Investing in Bursa: Cash is king kcchongnz

kcchongnz

Publish date: Thu, 14 May 2015, 07:38 PM

How do normally people talk about stocks in forums? How do people normally “invest” their hard-earned money? Let us go and view a thread in i3investor and see what they say.

“Go..go..go.....tp 20c ...tomolo “

“13cents maybe will consider, 0.155 i don't dare to pick up”

“vsolar broke 0.165 strong support will extended drop to 0.10 “

“0.175 block sudah hilang..but 0.165 still makan tak habis.. “

“0.17 now... unload while u still can before drops to 0.15-0.16 “

“When is a good time to buy? @ 0.2? 0.18? 0.15? “

“Rebound! Rebound! Rebound”

“TA also weekly chart also shooting star and bearish engulfing,,that mean next week will extended drop...”

Did they talk anything about the business? Isn’t investing in a stock investing in part of a business?

Let us look at some research reports from investment banks

Maybank Research on Tan Chong

1Q15 earnings above our expectation, below consensus.
Raise our FY15-17 net profit forecasts by 18% p.a., TP by 1% to MYR3.45 (+1%) on unchanged 0.8x FY15 NTA peg.

On Perisai

1Q15 results in line, but 1st rig may succumb to rate cuts, while delivery of 2nd rig is likely to be delayed till end-2015.
Cut 2015/16/17 net profit forecasts by 50%/36%/17%, largely on lower profits from rigs operation.
Downgrade to SELL; TP lowered to MYR0.42 (-35%), based on 7x 2016 PER (unchanged).

Valuing Tan Chong based on its net tangible asset (NTA)? Valuing Perisai based on 7x 2016 PER, or price-to-earnings ratio. Why 7, and not 8, 10, 15, or even 30? Why based on 2016?

Has any of these analysts run a business before? Do you agree that investing in a stock, unlike speculating or punting, is about investing in part of a business?

Many may argue with me that they have made a lot of money from the stock market following the above methods or “strategies”, and no necessity to understand a business, but what I know from academic research is to the contrary. And being a person who have done academic research before, I do know academic research is very rigorous, unlike wild claims. The link below shows some research about the outcome of individual investors speculating in the stock market.

http://klse.i3investor.com/blogs/kcchongnz/75553.jsp

And what is wrong in all those analyst reports above?

What is important in a business?

I have worked in the construction industry for many years. The last 12 years I was working in a well-known public listed construction company, mainly doing deep foundation works. Before I was posted to take charge of an overseas wholly subsidiary company, I used to hear good financial performance of this subsidiary company; that they have a lot of huge projects and making a lot of profit, a company with profit growth every year. At that time, I know nothing about accounting and finance. I didn’t know why the financial controller and the finance director in the Headquarter were not happy about the performance of that company, because the head office had to constantly remitting money there. Eventually those key people in-charged were kind of forced to resign.

When I was posted there to take charge of the office, I encountered a lot of problems. Yes, there were a lot of profit in almost every project, but the clients of almost every project seemed to owe us a lot of money. The truth was there were delays in many of those projects for all kinds of reasons. We were claiming for a lot of variation works, unforeseen different ground conditions, delay in issuing of construction drawings, additional costs and loss of profits for delay allegedly due to the client or the consultant’s faults. The other sides were accusing us delaying the work and problems in the work and slapped us with additional works done by third party, and liquidated and ascertained damages (LAD) for delay. Who was right and who was wrong?

So in our book, we have these revenues and profits of additional claims, additional works, but no LAD allowed, of course. We had a lot of profits, profit hidden in uncertain claims, in receivables which were highly arguable. Contractors are always burdened with all these problems, not a nice place to be in.

So we had profits and profit growth, lots of them, but no cash as the clients don’t pay. In fact they asked money from you because you delayed their projects, causing them to lose money for not able to hand over the site to their building contractors and hence delay in the completion of the projects.

So to me in construction, as well as in any other business, cash is king, not profits, nor profit growth, not PE ratio, ROE. The success of a business hinges mainly on its ability to generate cash, and grow internally with the cash generated internally. Even if you talk about profit, it has to eventually shown in real cash. No company can sustain its growth without eventually getting cash from the business.

