kcchongnz blog
V.S Vs Globtronics kcchongnz
This article is for sharing of opinion. It is not a buy or a sell call.
When I wrote an article on V.S recently in the thread below, there were quite some interesting debates about it. Thanks for the valuable feedback.
http://klse.i3investor.com/blogs/kcchongnz/76875.jsp
That is good as we all can learn from them. Although the argument can be a little heated up and blunt at times, I hope participants do not get offended and angry with each other. After all it is a sharing of knowledge, and it is not about personal attack.
My argument was “cash is king”. If there is no cash an investor can extract from the business, it is not a No-Brainer Investment, or NBI, purely in my context. A couple of forumers argued fervently that V.S is a good investment because of its fantastic growth prospect, and that we must be forward looking, and it is no use looking at past financial statements. They claimed that V.S is cheap at RM4+, as compared to MPI and Globtronics. Some argued about the qualitative aspect, that the management is very good, their integrity and willingness to share, and they are the experts in the industry.
The above arguments somewhat have their validity, after all, who can argue about the steep rise of its share price recently? And yes, my knowledge about V.S is also limited; I don’t know about its future, its management. I don’t have enough insights, insider information as some possess, and that is why I only rely on the past performance to make an educated guess. So please bear with me.
As an individual investor, we have our limitations, no doubt. But that shouldn’t stop us from making a judgement based on publicly available information such as its past financial statements, should it? Somehow it is strange for me, I always base on financial statement to make judgement, but it has served me very well to avoid investing in some lemons, though I missed some multi-baggers. The link below shows some of my experience. And you know what, it was 100% spot on; that the past performance of a poorly managed company tends to continue its streak.
http://klse.i3investor.com/blogs/kcchongnz/45373.jsp
Let us get started. First and foremost this is what I learned from a former here regarding the business model of V.S and Globtronics. Are they doing the same thing and are comparables?
Posted by soojinhou > May 24, 2015 08:25 PM | Report Abuse 
flagged
“OTB, with all due respect to Mr Koon, I think it's a folly to compare VS with Gtronic and MPI. VS is not an electronics components manufacturer, its is more of a PCB and plastic injection EMS player. In my opinion, it doesn't require the technological expertise that the latter 2 demands. Also, Keurig is not doing well, and I don't think a cold drink machine will not be as popular as a coffee machine, simply because your soda do not have the coffee connoisseur factor. In other words, would anyone pay a couple hundred dollars for a machine to make coke? Still, VS has a wonderful run and it is wonderful profit. But in my opinion its core competency and prospect is a bit over inflated.”
The above is just a statement. We can actually look at the financial performance, or get back to business. Is V.S a quality growth company? Should it deserve the same market valuation as say Globtronics as suggested by a number of forumers?
I did write an article on how to identify a high quality growth company as shown in the link below:
http://klse.i3investor.com/blogs/kcchongnz/70874.jsp
Marker valuation
The price of Globtronics and V.S closed at RM5.95 and RM4.15 respectively at the end of May 2015. At these prices, Globtronics is trading at a PE ratio of 26. V.S’s trailing twelvemonth EPS is 45.6 sen. Why there is nobody offering RM11.85 for V.S share with the same PE ratio of 26 as Globtronics? Is the high PE ratio of Globtronis due to its much higher growth than V.S?
Growth
Table 1 in the Appendix shows the revenue and net profit of V.S grows by a compounded annual rate (CAR) of 19% and 60% respectively since 5 years ago, compared to 10.3% and 32% respectively for Globtronics. V.S is certainly growing much faster than Globtronics.
Figure 1 below shows the share price performance of the two stocks. One can see the share price of Globtronics has been outperforming V.S by a wide margin. Why don’t investors pay a higher price for a higher growth stock such as V.S as compared to Globtronics?
The quality of growth
A high quality growth is accompanied by high return on capitals, higher than its cost. That is the very basis of corporate finance. I have said many times, a company can borrow RM1b and still grow the profit of the company by RM10m, if it just earn a return of 1% from the borrowed money. But that is certainly not a quality growth and a very clear shareholder value destroyer.
Let us first look at the return on equity by using the famous DuPont Analysis to dissect where does the return comes from. For those who are interested to know more about DuPont analysis, you can refer to the link below:
http://klse.i3investor.com/blogs/kcchongnz/49969.jsp
Table 3 below shows the DuPont analysis on the return on equity (ROE) of Globtronics.
Table 3: DuPont analysis of Globtronics
ROE of Globtronics improved year after year from 7% to 22.6% in 2014, twice above its cost of equity. The uptrend of the return on capital is also shown in the return on invested capital, ROIC. Globtronics ROIC is a whopping 47% in 2014. More importantly, the ROE was achieved with the increasing profit margin from 7.3% six years ago to 18.1%, and somewhat from a slightly higher asset turnover of 1.0 time in 2014. The leverage is maintained moderately low at 1.2.
