Choivo Capital


Choivo Capital
Publish date: Sun, 02 Dec 2018, 07:27 PM

For better formatting, visit RCECAP 

After much consideration, i decided to share out my famous RM5,000 research. Which due to very few having seen it, is more famous for the price tag than the content. Despite the price tag being said mostly out of jest. I was however, serious about not giving it out for free.

Having said that, people outside of my investors have seen it, by virtue of having provided me value equivalent to that amount via their critiques, and their sharing of their own ideas with me, rather than actually paying the amount. 

I firmly believe that the best ideas should be kept secret. As good ideas don't come by often. This is clearly not shared by people in our forums such as davidtslim etc.

The reason more likely than not, is because its not a good idea to begin with, and they wanted to capture the profit without needed to be right by frying up the shares before they are proven right or wrong, thereby locking in the profit.

Its quite amazing for people like davidtslim to be wrong on every single one of his articles, on Hengyuan, Masteel, Lionind etc. And to still be profitable.

For more information on the above, please refer to 

The unique characteristics of the Malaysian Equities Market

The art of being a quarter predictor.

So, why did i change my mind?

They are two reasons,

  1. Its difficult for someone to understand how you think, unless they see a full bit of research. And to do so using "Google", "Facebook" etc is not good enough, as everything have already been said about those companies. One can very easily accuse you of plagiarizing it from others.

    With the opening of my site, and me deciding to start looking for investors seriously, or at least build a trail where potential investors can read and find me 3 years down the line.

    I have to pay something.

  2. With the sharp drop in equities prices in the last few months, coupled with me turning it into 32% of the fund. RCECAP have ceased to be my best opportunity, and even if it was, i can't buy more without risking my sleep. At the end of the day, its what you do not know you do not know that kills you.

    Back in late 2017, with equity prices so high, this was one of the best opportunities i can see. Currently, with prices of so many great companies falling 40-60%. I can actually find equally good investments for my fund. I've stopped buying anymore for the fund 2 months ago.

    And so the effect to my investors and myself is likely to be minimal, if any.


As always. Criticism is always preferred. I'm more interested in finding out where i'm wrong, or where you have a different perspective, than mere agreement.

I'm here to invest, via the pursuit of truth and make money. I'm not here to protect my intellectual reputation. If i turn out to be an idiot on something fundamental, its best to find it out now. 

Lets begin. 





We are long RCE Capital Berhad (RCECAP – 9296), with intrinsic value estimated at RM2.61, offering 73% upside from its current price of RM1.50 on 31st December 2017. At the current price, the company is trading at 6 P/E and 0.97X Book.


Business Description

RCE Capital Berhad principal activity consist of the provision of personal financing to government employees in Malaysia through its wholly owned subsidiary RCE Marketing Sdn Bhd (RCEM). 

Unlike typical financing arrangements, RCEM employs a unique distribution and collection mechanism. Under non-contractual arrangements that RCE has with various cooperatives and foundations, loans are channelled to these organizations for lending to their end-borrowers who are government employees, via a personal loan scheme with direct salary deduction.

As of 2017, loans are channeled to the cooperatives, Yayasan Ihsan Rakyat ("YIR") and Yayasan Dewan Perniagaan Melayu Perlis Berhad ("YYP"), through whose body, it manages the lending to government employees. Loan repayments are done through direct salary deductions.



RCECAP’s business focuses on giving personal loans to goverment servants in the B40 (Bottom 40% Earners) segment who often cannot get loans from conventional banks.

This additional risk is remunerated via higher interest rates (average effective rate of loans is 15%) and mitigated by the low loan sizes (average size of RM15,000) and most importantly, the nature of its repayment process.

The company borrows money at 4.5%-6% (via loans from banks, bond issuances, or securitzation of the loan book) and loans them out to the government servants at roughly 15% to 20%. Net of impairments, the company makes roughly 6.5% return on assets. The second highest in Malaysia

As they are a financial institution, and have much more predictable cashflows, they are also able to leverage up significantly higher than non-financial institutions safely. The company is currently leveraged 2.5 times. Giving them return on equity (return on every additional dollar invested) of roughly 16.5%.

Most non-deposit taking financial institutions can leverage up to 5 times safely. This would indicate “industry normalized” return on equity of 33% return on equity which is quite impressive.

Another thing about financial institutions, is that they are essentially perpetual growth engines. Banks generally grow in line with the economy. When people have higher income, they tend to borrow more, rather than less. This proves accurate up to a point. With the difference being the rich tend to borrow more for investments.

