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Choivo Capital

Author: Choivo Capital   |   Latest post: Fri, 8 Jan 2021, 11:13 AM

 

(CHOIVO CAPITAL) WCE (3565) – A 2021 Update

Author: Choivo Capital   |  Publish date: Fri, 8 Jan 2021, 11:13 AM


For a the original copy with high resolution pictures, better formatting and additional details.

 

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(CHOIVO CAPITAL) WCE (3565) – A 2021 Update

 

 

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https://t.me/Choivo_Capital

 

This writing is based on my own assumptions and estimations. It is not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest. I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.

 

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In terms of price movements, WCE have done quite well since my previous sharing. Increasing from RM0.28 to RM0.41 (hitting a high of RM0.485)

 

However, the share price fell almost 10%, along with most of the Malaysian Market due to COVID fears.

 

For many people, even if they understand the business well, falling share prices have a way of making one feel a certain trepidation in their hearts.

 

And so, I would like to share my perspective on some developments regarding WCE.

 

 

4 Sections Opening is 1H 2021

 

As explained in my previous article, 4 additional sections will be opening in 2021. To provide some context and where these sections are located, here is a detailed map of the alignment.

 

 

As you can see from the map above, the 4 sections being opened in 2021 are all the key and high traffic sections in Selangor, they run closer to Port Klang and touches key areas in Selangor around NKVE, SKVE and KLKSE, highways with significant traffic congestions.

 

Additional observation needs to be done on the traffic to see how accurate they are in line with projected numbers. Having said that, even given my worst case scenario, which uses a starting traffic of RM230m, that is 16% below the worst case given by the rating agency (RM275m) which is in turn 40% lower than the projection made by WCE.

 

Discounted cashflow still result in a RM0.57 per share (even after assuming max dilution), and the current price of RM0.41 per share is far below this amount, much less the cost of the majority shareholders of >RM1.00.

 

I think there is still significant margin of safety.

 

 

 

Purchase of Shares by Majority

Shareholder

 

As I understand from a few friends, a copy of my research ended up in the hands of the CEO of WCE Berhad, Dato’ Neoh Soon Hiong,

 

It had then naturally passed to one of the major shareholders, Tan Sri Dato Surin Upatkoon, who is also the majority owner of companies like Magnum and MPHB, it clearly made sense to him, as he then took the opportunity to buy additional shares.

 

 

 

 

Conclusion

As explained in my previous article, the nature of highway concessions means we will not be seeing accounting profit figures immediately, as this is ultimately a 50+10-year concession.

 

However, 2020 was a key turnaround for them with the long outstanding land acquisition issues being solved, and 2021 is the year, most sections will be completed, with the key and high projected traffic sections in Selangor being completed.

 

Given the margin of safety, and upcoming catalysts, I think it is something worth waiting for.

 

 

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paperplane Umobie listing soon, got money to buy more, wakaka
13/01/2021 2:14 PM

(CHOIVO CAPITAL) MYNEWS (5275) – Q4 2020 Update – Fall in Wastage by 64% & CU Stores Opening January 2021

Author: Choivo Capital   |  Publish date: Fri, 8 Jan 2021, 11:06 AM


For a the original copy with high resolution pictures, better formatting and additional details.

 

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(CHOIVO CAPITAL) MYNEWS (5275)

– Q4 2020 Update – Fall in Wastage

by 64% & CU Stores Opening January

2021

 

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https://t.me/Choivo_Capital

 

This writing is based on my own assumptions and estimations. It is not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest. I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.

 

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Out of all my picks this year, the one that is currently underperforming in terms of price movement is myNEWS, and most of it is due to the Q4 2020 results which appear lackluster on the surface.

However, unlike my other picks, which are mostly turnarounds (due to high commodity prices, which may be transient), I consider this as a long-term investment (with upcoming catalysts).

And as I said in my previous research, when it comes to long term investments, the focus is not on short term price movements or next quarter results, but keeping track on the business in terms of

How the revamp is going?

How are the CU stores going?

How is the Food Processing Centre Utilization Rate and Wastages? Etc

Having said that, for many people, even if one understands the business well, falling share prices have a way of making one feel a certain trepidation in their hearts.

And so, I would like to share my perspective on the current results and the business.

 

 

myNEWS Berhad –  Q4 2020 Results



For many (including myself), we were expecting a stronger recovery in terms of the financial numbers for Q4 2020.


However, it materialized in a slower than expected manner in Q4 2020, and there are a few reasons for it.

Slow Recovery 1 – Recovery in
Shopping Malls being the slowest

Despite the recovery in terms of movement in Malaysia, and road congestions again happening around Malaysia, as we can see in this chart by TomTom below,



Shopping malls (which consist of 80% of myNEWS store mix) experienced the slowest recovery, with numbers only really picking up in December 2020.

The reason for this simple, by virtue of typically having the highest density, its recovery will be slower.

When it comes to travelling during this period of COVID-19 when cases are high, people do not go from staying at home all day, to gallivanting around in malls the next moment.

They typically first start going to their neighborhood shops, before then going to the denser areas like SS2 & SS15 etc, and after noticing nothing happening to them, only then start going to high density areas like shopping malls.

And so, in terms of footfall traffic, myNEWS’s recovery should mainly happen from November onwards.





Slow Recovery 2 – Higher Food Processing Losses from Asset Impairments & Inconsistent Spending Patterns

Since the start of this pandemic in March 2020, the gestation costs relating to the Food Processing Centre (“FPC”) segment have increased.




The gestation costs relating to the FPC after reducing in Q4 2019, have since increased again in 2020 and hit a high of RM4.3mil in Q4 2020.

Most of this is due to the pandemic and flip-flopping government policies which caused erratic and huge fluctuations in day-to-day sales which made the production planning difficult and products wastages high.

However, much of it is also likely due to a RM1.7m one-off Property Plant and Equipment write off’s/impairment relating to the FPC.



*Losses in Q4 for RTE JV is higher likely due to impairment of PPE.



Q4 2020 was the first time in myNEWS history that such large PPE impairments have occurred.

For shop closures, many items can be reused, and any fittings that cannot be reused (This amounts to RM60k-RM80k per store) is impaired during the quarter itself.

Is it possible for myNEWS to close approximately 15-20 stores in Q4 2020?



As you can see based on the store numbers, I do not think this is the case.

My guess is that the above is related accounting adjustments related to impairment on PPE for the RTE, requested by their financial auditors during the year end audit, due to the extended gestation period and costs.

Having said that, the numbers above hide a few very interesting developments.

 

Business Developments – QoQ fall in wastages by 64%

As I explained in my previous article, one very good thing about the COVID-19 pandemic for myNEWS is it gives the management time to improve their own processes, as acknowledged by the management themselves in the Q3 2020.




Was this really the case?


One of the major expenses and problems with the RTE was high wastages. However, if we are to look at the wastages for this year 2020.


Despite FPC utilization rates for Q3 and Q4 being roughly the same at 35%, wastage has fallen by 64% from RM2.5m in Q3 to RM0.9m in Q4

One of the main cause of wastages was the usage of third-party logistics companies. 

Before this, when the goods mainly consist of dried goods with long shelf life, having precise control over the timing and movement of the product from each store was not necessary.


However, when your RTE goods have a shelf life of just 3 days, the usage of third-party logistics is no longer viable as they cannot fit your timing and schedules exactly every time.

In Q4 2020, myNEWS have completed their exit plan from their third-party logistics partner, and have fully insourced it, enabling it to fully control movement of products and its inventory management, resulting in the wastage reduction of 64% that we see above.


This also further prepares the company for the opening of the new CU stores in Jan 2021, which will now increase utilization.




Business Developments – Higher Capex spending on CU and SuperValue stores opening 2021

During the latest analyst meeting, myNEWS also indicated that they would be opening 100-120 new stores with 30 – 50 of them expected to be the CU stores (it could be a higher percentage if the CU stores do better).

So far, I don’t think the market has fully priced in the reaction of the Malaysian public towards the new CU stores.



In general, Malaysians have a real love towards all thing’s food, new, and Korean/Japanese.

When comparing the food between myNews and Family Mart, they are more similar than not However, I do think Family Mart is much better marketed than myNEWS, with a very strong focus on Ready to Eat Meals by virtue of their Japanese Branding and Konbini Roots.

The CU brand aims to replicate this, except with a novel Korean concept. And I have no doubt that when the first CU stores open in January, there will be pictures of people queuing outside the store.

And when these pictures appear, the investment community in Malaysia is likely to wake up and start to find myNEWS shares very attractive again.



And looking at the sharp increase in Capital Expenditures in Q4 2020, I think things should be on track.





Business Development – Consistant Innovation in search of a Defining Food Item 

For a Retail Convenience Mart to succeed in this day and age, you need a reason for people to walk in the store. And because Newspapers & Magazines no longer cut it, the main method is via Food/Dessert/Sugar.

For example, when I think of Family Mart these days, the first thing I think about is the Sofuto Ice Cream. It is very rare that a customer comes in and leaves without buying a Sofuto Ice Cream (it is not so obvious with the Oden, which I think is just normal and overpriced).

During the last few months, myNEWS have also identified this key need and have been working hard to innovate and find this defining food item.


And just last month that have released the above 3 items, which indicates improvement in the menu and dessert line.

It would be great if myNEWS had a killer dessert that engraves the urge to visit the store, in the minds of the public.

And lastly, one thing I’ve forgotten to include in my previous article.


 

Strong Fund Interest

Since October 2020, Aberdeen have appeared as a major investor in myNEWS with a larger than 5% stake, and since then they have only added more.

They also increased their stake after the Q4 2020 quarterly results was announced on 21 December.

The price at which that purchased their position like range from RM0.55 – RM0.80 looking at stock volumes over the last 6 months.

For investors, we should have our own opinion on the value of the company. Having said that, the ability to buy shares in myNEWS at the current price, which is likely to be a discount to Aberdeen’s cost price, provides a kind of comfort and is a nice little bonus.




Conclusion

This quarter, my main takeaway is the drastic action taken by management to solve RTE wastage issue by in housing their logistics systems, and its success in execution has resulting in a 64% reduction in food wastageas well as the new CU stores likely to open mid-January, as well as encouraging progress in the search of a defining item.

Considering that Mr Dang Tai Luk is the kind of person who could code by himself the initial software that tracked inventories etc when he first started the store, I have little doubt that the rest of their plans would be successful and 2021 will be a very good year for myNEWS.

 

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(CHOIVO CAPITAL) KFIMA (6491) - A 3.6 PE Palm Oil Plantation Company with 5% Dividend Yield & 100% ROA Business Segments

Author: Choivo Capital   |  Publish date: Fri, 8 Jan 2021, 9:12 AM


For a the original copy with high resolution pictures, better formatting and additional details.

 

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(CHOIVO CAPITAL) KFIMA (6491) -

A 3.6 PE Palm Oil Plantation

Company with 5% Dividend Yield &

100% ROA Business Segments

 

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https://t.me/Choivo_Capital

 

This writing is based on my own assumptions and estimations. It is not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest. I make no representations as to the accuracy, completeness, correctness, suitability, or validity of any information on my report and will not be liable for any errors, omissions, or delay in this information or any losses and damages arising from its display or usage. All users should read the posts and analysis the information at their own risk and we shall not be held liable for any losses and damages.

 

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

 

 

Released 28 December 2020

 

Overview

 

As many would have been aware, prices of palm oil prices have been rising for the last few months and as of December 2020, have reached an 8 year high.

 

 

Why have this happened?

 

Well, the current high palm oil prices are due to a combination of,

 

  1. Less new hectarage being planted due to lower prices from 2018 to 2019;
  2. Pressure from NGO’s and European Governments; and
  3. La Nina which results in colder and wetter weather, resulting in lower yield.

 

All of this resulted to what Godrej’s Mistry described to Bloomberg as, “A perfect storm for vegetable prices”.

 

And this has naturally resulted in the share prices of palm oil plantation companies in Malaysia breaking new 1 – 2-year highs.

 

However, most plantation companies in Malaysia consist of two types.

 

  • If they are good, they are also very expensive. With companies like Genting Plantation, Kuala Lumpur Kepong, Batu Kawan Berhad, IOI Corp, Sime Darby Plantations and United Plantations trading at 30-40PE’s with 0.5-2% Dividend Yields. Only Sarawak Oil Palms is trading at reasonable valuations.

 

  • And then there is the companies like FGV, Jaya Tiasa, TDM, Rimbunan Sawit, the 2nd tier ones. Who are heavily in debt, largely loss making (even with high palm oil prices), with sub-par management, who despite the above, are trading at 2019-2020 year highs. And if its cheap (on a book value basis), its usually for a very good reason, ie the companies do not treat minority shareholders well.

 

 

It's almost as if, “Cheap and Good” does not exist for plantation companies in Malaysia. Except, I think I found one.

 

 

 

 

An Overview on Kumpulan Fima

Berhad (KFIMA)

KFIMA was for incorporated by the Malaysian Government on 24 February 1972 for the development of Agro based industries within the framework of the then New Economic Policy.

On 1979, they started their liquid bulking terminals in Port Klang and Butterworth (a key cash cow for the company), and in 1981 became the controlling shareholder (with 60.02%) of FIMA Corporation Berhad (FIMACOR), a company that was primarily involved in the printing of security documents (another cash cow for the company). In 2002, their subsidiary FIMACOR started a joint venture with Giesecke & Devrient for the printing and production of bank notes for governments around the world.

In 1991, the company underwent a Management Buy-Out in line with the privatization policy of the Malaysian Government, with the new owner being Tan Sri Dato’ Haji Basir bin Ismail and his family. Till today, his family oversees and owns the business.

And in 1995, they ventured into the food business via a mackerel canning project (among others) in Papua New Guinea, which today makes a profit consistently, and have been increasingly its profitability.

They had also owned a stockbroking business in the 1990’s, that business along with the rest of the company was almost wiped out in the 1998 financial crisis. They have since sold that business to focus on their low risk and high profitmaking businesses in the printing of Security Documents and Liquid Bulking.

The losses incurred by the stockbroking business in 1998 resulted in large debts, which were fully paid off by 2007 due to the strong profitability of the Security Documents and Liquid Bulking division.

In 2007, just before Palm Oil prices shot up to a high of RM3,683 per tonne in 2008, they purchased an 80% stake in PT Nunukan Jaya Lestari for RM94 million, an Indonesian palm oil plantation company with 18,000 hectares (6,200 hectares plantation) in East Kalimantan.

Since then, they have made this a third core business, and most of the profits from the printing of Security Documents and Liquid Bulking (excluding the dividends steady dividends of about 5% at today’s share price) have been invested into expanding the plantation business in Indonesia and Malaysia, which is quite profitable.

 

Why the share price stagnated

Despite being quite well managed, with significant dividend yield, a burgeoning cash pile, and a growing plantation business, over the last 8 years, the share price has generally stayed even at RM1.7-RM2.5.

Why was this the case?

  • Close to zero coverage by investment analysts, and a management that does not see a need to talk to investment analysts.

 

  • The loss of one of the contracts in the security document division, which has resulted in profits falling temporarily (it has since recovered due to the increasing profitability of the plantation and food division.)

 

  • Legal problems by the Plantation Division in Indonesia which resulted in multiple impairments and writebacks, which hid the true operating performance of the company, which has been resolved.

 

  • The purchase of greenfield plantation developments in Malaysia, which required significant investments to clear the land, build required infrastructure, worker hostels, bunds, estate drains, palm nurseries, GPS mapping to ensure maximum efficiency etc, and lastly the planting of palm seedlings.

 

Most of these new palm oil plantations in Malaysia only hit maturity in 2020.

With the above in mind and record high oil palms prices, I think KFIMA is ripe for a re-rating.

 

 

 

Understanding KFIMA’s Businesses -

Printing of Security Documents

KFIMA’s involvement in the Printing of Security Documents business started when they acquired a 60.02% stake in FIMACOR in 1981, which is the largest contractor for the Malaysian Government when it comes to printing of security documents.

 

 

FIMACOR was also previously the only government agency in charge of printing security documents for the government before they were privatized.

 

 

 

What are these security documents? To put them simply, they are documents issued by the government, which uses special papers, inks, watermarks and presses to ensure that it is not easily faked.

 

 

In terms of product mix, as of 2020,

 

 

A large portion of the security documents produced by KFIMA is related to “Transport Documents”. These are basically your Road Tax Stickers,

This category also includes other items such as your car ownership certificates etc.
So, how good of a business is this?

As we can see from above, this is an extremely profitable business and a strong cash generatorFrom 1999 to 2010, the profit generated by this business have steadily increased from a loss of RM1.4m to a profit of RM45.1m. And from 2011 to 2017, this business could generate profits of RM61.7m on average.

In addition, this is also a business that needed minimal Capital Expenditures. When comparing the Profit Before Tax and the Simplified Owners Earnings (Profit Before Tax + Non-Cash Adjustments – Capital Expenditures), on average, more than 92.2% of the profit was turned into cash.

And if we were to look at it in terms of Returns On Asset – “ROA” (For every dollar invested, how much profit do I make?), from 1999 – 2010, ROA have increased steadily from -0.9% to 25%. And from 2011 – 2020, Return on Asset have averaged.18.5%

However, as the company holds large cash balances (which does not need to be reinvested into the security document business), this depresses the ROA. Excluding the large cash balancesReturn on Asset for 1999 – 2010 increases to -0.9% to 53.5%. And from 2011 – 2020, Return on Asset (excluding cash) have averaged 87%.

* To simplify things, we allocate to this division all the cash in FIMACOR, this is because the printing of security documents contributes most of the profit. In addition, unlike the security documents business, the palm oil plantation business still requires very significant investment, and most of the cash generated is reinvested into the business. This is means that the return on asset (excluding cash) for this division is marginally overstated. *

How is this business so profitable?

When it comes to the business of printing security documents for governments, or currencies, the real difficulty usually comes from getting the contract and building a reputation.

After that, given the sensitivity of the items being printed, that contract is basically yours for life, with close to zero competition.

Why is there little competition? When it comes to items like those, as a government you do not want many suppliers which increases the risk of counterfeiting significantly.

In the 29 years after the management buyout, this business has only lost 1 contract related to travel documents (passports) in 2017. The earnings have since stabilized and slowly increased again.

Having said that, even after losing the contract, the return on asset (excluding cash) of the business still averages 36% in the 3 years after. The number of businesses in BURSA that can obtain these kinds of numbers can be counted on with one hand.

The downside to this business, however, is low growth prospects.

 

 

Understanding KFIMA’s Businesses –

Bulk Terminals

Now, for many people, the question would be,


“Why KFIMA versus FIMACOR?”

 

 

 


Especially since purchase of FIMACOR shares give you 100% exposure to the amazing Printing of Security Documents business and the profitable Indonesian Palm Oil Plantation.

 

 


And the answer would be the incredible Bulk Terminal business that is 100% owned by KFIMA (and because KFIMA is even more undervalued than FIMACOR).

 

 


KFIMA is currently the owner of 5 liquid bulk terminals. 3 of them are located at the North Port in Port Klang and 2 of them in Butterworth Port.

 

 


These terminals have in total 271 tanks and a combined storage capacity of 275,190 MT (expansion by 20,440 CBM in 2020 at Port Klang) and can handle a wide range of liquid cargoes ranging from palm oil products to latex concentrates, oleochemicals to specialty oils, as well as petroleum products, industrial chemicals, and technical fats.

 

 


KFIMA also provide the miscellaneous services like transshipment, containerization, local dispatch, heating, blanketing, drumming of liquid products, customs declaration tracking etc.

 

 


To understand why the bulking terminals business is so great, we first need to know,

 

 


What are Bulking Terminals?

 

 


To give you an idea, here is a picture of KFIMA’s bulking terminals.

 

 

An Overview on Kumpulan Fima Berhad (KFIMA)

 

 

KFIMA was for incorporated by the Malaysian Government on 24 February 1972 for the development of Agro based industries within the framework of the then New Economic Policy.

On 1979, they started their liquid bulking terminals in Port Klang and Butterworth (a key cash cow for the company), and in 1981 became the controlling shareholder (with 60.02%) of FIMA Corporation Berhad (FIMACOR), a company that was primarily involved in the printing of security documents (another cash cow for the company). In 2002, their subsidiary FIMACOR started a joint venture with Giesecke & Devrient for the printing and production of bank notes for governments around the world.

In 1991, the company underwent a Management Buy-Out in line with the privatization policy of the Malaysian Government, with the new owner being Tan Sri Dato’ Haji Basir bin Ismail and his family. Till today, his family oversees and owns the business.

And in 1995, they ventured into the food business via a mackerel canning project (among others) in Papua New Guinea, which today makes a profit consistently, and have been increasingly its profitability.

They had also owned a stockbroking business in the 1990’s, that business along with the rest of the company was almost wiped out in the 1998 financial crisis. They have since sold that business to focus on their low risk and high profitmaking businesses in the printing of Security Documents and Liquid Bulking.

The losses incurred by the stockbroking business in 1998 resulted in large debts, which were fully paid off by 2007 due to the strong profitability of the Security Documents and Liquid Bulking division.

In 2007, just before Palm Oil prices shot up to a high of RM3,683 per tonne in 2008, they purchased an 80% stake in PT Nunukan Jaya Lestari for RM94 million, an Indonesian palm oil plantation company with 18,000 hectares (6,200 hectares plantation) in East Kalimantan.

Since then, they have made this a third core business, and most of the profits from the printing of Security Documents and Liquid Bulking (excluding the dividends steady dividends of about 5% at today’s share price) have been invested into expanding the plantation business in Indonesia and Malaysia, which is quite profitable.

 
 

Why the share price stagnated

Despite being quite well managed, with significant dividend yield, a burgeoning cash pile, and a growing plantation business, over the last 8 years, the share price has generally stayed even at RM1.7-RM2.5.

Why was this the case?

 

A bulk terminal is an industrial facility used to store large quantities of a products (chemicals, liquids, petroleum, grain, petroleum products, food oil etc) before the product is transferred to another facility for processing or delivered to end-users.


They are typically built at ports and refineries and are often an important component of larger networks of pipelines, storage facilities and processing facilities.


Now, KFIMA’s bulking terminals are centered around ports, and the thing about bulking terminals located at ports is, you only obtain the opportunity to build them when the port is first started up or the early days of operation. As you can see above, bulking terminals require very large pieces of land situated directly at the port, or very close to it to link up to its piping infrastructure.


This is because to the ships that stops at ports are usually very large, especially if they carry the kind of goods that is stored at bulk terminals, example below.

 

 

As a port develops, the ability to buy the large tracts of land becomes increasingly difficult (or impossible) and expensive (extremely so).
 

And this means that competition becomes limited to just the existing bulking terminal holders (who also obtained the land early). And while demand increases from the port developing over time, supply of bulking terminals remains fixed as it becomes increasingly impossible to expand capacity.


This gives bulking terminal owners the ability to charge prices as high as the market could bear (it only needs to be slightly lower than hiring lorries to move the products directly from the ship, which also happens to be a logistical nightmare).


What does it mean in terms of the numbers?

Like the printing of security documents, this is an extremely profitable business and a strong & steady cash generator. Since Day 1, this business has been profitable. (The fall in profit in 2017 and 2018 is due to low CPO production due to the draught then, which reduced supply)
 

And as we can see, from 1999 to 2009, as Port Klang and Butterworth Port matured in terms of traffic, the profit generated by this business have steadily increased from RM16.2m to RM45.8m. And from 2010 to 2020, this business could generate profits of RM38.8m on average.
 

In addition, this is also a business that needed minimal Capital Expenditures. When comparing the Profit Before Tax and the Simplified Owners Earnings (Profit Before Tax + Non - Cash Adjustments – Capital Expenditures), on average, more than 105% of the profit was turned into cash.


And if we were to look at it in terms of Returns on Asset, from 1999-2010, ROA have increased steadily from 20% to 29%. And from 2011 – 2020, Return on Asset have averaged 40.5%


However, like the Printing of Security Documents business the company holds large cash balances (which is does not need to be reinvested into the Terminal Bulking Business), this depresses the ROA.


* To simplify things, we allocate all the cash in KFIMA (less the cash held by FIMACOR which was allocated to the printing of security document division), this is because the bulking terminal contributes most of the profit in KFIMA. In addition, unlike the bulking terminal business, the palm oil plantation business still requires very significant investment, and most of the cash generated is reinvested into the business. This is means that the return on asset (excluding cash) is marginally overstated. *


Excluding the large cash balances, Return on Asset for 1999 – 2010 increases to 24.9% to 43%. And from 2011 – 2020, Return on Asset (excluding cash) is basically infinite as a negative working capital model is sometimes employed. Ie. Free Money.


Like the printing of the security documents, the downside to this business, however, is low growth prospects.

 

 

 

Understanding KFIMA’s Businesses –

Food

KFIMA is also in the Mackerel Canning business in Papua New Guinea, via International Food Corporation Limited which they acquired in 1995.

The business primarily sells canned mackerel under their own brand “Besta”, and the canned Mackerel’s is also exported to Europe.

How is it in terms of profitability?

It is not a fantastic business, but over the years it is self-sustaining, profitable and contributes significant amounts of cash.

Earnings for the last few years have increased again as they started exporting more to European countries.

 

 

 

Understanding KFIMA’s Businesses –

Plantation

 

Since the start of the company, due to its agricultural background, the company always had a small Palm Oil and Pineapple Plantation in Johor.In 2006, to grow the business further, KFIMA decided to expand further into the Palm Oil Plantation business and turn it into their third pillar.

Development to expand the business was done primarily under FIMACOR. However, several estates were done under KFIMA directly as well. The details and chronology are as follows.

 

FIMACOR - Plantation

  • 2007: 18,000 Hectares in Kalimantan, Indonesia (80% stake for RM94 mil)
    • This was a relatively mature estate that did not need much additional work beyond standard maintenance and capital expenditures.
    • 2012: Building of Composting Plant with 17,000 mt compost fertilizer capacity, online 3Q 2013
    • 2017: Order received from Indonesian Government revoking land title due to overlap with forestry areas. Impairment of RM28.37m taken up.
    • 2019: New land title received for 16,474 hectares, (which is 19,974 hectares less the 3,500 overlap with forestry areas). Writeback of RM23.63m.
    • 2020: Could not sell any CKPO for 3 quarters due to plant operating license problem. Impairment of RM17.79m on decision made by the Mahkamah Agung allowing the judicial review application by the Indonesian Government.
    • 2021: Pending Court Decision.
    • Throughout all these legal actions, the Indonesian Government have allowed the plantation to continue to operate.
       
  • 2012: 785.4 Hectares in Kemaman, Terengganu (Land Purchased for RM29.11 million)
    • Considered a greenfield development, with complete replanting required.
    • 2014: Deal completed. 405.4 hectares consist of Palm Trees older than 28-year-old. Remaining 380 hectares unplanted.
    • 2015: 380 Hectares unplanted, cleared. Replanting started on 405.4 hectares consist of Palm Trees older than 28-year-old.
    • 2016: 489.1/785.4 Hectares planted.
    • 2017: Replanting Completed.
    • 2018: 127 Hectares (Planted from 2015-2016) or 13,672 oil palms to be replaced due to elephant encroachment. 28 Hectares are now matured.
    • 2019: 117 Hectares are now matured.
    • 2020: 491 Hectares are now matured. 12 Hectares or 1,295 oil palms damaged by elephants.
  • 2015: 249.8 Hectares in Kuala Krai, Kelantan (99 year lease) (100% for RM3.7m)
    • 2016: Site clearing and terracing expected to be completed.
    • 2017: 110 Hectares Planted.
    • 2020: Full replanting completed.
  • 2015: 404.6 Hectares in Gua Musang, Kelantan (89% of Next Oasis for RM890 (not a typo), in exchange for bearing the cost of development)
    • 2016: 249.8/404.6 Hectares cleared, and oil palm nursery sites completed.
    • 2017: 230.7/404.6 Hectares planted.
    • 2018: 396/404.6 Hectares planted.
    • 2019: Damage to 13,672 young palms from elephant, trenches being built
    • 2020: Replanting completed.
  • 2016: 2,000 Hectares in Kuala Kangsar, Perak (80% of R.N.E Plantation for RM4.2 million) (60 years lease, option to renew for 30 years.
    • 2018: Permission and Approvals obtained.
    • 2020: Development commenced.
  • 2018: 1,331 Hectares in Jeli, Kelantan (80% stake for RM33.74 million)
    • 2018: 566 Hectares undergoing rehabilitation works, and replanting have started. 150 Hectares have been cleared and terraced. Infrastructure works being carried out. GPS mapping for system construction, terrace positioning and creating an efficient road system. Upgrade of existing workers quarters to accommodate up to 50 workers. Construction of 8 new quarters that can accommodate a further 64 workers.
    • 2019: Rehabilitation work on 437 hectares done.
    • 2020: Area under cultivation 1,162 hectares. Full replanting and rehabilitation completed.

 

 

KFIMA - Plantation

  • 2011: 5,000 Hectares in Miri, Sarawak (52% equity given in exchange for developing it)
    • 2012: 1,200/5,000 Hectares cleared.
    • 2013: 10 blocks of living quarters completed, the rest to be completed by June 2013. 4,300/5,000 Hectares cleared. 1,115/4,300 Hectares planted.
    • 2014: 4,888/5,000 hectares cleared. Remaining 112 hectares is used for housing etc. 2,187/4,888 Hectares planted
    • 2015: 4,453.8/4,888 Hectares planted.
    • 2016: 4,610.4/4,888 Hectares planted.
    • 2017: Planting completed. 473.79 Hectares is now mature.
    • 2018: 822/4,888 Hectares is now mature.
    • 2019: 1,648/4,888 Hectares is now mature.
    • 2020: 4,271/4,888 Hectares is now mature. Lower yield due to flooding. Will be fully mature in 2020.

To sum up the above developments,

  • Only the Indonesian Plantation acquired by FIMCOR was a brownfield development that only required the standard Maintenance and Capital Expenditures.

 

  • All other fields are greenfield developments that required significant additional capital expenditures. The most significant of which being the Miri Palm Oil Field measuring 5,000 hectares, which is 52% owned by KFIMA and will be fully mature in 2020.

 

  • The acquisition of new fields by KFIMA over the years have resulted in large capital expenditures, and the start of Greenfield Plantations have resulted in significant gestation costs from 2013-2019.

 

And how does this translate into the numbers?

 

On a Group level, the contribution of the plantations are as follows.

 

 

As we can see here, historically the Group’s plantation business is profitable.

 

However, the results of the group from 2012 - 2020 were depressed by the initial investments into the greenfield developments, and one off items.

 

If FIMACOR’s plantation business is seen individually (as it mainly consists of the mature Indonesian plantations), the following results are obtained.

 

 

Seen individually, excluding the largest greenfield development (5,000 Hectares in Miri), FIMACOR’s plantation business is significantly more impressive.

 

Excluding all extraordinary items (the impairment in 2017 and 2020 and writebacks in 2019), from 2009 to 2020, the plantation business of FIMACOR have averaged Return on Asset of 13.5%.

 

* The Return on Asset for the plantation is depressed due to cash balances not being deducted out (as we have already allocated them to the printing of security document segment)*

 

And if we are to look at KFIMA’s Plantation segment, which mainly holds the 5,000 hectare Miri Plantation.

 

 

From 2008 to 2013, the company has maintained it profitability, mainly from contributions from its existing small pineapple plantation and small palm oil plantation in Johor.

 

However, as we can see, since the acquisition of the Miri Plantation in 2011, capital expenditures have been quite high for 2012 - 2019 as the land is cleared, infrastructure built, and the oil palms planted.With all 5,000 acres in Miri maturing in 2020 and 2021 and coupled with record palm oil prices, I think KFIMA is ripe for harvesting.

 

 

Catalyst 1 – Maturity of Palm Oil

Plantation in Miri and Kemaman

 

Typically for a matured estate, excluding any droughts, EL Nino and El Nina’s, “FFB Per Mature Hectare – MT” should be around 23MT per hectare, a figure KFIMA hit in 2013.

 

When there is a drought, you get 2017, when “FFB Per Mature Hectare – MT” is only 19.4 MT

 

Subsequently, as there is clearing of old trees for replanting, as well many of the new trees which have not hit maturity, the yield has stayed low.