In contrast, V.S has not shown its ability to improve its ROE for the last few years, despite its increasing high leverage of 2.4 in 2014, up from 1.9 in 2009. ROE has been in single digits every year, way below its cost of equity. It has extremely thin margin of 0.6% to 3.5%, hardly shows it is technology intensive kind of business, rather a low cost contract manufacturer without much moat. A further squeeze of its margin can easily result from profit to loss in its operations.
Table 4: Return on capitals of V.S
ROIC is also very low at 6.7% in 2014, hardly matching its weighted average cost of capital. A good company must have a ROIC of double digits figure.
ROIC is one of the two components of the Magic Formula described in the thread below:
http://klse.i3investor.com/blogs/kcchongnz/51631.jsp
Figure 2 below shows the comparison and trends of return on equity for Globtronics and V.S. A picture paints a thousand words.
Cash flow
My ultimate benchmark for a good company is, on average over a number of years, it must be able to produce cash, or free cash flow, after allowing for capital expenses to maintain its business. This I have deliberated in the thread below:
http://klse.i3investor.com/blogs/kcchongnz/76588.jsp
Comparing the cash flow of Globtronics and V.S as shown in Table 5 and 6 in the Appendix, it is easy to see which company is a cash cow, and which is sucking cash.
Table 6 shows that Globtronics produces an average positive FCF of RM26.8m last 6 years, with RM43.6 m last year. Its FCF on average amount to 9.3% of revenue (>5%), and its cash return is 16.4% (>10%) of its capitals invested in the business. It is indeed a cash cow.
In contrast as shown in Table 5, V.S has been spending huge amount on capital expenses. Average FCF is only 0.4% of revenue, and less than one percent of invested capital. It has shown some good improvement over the last two quarters though.
Conclusion
Looking at the business model, peeking through its past financial performance, V.S is far away in its performance when compared to V.S. It is like what the Chinese says “a small witch seeing a big witch”, 小巫见大巫. How can V.S command a PE ratio the same as Globtronics? I wonder.
But then what is the appropriate valuation of V.S? In my opinion, using enterprise value is the right metric to value V.S as it has a lot of debts and substantial minority interest as I have commented in my first post on V.S. In this valuation, growth is not taken into consideration, but then what good is growth if it doesn’t come with increased margins and return on capitals?
What I can see V.S is not that great a company. But then not-so-good company can still be a good investment if it is selling cheap. Is V.S at the present price of RM4.15 cheap?
For those who wish to learn about how to identify quality growth company selling at reasonable or cheap price for a small fee, please contact me at
K C Chong (31st May 2015)
Appendix
Table 1: Growth of V.S
Table 2: Growth of Globtronics
Table 5: Cash flow of V.S
Table 6: Cash flow of Globtronics
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Discussions
2 people like this. Showing 50 of 53 comments
From what I gathered VS is now overvalued
So
VS = Very Sorry
Very Sorry for those holding this overvalued share
For those who chase VS?
VS = Very Stupid
Better sell off all VS shares before it breaks RM4.00 support!!!
Better go and sign up an online study course with KcChongNz
2015-05-31 20:52
do not say like this, it is very bad
Posted by bracoli > May 31, 2015 06:26 PM | Report Abuse
Wahhhh die... All kena con by otb and koon... Kikiki
2015-05-31 21:16
Calvin, can you do me a favour, I am going to sell all my kbunai shares.
I bought it 7.5 sen because I thought it would be 11MP play, but unfortunately it is not...
I have to let go, because there is emergency in my family, I need to get back the cash.
I know I shouldn't ask for 7 sen, but can you buy from me at 6.5 sen at opening matching queue tommorow? I know I will incure some RM 300+ losses, if I can let go at 6.5 sen,
If I have to sell off at 6.0 sen, It is about RM 500 losses.
Can you please help to make KBUNAI opening 6.5 sen? to help me narrow my losses.
Thank you. May God bless you.
2015-05-31 22:06
Thanks KcChong in depth knowledge sharing. I totally agree with your analysis. I prefer Gtronics.
2015-05-31 22:32
All my subscribers bought at 2.52 or 3.30, we sold all > 4.48.
We are laughing all the way to the bank.
We buy back again around 3.80 to 3.90, if we sell now at > 4.20, we are still laughing all the way to the bank.
Please note that private placement will be done around 3.90 level.
Thank you.
2015-05-31 23:30
I know to do my own FA analysis. My performance is proven in I3.
I will not recommend a stock if FA failed my stock selection criteria.
