economics of the business first. Unless they actually know how to run an investment fund on their own and do general insurance, i find it hard to see their edge.
21/12/2019 9:15 PM
Sslee Dear Choivo,
Thank you. Will attend next Tunepro AGM and let them know
about your suggestion.
21/12/2019 10:31 PM
i3lurker when you copy

you do not understand

just copy blindly with no understanding

monkey see

monkey do

monkey see man slaughtering cow

monkey take baby and chop baby head off

monkey see WB buy something

monkey also buy
21/12/2019 10:37 PM
Choivo Capital I wished i followed WB and sailang into apple at Dec 2018.
21/12/2019 10:38 PM
Icon8888 Hmmm interesting ...

But there are so many other cheaper stocks in Bursa ...

Maybe I will consider adding a bit to my portfolio if it falls to RM8 ...
21/12/2019 11:57 PM
Choivo Capital True. It may very well get to that price if the QR's are matched with a financial crisis.

That would be very interesting.
21/12/2019 11:58 PM
Icon8888 Lending to poor people and charge exceptionally high interest rate

This is exactly the kind of stock that you can’t lock it up for five years and throw away the keys

Not touching it even with a ten foot pole unless somebody can explain to me how they can be so good at collection and debt recovery

When something defies nature, it makes me uncomfortable
22/12/2019 1:42 AM
i3lurker these are sold online without medical checkup

////health, life, savings plan etc those are usually not sold online.///
22/12/2019 8:39 AM
Sslee Hahahaha,
Choivo already forget about his defination on wonderful company that must seek to benefit society at large.
22/12/2019 12:13 PM
Choivo Capital My preference is wonderful company, but price matters, as well as my own circle of competence.

Very hard to find wonderful company at good or fair price.

Tsmc is pretty decent lah
22/12/2019 2:31 PM
Sslee Haha Choivo,
Just pulling your leg as I appreciate your intention of explaining the previous accounting standard IFRS 139 and current IFRS 9 emphasizes shifts to the probability of future credit losses, even if no such triggering events have yet occurred thus affect the reporting of profit.
But I take offend of your sentence, “Quite interesting, does not sound like the place i want to work at (since i’m in financial reporting), but definitely sounds like the kind of company whose stock i want to purchase”

Any good company should place customers first, employees second and shareholders third because
1. With happy customers, you will get more customers and thus your business will prosper.
2. With happy employees, they will produce more and be more efficient.
3. With business continuously growing, shareholders will be rewarded with high premium of PE 25 to 50 to 100 and beyond.

I am lucky to work in a company that believes we are blissful to be in an industry that benefits all our stakeholders. It is this believes that drive us to do our best, to be the best and prepare to walk an extra mile for our customers.

Thank you
22/12/2019 6:47 PM
Outliar Just stick to Petron :P
23/12/2019 1:37 AM
Choivo Capital Haha my petron is easily 5-6 times the size of my aeoncr position. Just bought a bit more that day, and im honestly a bit itchy to buy more.
24/12/2019 3:52 PM

(CHOIVO CAPITAL) Solving the Malaysian Property Overhang Problem within 2 years.

Author: Choivo Capital   |  Publish date: Sat, 6 Jul 2019, 5:16 PM


For a copy with better formatting, go here, its alot easier on the eyes.

Solving the Malaysian Property Overhang Problem within 2 years.

===================================================================

Since 2014, the property development industry has been in the doldrums, with property overhang in Malaysia hitting a peak of RM19.86 billion in 2018.

 

Interestingly, Johor reported RM36.75 billion worth of unsold property (including commercial units), which is oddly higher than the entire Malaysian Property overhang value. They likely use different methods of computation, which I will not go through as its not relevant.

 

However, I think most of the unsold property in Johor is from those crazy china property development companies, so the effect should be pretty contained. Who on earth would ever buy a 1mil condo in JB, that is built on reclaimed land in the outskirts, crazy.

 

Like most Asian countries, property prices here are extremely elevated due to,

  1. Low home deposit rates of 10% or less. Pre-2008 crisis, in western countries, deposits to purchase a house was typically 20-30%.
     
  2. Long loan tenures of 35 years.

     
  3. The Asian predilection towards property due to the ability to leverage up 10X, and the good fortune bestowed upon the previous generation (who bought in urban areas), due to the geometric increase in population density in urban areas over the last 40 years.

 

This resulted in property in developed countries, selling at prices which indicate yields far below the risk-free rate. Without AirBnB, you are likely getting at best 3-4% yield. Which is utterly insane when Housing Loan is 4.8% and FD at 4.2%.

 

The key thing to note here is, the desirability of the property is not the problem, it’s the affordability.

 

 

 

Solving the Problem

So, how do we solve this? Well, it’s pretty straightforward. Nothing sells as well as “Greed” and “Hope”. Mix those two in and add a sprinkle of “Financial Engineering”.

 

Per year, Magnum and Berjaya Toto, sells about RM8 billion worth of lottery tickets. This does not include the illegal lottery sales in Malaysia.

 

Many of you are likely to be able to guess where i'm going at by now. Now, here is how I would go about it.

 

  1. The government is to create a SPV, that is allowed to sell Lottery Tickets (We won’t call it that, I’ll explain later). Except the prizes are houses.

    Allow property developers to sell (on consignment) properties they are unable to sell to the company, at cost plus 3% and/or 25% lower than bank valuation prices. For the sake of illustration, let’s say,

    Bank Value: RM1,000,000

    Price paid to developer: RM750,000 




     
  2. Make the odds such that it’s a zero-profit venture. And the key thing here is, to declare the value of the property, which will be the prize, at the Bank Valuation. Thus making it, technically, a positive Expected Value bet. Example,

    Bank Value/Prize: RM1,000,000 house

    Price Paid by SPV to developer: RM750,000

    Value of Tickets Sold: RM760,000 (additional 10k to cover cost)


    With this structuring, one can now market this as a Positive Expected Value Bet, which no lottery in the world can do.

    IE, if you think the bank valuation is the right price, you are statistically ensured of making a profit, if you buy enough tickets. Thus, making it a “wise” financial decision.

    If the government wants, they can even add in an escalating odds feature (tied to your IC), where the more tickets you buy, the higher your probability of winning a higher value property.

    And if you won a property, the value of the property is set off against the total value of your ticket purchases, with a cap of zero, removing the escalating odds, unless you start buying more tickets again.

    In addition, for those immensely unlucky individuals who spent tens/hundreds of thousands buying tickets without winning, they are given the option to set off value of the tickets bought, against the value of the house they want to buy directly from the pool.

    Properties won, cannot be sold for a period of 3-5 years.

 

 

The problem with the property market, now, is not that people don’t want to buy property. They can’t afford to buy it, and/or they don’t want to be tied down with a 30-year loan.

 

With this, suddenly it’s buying a house is not about getting bogged down with a 30-year loan. But to buy RM100 worth of tickets a month. Which turns it from “serious” money into “fun” money. And there is a lot more of the money in the fun category.

 

And if the marketing is done properly,

  1. Strong Emphasis on the positive EV of the bet across all the local newspapers and online news portals.

     
  2. EVERY win is splayed across the newspaper or online news portal with happy reactions from the winners etc.

 

I don’t see why it would not be possible to sell at minimum RM10 billion worth of houses in a year. Especially since the youth market, which this Malaysian lottery companies have been completely unable to capture, would be likely to buy the bulk of it.

 

However, how do we make it RM20 billion in sales? 

 

 

 

Tapping into the Halal Market.

For this idea to really work, we need to access into the remaining 75% of the population in a legal way.

 

Make no mistake, Gambling (“Maysir”) is illegal under Islam. However so is earning interest (“Riba”).

 

Currently, every single Muslim in the world owe a debt to Anwar Ali. He was the man who changed "interest" to "profit on investment". Before he did so, banks worldwide were so very sensitive to Muslims religious scruples, that they made sure to not pay interest on any deposits.

 

It’s amazing what a simple bit of linguistic gymnastics can do.

 

What are “Sukuk” bonds, except for asset backed/secured bonds? Which Malaysia was the first to issue, before most of the other Islamic countries followed suit. If one wants to see the full extent of the creativity in linguistics gymnastics, just take a read at a Sukuk Prospectus.

 

So how can the government do it?

 

Well, first of all don’t call it a lottery ticket, call it a lucky draw (“Cabutan Bertuah”). 

 

For something to be a lucky draw, it needs to have a characteristic where whatever is bought, would be the same price if it didn’t have the “lucky draw” aspect. The tickets/vouchers need to be given after a purchase. 

 

It can therefore also be structured to be a lucky draw (“Cabutan Bertuah”) as such,

 

  1. Donate to the government and get a lucky draw voucher. If you want you can continue holding the voucher to the lucky draw, if you don’t want, you opt to not take the voucher.

     
  2. Joint venture with companies where they can sell special edition/limited run goods (different taste, design etc) which include a number of these lucky draw vouchers or incorporate these vouchers into their products. Again if you want, you can opt to not take the vouchers.

    Companies that sell essential goods and fast-moving consumer goods are essential.

 

 

And most of all, at no point, do you ever want to bring any aspect of religion into it and start up unnecessary discussions. Keep it purely secular.

 

The goal is to make it such that it would be easy to make the leap. People with different religious interpretations can just as easily choose not to buy the special goods. 

 

 

 

 

 

The Downside

Unless I’m mistaken, ASB once did this lucky draw (cabutan bertuah) thing, for motor vehicles. However, some people complaint that it was haram, and it was brought to an end.

 

If the government were to do this, and be foolish enough to say that it is Halal, it would be political and religious suicide, where you will start a whole new competition to see who is the most religious and can denounce this the loudest.