Look at those high growth companies without generating cash as discussed in this thread here:

http://klse.i3investor.com/blogs/kcchongnz/63777.jsp

How have their share prices performed in the long-term? Need I say more?

Why is cash important?

A business needs to pay all the expenses such as administration, marketing, workers, plant and equipment, materials etc. to produce goods and services. After deducting cash to pay for all these stuff, and sold or executed the services and receive cash, you get some cash left over from the operations, termed cash flows from operations (CFFO). In order to fund growth, the company also needs to spend some cash to buy new equipment, upgrade its fleet of plant, or what we termed capital expenses, capex. What is left then is the free cash flow (FCF) in the year. Without this FCF, there is no money for distributing dividends to shareholders, to invest in other profitable ventures, pay down debts, or buy back shares when they are selling cheap.

Of course a company can resort to issue new shares, borrow more money from banks to fund all these stuff. Many of those high growth companies in the link above did just that. However, issuing more shares dilute your interest in the company. Borrowing more needs to pay more interest. Worse it becomes more risky in time of economic downturn when banks may show no mercy in recalling back their loans in the worst timing. Has any analyst tell you about these?

Let us look at two construction companies listed in Bursa which I happen to be more familiar with, Pintaras Jaya Berhad and Kimlun Corporation Berhad.

Cash flow of Kimlun

Table 1 shows that Kimlun has consistent profit for the last 5 years. It has a good profit growth of about 8% a year for the last 4 years too.

Table 1: Cash flow for Kimlun

Year	2014	2013	2012	2011	2010	Av 5-yr
Net profit	49182	35476	49222	42676	36559	42623
CFFO	82714	-17671	-60228	-38536	37012	658
Capex	-18088	-37172	-75589	-12080	-20792	-32744
FCF	64626	-54843	-135817	-50616	16220	-32086

The problem is, especially for the three years from 2011 t0 2013, there were negative CFFO, meaning that the company has to fork out money from somewhere to fund its operations, or not enough cash collection to pay for administration expenses and working capital requirements. FCF during those three years was at a total negative of 240m, meaning that the company had to find 240m somewhere else in those three years, just to keep its doors opened. In the last 5 years, cash received just barely enough for its operations. But what about cash needed for capital expenses, paying dividends etc.?

A look a t its balance sheet tells the story as shown in Table 2 below.

Table 2: Balance sheet of Kimlun

Year	2014	2013	2012	2011	2010	2009
Share capital	150281	120225	120225	114500	114500	82500
Total debts	179080	235126	161439	65025	31109	45878
Cash	86103	32128	36334	81653	111217	68013
Net cash	-92977	-202998	-125105	16628	80108	22135

Kimlun has to do just that; issuing more shares and borrowing more money each year. The share capital, or the number of shares, has almost doubled from 82.5m to 150m in the last 5 years from rights issues and private placements, diluting the earnings per share. Total borrowings from banks has increased by 4 times from 46m to 179m. It is all the bad news. The good news is it has improved considerably in the recent year in 2014. This is due to none other than improved cash flow. The question is will this sustain the next year. It has to if it wants to survive. That is how I see it.

Cash flow of Pintaras

Table 3 below shows the profit and cash flow of Pintaras Jaya for the last 5 years. You can see a total different picture.

Pintaras net profit grows by 27% a year from 2010 to 2014. Its CFFO grows in tandem, the same can be said about its FCF, despite its heavy capital expenses for growth.

Table 3: Cash flow of Pintaras Jaya

Year	2014	2013	2012	2011	2010	Av 5-yr
Net profit	54238	52317	42149	25682	20737	39025
CFFO	63300	49090	54592	24353	12848	40837
Capex	-33874	-8233	-20230	-30291	-10056	-20537
FCF	29426	40857	34362	-5938	2792	20300

How does this good cash flow impact on its balance sheet?

