Choivo Capital

Author: Choivo Capital   |   Latest post: Mon, 9 Nov 2020, 8:04 PM


(CHOIVO CAPITAL) A postmortem of my wood based export picks.

Author:   |    Publish date:

This year one of the major unrealized losses for me personally was my wood based export picks.

Currently they consist of about 10% of portfolio, with losses of 2% - 40%, average loss should be something like 30%.

The largest is Liihen, which is about 5% of portfolio, followed by 3.5% in Latitude and 1.5% in Focus Lumber (bought very recently).


Initial Thesis

I first opened by position in Liihen at about RM3.3, sold all of them at RM4.1, and bought just over half back at RM3.88.

My initial thought process then was that,

  1. Liihen is actually a pretty good business, at least in the context of cost based business. It had a tight control over their manufacturing efficiency, with factories being located near to each other and suppliers. Management is honest and competent, low capital expenditure requirement, natural moat in having large amounts of rubber wood in Malaysia.
  2. Over a longer period of time, the USD should gain against the RM, mainly because I expected Najib to be around and result in the slow deterioration of the economy.
  3. As the economy in the US was booming, and hurricanes just happened, I expected the company to continue to have strong demand for its products.
  4. Valuation is relatively undemanding even though we are at the higher end of the cycle. And I figured the economy still had some way to come, as the “Euphoria” period has not yet arrived, and we had the hurricanes etc etc.

On Latitude, I bought at about RM4.66.

  1. Valuations is cheaper than Liihen.
  2. Much lower cost base due to being in Vietnam.

On Focus Lumber, bought only a week or two ago at RM1.05.

  1. Really cheap.
  2. Management appears relatively honest and competent.


How did things turn out

Initially, things went quite well. There was a run up in currency, revenue was rising, rubberwood export banned ensured supply and LIIHEN appeared to keep its cost in control, I sold at RM4.1 during the run up. And after the fire broke out, I started buying again.

The USD strengthened initially before correcting, which was expected, I expect the USD to continue to strengthen slowly, due to the cash repatriation by US companies from offshores, which should amount to more than USD 1 trillion. In addition, we still have the increased rates resulting in cash inflow into the US, as well as the repayment of US denominated borrowings.

A black swan event could happen, where the pseudo truth of the USD currency and treasury being the gold standard fading, and thinner yields between company bonds and treasury yields being the result of the weakening of the USD economy due to money printing, instead of euphoria by the markets, but that’s a bit too far-fetched for now I think.

Demand continued to rise, with LIIHEN hitting record revenue, however, labor constraints and cost increase, cut into profits, along with the USD weakening temporarily.

Labor cost now appear to show no signs of weakening, as the new PH government appears to be trying to cut down foreign and illegal labour. However, I honestly can’t really see them implementing a higher minimum wage or clamping down too hard, as many of our manufacturing, plantation and construction industry rely on foreign labour to keep cost low.

Having said that, I don’t see too many countries that can do it better or cheaper than Malaysia when it comes to furniture. So that is a decent moat. Do let me know if you can find one.


Potential errors in judgement.


Potential Overvaluation

For this one, I paid for earnings, not NTA, which means I needed to be a lot more stringent due to the difficulty and uncertainty levels increasing by levels of magnitude.

At the end of the day, LIIHEN, despite being managed well, is still in a cost based cyclical industry. And is in the later end of the cycle. A P/E of 7 then may very well be too high, if one expects deterioration of earnings in a few years.

I was probably also in a bit of a trading mood, betting on the USD and increased demand, instead of the intrinsic business(which to be fair is pretty good). I could say that back when I made the purchase, exuberance and valuations was a lot higher for other companies. However, I don’t think this is an excuse, as my name is not Warren Buffet, and I have so much money that I need to make less than optimal investments.

There is always something else, and worst case, fixed deposit.

The best investment scenario for cost based businesses, should be, sellng far below book, good balance sheet, and value now on P/B. Incredible expansion occur when people go from valuing P/B to P/E. Think LIONIND or PARKSON. Or CHOOBEE at one point.

Having said that, I could very well be singing a different tune if this investment worked out, and the government was a lot friendlier to foreign workers. Saying about how my analysis is correct, and LIIHEN is a good value play etc. And that its alright to pay a reasonable price for earnings, instead of fire sale prices.

Or if this was say, PENTAMASTER during the run up last year, i may even say that growth at a reasonable price is a really good idea! It is by the way, depending on your investment style.



I still think it’s a fairly decent investment, and ill be keeping them. Its probably not perfect for my investment style or size, but still fairly ok with it.

But moving forward, I will definitely be much stricter with my valuation of cost based businesses and buy in smaller tranches and diversify further. You live you learn.


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

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  3 people like this.
Fabien "The Efficient Capital Allocater" i have my fair share of wood based stock too. all are out of money with average losses of 25.60%
02/06/2018 7:53 AM
Fabien "The Efficient Capital Allocater" Jon, your weightage of 10% of portfolio is coming from latest market price or at cost? since the MV has been dropping much, original weightage should be higher right
02/06/2018 9:13 AM
KLCI King Fair & honest, thank you.
02/06/2018 10:14 AM
value88 Liihen's poor performance in recent quarter is way below my expectation.
The profit margin deteriorated QoQ by too much. The higher material cost and labour cost have been there since a few quarters ago, but why margin only down by so much in this Q (?). Let's see what happen next Q..
Latitude is in more difficult situation bcos it has plant in Vietnam, and there are many new China furniture companies in Vietnam now and the competition is stiff. I think Latitude is hard to recover in subsequent Qs.
02/06/2018 10:47 AM
KLCI King I like this statement:

"At the end of the day, LIIHEN, despite being managed well, is still in a cost based cyclical industry. And is in the later end of the cycle. A P/E of 7 then may very well be too high, if one expects deterioration of earnings in a few years."
02/06/2018 11:44 AM
Haseltine Jong people should take a close look at this article. many firms are cyclical stocks. Low PE ratio doesnt mean cheap, it just meant that that very quarter/year macroeconomic condition are fuelling earnings or lower cost.
02/06/2018 12:37 PM
Choivo Capital Latest price. never counted based on cost really. Maybe should try.

Fabien Extraordinaire Jon, your weightage of 10% of portfolio is coming from latest market price or at cost? since the MV has been dropping much, original weightage should be higher right
02/06/2018 09:13
02/06/2018 1:30 PM
qqq3 Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

hahahaha......that reminds me of OTB and his stock selection criteria......always looking to buy shares at the peak of their economic cycle when the company just reported maximum profits and always low PE stock about to come crashing down............
02/06/2018 1:50 PM
qqq3 two words......business sense....

keep business sense with you.......you can look forward to a life of luxury.
02/06/2018 1:52 PM
qqq3 worthwhile reading


And for those who want more diversification than KYY, you can read about my portfolio and how to built a portfolio by reading my posts here.

02/06/2018 1:55 PM
Fabien "The Efficient Capital Allocater" for stocks that have substantially decline in value or prolonged decline say 1 year (i copy from previous MFRS 139), i would fix the value at cost and recalculate the portfolio weightage accordingly. i maintain such alternative view on top of the usual MV-based portoflio weightage so that i won't kid myself, say if the stock has declined by 40%, that it only constitutes neglible amount to the portfolio performance because it is not. it has a small weightage because the value has eroded, at the point of origination of the investment, it is not!
02/06/2018 7:36 PM
issac99289928 Ringgit could hit 4.20 against US dollar by year end — DBS

great earning boost and furniture stocks suddenly become hot stocks again.

02/06/2018 7:51 PM
lizi thanks for sharing..
02/06/2018 7:58 PM

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