 

In addition, if these currently frozen properties were released into the market, it would likely to accelerate the depression of property value to its real value due to demand to buy property outright drying up.

 

It should further accelerate once the 3-5 year freeze is over.

 

However, it is likely to be gradual instead of sudden, as there is no major liquidity crunch beneath it.

 

There is a big difference between, everyone had a 30-year loan they can’t pay and are forced to sell a property, and someone who won a house in a lottery and in no rush to sell, but wouldn’t mind the money.

 

 

 

 

 

Conclusion.

This was a fun thing to think about, but I doubt it will ever be implemented, as the execution needs to be done perfectly, and probably by a privately held SPV, for it to not trigger all the religious and political minefields that litter around and on it.

 

Having said that, if the government actually plans to do it properly and in line with the essence of the idea detailed here, and avoid most of the political and religious minefields,

 

I have no doubt we can do RM20bil in sales in the first year.

 

Disclaimers: Refer here.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

  johnyeoyeo likes this.
 
probability Bring indians from India...they dont mind getting half the salary of malaysian and work double the hours...they are more knowledgeable and competent too..

Surely malaysian businesses will become more profitable
08/07/2019 5:30 PM
ks55 The first chief executive of Hong Kong, Tung Chee-wah, did the right thing with his housing policy in 1997, aiming for at least 85,000 flats a year in the public and private sectors, a home ownership rate of 70 per cent within 10 years, as well as a reduction in the average waiting time for public rental housing to three years.

However, he caved in under public opinion (from people already owned a property) and pressure from property tycoons like Li Ka-sheng and others to hold property price firm amid the Asian financial crisis. So the plan was shelved.

Otherwise, you will not see Hongkong coffin homes that need 2 generations to pay off the mortgage.

Malaysian govt should take this opportunity to let housing price fall to a more affordable level, without any dampening policy or subsidy.

Let the housing price find its own equilibrium, where supply and demand crosses.
Let those fly by night developers pack and go home.
Let the flippers go bankrupt.
AND let the fittest survive..............
08/07/2019 5:33 PM
probability So that the 1% rich can fatten their pocket further

As long as majority suckers are there...they can hv fun
08/07/2019 5:34 PM
ks55 https://www.scmp.com/news/hong-kong/politics/article/2150463/no-hong-kong-housing-crisis-if-ex-leader-tung-chee-hwa-had
08/07/2019 5:34 PM
ks55 If we had followed reason instead of the masses ... today’s housing problem would have been resolved.

Statement by former chief executive Leung Chun-ying



BUT Govt of the day prepare to let Maybank lose money?
Is govt prepare to let developers close shop?
Is developer prepare to put up more low to medium cost housing like HDB flats?
9 millions willing buyers (from 26 to 38 yo) just waiting for a suitable house to call home. Is govt deaf? Are developers blind?
08/07/2019 5:49 PM
Sslee Dear ks55,
https://www.youtube.com/watch?v=FAKE_IMzT2s
Martin Jacques: Hong Kong is a typical colonial economy; it is not a competitive economy, it’s a monopolistic economy. It basically preferred or empowered the tycoons to run Hong Kong to divide up the spoils between themselves above all in the field of property where most of the money was made. So this is an oligopolistic and monopolistic economy.

Thank you
08/07/2019 6:09 PM
ks55 Simply there are too many people complaining houses are beyond reach.
Govt also like to say the same so as to put up PR1MA, Rumah Selangor Ku, and so on and so forth.

Is HDB flat expensive?
They are simply given for 'free' to all eligible!
Is private housing in Singapore cheap?
But there are still so many buying up as investment after they bought first HDB flat.

Singapore houses are not cheap, could be 5 to 10 times more expensive than Malaysia. But no one complain they could not get married because of housing problem!

AND NOW is Malaysian housing expensive?
Up to you to gauge yourself.
If you choose to buy a house with mortgage up to 30% of your household income, it is not expensive.
If you want to buy a house that take you 2 generations to pay off your mortgage, you are simply wearing hat too big for your head!

All in all, I would say it really depends on your mentality whether you are kiasu, or down to earth.......
08/07/2019 6:18 PM
stockraider THAT IS PRECISELY THE BUSINESS MODEL OF SINGAPORE, THEY BRING HIGH GRADE TALENT THAT CONTRIBUTE TO PROGRESS OF SINGAPORE LOH..!!

AS A RESULT SPORE ARE COMPETITIVE AS IT HAS UNLIMITED QUALITY INTERNATIONAL TALENT FROM CHINA, INDIA, EUROPE, USA , AUSTRALIA ETC AND CREATE TALENT QUALITY COMPETITIVE JOBS, COMPARE WITH MSIA THAT CREATE LOW SKILL PAYING JOB FOR BANGLA, NEPAL, BURMESE, INDON ETC LOH....!!

YES OPEN UP LIKE SPORE, IS ALSO THE BUSINESS MODEL FOR PROGRESS AND SUCCESS MAH...!!

Posted by probability > Jul 8, 2019 5:30 PM | Report Abuse

Bring indians from India...they dont mind getting half the salary of malaysian and work double the hours...they are more knowledgeable and competent too..

Surely malaysian businesses will become more profitable
08/07/2019 6:48 PM
stockraider U r out of point loh....!!

A local fellow want to buy a house should consider the advantage or cost & benefit of rent v buy mah...!!

Take for example a Double storey house in bandar utama, costing Rm 1m can be rented for Rm 2.3k per month, whereas if they buy it will cost Rm 7k a month and this is based on financing over 35 yrs loh..!!

Thus it is much better to rent Rm 2.3k per month instead of buying instalment Rm 7k per month loh...!!

Save up the diff , & u can buy insas to hedge against inflation n participate with economy growth loh...!!

The reason why it is chaper to rent is that the landlord is subsidizing your accomodation loh...!!

You need to be businesslike, when handling finance in a savvy way loh.!

Posted by i3lurker > Jul 8, 2019 6:58 PM | Report Abuse

stockraider already mentioned

rent

do not buy

KISAH BENAR EXAMPLE, GENUINE example Bangsar double storey house

MV = RM1.6 million to RM2 million

local family offers RM1,500 rental per month

Bangla offers RM2,500 rental per month

who you want to rent to?
of course Bangla lah, they stay 30 person per house that's problem belong them.

so RM2,500 X 12 = RM30,000 per year

= 30,000/2,000,000 = 1.5% yield per year...

of course stockraider says rent lah

bloody stupeed to buy is it not?

why buy? put FD better lah
08/07/2019 7:09 PM
probability aiyo raider..singapore citizens are like shareholder of the businesses set up there...they dont compete for wages with the foreigners..

they milk them!

olders citizens already have established assets...and their younger generation net worth is being enriched by reducing/maintained population..
08/07/2019 7:37 PM
probability i think malaysians (majority) will not be able to compete with even bangla..if given fair chance to compete...

dont let the malaysian become slave in their own country in the name of competitive business.. no harm raising wage at the expense on ROE...it does not reduce your competitiveness...as the majority business compete internally within Malaysia

malaysia have all the resources to ensure a wealthy nation...provided managed well and wealth is evenly distributed..

education, skills and competency is something the citizens definitely need to improve...but not at the expense of foreigners getting all the benefit they can get as a citizen
08/07/2019 7:45 PM
stockraider Cannot be like that loh....even Singapore msia supply alot of talent tho them mah......!!

Msia also export talent to USA, UK, China, Taiwan, Australia, Spore etc mah....This is bcos so msian are really good loh...!!

We should further develop them mah...!!

If msian cannot compete dieloh....some more u want to have high pay how leh ??

U cannot get high pay if u do not try hard loh...!!

So u need to be good , if no good develop ur skill lah...u think spore in 1965 very good meh ?? No better than msia mah....!!

But they are determine to improve mah....msia should be like that loh..!

Cannot compete is no excuse, need good attitude to learn how to do well loh.....!!


posted by probability > Jul 8, 2019 7:37 PM | Report Abuse

aiyo raider..singapore citizens are like shareholder of the businesses set up there...they dont compete for wages with the foreigners..

they milk them!

olders citizens already have established assets...and their younger generation net worth is being enriched by reducing/maintained population..


probability
10185 posts
Posted by probability > Jul 8, 2019 7:45 PM | Report Abuse

i think malaysians (majority) will not be able to compete with even bangla..if given fair chance to compete...

dont let the malaysian become slave in their own country in the name of competitive business.. no harm raising wage at the expense on ROE...it does not reduce your competitiveness...as the majority business compete internally within Malaysia

malaysia have all the resources to ensure a wealthy nation...provided managed well and wealth is evenly distributed..

education, skills and competency is something the citizens definitely need to improve...but not at the expense of foreigners getting all the benefit they can get as a citizen
08/07/2019 8:23 PM
probability aiyo raider...though i dont have the numbers with me...i can tell that the country's gdp per capita ratio to the average (majority population) wage earners's wage...would be having a steep difference...

the argument is more on what can be done to distribute the wealth..

all the natural resources money is going into a few crony pockets

this is not good for malaysia
08/07/2019 8:29 PM
stockraider I read the malay T10 numbers is even higher than the chinese T10 loh...!! This is bcos the govt benefit the elite Malay the most loh..!

If there is unequal distribution of wealth, they need to help their own people by giving training better and increasing their competitive attitude loh..!!

We cannot be simply increasing pay forever loh...!!

If u increase pay without increasing productivity means inflation will hit us loh....!!

This is what happen this few yrs, when everyone complain, that things all gone up price and higher cost of living loh...!!

Cost of living Up why leh ??
Govt Simply impose increase salary.
Corruption not under control.
Discrimination social engineering
Wastage, doing unnecessary things that does not generate productivity.
Giving Free monies; by giving free monies thru brim, subsidy etc loh...!!
Ringgit collapse bcos msia cannot compete loh....!!