The low-end civil servant borrows to buy a Proton, the mid-end engineer, borrows to buy a Honda and the manager borrows to buy a BMW.

To understand further about the development of credit, and how the US went from being a nation of net-savers to net consumers (and how most of the world is following in those footsteps), read “A Piece of the Action: How the Middle Class Joined the Money Class” by Joseph Nocera.


Investment Thesis

  • Favourable Industry Dynamics and unwinding of biggest competitors

    Remuneration of government employees have grown from RM16 billion in 2000 to RM78 billion in 2018 or CAGR of 9.2% per annum. RCE Capital Berhad loan book of RM1.4 billion consist of only 1.4% of the RM100 billion market for personal loans to government employees.

    Since 2013, its biggest competitors (Bank Rakyat and MBSB) have been unwinding their loan books, with their growth tapering, or stopped altogether. On the other hand, the loan book of RCECAP have been growing at CAGR of 7.7% from 2015 to 2018.

    Why? Well, referring to the report by Maybank

    “In 2009, MBSB burst aggressively into the personal financing space, with a 4-year CAGR (2008-2012) of 169%, and its personal loans portfolio ballooned from just MYR342m in 2008 to MYR17.8b by 2012. Competition among the players heated up and soon, institutions were extending personal loans of up to 20-25 years in tenure (as opposed to 5-7 years for loans extended by the commercial banks).

    Concerned over the rise in household debt, which stood at 82.9% at end-Mar 2013, BNM announced several restrictions in July 2013 that included: 1) a maximum tenure of 10 years for personal financing and 35 years for residential and non-residential properties; and 2) prohibition of pre-approved personal financing products. We understand that it also encouraged banks and NBFIs to comply with a debt/service ratio (DSR) cap of 60% for urban borrowers with income of 

    RCEM’s loan book was marginally impacted, declining 2% in FY14, but the biggest impact was to its bottom line. A decision was made to revalue its receivables that were up to 25 years in duration, in light of the shorter tenure imposed by BNM. This resulted in higher provisions and a plunge in RCE Capital’s net profit to just MYR10m in FY13 and MYR13m in FY14, from MYR101m in FY12.”

    Basically, after that happened, everyone had to make provisions and got burnt. MBSB took on a kitchen sinking exercise that lasted 3 and a half years. Their biggest competitors then decided to focus more on home, corporate/commercial financing. With MBSB taking up a banking license.

    Due to the unwinding or non-growth of its competitors’ loan books in this sector, they can make higher quality loans, resulting in Non-Performing Loans (NPL) falling from a high of 15.7% in 2012 to roughly 4% in 2018, with the NPL of new loans made after the change in credit assessment averaging just under 2%.

    Even in banking, the words of Seth Klarman rings true.

    “Where to best apply your focus and skills depends partially on where others are applying theirs. When observing your competitors, your focus should be on their approach and process, not their results. Short-term performance envy causes many of the shortcomings that lock most investors into a perpetual cycle of underachievement. You should watch your competitors not out of jealousy, but out of respect, and focus your efforts not on replicating others' portfolios, but on looking for opportunities where they are not.”


  • Skin in Game

    One of the best things about financial institutions is that, if the company is properly managed, it can be very hard for things to go wrong.

    As the income is recurring and largely predictable, if one manages their cashflow, loan requirements, risk models and actuarial tables well, money comes in like clockwork, every single day, on the dot.

    In addition, as the product is cash and well, everything in the business is basically cash. The companies are thus by nature, much more efficient at putting money to work.

    One avoids the inevitably lower returns that come from conservatively managed companies with robust cash balances. No matter how competent they are.

    The risk of bad capital allocations is also lowered. As there very little need for large capital expenditures (relative to the equity), which looking at the average, is anything but equity accretive.

    To obtain above average results, the management only needs treat the money as their own, be conservative, check twice and ensure that the risk taken in giving out loans is generously compensated.

    Given the requirements above, it’s clear that financial institutions that perform better, are likely to be owned by private companies or individual. Rather than a CEO hired by a state owner.

    And this is backed by research done globally. As per research by Marcia Millon Cornett, Lin Guo, Shahriar Khaksari and Hassan Tehranian on June 2005

    “The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison”

    The research stated, and I quote: 

    “We find that state-owned banks generally operated less profitably, held less core capital, and had greater credit risk than privately-owned banks prior and the performance differences are more significant in those countries with greater government involvement and political corruption in the banking system”

    RCE Capital Berhad have 61.5% of the shares being held by Tan Sri Azman Hashim, via his 100% owned company Cempaka Empayar Sdn Bhd.