 

However, if we notice, in 2019 and 2020, despite matured estates rising from 8,119 Hectares in 2018, to 9,579 Hectares in 2019 and 12,533 hectares in 2020. Production have largely stayed even.

 

This is mainly related to the Economic Life profit of a Palm Oil Tree.

 

 

However, if we were to break it down to look at the new plantations in Malaysia, production has been increasing exponentially as these plantations achieve maturity.

And this can be seen particularly clearly in Q2 2021.

 

 

As per the quarter report, revenue from the Malaysian Plantations for Q2 2021 have increased by 64.1% (RM4.3m) versus Q1 2021.

Resulting in Profit Before Tax increasing from RM1m to RM5.5m, a 457.6% increase.

And this is mainly from the Malaysian Plantations now being profitable as the palm oil estate reach maturity.

 

 

 

Catalyst 2 – Recovery of business

from COVID 19, and Malaysian

Plantations making a profit.

As we can see from here, all their businesses have recovered very strongly from the Covid-19 pandemic.

 

Some of their businesses like the Bulking Terminals, Plantations and Foods have reached new highs.

 

In addition, KFIMA Plantations which primarily contains the Miri Plantation, have close to doubled revenues and recorded its maiden profit.

 

As for their quarterly results,

 

 

KFIMA have achieved their highest operating profit in 16 Quarters or 4 years.

(Q2 2018 is excluded as it includes a RM23.6m writeback)

 

 

 

Risks – Loss of Contracts from the

Printing of Security Documents

Division

In 2018, the company lost a passport printing contract with the government.

 

The main reason for this being passports being increasingly technologically advanced, with E-Inlay’s, E-Cover’s, and E-Pages etc.

 

Therefore, a portion of the passport printing contract is given to another player (DSONIC if i'm not mistaken) who also obtained the contract to do all 3 of the above, to enable them to do the complete passports.

 

2017                                                                      2020

This resulted in Travel Documents, which previously consisted of 54.3% of their business, reduce to just 18.8% of the business.

 

I do not foresee much risk when it comes to their other security documents business as much of these are still relatively low tech.

 

In addition, based on what I have observed in their 20 plus year history so far, the management usually inform of any bad news far in advance. For example, the loss of contract which took place in Q1 2018, was informed as early as 2016. There has been no such updates recently

 

And lastly, since 2018, the family owning the company have been steadily buying more shares.

 

 

For the last three years (2018, 2019 and 2020), the purchase of shares by the owners and the company can be summarized as follows.

 

 

No owner will buy more shares if they think the company is overvalued, or if they think the company is going to lose a key contract.

And if you were to notice, only for KFIMA did the family buy shares themselves.

 

 

Estimates

 

To identify our initial fair value, to be conservative, we will use the reversion to mean earnings for Plantation (This assumes the plantation division’s previous profitability and does not include increase in CPO prices or the new contributions).

 

For the Bulking Terminals and Printing of Security Documents, due to their stable earnings, we will use their normal earnings.

 

And as for the Food Division, there have been consistent improvement in earnings over the last few years due to various measures taken, we will use the most recent earnings.

 

As the company typically keeps a very large cash balance, and pays a very steady dividends, we will calculate this separately in the valuation.

 

A margin of safety of 10% is applied (lower than the usual 20-30%) as we are already being conservative by not pricing in the new contributions from the Miri Estate as well as higher CPO prices.

 

In addition, a Price to Earning Ratio of 10 is used. I personally think this is too conservative, especially given the size of the moat when it comes to the terminal bulking business and printing of security documents business which can generate close 100% ROA’s or free money.

 

With the above, assumptions, we obtain a valuation estimate of RM3.13.

 

There is no other plantation company in Bursa which sells for 3.6PE and gives you a 5% dividend yield.

 

Labels: KFIMA
  wkc5657 likes this.
 
Trust Choivo... good analysis on K Fima..
08/01/2021 9:31 AM
wkc5657 the owners should just privatise it since no one in the market see the deep value...

thumbs up for the deep analysis, will re read again :)
08/01/2021 10:17 AM
stockraider This is one of the best pick for palmoil investment exposure loh!!

Very big margin of safety & high sustainable dividend yield mah..!!

Good prospect mah!


Buy loh!
08/01/2021 11:02 AM
stockraider Raider just bought 40k units....u should buy also mah...!!

Tq Choivo for the fine write up loh!
08/01/2021 11:04 AM
stockraider Why the rally on cpo is sustainable leh ??

If u check the cpo spot & future from Jan 2021 to Dec 2021 all prices are above Rm 3000 until November 2021 & only December 2021 is slightly below Rm 3000 but still consider high at around Rm 2970 per tonnes.

For your info, when palmoil is average rm 2500, all the palmoil plantations make good profit mah...!!

Thus the good profit of palmoil company is sustainable very good & the average palmoil price should easily exceed average rm 3000 for 2021 mah...!!

Like calvin sifu says there are Great Safety In Palm Oil Shares loh!


Posted by calvintaneng > Jan 9, 2021 11:49 AM | Report Abuse

Cpo reaching Rm4000

Moving up to Rm4500 and Rm5000 range due to la nina

Hide in great safety of palm oil shares

Posted by calvintaneng > Jan 9, 2021 10:11 AM | Report Abuse

Happy morning all

Yesterday Soybean prices in USA closed above Usd13.70 to yet another new high due to very dry weather in South America

La nina is here with uneven weather on earth

Floods in Malaysia will deplete cpo stocks and drought will decimate Soybean crops in Brazil and Argentina

Leading to huge shortfall and panic buying later

Palm oil bull is now on course to run for all the months of 2021
09/01/2021 1:14 PM

(CHOIVO CAPITAL) MYNEWS (5275) – Dr CU in da house. 66% Upside

Author: Choivo Capital   |  Publish date: Wed, 9 Dec 2020, 2:27 PM


For a the original copy with high resolution pictures, better formatting and additional details.

 

Go here.

(CHOIVO CAPITAL) MYNEWS (5275) – Dr CU in da house. 66% Upside

 

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

 

“The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they’re on the operating table.”

Warren Buffett

 

MyNEWS Berhad -  A Background

MyNEWS was started back in 25 December 1996 as a single news stand called “MAGBIT” by Mr Dang Tai Luk, together with his wife, Ling Chao and his family on the ground floor of 1 Utama. In 1997 he opened a second outlet in Jejantas Sungai Buloh, and just one year later, he expanded and opened his first magazine and convenience store called “myNEWS.com” the precursor to the company today.

 

By 1999, he had 10 outlets. 2007, 100 Outlets and so on.

 

 

And on 29 March 2016, MYNEWS’s IPO’ed with the purpose of raising money to open more outlets, and more importantly, to bring their stores up to the level of overseas convenient stores, by opening a Food Processing Centre (“FPC”).

 

MyNEWS needed to own their own Food Processing Centre, as there are very few businesses in Malaysia that can supply to all their current stores, much less the future ones. Especially since they also require their own types of products etc (And one thing MyNEWS have learnt this year, is that it’s extremely to start up a food processing center without prior experience.)

 

To open their Food Processing Centre, in 2017, they teamed up with two Japanese Companies,

 

1)            Gourmet Kineya Co. Limited (Ready to Eat Meals)

2)            Ryoyu Baking Co. Ltd. (Bakery)

 

to produce the meals in their FPC, and by the 2018, the FPC was finally operational.

 

They had the idea of doing what QL Resources is doing today via Family Mart, before QL even opened one store.

 

However, MYNEWS was a touch more ambitious than QL and 7/11, and instead of going at it via the franchise route where the franchisor already has in place certain SOP’s regarding

 

1)            What kind of food products are more popular?

2)            What is the typical sales volume and sales mix given certain demographics?

3)            Storage/Manufacturing of Food?

4)            Logistics etc etc

 

 

This was in exchange for the ability to do what the Franchisor of Family Mart, 7/11, CU, Circle K, Lawson can. Which was the ability to franchise out the name and business model and earn what basically amounts to free money.

 

This gave rise to a certain gestation period, where they had to optimize all these things via trial and error, resulting in start-up losses from the FPC’s that was larger and longer than expected, and this masked strongly increasing revenue and profit.

If not for taking their shot at making their own complete franchise brand by offering Ready-To Eat, and experiencing what Jeff Bezos would call an experimental failure.

 

myNEWS would have recorded their best year in 2019.

 

However, their troubles with the FPC, also came alongside the meteoric rise of QL Resources’ “Family Mart” (who went with the franchisee model under Family Mart), which is hugely popular among the Malaysian public.

 

This magnified their FPC struggles, reduced the level of patience investors are willing to give MyNEWS to go at it their own way, and slowly turned investing sentiment against them.

 

And then in 2020, the COVID 19 pandemic hit. And for the first time since the start of the company, did their number of stores fall. This has caused the share price to fall back close to their IPO price of RM0.55 after a 1:1 split (It IPO’ed at RM1.1)despite 2019 earnings (excluding FPC start-up costs) being 67% higher than of 2016.

 

A wonderful company have gotten into temporary trouble and is currently on the operating table.

 

I think they will be getting off that operating table very soon (but as usual, the price does not reflect that).

The Convenience Market & Convenience Store Industry

Now, the Convenience Market consist of the below three main categories.

 

myNEWS is in the “Retail Convenience Stores” category. They have also recently expanded into Grocery Convenience Stores (think KK Mart), with the “Super Saver” brand, and have two outlets opened in Alor Setar and Melaka

 

One a very fundamental level, the Convenience Store industry Globally and especially in Malaysia is a fast-growing industry with good margins.

 

 

 

And the reason for it is simple and, its in the name. “Convenience”.

 

As population density increases, this increases traffic jams, difficulty in finding parking spaces, increases parking costs and increases the length of time needed to access your vehicle (Condominiums versus Landed Property). It is so much more convenient and saves much more time, to just walk to the nearest convenience store.

 

As we can see this in the chart above, the more developed a country, the higher the population density, and land size with high population density, the higher the number of convenience stores.

 

Of course, they are exceptions such as Hong Kong and Singapore. This is because in those countries, they fully integrate shopping malls, hypermarkets, train stations and condominiums all in one package. In which case, there isn’t much need for convenience stores.

 

And as we can see here in this table comprising of the 3 largest retail convenience stores in terms of store number and EBITDA % (Earnings Before Interest, Tax, Depreciation & Amortization).

 

 

As we can see here, despite all 3 parties opening new outlets at a very fast pace, EBITDA margins remain constant for all 3.

 

This is an industry with very strong structural tailwinds and long-term growth and profit potential and can therefore sustain a few large players.

 

And why is this important? Because you cannot spin gold out of straw.

 

“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Warren Buffet

 

And with only a density of 9,000 per convenience store, versus Thailand, Japan and Taiwan who have urban population densities of 2,226 per store, 2,171 per store and 1,653 per store. There is a long runway left for Malaysia to go.

Barbarians at the Gate – The Rise of Family Mart

On 11 November 2016, QL Resources opened the very first Family Mart outlet in Wisma Lim Foo Yong, and with this company primarily run by their very competent son, Mr Chia Lik Khai, an ex-Shanghai Mckinsey who also spent a number of years at Agilent and Avago Technologies, it took off like a rocket.

 

They expanded very quickly, and soon, new outlets started popping up like Mushrooms (pun intended) in Klang Valley, and sights below where outlets were constantly full of people queuing became very common.

 

 

For a very long time, the convenience retail store industry in Malaysia was very static. As this was such a good industry with great margins.

 

Companies like 7-Eleven were more than happy to just continue selling their little tidbits and Slurpee’s and just create more stores, instead of hitting the levels of services and products offered by convenience stores in Thailand, Korea, Japan or Taiwan.

 

As for myNEWS, they evolved as their capabilities and capital grew. Starting from a single news stand, to opening a magazine shop, then convenience stores, while being far more efficient than 7-Eleven and then raising via an IPO the approximately RM100 million needed to open a food processing center and the required logistic system, to evolve to the next level of offering Ready-To-Eat meals (QL Resources also spent around RM100 million on their food processing centre).

 

However, their choice to start without their franchisor (as well as QL’s deep experience in Ready to Eat Meals and Processed Food) meant that QL beat them to the punch when it comes to offering the “Konbini” experience.

Comparing the numbers of Family Mart, 7-Eleven & myNEWS.

So, what does this mean in terms of the numbers?

 

Before we continue, there is a few things to note.

 

The year-end of Family Mart, 7-Eleven & myNEWS is as follows, 31 March, 31 December & 31 October. Therefore, for the year 2020, Family Mart’s financials does not include the impact of COVID-19 and the detailed financial statements are available.

 

As for myNEWS and 7-Eleven, as their year end results of not been obtained, this is just a Year-To-Date figure, and unlike Family Mart, their 2020 contains the full impact of the COVID-19 pandemic.

 

Additionally, as Family Mart has only been operational for 3-4 years, their numbers is not fully stabilized. However, I think it is more than enough to give a good estimate in terms of their long-term margins etc.

 

As for myNEWS, their Food Processing Centre (“FPC”) first started in November 2019.

 

In order to make it comparable to 7-Eleven, as well as to illustrate their incredible performance, if not for the temporary troubles with the FPC, we have illustrated the numbers when FPC is include and when it is excluded.

 

Lastly, in November 2019, 7-Eleven purchased Caring Pharmacy and consolidated their numbers in the financial statements. As there is no detailed breakdown, we are unable to separate them out.

 

Revenue Per Outlet

One of the key metrics used when looking at a store, is the amount of Revenue generated by Each Store.

 

As we can see here, QL/Family Mart by virtue of selling higher ticket value items, knocks it out of the park when compared against 7-Eleven and myNEWS.

 

Higher revenue, assuming all other things are equal, result in better economy of scale, and higher profitability (hopefully).

 

Is this the case?

EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization) & Profit Before Tax  as a Percentage of Revenue

As we can see from above, this is not really the case.

 

On average before including the temporary losses of the Food Processing Centre, myNEWS records close to triple the EBITDA margin of 7-Eleven and Family Mart, and in terms of Profit Before Tax Margin, myNEWS is close to double that of 7-Eleven and Family Mart.

 

And to give on idea on why this is the case, we need to look at the more detailed numbers.

Detailed Cost Breakdown as a percentage of Revenue

Cost of Goods

In terms of Cost of Goodsthe prices obtained by myNEWS have typically been significantly lower than that obtained by 7-Eleven. And much of this is likely due to the significantly longer credit terms obtained by 7-Eleven versus myNEWS, which likely results in higher prices.

As for Family Mart, leveraging on the bankability of QL when it comes to sourcing goods, as well as being able to purchase directly from QL any raw materials, they can obtain significantly lower prices than both. Much of myNEWS Cost of Goods increase in 2020 is due to higher wastage from the COVID 19 pandemic.

Staff Costs

Staff Costs is another aspect where myNEWS really shine. myNEWS (the ones without Maru Café) typically have smaller sized stores in Shopping Malls, and because of this, myNEWS can man the store with significantly fewer staff, and this reduces staff costs significantly.

As for whether more foreign workers in the mix having contributes to this. According to Mr Dang, foreign workers actually cost the same of local employees as you need to bear the cost of housing them, flying them over, settling their visa’s etc.

Rental Costs

However, because myNEWS store composition usually consist of smaller shops in shopping malls (around 80%), this results in higher than usual Rental Costs. As for why 7-Eleven’s is so low, its due to their much wider reach, resulting in a very large portion of the stores, being in rural areas, or city outskirts, when compared against myNEWS and Family Mart.

Administration, Selling, Distribution & Others Costs

As for Administration, Selling, Distribution & Others costs, this is where myNEWS really shines. myNEWS had by far the lowest when compared to the other two. By running smaller store which focuses mainly on dried goods etc, they needed to pay significantly less when it comes to utilities, logistics, food wastages etc.

As for Family Mart, due to their model where they started directly with the “Konbini” model and served Ready-To-Eat Meals from the beginning, they had significantly higher costs, in some cases almost doubling that of myNEWS’s.

 

All these gains in (Costs of Goods, Staff Costs & Administration, Selling & Other Costs) which more than offset their higher rental costs, are the reason for myNEWS’s higher profitability versus the other two before the onset of the temporary troubles with the FPC’s.

Having said that, how does this translate to the numbers of the Company as a whole?

Profit Before Tax (%), Return on Asset (%) & Return on Equity (%)

Despite having far better Profit Before Tax and Return on Asset Margins, their return on Equity have been significantly lower than that of 7-Eleven and Family Mart, a company that have only started for 3 – 4 years.

Why is this the case?

 

 

Inventory Turnover Days, Trade & Other Receivable Turnover Days, Trade & Other Payable Turnover Days and Debt/Equity Ratio

 

Well, one thing about 7-Eleven is that they employ significant leverage in their business, which both Family Mart and myNEWS do not.

But the main reason for this, is the ability of Family Mart and 7-Eleven to obtain run negative Working Capital Business Models, which basically mean that their suppliers are the ones providing the cash/working capital needed to run the business.

And they do so by keeping Inventory and Receivables Days Turnover Days as short as possible (which mean they keep less inventory as a percentage of their Revenue, and give very little credit to their Debtors), while keeping Payables Days Turnover long (which means they require a lot of credit from their suppliers).

Why are Family Mart & 7-Eleven able to do so, when compared against MyNEWS? It is largely due to two reasons.

  • QL Resources Berhad/Family Mart and 7-Eleven, are far bigger companies when compared against MyNEWS, this means that more people want to do business with them, and therefore they have to ability to extract longer credit terms. In addition, currently Family Mart is also funded by significant number of advances by its holding company QL Resources.

 

  • Both 7-Eleven and Family Mart have significant amount of franchisee’s who bear the costs of stocks & inventory and are required to pay this upfront with no credit terms (while they keep the credit terms given by the suppliers). This take a certain amount of inventory out of their books and provides them with additional cashflow.

 

  • A large of amount of the revenue (and therefore inventory) of myNEWS consist of tobacco products around 34%. Tobacco companies don’t usually provide long credit terms.

Net Working Capital and Working Capital/Equity Ratio

Translated into numbers, those Inventory, Receivables and Payable Turnover Days mean that,

For companies like 7-Eleven & Family Mart, in addition to the capital they have put into the business “Equity”, on a net basis, the suppliers of these companies, provided them with an additional 154% and 58% of capital to fund or expand their existing businesses.

While for myNEWS, in addition to their Equity, they also need to fork out, on average 15% of additional capital to fund their supplier’s businesses.

The thing about running negative working capital business models, is that it is especially advantageous when the company is expanding very quickly.

For a company without an expansion plan running a negative working capital business model, this business model only provides additional returns on the initial phase, before going on as normal.

But for a fast-growing business, like myNEWS and Family Mart, running a negative working capital business model give rise to situations like below.

As you can see above, this means that your suppliers can now fund your expansion plans.

The more stores you open, the larger the amount of funding provided by your suppliers, which reduces the amount of cash you need to open new stores.

And unlike 7-Eleven and Family Mart who have already fully optimized this, there is still significant room for myNEWS to optimize their working capital structure to obtain superior Return on Equity and supercharge their growth, while maintaining their superior Net Profit Margin and Return on Asset.

A full breakdown of the numbers will be attached as appendixes at the back.

The Turnaround – The Evolution of Retail Convenience Stores

With the advent of Family Mart, the current convenience store model used in many locations (particularly in Klang Valley) by myNEWS are no longer viable.

Because the moment Family Mart opens a store near you, the number of customers your get to come into your shop to buy the snacks and little knick knacks plummet.

To understand why, we need to think in terms of how retail convenience stores evolved.

For a long time, these stores started as newsstands and cigarette shops. Why?

Because at that point, the fact that you sold newspapers and magazines (for people to also peruse) is enough reason for people to come in, entertain themselves by taking a quick flip through the papers etc (I know I did this a lot back when I was younger, when my parents are paying for the groceries at Tesco) and then pick up their paper/magazine, along with any other stuff.

With the advent of the internet, smart phones etc. This suddenly created a vacuum in terms of a reason for people to enter these stores.

Now, for the overseas stores, because their stores have already evolved long enough and offer many different products from food and dessert (extremely good ones in fact) and pharmaceuticals, to even every-day grocery items like eggs, some vegetables and even meat and fish (along with them already being in high density areas and fulfilling the convenience factor), they could just continue moving along.

But for convenience stores like myNEWS who are still in the early phase of the evolution, they need to take the second step, and give customers a reason to come to their stores again.

Sugar (and then food). One of the three most addictive things in the world, with the other two being carbohydrates and a steady salary.

And, this was why myNEWS IPO’ed to raise the RM100m to fund their FPC’s.

However, Family Mart (QL) beat them to the punch and released that incredible ice cream (we don’t even need to mention 7-Eleven here. Who on earth still drinks slurpees?), along with their range of food products.

And now the moment a customer walks by a Family Mart, the memory of the taste of that ice cream instantly triggers, and they can’t help but walk in, and buy one (along with whatever catches their eye then). I know I am one of these people.

In addition, unlike myNEWS or 7-Eleven, Family Mart started with “Food & Desert” as their Main Selling Proposition, and therefore unlike the other two, does not have legacy items/relationships regarding of them

And so, how does myNEWS plan to turn things around?

Catalyst 1 : The opening of the first CU Store in 2021 Q1

This is where their new partner CU comes in, and myNEWS intends to open the first CU stores by Q1 2020with a target for 30-50 CU stores opened in 2021, and a 500 stores target in five years. All of it will be funded via internal finances.

In my opinion, there are two main reasons for myNEWS being unable to fulfil their ambition of opening their own branded franchise, and the problems faced by the FPC.

  • Inability to provide the right product mix and the “Taste” needed.

    As QL was the franchisee of Family Mart, they obtained the right product mix and the required recipe’s and beat myNEWS to the punch in releasing the ice cream and Japanese food.

    This meant that, even if myNEWS copied the product mix used by Family Mart, they may always be seen as Johnny-come-lately and an inferior copycat.

And with the above in mind, myNEWS needs a restart button when it comes to their RTE focused stores, and this is what CU provides.

CU is owned by BGF Retail who used to be the biggest Family Mart operator in Korea.

In 2014, they took what they knew from Family Mart, and started their own brand CU. From there, BGF converted all their stores in Korea to CU stores.

Today, CU are the biggest convenience store operator in Korea with 15,000 outlets. Their products in Korea are so good, that today, Family Mart is non-existent in Korea. This despite the non-compete agreement signed in 2014 having expired in 2016, and Family Mart is able to re-enter the market via another player.

With CU as their partner, MyNEWS now can offer another completely different type of food, “Korean”, that is equally popular as Japanese food in Malaysia, and have access to CU’s product mix and recipes.

 

By having CU come in, it solves most of their problems in one go.

  • The opening of the CU stores means that myNEWS now have a new identity and would be able to be able to provide a consistent experience across the board for their customers.
  • The CU stores, like Family Mart, will be built with Ready-To-Eat food as its core, and this means the Food Processing Centre, can now be run at a much higher capacity (75%) and enable it to breakeven (before COVID 19, it was operating at 50% capacity). In addition, materials used for both RTE segments are interchangable.

In addition, as of today, myNEWS still has a RM100m credit line, that lies mostly unused, which can be utilized to open the new stores.

Catalyst 2: COVID 19 and the Formula 1 Safety Car Mental Model.

In Formula 1, whenever an accident happens, a Safety Car will come out and all the cars must follow behind them.

When this happens, this is very bad for the leaders of the race, as because the safety car limits everyone to a slower speed (by virtue of it being a much slower car than a Formula 1 car), this meant that all the hard won gains by the leader is lost, and the competition becomes much closer.

When the COVID-19 pandemic hit, both myNEWS & Family Mart had to slow down their expansion. In addition, lower footfalls, meant that both myNEWS & Family Mart had both reduced their RTE offerings volume.

If you were to go into a Family Mart store today, it’s Ready to Eat shelves are actually quite empty and comparable to that of myNEWS previously.

However, unlike Family Mart/QL whose main route of improvement consist of opening new stores (which has been put on hold).

During this COVID 19 period, MyNEWS had been able to take advantage of the lower footfalls and revamp their current MyNEWS outlets to include more machineries that is needed to convert an outlet to be RTE focused.

At the start of the 2020, during an analyst meeting, the management have indicated the following.

And the benefits of this is very clear, the store on the left with the new layout, is clearly much better than the one on the right.

Have myNEWS taken advantage of this COVID 19 pandemic and revamped the existing outlets?

 

For the 9 months YTD 2020, MyNEWS have spent Rm23.3mil in purchase of property, plant & equipment.

As the number of outlet in 2020 on a net basis have actually reduced slightly, this means that the management have followed through on the revamp of existing stores, and most of the RM23.3m spent have been done on the store revamps to enable them to catch up to Family Mart’s offerings.

Catalyst 3: COVID 19 and the Safety Car leaving

However, unlike Formula 1, the retail convenience market is not purely a race. It is a business, where the pie is expanding for everyone.

As long as COVID 19 and the government’s policy (safety car) regarding it is around, everybody can only drive slowly and make less money or losses.

However today, despite COVID 19 Cases still being above 1,000 per day, we see the jams starting around the roads, queues outside of restaurants, and business reopening. Sunway Pyramid today is packed like usual.

As for our government, they have also done the following.

  1. Allowed Travel Between States and Districts Starting 7 Dec;
  2. No more limit on number of pax per table for dine in Starting 7 Dec; and
  3. No more 3 pax limit for travelling in cars Starting 7 Dec.

Its clear that many people, including our government think we may have somewhat overreacted in relation to this COVID-19 pandemic, and/or, that our hospitals and other medical businesses have had more than enough time to build up capacity, and/or, the consequence of not doing business or going about your own day is worse than the COVID-19 virus.

And as we can see here from 7-Eleven’s financial results for Q3, which run from (July 2020 – September 2020),

7-Eleven’s profits have largely recovered.

myNEWS’s Q3, which run from (August – October 2020), and should therefore contain a larger recovery as its further from that (March to July), and I think myNEWS has a good chance to breakeven this quarter as well.

Risks 1: Execution.

With all investments, especially turnaround ones like this, the main risks have always been in terms of the execution.

On a personal level, having studied MyNEWS since its inception as a business 20 plus years ago, and how the management runs it.

So far, I’ve always mostly agreed with the actions taken by management.

Of course, one could always say that they should have just worked with CU from the get-go, instead of trying to do things from scratch. However, it’s always easier to criticize and suggest the correct choice, with the benefit for hindsight.

One thing I like about this family run business, is the lack of Ego and especially Wah Lai Toi drama that typically comes with family businesses.

 

On September 2019, they have hired Madam Low Chooi Hoon who has deep experience in marketing and operating FMCG goods across South East Asia. And on October 2020, after proving herself, the co-founder and brother, Mr Dang Tai Wen himself, steps aside to allow her to take the reins as Chief Executive Office – Retail, a role he had help since the start of the company without drama, proving that they can work together and focus on the bigger picture.

 

And at the end of the day, this management is still one that turned 1 News-stand into 531 Convenience stores.

 

I think they will execute it fine.

 

Valuation.

The thing about great businesses, is that they are rare, and its something that must be proven over time.

And if they do end up being great and turnaround from their temporary troubles, whatever your target price initially then, you would likely be severely undervaluing it. And if it turned out to not be great and the turnaround fails, whatever price you previously bought it for, is likely to be overvalued (like Parkson).

And so, for MyNEWS, my focus when it comes to this investment, is not so much on the share price, but keeping track on this business in terms of,

How the revamp is going?
How are the CU stores going?
How is the Food Processing Centre Utilization Rate and Wastages?
How does the drinks, food and snacks taste like?

Having said that I have a high conviction that within the next 3-6 months, MyNEWS would be able to revert their Pre-COVID 19 mean, and so we will use that as a basis for determining an initial valuation.

A higher PER is used to account for the fact it is a very fast-growing business, with great industry economics and good management.

Do note, before their problems with the Food Processing Centre, MyNEWS used to trade at around 35 times earnings, at RM1.3. In addition, with most convenience stores players around the world trading at 40PE-50PE (QL is around 60PE).

I think the current PER applied is quite conservative.

And, One Last Thing

Is it priced in?

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM1.13.

It has since increased somewhat as people notice the gradual reopening of businesses around Malaysia.

However, I don’t think the market has priced in,

  • Breakeven for Q3 2020 for MyNEWS
  • Start of the first CU stores in Q1 2021 and
  • Turnaround of the Food Processing Centres, and
  • The long-term prospects of the venture as a franchisee of CU in Malaysia.

 

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Disclaimers: Refer here.

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Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

 

For a the original copy with high resolution pictures, better formatting and additional details.

 

Go here.

(CHOIVO CAPITAL) WCE (3565) – When the roads align. 562% Upside.

 

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Labels: MYNEWS
  6 people like this.
 
supersaiyan3 I wonder if FamilyMart is ran by franchise. I met one of the Chia cousin and he said its all wholly owned by QL.

Nice research.
09/12/2020 4:03 PM
wkc5657 as always, nice analysis by you :)

so how much weightage are you holding this counter against your overall portfolio?
09/12/2020 4:20 PM
thesteward Agree with The Analysis. Gogo mynews rm1
10/12/2020 1:29 AM
super_newbie Good analysis, looking at the population density per convenience store, it seem like we Malaysia has a lot growth's space.
15/12/2020 9:55 PM
KLCI King Very informative and good analysis

May not agree on certain things especially when come to future prospect & estimates.

Overall, it is the way to study before making any investment decision

Thumbs up to writter
29/12/2020 7:06 PM

(CHOIVO CAPITAL) WCE (3565) – When the roads align. 562% Upside.

Author: Choivo Capital   |  Publish date: Sat, 5 Dec 2020, 11:30 PM


 

For a the original copy with high resolution pictures, better formatting and additional details.

 

Go here.

(CHOIVO CAPITAL) WCE (3565) – When the roads align. 562% Upside.

 

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

 

 

 

When the roads align. 562% Upside.

 

Brief Overview

WCE is one company I’ve had some history with, and written 2 articles, both of which have different conclusions.

 

11 March 2019: A brief analysis and valuation of WCE Holdings Berhad (WCEHB).

 

28 July 2020: Why Highways are a Gruesome Industry – WCE Holdings Berhad (3565)

 

Since my last article, one thing kept bugging me.

 

Despite being conservative to the utmost extreme in my assumptions for the discounted cashflow projections. The fair value of WCE that I calculated then still ended up to be around RM0.25 per share.

 

Now why does this matter?

 

Well, the thing about discounted cashflow projections, is that there exists a “Hubble Telescope Problem” within each them.

 

"Discounted Cashflow to us is sort of like the Hubble Telescope—you turn it a fraction of an inch and you're in different galaxy." – Curtis Jenses – Third Avenue Management

 

Any small changes in growth estimates, cost of capital, and terminal growth rates in a discounted cashflow calculation can result in wildly different outcomes, much less a 50 year one which I did for WCE Holdings Berhad in the article above.

 

And since long term discounted cashflows are compounding/exponential in nature, if I was overly conservative by just 10-15% (which I have no doubt I was), the true intrinsic value of the company could very well be 5-10 times higher.

 

Since the day I’ve written that article, I’ve also read the rebuttals by Felicity of “Intellectpoint”

 

  1. Why they are flaws in the most extensive written piece on WCE
  2. Why some highways are less profitable

 

And have mulled over the above for some time.

 

With the above in mind, I set about studying WCE again, and well, I think I was erroneous on a few counts, and WCE is worth magnitudes more than what it is priced today. After reading the summary below, you may find it interesting to read the above articles for some context as well.

 

 

 

WCE Berhad -  A Background

WCEHB main business is that of a 80% owner of West Coast Expressway Sdn Bhd, which is contracted to build and operate the 233km highway from Banting in Selangor to Taiping in Perak, with the remaining 20% held by IJM via Road Builder Sdn Bhd (who also happens to be the largest shareholder in WCEHB.

 

WCEHB also have a property business via its 40% stake in its associate Bandar Rimbayu (contributes around RM30-RM40 mil in earnings a year). Construction of WCE was initially expected to be completed early 2019. However, over the last 2 -3 years, the completion date of have pushed back mainly due to:

 

1)       Land Acquisition problems which resulted in;

2)       Alignment Changes; and

3)       Higher than expected land acquisition costs.

 

The land acquisition cost of the 3,913.99 acres of land need for the highway was initially expected to be RM980 million, with the full amount to be borne by the government.