So simply give more salary and freebies without much effort on the recipient or increasing productivity will make thing worse for the country loh....!!

ONE WAY PROBABILITY CAN DO TO IMPROVE WEALTH IS THAT, U DONATE PART OF YOUR WEALTH AWAY LOH...!!
But u think carefully lah...we have been doing that all this for a long time...bcos govt take ur monies but benefit the malay loh..!!

1. More university for the malay
2. More school for the malays.
3. Mosque and religious funding for malays

All these our children do not benefit but after 60 yrs of wealth transfer, their progress are still backward loh...!!

Posted by probability > Jul 8, 2019 8:29 PM | Report Abuse

aiyo raider...though i dont have the numbers with me...i can tell that the country's gdp per capita ratio to the average (majority population) wage earners's wage...would be having a steep difference...

the argument is more on what can be done to distribute the wealth..

all the natural resources money is going into a few crony pockets

this is not good for malaysia
08/07/2019 8:51 PM
stockraider Your suggestion does not help loh...!!
Make things worse loh...!!
Do not be emotional, i think u r frustrated loh...!!


Posted by i3lurker > Jul 8, 2019 8:54 PM | Report Abuse

Felda Settler Chef Wan says...……...

Quote “Back home, many of my fellow Felda settlers sell off fertiliser subsidies given to them by the Government, and when they receive dividends, they marry two or three times and ‘breed like cats’! unquote (from News Straits Times

wow!

I never knew that!! ..... They obviously need help!

Solution as follows:-
I propose that we now waive off all their outstanding loans from the Gobermen and hereby approve another RM1 million loan per head (babies included) interest free and convert to outright grant after 2 years.

Every Raya will have bonus too
08/07/2019 8:56 PM
7300 recession looming....150yrs deutche bank can see n started with asia,the deep cuts until to 2022 is no play play for next 15-20 years cycle huge ballons bust,
08/07/2019 11:43 PM
7300 not like US wolf, German are straightforward n sharp....mana soros?
08/07/2019 11:46 PM
stockraider Sochai u go n donate more money loh...!!

Talk very easy mah....!!

The non bumi have been donating so much money to the other races for past 60 yrs since independence loh...!!

But they need to buck up and improve for the greater good of msia, cannot always depend on handout loh....!!

U need to study better economics loh...!!

Posted by i3lurker > Jul 10, 2019 1:37 PM | Report Abuse

Problem with Malaysia is that people never studied economics and selfish racist people unwilling to give money to other races even though giving money to other races will help themselves.
10/07/2019 7:36 PM
VSOLAR Sailang Margin All In No no no need more people to work harder to contribute more to the country hahah
10/07/2019 7:39 PM
probability the capitalist like raider want you sochais to work hard for him ma...lol!
10/07/2019 7:40 PM
VSOLAR Sailang Margin All In it's okay can make back the money from his bad investments wakakaka
10/07/2019 7:50 PM
probability Humans have to learn from honey bees...the Queen (capitalist) and worker bees (wage earners)...lives together in a ~ fair society...they share their harvested honey together...independent to who brought more honey...they take care of their eggs, larva and pupa together...they know in which portions to share royal jelly with the queen..

obviously the queen bees knows to appreciate its worker bees..

they seem to know 'the balance'...

unlike human capitalists...that greedy ones ma....if they can get away with enslaving others ...they will....they dont mind squeezing the workers till their last drop of blood for their return on equity ma...

lol!
10/07/2019 7:50 PM
stockraider Simple question Raider ask probability loh ??

Are u willing to donate 20% of your wealth to these people and set aside lesser for your family members leh ??

Are u willing to pay 15% more in everything u buy compare with lesser this people pay leh ??

Are u willing to finance 50% increases in wages at the expenses of 20% increase of all good & service for all malaysian leh ??

Are u willing see continue wastages like building excess school,university, mosques , hospitals using all the tax payers monies that u and your children will never use bcos of its poor quality leh ??

If that is the case, it is not the time for all msian to be productive & work hard and make use of the limited resources efficiently mah..!!

If in order to improve the country, entail change of all msian people attitude & motivation, in order to be a go gather, do u not want to support this positive change leh ??

Thus simply increase pay without productivity is not the answer loh....!! U need to better the society 1st & not handout mah...!!

Posted by probability > Jul 10, 2019 7:40 PM | Report Abuse

the capitalist like raider want you sochais to work hard for him ma...lol!
10/07/2019 7:57 PM
VSOLAR Sailang Margin All In raider you trying to be racist here? No good
10/07/2019 7:59 PM
probability raider...we are not talking about donation here...i have no objections for workers to raise their competence level...

i am talking about giving 'pay' (A) fair to the 'cost of living' (B)...

remember B is actually where the business make their money...and its from business is where the A is formed...

A and B magnitude must be balanced...you cannot raise B and squeeze on A...

thats pure enslavery
....................

think about the maths above deeply...

i know the economics of money flow deeper than you can think
10/07/2019 8:04 PM
probability business make money B based on the populations basic consumption (cost of living)...

if you dont give them pay A...at the same magnitude level....you as business owner (capitalist) are basically siphoning their hardwork to your own benefit..
10/07/2019 8:07 PM
stockraider We are the victim & is still being discriminated...not racist loh..!!

Coming to minimum pay...a foreign bangla employee will cost an employer all in cost of rm 1600 per month inclusive of levy whereas the local will cost the employer about rm 1350 per month but why employer still willing pay more for the foreigner leh ??

This is bcos the foreigner are hardworking and has good working attitude whereas the local are soft, lazy and has bad work ethics loh...!!

One foreigner can do about 2.5 worker jobs loh...!!

Thats why raider say we must buck up loh....!!

It is not exploitation mah....!!

Posted by Mr Jho Heavenly Petron & GCB & ECONBHD > Jul 10, 2019 7:59 PM | Report Abuse

raider you trying to be racist here? No good
10/07/2019 8:08 PM
probability the subject we are discussing here (as far as i am concern) its none specific to malaysia or the inequality between races wealth distribution based on their hardwork or competence...

its about the general issue of the 99% poor everywhere..in the world

all their fucking hardwork right from the age of 5 till 26 and till they retire is siphoned by the capitalist (1%)...

their earnings will never catch up with the cost of living which their strive for all their life.....cost of living is a moving target ...and illusion..lured by the capitalist...which they will never attain...

they will never attain financial freedom they imagined they will
10/07/2019 8:14 PM
probability simply because as much as their pay is raised by the business they work for..their consumption cost is raised even higher..so that the business will make more money (from the net difference)....

this tension of stretch is inevitable..in a capitalist economy...but the tension can be relaxed if the capitalist cares...and if the worker demand a better pay..an lesser cost of living..

its a purely a mindset thing that can be cultivated ...if the workers act in unison
10/07/2019 8:18 PM
stockraider As raider say no use u simply give higher pay without productivity improvement mah...your barang price will also increase to compensate loh...!!

Take Australi chap fan will cost Rm 50 per plate compare to here Rm 7 per plate loh...do u want this to happen in msia leh ??

The other thing, if msian minimum pay is Rm 8000 month same as australia u think msia can compete with Thailand, Vietnam, Philipine, Indonesia & mynmar and sell n produce more than them leh ??

All these asean countries are quietly laughing at our stupidity to have such a high salary loh...!!

The business owner put their capital,entrepreneurial and management effort at risk, thus they need to be given fair return loh...!!

They can always move to another country loh...!!

The business owner is not exploiting, as they put in alot of tears, sweats and capital at risk try to promote & develop the country loh..!!

In addition they also paid alot of taxes mah...!!

Posted by probability > Jul 10, 2019 8:07 PM | Report Abuse

business make money B based on the populations basic consumption (cost of living)...

if you dont give them pay A...at the same magnitude level....you as business owner (capitalist) are basically siphoning their hardwork to your own benefit..
10/07/2019 8:22 PM
stockraider Why those workers do not build & create wealth leh ??

This is mainly, Bcos of poor financial management loh....!!
Imagine a worker can make Rm 7000 a month but they over spend Rm 8000 month........how to build wealth leh ??

U need to save & save mah...like make Rm 7000, u spendlah Rm 5000 a month loh..!!

This means need to downgrade your immediate standard of living in order to build capital mah....!!

To build wealth, the paramount importance is not actually how much u make but how much u save mah.....!!

If read rich dad v poor dad book, this is what happening to the whole world loh..!

In order to be successful u need to breakout from your poor dad mentality and join the rich dad mentality and change our attitude to live loh..!!

Posted by probability > Jul 10, 2019 8:14 PM | Report Abuse

the subject we are discussing here (as far as i am concern) its none specific to malaysia or the inequality between races wealth distribution based on their hardwork or competence...

its about the general issue of the 99% poor everywhere..in the world

all their fucking hardwork right from the age of 5 till 26 and till they retire is siphoned by the capitalist (1%)...

their earnings will never catch up with the cost of living which their strive for all their life.....cost of living is a moving target ...and illusion..lured by the capitalist...which they will never attain...

they will never attain financial freedom they imagined they will
10/07/2019 8:34 PM
VSOLAR Sailang Margin All In probability you should be the next Prime Minister really, I will vote for you. You have the exact same ideas as me, just that I can't put it in words as coherently as eloquently as you.

The fundamental source of the problem is greedy capitalists! Need so much money for what?
10/07/2019 8:40 PM
VSOLAR Sailang Margin All In I think one of the main reason for Malaysia employees to be unmotivated and can't work in a productive manner is because of the low wages. It's just like you work so hard but you still earn peanuts. Why not just go overseas to work, where you can earn more and can earn more in terms of purchasing power?
10/07/2019 8:41 PM
VSOLAR Sailang Margin All In stockraider please don't bullshit, Australia chap fan where got RM50? Spewing lies again. Full of lies and shit lah really !
10/07/2019 8:43 PM
stockraider Why bill gates, warren buffet, quek leng chan, robert kwok....not bcos they really want to just make alot of monies in which they already have more than enough, it is bcos monies look for them mah...!!