    For more anecdotal and local examples, one can also refer to anecdotal evidences of the share prices and profitably of banks with strong private influence, such as Public Bank and Hong Leong Bank. As well as other privately-owned financial institutions such as Aeon Credit Service Berhad and Elk-Desa Resources Berhad.

    These companies have had profitability growth and share price increase far higher than the average state held financial institution such as Maybank etc.



  • Customer base consist primarily of B40 government employees.

    RCECAP’s business focuses on giving personal loans the B40 (Bottom 40% Earners) population and government servants who often cannot get loans from conventional banks.

    This additional risk is remunerated via higher interest rates (average effective rate of loans is 15%) and mitigated by the low loan sizes (average size of RM15,000) and most importantly, the nature of its repayment process.

    Unlike other loans, as these are loaned to government servants, this allows the company to make direct deductions on the salary. Every month, RCE Capital gets paid before the borrowers even sees their salary. There is a 1-2 month delay for the first deduction.

    In addition, as the guarantors are also often government servants, in the event the original borrower cannot make the payment, the Company will simply deduct the salary of the guarantor, providing a second layer of safety.

    In addition, Malaysians have historically had low financial knowledge or education. A study by Asian Institute of Finance (AIF) found only 28% of respondents confident of their financial knowledge.

    This is despite our natural human propensity to overestimate our own abilities as seen in another study where 80% of respondents considered themselves in the top 50% quartile when it came to driving ability.

    This lack of financial knowledge is particularly prevalent in B40 individuals, with most being unable to differentiate nominal and effective interest rates. Instead, focusing on monthly instalment amounts and upfront payments. They look at cashflow and their ability to meet them, not the interest rate charged. This allows the company to structure the loan to charge high interest over a very long period of time in exchange for lower payments.

    This ability allowed the company to make higher than usual profits. RCECAP have the second highest ROA in the industry at 6.11%. Most banks have ROA of less than 1.5%.

    As RCECAP can obtain loan repayments via salary deductions, they are able to issue personal loans much faster than the typical banks with no collateral down, giving them an edge.

    One of the ways the company sell these loans, is to have an officer bring all the paperwork to the client and complete the relevant checks proceed with loan disbursements within a day, or in some cases, in a few hours. To be able to issue loans so quickly without affecting loan quality is quite an edge.




  • Increased Dividends

    Given the increased profitability and financial standing, the company have enacted a policy of paying out 20-40% of earnings. Dividends this year have risen to 7 sen a share (27% payout), compared to 3 sen a share previously. 



  • Time and increasing earnings

    Time is the friend of a good investment and the enemy of the bad one. Given the current valuations and the economics of the business, a purchase of the stock would likely be a good investment.

    At the end of the day, behind every stock is a company. And increased earnings result in
    higher valuations. With earnings steadily rising, and likely to be resilient. One can probably expect a good outcome.


Key Risks

  • Slowdown in remuneration or job cuts by the government.
    In Malaysia, we are well known to have a fat civil service, with the GE14 elections coming up, one would naturally worry about a downsizing in the civil service.

    However, allow me to point out that, historically worldwide, no government has ever cut the civil service, despite how bad things may become. And no government that has won office and cut the civil service have ever been re-elected.

    Government servants in the US are among the best paid worldwide with average salaries of USD70,000 per annum, with productivity per employee being almost lower than Greece.

    In San Jose, California, City Councils and politicians would rather cut down infrastructure maintenance and issue bonds just to meet ever increasing payrolls. Even quasi dictatorships like Venezuela, which is currently facing inflation in the millions of percentage points, have not yet started firing government employees.

    For more information, read this

    California and Bust

    In Malaysia, the incentives are even stronger, with government employees being the single largest voting base. Our current prime minister, Najib won the last election by fattening the civil service.

    In the event PH wins the election (which I consider to be more than likely), they are not so foolish to ever consider that. Tony Pua have said the same many times over the years, and Mahathir is more than aware of the reality of the situation.

    At best, they can only freeze higher and lower increments. Which given the valuations, is more than priced in.

    The real risk, is in B40 government servants, leaving the civil service in large number to join the private sector. But this is highly unlikely for a few reasons.

    The kind of lifestyle afforded by being in the civil services, is very different from that of the private sector. In addition, that “1 hour breakfast, 2 hour lunch, 1 hour tea break” (not counting the smoke breaks etc), is likely to have slowly eroded the employability of the average B40 civil servant.

    To top it, civil servants also need to put in their 30-35 years to get the maximum pension. To leave before that period, is to lose almost everything.