 

However, on 16 October 2018, they received notice that the government have completed the acquisition of 3,171.38 acres of land out of the total 3,913.99 acres of land, for a total of RM1.47 billion. Out of the remaining unacquired land, they also received notice that the remaining 382.71 acres of land would cost another RM0.33 billion. As for the remaining 359.90 acres of land, WCEHB estimated it to cost another RM0.33 billion.

To cover this shortfall, they first decided to identify savings and efficiencies that can be done on the project. The construction is done by IJM via Road Builders Berhad, who have completed multiple highways like NPE, Besraya and LEKAS all within budget. Both NPE and Besraya are profitable, while LEKAS is in the process of building up the necessary traffic. The CEO (Dato Neoh) is also a 30-year highway engineer, project manager and CEO who used to work in NPE, Besraya and Lekas.

 

This delay, coupled with the right issue required, the current economic & highway industry climate, as well as, the general investing public’s misconception/lack of understanding the real economic reality versus the current accounting numbers for concession companies have resulted in a drastic fall in the share price, and the opportunity we have today.

 

To buy shares in the WCE Project/Company for far lower than the price paid by the major shareholders who invested in the company and the WCE project.

 

For reference, here is an illustration of the West Coast Expressway Alignment.

 

 

As we can see here, WCE mainly caters to the parts of Selangor not covered by the NSE and provides a direct route from Port Klang to Lumut Port and right up to Penang Port.

 

 

As the WCE route contains significant non-tolled roads, and a smoother gradient compared to NSE, and shorter distances when it comes to commercial travel, there is likely to be good demand from commercial vehicles (who are cost and time sensitive) and public vehicles (who are mostly time sensitive. Who actually knows what the toll rate per km for each highway in Malaysia and do price comparisons before travelling? You just set your Google Maps, decide if you want to pay toll or not and go.)

 

 

 

 

Catalyst 1: Cancellation of PLUS’s 18%

Discount/Toll Restructuring

 

On 17 January 2020, the previous Pakatan Harapan government announced that starting February 2020, PLUS will give an 18% discount for Class 1, 4 and 5 Vehicles (Non-Commercial) with no toll rate increase till the end of the concession, in exchange for an additional 20 year concession period, and a likely RM7.5 bil buyout from its current shareholders of EPF and Khazanah.

 

(The article does not specifically state a buyout, but why else do you need to securitize and raise RM7.5bil from the markets then?)

 

WCE lenders and bondholders instantly started worrying about how this will impact the future traffic for WCE. (It does not impact WCE traffic much as there is no 18% discount for commercial traffic, and public traffic is generally price inelastic, but time elastic due to Google Maps)

 

However, since then we have had a change in government, and till today there is no news on the completion of the toll restructuring of PLUS. Judging from the current situation, I think it is very likely that the toll restructuring will likely fall through due to,

 

  1. Different governments have different policy.

 

During the Pakatan Harapan government, many would have noticed the constantly differing signals by government leaders on the toll restructuring.

 

Mahathir, Azmin and Baru Bian will talk about the selling the highways to a private bidder.

 

However, Lim Guan Eng, Tony Phua and Anthony Loke will constantly reiterate their refusal to sell the company to a private seller and plan to restructure it to be held by the government instead.

 

Lim Guan Eng and Tony Phua will announce the purchase of highways from Gamuda, while Mahathir and Azmin will deny a decision has been made, and it is pending cabinet approval.

 

And till today, there is no news on the toll restructuring of PLUS Highway Concessions, while it appears Gamuda’s sale of highways have fallen through.

 

It has since been almost one year since the announcement with no news. The way things are looking,and considering the differing perspective of the new government in charge, it seems very likely the sale/restructuring will fall through, and sooner rather than later.

 

 

  1. Covid 19 and the Lack of Money

 

This COVID 19 pandemic have also like resulted in a lack of money for both the Malaysian Government and PLUS Malaysia.

 

For the Government, all of their COVID related stimulus items have resulted in Budget 2021 to be the largest ever at RM322.5 bil, when the nations income is at an all time low, and the deficit this year expected to exceed RM100bil.

 

This deficit will need to be funded by a record issuance of bonds by the government, which will likely be subscribed by the number one buyer of Malaysian bonds, EPF and the Malaysian Banks and Insurance companies.

 

Except, with the government allowing EPF members to withdraw from their EPF Account 1 as well, which is likely to result in outflow amounting to RM15 billion, there is quite simply very little additional liquidity available for the government to issue the relevant government guaranteed bonds amounting to RM7.5bil for the restructuring for PLUS Malaysia. Especially given the lack of political will.

 

As for PLUS Malaysia, given their previous year toll collection of RM3.5bil or so, the 18% toll discount coupled with record low traffic numbers due to COVID 19 Is likely to have resulted in a revenue loss of at least RM1bil or more.

 

 

Averaged out, the above chart shows a reduction in traffic volume of around 30-40%.

 

Given their net debt of RM26 billion (RM30 billion in Debt, RM4 billion in Cash as per 2019 audited report) and yearly financial repayments of RM1.8bil (with an escalating instalment structure), the revenue loss above may result PLUS getting uncomfortable close to the minimum requirements of the sukuk covenants in the not so far future, especially if the current traffic trends continue into next year. There is a reason why MARC placed their bonds on rating watch (Still AAA though).

 

Due to the reasons stated above, I think it is very likely that the 18% toll discount forced upon PLUS by the Malaysian government will be lifted soon.

 

In August 2020, the government have already stated that the 18% discount on PLUS Highway will be reviewed, and an update is expected to I think there is a good chance the information will come after the budget is finalized around February 2021.


 

 

 

Catalyst 2: Highway Trusts

 

Why February 2021?

 

The current flavour of the day for the government to solve this highway issue, is the creation of a trust to hold all the highways, and the decision is likely to be made 6 months from the end of August 2020, or February 2021. They did raise it in parliament again just this November 2020.

 

Which is actually a very good thing, as this would mean the government takes over the entire highway at the cost of construction and clear all debt and amount owing related to the highway.


 

Currently, WCE is trading at a 70% discount to its book value. An instant 100-200% upside.

 

 

Catalyst 3: Land Acqusition Mostly

Solved, No More Right Issues

 

As explained earlier, in 2019, WCE have finalized most of their land acquisition matters, and a right issue was undertaken to fund this.

 

This right issue was fully taken up by all the major shareholders, IJM, MWE (Tan Sri Surin Upatkoon) and United Frontiers (The Mamee Family)

 

As the land acquisition issues are mostly settled, a few sections have opened, and the rest are too be opened based on the schedule below.

 

 

And from what I know according to people working in WCE, for the sections that have already opened, actual traffic is very close or equal to the projected traffic, if not for the COVID 19 pandemic, they would have exceeded expectations.

 

And here, based on our own observation of the traffic camera’s in WCE.

 

 

All things considered, we can see that traffic is quite good, especially when having considered the current Conditional Movement Control Order, which currently ban interstate travel.

 

In addition, the sections have not yet been fully connected to the other sections and interchanges which are linked to other highways and developed areas, which should further improve traffic numbers.

 

As for the right issues,

 

“The worst is over for us. The land acquisitions are about 95% completed and we have commenced construction works for Sections 7 and 11 – the last two sections, which is estimated to be completed by 2022” Dato Neoh Soon Hiong

 

“Neoh says that the funds raised from the rights issue, coupled with funds from the earlier government support loan (RM2.24bil), its syndicated term loan (RM1.5bil) and sukuk (RM1bil), in turn, puts WCE in a good position to complete construction of the highway.

Notably, there has been an increase in the project cost for WCE by RM750mil to RM6.69bil largely due to higher estimated land acquisition costs.

However, WCE chief financial officer Lyndon Alfred Felix explains that the company has embarked on wide-reaching project cost savings on actual construction costs. In addition, there have been renegotiations in court for the land acquisition compensations. All of these, he says, will offset the total cost overrun.”

As a result, it is highly unlikely for WCE to have another cash call in the near future.”

 


 

Risks : Delays in Toll Compensations

 

Reading PLUS Malaysia’s annual reports and bond rating reports, I noted the ever-burgeoning toll compensation owing by the government, which translates to slow repayment.

 

After some discussion with industry players, this situation appears to be mainly unique to PLUS, which is a GLC, that is owned by EPF and Khazanah. And since it’s a right hand to left hand kind of deal in that case, they are naturally subject to certain delays.

 

However, when looking at the accounts of private companies such as LITRAK,

 

 

I noticed that delays in toll compensations is not really an issue, and generally less than a year’s worth of the compensation is held in the books, which indicate that advances were also paid.

 

In addition, unlike PLUS who appear to have to agree to whatever suggested by the government, despite the government’s previous exhortations to implement peak/off-peak toll rates for LDP, this has not yet been implemented due to Gamuda and the Government having not yet agreed on the basis of the compensation, or the acquisition deal going through.

 

 

 

Cashflow Projection / Intrinsic Value

of WCEHB

 

When thinking about investment in projects/companies, especially one like a highway concession (or even power concessions like MFCB), where there is a long gestational period as construction is ongoing, and time is required to reach economies of scale.

 

We need to think about cashflows over the lifetime of the project, and the best way to go about this is via a Discounted Cash-Flow forecast (“DCF”), where all future cash inflows and outflows of the project, is discounted to present value (a bird in hand is worth more than a bird in the bush)

 

This natural require a lot of educated assumptions, with which we target to be as conservative than not. Its better to undervalue a company than to overvalue one.

 

A summary of my assumptions is as follows.

 

 

(A) Cashflow Projection: Opening Debt

The interest capitalized is around 4% of the entire project cost from 2015 to 2023. This is about half of the current interest rate, as the loan is progressively drawn down, and parts of the loan attributable to each section is no longer capitalized when that tolling begins for that section. To date about RM550 million have been capitalized in the Infrastructure Development Expenditure.

 

 

(B) Cashflow Projection: Interest Expense

By the time the highway is completed, WCE would have used borrowing facilities totalling RM4.74 billion.

 

This consist of 3 kinds of loans,

 

  1. 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.

 

  1. 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.

 

  1. 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%

To simplify things, in our DCF, we will ignore the schedule above, and 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.

 

In any event, the repayment schedule used by my cashflow model is more conservative.

 

 

(C) Cashflow Projection: Expected Operating Costs (EBITDA%)

 

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 WCEHB, 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 more mobilization and demobilization costs related to the machinery needed for maintenance).

 

In addition, Intrastate highways tend to have a higher (Class 2 and 3 – Lorries and Trucks) demographic from long distance shipping.

 

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 small subcontractors to maintain their highways.

 

IJM/Road Builders Sdn Bhd should be able to get the cost slightly lower in view of their deep expertise in construction and road maintenance.

 

 

(D) Cashflow Projection: Discount Rate

 

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

 

It may seem low. However, it is sufficient as I’m already adjusting in the margin of safety via all the other assumptions.

 

In addition, if necessary a discount can be directly applied to the per-share intrinsic value.

 

 

(E) Cashflow Projection: Starting Toll Revenue Base

According to the RAM Rating report, the base case starting revenue is around RM461m, while the sensitized (Rating Agent Speak for “Worst Case”) scenario is around RM275m.

 

For our case, to be more conservative, “Best Case” will be RM461m, “Base Case” will be RM275m and “Worst Case” will be RM230m.

 

Our worst case will be significantly lower than RAM Ratings own “Worst Case” scenario, to account for any additional delays in opening new sections.

 

For more information on how I obtained these numbers, refer to the article reference in the “Overview”.

 

 

(F) Cashflow Projection: Toll Rate

In the typical highway concession, the toll rate increases at 10% every 5 years.

 

This appears to be the case here as well, as the revenue growth for the 5 year period is about double that of projected traffic growth in the table above (5.6% vs 3.2%), which is likely due to toll rate increase.

 

 

(G) Cashflow Projection: Growth Rate

For these, I will be using the traffic of a standard inter/intra-state highway like NSE and Anih, along with the typical traffic growth of a new highway.

 

 

This is the current projected traffic growth rates as per their MARC Rating Report. As it is significantly lower than that of WCE’s, we will be using this especially when projecting the growth rate of WCE, when it becomes a matured highway 20 – 25 years down the line.

 

The “Best”, “Base” and “Worse” case are based on the North South Expressways, Central and Northern traffic growth over the last few years.

 

The same growth rate is used across all scenarios, as looking at projected traffic reports, the different scenarios are often merely just 0.1% different up/down every other year, for a 50-year projection.

 

As all projections will always be wrong, but one would want to err on the side of caution, I just made more conservative assumptions and applied them across the board.

 

For more information on how I obtained these numbers, refer to the article reference in the “Overview”.

 

 

 

(H) Cashflow Projection: Number of Shares - (Maximum Dilution from RCPS and Warrant)

The key to identifying the intrinsic value of this investment, is to identify the NPV per share.  The higher the number of shares, the lower the intrinsic value per share. For this, we will go the most conservative route and assume maximum dilution from the RCPS and Warrants.

 

According to the Rights Issue 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 1,325,298,970 shares.

 

This expands the number of shares by around 171%. Dropping our estimated intrinsic value by that amount and increasing our margin of safety.

 

 

(I) Cashflow Projection: Cashflow from Maximum Dilution from RCPS and Warrant

The conversion of the RCPS and Warrants result in a cash inflow, which we will include in our intrinsic value calculation. The amount is included in the table above.

 

 

 

(J) Cashflow Projection: Others

Dividends: As West Coast Expressways Sdn Bhd’s capital structure consist of only ordinary shares, dividends would only be able to paid out when it has positive retained earnings. Most highways would not have this during the initial years, and so no dividends are paid until the cumulative retained earnings become positive. Subsequently, a 100% dividend pay-out policy is assumed.

 

Initial Losses: For our “Worst Case” and “Base Case”, the first few years are likely to be losses. This is likely to be the case in the real world as well, as the highway is opened section by section and will only reach the first phase of full economy of scale when it is fully opened. The initial losses are assumed to be financed via additional drawdown of finance facilities (if required).

 

Income Tax: Income Tax of 24% (current corporate income tax) is applied throughout the concession period. No adjustment is made for deferred taxes. Current tax laws of allowing loss allowance to be brought forward for only 7 years is applied throughout the concession.

 

Borrowings: Debt payment is “EBITDA less Dividends (if any). Borrowings must be zero by the end of the concession period.

 

Now, with all the above in mind, what does our “Worst Case”, “Base Case” and “Best Case” look like in this case?

 

 

The detailed workings for (Appendix A – Worst Case), (Appendix B – Base Case) and  (Appendix C – Best Case) can be found at the back of this document. Even under some of the most onerous assumptions, our worst-case scenario is still present a 103% upside to today’s prices.

 

If you were to read my previous article linked in the overview, I made another DCF then, where assumptions for traffic projections etc were so far below the reality for highways in similar areas and demographic, and despite that it was still valued at RM0.25 per share.

 

If there ever was an investment with an extremely asymmetric risk/reward in Malaysia, it is WCEHB.

 

At the absolute worst-case scenario, you would still make a decent amount of money, but if you were to make the base/best case scenario, you would make orders of magnitude more money.

 

If we were to look at it in a probabilistic way, I think there is,

 

  1. 20% chance for the Worst Case to occur;
  2. 60% chance for the Base Case to occur; and
  3. 20% chance for the Best Case to occur.

 

This gives us our long-term target price of RM1.57.


 

And, One Last Thing.

Is it priced in?

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM0.375.

 

Back in 2017, before the delays due to land acquisition etc, the mere hint of the highway opening certain sections and fully reopen by 2020, had prices fly up from RM 0.915 to a high of RM1.68.

 

Today, despite the land acquisition matters being large solved, with 5 out of 11 sections having opened to-date, and another 4 sections to be opened in 2021. The share price is at a mere RM0.285.

 

In addition, let’s not forget the possibility of a highway trust, or the removal of 18% discount from PLUS Highways. Of which the decision will be announced by February 2021. It’s as if Mr Market forgot to read the news.

 

None of the facts I have written above have not been priced into the stock at all.

 

 

 

(Appendix A – Worst Case)

 

 

 

(Appendix B – Base Case)

 

 

 

 

 

 

(Appendix C – Best Case)

 

 

 

Labels: WCEHB
  2 people like this.
 
bull500 good analysis
06/12/2020 2:17 PM
WHYO0001 choivo capital
Appreciate & thank you for yr time to write this story
06/12/2020 9:02 PM
thesteward Good article. At current price looks attractive. Thanks for the sharing
06/12/2020 11:11 PM
Choivo Capital My cost is 29 sen, starting buying from 26 sen.
06/12/2020 11:50 PM
JBond007 Just a name change from KEuro (Kumpulan Europlus Berhad).
Why so excited?
06/12/2020 11:54 PM
Choivo Capital name change 4-5 years d. You didnt read news is it?
06/12/2020 11:56 PM
JBond007 Of course I know, I have hold the shares for many years already (since Chan Ah Chye time). Anyhow hope IJM can repackage WCE into the fame Road Builder.
07/12/2020 12:33 AM
Felicity Not far from how I see it, with new information. I think however it is worth more. Should not be RM1.50. Especially given that the interest rates is low and the perceived value should be higher as well. Also, since it is a port to port highway, given the positive manufacturing situation as we can see, it is all the more positive for a coastal port highway.
07/12/2020 12:29 PM
Choivo Capital I think there is a chance market will overvalue it , especially during the first few years, when traffic is as per base case. They would think it can go up at the early phase in perpetuity.

So there is that.
07/12/2020 1:48 PM
harmie Very detailed and well informed analysis
08/12/2020 10:24 AM
Qiinvestor Thanks for the sharing.
Always love to read Felicity and Choivo's articles. They came with great insight. That constructive debate over WCEHB valuations few months ago was excellent, and hard to be seen in anywhere in this forum.
Though, I always have faith in Felicity. Been following WCEHB like 4 5 years ago since Felicity recommended it.
08/12/2020 10:35 AM
LKOH Any idea when will WCE be completed?
08/12/2020 1:55 PM
Icon8888 hey why delete agian, haizz.
19/12/2020 9:33 PM
Sslee Dear Choivo Capital,
TQVM for your many “Chun Chun” calls lately
https://klse.i3investor.com/blogs/Sslee_blog/2020-12-23-story-h1538367...

As the year 2020 comes to an end, a new beginning awaits us. The rollout of Covid-19 vaccine is a light at the end of the tunnel, but there are still long ways to go before we emerge from the darkness as each of us need to struggle between good over evil inside us to claim victories.

May good triumph over evil; light dispel darkness; wisdom replace ignorance; humility defeat hubris; love overcome hatred and peace instead of war. Let’s celebrate the return of light inside us and may the light from within shine brightly a path towards a fulfilling life, love, joy, peace and prosperity.

Thank you. I wish all a “Merry Christmas and Prosperous New Year”.
Stay safe, stay invested, stay happy and enjoy the holiday/long weekend with family.

Best Regards
SS LEE
23/12/2020 6:31 PM

(CHOIVO CAPITAL) MASTER (7029) – Packaging Boom, All Time Low Pulp Costs, Record Revenue by Major Customer

Author: Choivo Capital   |  Publish date: Tue, 1 Dec 2020, 2:29 PM


 

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

(CHOIVO CAPITAL) MASTER (7029) – Packaging Boom, All Time Low Pulp Costs, Record Revenue by Major Customer

 

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

Packaging Boom, All Time Low Pulp Costs,

Record Revenue by Major Customer

 

 

Overview

This pandemic resulted in a packaging booms for both Paper and Plastic based packaging, due to the online delivery boom, as demand for online delivery of goods increases drastically.

And we see this reflected in the share prices of plastic and paper packaging companies in Malaysia and Globally.

 

However, Master-Pack Group Berhad is a major laggard, despite also being the most direct beneficiary of the Solar Boom, with their major customer US’s First Solar Q3 sales rising by 70%.

The solar industry makes up 67% of Master’s revenue, with the rest being the Food & Beverage as well as Medical, both of which have also seen a boom this year.

 

 

 

Master Pack Berhad -  A Background

MASTER is primarily engaged in the business of manufacturing corrugated packaging products, wooden packaging and providing one stop packaging solution, warehousing as well as Vendor Managed Inventory with 28 years of history.

 

Over the years, they have built up their reputation as the key packaging player in the solar industry, starting with First Solar (one of the largest American solar companies in the world), where in 2011, they won an award as their top supplier.

 

 

This is because the boxes used by the solar industry tend to be custom made, to account for the unique product being shipped.

And from there, they built up their customer base in the solar industry. And today, the solar industry makes up 67% of their sales.

Resulting in their below historical results,

 

 

 

Which is in line with their major customer, First Solar’s own explosive results.

 

 

 

Catalyst – Falling Costs

 

Since the second half of 2019, prices for wood pulp have fallen drastically and have stayed down mainly due to reduced usage of papers, while capacity expansions by wood pulp companies coincided with the coronavirus pandemic. Until the current industry consolidation is completed, prices for wood pulp are expected to stay low.

 

Low wood pulp prices are also the main reason why paper packing companies like MUDA, ORNA, PPHB and MASTER remained profitable throughout the pandemic.

 

 

 

Catalyst – First Solar Blockbuster Q3 Results

 

For the third quarter, their major customer First Solar have recorded an incredible 70% growth over the previous year, and 44% over the previous quarter.

 

Like in 2019, when First Solar’s Revenue exploded upwards, resulting in a 38% growth in revenue and 146% growth in profit for MASTER, a similar result should occur this time as well.

 

 

 

Long Term Catalyst – First Solar 2nd Factory in

Malaysia & Biden Presidency

With Biden being the new American President, solar energy demand supplies, incentives are expected the skyrocket, growing the renewables industries further.

And this is something First Solar is planning to capitalize on by opening their second factor in Malaysia.

In addition, the First Solar factories in Vietnam have also hit a 98% manufacturing yield, resulting in higher outputs. This should also result in additional order for Master Pack’s factories in Vietnam, where they also support First Solar’s factory.

 

 

All of which are likely to bode very well for First Solar, who is their premier packaging supplier in Malaysia and Vietnam.

 

 

 

Risks – Lower Revenue in Q3 2020 (continued)

Now, for the first two quarters of 2020, MASTER recorded a lower revenue, due to their Malaysian factories only being allowed to run at 50% capacity. However, this was partially set off by their Vietnam factories which started up in Mid-2019 to support First Solar.

However, for Q3 2020, revenues for MASTER fell. Why is this the case?

 

This is mainly from First Solar, recommissioning their current remaining Series 4 lines in Kulim, Kedah to manufacture Series 6 solar panels. This resulted in a temporary drop in revenue. According to First Solar’s Q3 Earnings Call Transcripts, this conversion has be completed in late Q3.

 

 

 

Projected Profit for Q4 2020 & Target Price

Given the completed conversion in the Malaysians First Solar Factory, as well as impending orders by First Solar, who recorded record revenues in Q3 2020 and expected to record even higher revenue in Q4.

I think it would be conservative to project a back to normal earnings for Master, and a slight increase on top especially with the Vietnam factories contributing fully from the second half of 2019.

For the purpose of our projection, we will use Q2 and Q3 2019. Mainly due to the Q4 2019 results being impacted from reduced demand in China due to the Covid 19 cases.

Now, I do think using Q4 2019 RM6m in earnings may be to optimistic. However, Q2 2019 earnings are a little too low as it does not include the full Vietnam factory contribution. With that in mind, we will use a conservative RM 4m in net profit for our projections.

And so, we arrive to our target price of approximately RM2.5, when earnings for Master Pack return to the mean.

 

Do note this does not price in the additional orders that are likely to come from the second factory from First Solar which is expected to start Q1 2021.

 

 

 

And, One Last Thing.

Is it priced in?

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM2.55, despite being projected to make more money in Q4 2020, and have earnings increase further after the new First Solar factory is started up in Q1 2021.

 

Clearly the market still thinks that the drop in revenue or earnings is not temporary, resulting in this mispricing. I don’t think the market is pricing in any of the facts I have written above have not been priced into the stock at all.

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

 

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

(CHOIVO CAPITAL) LIONIND (4235) - Budget 2021, Rising Steel Prices

 

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

Labels: MASTER
  2 people like this.
 
supersaiyan3 ok, buy little bit lah.

(Yesterday asked to quote corrugated boxes, didn't expect it to be such a high price. Minimum order costs RM13k, that's enough boxes for 6 years for me. )
02/12/2020 12:32 AM

(CHOIVO CAPITAL) BAT (4162) - Budget 2021 (The Dark Knight Rises)

Author: Choivo Capital   |  Publish date: Mon, 9 Nov 2020, 8:04 PM


 

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

(CHOIVO CAPITAL) BAT (4162) - Budget 2021 (The

Dark Knight Rises)

 

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

 

Budget 2021, The Dark

Knight Rises.

 

 

Overview

One company I’ve always had at the back of my mind, is British American Tobacco (Malaysia) Berhad. Even with the advent of vaping etc, cigarettes is fundamentally a very good business. It is naturally addictive, and because of that, has a certain pricing power (the taste of one cigarette is very different from another as many smokers will attest).

 

 

 

The Challenges in the Malaysian

Cigarettes Industry

However, this business has faced a lot of challenges in Malaysia, mainly due to a few reasons.

 

  1. The constant increase in excise tax on cigarettes.

 

Since 2004, excise duty on cigarettes have risen every year.

 

With a culmination of a 42.8% increase in 2016, which coupled with a lack of enforcement, resulted in an explosion in the illegal cigarettes market.

 

The math is simple, if a pack back then cost RM15 – RM18,while the illegal one costs RM3 - RM5, regardless of how much you prefer the taste of the other, if you’re in the B40 and M40, whose income levels have not risen in tandem with Global or Malaysian inflation, you will more likely be choosing the cheaper options.

And here, we can see that the main method used to supply illegal cigarettes is via smuggling. (Vape is technically illegal as well, but as the market is very fragmented for them, coupled with lack of regulation, we don’t really know the numbers)

 

 

 

  1. The complete failure in enforcement against illegal cigarettes.

 

Now why is smuggling the most popular method in the supply of illegal cigarettes?

 

For one, its much cheaper to produce cigarettes overseas. And secondly, due to our long coastal lines and lax shipment laws regarding cigarettes, it is very easy to bring in illegal cigarettes.

 

For example, in the countries like Singapore and Australia, illegal cigarettes are only 10% of the market (Malaysia: 65% of the Market) despite prices being 2 – 3 times higher than Malaysia.

 

The main reason for this is because these countries banned the transhipment of cigarettes. This means no cigarettes can touch their ports, unless it is for local consumption.

 

This is not the case in Malaysia, where we have many ports, many of which are lax in enforcement, where containers of cigarettes meant for transhipment, can arrive full and leave empty for various reasons.

 

 

 

  1. The rise of vaping and electronic cigarettes, which was not regulated sufficiently, or enforced.

 

And lastly, there is the vaping and electronic cigarettes industry, which based on recent estimates, have become a RM2 billion industry. This is an industry there is until today is still unregulated and untaxed. This naturally affects the legal players like BAT.

 

And how have this affected BAT in terms of the numbers?

 

As we can see here, since their high in 2015, earnings have only gone down for BAT. And this has naturally led to this very depressing looking chart which we can see here.

 

 

Since reaching their high of RM72.50 back in 2015, it has only going downhill due to the last excise duty rate increase in 2016 which have resulted in the explosion of the illegal cigarettes industry and the decline in their profits.

 

Except something incredibly (and unthinkable just a few months ago) good for BAT have happened with budget 2021.

 

 

 

The Turnaround – KYO

 

Even before the 2021 budget announcements, BAT have started turning things around by introducing KYO, a budget range of cigarettes at around RM11.50 for a pack of 20. In addition, the movement restriction orders meant that more people are ordering their cigarettes from online (you cannot find vape and illegal cigarettes on Shopee and Lazada etc), culminating in 2 consecutive quarter of q-o-q profit increases.

 

 

 

The Turnaround – Budget 2021

Naturally, this was not something that BAT took laying down. Since 2015, they have spoken endlessly about the loss in tax revenue for the government due to the illegal market.

 

However, they were too many fingers in this pie. And the ball was thrown around with the Ministry of Health (MOH) stating that it has no authority to enforce legislation against illegal cigarettes, and it is up to the Customs department.

 

The customs department naturally (and conveniently might I add) disagrees and says it is the MOH’s prerogative to clamp down on illegal cigarette packets which don’t portray health warnings (which is irrelevant as even illegal cigarettes have health warnings). You should read up on our Customs department and its placing on the corruption index.

 

That was, until today.

 

Facing an unprecedented squeeze in our budgets, with the government more desperate than ever for additional revenues, all gloves are off.

 

According to the 2021 Budget, effective from 1 January 2021, the Government will implement the following measures:

 

  1. Freezing the issuance of new import license for cigarette;

 

  1. Tightening the renewal of import license for cigarette through review of license conditions including the imposition of import quota;

 

  1. Limiting transhipment of cigarette to dedicated ports only;

 

  1. Imposition of tax on the importation of cigarettes with drawback facilities for re-export;

 

  1. Disallow transhipment of cigarettes and re-export of cigarettes by small boats including kumpit and instead be allowed only in ISO containers; and

 

  1. Making cigarettes and tobacco products as taxable goods in all Duty-Free Islands and any free zones that have been permitted retail sale of duty-free cigarettes.

 

  1. Impose excise duty of 10 percent on devices for all types of electronic and non-electronic cigarettes including vape effective from 1 January 2021.

 

  1. Liquid used in electronic cigarettes will be imposed an excise duty at a rate of 40 cents per millilitre.

 

This is an unpresented level of enforcement on illegal cigarettes by the Malaysian Government and is very close to the level of enforcement done by countries such as Singapore and Australia where illegal cigarettes is only 10% of the market.

 

In addition, the tax of vape liquids of 40 sen per millilitre translates to around RM40 in excise tax for one standard 100 ml bottle.

Given that each 100ml bottle is on average RM40 per bottle this translates to around the excise tax being around 50% of the total selling price for vape liquids.

 

This brings it in line with the current cigarette excise tax levels.

 

Currently, each cigarette is tax at RM0.40. Using Dunhill (since the above is a premium juice product) as a comparison.

Now if you ask most cigarette users, the feeling of the vape liquid is just not comparable to that of smoke.

 

And given that prices are going to equalize (and with there being strong enforcement on illegal cigarettes) , I think most smokers will be going back to normal cigarettes.

 

In addition, let’s not forget the various initiatives BAT have done to cut cost and win back market share, such as shutting down their Malaysian factories to move to a full import model to reduce costs, as well as, introducing KYO (the budget cigarettes) and GLO (their heating based solutions).

 

All of which resulted in earnings increasing for Q2 2020.

 

And lastly, now that the vape market is regulated, BAT can bring in their own solutions VYPE. Which holds a 41% market share in the UK, and high teens in other countries.

 

 

 

 

Valuation

Due to its very stable business (with proper regulations and enforcement now in play) with high dividend pay-outs of 100% or more and close to zero capex (now that everything is imported in due to lower cost of producing overseas), I’ve always looked at BAT as a dividend play.

 

 

Now, for our worst-case scenario, I’m going to assume that all these actions done by the government did nothing in reducing the market share of illegal Cigarettes and Vape market share, and only maintained the current status quo.

 

In which case, we are only looking at a 50% upside given dividend yield requirements of 5.5% with a target price of RM15.28.

 

Now, what if due to these actions, the market share of illegal cigarettes and vape, goes back to 2017 - 2018 levels of 50% vs the 75% today?

 

Well, we are now looking at 212% upside or a target price of RM31.84.

 

Now what if things went back to its 2016 levels, except instead of making RM900 million a year, we adjust it downwards to RM700m a year due to there being  new players like the vaping industry?

Well, we are now looking at a target price of RM44.6 and an upside of 336%.

 

 

 

One last thing,

And where is BAT price today? Is it priced in?

Well, it went up a little, but not by much.

 

Personally, when I first found out, I wanted to buy as much as possible that Friday on 4.50pm but was unable to do so.

 

During the weekend, I was personally scared that it would limit up without me getting a share, however, I only needed to pay 5-6% extra.

 

One thing to note about this company, is that for a long time, this company was a local and foreign fund darling, and many of them still hold it as it is too cheap to sell given the dividend yields.

 

 

And like many here, they are also all very familiar with the problem that plagued this company, and given the 2021 Budget announcements, would likely want to top up, or stop selling.