Success build success loh....!! This means they cannot help it loh....business just look for them mah...!!

These people donate alot of monies....but after donating alot....the monies again come looking for them loh...!!

One thing...u need to do something productive to breed success...u cannot sit down & shake leg, hoping u will be rich.

U need work hard, creative, skillful and rational b4 success look for u loh.....!!

In addition...if u earn monies....u must save up monies to create more productive capital mah...!!
10/07/2019 8:49 PM
stockraider after currency conversion about there loh...!!

Thats why alot of people cook ownself loh...!!

Posted by Mr Jho Heavenly Petron & GCB & ECONBHD > Jul 10, 2019 8:43 PM | Report Abuse

stockraider please don't bullshit, Australia chap fan where got RM50? Spewing lies again. Full of lies and shit lah really !
10/07/2019 8:50 PM
zhen wei & JP Malaysia = low wages
10/07/2019 8:53 PM
stockraider Already explain why salary cannot be high loh...!!

The other thing, if msian minimum pay is Rm 8000 month same as australia u think msia can compete with Thailand, Vietnam, Philipine, Indonesia & mynmar and sell n produce more than them leh ??

All these asean countries are quietly laughing at our stupidity to have such a high salary loh...!!

It is all about productivity loh...!!

Posted by zhen wei & JP > Jul 10, 2019 8:53 PM | Report Abuse

Malaysia = low wages
10/07/2019 8:56 PM
zhen wei & JP Demand> productivity > efficiency.
10/07/2019 9:06 PM
stockraider Remember if u go on the basis of high pay....the export industry will kaput and thus msia economy will kaput too loh...then one day ur grand daughter or great grand daughter may need work as a maid to spore, thailand, hk, vietnam to save and feed your family.

Just be very careful loh...!!
If u make the industry not competitive loh....!!

Posted by zhen wei & JP > Jul 10, 2019 9:06 PM | Report Abuse

Demand> productivity > efficiency.
10/07/2019 9:21 PM
VSOLAR Sailang Margin All In Why i see Singapore higher wage, but export industry no kaput, instead Malaysian need to go Singapore to become waiters (your perceived low class jobs btw). Why Australia with the highest minimum wage in the world doesn't have their export industry kaput? I think Malaysia is really a low wage country problem. Wawasan 2020 become high wage country leh, how high can it go I wonder, got 5 months left. Fresh graduates can barely get 3k (it's in Ringgit mind you!)
10/07/2019 10:24 PM
probability one can understand the views i had expressed above if you view the arguments in a closed loop economy (a single country where there is no export or import involved) where business exist interdependently within this economy to cater the needs of its citizens.

(you need not confuse by bringing cheap labor or competent workforce from foreign country into the equation)

within a closed loop economy, composite work done by all worforce = composite consumption of all workforce

competitive advantage of a worker (competence) would only make him deserve a salary relatively higher than less competent workers within the same country

the competent work force would enjoy consumption at the magnitude he earns..and thus deserving luxury items ( a bigger house , better car, better brand shoes, clothes and watches relatively)

this relative differential in competence would have at most extreme case be in the ratio of 40% very competent and 60% less competent..

it could never ever stretch to the observed 5% rich and 95% poor workforce to an extent that this 95% poor is unable to afford even the BASIC CONSUMPTION needs (an average house , an average car, education, children etc).....

despite these younger generation are inheriting cumulative workdone by their predecessor citizens

such an extreme stretch of maldistribution (unevenness) in consumption capability (consumption power) within the same country can only be done...caused by:

the bullying capitalist
........................
10/07/2019 10:49 PM
stockraider Correctloh...why spore leh ?

Singapore is the most competitive economy in the world mah....!!

They have skillful workers and make more high tech products, pharmauceutical, petroleum industry, there have great tourism industry with superb openness with various cultural of the world, there are hub connecting the world, then their education are superb quality loh...!!

The govt servant very small size and very efficient and most importantly they is not much corruption & wastage leh ??

If U compare to msia chehkai..youth define 30 or 40 also big arguement loh...also education very low standard, corruption high, wastages here & there....all the rich do not even use govt services such as university, secondary school, hospital etc bcos perceive very poor standard loh...!!

Again the people very backward talk about politic like race & religion and royalty to further divide the people. Alot of interference with free flow business even concert also cancel...the authority no brain loh...!!

Btw in spore u still can get Kai fan at SGD 2 to 3 whereas msia u get Rm 5 to Rm 8 loh...!! The inflation in spore not that high at all loh...!!

Yes salary is high, when u convert from SGD to MYR...but dollar to dollar...the price of basic necessity not expensive and cheap loh...!!

But car are extremely expensive alot of people do not own these assets loh..!! The public is taking bus and rail, which are super efficient & reasonable cheap mah...!!

The highest investment item for sporean is property...owning a HDB apartment is a commitment for a lifetime and consider very expensive n just like msia mah..!!

But in Msia u still can buy cheap cheap flat & apartment costing Rm 100k to Rm 300k, thus msia is cheaper.

Having say that Spore can afford to hava a minimum salary of Rm 6000 bcos they are highly efficient & most people work very hard loh..!!


Posted by Mr Jho Heavenly Petron & GCB & ECONBHD > Jul 10, 2019 10:24 PM | Report Abuse

Why i see Singapore higher wage, but export industry no kaput, instead Malaysian need to go Singapore to become waiters (your perceived low class jobs btw). Why Australia with the highest minimum wage in the world doesn't have their export industry kaput? I think Malaysia is really a low wage country problem. Wawasan 2020 become high wage country leh, how high can it go I wonder, got 5 months left. Fresh graduates can barely get 3k (it's in Ringgit mind you!)
10/07/2019 10:56 PM
stockraider I like to correct your wrong perception especially in msia loh....!!

Msia

1}T40 consist of about 15% of the population loh...!!

2) M40 consist of about 40% of the population mah..!!

3) b40 consist of about 45% of the population loh..!!

Where got 95% income control by 5% of the population leh ??

'it could never ever stretch to the observed 5% rich and 95% poor workforce to an extent that this 95% poor is unable to afford even the BASIC CONSUMPTION needs (an average house , an average car, education, children etc).....
despite these younger generation are inheriting cumulative workdone by their predecessor citizens

such an extreme stretch of maldistribution (unevenness) in consumption capability (consumption power) within the same country can only be done...caused by:
the bullying capitalist'!

THE MAIN REASON FOR YOUR WRONG IMPRESSION ARE DUE TO THE COMPLAIN BY THOSE GREEDY WHO WANT TO BE RICH BUT NOT PUTTING IN THE NECESSARY EFFORT?

Thus giving u a wrong impression that business owner is exploiting but in fact they do not.
The business owner put their capital,entrepreneurial and management effort at risk, thus they need to be given fair return loh...!!

They can always move to another country loh...!!

The business owner is not exploiting, as they put in alot of tears, sweats and capital at risk try to promote & develop the country loh..!!

In addition they also paid alot of taxes mah...!!


Posted by stockraider > Jul 10, 2019 8:34 PM | Report Abuse X

Why those workers do not build & create wealth leh ??

This is mainly, Bcos of poor financial management loh....!!
Imagine a worker can make Rm 7000 a month but they over spend Rm 8000 month........how to build wealth leh ??

U need to save & save mah...like make Rm 7000, u spendlah Rm 5000 a month loh..!!

This means need to downgrade your immediate standard of living in order to build capital mah....!!

To build wealth, the paramount importance is not actually how much u make but how much u save mah.....!!

If read rich dad v poor dad book, this is what happening to the whole world loh..!

In order to be successful u need to breakout from your poor dad mentality and join the rich dad mentality and change our attitude to live loh..!!
10/07/2019 11:13 PM
VSOLAR Sailang Margin All In You sure or not, you see the top management salary compared to those normal executives... Then you can clearly see the imbalanced distribution of wealth generation with regards to value creation of the employees already. You work 60 hours, I also work 60 hours, just because you worked longer or have better connections to get to the top then you deserve to be paid 100 times or even 1000 times more than a normal executive, this doesn't make a lot of sense to me. What I see is the wealth gap keeps on widening in Malaysia because of these greedy capitalist. That's not how a nation progresses, if you want to have advancement the government need to put in place policies that helps to narrow the wealth gap!
10/07/2019 11:25 PM
stockraider If u do donkey work surely u does not deserve high pay, compare with some other guy who huge value add to the the enormous wealth creation of the company mah...!!

Posted by Mr Jho Heavenly Petron & GCB & ECONBHD > Jul 10, 2019 11:25 PM | Report Abuse

You sure or not, you see the top management salary compared to those normal executives... Then you can clearly see the imbalanced distribution of wealth generation with regards to value creation of the employees already. You work 60 hours, I also work 60 hours, just because you worked longer or have better connections to get to the top then you deserve to be paid 100 times or even 1000 times more than a normal executive, this doesn't make a lot of sense to me. What I see is the wealth gap keeps on widening in Malaysia because of these greedy capitalist. That's not how a nation progresses, if you want to have advancement the government need to put in place policies that helps to narrow the wealth gap!
10/07/2019 11:41 PM
VSOLAR Sailang Margin All In then you are dead wrong, work in Australia do donkey jobs get paid $20/hour. In malaysia if you are a 'professional' can barely make RM10 per hour.
10/07/2019 11:45 PM
stockraider Thats why australia economy not robust, like singapore loh...!!
Bcos misallocation of resources loh...!!