Table 4: Balance sheet of Pintaras

Year	2014	2013	2012	2011	2010	2009
Share capital	160128	160128	160128	160128	160128	160128
Total debts	0	0	0	0	0	0
Cash	168721	155459	122429	101741	97331	94892
Net cash	168721	155459	122429	101741	97331	94892

The share capital doubled from 80m to 160m from a one-for-one bonus issue capitalized from its retained earnings, not as a rights issues and hence did not dilute the interest of the shareholders. It needs not borrow any money from the banks as the cash it receives each year, after spending to buy more machineries for growth, still left a lot in its balance sheet, after paying increased dividend each year with a dividend yield of about 5% each year. Need I say more about this?

Figure 1 in the Appendix shows the relative share price performance of Pintaras and Kimlun for the last 5 years. A picture paints a thousand words.

Conclusions

It is entirely possible for a company to generate “profits” while operating at a cash loss. But take heed. Businesses don’t grow because of profits. Vendors don’t take “profits” in lieu of cash payments. Owners don’t make money with “profits”.

Success in a business, growth, stability in business all come down to one simple thing: Cash.

Why your advisers or the analysts aren’t tell you all these? Why don’t you take heed on that?

K C Chong at ckc15training2@gmail.com

Appendix

Discussions

14 people like this. Showing 29 of 29 comments

truthseeker1

As usual bias is prevalent in his blogs. Why only his counters got cash?

2015-05-14 20:45

sephiroth

Mmode = CASH IS KING co.

http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=186226&name=EA_FR_ATTACHMENTS

Total shares 162.7095m

Total cash 27.6 sen per share (44.907m/162.7095m)

Total borrowings puny 1.07 sen(1.747m/162.7095m)

2015-05-14 20:49

YiStock

mr kcchong, may i ask..when u diagnose a company's financial,there are always two parts: NOPAT and comprehensive income after tax (usually involved foreign ccurrency translation gain/loss. May i know:
1) which figures is more reliable to use? certain company has high portion of forex gain/loss against NOPAT, year in year out, making the comprehensive income especially high.
2) do u consider to use comprehensive income if forex play big role on company 's day to day biz..or strictly to look on NOPAT still.

Apreciate your kind feedback. Tqvm

2015-05-14 21:26

chrisyap

yes yes mmode is cash rich ! kiki

2015-05-14 22:21

CCCL

Eksons have more than 70cts cash per share, sadly directors too stingy :(

2015-05-14 22:51

truthseeker1

Perhaps stingy people likely to have a lot of cash. What are Bursa stingy counters?

2015-05-14 22:53

爱丽丝梦幻世界

kcchong, u are right. i agree "business important"! Appreciate ur post & i learn a lot from u. still remember last time: Stocks less than 50 sen but not too bad as investment?

Posted by kcchongnz > Dec 24, 2012 08:16 PM | Report Abuse

al833D, you like NTPM? Me too.
Great consumer stock too. Revenue has been growing nicely for the past years. Its profit dropped the last two years though due to rise in cost of material, paper and pulp, and other operating costs. Its recent quarterly results improved immensely. Trailing twelve month earnings per share of about 4 sen and PE about 10. Undemanding market valuation. Seems like potential of further operating improvement. A re-rating soon?
http://www.intellecpoint.com/search?q=ntpm
You also like Keladi, Skpres, InaRi and Cheetah pwroot. Could you tell us why you like them, preferable with some numbers? I also hope others input their opinions and analysis too. You know it is only that much I alone can do. Thanks first.

2015-05-14 23:30

爱丽丝梦幻世界

http://klse.i3investor.com/servlets/pfs/25991.jsp

2015-05-14 23:30

The One

l|[•]|l Excerpts from many sites and also my own views: Malaysian bourse used to be an exciting place to invest but that was in the past and not anymore. Bursa failed to curb predetermined fates of counters.. corrupted analysts.. published rumours that later faded away or denied.. mainly controlled by syndicates and and their heaven for money laundering and squeeze money from our coffers.. thus.. exit while you can and dont fall trap to them and your egos •

l|[•]|l Farewell Bursa Malaysia •

2015-05-15 01:12

sunztzhe

I shall focus on the right business model, the industry type it competes in, the right competent management structure to execute the biz strategy and the right entry price...the rest are secondary.