 

However, for the foreign funds, chances are they have not read the news yet this morning, and there fore still queued to sell, while the local funds, chances are, they need to write something up for their investment committee to approve.

 

They are inherently unable to be as agile as a retail participant.

 

Let me quote you something I wrote back in 20 January 2020.

 

Well, what do you think I’ll be doing?

 

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

 

 

 

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

 

Labels: BAT
  2 people like this.
 

(CHOIVO CAPITAL) LIONIND (4235) - Budget 2021, Rising Steel Prices

Author: Choivo Capital   |  Publish date: Mon, 9 Nov 2020, 12:42 PM


 

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

(CHOIVO CAPITAL) LIONIND (4235) - Budget 2021, Rising Steel Prices

 

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

Overview

When thinking about the companies affected positively by the budget, we naturally look for companies whose valuations are also currently very attractive.

 

And I think Lion Industries Corp Berhad fits the bill, especially since they are among the top 3 largest steel rebar players in Malaysia.

 

 

Budget 2021 - Construction

For Budget 2021, the government have allocated quite a large amount towards construction and infrastructure development. The main ones being,

 

  1. RM 15 billion will be allocated to fund the Pan Borneo Highway, Gemas-Johor Bahru Electrified Double-Tracking Electrified Project and Klang Valley Double Tracking Project Phase One. In addition, several key projects will also be continued such as Rapid Transit System Link from Johor Bahru to Woodlands, Singapore and MRT3 in Klang Valley.

 

  1. RM3.8 billion to fund new projects such as,
  • Construction of the Second Phase of the Klang Third Bridge in Selangor
  • Continuing the Central Spine Project with the new alignment from Kelantan to Pahang;
  • Upgrading the bridge across Sungai Marang, Terengganu;
  • Upgrading of Federal Road connecting Gerik, Perak to Kulim, Kedah
  • To continue building and upgrading Phase of the Pulau Indah, Klang Ringroad Phase 3, Selangor
  • Construction of the Pan Borneo Highway Sabah from Serusop to Pituru; and
  • Construction of the Cameron Highlands Bypass road, Pahang with emphasis on preserving the environment.

 

  1. RM780 million to fund regional projects such as,
  • Rapid Transit Bus Transport System at 3 High Capacity Routes and construction of busway at IRDA in Johor;
  • Construction of the Palekbang Bridge to Kota Bahru, Kelantan under ECER;
  • Construction of infrastructure and related components of the Special Development Zone project in Yan and Baling, Kedah under NCER;
  • Infrastructure Project in the Samalaju Industrial Area, Sarawak under SCORE; and
  • Continuation of the Sapangar Bay Container Port Expansion Project, Sabah under SDC.

 

  1. EPF will continue the development of Kwasa Damansara with an estimated Gross Development Value of RM50 billion. It will consist of commercial, residential and more than 25 thousand houses (including 10,000 affordable homes) to be built.

 

  1. Sabah and Sarawak will receive Development Expenditure allocation of RM5.1 billion and RM4.5 billion respectively. These allocation among others are for building and upgrading water, electricity, and road infrastructure, health and education facilities.

 

  1. Additional funding of Low-cost housing amounting to RM1.2 billion.

 

  • RM 500 million to build 14 thousand low cost housing units under the Program Perumahan Rakyat;
  • RM 315 million for the construction of 3,000 units of Rumah Mesra Rakyat by Syarikat Perumahan Nasional Berhad;
  • RM 125 million for the maintenance of low cost and medium-low stratified housing as well as assistance to repair dilapidated houses and those damaged by natural disasters; and
  • RM 310 million for the Malaysia Civil Servants Housing Programme (PPAM)

 

And many more smaller development projects, including initiatives to promote and ease homeownership for the citizes

 

 

 

Rising Steel Prices

And even before all these are happening, steel prices have been steadily marching upwards.

 

Per Statista.

LME Steel Rebar Prices

 

In the major steel producing countries China and India, steel prices have been increasing very strong, and this is similar globally as recovery and demand picks up pace, faster than the reopening of supply.

 

This is also corroborated by various news articles around the world.

 

 

“Steel Prices In Asia expected to increase strongly in the second half of 2020”

 

 

“US Rebar prices hold steady in November, after rising strongly in September and October”

 

 

"In China underlying demand remains exceptionally strong,…,The rest of the world is picking up after a horrendous Q2 and Q3, and now we're seeing steel prices recovering pretty strongly across all regions,..., I think they will continue to rise.

 

Prices of hot rolled coil steel, used in the manufacturing sector, have shot up 37% since April in China, the world's biggest steel market and the first country to recover from the pandemic.”

 

 

Domestic steel companies have increased prices by Rs 2,700-3,000 per tonne in August — the third time since the start of the pandemic — as demand improves and input costs remain high due to shortage of iron ore. The uptick is in line with an increase in the international price of steel.

 

While both primary and secondary steel players increased benchmark prices of hot-rolled coils by Rs 700-750 per tonne on an average from July 2020, for cold-rolled coils, prices have gone up by Rs 500-550 per tonne. Those of pig iron and steel have gone up by Rs 3,000 per tonne in the local market in August, industry sources said.

 

A key factor is international steel prices, which have improved by almost $500 per tonne, according to a top official of a state-owned steel major.

 

 

Domestic steel companies have increased prices by Rs 2,700-3,000 per tonne in August — the third time since the start of the pandemic — as demand improves and input costs remain high due to shortage of iron ore. The uptick is in line with an increase in the international price of steel.

 

While both primary and secondary steel players increased benchmark prices of hot-rolled coils by Rs 700-750 per tonne on an average from July 2020, for cold-rolled coils, prices have gone up by Rs 500-550 per tonne. Those of pig iron and steel have gone up by Rs 3,000 per tonne in the local market in August, industry sources said.

 

A key factor is international steel prices, which have improved by almost $500 per tonne, according to a top official of a state-owned steel major.

 

 

China’s national price of HRB400 20mm dia rebar, an indicator of the domestic steel market development, continued to increase for the third working day on October 30 to Yuan 3,860/tonne ($577/t) including the 13% VAT. It was up by Yuan 22/t on day, the steepest rise among the three days.

 

 

And these steel prices are also increasing in Malaysia, as shown by YKGI’s  (a Malaysian Steel Manufacturer’s) most recent quarterly result, where they recorded a net profit of RM2.3 million after 9 quarters of losses

 

 

 

 

Net Cash & Additional Disposals

 

Unlike other steel companies, LIONIND is in a strongly net cash position. As of today, they have net cash totalling RM255m, this is higher than their current market capitalization of RM 193m.

 

In addition, they are also in the process of disposing Antara Steel Mills Sdn Bhd for a cash consideration of RM546.56 million (USD 128 million)

 

Bringing their total cash balances to RM806 million.

 

 

 

Target Price

Given the imminent closing of the disposal, the 2021 Budget which is expected to strongly increase the demand for rebar steel for construction in Malaysia, as well as rising steel prices around the world, I think there should be enough factors in line which should positively impact LIONIND’s share price.

 

 

 

One last thing,

Is it priced in?

Well, does not look like this is the case at all.

 

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

 

 

 

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

 

 

Labels: LIONIND
  2 people like this.
 
GLNT I think the opposition is trying to reduce expenditure on construction projects before they approve the budget.
09/11/2020 2:08 PM
kalteh You are using June QR but Sept QR is already available. And the liabilities numbers are much higher in the latest one. Not much upside once factoring in that
07/01/2021 9:18 AM

(CHOIVO CAPITAL) MBMR (5983) - 10% Projected Dividend Yield, All Time High Revenue and Earnings (SUMMARY)

Author: Choivo Capital   |  Publish date: Thu, 5 Nov 2020, 1:34 PM


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

(CHOIVO CAPITAL) MBMR (5983) - 10% Projected Dividend Yield, All Time High Revenue and Earnings (SUMMARY)

 

 

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

 

10% Projected Dividend Yield, Record Earnings.

 

 

Overview

This pandemic has changed the way people travel and their modes of transportation.

 

With the virus around, people who previously used public transport, now much prefer using their own vehicles which have resulted in increased demand for vehicles.

 

Due to the ongoing pandemic, there is a much stronger focus on vehicles that are, cheap and have value for money. As a result, the three main beneficiaries are as follows.

 

  1. Perodua (Monthly Sales have broken their 27 year record for 2 consecutive months)
  2. Proton (Sales have recorded 5 consecutive months of Y-o-Y Growth)
  3. Second-Hand Cars (Sales have soared with Myvi being the most popular vehicle)

 

In addition, the government have also announced SST exemption (100% on locally assembled cars, 50% on imported cars) till 31 December 2020 to spur sales.

 

 

 

Why MBMR Resources Berhad 

(“MBMR”)?

In the Malaysian vehicle market, Perusahaan Otomobil Kedua Sdn. Bhd. (“Perodua”) is the industry leader.

 

 

Despite declining number in vehicles sold in Malaysia from 2015 (666,677 cars) to 2019 (604,287 cars.) The number of vehicles sold by Perodua have increased from 213,307 cars in 2015 to 240,341 cars in 2019. Increasing market share from 32% in 2015 to 39.8% in 2019. Its market share in 2020 have further increased to 42.5%.

 

Why is this the case? This is due to income levels in the M40 and B40 rising slower than in previous years, resulting in a stronger focus on cheaper and value for money cars. This pandemic has further strengthened this focus.

 

Currently, the cheapest (all-in ownership cost) and most fuel-efficient car in Malaysia is the Perodua Bezza 1.0 G (A Proton Saga 1.3 Base is cheaper by about RM2k but is 30-40% less fuel efficient). The release of this car also resulted in a strong increase in revenue and profit for Perodua.

Now, Perodua is owned by, UMW Corporation (38%), Daihatsu Motor Co. (20%), Daihatsu (Malaysia) (5%), MBM Resources Berhad (22.6%), PNB Equity Resource Corporation (10%) and Mitsui & Co. (4.4%). The fact that no one holds a controlling stake also means that Perodua’s earnings are usually paid out as dividends.

 

Unlike companies like DRB-HICOM, who has many other businesses, many of which are loss making during this COVID period, and thus mask the increased earnings from PROTON. The earnings and dividends contributed by Perodua is usually around 75% of MBMR’s earnings and cashflow.

 

However, despite being expected to record explosive earnings in Q3 and Q4, MBMR is currently selling at RM2.85, far below its Pre-covid valuations of RM4.0 and is selling at just 4 PE today.

 

 

 

Earnings Versus Dividend Payout

Despite large dividends by Perodua to the MBMR, the dividends paid by MBMR is usually lower, why is this the case?

As we can see here, this is mainly due to a large loan taken out in 2011. Since then, the reduction in dividend pay-out was mainly due to cashflow being diverted to pay off this loan. When the MBMR turned strongly net-cash in 2019, dividends payment tripled. In addition, as we can see here, the other segments of MBMR usually generate additional cash as well. So why was the loan taken out in 2011?

 

 

 

Why was the loan taken out in 2011?

In 2011,a loan of RM370m was taken out by MBMR for the privatization of Hirotoku Holdings Berhad which cost a total of RM410 million (to this day, this company is run by the Japanese Partner). This company is primarily in the business of manufacturing Acoustic and Safety Products for vehicles.

 

In addition, in 2012 the company also started OMI Alloy (M) Sdn Bhd, an alloy wheel manufacturing company. Both companies are under the Auto Parts Manufacturing Segment.

 

How has these companies performed over the years?

 

 

For Hirotako Berhad, earnings have fallen somewhat since the glory days of 2009-2013, however it is still quite profitable. However, the lower profitability did require a write off on goodwill in 2017.

 

But for their alloy wheel manufacturing company OMI Alloy (M) Sdn Bhd, it performed badly due to China flooding the market. This loss-making division have been shut down in 2019 and would no longer result in losses for the company.

 

What about their other division, the Motor Trading Division?

 

 

Its profitability fell during the 2013-2017 period but have since risen again to all time highs due to the release of the Perodua Bezza. The contribution by Perodua have also increased to record highs.

 

Both segments are likely to contribute positively to the record earnings to be recorded by Perodua for Q3 and Q4, as well as in the future.

 

 

 

How has Perodua performed during

the pandemic?

 

 

As we can see here, in the month of April and May, sales have naturally fallen due to the controlled movement order. However, since then, Perodua’s has soared far above its 2019 sales numbers.

 

For the other carmakers, there is a slight purchase backlog factor, which have result in sales increasing in the subsequent months, but they have since fallen back down.


Perodua on the other hand, have increase continued to record increasing sales numbers, Perodua’s monthly sales for September and October have broken their 27 year record for 2 consecutive months.

 

This is due to the change in traveling methods, where people no prefer to travel in their own cars, and the strong focus on a cheap and value for money vehicles, for which the Perodua Bezza ticks every box.

 

 

 

Q3, Q4 and Full Year Profit Projection

Given what we know about the company, we first get some baseline assumptions using the 2019 numbers.

 

 

As we can see here, on average, Perodua contributes RM 781 of profit to MBMR per unit of vehicle sold in 2019. (There is various product mixes etc)

 

And on average, the non Perodua segments contribute about RM 3.471m in net profit per quarter. (As associate contributions and dividends is not taxed, we can just deduct the Perodua Contribution from the Net Profit of MBMR)

 

With these assumptions in mind,

 

 

As we have Q3-2020 sales unit numbers, there was no need for additional projection. As for Q4, sales in October is 26,852 units. As maximum production capacity is only 25,000 units per month. We will only project 76,852 units (26,852+25,000+25,000).

 

It appears that MBMR is going to post record operating earnings for the Q3 2020 (RM55.3m) and Q4 2020 (RM60m). As of today, they are still producing vehicles at maximum capacity (appoximately 25k per month) to be sold.

 

 

 

Dividend Payout?

The question now is this.

 

Will most of these profits be paid out as dividends, or used to purchase other companies or PPE?

 

There are a few things to note.

 

  1. With the borrowings being fully paid off, it would be reasonable to think that a significant part of the additional cashflow will be used to pay dividends, as they have shown in tripling the dividend payout in 2019. In addition

 

  1. Back when they acquired Hirotoku Berhad, the car parts manufacturing business was a good one, this was before china came into the picture. Given the economics today, this industry is not very attractive anymore, and this is why PPE purchases by MBMR have been quite low over the years. After the OMI Alloy fiasco, I don’t think they will want to try that again.

 

  1. The 50.2% owner of MBMR is Med-Bumikar Mara Sdn Bhd. Like Perodua, there is no controlling owner. 70% of the shares are controlled by 6 different families who have entrepreneurial/business background. Given that no one has control over the company, historically, any additional income would likely be distributed out, so the respective families can do whatever they want with it.

 

 

With these in mind, I think that for the FY2020, at minimum RM100m (70% of earnings) would be distributed as dividends by MBMR, this translates to 10% dividend yield.

 

 

 

Target Price?

 

For the purpose of calculating and initial target price, I will use my projected 2020 full year profit of RM137m.

 

This is extremely conservative, considering their normalized profit in 2019 and 2018 is RM184m and Rm166.8m

 

In addition, there is the release of the highly anticipated new SUV, the DL55, which is based off the Daihatsu Rocky, and expected to again focus on value for money, like the Bezza

 

Given the conservative assumptions, only a small discount in relation to margin of safety is needed. Target price is dynamic, however I think this works well as a mid-term investment as well.

 

 

 

And, One Last Thing.

It appears we are not alone, in the last few months, there have been very strong institutional buying. Much of it likely due to the factors explained above.

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

 

Labels: MBMR
  2 people like this.
 
wkc5657 MBMR or POS better?
05/11/2020 1:43 PM
Choivo Capital I have both, MBMR is bigger size though. Because lots of money coming out as div.
05/11/2020 1:44 PM
soojinhou Another note, many people say that the sales volume is boosted by the sales tax exemption. If one is to study the quantum of discount before and after the exemption, it is on average 3% savings of 2-3k only. I don't think such a minor discount can drive such strong sales. Therefore, I think it is credible that avoidance of public transport is also responsible in driving the strong sales, playing straight into the private transport theme. Therefore, should the sales tax exemption be removed next year, I think sales should still be resilient at around 20k unit per month.
05/11/2020 2:20 PM
speakup Choivo still around? not arrested by SC for giving out stock recommendation without license?
06/11/2020 9:20 AM
ITreeinvestor Choivo, where is icon8888?
06/11/2020 9:54 AM
Gidstock Hi Choivo, what do you think when electronic vehicle become common in the future and selling at affordable price? Is perodua R&D working towards electronic vehicle? Oil will deplete one day and electronic vehicle is the effort human is taking towards green and renewable energy.
06/11/2020 11:33 AM
KevinL MBMR 0176
Plus point:
- Reducing debt level since FY17.
- Low P/B in FY20 of 0.56. However, average P/B since FY15 is 0.57.
- DCF (discounted at 15%, growth rate of 8%) based on past 3 years average is RM 3.24.
- Positive liquidation price of RM 0.51.

Negative point:
- Slim net profit margin. 5 years median of around 5%
- Low 5 years average core ROE of 4.55%
- Annualised P/E in FY20 is 22.1. Average P/E since FY15 is 8.4. Despite the current price has drop significantly in FY20, it is still relatively higher than the price pre-FY19 even though its FY20 annualised net profit is much lower than pre-FY19 net profit.
- Negative expected return: Downside RM 0.51, upside RM 3.24. Current price RM 2.86. (-2.35 x 50% = -1.175) + (+0.38 x 50% = +0.19) = -0.985
- Expected return vs current price: -34%

Conclusion:
- Unattractive from long-term valuation perspective.
- Require sentiment and catalyst i.e. very strong boost in QR earnings to invigorate market interest.
06/11/2020 6:54 PM
Zuliana After what happened to Choivo Lctitan prediction .. no more looking at another Choivo prediction.
Once bitten, still want to be bitten again???
07/11/2020 6:07 PM
stockraider Posted by Victor Yong > Nov 7, 2020 4:53 PM | Report Abuse

Too strong the tsunami in volume, traders yang negatif rugi saja :). Big Dana sapu, tiada dapat stop it

Date Close Volume
06/11/2020 0.14 210,315,400
05/11/2020 0.125 157,969,200
04/11/2020 0.115 170,114,300
03/11/2020 0.10 22,745,700
02/11/2020 0.10 15,774,400
30/10/2020 0.105 8,089,700
28/10/2020 0.12 653,000
27/10/2020 0.12 3,567,700
26/10/2020 0.115 2,413,300
23/10/2020 0.12 3,333,300
22/10/2020 0.13 6,231,200
21/10/2020 0.13 8,978,900
20/10/2020 0.14 4,131,700
19/10/2020 0.14 7,777,700
16/10/2020 0.14 7,777,700
15/10/2020 0.15 3,656,000
14/10/2020 0.15 14,174,900
13/10/2020 0.16 3,426,000
12/10/2020 0.155 13,841,200
07/11/2020 6:28 PM
stockraider Very powerful rally coming for netx-w mah...!!

Netx will breakout from present consolidation 13.5 to 14.5 sen soon towards elevated level of 15 to 20 sen soon.

As usual the warrant will magnify this potential gains towards 8 to 12 sen loh...!

Your gain is more substantial with warrant if u hentam kuat kuat at 4 to 4.5 sen mah...!!

Always support the house or insiders...u will have the advantage like Raider loh..!

Master the insider skills bet with the insiders & not against them in Netx loh...!!

The management already put in Rm 35m RI excess in netx...that will trigger buy & u should follow buy mah....!!

U CAN BE PANLAI TOO MAH...!!

IF U BUY NETX B4 IT SHOOT UP HIGH HIGH ABOVE THE ROOF MAH..!!

IN ADDITION VERY SAFE WITH MARGIN OF SAFETY MAH...!!

VERY SMART MOVE TO BUY NETX LOH...!!

NOT LIKE DINOSAUR SOHAI 3iii N HIS BUDDIES SOHAI NAYSAYERS MIKE, SHOOT, SCENERY LOH...!!

THEY ARE PONDANS CHICKEN....GOOD FOR NOTHING LOH...!!

SEKARANG NETX CASH RICH NET CASH PER SHARE 15 SEN & NTA 23 SEN V SHARE PRICE 14 SEN LOH....!!

VERY STEADY...VERY SAFE....VERY BEST LOH...!!

MESTI BELI LOH....BIG MARGIN OF SAFETY LOH...!!

Posted by Victor Yong > Nov 7, 2020 4:53 PM | Report Abuse

Too strong the tsunami in volume, traders yang negatif rugi saja :). Big Dana sapu, tiada dapat stop it

Date Close Volume
06/11/2020 0.14 210,315,400
05/11/2020 0.125 157,969,200
04/11/2020 0.115 170,114,300
03/11/2020 0.10 22,745,700
02/11/2020 0.10 15,774,400
30/10/2020 0.105 8,089,700
28/10/2020 0.12 653,000
27/10/2020 0.12 3,567,700
26/10/2020 0.115 2,413,300
23/10/2020 0.12 3,333,300
22/10/2020 0.13 6,231,200
21/10/2020 0.13 8,978,900
20/10/2020 0.14 4,131,700
19/10/2020 0.14 7,777,700
16/10/2020 0.14 7,777,700
15/10/2020 0.15 3,656,000
14/10/2020 0.15 14,174,900
13/10/2020 0.16 3,426,000
12/10/2020 0.155 13,841,200
07/11/2020 6:30 PM
stockraider Remember With Rm 126m to Rm 131m net cash in Netx with the RI completed ,u can find big opportunity mah...!!

In addition there is a bigger skin in the game, where management confidently buyout netx & had put in rm 36m of its own hard own money to be the new substantial shareholders loh...!!

Everything is reset for Netx, it is the beginning of a New Era & a new prosperous technology NETX Mah....!!

Very Bullish scenario mah...!!
07/11/2020 6:30 PM
stockraider YES BIG INTEREST ON NETX MAH...!!

NETX BENEFITED FROM;

1. HIGH GROWTH TECHNOLOGY BUSINESS
2. HIGH MARGIN OF SAFETY DUE TO STRONG NET CASH
3. AFTER CONSOLIDATION THE SHAREHOLDING STRUCTURE VERY STRONG LOH!


Posted by Good123 > Nov 7, 2020 10:48 AM | Report Abuse

on the way back to 20sen then private placement to hongkong/china group to expand to fintech microfinance or digital banking probably.


cheap valuation , margin of safety is big. mgmt buyout to ensure top mgmt interests are in tandem with shareholders


Posted by Good123 > Nov 7, 2020 10:50 AM | Report Abuse

current price 14sen, possible to double or even triple in price few months down the road probably. better late than never.

ask your fund manager :)
07/11/2020 6:31 PM
stockraider Remember Technology business high growth sector must have some exposure when they are opportunity get it for a song like Netx mah..!
07/11/2020 6:33 PM
bursakid My EP is 2.85, I will come back and have a look at it again after 2 more QR's
08/11/2020 9:18 PM

(CHOIVO CAPITAL) KRONO (0176) - Is it Alibaba (Alibaba Cloud)? (SUMMARY)

Author: Choivo Capital   |  Publish date: Tue, 3 Nov 2020, 12:03 PM


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

(CHOIVO CAPITAL) KRONO (0176) - Is it Alibaba (Alibaba Cloud)? 

 

 

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

Overview

A few hours ago, a friend updated me on this information relating to KRONOLOGI (Kronologi Asia Berhad), a company I’ve had at the back of my mind for some time.

 

KRONOLOGI had won an exabyte-size cloud hyper-scale supply and managed services contract in China. It was by a market-leading web search, online community and artificial intelligence services provider. And according to the CEO, Edmond Tay, “Involves China’s largest cloud hyper-scale infrastructure for cloud-based data archive, long-term data preservation and retention services”

 

They did not disclose the identity of the Chinese entity. But this sure sounds like Baidu or Alibaba.

 

 

 

 

Brief Background of KRONOLOGI

As im not done with my analysis, i will only provide a summary for now.

 

KRONOLOGI is an Enterprise Data Management (“EDM”) company.

 

They provide both the hardware (servers etc) and the software needed to retrieve, compute, store, archive and backup data for medium sized companies, or companies who are not keen on taking on the large minimum costs that is charged by the top tier companies like Oracle, as well as provide yearly maintenance and service.

 

In the last few years, they’ve started to also offer a PAAS model, where you pay as you use, based on your capacity. This is because many customers do not want to have physical servers in their offices, nor do they want to incur the capex cost.

 

However, this is very good for KRONOLOGI as it results in much larger profits over the long run. There is a reason why Microsoft prefers for people to sign up for a Office 365 subscription versus selling you Microsoft Office outright.

 

 

 

 

Acquisitions (Expanding Reach and Capabilties)

Unlike most companies listed in Malaysia, KRONOLOGI makes use of the benefits of being publicly listed, that is to use their shares to buy other companies at reasonable prices, allowing them to grow their reach and capabilities much faster.

Over the years, they have acquired these companies using a mixture of cash and shares.

 

2019: Sandz Group

Price: RM75m

Structure: RM5m Cash, RM70m in Shares (RM0.5665 per Share)

Valuation: RM6.3m (USD1.5m) yearly profit (12x Price-Earnings)

 

2018: Quantum China Limited (16.67% Ownership)

Price: RM12.6m

Structure: RM12.6m Cash

Valuation: RM60k profit (Profit grew 600% to RM375k in 2019. This indicates contracts already baked in upon acquisition, just not yet materialized)

 

2018/2017: Quantum Storage (Hong Kong) Limited

Price: RM45m

Structure: RM5m Cash, RM40m in Shares (RM0.98 per Share)

Valuation: RM5m (USD1.2m) yearly profit (9x Price-Earnings)

 

2016: Quantum Storage (India) Pte Limited

Price: RM26m

Structure: RM15.2m Cash, RM10.8m in Shares (RM0.1941 per Share)

Valuation: RM4.1m (USD1.0m) yearly profit (5x Price-Earnings)

 

The biggest concern of these acquisitions is that because they (other than the Sands acquisition) are often related or owned by the Directors.

 

This was due to Kronologi being listed/born on the Malaysian public market in in a different way from most. In their case, a holding company was first created, and their then largest company injected into the holding company to be listed.

 

In the subsequent years, the management wanted to consolidate all their companies into the public company, and so we have the above acquisitions.

Now, when it comes to public companies acquiring companies related to the management, there are naturally some misgivings towards the company, as there is the fear that the management is using the public company to bail out their private holdings.

 

However, as we can see here, post acquisitions and consolidation of their businesses, the Revenue, Profit and Estimated Operating Owners Earnings have grown consistently every year.

 

Their profit in 2020 fell mainly due to one of their larger customers being from one of the largest Airports in Asia (with this China contract, this point is moot).

 

So, at minimum, we can say that the probability that acquisitions are truly accretive in terms of reach and capabilities is quite high.

 

And to be frank, the valuations they paid to acquire these companies is more than fair.

 

Where else do you get to acquire companies in fast growing industries like datacentres for 5-12 times earnings?

 

 

 

The Proof -  The Alibaba (or Baidu)

Contract

Having said that, despite the nice table above which showed consistently increasing revenue and profit post acquisitions, that is in my opinion insufficient, as the time period is too short, and the real reason for the acquisitions is in order to be capable of taking on the really big contracts.

 

And this brings us to the China contract that they just obtained. For one, this is a CONTRACT, not a Memorandum of Intent (Which means nothing).

 

 

Given this pandemic, the data centre business is expected to go through an explosive growth period, as companies around the world digitalize.

 

And China will be growing especially fast. They have started speeding up the construction of their data centres. Baidu have unveiled plans to have more than 5 million intelligent cloud servers by 2030.

 

And Alibaba is going next level by announcing plans to spend 200 Billion Yuan or (USD28 billion) to build hyperscale data centres in China. They just finished 3 of them this year, with 10 coming in the next 2-3 years.

 

And KRONOLOGI just got a contract for one of them.

 

KRONOLOGI is a company run by Singaporeans who have the capability to provide services to TEMASEK. I am fairly certain they will do a good enough job with this contract to justify getting a few more of these contracts. And given the speed at which companies like Baidu or Alibaba is moving, these contracts should also be very juicy, as they will be focused on providers who can do a good job, not so much on price.

 

 

Target Price / Valaution

One of the difficulties in companies like these, is that it’s often not that easy to put a price on them.

 

If this turns out to be the start of something amazing, you are likely to severely undervalue the company. If it turns out horrible, you get WeWork etc.

 

Having said that, given KRONOLOGI’s track record, I think they have a good chance are turning out well.

 

 

Given the new contract, i think there should be an increase in estimated operating earnings of RM18m (RM27m, less maintenance Capex of RM9m) in 2019.

 

To be very conservative, I’m only going to increase projected earnings by 10% to RM20m.

 

Given that this company grew Estimated Operating Owners Earnings to from RM9.2m to RM26.9m, as well as the Alibaba/Baidu data centre contract, I think a PE Ratio of 25 times is appropriate. For the record, most data centre companies are either 40-50 times Earnings, or 20-40 times Revenue.

 

Having said that, I think with this contract, they are likely to break their previous record high profit, and thus break their previous high of RM1.2 as people start seeing it as the good company in fast growing industry.

 

 

 

 

 

And, One Last Thing.

Is it priced in?

 

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its pre COVID price of RM1, despite having made a core operating profit in Q2, having obtained the Alibaba/Baidu data centre infrastructure contract, and having good financial structures and a net cash position.

 

In Q1, the company recorded a loss due to an impairment to PPE of RM11.6m taken out of prudence. As they had new infrastructure coming in, and they decided to replace their current PPE early to take advantages of the new PAAS demand coming. A portion of their old infrastructure was used by Hospitality, Airport and Airline customers, making Q1 an opportune time to replace them.

 

In Q2, like most companies in the world, they were affected by the pandemic, as well as higher air freight cost for their components, but still made a profit. This profit would likely increase as freight cost fall over time, and when the Alibaba/Baidu contract starts.

 

Based on the current price, I think most of the facts as well as the Alibaba/Baidu contract written above have not been priced into the stock at all.

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

 

 

Labels: KRONO
  6 people like this.
 
speakup choivo still around?
thought arrested by SC for giving out stock recommendations without license
05/11/2020 9:54 AM
enigmatic The company really is Baidu.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3104979
13/11/2020 6:30 PM

(CHOIVO CAPITAL) POS (4634) – The Next Proton (Except you can buy it directly)

Author: Choivo Capital   |  Publish date: Sat, 31 Oct 2020, 8:50 AM


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

(CHOIVO CAPITAL) POS (4634) – The Next Proton (Except you can buy it directly)

 

 

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

“Never Waste a Good Crisis.”

Winston Churchill

One thing about a crisis, is that they change consumer habits, speeding up both the demise and growth of different industries.

 

As this is Bursa Malaysia, when one can only go long and not short, i’ve spent quite sometime the last 1-2 months looking for companies whose growth have sped up, or whose business is poised for a turnaround as a result of this crisis.

 

And most importantly, companies whose valuations are still logical.

 

And this last criteria of logical valuations is particularly hard to meet, especially these days, when every glove, plastic, healthcare stocks are flying through the roofs.

 

Last week, I think I’ve found a fairly compelling idea.

 

I’m still in the process of doing a very deep analysis on the company and am planning to do a full write up.

 

However, it appears that doing so will take much more time than expected.

 

So here is a summary instead, which i think is more than comprehensive enough, and conveys most of what I’ve discovered and think about the company.

 

 

The Online Delivery Boom

One industry I thought should do well during this crisis, is the companies in the Delivery Industry, whether they are a “Last Mile Provider” or “Warehouse/Integrated Logistics Provider”.

Larger amounts of online deliveries (number of parcels processed per day have doubled from 400k to 800k according to POS Laju), should result in a drastic expansion in this industry.

I mean, even the government is sending you SMS’s to start buying things online.

 

And looking at their share prices below.

 

 

As we can see, most of them have recovered up to their pre-pandemic valuations. Some of them are also doing very well in terms of share price appreciation.

 

GDEX is an obvious candidate to benefit from this, given that their biggest business (more than 95%) is in the last mile delivery.

 

Meanwhile, companies like TASCO benefited from being linked to vaccine transportation by virtue of their cold logistics chain (they have since denied it), as well as an increase in flight freight rates which implied increased profits.

 

Or, TRIMODE who benefited from being the logistic provider of choice for most glove companies in Malaysia.