Posted by Mr Jho Heavenly Petron & GCB & ECONBHD > Jul 10, 2019 11:45 PM | Report Abuse

then you are dead wrong, work in Australia do donkey jobs get paid $20/hour. In malaysia if you are a 'professional' can barely make RM10 per hour.
10/07/2019 11:48 PM
stockraider Remember if u work in australia, u can forget about of year end bonus and performance incentive loh...!!
U just rely on your fixed salary loh....!!

Bcos majority of the co think that, they have been over paying fixed overall salary to their staffs, thus bonus and performance incentive as reward is unheard of mah......!!

But not in spore & msia loh....!!
10/07/2019 11:54 PM
7300 another 3 yrs to down,2 years to sideway n 10 years to stabilised
14/07/2019 10:13 PM

(CHOIVO CAPITAL) The Black Swan Hidden in RCE CAPITAL (RCECAP)

Author: Choivo Capital   |  Publish date: Sat, 15 Jun 2019, 3:57 PM


For a copy with better formatting, go here, its alot easier on the eyes.

The Black Swan Hidden in RCE CAPITAL (RCECAP)

===================================================================

 

I never really expected this day to come, or for me to do it in such circumstances (I would have preferred selling it for much more). However, over the last week, I cleared my entire position in RCECAP.

 

Normally, I wouldn’t be inclined to explain to the public why I did so, however, as I had written the article below, i felt morally obligated to do so.

 

Lets Talk About RCE CAPITAL

 

Make no mistake, the management is great. I am personally very happy with how the company is managed.

 

Investor Relations is very forthcoming and easy to speak with. In addition, the Credit Culture facility (now cancelled) gave me a peek in terms of their thought process when it comes to how they consider risk/reward for each loan.

 

A 10% credit facility to a company giving out personal loans at 11% in Singapore. What a deal!

 

This is incredibly attractive, since the risk-free rate in SG is like 1.5-2%, while Malaysia’s is like 4%. In addition, RCE makes roughly 6.5% net on their loan books (second highest in Malaysia, the first is Elk-Desa), 10% would be unbelievable.

 

And due to the sheer impossibility of having impairments of less than 1% doing personal loans, it seemed extremely likely that RCECAP would have been able to takeover the entire company for a song when they inevitably failed to meet the interest payments in full.

 

If RCE’s impairment rates for its Malaysian books is comparable as a benchmark (its not), RCE would end up owning both an SGD loan book paying out 6.5% net, AND a SG Personal Loan company.

 

Pretty decent deal. No surprise it didn't work out, you'd have to be a fool of the highest degree to take the other end of that deal.

 

Its not the kind of a mindset you want in a venture capitalist, but definitely one you want in an financial institution.

 

 

 

The Black Swan

Despite waxing lyrical about the company in my previous company and in the paragraph above, I still sold my position as the fundamentals have changes somewhat last Saturday.

 

In my opinion, the real risk that lies in RCE Capital was in the political aspect, and this was one aspect I have always tracked very closely, along with the civil servant loan market.

 

It was last Saturday when something caught my attention.

 

8/6/2019 (THE STAR) - Civil servants spend more than half of salaries on repaying debts

8/6/2019 (THE STAR) - What is Angkasa

8/6/2018 (THE STAR) - Syndicated loan scam 

13/5/2018 (THE STAR) - Be wary of Angkasa loan offer, civil servants told

 

In just one day, 3 unflattering articles on co-operative loans appeared on “The Star” (and I also found an unflattering article written in May). Nothing about what they said is unknown.

 

Chances are, you only went for a Koperasi's loan because you can’t get one from Bank Rakyat or MBSB, and so there is almost no way that you would get a full payout. A 20-30% haircut is normal and stated in the contracts.

 

However, like the process of making sausages or industrial farming, its one of those uglier things that people don’t talk about.

 

To make it so public felt a little like the ground moving. Especially since “One particular prominent Malaysian cooperative” sounded like “Yayasan Dewan Perniagaan Melayu Perlis Berhad” which is funded by RCECAP. They are the biggest Koperasi after all.

 

Just 4 days later this appears.

 

13/6/2019 (THE STAR) - Probe on loan scam, co-operative commission acts

 

I cleared the rest on that day.

 

 

 

Why does this matter?

One of the things I always tried to find out, was who owns these Koperasi's.  However, it had proven quite difficult.

 

The thing one should note is, these Koperasi's, if active with good volume, are an incredibly lucrative businesses.

 

Their job is just to take a commission for each loan given, with no skin in game since they don’t hold the loan book.

 

Often, it’s the financial companies backing them, like RCECAP that is even doing the sales and credit vetting.

 

They are wholly disposable if not for their ANGKASA codes (which are needed to do direct salary deduction). And RCECAP or the other financial companies are essentially just renting the codes.

 

I had previously naively assumed that it was run like a typical ko-operasi/savings & loan, where depositors have shares equal to the amount deposited. However, recently, I’ve learnt from my ex-banker friend, that this is not really the case.

 

For cooperatives, there are about 800 licenses, and only about 30 are significant business. Back in the day, the government used to give out a Koperasi license/ANGKASA code to UMNO Division heads, and it was (and still is) a good source of income for the party.

 

And “Yayasan Dewan Perniagaan Melayu Perlis Berhad” the biggest one which is funded by RCECAP, is apparently owned by Dato' Sri Dr. Shahidan bin Kassim (I don’t have proof), the UMNO warlord who was accused of child molestation, but was ultimately given a discharge not amounting to an acquittal by the Kangar Sessions Court for the allegation of molesting of an underage girl after the victim retracted her report, for one reason or another.

 

In addition, my friends in MOF have also indicated to me that the government being unhappy about Koperasi personal loans by civil servants and they are thinking of ways to solve it.

 

These news feels a little like positioning before the big whacking.

 

 

 

 

What actions could the government take?

Well, so what actions could the government take to reduce the loans?

 

The more common ones are as follows and was done in 2014.

  1. Decrease the personal loan length from 10 years to say 5 or less.
  2. Lower the proportion of civil servants’ personal loans, in the loan portfolio of banks, making it harder to loan money or buy Sukuk from companies like RCECAP.
  3. Lower the maximum salary deduction / garnishment from 60% to 40% or so.

 

In 2014, the losses from MBSB and lower profit in RCECAP, is due to these companies in being a bit cheeky and giving out personal loans that have actual lengths that are longer than what was allowed. The plan was to keep it off the system first, and to extend the tenure say 5 years down the line.

 

However, there was a directive from the top disallowing this method, despite all the loans given out, resulting in the massive impairments. After that lesson, they all started to toe the line.

 

As the above methods apply to future loans and not current, it would not have any impact on the current loan book unlike 2014 but would affect growth.

 

However, there is are two other methods, I don’t think too many have considered.

  1. Making koperasi’s pay a high lease for the codes, ensuring most koperasi’s shut down.
  2. Opening access for these codes to deposit taking financial institutes such as Maybank, CIMB etc. The banks have been lobbying for access for a long time.

 

Done in combination, especially the second method, would ensure that civil servants get a better rate (since Maybank etc have way cheaper cost of funds, and can accept a higher NIM), and indirectly (this is important as you can’t just take away the codes unless they broke the law) killing off ALL Koperasi’s since they have a cost base and marketing / eyeballs disadvantage.

 

Given that this is a Pakatan Harapan government, they are incentivized to shut down these Koperasi’s and further cripple UMNO’s source of funding, and to top it off, they can couch it as being it betting a good deal for the civil servants and the people (which it actually is).

 

Of course as EPF is a majority holding in MBSB and MOF owns Bank Rakyat, its not like there is no cost to it. However, EPF & PNB etc also control and hold CIMB, Maybank etc, its more like a left hand to right hand transaction. 

 

This changes the dynamics completely.

 

 

 

Conclusion

Given this change in fundamentals, the valuation in RCECAP changes quite significantly. Realistically, there is a good probability that RCECAP is now only worth its current loan book, which pays out 6.5% net.

 

Well, if I’m only buying the loan book, I’d like a 30-50% discount to book.

 

These days, with the sheer amount of opportunities globally. For example, Kraft Heinz and Intel is only trading at 6 and 10PE respectively, with earnings yield over Enterprise value something like 11 and 13 times, not a bad price at all.

 

It has become increasingly difficult for me to justify holding RCECAP, especially with the change in fundamentals.

Sucks to not be able to take that lovely 5 cent dividend though.
 

Disclaimers: Refer here.
 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

 

 

Labels: RCECAP
  2 people like this.
 
teareader818 I know of a Public Sector Cooperative where a civil servant in applying for a personal loan has to obtain signed sureties from two ELIGIBLE members, which at times, can be hard to come by. I don't know whether this condition applies to all cooperatives. It seems that those running the cooperatives, who are usually ex-civil servants, tend to treat them as their own personal banks. Expect another government bailout if things get critical.
15/06/2019 5:16 PM
Choivo Capital Yeah guarantors need to be civil servants usually. And if the original lender don't pay, direct deduct from the guarantor salary.

How do you mean by critical, and why would the PH govt bailout?
15/06/2019 5:25 PM
chamlo Under stingy PH govn hard to get pay rise or BSH reduce. So loan defaulters will increase?
15/06/2019 5:32 PM
cyeec2000 If civil servants loan provision is good bussiness, mbsb would not exit to be full fledge islamic bank and bank islam claimed to intend to reduce this exposion.
15/06/2019 6:38 PM
Choivo Capital He says it cracked its skull 5 months ago, i say it got influenza last saturday, and may get worse as the hospitals nearby are shit.

