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,
On Latitude, I bought at about RM4.66.
On Focus Lumber, bought only a week or two ago at RM1.05.
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.
Conclusion
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.
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Created by Choivo Capital | Dec 09, 2020
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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
2018-06-02 09:13
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.
2018-06-02 10:47
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."
2018-06-02 11:44
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.
2018-06-02 12:37
Latest price. never counted based on cost really. Maybe should try.
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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
2018-06-02 13:30
two words......business sense....
keep business sense with you.......you can look forward to a life of luxury.
2018-06-02 13:52
worthwhile reading
https://klse.i3investor.com/blogs/qqq3/159254.jsp
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.
https://klse.i3investor.com/servlets/forum/600157964.jsp
2018-06-02 13:55
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!
2018-06-02 19:36
Ringgit could hit 4.20 against US dollar by year end — DBS
great earning boost and furniture stocks suddenly become hot stocks again.
http://www.theedgemarkets.com/article/ringgit-could-hit-420-us-dollar-year-end-%E2%80%94-dbs
2018-06-02 19:51
Fabien Extraordinaire
i have my fair share of wood based stock too. all are out of money with average losses of 25.60%
2018-06-02 07:53