 

However, one thing that stands out the most for me, is the underperformance of POS Malaysia in terms of share price.

 

POS Malaysia, like GDEX is the most direct beneficiary of the E-commerce Boom but is a major laggard.

 

However, unlike GDEX, who has seen its share price increase 33.3% since the start of the year, the share price of POS Malaysia has instead fallen by 39%.

 

I don’t think this is justifiable, given their position as the largest last mile provider with the widest reach in Malaysia.

 

Especially since POS Malaysia have particularly strong market share among SME’s and new e-commerce businesses, which are currently the main drivers of e-commerce and likely to continued doing so in the future.

 

 

The Transformation of POS Malaysia

& Taking Advantage of a Crisis

Nobody ever said that only people in the equities market can take advantage of a crisis. Businesses can too.

So how has POS Malaysia taken advantage of this crisis?

Or more precisely, what are the things POS Malaysia have spent the last 3 years doing in order to be perfectly poised to take advantage of this crisis?

Opening an Online Portal (POS Laju Sendparcel)

On October 2019, POS Malaysia Launched POS Laju Sendparcel.

 

This is a fully online platform, which allows customers/businesses to auto generate consignment numbers easily, provide 24-hour access and fast order placements, instant pricing quotes, and drop off parcels at drop off points (they can come to you if volume is enough), and auto-calculate volume discount.

 

This is part of a 5-year transformation plan that started since 2019 (after they recorded their first loss in 2018) with the end goal of increasing efficiency by fully automating systems, and finding new sales channels (SendParcel), to push yields and enable them to increase capacity from 500,000 parcels a day to 1,000,000 parcels a day by the end of 2021 without substantially increasing costs.

 

Since it opened in October last year, they have grown exponentially (with the numbers exploding upwards due to the CMCO), and now have 86,000 users (that is a lot of users if your customer base is SME’s), and is on track exceed its initial target of RM30 million in Revenue for its first year.

 

According to the CEO, it is currently hitting 2 million parcels a month in September (this translates to around RM13.2m a month in revenue, given average revenue per parcel of around RM6.6 (RM21.7m revenue generated, 3.3 million parcels delivered from SendParcel for Oct 2019 – June 2020).

 

From barely 400k average parcels per month for the period of (October 2019 – June 2020), to 2 million packages a month for September. Utterly incredible

 

 

Creation of Fully Automated Fulfillment Centres

Currently, POS Malaysia has a courier segment capacity of 530,000 parcels a day from two parcel processing centres in Shah Alam and at KLIA2 (That excludes 78 Pos Laju offices nationwide, which double-hat as a front office to receive parcels as well as to act as mini parcel processing centres in the back of the premises).

 

As many would have noticed, the two main parcel processing centers are in Selangor.

 

As there is no other parcel processing centers anywhere else this increases processing time. For example, a package from Singapore to the receiver in Johor, needs to pass by KLIA first.

 

To make their courier segment/parcel delivery more efficient, they will be spending approximately RM340 million develop fully automated integrated fulfilment centers in the Northern region, East Coast Region, Sabah and Sarawak.

 

Their first one in Senai Airport (costing RM40 million with the capacity to process 120,000 parcels a day) will be completed in 2021.

 

These fully automated integrated fulfilment centers will enable them to do cut them processing time, and provide same day deliveries in these areas.

 

Installation of Semi Automated Sorting Systems

Over the last two years, since the new CEO have joined, POS Malaysia have installed 28 distribution centers with semi-automated sorting systems which reduce manual workload and streamline workflow for total efficiency.

 

The installation of these semi-automated sorting systems results in immediate benefits to its processing capacity and speed, where they are now able to process 60 per cent more items, bringing down the total processing time by one to two hours per day.

Drastically Increasing Personnel via the POS Rider

Scheme (Bypassing Unions)

For Q2 2020, courier volume increased 72% versus Q2 2019 from 343,000 parcels daily on average, to 590,000 parcels. Today, the daily average is 600,000 to 800,000 parcels a day.

 

To cope with this increased demand, POS Laju decided to take advantage of their POS Rider Scheme (launched October 2020), which paid their riders purely on commissions (They took in an additional 1,300 riders initially).

 

This bypasses their Unions (There is 7 Unions  in this Company), and makes these additional costs purely Variable instead of a Fixed one.

 

In addition, it also appears to be decent for the riders, many of them who have lost their jobs during this crisis.

 

If one manages to delivery 150 packages a day (basically work 24 hours a day, assuming 10 minutes per package) and works 6 days a week. One is theoretically able to hit RM10,000 per month in income (This is gross, before accounting for maintenance, fuel etc which is borne by the riders. Think GRAB)

 

This also appears to be the model POS Malaysia will be taking in the future, likely reducing their overall “all in” cost in the future.

 

 

Directly Hiring Cargo Planes

Since April, POS Malaysia have taken to directly engaging with Cargo Flight Services to supply the sudden increase in demand.  Increasing the capacity of cargo transportation from 200 tonnes a week to 510 tonnes a week.



And all this during a time when rates for planes are at close to all-time lows, from jet fuel being so cheap these days (it used to be the highest and most expensive grade), that it is even being blended and used in Ships (which typically uses the lowest grade).

Bringing Forward IT Investments

(Save Costs, Increase Revenue, Expand Bottomline)

For most companies, increasing IT investments during this period means spending money on ZOOM, Microsoft Teams, and Laptops.

 

This is not the case for POS Malaysia.

 

They have brought forward their plans to spend RM100m to digitalize their core systems, including a new track-and-trace system, to drive up revenue and service quality up while containing costs.

 

The new core systems are expected to be fully operational by mid-2020, with the peripherals and sub-systems to follow.

 

The data analytics portion will be fully online in two years. The data analytics portion is there to help them manage their resources more efficiently, for example, in terms of manpower distribution and responding to volume growth in different areas.

 

In addition, POS Malaysia are also looking to launch an app that will allow its postmen to become agents for bill payments, mobile credit reloads and other payment services that can be done online, so that they can a moving outlet for these services, increase yield per employee, and increase their own salaries.

Funding the Above – Simplify, Simplify, Simplify

(Disposal of Non Core Systems)

How to pay for the above? Right issue your ass all the way to Holland?

Well this not the POS Malaysia way.

Since the new CEO came in, POS Malaysia have taken steps to dispose partial stakes of their Non-Core Business, to business partners with the capability to run it well. Just like Proton.

  1. Divestment of 51% shares in wholly owned subsidiary World Cargo Airline Sdn Bhd (WCA) to Asia Cargo Network Sdn Bhd (ACN) via issuance of new shares in WCA to ACN for RM40m cash. This will give rise to RM63m in disposal gain. Last year, this company lost RM32m.
     
  2. Divestment of a 49% stake in Pos Aviation Engineering Services Sdn Bhd to SIA Engineering Co Ltd for a cash consideration of RM10.09 million in February 2020.
     
  3. At least one more divestment is will happen next year, and if I have to guess, it will be the Ah Rahnu pawn broker.

Finding the Right Management

For some of you who have been keeping track of POS Malaysia, and Syed Mokhtar Albukhary’s companies in general, you would have noticed quite the flurry of activity.

 

For one, Syed Mokhtar has put his daughter on the Board of Directors in his companies, from MMCORP, Tradewinds, DRB-HICOM and of course, POS Malaysia.

 

Interestingly, unlike the children of most extremely rich businessman (like the YTL daughters who seem more interested in enjoying the nice things in life) this lady appears to be quite the go-getter and have quite the CV.

 

Like many of the third-generation children, she has immaculate University Credentials, and Investment Bank experience (This can also be Top Tier Consulting Firms, or Banks), which, to be fair, is definitely something that can be bought with connections, donations or the potential of future business.

 

However, in her case, one thing really stood out.

 

She was also an external consultant for the Bill & Melinda Gates Foundation from October 2015 to May 2016, where she produced an integrated index to measure women’s empowerment and submitted a list of realistic recommendation on empowering women in various age groups.

 

Unlike, the above, this is something that cannot be bought.

 

In addition, in POS Malaysia, Syed Mokhtar changed 3 CEO’s in 2 years, in search for the right person, and most of them have very Non-GLC backgrounds, whether it was an ex Airasia C-Suite member, or people who worked for a long time in his other companies.

 

In addition, the new Chairman, Datuk Yasmin binti Mahmood, is not some political appointee or ex-government personnel who is there to warm the chair for optics. She was formerly the Managing Director of Microsoft in Malaysia.

 

Let’s not also forget, that Syed Mokthar was the person who dared to sell 49% of Proton (A company with the entire eyeballs of Malaysia on it, and deep emotional attachment for the Bumiputra’s) to a Chinese company, and have a Chinaman run it.

 

This is clearly not your typical GLC.

The Art Of Turning Weakness

Into Strength
Now looking, at the constantly down trending chart, the market no doubt seems to be thinking that the challenges being faced by POS Malaysia far outweigh the actions above taken by the Company to turn things around.

Let’s look at some of the key risk’s and challenges being faced by the company and see if this thinking is justified.

POS Malaysia have 7 Employee Unions and is

inefficient.

One thing people like to refer alot to, is the seven employee unions under POS Malaysia, and how this must mean that the company is inefficient.

 

It does sound quite reasonable, but let’s see if this is the case.

 

 

Since being taken over by DRB-Hicom/Syed Mokhtar in 2012, POS Malaysia have steadily recorded a reduction in Staff Cost % over Revenue.

 

This is from efficiencies found in the business, as well as, acquisition of DRB-Hicom’s logistics division to be integrated into POS Malaysia

 

(In case anyone is wondering, the acquisition was paid for with POS Malaysia Shares then, at RM3.3 per share. Which I think is fairly decent given that POS Malaysia shares were overvalued then)

 

However, when looking at the numbers, we must always think about the comparison to its competitor.

 

And who better to compare against, other than GDEX.

 

The second biggest last mile provider in Malaysia, and because it is run by Chinese and have Singaporean links, is widely seen to be highly efficient.

 

As we can see from here, this is not really the case.

 

In fact, POS Malaysia staff cost as a percentage of Revenue, is lower than that of GDEX.

 

And even if we were to ignore the acquisition of POS Logistics in 2016, it does not change the fact that GDEX’s staff costs % have been steadily increasing over the years, while POS Malaysia’s have been staying even or reducing.

 

Why is this the case? Which brings us to the second point.

Mail Volumes have seen an accelerated decline

As it is widely known, around the world, mail have seen an accelerated decline over the years.

And this is no exception for POS Malaysia, from 2014-2016, total volume of mail has fallen from 1.026 billion to 893 million per year, for a CAGR of -7%. This has accelerated and from 2016 to 2019, this has fallen from 835 million per year to 655 million per year.

 

And the reason is obvious, with the advent of email, the internet, the mobile phone etc, the need for physical mail have fallen drastically.

 

Historically, the biggest users of mail with 95% share of customers, is commercial companies, such as banks etc who use it to send physical bank statements.

 

However, today, most people are getting their statements via email, which reduces the usage of physical mail. This along with other similar factors, resulted in the reduction of mail volume.

 

Historically, sending mail is a high volume, low value, low margin (if any) business, whose selling prices is capped by the government.

 

Except, cost escalates every year from both inflation, and the government’s requirement for increased coverage area (as they are a Universal Service Provider).

Since 2010, these rates have not been adjusted until 1 February 2020, when POS Malaysia got government approval for a postage rate increase for registered mail, commercial mail and small parcels below 2kg.

 

Stamp Rates (Commercial Mail): RM0.60 increased to RM1.30 (most companies use this when sending out mail)

Commercial Private Letterboxes: RM150 increased to RM 200 per year.

Postage of Commercial Registered Mail: RM2.20 increased to RM3.10

Postage of Non-Commercial Registered Mail: RM2.20 increased to RM2.40

 

As explained earlier, one of the roles of National Postal Services companies like POS Malaysia is their “Universal Service Obligations” to serve every corner of the country.

 

And currently, there is no profit in providing this service, it is a cost.

 

This increase in rates and is expected to contribute an additional RM100 million to RM150 million in pure net profit per year to POS Malaysia and help to reduce the cost of providing this service significantly.

 

And so, we must ask ourselves, is the reduction in usage of Mail a bad thing to POS Malaysia?

 

The answer is surprisingly not so simple.

 

Historically, “Mail” and “Courier/Poslaju” are two very distinct divisions. They often have their own sorting center, routes, delivery staff, and delivery vehicles etc.

 

However, as POSLAJU grew to represent an increasingly larger percentage of revenue and the “Postal” segment, POS Malaysia have started to take steps to merge these operations and consolidate them.

 

This initiative started somewhere around 2012 when DRB-Hicom took over and have only accelerated since then.

 

If you were to check with your typical POS Malaysia delivery person today, chances are their items consist of both Parcels and Mail.

 

Now, on average each piece of “Mail” gives slightly over RM0.70 of revenue, while each “Courier” on average gives about RM10 or so of revenue.

 

Given that operations are now consolidated, would it be better to drive 5km to deliver one piece of mail for RM0.70 (on average) or to deliver a Parcel which gives you RM10 (on average)?

 

Of course, there is the matter of sizing. However, I think that pales in comparison to the staff cost and fuel cost etc involved.

 

With their consolidated “Courier” and “Mail” segments, the reduction in “Mail” items and the increase in “Courier” items means that, POS Malaysia’s Postal operations is transitioning upwards in the value chain from low value items, to high value items that include tracking.

Too Many Outlets

Now, in the point earlier, I showed that the revenue of POSLAJU/Courier segment have been increasing very strongly.

 

However, when analyzing a company, we must look at the numbers not in isolation, but in the context of the industry and other players.



And who best to compare to, then the second taikor of the Malaysia courier industry, GDEX.

 

 

Now what does these numbers mean?

 

Who grew faster?

 

 

 

 

 

 

Well, whether on a 3 Year, 5 Year or 10 Year basis. At every level, POS Laju have grown faster than GDEX.

 

How can this be the case?

 

How a Malaysian “GLC” beat a private company that is run by both Chinese and invested by TEMASEK (Singapore’s National Fund) and SingPost (Singapore National Postal Company)?

 

The answer is simple.

 

By virtue of being forced by the government to be a Universal Service Provider, this meant they needed to have a nationwide presence.

This network and coverage is something that was built up by POS Malaysia over its more than 100 years history.

 

And it is also the reason for their absolute dominance in the Consumer or SME market which led to their faster growth rate.

 

Now, for many of us, when we get a parcel from Shopee, Lazada (for example) these days, it would be from J&T Express, GDEX and POS Laju etc.

 

It would be fair to say that the smaller players, especially if combined, hold more market share in these large e-commerce businesses.

 

Now, business with large e-commerce players is something most would welcome due to the large volume.

 

But the fact of the matter is, businesses like this is not that lucrative. Because these business have have very strong negotiating power, and you can bet that every year, they will find a way to chop you on the price.

 

Now, let’s talk about the consumer of small SME market instead.

 

Let say you have a package to post, its very easy to find a POS Laju outlet, where on earth do you find a GDEX outlet or a J&T outlet?

 

These outlets do not exist (you can try to find a “Mail Box Etc” outlet, but these are far and few in between).

 

And if you are a standard consumer, or just started your business due to this pandemic, chances are POS Laju will be the first thing on your mind for delivery options, and you will be paying the list price.

 

In addition, E-commerce is largely driven by small businesses. The top 100 largest ad spenders on Facebook (less than 0.1% of business users), constitutes of only 17% of their revenue. It isn’t the giant businesses who will make up for the bulk in online spending.

 

It is the SME’s who do online Facebook live shows, or have a small e-commerce stores etc like these who will drive e-commerce.

 

And this E-Commerce trend is only going to be accelerated by this pandemic and keep booming upwards in the coming years.

 

And it is far easier and cheaper to maintain a network of about 1,000 contact points to grab this Consumer/SME market, than it is to build one from the group up.

 

When I was studying POS, I could not help but notice the similarities between POS and Intel (back in the 1974-1984).

 

Back in 1974, Intel had 82.9% market share in DRAM, and this contributed more than 90% of their revenue.

 

Over time, the Japanese improved, and obtained production yields of around 40% higher than the US companies. They then flooded the market and turned DRAM’s into a commodity.

 

Intel suffered. And by 1984, their market share was just 1.3%.

 

Now, from 1974 to 1984, their Microprocessor division have been growing to become a large part of the business, and some of their middle managers have also quietly made the decision to adopt a new process technology which inherently favored Microprocessor rather than DRAMS.

 

And in 1984, at this inflection point, when facing the decision to on whether to throw more money into the DRAM blackhole, or to leave that business (it would be equivalent to Ford leaving the car business) and go all in into Microprocessors.

 

They picked Microprocessors, and until recently again got back a 90% market share.

 

Like Intel back in 1984, looking at the rise of ecommerce and the boom in the parcel business, POS Malaysia is currently at an inflection point.

 

And they have chosen to go all in, into the courier business and optimizing every inch of it.

Projected Profit for Q3 2020?
And so, I can hear the questions already.

“OK, it looks like it has a good chance of turning around this year.

You know, maybe the last two years results are not so good as it was still the gestational period of installing semi-automated sorting systems, and starting the online platform, and there was no rate increase then.

But what is the proof that all this is working?

Show me the numbers!”

Well, when POS Malaysia changed their CEO to Syed Md Najib in 2018, they embarked on a 5 year transformation plan, starting 2019, with plans to breakeven by 2021.

 

In a recent interview on 20 September 2020, he said that, due to the increased postal revenue from its SendParcels business as well as measures to increase the efficiency of its operations.

 

The original plan to breakeven for the year by FYE 2021, have been brought forward a year to FYE 2020.

His exact words are:

“A lot of our forecasts and plan had been expedited because of the Movement Control Order (MCO).

It would be fair for me to say that our plan has been fast-forwarded by about a year owing to the increase in demand for SendParcel’s services during the MCO period.

Originally, we forecast to break even [for the year] by the end of FY2021.

But now, we think we can hit break-even point by the third quarter and be profitable by the fourth quarter.

If the trend of increased demand for e-commerce continues, we are hopeful of reaching this target”
 


Now, this seems like a very bold statement to make, especially for a Company that made losses since Q2 2018.

 

In addition, for the year-to-date Q2 2020, POS Malaysia have made a net loss of RM66.75 million.

 

In order to breakeven by Q3 2020, it needs to make around that RM66m in profit.

 

Now based on the CEO’s statement above, he appears to be banking on the “Postal Segment” (their biggest segment) to turnaround and post profits.

 

Is this possible?

 

Let’s look at the Postal Segment results for Q1 and Q2.

Now, the above numbers are “Year to Date”. This means they are cumulative and not for Q1 and Q2 separately.

 

And you can see something a little strange here, the YTD Revenue for 30 June 2020 (RM959.5m) is higher than YTD Revenue for 31 March 2020 (RM422.1m), but the YTD Loss is lower.

 

Breaking it down into the individual quarters, and

 

Firstly, we exclude the additional revenue from the increase in mail rates (which was projected to be around RM100-150 million a year).

 

This is because we want to estimate the increase in mail volume and revenue due to this pandemic, and not have the data distorted by this increase in rates.

 

We estimate this at RM10m per month.

 

From here, we can see that Q2 actually recorded a profit of RM4.2 million, versus the RM49.9m loss in the previous quarter.

 

As this segment has high fixed costs (but low variable costs), we need to calculate the Gross Profit Margin of the Additional Profit, and the Additional Revenue for Q2 vs Q1.

 

And from above, we can see that from Q1 – Q2,

 

  1. Courier Revenue and Volume have grown by RM105.3m or 26.2%
  2. Courier Profit have from increased by RM44.0m or 137%
  3. Gross Margin on Additional Revenue is 41.8%

And using the above Revenue Growth Rates for Q2 and the Q2 Gross Profit Margin on Additional Revenue, Projected Revenue and Profit for Postal Segment for Q3 alone is RM640.3m and RM59.7m.

 

Now, they are three other segments in POS Malaysia, “Aviation”, “Logistics” and “Others”. How would these perform?

 

  1. Aviation: This division is going to be impacted by planes being grounded etc, as the previous two quarters have shown. However, POS Malaysia also have their own planes, and airfreights rates have increased very strongly the last few months. And is evidenced by TASCO’s Q2 profit quadrupling from RM2.6m to RM10.7m.
     
  • Logistics: Given the strong demand for logistic services recently this division should do fairly well, or at least better than the last quarter.
     
  • Others: Revenue from here come mainly from their pawnshops. Whose profits have increased very strongly. They made RM8.9m profit in Q1 and doubled this to RM17.6 profit in Q2.

 

All in all, it looks like the turnaround is real, and there is a good probability that POS Malaysia is going to breakeven for the year 2020 on Q3.

 

And one last things, since no analysis is complete without a reference to Vaccines or Covid-19.

 

To put the cherry on top, since early 2019, POS Malaysia have been doing deliveries of medication, lab samples and the like for some government hospitals.

 

This means they have the capability to distribute the vaccine as well.

 

Given the fact they initiated the POS Riders initiatives, which helped the government to reduce joblessness and increase the income of the people, who do you think the government will give the COVID 19 distribution contract to?

 

I think it’s going to be POS Malaysia.

Target Price
And so, to calculate our target price.

To be conservative, we are just going to assume that the other divisions combined make a grand total of zero profit, and only use the “Postal” numbers.

 

Make no mistake, these growth in earnings are not a one-time show.

 

This turnaround and success happened when the 2 years of hard work from POS Malaysia and the new CEO Syed Najib to make the company more efficient, automated and increase sales channels, meets an unprecedented opportunity, ie the COVID 19 crisis which caused an E-Commerce boom.

 

POS Malaysia and Syed Najib are the phrase “Never let a good crisis go to waste” personified.

 

Again, target price is dynamic, as people realize that this company is turned around, it should go to around RM1.5.

 

When Q3 comes out and people see proof of the turnaround, it will go to RM2.1.

 

As people realize POS Malaysia have turned around and is going to record increasing profits due to the accelerated growth of E-Commerce, there will be significant additional price appreciation.

 

In addition, whether got MCO or not MCO, COVID or no COVID, POS Malaysia is expected to continue growing at an accelerated pace.

 

Don’t forget, POS Malaysia was a RM5 company back in 2018, before the new government came in.

 

And it was a RM3 company when the new CEO first came in, and it is a far better and far more profitable company today than it was then.

And, One Last Thing
Like my LCTITAN pick, I don’t like investments or trades where all the upside is priced in, like the current glove counters (You think Covid-19 will stick around forever? You think nobody will open new factory?).

There is a reason why despite making record profits, share prices went down instead.

Think again, why on earth would Top Glove pay out a fat dividend, and then plan to raise more money by selling shares on another listing in Hong Kong?

I like my investments, where they will do well whether COVID 19 is around or not.

Fact of the matter is, even after COVID 19, people are still going increasingly do their shopping online as it is just a better solution. 

 

And so, we must ask ourselves, is it priced in? Has this stock been fried?

Like my previous pick, LCTITAN, this stock is 
pretty damn clean.

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM1.5, despite being projected to make more money in Q3 2020.

 

Clearly the market still thinks this is some random GLC that is inefficient and going to suffer (or even potentially go bankrupt like MAS) for the next 1 – 2 years.

 

It had unfortunately shot up a bit due to the SMS from the government, which resulted in people turning their eye to the logistics industry.

 

However, I don’t think most people understand the full scale of how much better POS is doing to do. Most of the facts I have written above have been priced into the stock at all.

 

As always, buy and sell it at your own discretion. Determine for yourself whether this is a trade or investment.

 

Target price is dynamic. Set your own based on your own understanding of the situation, your sizing and your risk assessment/tolerance.

 

All the best and good luck.

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram:  https://t.me/Choivo_Capital

Labels: POS
  5 people like this.
 
VenFx Give 1 like for Pos article
31/10/2020 10:12 AM
CharlesT certainly worths a look
31/10/2020 10:40 AM
lcwin hahaha.. I realised you deleted my comment by reposting this again. Trying to con retailers is bad Karma. Anyway I won't comment further as you will delete it so for Investors beware of this Guy....Cheers
02/11/2020 10:11 AM
Slc1 In bursa we have to 'saya jaga saya' motto or else you will see all your money disappeared.
02/11/2020 10:23 AM
MohdHafiz Joker come con your money. please dont even read and follow. he post and he ady bought u all help him make money
05/11/2020 5:16 PM
MohdHafiz Icwin is correct. he will rot in hell. karma guy. his project of lctitan 8 bucks. where is it.
05/11/2020 5:16 PM
Choivo Capital lcwin,

if i want to, i can just make it so cannot post comment.

I deleted and reposted to ensure it gets tagged to the stock page.

Who are you btw? You're not that important you know.
05/11/2020 6:18 PM
Choivo Capital If you wake up, nothing to do and want to post comment. Go post all you want.

All my post allow people post comment one.
05/11/2020 6:19 PM
Fear Trend haha... lame choivo is at it again. please comment lctitan 300 million profit my dear... post exaggerate thing to con ppl... bossku
05/11/2020 6:38 PM

(CHOIVO CAPITAL) LCTITAN (5284) – An Update on Naptha, Polyolefin & Butadiene Prices

Author: Choivo Capital   |  Publish date: Mon, 19 Oct 2020, 9:49 PM


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

(CHOIVO CAPITAL) LCTITAN (5284) – An Update on Naptha, Polyolefin & Butadiene Prices

 

 

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

Well, since my last article on a call for LCTITAN on 26 September 2020, the share price of LCTITAN have increased from RM1.96 to RM2.51, a gain of RM0.55 or 28%. For those who have taken action the moment the summary was posted on I3, they would have been able to buy it at RM1.81, for a gain of RM0.70 or 38%.

Now, if you’ve read my article, you would know that the key to the explosive earnings for Q3 and Q4 lie mainly on 3 factors,

  1. Current and Future Naphtha Prices
  2. Current and Future Polyolefin & Butadiene Prices
  3. Sentiment and How much is priced in?

Lets look at each factor.

 

Current and Future Naphtha Prices

Since my article was written, Naphtha prices have increased slightly from USD353 to USD383. However, they have since gone on a downward trend.

Having said that, prices are still significantly lower than the 2016 averages (when they recorded all time high profits).

With that in mind, and coupled with Polyolefin and Butadiene prices holding steady or increasing since i last wrote (i will elaborate on this next), Q3 and Q4 are likely to record an explosive growth in earnings, the only question would be the quantum of the its profitability.

Studying the development in oil prices (which correlate tightly with Naphtha prices), its difficult to predict where prices would go in the next few months within 5% upwards or downwards.

Having said that, i think my thesis still stands.

Currently, demand for oil have fallen structurally by about 10-12% due to lower transportation and airlines still being unable to fly internationally.

Supply have also naturally fallen due to shale rigs in the US going bust, and most of the producers cutting productions to control prices. OPEC+ (actually just Russia and Saudi Arabia) have reiterated that their current production cuts (which should prevent oil prices from falling), but there are others like the US who are now restarting oil production.

In addition, they are countries like Kuwait, who rely very much on the sale of crude oil, to meet their national budgets.

The current oil crisis have resulted in a downgrade of Kuwait’s bonds, by Moody’s due to liquidity risk, and as of today, Kuwait are actually unable borrow money in the bond markets, and are forced to dip into their general reserves.

I imagine their current situation would mean that if prices every got a little higher, they would open the taps secretly to get some extra cash. This would apply to a lot of other oil producing countries. Malaysia for one is not cutting output.

If i have to make a guess, i think oil prices should remain range-bound, absent a resurgence in demand, something that looks quite unlikely in the next few months especially with COVID-19 cases increasing.

 

 

Current and Future Polyolefin & Butadiene Prices

On the other hand, Polyolefin and Butadiene prices have largely stayed even or increased somewhat due to supply constraints in the US, as well as Hurricane Laura knocking out certain refineries and Hurricane Delta that happened last week, which cut out the power.

One thing i think many are concerned about is, how will any future lock downs affect the usage of plastics, especially in terms of packaging.

Well, one reason for the strong resurgence in plastic prices was due to these lock-downs creating a strong demand for food delivery and online deliveries which massively increased the demand for plastics.

Here are some of the news flow when it comes to plastic prices, as well as its supplies and demand currently.

Weekly Resin Report: Spot Materials Remain Scarce
Oct 14, 2020
Processors scrambled to secure material to fill supply gaps, add to inventory as a buffer against additional supply-chain disruptions…

Weekly Resin Report: Spot Resin Prices Hold Flat, But at Elevated Levels
Oct 07, 2020
Resin prices were flat last week, and trading did not skip a beat as the calendar flipped to October and…

Weekly Resin Report: Processors Face Thinning Supplies and Escalating Prices
Sep 30, 2020
Heavy demand from both processors and resellers came up against insufficient supplies last week caused by…

Weekly Resin Report: Supply/Demand Imbalance Continues
Sep 22, 2020
Widespread damage and ongoing Louisiana power outages in the wake of Hurricane Laura kept some polyethylene and polypropylene producing plants from restarting. The production shortfall has become more evident and the supply/demand imbalance more…

For a more detailed read, you can go to this website PlasticsToday and do some reading.

Sentiment and What is priced in?

Now when it comes to every trade, we have to ask ourselves how much of this is priced.

At the current price of RM2.51 or RM5.7 billion; for a company with RM4 billion in net cash, and expected to make about RM300m for Q3 and Q4, i have to say not too much.

The last time it Naptha prices were this low, LCTITAN was selling at RM6.5 per share.

Now i have to admit, prices for Polyolefins and Butadiene was higher then, and so i think a reversion to mean target of RM4 is more likely.

Of course, quite a few things needs to happen for this to happen.

For one, many investors and fund managers are still slightly apprehensive about LCTITAN earning potential given the missed targets previously.

And so, they likely only bought their initiating positions and are waiting for the Q3 results to come out before taking up the rest.

And secondly, prices of Naphtha needs to remain at current levels or lower, while prices of Polyolefins and Butadiene need to remain at current levels of higher for the next 2-3 months till 31 January 2020 to result in earnings to maintain or increase for Q4.

And of course, if a result comes, rising sentiment and increasing prices have a way of reinforcing positive feedback loops, taking things to the next levels.

And as always, target prices are dynamic, and dependent on your own risk assessment and trade sizing.

So you will have to think for your own target price given the information provided in my previous article and this one, along with whatever additional information you found on your own.

Good luck.

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Disclaimers: Refer here.

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Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

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Labels: LCTITAN
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19/10/2020 10:41 PM

(CHOIVO CAPITAL) LCTITAN (5284) Five Magic Words - Rising ASP’s, Falling Costs, Hurricane (or is it Butadiene?)

Author: Choivo Capital   |  Publish date: Sat, 26 Sep 2020, 8:36 AM


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

(CHOIVO CAPITAL) LCTITAN (5284) Five Magic Words - Rising ASP’s, Falling Costs, Hurricane (or is it Butadiene?)

 

 

 

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In the last 1-2 weeks, I’ve been studying up on the convenience store sector.  One thing led to another, and I found myself watching this video of a 
guy eating delivery hot pot with friends.

The thing that surprised me the most, was the sheer number of plastic containers being used. Its utterly incredible. Every single piece of meat and vegetable had its own plastic containers.

 

 

 

 

Now, one of the things I’ve been thinking deeply about this crisis, is how consumer spending and behavior have changed.

During a crisis, certain trends pick up speed, and other trends may fall completely. And some of these trend changes may very well be permanent, and thus affect valuations of many companies very differently.

The one trend that i think this COVID19 crisis have helped gain serious momentum in, is the online food delivery trend.

Currently, more people are buying food via online deliveries, and even the older generation who often still uses Banking Cheques, have embraced the use of GrabFood and Foodpanda. And all these food deliveries use up a lot more plastics.

This is a trend that I think will persist in a positive upward trajectory over the next 10 - 20 years because it just works, and the convenience is something people will pay for. The only problem previously was gaining traction fast enough, which COVID19 just helped solve.

And so, I decided to study the plastics industry.

 

And I think I have found, what I consider to be a top tier short to mid-term trading opportunity. At current prices, I also think it also makes a decent investment.

 

 

Overview

So, the question here I’m sure many want to ask.

Why LCTITAN?

Why not a plastic packaging company like SCGM, SCIENTEX and DAIBOCHI etc?

 

 

Well, it’s simple.