I was right when i bought it, when i held it, and when i sold it.
15/06/2019 7:52 PM
joekit Maybe after you threw all your shares in rcecap then the share price will start moving up...hahahahaha....that happens all the time....hahahaha.....
15/06/2019 10:24 PM
teoct OK.

Thanks anywhere for sharing.

Happy weekend all.
15/06/2019 10:24 PM
Choivo Capital Hahahahah possible. No idea lah. This was a fundamental buy.

It may be worth thinking as a trading buy, if i were ever to pick up trading tendencies.

====
joekit Maybe after you threw all your shares in rcecap then the share price will start moving up...hahahahaha....that happens all the time....hahahaha.....
15/06/2019 10:24 PM
15/06/2019 11:50 PM
Philip ( buy what you understand) I think the mark of good investor is someone who never stops learning something new every day, improves his thought process and absorbs new mental models.

In a nutshell the points you made are all facts which made me not invest in rce capital. And you are right, it may not happen today, it probably won't happen this year. But 5-10 years from now, it will definitely change.

I'm not a good predicter of time. But I believe I'm an ok judge of long term trends. All I can say is don't be disheartened if once you sell your shares the price goes up for a little while. In the end the long term is what matters.
16/06/2019 12:56 AM
Philip ( buy what you understand) As for Intel, my advise is to not invest in it. Intel the name is very different from intel the company.

For tech companies the ability to pivot, to push new technologies and to efficiently push your team to be more efficient than the competition means everything.

In every single way Intel has underperformed. For a company that was the leader in semiconductors advances it has declined in many uninspiring ways. Intel inside today means expensive and lower quality.

Intel missed mobile.(tsmc & foxconn took over).
Intel missed graphics. (AMD turned their fortunes on gpu processing).
Intel's 10nm wafers were years late to the party, while competitors with smaller R&D budgets were able to produce further advancements than intel.

For me it's all about the node race. And it has proven that the bigger company with larger resources does not seem to have the competitive advantage that smaller companies have.
16/06/2019 1:15 AM
Philip ( buy what you understand) I think the best advice I could give new investors is to first look at the business itself, then into the price. Because the price fluctuates whole the business model rarely changes, if you can monitor the good businesses, when the right price comes you will not hesitate to put all your money in.

But buying a stock based on PE, NTA alone can prove very dangerous if you do not understand how the businesses got it's lending status the way it had.
16/06/2019 1:21 AM
Choivo Capital Thanks phillip,

I'm still studying intel. So i have not casted my full line

One thing to note is this. Its not so much about the node (which is very important) but also about the architecture.

Why is Nvidia Turing, which is on 12nm, still vastly outperforms AMD's which are on 7nm, in terms of power and efficiency?

That is the thing i'm banking on.

In every major area intel is in, they are the market leaders, whether servers and CPU.

And i severely doubt AMD can ever beat intel in CPU or nvidia in GPU. They simply dont have enough money, and they dont make enough money to reinvest into R&D the same way intel and nvidia does.

Now, Intel is planning to go into graphic processing, a market where the leader Nvidia makes 30% roe, and unbelievable amount, because they simply had no decent competitor.

Intel knows what its takes to do architecture, they make the vast majority of CPU's and would be more than capable of making graphics cards that are more compatible with their CPU's. And with the margins available, they would be more than able to sell cpu and gpu jointly.

Is it probable that they can achieve this? I think more likely than not. I still have some studying to do though.

However, at 10PE, i think i'm willing to take a position on it, and build it further as my confidence level increase, or maintain it if it doesnt.
16/06/2019 2:58 AM
Investee Hi, why did you mention that the Credit Culture facility is now cancelled? Is it announced?
18/06/2019 10:11 AM
Choivo Capital Yes. It was announced.
18/06/2019 4:01 PM
Investee Bro, Can share link? Can't seems to find it
18/06/2019 8:20 PM
Choivo Capital http://malaysiastock.biz/Company-Announcement.aspx?id=1137558
18/06/2019 8:25 PM
soojinhou Give you a like even though you are an arrogant asshole since you spent time to follow up on your buy calls, and that benefits the investment community.
18/06/2019 8:36 PM
eleh Nice reading. To be frankly i also noticed that few news by KPDNKK that indicated in TV which saying all those koperasi is giving misleading info when all gov servant apply loan last year.

https://www.youtube.com/watch?v=xEGhkS__sg0&feature=youtu.be
18/06/2019 8:40 PM

(CHOIVO CAPITAL) A Look At OPENSYS (M) Berhad (OPENSYS)

Author: Choivo Capital   |  Publish date: Sun, 9 Jun 2019, 2:47 AM


For a copy with better formatting, go here, its alot easier on the eyes.

A Look At Opensys

===================================================================

 

Well, its been sometime since I last wrote. And well, it was mostly out of me being a little lazy, more focused on my reading, as well as some self-reflection in terms of my investing and how I go through life in general.

 

In any event, I decided to get back in the groove of things with this bit of research I did for OPENSYS (M) Berhad.

 

The reason i’m sharing this is due to,

  1. Better or similar opportunities in the market, especially globally, given the fall in prices recently.
     
  2. I’ve already bought my position. For the record, it’s a smallish position mainly due to me finding opportunities elsewhere.

 

In addition, I also felt that as most of my insight was already stated out in bits and pieces by others via blogpost or comments, with some stretching back to 2015. It would not make much difference for me to share my research.

 

As always, criticism is preferred.

 

OPENSYS (M) Berhad (KLSE: OPENSYS - 0040)

Recommendation

We are long OPENSYS (M) Berhad (OPENSYS – 0040), with intrinsic value estimated to range from RM0.273 to RM0.664 per share. This represents a range from, a downside of 11% to an upside of 118% from the current share price of RM0.305.

 

 

 

Business Description

OPENSYS (M) Berhad principal activity consist of assembling and maintaining machines/providing solutions relating to,

 

  1. CRM Machines (2012 onwards)
  2. Cheque Truncation System (CTS)
  3. Payment Kiosk

 

Prior to 2012, the company’s main business consists of providing cheque processing services by selling and maintaining the CTS machines, which via image processing, converts cheques and standing instructions into electronic fund transfer instruments, with as much as 80% operational cost savings to banks at less than half the price of traditional systems, as there was no need for the physical movement of cheques.

 

They also provided non-cash-dispensing self-service kiosks that allowed customers to make deposits of cheques and cash, pay bills and renew insurance premium and subscription plans using cash, cheques, credit and debit cards.

 

In both areas, they are both the cost, product and market leaders. However, both industries are currently in a period of contraction.

 

Cheques used to be the only/easiest way to provide multiple approvals for certain payments, however, these days, most banks have made special approval tokens, that can be given to multiple individuals and only have payment made when all relevant parties have given approval via those tokens.

 

As for Payment Kiosk, most of these with online and electronic payments, not much point going to a branch to use a computer, when you can do so at home.

 

The company makes money by selling the machines at a gross profit margin of 10 - 15% and charges an annual maintenance fee of 10 – 12% for the machines. The main portion of the profit comes from the maintenance services which have much higher margins.

 

In 2012, they embarked on a new area of growth via CRM Machines, an industry which many would also consider a declining industry, but I digress.

 

 

 

 

Investment Thesis

 

 

  • Cash Recycling Machines are the best product/solution based on first principles.

Compared to other solutions, such as Cash Dispensing Machines and Cash Deposit Machines, Cash Recycling Machines offer roughly 30% savings in operational cost and capital expenditure.

 

The logic is quite straightforward, you now only need one machine, and as the machine can both accept and dispense cash, the amount of times you will need someone to come and either collect/refill the money will naturally reduce by around half.

 

 

  • Cash will continue to consist of the bulk of payments (by transaction count) globally for a long time.

Other than Sweden, cash is still widely utilized worldwide making up 85% of global transactions by volume.

 

Now, naturally most will point to China, where cash is used increasingly less due to the proliferation of QR codes.

 

The question we need to ask is, are situations like these the rule or the exception?

 

Despite the systems used by Alipay etc being the best technologically (highest capacity and processing speed) and having the lowest cost. Why is VISA and Mastercard still the mainstay globally?

 

Why do people still use credit cards and debit cards instead of e-wallets like Alipay etc? The reason is two pronged.

 

Firstly, the Chinese population was severely under-banked back when Taobao etc was launched by Alibaba etc in 2003 and 2004. Alibaba then introduced Alipay as a solution process payments on that platform.

 

With the sheer growth in these online shopping platforms which very quickly captured the bulk of the market for both suppliers and customers.

 

This resulted in most people in China having and using an Alipay account, before they even had a bank account, much less a debit or credit card.

 

Other than car loans, housing loans and corporate loans, the people of china completely skipped this process of being banked by traditional providers.

 

This meant there was no momentum or vested interest stopping banks or financial providers from going cashless.

 

The second reason is, till today, Alipay does not charge even 0.01% in transaction cost for any of the more than USD6 trillion processed each year. They make money from the fact that the vast majority of the Chinese people actually keep their savings and current accounts on ALIPAY, and buy their money market funds, fixed deposit and other financial products.

 

This meant that most merchants are more than happy to use ALIPAY. This is clearly not the case in Malaysia or most countries.. Most e-wallets merely serve as aggregators for other payment services such as Master, Visa etc, which charge a fee from 0.15% to 2% depending on the type used.

 

Good luck having vendors swallow that, especially since they can’t charge more for people paying using debit/credit cards, pursuant to a new BNM ruling. And let’s not forget the monthly fee to rent a merchant processing machine, which Alipay does not charge.

 

I don’t see my favorite hawker ever taking payment via visa anytime soon.

 

Currently, most e-wallets are going on a tear bleeding money like crazy to acquire customers. Touch N Go went from making RM20m a year to losing RM40m a year just from trying to acquire customers. The only reason most people have in using the current e-wallet services (Grab, Boost etc) is due to these customer acquisition promotions.