  • Mismatch of cashflow
    Given the high leverage, management of cashflow is key. In the last financial crisis in 2008, other than,

     - The wanton abandon of standards in writing housing loans
     - The extremely high leverage of investment banks

    The reason the crisis happened and either bankrupted or destroyed the equity layer of banks in America and in other parts of the world is due to mismatching of the cashflow.

    This usually means taking out short term loans to buy long term assets. Needless to say, when one does business this way, the inability to roll over loans (or obtain new ones) and liquidate assets at reasonable prices quickly, can spell disaster.

    Historically, RCECAP have obtained financing via term loans from Ambank (where Tan Sri Azman Hashim, the owner of RCECAP, holds 12.97% shares).

    In recently years, it has shifted its financing from term loans to Sukuk Issues (bonds, but Islamic). These bonds were created via the securitization of the loan book, and the interest payment is paid out from the interest income received from the loan book. There are a few benefits to this.

     - Payment schedule is stretched out over a longer period.

     - Interest rates are now fixed, not floating, with a negligible increase in interest cost.

     - Borrowings is secured against the loan book instead of the company. Limiting exposure. Having said that, if a scenario where the loan book is taken away due to the inability to meet interest payments occurs, we are likely to be in trouble as well. Just a little less if it were a term loan instead.

    The downside to using a Sukuk, is that increasing deposits are needed to secure every drawdown of the sukuk. Resulting in less efficient but safer capital structures.


  • Inability to access CCRIS
    Currently the company is still unable to access BNM’s CCRIS system. The reason given being BNM’s priority in providing this access to other larger providers.

    However, the Company mitigates this by referring to CTOS reports. Which is arguably just as good and used by financial institutions.

    Another reason for the increased profitability is due to their own proprietary credit scoring system created in 2013, that helped to better sieve out customers profitably.

    We do not have details on this system, as the information is naturally P&C.


  • Other unquantified risks
    Prior to 2011, RCE did business with primarily KOBENA, KSB and KOWAJA. Post 2011, the business relationship with those 3 cooperatives have been terminated, and RCE now has two new business partners in YIR and YYP.

    In addition, in 2012, KOWAJA had to temporarily cease giving out personal loans, this affected the profit and revenue somewhat. The reason is not known.

    Currently the probabilities and effects of a change in partner/partners as well as potential for cessation of loan notices being given is also not known.




The average loan duration in RCECAP is about 7-8 years, with average loan size of RM15,000. At the current P/E of 6. Given the quality of the loan book, one can deduce that the company is currently selling at less than liquidation value.

Given the high-quality loan book (6% ROA compared to the typical less than 1.5% for most banks. A conservative PE of 10 appear to be fair, with other companies like Elk-Desa Resources Sdn Bhd and Aeon Credit Services Sdn Bhd, having P/E’s of 12 and 11.

To understand more about the valuations of financial institutions, kindly read the below article.

The valuation of financial institutions. And why Coldeye is wrong on MBSB




As expected, Pakatan Harapan won the elections. It may have been better if they have lost in the short term for RCECAP, but over the long term, it should still be a net postive.  For my thoughts on these, you can refer to,

PH Win, I Called It!! Whats next?

The Malay Tsunami and the effects of elections on the economy (and by extensions, the market)

In relation to the things that will directly affect the company, our current prime minister, have reiterated our view, that the civil service cannot be cut. Or in the words of Tony Pua “Unthinkable”.

The 17,000 government servants/political appointees that will be let go is by and large high-income earners. With Tun Mahathir, stating that the B40, if any will be spared.

In any government, the lowest income groups are the last to be fired, if ever. As they consist of the largest demographic. Votes are one man one vote. Not one dollar one vote. Thankfully.

With the new government in place along with a much higher earnings base I do not expect, growth to continue as strongly as they did in prior years.

However, given that valuations are still at liquidation value, despite the increase in profits and the doubling in dividends. This sheer margin of safety, means that the difference in price to intrinsic value is still very attractive.

Refer here.


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8 people like this. Showing 19 of 19 comments


Finally, i have achieved what i wanted....Jon's recommendation without taking out 5k from my pocket... he he

I like it. Keep it up Jon!

sifu Jon, any idea...why the revenue dipped after 2010 by almost 50% by year 2014?

2018-12-02 19:51

Jon Choivo

BNM was afraid of housing debt being too high and started 2 rulings.