SCGM and many of the plastics packaging companies have run up so far ahead, selling something like 30PE on record earnings, or all time high prices due to the strong demand in plastics.

And because of this, i don’t think they make that good investments or trading opportunity anymore as most of it is priced in.

However, unlike the plastic packaging industry, the plastics focused petrochemical refining industry did not.

In addition, for these industries, they have a far better catalyst.

Because in the case of LCTITAN especially, their raw material cost (Naphtha) has fallen significantly during this period.

In addition, like the previous refinery run, a hurricane has struck in the petrochemical refinery complexes in the US, decimating supply at a time when demand is rising very strongly.

 

 

PCHEM VS LCTITAN

In the Plastics/Resin Petrochemicals Refining market in Malaysia. They are only two real suppliers. PCHEM and LCTITAN.

Now, both have had their share prices beaten down severely during this COVID-19 pandemic.

So why LCTITAN?

They reason for it is this.

The first, is that in terms of Revenue, plastics contribute approximately to each respective company,

 

PCHEM: 60%

This is their “Olefins and Derivatives” segment, a large portion of it is plastic resins/polymers, but it also includes other Olefins and other basic and high-performance chemicals. Which means the real plastic resin/polymers contributions is significantly smaller than the stated 60%.

In addition, the main feedstock for PCHEM is Methane and Ethane (basically Natural Gas), whose prices have increased during the year, by about 5%.

 

LCTITAN: 80%

This is their “Polyolefin products” segment. It consists of ONLY plastic resin/polymers.

In addition, Unlike PCHEM whose feedstock cost have increased 5% this year, LCTITAN’s feedstock cost (which consist of more than 95% of their costs) which consists of Naphtha, which have FALLEN 34% since the start of the year. This reduces their cost very significantly.

 

 

What does Lotte Chemicals make?

Now, as said earlier, 80% of their revenue comes from “Polyolefin products”, which is basically “plastic”, and when it comes to “Plastics”, there are two main categories.

 

Polyethylene (“PE”)

 

There are 3 main categories for this that is produced by LCTITAN, these are HDPE, LDPE and LLDPE. What are these used for?

 

 

To put things simply, these are softer types of plastics, that is used mostly for plastic bags, packaging industry, food packaging etc 

 

 

Polypropylene (“PP”)

 

 

To put simply, this is a harder kind of plastic with more structural integrity.

It is mainly used for plastic bottles, cups, car parts, solar panel covers, plastic spoons etc. Basically, any and everything else that uses plastics.

 

 

LCTITAN is the biggest (if not, the only) manufacturer of Butadiene in Malaysia with its 100,000 metric tonne production capacity and a supplier of Synthomer, the only manufacturer of Nitrile Butadiene Rubber in Malaysia.

 

Butadiene is the key ingredient in the production of nitrile gloves and prices of Butadiene have doubled since Q2 due to the strong demand of nitrile gloves worldwide.

 

 

For a more comprehensive picture, you can refer to this slide by LCTITAN.

 

 

In addition, the increased usage of Face Shields, Throat Swabs, Personal Protection Equipment etc have also increased the usage of PE’s and PP’s globally.

 

As you see in the slide below, PP’s are a key raw material of these items.

 

 

 

 

Catalyst and Important Factors

Rising Average Selling Prices (ASP)’s.

So, how have prices of Polyethelene (LDPE, HDPE, LLDPE) (“PE”), Polypropylene (“PP”) and Butadiene (“BD”) fared?

Well, it’s really difficult to find the prices of these items, as there are very little public charts on them, and when it’s available, you’d usually need to pay a subscription fee.

 

There are some public prices like this one from investing.com

 

 

This one shows to LLDP PE is back up to mid-2019 levels, but this is only one segment of PE and does not even include PP prices. And so, it is clearly not enough.

 

With some help from a friend access to a Bloomberg Terminal, we get the below.

 

 

 

 

And as we can see here, prices for all PE and PP items have increased versus 2019, and reached Q2 2019 prices, which was the high point in 2019.

As for Butadiene, South East Asian pricing have reached back to Pre-Covid levels due to the strong demand for nitrile gloves, whose factories are primarily located in South East Asia.

Now, for some of the items like PE-LLDPE and PE-HDPE, there isn’t a single price available, as it depends on the markets.

This is because refineries only exist in certain places/markets in the world, and their distance to consumers or feedstocks is different, resulting in somewhat different prices depending on the market.

And so, I picked the largest ones, China and Houston. And their price changes are as follows.

 

Polyethelene (LDPE): USD7,105mt to USD7,325mt (3% increase)

Polypropelene: USD751.5mt to USD784.6mt (4% increase)

Polyethelene (HDPE – Houston): USD705mt to USD1,005mt (43% increase)

Polyethelene (LDPE – China): USD744.0mt to USD747.3mt (0.4% increase)

 

As for Butadiene, prices have doubled since Q2, and is higher than Pre-Covid levels, which I’ve defined as Feb 2020.

Versus Q2 2020 - Butadiene (South East Asia): USD275mt to USD725mt (163.6% increase)

Versus Feb 2020 - Butadiene (South East Asia): USD665mt to USD725mt (9.0% increase)

 

So, what does this mean?

Well, as we can see from this chart, 2020 Q3 prices have basically recovered back to 2019 Q2/Q3 levels in just 3 short months, with HDPE increasing roughly 43% vs 2019.

And this pace is expected to continue due to strong demand increase, especially for Butadiene due to the strong demand for Nitrile Gloves.

And how does this matter, well in 2019 Q3 and 2019 Q4, given current prices for PP and PE LCTITAN could make at minimum roughly RM130m per quarter, or RM520m per year, except Naphtha cost is down 34% today.

Now, I understand that a lot of the information here will not be available publicly, and so I also enclose here some screenshots from the Bloomberg terminal to prove its authenticity.

 

This is the price of Propylene (a chemical byproduct that is mainly used in producing PE and PP, and usually created from Naphtha by LCTITAN) in Japan.

 

 

This is the price of Ethylene (a chemical byproduct that is mainly used in producing PE and PP, and usually created from Naphtha by LCTITAN) from Japan as well.

These charts are 10 years in length, but as you can see, 2020 prices are back to 2019 levels.

And this is the price of Butadiene in South East Asia. Last week, prices jumped up 13% in a single week. You can also refer to this link for the sole Butadiene price chart i can find online.

By and large, PP, PE (and all their associated chemicals) and Butadiene have had their prices increase across the board in ALL Regions back to Q2 2019 levels or Pre-Covid Levels.

Falling Costs (Naphtha)

Now, LCTITAN only use one kind of feedstock.

Naphtha. That’s it.

Naphtha is produced primarily from crude oil (whose price and demand have fallen due to low economic activity and transportation) and is primarily used for 3 things.

  • Dilution of Crude Oil for processing – Demand for this has naturally fallen as transportation (especially air) have fallen like a rock. Car Traffic is down 8% globally.
  • Plastics – Except due to natural gas prices being quite low historically since 2009, due to the increase in shale oil fields in the US (which produce Natural Gas), most plants in the US (a major supplier of plastics) using Natural Gas instead of Naphtha as feedstock. So, there isn’t much competition for Naphtha in this space either.

 

And with these things in mind, how does Naphtha prices look like today?

 

 

Fallen like a rock.

It is close to its all-time low (the all-time low is the peak of Covid-19 when it fell to USD130.44, before that it was the 2008 crisis when it fell to USD258.17) and has in fact fallen from USD536.17 to USD353.85 (Down 34% for the year).

Interestingly, due to the lower Naphtha prices, natural gas prices have increase due to the closing of shale rigs in the US reducing supply of natural gas in the US, LCTITAN now holds the cost advantage versus PCHEM in PP and PE, even though PCHEM signed a fixed cost contract for natural gas with PETRONAS in 2016.

Except that is not the end of it.

 

 

 

Hurricane Laura Decimating Petrochemical Refineries in USA

When it rains, it pours.

Just like the previous petroleum refinery trend in 2017-2018, a hurricane occurred two weeks ago in Louisiana, United States.

Hurricane Laura has hit and affected the petrochemical complexes in Lake Charles, Louisiana, and this is expected to further squeeze the already rising and high PE and PP prices.

From April to July, inventories of PE and PP in the US have already fallen by 756 million lb or 343,000 metric tonnes due to the increased demand, which resulted in the price increases you see above.

What this means, is that the impact of the hurricane has not yet been priced in yet into the prices of PE and PP.

Here are extracts of the reports

1 September 2020: The added production disruption will further tighten already scarce polyethylene (PE) and polypropylene (PP) supplies, and several producers declared force majeure, which will apply continued upward pricing pressure on these already rising markets, reports the PlasticsExchange in its Market Update. Its trading desk returned the third straight week of record results, placing August 2020 among the resin clearinghouse’s highest-volume months ever, equaling the extreme Hurricane Harvey market back in September 2017.

Estimates provided by the PlasticsExchange included 16 NGL crackers with a daily capacity of 95 million pounds, 14 PE reactors with daily capacity of 30 million pounds, and five PP reactors with daily capacity of 20 million pounds. Indeed, Hurricane Laura slammed into Louisiana last Wednesday as a very strong Category 4. The sustained 150-mph winds made it the largest storm to hit the United States in a decade and tied the strongest in terms of wind speed ever recorded in Louisiana, matching a storm back in 1856.

 

 

Supplies of PE and PP were tight even before Hurricane Laura made landfall, Pruett said.

From April to July, inventories of PE fell by 565m lb (256,000 metric tonnes), he said. From June to July, PP inventories fell by 200m lb.

These are significant reductions, Pruett said. He estimates that inventories for both plastics stand at 5-6 days below normal.

"With not enough PE or PP supply to satisfy demand prior to Hurricane Laura, these markets have just become extremely tight," Pruett said.

As Hurricane Laura approached Louisiana, Pruett said that 10-15% of US PE and PP production shut down as a precaution.

Many of these plants escaped damage and are starting up.

Still, that leaves about 5-6% of PE and PP capacity that will remain down in Lake Charles for more than a month, Pruett said.

Even when power is restored, workers returning to the plants could find more extensive damage, which could keep plants down for even longer, Pruett said.

Sasol Chemicals North America declared force majeure on all polyethylene (PE) products Aug. 31, including linear low-density polyethylene (LLDPE) and high density polyethylene (HDPE) grades at their Texas and Louisiana manufacturers in light of Hurricane Laura's assault on Aug. 27.

 LyondellBasell has shut multiple plants in Louisiana and Texas ahead of Hurricane Laura's landfall, reported S&P Global with reference to a spokeswoman's confirmation in an email Aug. 26.

 

 

 

Million Dollar Question – What is the Projected Earnings?

Well, throughout the years, changes in Naphtha, PP and PE prices can be quite large.

And as LCTITAN does not really disclose average prices for all 3 for the year, it does not really make sense to project the earnings by year.

Therefore, to do our projection, I will use the quarter where PP and PE prices are quite like the amounts today (Naphtha prices is generally very volatile, as oil prices are also very volatile).

And this would be Q2 2019 as I previously explained in the “Rising ASP’s” section earlier.

(A) Cost of Goods Sold
The cost of goods sold includes item such as depreciation and staff cost which is fixed. To identify and isolate the 34% drop in naphtha costs, I deducted the 2020 Q2 latest depreciation number, and the staff cost of RM50m a quarter, and that amount is multiplied by 34%. This gives you the savings to be had from lower naphtha cost.

Do note, for staff cost the total amount for the whole company is RM50m a quarter, or RM200m a year. But some of this amount needs to be allocated to Distribution and Administration expenses.

However, as I did not have the breakdown, I just allocated the entire amount to the Cost of Goods sold.

The right amount of savings should be higher.

 

(B) Cost of Goods Sold
For other income, this is due to write back of inventory in Q2 2019. For 2020, there is already a write back in Q2, (due to the steep fall of PE and PP prices in Q1 which have since increased). So, I don’t think this is relevant. Its also to be more conservative.

 

(C) Miscellenous Items
I have no idea what the numbers for these are going to be next quarter or next year. But they are typically quite small. And since the net impact to Q2 2019 Income Statement is positive, to be conservative, I will remove it.

 

(D) Finance Income and Costs
Fall in interest rates mean lower finance income and finance costs. I’ve therefore changed it to the finance income and costs in Q2 2020.

 

(E) Income tax
Tax is adjusted to 24% of the projected profit.

 

And so, just from the decrease in naphtha costs, and not even including the potential profits from the higher ASP due to margin squeeze from the hurricane.

LCTITAN is projected to make roughly RM483.4m for Q3. Giving an annualized profit of RM1.9 billion.

Now, knowing my readers, many people would naturally be a little skeptical.

These numbers do seem quite high, and so we have to ask ourselves, what other things can we use to support these assumptions?

As many would be able to deduce by now, the crux of the much higher projected profitability is the low price of Naphtha.

 

Now referring to the chart below,

 

 

 

The last time Naptha prices were around these levels is in 2016 (Naptha prices was in fact still significantly higher then) during the oil price crash.

 

What was LCTITAN’s profit’s in 2016 like?

 

 

All time high.

 

Now, what if we include the higher PP and PE prices, from both long-term trends in the increased usage of PP and PE, as well as the impact of the hurricane?

 

 

Quarterly profit increases to RM695m to RM908 million. Giving rise to annualized numbers of RM2.8Bil to RM3.6bil

Now, to be fair, since its already 13 September 2020, 2020 Q3 numbers will be nowhere near that, instead it will be more like RM520m. So, these will be more towards Q4 numbers, and depends on how much capacity the hurricane removed and how long it will take for plants to come back etc.

Still, it does not change the fact that plastic demand has gone through the roof in the last few months due to additional production of PPE, Masks, Online Deliveries, coupled with the low outputs in US refineries due to the shutdown of shale wells in the US resulting in lower gas supplies.

 

 

 

 

Current Valuation

And so, how much is LCTITAN valued today?

 

In terms of market capitalization, it is at RM4.4bil. This is a zero-debt company that also holds,

 

 

RM3.9 bil in cash and cash equivalents (This is for the LINE PP and PE plant in Indonesia, where the country does not have their own PP and PE refinery and therefore need to import these products).

This basically means, you buy the company for the cash it has in there, and you get for free, a business making at minimum RM483m per quarter or RM1.9bil a year, that has the potential to make RM908mil a quarter or RM3.6bil a year (if all the stars lined up).

Quite the deal.

 

 

 

Public Share Float

Now, one of the questions I’m sure is on everybody’s mind after this is,

“Yes, can go up, but LCTITAN is so big and heavy, how to go up?”

Well, the current market cap in LCTITAN is RM4 billion.

 

However, 76% of the shares are held by the ultimate holding company, Lotte Chemical Corporation. And they cannot sell it if they want to maintain basically the right to do whatever they want including changing the Articles of Association etc (which is why when they listed, they only sold 25%).

 

 

So, the publicly traded shares only amount to RM1.1bil.

In addition, as people start to read this article, I’m sure many of those who were previously “Stuck” (like many in Supermax before this) would now think to themselves,

“Maybe I should hold or even buy more as I think price will go up”

Resulting in the previously ample supply of stock from people who are stuck and want to sell, now drying up instantly, as they decide they want to keep and make more money or maybe even buy more.

Liquidity is dynamic after all.

 

 

 

 

50% Dividend Payout Policy

 

One of the problems with Hengyuan previously, and even today, is that it is owned by a Chinese company and is therefore unlikely to pay out much dividends etc.

LCTITAN is different.

It is owned by Lotte Chemical Corporation and therefore to move money back to the holding co, they need to constantly pay out dividends.

 

Historically they have paid out dividends every year.

 

 

And the only reason for the reducing dividends was lower earnings due to PE and PP prices falling in 2019 (due to the ban on plastics import from the US by china, resulting in flow of supply to Asia) and most importantly, high Naphtha prices in previous years.

As you can see here, they lowered the dividend payments because earnings fell  when Naphtha prices increased to almost USD725 in 2018.

In addition, there was also the fall in PE and PP prices in 2019 due to the ban on plastics imports from the US by China, resulting in the flow of US supplies to Asia.

As Naphtha prices is much lower today, while PP and PE prices have recovered to Q2 2020 levels and expected to go up further from the hurricane, I expect earnings to increase very explosively in Q3 and Q4 2020.

Which given history, should result in a large dividend, something that was also stated by their CEO, who confirmed a 50% dividend policy in a recent SinChew interview.

 

 

 

 

Risk Factors

Industry Risk

On a fundamental level, this industry is supposed to enter an oversupply situation in 2021 and 2022.

However, given the sudden surge in demand, which is likely to be structural and permanent, this situation should resolve itself mostly.

In addition, capex cuts by many petrochemical companies around the world (most refineries do other items including PP and PE, few are as focused as LCTITAN), there may be an undersupply situation in the foreseeable future instead.

Most affected refineries from the hurricane is expected to be restarted by October.

However, this is still hurricane season in the US, so you never know. The current impact in US is due to Hurricane Laura, but let’s not forget Hurricane Sally which may hit Louisiana as well.

However, even if everything goes back to normal, I expect LCTITAN to make RM482m in Q3 and more in Q4 as Naphtha prices are expected to remain depressed for some time due to the low economic demand as we are still in recession.

Lotte Chemical USA Corporation

LCTITAN owns a 40% share in an ethane cracker and monoethylene glycol (“MEG”) plant in the USA.

This plant was started up in September 2019 and primarily used to make ethylene from ethane. And MEG from ethylene.

 

Hurricane Laura also affected that plant as you see here.

 

 

However, here is why this information matters little.

This plant was only opened in September 2019, after running for 6 months, they basically cut production severely in Q2 2020. Coupled with the low ethylene prices in the US then, it recorded a loss of RM18 million.

This amount is included in my target price estimate, even though it is running and contributing to profit for a full 2 months, and with ethylene prices increasing strongly from July to September 2020.

 

The more important question is this, how much did this US Plant make back when it was first opened and running at full capacity?

 

 

 

 

 

Profit of RM163m in ONE QUARTER (Q4 2019).

How much do you think it will contribute for Q3 2020, when ethylene prices are higher than it was in Q4 2019?

If anything, they contribute a similar amount this year for Q3 2020.

Do note my target price does not incorporate this. Earnings may be up to 30% higher than the RM483.4m projected just for Q3.

In addition, in the statement, LCTITAN states that the impact will not be material.

In “Audit” terms, this means it should affect less than 5% of revenue, or in this case 10% of profit.

Increase in Naptha Prices

As we can see in my thesis above, the increase in profitability hinges mainly on Naptha prices staying low.

As Naptha is primarily produced from Crude Oil, for prices of Naphtha to stay low, crude oil prices need to stay low.

To start thinking about Crude Oil prices, we need to think about the supply and demand of crude oil.

Here is an interesting statistic.

As per Statista, from the previous financial crisis in 2009 to 2019, oil consumption have only grown by a CAGR of 1.73%.

 

And if we take the last 5 years from 2015 to 2019, it only has a CAGR of 1.07%.

 

 

This is an incredibly low rate of growth.

 

Now, in terms of %, oil is mainly used for,

 

 

Road Transportation.

Now, according to friends who work in highways in Malaysia, in terms of KM travelled, road transportation has fallen by about 8% compared to 2019 when comparing the latest month in 2020.

Meanwhile, for Aviation, it has basically fallen to zero.

This basically meant that about 12% of oil demand have been lost, with the 4% (from road transportation 8% X 50% = 4%) likely structural (due to work from home habits being built) and will need to be regained slowly.

And when it comes to air travel, I doubt international travel will be allowed any time soon.

Make no mistake, governments around the world are all itching to allow it again, but they just don’t have a good enough reason to do so yet.

To be honest, i think international travel will only be allowed after a vaccine is released and most of the key risk groups the population is vaccinated.

This is likely to happen in Q2 2021 earliest.

And even if international travel was allowed, I doubt it will recover previous levels, because business air travel (which previously consisted of 30% of all air travel) just does not make much sense these days when you can just work or meet remotely via video conferencing, and this is a habit every company in the world have now cultivated.

And because of this demand for oil is likely to fall back to 2014-2015 levels, while supply will not be reducing, as most shale wells in the US is expected to be restarted come end of September 2020, putting further pressure on crude oil and thus Naptha prices.

In addition, countries like Iran, Kuwait, Iraq who are already facing severe liquidity crisis due to most of their country’s revenue coming from the sale of crude oil, will likely be increase production in desperation.

Supply is likely to exceed demand in the short term (3-6 months) resulting in the current Naphtha prices to continue being depressed in the foreseeable future.

 

 

And, One More thing

With all the information above, we need to ask ourselves one very fundamental question.

Is it priced in?

Has anybody fried this share up so far?

This stock is 
more virgin than extra virgin olive oil.

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM2.4, despite being projected to make more money in Q3 2020.

Clearly the market still thinks this is some random petrochemical company that is going to suffer for the next 1 – 2 years due to reduced demand.

None of the facts I have written above have been priced into the stock at all.

When you are reading this, prices is likely to be a bit higher as much of this information is likely to be public from a summary i will publish beforehand, and this may move prices upwards a little.

Also, there was an interview with the MD in Sinchew, which spiked up the price a bit at first.

 

Target Price

And so, the second million-dollar question, what is the target price?

For me, the target price is dynamic.

When this article releases, and PP, PE and Butadiene prices shoot through the roof, it should increase to somewhere around RM2 to RM2.5 by 31 October 2020 as market now anticipate the strong projected profits.

I’m being conservative on this one, as there are quite a few fund managers who have been traumatized by this company and want to get out. This amount may be higher, if the telegram groups start promoting.

Personally, I’m projecting around RM550m or more for Q3, which is an all-time high quarterly profit.

But to be conservative, let’s say I’m wrong on this one, and its only RM350m.

Well, currently the market is pricing this company on a price to book basis, with the company not being worth much more than its cash, as most people still think this is some random petrochemical company that will suffer during this COVID, instead of one that will make record profits.

The results will surprise most of the people and result in an increase in share price, but as the market may still think the profit may not be sustainable, it may only increase to RM3-RM4 post Q3 results, as people want more proof.

Now, im certain Q4 will also be at least RM400m-RM550m in profits.

When this happens, suddenly, in the mind of the public, this company’s survival will no longer be in doubt, instead people will be thinking about all the expansion plans this company has.

They will think about the US associate contributing RM150m a quarter.

They will think about the Indonesia PP and PE plant which will grow revenue to RM25bil etc.

And then, suddenly, they would want to price in the growth and maybe push it up higher to 10PE.

This is where it will go up to RM6.5 or more.

The most lucrative investment is one where people go from thinking the company dying (and thus valuing it on Price to Book Basis), to thinking it will now be making supernormal profits with strong potential for growth, and thus valuing it on a Price to Earnings Basis.

And I think LCTITAN is one of these stocks with a lot of catalyst upcoming.

Needless to say, quite a few things have to line up very well in order to hit the RM6.5 target price, but I think the odds are pretty decent.

Buy and sell it at your own discretion. This is my target price, set your own based on your own observation and understanding of the situation.

As always, all the best and good luck.

 

 

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Disclaimers: Refer here.

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Labels: LCTITAN
  2 people like this.
 
LaoTzeAhSir wow. mgmt holding 75% shares. just like harta 50% above. the price can simply move upward easier than tg n supermx
26/09/2020 10:08 AM
davidtslim Haha, this fler is a NO principle guy. Previously keep criticise other ppl as quarterly predictor and now this fler become quarterly predictor. Obviously can sense him NO profitable track records on investment n just pandai talk, while I hv spotted a few good stocks n earned comfortably over 4-5 years. He often say want long long term investment but now picks a cyclical stock like LCTitan.
26/09/2020 1:35 PM
davidtslim For me nothing wrong with quarter prediction n cyclical stock as many of my previous articles. This guy is the most arrogant ppl that I ever see but NO track records n always think he is smarter than others in investment. Actually I believe our past 4-5 years results show our overall capability.
26/09/2020 1:40 PM
Choivo Capital David,

When life gives you lemons, you make lemonade.

Even if I wrote it as an investment, the structure is still the same.

It's hard not to find buyers, when you are selling gold for a very cheap price.
26/09/2020 2:27 PM
Choivo Capital Also, as an investor, I love buying at cyclical bottom.
26/09/2020 2:28 PM
Sslee Haha,
When you are young, you tend to act as an idealist, who somehow thinks things in an ideal form as they shall or ought to be rather than as they are. When you are a little older you wise up and think things as how they should be but accept what they are.
Jon’ wonderful company TimeCom is a good long term investment.

We should encourage more bloggers to share their research work as nowadays you just need goggled to find out the relevant data.
26/09/2020 2:31 PM
Choivo Capital Look at your top picks today and mine.

Timecom (rm9 to m12)
Opensys (RM0.3 to RM0.8, high of Rm1)
Rcecap (rm1.2-1.9)
Petronm (this one I admit didn't go well)

All of the above not counting div.

I'm willing to bet 1-2 year from now lctitan price will be higher than today as well.

What about you?

Lionind
Annjoo
Hengyuan
Petronm
Datang
Etc, too many to list.

What was the price when you recommended and the price today?

Anyway, let's not talk about unrelated things here.
26/09/2020 2:33 PM
davidtslim Actually I like LCTitan also and ever cover it b4. I have some performing stocks like Tguan, Supermx (at price RM3.5 ex-bonus), dayang at price RM1 and rise to RM3 at one time.
26/09/2020 4:54 PM
speakup if u like lctitan, pchem is a better choice
26/09/2020 5:12 PM
Philip ( buy what you understand) Hi davidtslim, mind to share your portfolio so we can study your comfortable picks? So far your sharing on Supermax is after the event happened, your sharing on hengyuan and petronm has already crashed ( I don't see any sell call from you, only buy calls), and your dayang picks also similar endings.

Hope to you learn more from you, do share some of your long term results.
27/09/2020 8:44 AM
Choivo Capital Either way, at 1.96, I think for the next 3-6 months, everybody who buy at this price will make money. Unless something incredibly unexpected happens.

Above rm3, well, everyone have to sendiri be smart.
27/09/2020 11:41 AM
Choivo Capital Personally, david, we have our differences.

However, I don't want to argue. You have your way and I have mine.

However, it appears our path cross at this particular stock, and we actually think quite similarly for this one.

Good luck.
27/09/2020 11:47 AM
supersaiyan3 Choivo, I reread the whole passage. Wonderful job, congratulations!
28/09/2020 9:48 AM
cruger12345 Gosh ... I hope you hit the number right.... I did the number in April 20 and feeling confidence I have all the number right only to be proven wrong after they release its Q2 20 result. If not because of the RM103m reversal of 1Q’s RM81m inventory write-down to net realisable value, it Q2 2020 was actually a losses. and now you are expecting a reversal and a profit of 482 Mil... That is irrational. All the best bro .. I hope you hit the jackpot
28/09/2020 11:25 AM
Primeinvestor rubbish chiovo, petrochemicals cant annualise peak earnings at even 10x, if you think supermax is worth RM2, lotte is not even worth Rm2, please be consistent in your assumptions
29/09/2020 4:04 PM
Sslee Dear all
For your information:
https://klse.i3investor.com/blogs/Sslee_blog/2020-09-30-story-h1514383998-Forewarn_to_be_forearmed_my_fellow_i3_bloggers.jsp
30/09/2020 9:20 AM
newbie8080 You are trying to link LCTITAN with butadiene for glove making?

Acrylonitrile butadiene rubber (NBR) and butadiene by itself is different.

Glove makers need NBR not butadiene.
30/09/2020 10:48 AM
sharkdododo NAJIB CHOIVO IN THE MAKING HUH? TP 8 BUCKS NOW SAY HE RUN AWAY.
22/10/2020 1:28 PM
MohdHafiz Tulis panjang tapi mana target price 8? tak graduate ni. mak tak ajar dia mathematics.
22/10/2020 6:54 PM

(CHOIVO CAPITAL) LCTITAN (5284) - Rising ASP's, Falling Costs, Butadiene (Glove Proxy), Hurricane, Selling For Cash (A Summary)

Author: Choivo Capital   |  Publish date: Fri, 25 Sep 2020, 11:02 AM


Well, this is a piece i've started studying for the last two weeks, and i think its one of the best ideas i have had in Bursa. 

I will only be sharing the summary for now. The full article will come this weekend.

Enjoy, and i hope you as my reader, can pick it up cheaply still.

This is the full article.

 

https://klse.i3investor.com/blogs/PilosopoCapital/2020-09-26-story-h1514324256-_CHOIVO_CAPITAL_LCTITAN_5284_Five_Magic_Words_Rising_ASP_s_Falling_Cost.jsp

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

 

Overview

COVID19 resulted in increase in demand for online delivery for goods and foods, as well as face mask, PPE, throat swabs etc as well as nitrile gloves.

This resulted in large increase in demand for plastics and butadiene.

Currently supply for Plastics is insufficient, from April to July, inventories of PE and PP in the US have already fallen by 756 million lb or 343,000 metric tonnes due to the increased demand.

In addition, globally, butadiene prices have increased very strongly with even TOPGLOVE facing supply shortage.

Despite explosive earnings projected for Q3 and Q4 2020, share prices of plastic and butadiene focused petrochemical companies are sharply down.

 

 

Why LCTITAN?

80% of revenue is from polyolefins (polymers and plastics), and polyolefins segment contributed more than 85% to its Profit Before Tax in FY2019. PCHEM plastics contribution is less than 50%.

Feedstock consist of 95% of petrochemical company’s costs. PCHEM feedstock is Natural Gas (up 5% for the year), LCTITAN feedstock (Cost of Goods) is Naphtha (down 34% for the year).

 

 

Rising ASP's

Polyolefin and Butadiene prices have increased strongly due to supply shortage and is higher than 2019 or pre-covid levels.

 

Polyethelene (LDPE): USD7,105mt to USD7,325mt (3% increase)

Polypropelene: USD751.5mt to USD784.6mt (4% increase)

Polyethelene (HDPE – Houston): USD705mt to USD1,005mt (43% increase)

Polyethelene (LDPE – China): USD744.0mt to USD747.3mt (0.4% increase)

As for Butadiene, prices have doubled since Q2, and is higher than Pre-Covid levels, which I’ve defined as Feb 2020.

 

Versus Q2 2020

Butadiene (South East Asia): USD275mt to USD725mt (163.6% increase)

 

Versus Feb 2020 (Pre Covid)

Butadiene (South East Asia): USD665mt to USD725mt (9.0% increase)

 

Even with just these prices (before the Hurricane Price Spike comes), LCTITAN can go back to Q3-Q4 2019 earnings, RM130m per quarter, or RM520m per year, except Naphtha cost today is much lower.

 

 

 

Falling Costs

Naphtha is the main feed stock for LCTITAN and 95% of their costs. Prices for Naphtha is close to all time low, fallen from USD536.17 to USD353.85 (Down 34% for the year).

 

 

The last time Naptha prices was around this level was in 2016 (it was still higher then). In 2016, LCTITAN recorded their all time high profit at RM1.3bil.

 

 

 

Hurricane Laura Decimating Petrochemical Refineries in USA

Just like the previous petroleum refinery trend in 2017-2018, a hurricane occurred just last week in Louisiana, United States.

Hurricane Laura has hit and affected the petrochemical complexes in Lake Charles, Louisiana, and this is expected to further squeeze the already rising and high PE and PP prices.

("With not enough PE or PP supply to satisfy demand prior to Hurricane Laura, these markets have just become extremely tight," Pruett said. As Hurricane Laura approached Louisiana, Pruett said that 10-15% of US PE and PP production shut down as a precaution.")

 

 

Public Float

76% shares held by Korean Holding co who won’t sell. As the free float is only 24%, share price is likely to increase without much resistance when market realizes their potential.

There is also now increased liquidity due to the Dividend Reinvestment Scheme by the company.

 

 

50% Dividend Policy

Historically, LCTITAN have paid out dividend every year, and have 50% dividend policy.

Reduction in dividend previously was due reduced earnings, from falling PE and PP prices in 2019 (due to the ban on plastics import from the US by China, resulting in flow of US supply to Asia) combined with higher Naphtha prices.

Explosive earnings in Q3 & Q4 2020 is likely to result in a high dividend pay-out this year.

 

 

Projected Earnings

  1. Cost of goods sold include depreciation and staff cost. These are removed to isolate the Naphtha Feedstock cost. Amount shown is the 34% savings in net Naphtha costs.