 

At some point, the Softbank etc venture capital money is going to run out, and these companies are going to need making money. I bet they will run out of money before people stop using cash.

 

 

  • The Opensys Edge

Currently, OPENSYS is the market leader in CRM machines, with 80% of the market share.

 

Most people may not know this, but CL Systems was the first in 2011 to introduce a self-service cash recycler machine. OPENSYS only thought started going through the process of qualifying for providing the machines in 2012 and sold their first machine late 2012.

 

Despite giving their competitors a head-start, by 2016, OPENSYS still obtained an 80% market share of the CRM Market, with the remaining 20% shared by CL Systems, NCR and Diebold Nixdorf.

 

This out-performance can be attributed to a few reasons,

  • For most banks, the Cash Deposit and Cash Dispensing Machine runs on two different computer systems, the difficulty then lay in creating the software to combine these two channels into one. OPENSYS was the first to do that.

 

  • This business is similar the rubber glove business, in that the maintenance and capital expenditures machines consist of a small portion of the Bank’s cost, with service, quality and technology being the focus of the banks, assuming the pricing is similar.


    In these areas, OPENSYS is easily the best, with the two most kiamsiap and China-man banks in Malaysia, Hong Leong Bank and Public Bank adopting their CRM machines en-masse.

 

  • This one is purely anecdotal, however, unlike CL Systems, NCR and Diebold Nixdorf, OPENSYS/OKI is a local business run by local Chinese.


    The other 3 are MNC’s whose base of operations are in Hong Kong, America and Germany, with the Malaysia business is run by one of their local branches.


    Well, I would bet my money on the local Chinese with skin in game, being a lot more driven than some Ang-Moh manager here on work holiday.

 

 

 

 

 

Catalyst

 

 

  • High probability of tripling to quintupling the profit related to Software Solution & Services

Recently, Bloomberg just reported that for the first time in a long time, the number of ATM’s have fallen by 1% globally.

 

What Bloomberg does not tell you, is that their ATM count consist of 4 different types of machines. They are, Cheque Deposit Machines, Cash Deposit Machines, Cash Dispensing Machines and Cash Recycling Machines.

 

Given the 30% savings operational maintenance and capital expenditure, banks are often replacing two machines (cash dispensing and cash depositing) with one cash recycling machines. Share of these machines have increase from 34% to 38% compared to the previous year.

 

They are currently roughly 17,500 (2017) Cash Dispensing and Cash Depositing machines in Malaysia, with growth expected to be roughly 5% per annum. To be conservative, let’s assume growth to be zero.

 

20% of them consist of CRM machines, with OPENSYS having 80% market share. They had installed a total of 2,500 and 3,200 CRM as of 2017 and 2018.

 

Most ATM and CDM machines were likely to have been bought before 2015, when OPENSYS is going around making banks aware of the technological and cost benefits of CRM’s, having started selling to Hong Leong and Public Bank, as well has having passed trials for other banks.

 

As most banks in Malaysia are now fully aware of the technological and cost benefits of CRMs and are planning to replace their machines CRMs when their equipment reaches the end of their life-span, which are typically 8 to 10 years. (Other factors such as end of vendor support for software operating systems, regulator changes and compliance to international standards, may shorten the replacement cycle for ATMs and CDMs.)

 

We can safely say the bulk of the remaining 80% of non-CRM, Cash Dispensing and Cash Depositing Machines in Malaysia will be replaced within the next 5 years.

 

Given OPENSYS’s ability to hold 80% market share within 2 years, despite giving their competitors a 1-year head start, it seems highly likely that they will be able to maintain this market share as the remaining machines are replaced.

 

Giving a potential 5X growth in maintenance revenue and earnings in 5 years, or 3X growth, assuming that the remaining 80% is evenly split between Cash Dispensing and Cash Depositing machines, and they are converted to CRM Machines on a 2 to 1 basis.

 

Ie: One Cash Dispensing and one Cash Depositing machine, is converted into one CRM Machine.

 

 

 

 

Key Risk

 

 

  • OPENSYS may not be able to maintain the market share.

Currently OPENSYS have sold CRM machines to every major bank in Malaysia, however, the bulk of the machines are sold to Hong Leong Bank, Maybank and Public Bank.

 

It is a little odd, why the rest of the banks seem to be a little slow in adopting the CRM compared to those two banks who are replacing the machines very aggressively. Especially since so many Cash Dispensing and Cash Depositing machines are so old.

 

It could be the typical GLC “take your time” attitude, or it could be a matter of solving the software programming to tie up both cash dispensing and cash depositing computer systems.

 

 

  • Forex Risk

Profits from the sale of the machines do get affected by forex risk, as purchase is denominated in JPY. However, this is not the bulk of the value of this Company in our opinion.

 

 

  • The Company is unable to maintain non CRM related Software Solution & Services revenue and profit

The non CRM related Software Solution & Services revenue and profit may well fall exceeding the gain in CRM related ones.

 

I don't think the revenue related to kiosk is significant, however, we may very well be proven wrong. 

 

 

 

 

Valuation

For our valuation, extremely conservative assumptions will be taken, and four different  scenarios will be performed, common assumptions are as follows.

  • 0% Growth in Total number ATM and CRM machines (Consensus is 5% growth).
  • Discount Rate of 4.5%.
  • All un-allocated Expenses and Income relate to “Software Solution & Services” (SSS).
  • 20% of Machines are CRM, remaining 80% is equally split between Cash Deposit and Cash Dispensing Machines. (Cash Dispensing Machine is likely to be far more than Cash Deposit Machine)
  • Tax Rates of 24%.
  • Zero profit from CRM Machines (This is the most onerous and unlikely one).
  • The market values OPENSYS at a PE of 10 in 5 years.

 

 

Scenario 1

Profit 5 years from now is calculated by taking the 2018 SSS Profit, less all un-allocated income and expenses. A corporate tax rate of 24% is then applied.

 

The remaining 80% Cash Deposit/Dispensing Machine are all converted into CRM Machines (essentially X5).

 

2018 SSS Profit: RM20,293,304
Less: 2018 Net Unallocated Income and Expense: RM(13,743,823)
Equals: Profit Before Tax: RM6,549,481
Less 24% Corporate Tax - Profit After Tax: RM4,977,606
Profit After Tax in 5 Years when remaining 80% Machines Converted to CRM (X5): RM24,888,028
Market Capitalization in 5 years (10PE): RM248,880,280
Discounted at 4.5% for 5 years: RM197,700,306
Price per Share: RM0.664

 

 

 

Scenario 2

This scenario is the same as scenario 1, except, the remaining 80% Cash Deposit / Dispensing Machine are all converted into CRM Machines on a 2 to 1 basis (essentially X3).

 

It assumes that if a branch has one Cash Deposit Machine and one Cash Dispensing Machine, it will be converted to one CRM Machine. This is quite unlikely as banks usually convert both to a CRM.

 

2018 SSS Profit: RM20,293,304
Less: 2018 Net Unallocated Income and Expense: RM(13,743,823)
Equals: Profit Before Tax: RM6,549,481
Less 24% Corporate Tax - Profit After Tax: RM4,977,606
Profit After Tax in 5 Years when remaining 80% Machines Converted to CRM on a 2:1 basis: RM14,932,817
Market Capitalization in 5 years (10PE): RM149,328,170
Discounted at 4.5% for 5 years: RM118,620,183
Price per Share: RM0.398

 

 

 

Scenario 3

This scenario is a much more conservative.

 

The profit 5 years from now, is calculated by taking the "Incremental net profit before tax growth related to CRM SSS only", that is then added to the current 2018 SSS Profit, less all un-allocated income and expenses in 2018. A corporate tax rate of 24% is then applied.

 

"Incremental net profit before tax growth related to CRM SSS only" is calculated by taking only the difference in SSS profit in from 2012 to 2018 (first machines sale is in late 2012, maintenance service revenue kicks in on 2013), less the proportioned (based on % of the 2012-2018 difference, on 2018 SSS Profit) un-allocated expense and income.

 

The remaining 80% Cash Deposit/Dispensing Machine are all converted into CRM Machines (essentially X4).

 

This scenario this amount assumes that the non CRM related revenue and profit is maintained.

 

However, it also severely understates the growth in in CRM related revenue and profit, as the gain in CRM related SSS profit is more than the net difference, due to the fall in cheque processing SSS profit from 2012 to 2018.

 

It sounds a bit confusing, but you can better understand it from the working below.

 

Difference in 2018 and 2012 SSS Profit: RM10,698,078
Less: Proportioned Un-allocated Expense And Income: RM(7,245,370)
Equals: Profit Before Tax from CRM only: RM3,452,708
Profit Before Tax from CRM only in 5 Years when remaining 80% Machines Converted to CRM (X4): RM13,810,833 (A)

 

2018 SSS Profit: RM20,293,304
Less: 2018 Net Unallocated Income and Expense: RM(13,743,823)
Equals: Profit Before Tax: RM6,549,481 (B)

 

(A+B) Less 24% Corporate Tax - Profit After Tax: RM15,473,839
Market Capitalization in 5 years (10PE): RM154,738,390
Discounted at 4.5% for 5 years: RM122,917,841
Price per Share: RM0.413

 

 

 

Scenario 4

This scenario is the same as scenario 3, except, the remaining 80% Cash Deposit / Dispensing Machine are all converted into CRM Machines on a 2 to 1 basis (essentially X2).

 

It assumes that if a branch has one Cash Deposit Machine and one Cash Dispensing Machine, it will be converted to one CRM Machine. This is quite unlikely as banks usually convert both to a CRM.