2015-05-15 01:33

kcchongnz

Posted by YiStock > May 14, 2015 09:26 PM | Report Abuse
1) which figures is more reliable to use? certain company has high portion of forex gain/loss against NOPAT, year in year out, making the comprehensive income especially high.

Me: I always view foreign exchange gain/loss as a one-off item and it is not representative of the performance of a company. Foreign exchange rate goes up and down every year at random and unpredictable. I would ignore that, including other one-off items such as revaluation of land, gain/loss of disposal of an investment etc.

2) do u consider to use comprehensive income if forex play big role on company 's day to day biz..or strictly to look on NOPAT still.

I only use NOPAT or net profit.

2015-05-15 04:51

YiStock

Thank you very much mr kcchong

2015-05-15 06:09

skyz

Go..go..go.....tp 20c ...tomolo <<< this one always can see, spinned by Dr Warrant at Nexgram forum. lol

2015-05-15 08:35

NOBY

Very true... very seldom you see analysts talking about cashflow or measuring a company from the health of its cashflow...

2015-05-15 08:46

fayeTan

good writeup... Price To Cash Flow may be better than Price To Earnings Ratio

2015-05-15 10:17

kcchongnz

Posted by NOBY > May 15, 2015 08:46 AM | Report Abuse
Very true... very seldom you see analysts talking about cashflow or measuring a company from the health of its cashflow...

Perhaps one of the reasons why analyst don't talk about cash flow is probably they think the message won't be properly disseminated anyway. Just read the posts below. Despite a lengthy writeup by me on what cash flows are, they talk about completely different thing.

But if one wants to invest successfully in the stock market, investing in a piece of any business, I think you must think like what businessmen think. Don't you agree?

Posted by sephiroth > May 14, 2015 08:49 PM | Report Abuse
Mmode = CASH IS KING co.
Total shares 162.7095m
Total cash 27.6 sen per share (44.907m/162.7095m)
Total borrowings puny 1.07 sen(1.747m/162.7095m)

Posted by chrisyap > May 14, 2015 10:21 PM | Report Abuse
yes yes mmode is cash rich ! kiki

Posted by CCCL > May 14, 2015 10:51 PM | Report Abuse
Eksons have more than 70cts cash per share, sadly directors too stingy :(

Posted by truthseeker1 > May 14, 2015 10:53 PM | Report Abuse
Perhaps stingy people likely to have a lot of cash. What are Bursa stingy counters?

2015-05-15 10:28

YiStock

Mr KC, any general guide on "Cash per share" a company should reasonably retained/maintained in order to optimize the opportunity and risk? Thank you

2015-05-15 10:33

NOBY

KC, maybe you should rename title to Cashflow is King instead of Cash is king... haha

2015-05-15 10:35

contemplator

The research reports from bank= Collection of free jokes

2015-05-15 10:35

speakup

looking for a Cash rich company.... try MPHBCAP

2015-05-15 10:41

speakup

MPHBCAP:
Cash RM595M
Borrowing RM63M
Shares issued 715M
Net cash per share RM0.74/share!

2015-05-15 11:07

adcool

unfortunately, some companies with healthy or in fact high cash flow are considered risk averse companies and with no growth potential. Hence, their counter prices are forever uninteresting. On other hands, some pump up their cash with more debts or selling of assets. Hence, should always take this into consideration.

2015-05-15 11:48

kcchongnz

Posted by YiStock > May 15, 2015 10:33 AM | Report Abuse
Mr KC, any general guide on "Cash per share" a company should reasonably retained/maintained in order to optimize the opportunity and risk? Thank you

My rule is if a company has high return on marginal capital and has good opportunity for reinvestment opportunity for growth, it should retain as much as possible its earnings for growth.

On the other hand, if a company has no opportunity for growth, whatever it earns should distribute all to its shareholders, even if it has high return on capital.

2015-05-15 11:58

YiStock

Mr KC, "High return of capital" different from " high return on marginal capital"?