 

  1. This is writeback of inventory (additional profit) for Q2 2019. It is a one-off item and thus not included to be conservative.

 

  1. These items are usually random and small in nature, as the net impact is an addition to profit, it is removed to be conservative.

 

  1. Interest income and expenses is adjusted to account for the lower BLR rate.

 

  1. Income tax is adjusted to 24% of the profit before associate loss and finance income.

Q3 2020 profit projected to be around RM482mil, with an annualized number of RM1.9bil.

When PP and PE prices increase due to Hurricane Laura,

Q3 & Q4 2020 profit is around RM695m – RM908m with annualized profit of RM2.8bil to Rm3.6bil.

 

 

Valuation

Market Cap today, RM4bil, and,

 

Its also a zero Debt Company, with net cash of RM4bil.

 

Buy RM1 for RM1, get company that can make RM1.9b annualized for free.

 

 

Risk Factors: Lotte Chemical USA Corporation

LCTITAN owns a 40% share in an ethane cracker and monoethylene glycol (“MEG”) plant in the USA. This plant was started up in September 2019 and primarily used to make ethylene from ethane. And MEG from ethylene.

Hurricane Laura also affected that plant as you see here.

Worst case scenario, it is shut down like in Q2 2020, where coupled with the low ethylene prices in the US then, it recorded a loss of RM18 million.

This loss is included in my target price estimate to be conservative.

However, the power plant was running and contributing to profit for a full 2 months, and with ethylene prices increasing strongly from July to September 2020.

The more important question is this, how much did this refinery make when running at full capacity?

 

 

 

Profit of RM163m in ONE QUARTER (Q4 2019).

How much do you think it will contribute this round, when ethylene prices are higher than it was in Q4 2019?

 

 

And, one more thing

Is it priced in?

Has anybody fried this share up so far?

This stock is more virgin than extra virgin olive oil and is completely untouched.

Other than the brief pop back in April-May 2020, which affected all stocks, it has only gone down since then and is way below its Dec 2020 closing price of RM2.4, despite being projected to make more money in Q3 2020.

Clearly the market is still pricing LCTITAN as some random petrochemical company that is going to suffer for the next 1 – 2 years due to reduced demand.

NONE of the FACTS I have written above have been priced into the stock AT ALL!

Do note my target price does not incorporate this. If this is included, earnings is likely to be 30% higher than the RM489m projected just for Q3.

In addition, in the statement, LCTITAN states that the impact will not be material, this means it should affect less than 5% of revenue, or in this case 10% of profit.

 

 

 

Target Price

Why 23% Margin of Safety?

Because I want the target price to be IPO price. Haha, but I think its adequate.

This company is going to go from being valued on a Price/Book basis, to Price/Earning basis, resulting in explosive share price growth. This does not account for momentum trading and herd mentality which is likely to increase the share price further.

Forward PER less than 2X.
 

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Whatsapp: Email me, for Whatsapp, i can only accept up to 256 people (unlike telegram where the limit is 20k). So i try to be more selective for this.

 

 

Labels: LCTITAN
  LaoTzeAhSir likes this.
 
soojinhou Haha what do you know. The fler who called everyone else quarterly predictor himself became a quarterly predictor haha. Talk about irony.
25/09/2020 6:19 PM
Sslee Haha,
A first for sharp mind and acid tongue Philip to say something good about Jon, this make it a “must buy and don’t miss category”

Philip ( buy what you understand) Bought lctitan 200k shares on 22-23 after reading some reports from Jon around 1.79
25/09/2020 4:50 PM
25/09/2020 6:55 PM
stockraider Chivo our Hero loh...!!
25/09/2020 7:48 PM
supersaiyan3 Nice one! But I couldn't quite get it until I red the other article by JomnJerry.
26/09/2020 12:58 AM
inPeace A sick psychopath write again to manipulate the stock prices
26/09/2020 8:24 AM
Choivo Capital https://klse.i3investor.com/blogs/PilosopoCapital/2020-09-26-story-h1514324256-_CHOIVO_CAPITAL_LCTITAN_5284_Five_Magic_Words_Rising_ASP_s_Falling_Cost.jsp

This is the full piece.
26/09/2020 8:42 AM
Sslee TQVM Jon,
Finally a turnaround, dividend giving and potential growth stock, I’m waiting for to employ part of cash in my hlebroking trading account. (Bought about RM250K worth) My only complaint why Philip manage to get at RM 1.79 whereas my cost is about RM 1.84?

https://www.grandviewresearch.com/industry-analysis/global-plastics-market
26/09/2020 10:03 AM
davidtslim Haha, this fler is a NO principle guy. Previously keep criticise other ppl as quarterly predictor and now this fler become quarterly predictor. Obviously can sense him NO profitable track records on investment n just pandai talk, while I hv spotted a few good stocks n earned comfortably over 4-5 years. He often say want long long term investment but now pick cyclical stock like LCTitan.
26/09/2020 1:35 PM

(CHOIVO CAPITAL) SUPERMAX (7106) – The Greatest Fool?

Author: Choivo Capital   |  Publish date: Sat, 5 Sep 2020, 6:08 PM


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

(CHOIVO CAPITAL) - SUPERMAX (7106) – The Greatest Fool?

 

 

 

 

 

 

 

 

 

 

 

 

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

“Now shoulda woulda coulda, means I’m out of time
‘Cause shoulda woulda coulda, can’t change your mind
And I wonder, wonder, wonder what I’m gonna do
Shoulda woulda coulda are the last words of a fool”.

“Beverly Knight: Shoulda Woulda Coulda”

On 22 May 2020, I wrote this article.

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

When that article was written, SUPERMAX was at RM5.75.

When I wrote that article, i was filled with regret at not buying the week before, despite having discussed in depth with a trader friend of mine on the Average Selling Prices (“ASP”) price increases, and felt that it was not fully priced in.

The plan was to put around 20% – 30% of my portfolio in.

I even made the choice of choosing SUPERMAX out of all of them, though for all the wrong reason (ie it was the shittiest and when speculating you want the worst of the lot ). It was the best option due to them having the largest percentage of Own Brand Manufacturing sales, enabling them to raise prices with wanton abandon.

As many can guess by now, especially if you know me, and the type of person i am, as well as my weakness in staying out of speculating despite the edge being so clear; you would know that i did not buy a single share. I Shoulda Woulda Coulda done it. but i didn’t.

Instead, I just sat at the sidelines, going about my daily life, trying to ignore the sight, sound and clamor of it going up.

Talk about an exercise in futility, when you are part of 2 – 3 investment or trading group. SUPERMAX was the only thing anybody can talk off then.

Back then, I thought the price would go to maybe RM7 – RM8 and that’s it. As i felt that the previous increase from RM1.8 to RM5.7 have already incorporated a significant portion of the gains.

In addition, i was a little too emotional at missing out on the initial rise, and thus too focused on what i missed out on, and thus to see what it would become in the short term, when all the factors I listed in my blog post above,

  1. Unprecedented Level of Demand for Rubber Gloves
  2. Structural Capacity Constraints
  3. Price Increases
  4. Lower Costs
  5. Everything else is shit.
  6. Record KLSE Transaction Volume, Record Retailer Participation

converge and act together in ways that will feed back on each other and become what Charlie Munger would call a “Lollapalooza Effect”.

Also known as, SUPERMAX, RM24.44

It got so insane and the volumes so high, that Bursa actually crashed multiple times the last few months.

If I was more rational, I think it would be possible for me to buy at RM5.75 (or 1 – 2 weeks earlier) and sell out at probably RM17 – RM18

And so, there i was, starting the SUPERMAX journey as the Greatest Fool.

So why this article? To inform you of my stupidity?

Well, there is that and more.

Where can the Share Prices of SUPERMAX / Glove Companies go from here?

This I guess is the million-dollar question (it would be a literal question for some) on many people’s mind right now. Let me answer this question in 2 perspectives.

What is the market sentiment and the news like today? How it will be like in the future?

When I first wrote my article in May, we were just coming off the one of the sharpest stock market crashes in history, and the subsequently, one of the sharpest stock market recovery in history.

And at that point, there appeared to be nothing but good news in the horizon for glove companies. COVID 19 seemed like it was getting worse and worse, and the consensus then was that the vaccine is at least 1-2 years off.

(I disagreed with the vaccine bit, because that was a problem where, with enough political will and money, it will be solved. This is not pregnancy, where its impossible to get a baby in 1 month by getting 9 women pregnant)

It was so obvious that anyone could see it (and everyone did), which resulted in an unprecedented level of capital inflow into glove stocks.

And as share prices go up, along with the news of the worsening of COVID-19 around the world, as well as the increase of glove ASP’s by glove companies, this fed a certain positive feedback loop for the stock prices of glove companies.

Today, 3 – 4 months later, things are quite different.

China and Russia have effectively pushed their vaccines to final trials and is likely to mass produce them by the end of the year.

Yes, the Russian vaccine is effective. And yes, that is a picture of Putin riding a bear with a gigantic needed that was posted on his Facebook (since deleted).

And i guarantee you, regardless of whether FDA or EURO approval is obtained for the vaccines above, even if it was rushed out with potential side defects. Countries will use it, because the trade offs is far worse, as many can see from the current economic fallout.

If i am frank, i think Sweden strategy of not doing anything (or maybe just a 2 – 4 week lock-down to allow the public healthcare system to get up to speed) was the right way to go.

And from current news in the US, i think they too will release a vaccine by year end, whatever the costs.

And as every day passes, the risk of a vaccine being released increases (and do note market prices in the future and not the past).

Its safe to say, the future news is not in favor of the present holders of glove companies stocks.

And in terms of sentiment.

Like how people tire caring about COVID-19 and following about the health and safety procedures, the endorphin high of owning glove stocks and watching it march steadily upwards have also worn off.

With 3 – 4 months to respond, the previously constrained capacity for glove production also does not seem so constrained anymore, with numerous new and old players planning to expand to take advantage of the price increases and incredible returns (for now).

If I were a betting man, COVID 19 was only a good thing for the glove companies in the short term, but a horrible thing long term wise.

Even before this, if you were to discount the ban on vinyl glove production by China.

Margins and ASP’s on gloves have been falling for 2 years. With COVID-19 basically bringing forward a ton of capacity expansion plans, funding the less efficient players to enable them to last longer, and attracting a lot of new players.

I expect supply to normalize in 3-6 months from now, before it goes into an oversupply situation, and prices plummet.

And this oversupply, resulting in lower prices is likely to be a structural issues that the industry is going to need years to shake off.

2 years from now, the share price of SUPERMAX is going to be far lower than the current price.

Does anyone still remember HENGYUAN, the lesson it taught in terms of financial results of temporary ASP increases, and its current vs previous share price?

The second perspective is this.

Who is the current and future owners of glove stocks

A few months back, back when Dayang was all the rage, i wrote this article.

The Art of Trading DAYANG Profitably Around Mr Koon Yew Yin and Mr Ooi Teik Bee.

One of the key ideas there i wrote about was about the “Diversity of Participants” which i think is very relevant today and i will elaborate it here again using SUPERMAX as an example.

Every market or individual stock is a complex system that is typically filled with a diverse group of participants who are irrational in one way or another.

They consist of people having different ideas and different views of things. Long term, short term etc etc, and all these individuals are a little or very irrational towards one end or the other.

For example,

The long-term investor may decide not to trade even though it may make sense for this quarter, allowing the trader to trade and make that profit.

The trader’s inability to sit still and hold, allows the long-term investor to buy it from them and hold it, making the money from the long-term growth of the company. Etc etc.

Despite the irrationality of their participants, their diversity ensures that they are all irrational in different directions, giving a net effect of zero, allowing the wisdom of crowds to prevail over the long term.

This ensures that the market is efficient and accurate most of the time. This means that over the long term, movements in share prices are usually in line with movement in earnings.

However, this diversity can often undergo phase transition, and thus result in boom or bust in the short term. What is a phase transition? This is where small incremental changes in causes lead to large-scale effects, or the “Grand Ah-Whoom!” moment.

What is this Grand Ah-Whoom! moment?

Imagine this. Put a tray of water into your freezer and the temperature drops to the threshold of freezing. The water remains a liquid until—ah-whoom—it suddenly turns into ice. Just a small incremental change in temperature leads to a change from liquid to solid.

The Grand Ah-Whoom! moment, occurs in many complex systems where collective behavior emerges from the interaction of its constituent parts. And this includes the behavior of the stock market.

In complex systems with human beings like the stock market, diversity is the most likely condition to fail first.

As you slowly remove diversity, nothing happens initially. Additional reductions may also have no effect. But at a certain critical point, a small incremental reduction causes the system to change qualitatively.

Taking SUPERMAX for example,

At the beginning before the COVID 19 boom, their active participants (Most majority shareholders do not really deal in the shares, and if they did, it is usually quietly. For this illustration I am going to ignore that subset) consist of mainly,

 

At RM1.8-RM2
Cyclical Value Investors (say 20%)
People who were trapped (say 70%)
Geniuses who saw the potential impact of COVID 19 on the stock (10%)

This results in the shares being quite undervalued, as the people who were trapped do not want to top up and the cyclical value investors, are there by virtue of their cheapness. While the geniuses, by virtue of being geniuses, and the rarity of geniuses, are the smallest portion.

As the boom starts, the market participants become increasingly diverse as new participants buy the share from the current participants, and the price slowly approaches fair value, the participants now consist of say (figures are just for illustration, they are likely to be different),

 

RM4.5-RM6
Cyclical Value Investors (15%)
People who were trapped (15%)
Growth Investors (15%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders (5%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Outsiders (20%)
Geniuses who saw the impact of COVID 19 on the stock (10%)
Shrewd Traders (20%)

As the boom rushes along, the “Cyclical Value Investors” and “People who become trapped” becomes increasingly smaller portions of the pie. It’s also very possible that some people turn from “Cyclical Value Investors” to turn into “Shrewd Traders”, especially as the retailers (foolish and shrewd) and fund money looking to ride the wave come in.

And so the boom continues, and the shifts continue. Soon, our participants consist of

 

RM12-RM14
Growth Investors (5%)
Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders (5%)
Koon Yew Yin’s & TY Yap & Ooi Teik Bee’s Other Goreng Outsiders (30%)
Shrewd Retailers (Usually Momentum Traders) (15%)
Foolish Retailers (25%)
Fund Money (20%)

It is around this point, as the price climbs higher and higher territory, that the Koon Yew Yin & TY Yap & Ooi Teik Bee & Other Goreng Insiders, fund managers, shrewd retailers and growth investors may start selling as well.

Soon the price shoots way past fair value, as well as past the moon and mars, at which point, the shrewd individuals sells out and it looks more like this.

 

RM20-RM24
Koon Yew Yin & Other Foolish Insiders (2%)
Koon Yew Yin’s & TY Yap & Ooi Teik Bee’s Other Goreng Outsiders (30%)
Foolish Retailers (58%)
Fund Money (10%)

 

At this point, population diversity falls, invisible vulnerabilities and risk start to build despite the price constantly marching upwards or staying even.

Why?

Because every single one of these participants use extremely similar trading strategies, and as they keep buying, their common good performance is reinforced.

How do you know you’re at this stage?

“When everyone in the stock cannot think of even one bad thing that will happen, or about the company, and the comments all sound the same.”

This makes the population very brittle, and a small reduction in the demand for Supermax/Glove shares could have a strong destabilizing impact on their prices.

I’m sure you guys have noticed how some days, the share price drops like crazy before recovering.

It is at this point that risk is at absolute highest.

Why?

As most of the market participants have the same strategy, in the event the thesis, or in this case, the news that is coming out is not as positive they expected, or worse, a vaccine is released.

It’s not just some of the market participants who want to sell, but, ALL OF THEM.

And as prospective buyers are likely to be market participants with similar trading or investment strategies, demand dries up instantly as well.

In the meantime, even if positive news comes out (by positive i mean any delay in vaccine or Covid 19 mutation), it will not increase by much as everyone who wants to buy the stock already has it, and has exhausted their cash and credit lines.

In this case the expected value calculation is highly negative, it probably looks something like this.

20% Very Good News of Vaccine: Down 60%
50% Good Vaccine News: Down 20%
20% Vaccine Delay News: Up 5%
5% Covid-19 Mutation News: Up 10%
5% Vaccine Delay and Covid-19 Mutation News: Up 20%

Expected Value: (0.20-0.6)+(0.50-0.2)+(0.200.05)+(0.050.1)+(0.05*0.20)= -19.5%

This means all outcomes considered, this has a negative expected value of 19.5%, the week when this news come out, and its likely to fall further as people sell.

Now as you can see in my elaboration earlier, often the goreng artist like Mr Ooi and TY Yap is very shrewd, and would have sold a large portion of their position as prices go up and inform their followers (Or at least Mr Ooi did, no comment on what TY Yap did, whom i consider more one of the most unsavory characters in the Malaysian market. But if you read the news online, you would have an inkling) .

This is where you may see some “consolidation” in terms of chart movements, which is where TY Yap & Mr Ooi & Other Goreng Insiders direct followers, shrewd traders and fund managers are transferring their shares to the foolish retailers.

Mr Koon on the other hand, often considers himself an investor and does not learn from his lessons and, to be blunt, swallows his own bullshit.

He will hold on longer, or wait for margin calls to force him to sell.

In 2018, he was burnt properly in 2018 from Jaks and Sendai and ended up losing more than half his networth and had to sell land in Ipoh, because he swallowed his own bullshit and was over leveraged.

Before making it and more back frying Dayang in 2019.

Before losing 90% of his net-worth in 2020 from swallowing his own bullshit and being over leveraged. An information he would like the public to forget today, considering that his blog post for that was deleted.

And now, he appears to have made most of it back from the rubber gloves, and looking at his constant postings (reading my article on how to trade around OTB and KYY, this is the stage where he is all in and no more money left to buy), and appears to have again swallowed his own bullshit and is again over leveraged.

I wonder what will happen this time.

History does not repeat itself, but it sure does rhyme.

While the foolish retail participant who are now out in record amounts due to the work from home initiatives, who is in reality a trader, but foolishly considers himself an investor, will likely make the fatal mistake of averaging down, often on margin.

Turning a bad trade, into a mediocre and fatal investment.

And with time, diversity returns, and the foolish retailer, turns into people who are trapped. And as prices fall further, with the cyclical value investors return.

Conclusion

There is a saying that many traders, especially the shrewd ones, live by.

“Do not try and make the last dollar”

And this is for good reason.

For most of these momentum or goreng trading strategies, the key ingredient for it to work, is to attract the greater fool to purchase the stock. And it is a very viable strategy.

And the last dollar is there to attract the greatest fools who will take the steaming pile of shit from everyone else.

And as each day passes, and as the stock prices increases, the average level of foolishness increases.

And so, if you are trading this strategy, the question you need to ask yourself is,

“Who else haven’t buy?”

“Who are the other greater fools left?”

Well, the below picture that was released one month or so ago, when Supermax was RM17.4.

For me, this is as great an indicator of where you are in the cycle as you are ever going to get.

If I was implementing this strategy, this was a sign that we are near the top.

If the uncle selling chicken in pasar also buy d, who else is left to buy from you?

Do you think they are greater fools left?

Well, when this all started, i was the greatest fool. And i hope that you, the person reading this, will not be the greatest fool when the clock strikes 12 and the music stops.

I am likely wrong at this very specific point in time (in fact given my track record, it may go up on Monday), but as each day passes, the probability of me being right increases.

With that, i end this. I hope things end will for you. And if you are still holding and currently have some gains and losses. I hope this piece helps you make up your mind.

Good luck, 走好,不送.

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

There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”

Like sardine traders, many financial market participants are attracted to speculation, never bothering to taste the sardines they are trading. Speculation offers the prospect of instant gratification; why get rich slowly if you can get rich quickly? Moreover, speculation involves going along with the crowd, not against it. There is comfort in consensus; those in the majority gain confidence from their very number.

Today many financial-market participants, knowingly or unknowingly, have become speculators. They may not even realize that they are playing a “greater-fool game,” buying overvalued securities and expecting — hoping — to find someone, a greater fool, to buy from them at a still higher price.

Seth Klarman

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

Disclaimers: Refer here.

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

Facebook: Choivo Capital

Website: www.choivocapital.com

Email: choivocapital@gmail.com

Telegram: https://t.me/philipcapitalmanagement (This is Phillips Telegram Chat, but i consider it the best telegram to follow for Malaysia Markets period. Its amazing how we got here given our history. He's one of the few with whom where i find myself more wrong than right whenever we argue/discuss)

Whatsapp: Email me, for Whatsapp, i can only accept up to 256 people (unlike telegram where the limit is 20k). So i try to be more selective for this.

 

 

 

 

<blockquote class="wp-block-quote has-text-align-left" style="box-sizing: inherit; quotes: " "="" "";="" color:="" rgb(102,="" 102,="" 102);="" font-style:="" italic;="" margin:="" 0px="" 1.8em="" 1.5em;="" font-size:="" 1.1em;="" font-family:="" palatino,="" "palatino="" linotype",="" lt="" std",="" "book="" antiqua",="" times,="" "times="" new="" roman",="" serif;"="">

 

 

 

 

 

 

Labels: SUPERMX
  9 people like this.
 
chewck631 The very fact that so many companies want to jump on board the gloves band wagon indicate that the demand will continue to grow for sometime. Cannot be all these companies hire fools to research and decide on such huge invest!!
06/09/2020 9:39 AM
CharlesT Few things i do agree with u...

Do not try n make the last dollar...

Will not hold any single share of supermax (or maybe will hold 1 lot for sentimental reason)in 2022 (or even SH 2021)
06/09/2020 9:40 AM
CharlesT Chewck631 u r wrong..99% of those co who claimed they want to venture into glove biz r mainly to goreng their share prices..especially those penny stocks..
06/09/2020 9:42 AM
CharlesT Glove biz r oligopoly....not any tom dick n harry can enter
06/09/2020 9:43 AM
Orlando WHO recommends wear a mask whn having sex

The more careful n wary r putting on condom too

Hidden demand KAREX
06/09/2020 9:55 AM
Orlando Though do not wish tis on my worst enemy

Whn WHO or Fauci say even jz 'U can't rule out semen carrying Covid...' KAREX wil fly
06/09/2020 10:14 AM
Orlando In KAREX u wil get 2 in 1 Condom n Gloves
06/09/2020 10:15 AM
Orlando U do no want to b looking back in 6 month time n having to Shoulda Woulda Coulda bot KAREX whn it was below RM 1 while squeezing ur balls hard
06/09/2020 10:18 AM
AT1mil Choivo Capital, no offence but arguing politely. You should get more experience in stock market before managing others money.. Write this decision in your dairy and look back in 2021 and you will know how inexperience you are in managing your friends and relatives money. Sorry ya.
06/09/2020 10:34 AM
pBlue What drives the glove bull run?

The Covid19 pandemic. The virus does not care about human sentiment. Why does the gloves have more to run... because there are more humans to infect. Currently 26 million people have been officially infected.... increase that by a factor of 10 to account for people who are asymptomatic... and it is just 260 million people. There are 7800 million people alive and humanity does not have immunity to this virus. Do not look at this like an economic bull run with greater fools, look at this as a pandemic with doctor having to contend with contaminated environment and hospitals that are flooding with Covid19 patients. It is bad in developing nation because they are poor and it is bad in developed nation because hospitals are not build to have excessive spare capacity. There are another 7500 million people more to go.

Vaccine typically take 5-10 years to develop. So saying we have a vaccine in 1 year is as you say expecting 9 pregnant women to give birth to a baby in 1 month. Politicians may say it time to throw a party. CEO will claim it can be done. And scientist will say we will do our best. But really the fastest vaccine ever developed took 4 years (mummps). Ebola vaccine with all modern tech of the last 2010s took 6 years to develop and test (It applied for FDA approval in December 2019).

Finally sure, you maybe willing to use the Swedish model, please consider 2 factors. (1) While the mortality rate of Covid19 is on average ~1%, this is only true if your hospitals are fully functional. 20% of people infected need medical care... as simple as antibiotics to as severe as ICU. When hospitals are pushed to their limit, the mortality rate goes up. Hospitals run of out essentials and common items, drugs, oxygen, even stuff as common as gloves. At its height the mortality rate of Covid19 in Italy was 8%, and people were saying China was hiding the true deaths as it had reported only 3.4% mortality rate.

(2) 1% mortality rate is still 1% of 7800 million people, that means 78 million people dead. More deaths than the 1918 pandemic. More deaths than WW2. In malaysia, it mean 310,000 deaths. Sweden has 20x more deaths than its neighbors. In New York, there were so many dead people, that the crematorium had to run 16 hours a day 6 days a week. Excess bodies had to be buried in mass graves and there were still bodies found rotting in the sun because Covid19 infected bodies could not be processed fast enough.
06/09/2020 10:34 AM
kelvin5349 i hope you understand what you are writing in your blog here since it is read by many.i hope you do some in-depth research before coming up with such.
06/09/2020 10:51 AM
cruger12345 Just because someone write something against the counter you holds you called him a fool and no in-depth research and tons of non sense. Ever asked your self that the author could be right and you are at the wrong side ? Ever asked yourself the price that you paid was much higher than the value that you get ? If you are saying the gloves companies are cheap because they can hike the ASP forever then who is the greater fool here ? Does TG shall wiorth 80 bil just because you expect that it can make 4 bil annually in the coming 2 years ? Did you ever ask yourself TG shall be valued on par with MBB even though MBB made 6 bil annually for the past 5-6 years. If it is not greater tool to push up the price I don’t know what else. But having said that if doesn’t mean you shall avoid glove counters because you could very well make more money but selling it to others who are willing to pay you higher premium. It is a hefty price that you are going to pay if you are actually speculating while thinking that you are investing in a heart company. Don’t confuse yourself . Just because you bought a fundamentally good company and paying a hue premium for it that is not consider speculating . What will you say if someone bought TG at 50,75 or even 100 isn’t him speculating that the ASP will be higher and higher forever ? This round the market maker is making a killing .
06/09/2020 11:17 AM
goldenluck16 Very simple strategy, buy when there is panic selling. TAKE profit when it hits new high. In between, trade wisely, medium term still very bright for glove companies. Covid-19 is here to stay. So called upcoming companies trying their luck can't survive the competition, they just put up a lot of hypes to unload their shares.
06/09/2020 11:18 AM
Goldberg CIMB Research maintain BUY on SUPERMX. - YES, A SCREAMIN BUY CALL, FOLKS-DONT MISS THE BOAT
TARGET PRICE = RM13.5
------------------------------------------------------------------

Date: 05/09/2020

Source : CIMB
Stock : SUPERMX
Price Target : 13.50
Price Call : BUY
Last Price : 9.60
Upside/Downside : +3.90 (40.63%)
06/09/2020 11:22 AM
inPeace https://www.webmd.com/lung/news/20200805/who-says-theres-no-silver-bullet-for-covid-19

WHO: There's No 'Silver Bullet' for COVID-19


https://seekingalpha.com/article/4369775-covidminus-19-real-results-are-long-way-away

COVID-19: The Real Results Are A Long Way Away

We still don't know just how long this pandemic will last - will one vaccine emerge that gives the immunity? Or will we have to endure life with the virus for years or decades to come?

No matter how promising early studies or phases are, there's always a chance for the final phase to have one serious adverse effect or not hit a target antibody response, causing all the work to go out the window.

Trial completion will take time, and interim and preliminary data provide mere glimpses of the overarching study. but keep in mind the risks that are associated with pushing vaccines through unprecedented fast timelines, as hope for a vaccine by the winter far exceeds the endpoint timelines of next year and beyond.


https://www.news-medical.net/news/20200826/Study-COVID-19-vaccine-should-be-at-least-8025-effective-to-prevent-ongoing-pandemic.aspx

''Some are pushing for a vaccine to come out as quickly as possible so that life can 'return to normal.' However, we have to set appropriate expectations. Just because a vaccine comes out doesn't mean you can go back to life as it was before the pandemic."

The new computational model finds that a COVID-19 vaccine will have to be at least 80 percent effective to achieve a complete "return to normal"


https://www.statnews.com/2020/08/28/covid-19-reinfection-implications/

Scientists are reporting several cases of Covid-19 reinfection


https://www.gatesnotes.com/Health/What-you-need-to-know-about-the-COVID-19-vaccine

from the blog of Bill Gates
What you need to know about the COVID-19 vaccine


https://www.channelnewsasia.com/news/world/covid-19-surgical-gloves-ppe-makers-struggle-booming-demand-13083368

COVID-19: Surgical glove makers struggle to keep pace with booming demand



https://www.statista.com/statistics/711286/value-of-the-global-ppe-market/

Value of the personal protective equipment market worldwide from 2019 to 2027


https://www.theedgemarkets.com/article/vaccine-makers-plan-public-stance-counter-pressure-fda

Vaccine makers plan public stance to counter pressure on FDA



Some of the articles that perhaps you need to consider before making a fool of yourself and jeopardize your reputation. Tq
06/09/2020 11:23 AM
inPeace https://www.webmd.com/lung/news/20200805/who-says-theres-no-silver-bullet-for-covid-19

WHO: There's No 'Silver Bullet' for COVID-19


https://seekingalpha.com/article/4369775-covidminus-19-real-results-are-long-way-away

COVID-19: The Real Results Are A Long Way Away

We still don't know just how long this pandemic will last - will one vaccine emerge that gives the immunity? Or will we have to endure life with the virus for years or decades to come?

No matter how promising early studies or phases are, there's always a chance for the final phase to have one serious adverse effect or not hit a target antibody response, causing all the work to go out the window.

Trial completion will take time, and interim and preliminary data provide mere glimpses of the overarching study. but keep in mind the risks that are associated with pushing vaccines through unprecedented fast timelines, as hope for a vaccine by the winter far exceeds the endpoint timelines of next year and beyond.


https://www.news-medical.net/news/20200826/Study-COVID-19-vaccine-should-be-at-least-8025-effective-to-prevent-ongoing-pandemic.aspx

''Some are pushing for a vaccine to come out as quickly as possible so that life can 'return to normal.' However, we have to set appropriate expectations. Just because a vaccine comes out doesn't mean you can go back to life as it was before the pandemic."

The new computational model finds that a COVID-19 vaccine will have to be at least 80 percent effective to achieve a complete "return to normal"


https://www.statnews.com/2020/08/28/covid-19-reinfection-implications/

Scientists are reporting several cases of Covid-19 reinfection


https://www.gatesnotes.com/Health/What-you-need-to-know-about-the-COVID-19-vaccine

from the blog of Bill Gates
What you need to know about the COVID-19 vaccine


https://www.channelnewsasia.com/news/world/covid-19-surgical-gloves-ppe-makers-struggle-booming-demand-13083368

COVID-19: Surgical glove makers struggle to keep pace with booming demand



https://www.statista.com/statistics/711286/value-of-the-global-ppe-market/

Value of the personal protective equipment market worldwide from 2019 to 2027


https://www.theedgemarkets.com/article/vaccine-makers-plan-public-stance-counter-pressure-fda

Vaccine makers plan public stance to counter pressure on FDA



Some of the articles that perhaps you need to consider before making a fool of yourself and jeopardize your reputation. Tq
06/09/2020 11:26 AM
JohnFarmer458 CGS-CIMB (5 September) BUY call TP 13.50
https://klse.i3investor.com/files/my/blog/img/bl6339_supermx_2.jpg

Affin Hwang (3 September) put overweight on Glove , BUY call
https://ibb.co/G2y0K8V

UobKayHian (4 September) put overweight on Glove , Buy call
https://ibb.co/28qKc4f
06/09/2020 11:42 AM
Cyrogx6 Half past 6 article
you didnt buy because you missed the boat, if you cant adapt, then buy others like XOX, M3Tech, Lambo.
Choivo aim supermax but no aim tan sri counter ?
scared your theory wont work with TG is it ?

This common sense article, chicken seller uncle also know how to blow water
06/09/2020 11:44 AM
kltower "I expect supply to normalize in 3-6 months from now, before it goes into an oversupply situation, and prices plummet." -- wrong analysis.

The actual fact is: Cumulative deaths expected by January 1 total 2.8 million, about 1.9 million more from now until the end of the year. Daily deaths in December could reach as high as 30,000. 