 

Difference in 2018 and 2012 SSS Profit: RM10,698,078
Less: Proportioned Un-allocated Expense And Income: RM(7,245,370)
Equals: Profit Before Tax from CRM only: RM3,452,708
Profit Before Tax from CRM only in 5 Years when remaining 80% Machines Converted to CRM (X2): RM6,905,417 (A)

 

2018 SSS Profit: RM20,293,304
Less: 2018 Net Unallocated Income and Expense: RM(13,743,823)
Equals: Profit Before Tax: RM6,549,481 (B)

 

(A+B) Less 24% Corporate Tax - Profit After Tax: RM10,225,722
Market Capitalization in 5 years (10PE): RM102,257,220
Discounted at 4.5% for 5 years: RM81,228,951
Price per Share: RM0.273

 

 

 

 

Conclusions

Needless to say, if one were to properly take into account in the valuations,

  1. The consensus 5% growth in total number ATM and CRM machines.
     
  2. The profit from CRM Machines over five years fully paid out as dividend amounting to RM115,200,000:
    • Selling price: RM72,000 per machine
    • 12.5% margin
    • 12,800 machines - remaining 80% not yet converted to CRM, assuming same market share.

 

Valuations are likely double at minimum. However, im quite the risk averse person who believes in erring strongly on the side of caution. Feel free to do the math if you have the time. 

 

In addition, for those who are unaware, i am not in the business of doing quarter prediction analysis. The total revenue and profit for Opensys is likely to be quite lumpy, from the ESM/Hardware sales.

 

The main goal for this bit of research, is to show and understand the SSS revenue and profit for the CRM business. 

 

Do let me know if you have any comments.

 

Disclaimers: Refer here.
 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

Labels: OPENSYS
  bursadiary likes this.
 
calvintaneng Good and thorough writeup. Thumbs up.

For today also visit www.chick.com

Btw.

Banks do put cash collecting and dispensing in petrol stations, shopping complex or places where there is heavy footfalls. As space will be limited and rent going up it will be cost effective to install one rather than 2 if one can do the job of 2
09/06/2019 8:35 AM
teoct Morning Jon, thank you for this sharing.

One question, what is your timeline for your forecast, one year, five years?
09/06/2019 9:51 AM
Choivo Capital teoct,

i expect 5 years for or so for complete conversion for all non crm to crm's.
09/06/2019 10:52 AM
Choivo Capital Another potential risk is

https://www.socash.io/

But i dont really see how it will become the norm.
09/06/2019 11:00 AM
teoct Sorry, i meant timeline for your prediction on the share price.
09/06/2019 11:12 AM
Choivo Capital No idea.

Do note its not a target price, its the range of values i consider the company to be worth today.


====
Posted by teoct > Jun 9, 2019 11:12 AM | Report Abuse

Sorry, i meant timeline for your prediction on the share price.
09/06/2019 11:14 AM
teoct There are currently more and more entities joining the e-wallet race. Eventually there will be a shake out.

Personally, will eventually use it as looking for change is most annoying and I am from the dinosaur age.

Reason why in China, Alipay and the others have not charge for the terminal and transaction fee is because they earn interest on the float (that is before money is credited to the merchant accounts). China central bank is proposing changes to this as technically the float money belong to the many merchants. And also the many users balance, no interest paid (unlike banks saving accounts).

I am not sure of Bank Negara rules on this.
09/06/2019 11:23 AM
abang_misai sounds desperate
09/06/2019 12:32 PM
Choivo Capital Short Sell loh.

I must be the first person to write a "Long Article" while telling you potential downside 20%.

Manage to get out of dayang?
09/06/2019 12:44 PM
bursadiary Very conservative valuation!!

Why?
1. CRM sales are material starting only in 2014 and peaking in 2015 until 2018 (see table ESM revenue >RM50m)!!
2. Opensys provides 3 year free maintenance period. It means maintenance profit started only in 2017!! (see table SSS margin)
3. Maintenance profit margin is north of 80%!! Just ask any software maintenance guys. There is almost zero cost. Majority fixed labor cost.
4. PE ratio should >15x because earnings growth potential >30% for next 3 years and recurring income is >80% of profit!!
5. Free cash flow > net profit. Very little capex for a software business. Some value in property bought few years back!!

Opensys is easily worth >RM300m market cap (<RM100m today)!! When profit double in 2 years, it will start to attract attention!! People are fixated on e-wallet today because of free cashback!! Cash is king!!
09/06/2019 1:08 PM
supersaiyan3 Good Analysis.

Personally I think the machines are not very user friendly, spit out money over and over again. (In fact I think Diebold has the best performance in that regards). But that probably doesn't matter as banks only look after their own interest.

In China, CRMs are horrible (as bad as their banking service). Their CRM gives you fake money because the machines cannot recognise fake money when it was deposited. If that happens in Malaysia, nobody would want to use CRM.
09/06/2019 1:47 PM
Choivo Capital Interesting, thanks. I didn't know that about china.

From an investment perspective, the keep spit out money thing is probably a plus, since it really helps with keeping out the fake notes.

I'm assuming Diebold is also just as effective at that, but more effective at identifying old notes vs fake notes? I never thought to test like that as i don't think it affects the economics of the business. Still its interesting to know.
09/06/2019 2:03 PM
Philip ( buy what you understand) Actually one interesting point which I am trying to figure out. Opensys does not do their own R&D for these machines, and it is instead a licensed technology from OKI, Japan. The question which I could not clear up the answer to is:

1) what is the terms of the technology partnership. Is it a profit sharing deal, or just a pure franchiser/franchisee deal where OKI sets the master price and opensys sells based on the listed price to customers. What is the minimum stocks level to keep, will the system buying costs erode/increase over time, and most importantly is opensys working on their own homegrown solution in the future to compete with fintech and peers.

2) it seems your assumption of profits here are all based on pure sales only ( correct me if I am wrong). But another part of opensys sales is also based on leasing of machines as banks I believe will be far more interested in short term 1-3 year leases of the esm equipment at a higher service price, but without the hassle of buying and storing the equipment. For opensys looking at note 14 of inventory there is write down of used machines, as these machines cannot be cannibalised for new equipment or reused for other applications. There is a 10,313,089 write off of esm equipment which I assume is the leasing part of equipment that has been obsolete/ revamped. As OKI does not have a policy of taking back old machines and refurbishing I believe the difference in service actual profits will be quite substantial, as I am taking the example of my office leasing the latest xerox photocopy machine for a 3 year contract and returning it after the lease is up for a newer model, which is cheaper than buying a new machine.

In the end what will be the market size of this industry, what will be the acceptable method for it's main customer base ( fintech, direct purchase and ownership, leasing) and how clear will be the profit and revenue growth 5-10 years from now are frankly speaking quite murky for me.

I would say it is not a bad business, but neither will I submit capital into such an endeavor. Opensys has a huge market share 80%, but in a space where the total addressable market is very small. The customer base is also very niche, which is worrying all the same as some believe opensys is worth 300+ million.

Time will tell.
09/06/2019 2:54 PM
Choivo Capital Fair points phillip.

I dont think they lease machines, more like receive payment for each transaction, when it comes to the kiosk and cheques. Look at the revenue note, they dont state any lease/rental income.

I'm fine with the write offs. You see the big ones in PPE note, however, i noticed that they are mostly fully depreciated to begin with. The adjustment amounts to only about 24% of current year depreciation, so an error rate of about 2-3% per annum on a straight line basis, relatively normal.

I do however, find it odd that they disclosed the write off in inventory. Probably need to find out.

Having said that, if we perform a valuation where every division except for CRM contributes zero, ie, we only take into account CRM SSS net profit, and included the discounted net profit from CRM sale, we are still looking at intrinsic value per share of around 40 to 50 plus cents.

Pretty good, but not utterly amazing, which is why its a relatively small 6.5% position.

You may want to take a look at kraft heinz and intel.
09/06/2019 3:39 PM
qqq3 are there really outside fund managers in such propositions?
09/06/2019 6:10 PM
Philip ( buy what you understand) The intrinsic value is based on a proposition that trajectories will stay current. I guess the big puzzle is to always understand if any slowdown in growth is permanent or temporary. Opensys already had a drop-off in machines sales in the latest annual report.

The usual mathematical assumption is
If 1 bottle of beer is sold at $1, then 100 bottles of beer is $100.
But in the real world if you went to the market to buy 100 bottles the price is more likely to be $90. A bigger bulk discount. As different modes of payments compete, I believe most banks will choose the option the involves the lowest cost of maintenance and financial expenses.

I believe based on slower than expected contribution over a longer period of time than expected, inclusive of increasing costs, exchange rates and competition, you will be be closer to a intrinsic value per share of 19 to 25 cents. Using your crm projection based on projected sales. But again this is projection as I am more conservative on the real number of CRM upgrades, replacements and it's maintenance in the long term.

In my opinion, the dividend payout will not match the earnings growth in the long run, as the earnings and revenue of the latest quarter will not match the expectations of further growth as expected.

It is the age old question, give out dividends now and sacrifice future growth, or withhold dividends so earnings growth can match future expectations.

It is like asking people in the 50's if credit card will ever take off, everyone believed then that credit card fraud will be it's downfall. If you told them visa would process 11 trillion dollars in payment volume in 2018 it would boggle their mind.

My personal opinion is that fintech will be a booming monstrosity, and as usage becomes more prevalent, there will be less and less OTC transactions and machine cash applications in the future. I can't remember the last time I carried a 1000 ringgit note, much less bringing the 10,000 singapore dollar note around.

I believe cash will definitely have it's place in the future, but ATM, CRM usage will definitely drop as cashless payments become more secure and easy to use.

Lightning always finds the path of least resistance to earth.
09/06/2019 6:24 PM