2015-05-15 12:25

kcchongnz

Posted by YiStock > May 15, 2015 12:25 PM | Report Abuse

Mr KC, "High return of capital" different from " high return on marginal capital"?

Marginal capital is earnings retained for the next year. If that retained earnings can made return higher than the cost of capital in the following year, then it is good as it is a wealth maximizing action by the management.

The easy way to look at it is to see if the return on capital is increasing year after year. This is not an easy feat. Moreover, the past may not represent the future.

2015-05-15 12:46

YiStock

Mr Kc, 受教. Deeply appreciate. Thank you

2015-05-15 12:52

kcchongnz

Posted by truthseeker1 > May 14, 2015 08:45 PM | Report Abuse
As usual bias is prevalent in his blogs. Why only his counters got cash?

Oh, that is the way you digest an article. Strange.

Never mind, can share with us your counters with goo cash flows from operations and free cash flows ah?

2015-05-15 13:24

kcchongnz

Posted by 爱丽丝梦幻世界 > May 14, 2015 11:30 PM | Report Abuse
kcchong, u are right. i agree "business important"! Appreciate ur post & i learn a lot from u. still remember last time: Stocks less than 50 sen but not too bad as investment?

Alice, you brought back my memory here.
http://klse.i3investor.com/servlets/discuss/167643.jsp

Congrats Alice. Your portfolio return 162% from 1/1/13 to 14/5/15, amazing. Better than the KLCI of 13.5% during the same period. You did it your way. Below is your result, fantastic. It is better to discuss and share isn't it? Rather than throwing shit around like these three guys below, or one guy?

1/1/2013 14/5/2015
Stock Name Ref Price Adj Price Price now Change %change
NTPM 5066 0.450 0.410 0.720 0.310 68.9%
Inari *0166 0.395 0.360 3.360 3.000 759.5%
Keladi 6769 0.215 0.210 0.290 0.080 37.2%
PWRoot 7237 1.170 1.110 1.720 0.610 52.1%
SKPRes 7155 0.350 0.330 1.010 0.680 194.3%
Cheetah 7209 0.490 0.460 0.490 0.030 6.1%
Pantech 5125 0.675 0.610 0.730 0.120 17.8%

Average 162.3%
Median 52.1%
KLCI 1675 1579 1805 226 13.5%

Posted by iafx > Jul 31, 2013 11:27 AM | Report Abuse
si-tipu-roti-canai, don't copied and modified other's comment again, ok?! enjoy your 38%.... hahahahahaaaaaaaa....

Posted by donfollowblindly > May 12, 2015 09:21 AM | Report Abuse
Newbie a lemon pick from kcchong which is total gone case in just 9 months ago. Stocks indicated in the above blogs is not totally gone case some may take longer time to recover.
http://klse.i3investor.com/blogs/kcchongnz/58905.jsp

Posted by truthseeker1 > Oct 18, 2014 08:53 PM | Report Abuse
Maybank C6. Recommendation time 10.5sen. Now 4.5sen Loss 6sen. If follow KCChong advise to invest 960,000shares at 10.5sen, Maybank C6 value will drop to RM43,200 a loss of RM57,600 in less than 2 months. Stock market is not a place for fun(last paragraph), genting casino or gambling is. KC why so quiet on this blog?

2015-05-15 15:32

kcchongnz

Posted by The One > May 15, 2015 01:12 AM | Report Abuse

l|[•]|l Excerpts from many sites and also my own views: Malaysian bourse used to be an exciting place to invest but that was in the past and not anymore. Bursa failed to curb predetermined fates of counters.. corrupted analysts.. published rumours that later faded away or denied.. mainly controlled by syndicates and and their heaven for money laundering and squeeze money from our coffers.. thus.. exit while you can and dont fall trap to them and your egos •

l|[•]|l Farewell Bursa Malaysia •

I have shown again and again that value investing works, and it continues to work, and it works very well, extremely well I would say, despite of all what you have mentioned.

The trick is do not fall into their tricks. Play your own game, in your own field.

Learn some fundamentals of value investing. Learn how to fish. Don't eat rotten fish thrown to you.

There ain't no fairy in Bursa.

2015-05-15 18:23

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