1) a maximum tenure of 10 years for personal financing and 35 years for residential and non-residential properties

2) prohibition of pre-approved personal financing products. We understand that it also encouraged banks and NBFIs to comply with a debt/service ratio (DSR) cap of 60% for urban borrowers with income of MYR5k/month and sub-urban borrowers with income of MYR3k/month.

Back then some personal loan was at 25 year tenure or so, this meant all the borrowers had to call in or restructure the current loans.

Needless to say many could not pay back the new amounts, and thus, they had to impair.

2018-12-02 19:56

Jon Choivo

Unlikely to keep it up to be honest. Unless the new position also reach maximum size.

2018-12-02 19:56

Jon Choivo

Not a buy call, got equally good investments in the market now.

2018-12-02 20:06


Wow very good research.
Do you have the insight on asset ratio between deduction at source and non deduction at source?

2018-12-02 20:51


Thanks for sharing. But I' sure you pissed off those who paid the 5k hahaha

2018-12-02 21:06


stock market very easy one......

any stock also can trade...good bad ugly also can trade as long as price and situation is right.


Good management, good business and good numbers in that order......

if it does not look right, don't get involved...much easier than analysing KYY comments.......

the next question is....u want to be contrarian or you want to join the crowd.....

see....its easy....but this ss guy is weird because he doesn't seem to have a he goes off talking about any thing every thing except stock market........

2018-12-02 21:13

Jon Choivo

Haha nobody paid 5k. usually they invest in the fund.

or we just talk and if i think they're critique will be of value, i'll share.

soojinhou Thanks for sharing. But I' sure you pissed off those who paid the 5k hahaha
02/12/2018 21:06

2018-12-02 21:16

Jon Choivo

Not sure how you mean.

However, they can only deduct up to 60%.

feimah Wow very good research.
Do you have the insight on asset ratio between deduction at source and non deduction at source?
02/12/2018 20:51

2018-12-02 21:18


RCECAP’s business focuses on giving personal loans the B40 (Bottom 40% Earners) population and government servants.
What is the loan exposure % between B40 and govt servants?

2018-12-02 21:23

Jon Choivo

They only give to government servants if im not mistaken.

Some say certain GLC staff can get loans from co-ops as well. But i never asked.

good catch.


Posted by feimah > Dec 2, 2018 09:23 PM | Report Abuse

RCECAP’s business focuses on giving personal loans the B40 (Bottom 40% Earners) population and government servants.
What is the loan exposure % between B40 and govt servants?

2018-12-02 21:29


Thanks for your speedy reply. It is a good piece of work you shared here.

2018-12-02 21:32


Good. Finally some quality article being posted on i3.

2018-12-02 21:37


Good one.

However, under the present government, anything could happen. That's the risk premium.

2018-12-02 21:38


Dear all,
Repost my comment from other blog:
Dear Fabien Extraordinaire,
In the world that reward mediocre, pretender and half hearted effort. A raw diamond, rare talent and passionate work are indeed a very rare to find and when one comes along into i3 community we should welcome him and if possible give him some constructive critical review and help in polishing this raw diamond into a shining star.
Jon is young, well read, knowing his subjects well, articulate, passionate and has the fire/braveness inside him to confront establishment with out of box idea and fresh air. These are the qualities New Malaysia needed the most from our Y&Z generation with critical thinking that can make an impact for the betterment of society and country.

Yours question:
Koon+ Bee + Choi = an awesome team a world champion
My take on the above is the team would not happen and it won't work.
Simple reason being their investment philosophy and thought process is vastly different from each other.
Their brain is wired in a very different way.

My take: In the place I work now there is this statement from our President Director;
Our Key Driver: People
We believe in developing a high performance team this is greater than the sum of its parts. Our team members contribute their unique backgrounds and cultural experiences to ensure high quality products to our customers.

It is because of vastly different thought, investment philosophy and across three different generations that will make this team awesome. Of the three, someone has told me Mr. Koon’s brain had already been hard wired for so long and impossible for change but reading Koon’s latest humbling article of JAKS Forced Selling. Please don’t count Mr. Koon out from this team yet.

Thank you

2018-12-03 08:57

Jon Choivo

Thanks Sslee.

2018-12-03 11:20


its just a small growing company. nothing to shout about... dont bet too big on it.

2018-12-03 15:43

Jon Choivo

Yeap. They are some additional risk i did not disclose, as i was too lazy to write. But its not a fantastic company. Merely good. But at this price. Well.

2018-12-03 16:12


Jon, may be the stock not that exciting. Hopefully the main shareholder need to do something about the share price. Haha. I don't hold any moment?

2018-12-20 20:14

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