Twindemic is coming, the whole year of 2021 vaccine is just 杯水车薪,小水无法救大火
06/09/2020 12:03 PM
alkanphel You can write very well my brother.
To me, you sound like a geek more than an investor.
Meet more people, learn from others who are more experienced than you.
The more you know, you'd realize the less you know.
Good luck with your fund!
06/09/2020 12:09 PM
Goldberg HERE WE GO AGAIN - WHEN CLOWNS MISS THE BOAT THEY TEND TO BE JEALOUS & BITTER AND END UP WIRTING RUBBISH. THEY JUST COULDNT BELIEVE THEY MISSED AN OPPORTUNITY OF A LIFETIME.

SUPERMAX HAS SOLID FUNDAMENTALS , EXCELLENT BUSINESS MODEL- OBM & ODN, GOOD EARNINGS ( FOR THE NEXT 4 QUARTERS) WITH 1.1 B IN PREPAYMENTS , A LEAD TIME OF 600 DAYS AND A PROJECTED PAT OF 680 MILLION FOR THE NEXT QUARTER.

MOST SCIENTIST BELIEVE THAT WE HAVE TO LIVE WITH THIS PANDEMIC FOR A LONG TIME AS AN EFFECTIVE VACCINE MAY NOT BE AVAILABLE - DUE TO MUTATIONS & REINFECTIONS. HENCE LONG TERM OUTLOOK FOR GLOVES ARE BRIGHT.

SUCH HALF BAKED NARRATIVES AND NONSENSICAL COMPARISONS WITH TULIPS & SARDINES REFLECTS HIS INABILITY IDENTIFY A MULTI BAGGER. YUP, A SORE LOSER.

CHOIVO, ITS STILL NOT TOO LATE TO GET ON BOARD AS SUPER IS FAIRLY VALUED AT RM15-18.
06/09/2020 12:56 PM
BlurBlur the greater fool theory is sound but only when exuberance mania is everywhere. of course u cannot predict it but i would think only next year would the party end.
i believe when u see major sh starts selling then u will know. especially from supermax n top glove owners. they will surely dispose some no?
06/09/2020 1:06 PM
BlurBlur according to many news sources i think the party will only end by end of next year. with oversupply, competition from locals, china etc. asp prices tapering out. lesser profit growth etc.
06/09/2020 1:17 PM
Goldberg WHO says widespread coronavirus vaccinations are not expected until mid 2021

The organization is stressing the importance of rigorous checks on their effectiveness and safety.

NONE of the candidate vaccines in advanced clinical trials so far has demonstrated a “clear signal” of efficacy at the level of at least 50% sought by the WHO, spokeswoman Margaret Harris said.
06/09/2020 3:06 PM
ruby20 Glove oversupply in 3 months? LOL!!

Good article but that sentence alone discredit everything
06/09/2020 4:03 PM
Hazzyy You can know the stupidity of the person by the questions he asked and the wisdom by the answer he gives
06/09/2020 4:12 PM
Hazzyy Intelligent but not smart . Does it sound right ?
06/09/2020 4:37 PM
lembest HAHAHA i rest my case
06/09/2020 5:27 PM
sosfinance Actually it is quite simple, when Supermx/Top Glove next quarter exceed the research houses' consensus with double digits, and ASPs still has no sign of peaking in Nov or Dec, share price will move up (moratorium issue is temporary knee jerk).
06/09/2020 8:25 PM
infinity888 I believe the greatest fool is YOU
07/09/2020 3:13 AM
teareader818 Choivo, I think you missed an important point that there may be a worldwide conspiracy led by the mainstream media to heighten the fear of Covid-19 in order to destroy the world economies. CDC just admitted that in US, actual deaths from Covid-19 were only about 6% of the total announced earlier. The other 94% deaths had on average 2.6 additional causes, such as cancer, heart and lung diseases, etc. Cases of people of having died from car accidents with Covid-19, were reported dead from the disease. CDC has also bluntly stated that there have been more deaths from suicides and drug overdoses than from Covid-19. These falsified reports in the US have very much to do with the US Elections in November. Cheers!
07/09/2020 6:19 AM
Tryingtogetrich Almost Everyone agree the party will end some time next year right? Look around !!!! Maybe people r starting to leave. Don’t be the last to leave oh.......... the last few to leave will have to clean out your account!
07/09/2020 7:17 AM
stockraiders Petronas is not only reporting loss, but they are also jumping into the glove mania by investing into the set-up of the glove-related industry.
07/09/2020 8:50 AM
speakup petronas making the chemicals for glove. their cost is the chemicals
07/09/2020 9:38 AM
speakup what petronas is making is like what luxchem is making, but on a much much larger scale
07/09/2020 9:40 AM
Primeinvestor STOCKRAIDER means he is smarter than petronas...HAHAHAHA
07/09/2020 9:50 AM
Investor https://www.cdc.gov/vaccines/hcp/acip-recs/general-recs/administration.html

*Note: This guideline is pre-Covid*

General Precautions
Persons administering vaccinations should follow appropriate precautions to minimize risk for disease exposure and spread. Hands should be cleansed with an alcohol-based waterless antiseptic hand rub or washed with soap and water before preparing vaccines for administration and between each patient contact (1). Occupational Safety and Health Administration (OSHA) regulations do not require gloves to be worn when administering vaccinations, unless persons administering vaccinations have open lesions on their hands or are likely to come into contact with a patient’s body fluids (2). If worn, gloves should be changed between patients.
07/09/2020 9:57 AM
newbie4444 Why Superman drop? Is it KYY, OTB sold while KYY ask us to buy?
07/09/2020 12:30 PM
hng33 Glove export to US on decreasing trend

https://importkey.com/i/supermax-healthcare-inc
07/09/2020 12:32 PM
Jack Khan Distribution Phase my friends. It will sideline and once awhile spike up to attract more fish then after 6 month it will start drop until normal. Sometimes may take years.
Not much flesh now only bone if you want.
07/09/2020 12:52 PM
Vairocana9999 I beg to differ.

Even when WHO's prediction of mass vaccination starts in mid 2021 comes true, it is only a beginning phase because it can take years to produce ample vaccines for the world populations.

The world economy will only start the real recovery journey when efficacious vaccines are available beyond 2021.

And to declare the Covid-19 pandemic is over, it could be another few years after 2021. In fact, WHO has predicted earlier that this pandemic would only be declared over most probably in 2025.

Then only the glove demand and supply will reach an equilibrium. However, the post covid-19 ASP for the big 4 will remain high and stable, due to the structural shift in demand and the new normal caused by this once in a century pandemic.

So from now till 2021/2022, we have a golden chance to witness the explosive PATs by the big 4 in the coming qtrs, and this is also once in a century, may be.
07/09/2020 2:13 PM
supersaiyan3 I disagree, based on:

1. HY is a trap (or collateral damage, it was never the intend of the owner to make money from goreng?), the owner from China make up the numbers, get loan, and reporting bad numbers even since. Evidence by top directors + CEO resigned (immediately after something goes wrong). JAKS (in JAKS, the owner never say they can make so much money, only KYY+ talk about their ambition), SENDAI got net cash?

Bear in mind i said similar thing about HY even before the rise. I hate to earn dirty money like that.

2. I think you are making a mistake without study in depth on the company, the technology, the pandemic, etc (or maybe you did? kindly share your insight). We may defer in opinion/conclusion but at least you study on the company first. I mean, don't talk about sentiment only, in the longer term, its always about the company.

3. Nobody knows about the future, who knows if somebody crash a plane into it tomorrow. However, based on available information, Supermax will do superbly over the next 12 months at least, it is equally risky to invest in the recovery.

4. Even after this pandemic, other disease may come. This is not a one-off event, the transmission is just amazingly fast, and therapy is so difficult. In the future, to prevent such event from happening, worldwide precautionary measure is pushing the glove industry to grow superfast year after year.

You know? China always has weird diseases, swine fever, h5n1 and we Malaysia as a country (and the rest of the world), never allow to import any livestock or uncook meat etc from China, because they will always have outbreak, forever. Only this time this pandemic is so strong due to its manmade nature. They may make more because it looks like they are winning the war.
07/09/2020 4:02 PM
Philip ( buy what you understand) 1. Supermax will have superb results there is no doubt about it. However... does the results match the euphoria and forward looking investments dollars to put into it moving forward? Can supermax next quarter reach 800 million? next quarter after that 1600 million? how about next quarter after that? Yes, one may not know the future, but paying the price today assuming that every year will be covid-19 year is not rational.

2. study or not, one thing is for sure: either you believe there will be a vaccine, or you believe that there will not be a cure. The probabilities of a vaccine coming out is far more likely than not, considering the entire world is rushing to produce a vaccine. The question to ask is simple: if no covid, how much will be the glove demand moving forward? If covid continues to exist... well.. different story.

3. Yes, other diseases will come, but that is not the question to ask. The question to ask is moving forward, by 2021 and on, how much more glove capacity will exist in the world? As supply will undoubtedly overload demand, how much will the price change versus supply? It is silly to assume that no one else has the capacity to produce gloves, and moving forward at such great margins, no one else will want to join in the game.
07/09/2020 4:13 PM
speakup chivo is very happy now
he can buy supermax cheap
FARK!
07/09/2020 4:17 PM
Choivo Capital My long term fair value of supermax is maybe at RM2.

Good luck, unlikely to touch it in the interim.
07/09/2020 4:55 PM
Choivo Capital @supersaiyan

https://choivocapital.com/2020/05/22/ragret-del-luna-10-pe-glove-companies-supermx-7106/

https://choivocapital.com/2020/03/28/lessons-from-golconda-a-reflection-on-moving-forward/

I wrote about supermax before the super run up in May and the virus in April.
07/09/2020 5:04 PM
EatCoconutCanWin good job Choivo ...you help a lot..tq
07/09/2020 6:04 PM
supersaiyan3 Philip, there is a big problem in your assumption. If you think Supermax double its profit every quarter, then in a year it will be 16 times growth, one way to value it will be 1600 times PE. That will be roughly RM1000.00 Per share. If you do a DDM, NPV, etc whatever 201 stuff you will get "infinity" as an answer.

I am quite sure nobody think Supermax worth RM1000, yet.

Supermax only need RM800m next QR, then slowly towards RM1b profit. At 20 times PE, assuming 4b net profit per annum, that will be 80b market cap. That will make Supermax worth slightly more than RM30.

(At RM2 a share, if Supermax make 4b profit, that would be PE of 1.4?? Possible, but not probable. )

Choivo, I got Supermax and glove fairly early too. What i mean is to advice you to do the calculation just as you did with Airasia. Don't jump into conclusion without working it through.

Let the numbers speak. Kossan, Harta still talking about USD30-40 ASP, Supermax is aiming USD280 now. Kneel to figures.

Remember bitcoin? Monopoly money can worth USD30k.

My guess is a half year pandemic will consume 2 years production of glove. It looks like it will go on for another 9 months at least, that will create excess demand for another 4 years at least.
07/09/2020 6:31 PM
blood7 loves kavalan solist hi jon, good evening....

let me share with you a very good article in i3.....
https://klse.i3investor.com/blogs/ss2020_vaInv/2020-07-20-story-h1510636040-Bonus_issue_of_Top_Glove_Hartalega_Kossan_and_Supermax.jsp

-so your opinion would be long term holders are idiots? the greatest fools too? :p
-you use 'supermax/glove companies'... so your article also meant Top Glove too? :)

lastly....
i think in life there's 3 situation....
1)you fall in love, you chase and you succeed....
2)you fall in love, you chase and failed....
3)you stand by the side wondering if the girl is perfect before you decide to go after, but then the girl left.....

jon, i am not guru or sifu, neither am i a multi-millionaire... but i can tell you this - please, please.... don't always choose 3

hahahaha.... good luck!
07/09/2020 6:53 PM
godhand looking at his article i can deduce that jon is one of the most neautral and human investor in this forum.
18/11/2020 8:39 PM

(CHOIVO CAPITAL) Airasia Group Berhad (5099) – The RM6 Billion Baggage Fee

Author: Choivo Capital   |  Publish date: Sun, 30 Aug 2020, 6:46 PM


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

(CHOIVO CAPITAL) Airasia Group Berhad (5099) – The RM6 Billion Baggage Fee

 

 

 

 

 

 

 

 

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

Airasia Group Berhad used to be an on/off investment for me that I sold just before the MCO happened, and the rest of the world went into lock-down.

I had wanted to write an article on my research into the company since as early as March 2020. However, the process of completing my research and compiling my old notes took more time than expected (it just kept expanding and taking detours), as well as other priorities.

If i have to be honest, i guess the main reason for the delay is because I don’t consider it a good investment based on my criteria’s, and that the only reason I’m really writing this is because I promised someone I would, subsequently announced it the my friends, and afterwards, i just felt like i had to finish it, and do a good job at it.

I don’t think I did that good a job (mainly because i don’t plan to invest in it, but it still reached 10,000 words lol). However, I think I managed to illustrate the gist of the company and all the pertinent issues surrounding it currently, and how it would affect the valuation.

I hope it provides some value to some of the Airasia investors here, who i’m sure have a lot of questions regarding the company today.

Background Grandmother Story

To be honest, the experience of researching and writing this article has been a little bit of a roller coaster ride intellectually and emotionally for me.

Airasia is one of those companies that I have some deep emotional ties with.

I remember that as a kid growing up, i had constantly read and actively observed the meteoric rise of Airasia and could not help but be in awe of the company and the man that was Tony Fernandes.

I still vividly remember the day when his autobiography came out.

I did not have much money and was therefore not able to buy it. However, I remember sitting in the bookstore for 3 hours and finishing it in one go.

I also remember in 2008, just before the 2008 World Cup, when I was a salesman for OSIM at Subang Parade.

A friend had told me he was at the Heng Seng (I think) store nearby.

I quickly ran over, introduced myself, shake his hand, and “helped” my friend sell him a huge RM50k LED TV System to watch the World Cup on (TV’s used to be much more expensive then).

When I first started reading up about Warren Buffett and value investing, one of the first company I thought about with Airasia and Tony Fernandes.

Despite not knowing anything about the numbers and the company, beyond what i’ve read in his autobiography, and my observations, i always encouraged my parents to invest in his company’s and IPO’s, which included AAX and TUNEPRO.

If not for their own risk controls in terms of portfolio sizing, that would have been a much more painful experience.

It was also one of the first companies that i had “Sailang”-ed in early 2016.

This was after the short report by GMT Research. At that time, i was very certain, that at minimum, Airasia was not faking the numbers. It may be messy and imperfect in terms corporate governance, but it was not malicious or fraudulent.

I bought a large position (whatever money I had) at RM0.9-RM1.2, doing very little research (it was peak period in audit and I had no time) and sold it off at RM2-RM3 and above.

Having said that, with the experience that inevitably comes with time (though slower than I would like), my perspective on Airasia is no longer as positive.

Overview

For many businesses, its often not that difficult to have an outlook on their futures with a high confidence level.

Companies like BORNOIL are likely to be underperforming and destroying capital for next 10 years.

Reasonably good companies like LIIHEN and PETCHEM are likely to continue chugging along with good profits helped by favorable industry/business dynamics. While wonderful companies like TIMECOM etc. can be expected to increase revenue and profits like clockwork for the next 5-10 years. The real question is mainly on the price.

(I can sense Phillip about to disagree with me right about here haha. I’ll extend an olive brand say concede that QL is a wonderful business, the price is just a little too rich for me given other opportunities.)

For companies like BORNOIL, it’s just so obvious. Incompetent management coupled with a horrible industry is unlikely to do well.

And for business like LIIHEN, PETCHEM or TIMECOM. Their futures are to an extent quite predictable to due to their business models being proven with reasonable/wide moats around it.

Revenue and earnings of these companies are also stable as they know very clearly how to continue being quite profitable, and where to invest this profits in order to obtain above average returns.

As the saying by Warren Buffet goes,

“You don’t need to know the age of a man to know if he’s old, or the weight of a woman to know if she is fat”

Wonderful investments often look obvious.

This is not the case for Airasia, even before the COVID 19 epidemic. A TIMECOM this is not.

Its Low Cost Carrier (“LCC”) business appears to be proven and is growing rapidly, but its economic dynamics are different in each of its airlines in different countries (an airline business in Malaysia faces very different economic and political problems in Indonesia or India).

Coupled with very strong competitors in certain regions, who are often deep pocketed, and more than willing to burn money and cut corners in order to obtain more market share. This has resulted in their profitability (along with the industries) being sporadic. Spectacular at times, middling to reasonable in most, and atrocious in others.

And to top it off, unlike businesses like HARTALEGA or TIMECOM, who define their circle of competence very clearly, and drive hard at these circles while waiting for fat pitches, Airasia seems to take on Venture Capital like characteristics, where they take stabs and gambles at other vertical or horizontal industries.

Instead of focusing on their core Malaysian LLC business, the company often has new ventures popping up continuously.

And again, some did spectacularly.

Airasia Thai, AAE Travel Pte Ltd Joint Venture with Traveloka, Asian Aviation Centre of Excellence, Tune Insurance etc.

While the others seem more than capable of crippling the company in the long run.

Airasia Japan, Airasia Indonesia, Airasia India, Airasia Phillipines, Big Pay, AAX

And now, we have the COVID-19 epidemic, which have placed both Airasia and the entire airline industry in deep and unknown waters with their survivability in doubt.

Given the above, I genuinely doubt that it’s even possible to identify the fair value of this company within a range of 30% or so, and create a 5 year discounted cash-flow that will have less than 50% variance to actual outcome.

In more ways than one, investing in Airasia feels very similar to venture capitalism where one is investing in a relatively hazy and opaque future.

And like most startups/venture capital type companies, Airasia is not a wonderful business that even an idiot can run (PCHEM is one, but they do have middling management, the best management that money can buy in terms of GLC’s, but that is a really low bar).

It has so many self-inflicted complexities, that in order to survive, much less thrive, this company needs extremely competent management, especially during times like this.

Given all these factors, when analyzing this company, i decided to double and triple down on the qualitative aspects, and when looking at their history, to see if the management’s decisions / thought process made sense at that point in time, and how each decision was executed. And from there, get an idea of how Airasia will handle the current crisis at hand, and its long term plans.

And so, we need to take a walk in this business through the shoes of Tony Fernandes and Kamarudin Meranun.

Walking in Tony’s And Kamaruddin’s Shoes

It was a sunny morning in 1983, when Tony woke up in his Epsom College dormitory bed, hungover, and with a strange woman in his arms who appeared to have been a British Airlines air stewardess…

Just kidding.

We all know the story of Airasia in its early days.

On 8 September 2001, Airasia was purchased by Tony Fernandes and Kamarudin Meranun’s company Tune Air.

When they took over the company from DRB Hicom, it had negative equity of more than RM100 million. They injected about RM110 million worth of capital and expanded the company.

For the next 10 years, their rise will be meteoric.

They had correctly identified the huge latent demand when it comes to air travel in South East Asia (I still remember the days when, as a kid, i just can’t help but feel a certain sense of awe whenever I meet someone who had traveled overseas by airplanes before, due to how rare it is as a result of the high costs) from referencing what Virgin, Ryanair and Jetstar did for the western world.

The business model they decided on is to have the lowest “Cost Per Available Seat Km” (CASK) in the region (and the world) and thus charge the Lowest Fares and rip market share from Malaysia Airlines (and every other airline in Asia in the next few years).

For the first 5 years, as they scaled up, there was quite frankly zero competition in South East Asia.

And by 2005, they had the lowest cost base in the world. Compared to its competition like MAS, its cost was at one point 70% lower.

By the sixth year of operation Airasia overtook MAS.

So how did they do it?

During the first 10 years of its birth, Airasia pioneered (or took the initial ideas of Ryanair etc to the extreme) some innovative methods to lower costs, such as.

  • Changing from Leasing Planes to Buying Planes, and to do so in Bulk
    When they first took over the company, Airasia’s planes consist of leased Boeing 737’s. They had lower capacity (148 seats versus 180 seats) compared to the Airbus A320’s that they had planned to replace it with.

    When looking at it in terms of KL – Kuching, the cost comparisons were as followed.

    Assumptions:
    Fuel Cost: $75 per Barrel
    USD:MYR: 3.65
    Fare: RM150
    Load Factor: 80%
    Airbus A320 Seats: 180
    Boeing 737 Seats: 148

This was the first step.

Given their early success, and seeing the huge vacuum in the market, Airasia then decided that the right step was make their company the LCC leader in ASEAN in order to have economy of scale and enable them to drive costs even lower, and the solution was to go all in at creating associates and joint ventures in South East Asia.

This enabled their second step, which was to buy their planes in bulk.

Airasia was one of the first (and to do it to such extremes) to make gigantic plane orders that stretched more than 10 years in advance.

In 2007, they secured an order of 130 Airbus A320’s for delivery up to 2012, planes worth easily 10-20 times the value of the company then.

They then increased this amount to 200 Airbus A320’s by 2008.

In 2011, they ordered another 200 of them, and from this order, becomes Airbus’s single largest customer.

In 2012, they placed orders for another 100 of them, and in 2016, they did it again by ordering another 100.

By placing such huge orders, they were also able to obtain discounts of 30% or more off the list price, and get the planes customized to suit their needs exactly.

In addition, as their initial orders were made just after the financial crisis, and before the boom in low cost airlines (A trend that was sparked by Airasia) in Asia, they were able to buy large amount of planes at a discount from the already low prices that were at the low end of the cycle.

This allowed Airasia Group to charge its Joint Ventures and Associates leasing fees for using their planes (The company AAC was created in 2013 to manage this) and it also enabled them to be in a business to of selling planes and slots to airplane leasing companies when the airline boom started.

In just a few years, this would go from a cost cutting measure, to a highly profitable venture and one of the key reason for Airasia’s profitability.

  • Extremely Good and Cost-Efficient Marketing
    Before Airasia came onto the scene, I think very few people would have heard of ads that say things like,

    “20,000,000 Free Seats”

    These were some of the really innovative ads that had a clear call to action/purchase. And to this day, Airasia’s ads and graphics is still top tier.

    It also spawned a business model where customers started to be conditioned into making holiday plans and air ticket purchases months in advance.

    This enabled Airasia to now fill up planes long in advance, and then use hedging to lock in fuel prices etc (this is not necessarily a good thing, as hedging is essentially insurance, and therefore there is a net cost element to it), and thus lock in the profits.

    They were also the first to identify the fact that referees have some of the most television time in the English Premier League, but had zero advertising on their clothes, and thus obtained an extremely cheap price for the first few years of that sponsorship.

    In addition, by having all the Joint Venture / Associate airlines under a single brand, they are now able to spread marketing costs widely, and thus obtain marketing costs per km that was close to 80% less than the competition, while advertising more widely.

    And to top it off, during the 2007-2008 financial crisis, when advertising spending was at an all-time low, they went big into marketing the business, and during this period, with the help of cost cutting everywhere around the world, they helped permanently changed consumer and business habits to be accepting of low-cost flights.

By the end of 2009, they have almost tripled the number of passengers carried at 14.3 million, from 5.7 million at the end of 2006.

The same can be said for capacity which increased from 7.4 million at the end of 2006 to 19.0 million.

This level of growth rate will not be seen or matched until 2007, when Airasia Indonesia and Airasia Philippines turned from associates of the company, to subsidiaries under the group and had their traffic combined.

  • Income Tax Allowance (extra 60% on top the 100%, can brought forward indefinitely)
    Airasia also negotiated with the government to provide them with an additional 60% Capital Allowance on purchase of airplanes, which can be set off against a maximum of 70% of Statutory Income.

    They first obtained it in 1 July 2004 – 30 June 2009, this was then extended another five years from 1 July 2009 – 30 June 2014.

    Subsequently, in view of the higher profits and less support required, it was lowered to 50% to 50% 1 July 2014 – 30 June 2019.

    This enabled Airasia to have a better cost structure.

    This was originally supposed to apply for planes in Malaysia only, however, it also applied when the plane is purchased by the Malaysian company, to be leased out to the associates.
  • Low maintenance and staff cost.
    “Cost are like fingernails; they need to be trimmed constantly”

    In addition to having an incredible focus on cost-cutting, Airasia also happen to be located in a low-cost region, when the industry is used to paying USD rates for airline staff.

    In their earlier days, they also managed to lock in long term maintenance contracts at low prices.

    If you were to read the annual reports, the sheer drive they have to lower costs and be more fuel efficient is incredible.

    Unfortunately, i can’t seem remember much beyond sharklets, and computer testing of routes etc, and i don’t think there is too much value in me giving it to you in detail as they are know to have the lowest cost per km in the world.

However, Airasia did not just focus on the costs, starting from 2005 onwards, they started really driving ancillary income.

The gains in ancillary income is two pronged, the first is the passenger related ancillary income, the second, is the income from the new horizontal or vertical businesses, as well as optimizing the usage of planes (Teleport etc).

In terms of Passenger Related Ancillary income, after they started driving it in 2005, it only took them about 5 years to hit the maximum in terms of proportion of passenger related revenue.

By 2010, it was 20% of passenger revenue and has maintained around that region since.

The rest of the gains came from non-passenger related revenue such as the Aircraft Operating Lease Income (which we will go into later) as well as Freight Services/Teleport.

At its peak in 2015, these ancillary revenues hit 22.6% of revenue, all of it coming from Aircraft Operating Lease Income.

Currently, Ancillary Income in Airasia can be basically split into 3 types.

Passenger Ancillary Revenues

  • Live Dynamic Pricing

    This was introduced in 2015, which basically means that the price of the airfare charged depends on the supply and demand at that point in time. Its not considered ancillary revenue but I wanted to somewhere to disclose it.

 

  • Express Boarding
    Self explanatory. Pay to board early.

 

  • Seat Selection
    Self explanatory. Pay to choose your seat.

 

  • Luggage/Baggage Fees
    This one was quite interesting. Over the first few years, you can see the company start optimizing this by increasing the minimum size and spend. Correctly predicting that there is a certain pricing in-elasticity for people who need to bring a luggage bag and what is the perfect amount to get the maximum revenue.

    And in 2017, they took it to the next level by introducing Live Dynamic Pricing depending on the supply and demand at that point in time.

 

  • Food
    Started out standard, now they are opening the restaurant, will explain further below when discussing Santan.

 

  • Insurance
    Travel insurance is one of the most profitable kind of insurance you can do. Combined Ratios for Travel Insurance at times can be as low as 60%. For more information on combined ratios refer here.

 

 

Aircraft Operating Lease Income

With the purchase of these huge purchase planes to fund their regional ambitions, as stated previously, Airasia, the Group Company now had a new income stream that would grow far more profitable than expected.

It would not be unreasonable to say that by 2016, this has grown to be their second largest revenue and largest profit contributor.

Without it, the Airasia Group would be lossmaking.

Externally, this also caused huge headaches with accusations by GMT Research that Airasia was only profitable due to the leasing of these planes resulting in profit transfers from unprofitable regional Joint Ventures, to the group holding.

Internally, i’m sure the other joint venture or associate partners did not feel comfortable about this as well, as it could be seen as Airasia Berhad milking the associates for all its worth.

This culminated in the sale of the planes and the leasing business

  • 28 Feb 2018 (Completed 31 Dec 2018) – BBAM Limited Partnership / FLY RM 9,775.6 million and RM 262.3 million (82 Aircraft and 14 Engines)
  • 24 Aug 2018 (Completed 8 August 2019) – Castlelake L.P. USD 739.5 million (RM 3,559.5 million) (25 Aircraft)
  • 25 July 2019 (Completed 31 December 2019) – Castlelake L.P. (RM 1,240 million) (14 Airbus A320-200)

Resulting in net gains of RM 298.8 million and RM 101.54 million, but a net loss in profit of around RM 643 million p.a until the new planes come in.

For the more cynical and realistic individuals, the real reason for the sale would be to settle Tony Fernandes’s and Kamarudin’s RM 1 billion margin loan that taken to inject into the company back in 2016 when prices of the shares were so low.

COVID19 non-withstanding, i do consider this a bit of a mistake.

With hindsight, it looked like a good decision due to COVID 19 happening, but I think fundamentally, it was an erroneous decision, made mainly for the reason of paying out enough dividends for Tony and Kamaruddin to pay back the margin loan, as the income lost is really too significant and the gains too little.

Freight Services / Teleport

Previously, each Joint Venture and Associate was responsible for filling up the belly space of their own planes.

Starting from 2016/2017, the responsibility of filling up the belly space of all the planes in the Group was allocated to HQ, and in 2018 Teleport was founded to finalize this and provide end to end shipping for customers.

The Overseas Airline Ventures

Earlier in the article, we wrote about how Airasia correct identified the gap in affordable air travel in South East Asia and after pioneering it in Malaysia, decided to do the same in other ASEAN countries.

They started this as early as 2004, just 3 years after taking over from DRB-Hicom, taking an extremely aggressive line in terms of business expansion.

To a large extent, to really drive down cost and drive up ancillary income, these ASEAN related airline ventures were needed.

So how did they do?

Well, even before COVID 19 happened, its record was spotty at best.

Now, do note the numbers i’ll be showing here do not include the loans and advances made by Airasia to these Associates and Joint Ventures.

They are very significant and will be included afterwards.

Airasia Thailand

Airasia Thailand was started in 2004 as a Joint Venture with Shin Corporation, and recorded increasing losses for the first 4 years as they expanded rapidly.

Like the Malaysian Portion, it was during the 2007-2008 financial crisis, when Airasia took advantage of the low advertising by other companies, and went on a marketing blitz, making low cost flights the choice for companies cutting costs then, that things turned around for them.

Losses instantly narrowed from RM 338.4 million in 2008 to RM 94.2 million in 2009, and by 2010, the company had recorded its maiden profit of RM 287.2 million and also repaid all loans owing to the group company.

In 2011, they showed profits of about RM 152.1 million, showing a certain ability to maintain profitability, and so Airasia instantly started the IPO process, and managed to raise money at roughly 10X earnings.

This meant their stake is now worth roughly RM 1,051.4 million, a roughly 8,622% return on investment of RM 12.1 million. (Airasia owned the Thai Airasia Stake, which is then owned by the publicly listed holding company. However, as the main business of the public listed arm is in owning the Thai Airasia Stake, we can easily do some extrapolation on the value assigned by the market to this stake)

Again, this is just on the investment in shares and not all the advances and loans made to the company over the years which have been repaid.

Over the years, Airasia Thailand have generally maintained its profitability, and is the only one of the joint ventures to ever pay dividends back to the Airasia Berhad and in a relatively consistent manner.

It was the crown jewel of the overseas ventures.

Things started to turn sour starting 2018 and 2019 due to losses, and in 2020 equity has fallen from a high of RM 989.7 million in 2017, to RM67.8 million. A sum that a mere one more quarter of loss will turn negative giving significant bankruptcy risks.

At today’s share price, the stake in Airasia Thailand is estimated to be around RM777.9 million, but, as stated earlier, this is based of the value of the holding company which owns the 55% stake in Airasia Thailand, and so that company has its own assets and may not be liable for the losses of the subsidiary in which Airasia owns its stake.

Therefore, by using the share price, I am probably overestimating the value of Airasia Thailand. A more accurate price would probably be the book value of just RM67.8m, the same valuation currently given to Airasia Berhad.

Or, if one is a touch more morbid, as Raymond Yap from CIMB famously put for AAX, Target Price RM0.

Airasia Indonesia

Airasia Thailand is where the sweet dreams end and the nightmare begin.

If Airasia Thailand was the crown jewel.

Airasia Indonesia might as well be a chronic slipped disk injury, that threatens to turn you into a quadriplegic at any point in time.

The company was started just one year after Airasia Thailand in 2005 with PT Fersindo Nusaperkasa. And like Malaysia and Thailand, it grew quickly, making increasing losses, and turned around during the 2008 financial crisis.

However, that was where their paths start to differ.

They were unable to maintain profitability as giants like Garuda Indonesia and Lion Air decided to enter this space and basically fight Airasia Indonesia to the death.

This was unlike Thailand, where the National Carriers like Bangkok Airways decided to stick with full service instead of going into the LCC model, giving Airasia Thailand full reign of the LCC market with the competitors being either too small, or Thailand not being their major markets.

As for Malaysia, it did so well because the only competitor was MAS and they are a GLC without a monopoly who never had serious competition before. Its like taken candy from a baby/

By 2015, the company was so illiquid that any advances and loans to them needed to be capitalized, and RM 625 million was converted to shares. In 2017, they had to inject a further RM 1,013 million.