I do not care it is black cat or white cat, can catch a rat is a good cat. Presently, it is still a good cat because we all make money.
Thank you.
2015-05-31 23:36
Please note that stock market is always very efficient, a stock without fundamental cannot go up from 2.50 to 4.53 in last 5 months. The stock price will not sustain at high level without any good fundamental.
2015-05-31 23:50
So, will u expect VS Ind to perform well which will be reflected in this June quarterly report mr OTB? What will be your TP for it?
2015-05-31 23:55
I play it very safe, I will not buy VS now. I will wait until the quarter result is out in June 2015 to make a decision. I will hold on to the stock which I bought at 3.80.
Please remember my golden rule, the company must make more money in current year compared to the previous year. I will monitor the performance on quarterly basis. I allow poor earning for a quarter, but not 2 consecutive quarters. I will avoid this stock if last 2 quarter results fail to grow. So far, VS has not failed my golden rule yet.
I avoid to answer you my target price, I wish to keep it to my subscriber only. I do not recommend to buy now, hence it is not necessary to tell you my target price.
Thank you.
2015-06-01 00:10
Judging by the dismall growth of ROE and ROIC with negative FCF as described by KCCHONG, will u agree that VS Ind is not an ideal growth stock nor it being a technology stock? What will be your opinion on his analysis?
2015-06-01 00:12
I do my own FA analysis, I look forward to the latest quarter result, my ROE for the latest quarter is 15.19%. FCF is 38.147 M.
My projected EPS growth in last 4 trailing quarters compared against 2014, EPS growth is 66.18%.
Please review it yourself whether it is an ideal growth stock or not.
I am not an expert in FA analysis, I am a remisier and I am not an accountant. I use my own method to assess a stock, to find its intrinsic value. Please note that RHB also recommended a target price of 4.50 if I am not mistaken.
Thank you.
2015-06-01 00:26
I have done my own analysis, a person who does not know anything can say that I con readers in I3. It is a very unfair statement. I am not that stupid to buy a stock without doing my homework. I do not say that my method is the best. To me, it is not so important to have very good FA report, to make money from stock market is the most important criteria to assess your success.
I do not care it is black cat or white cat, can catch a rat is a good cat. Presently, it is still a good cat because we all make money. I still trust my own analysis.
Thank you.
2015-06-01 00:34
I also done my own analysis on Gtronic, to my surprise, it failed my stock selection criteria. This stock cannot be considered a buy, to me it is fully valued.
A man's meat is another man's poison.
Thank you.
2015-06-01 00:39
Posted by Ooi Teik Bee > May 31, 2015 11:30 PM | Report Abuse
All my subscribers bought at 2.52 or 3.30, we sold all > 4.48.
We are laughing all the way to the bank.
We buy back again around 3.80 to 3.90, if we sell now at > 4.20, we are still laughing all the way to the bank.
Please note that private placement will be done around 3.90 level.
Thank you.
But why Koon Koon is still promoting this counter kuat kuat in I3 at current price level? Why you are still helping Koon Koon to promote this counters in seminars/talks?? Are you implying that Koon Koon may not have noble intention to promote VS in I3 at this level while Koon Koon, you and your supporters are selling happily at RM4+??
2015-06-01 07:14
Koon Koon set a very bold TP at RM6-RM7 for VS while the one who did all the homework (FA n TA) for him sold happily at RM4+...And I believe Koon Koon also sold happily at RM4+....
2015-06-01 07:17
As such, can I say that Koon Koon's intention may not be so noble, as he always claimed...Koon Koon shouted Buy Buy Buy very kuat kuat here while he sold quiet quiet and shy shy...
2015-06-01 07:19
Or shall we just forgive n forget the old man...just like Rsawit, Jtiasa, Mudajaya etc....What if Koon Koon found more most undervalued stocks and keep on repeating the same monkey biz in I3 again n again?? Shall we all just diam diam coz we are poorer than him and we dont donate as much as him to the poor? Or can we make ourself qualify so by buying 1 lot of VS n lose money then so that we could screw him??
2015-06-01 07:24
Mr Koon did not sell at 4.48. All my subscribers and I were selling. I operate on my own.
He did not con any reader here, I am honest and speak the true thing.
We sold with the intention to buy back, it is my strategy.
Thank you.
2015-06-01 07:48
I will not answer you any further question on Mr Koon, this information is personal and I am not supposed to disclose.
Thank you.
2015-06-01 07:50
Aiyo Petrol price went up d. This one sure lose one. That one old story.
2015-06-01 08:05
Posted by Ooi Teik Bee > Jun 1, 2015 07:48 AM | Report Abuse
Mr Koon did not sell at 4.48. All my subscribers and I were selling. I operate on my own.
He did not con any reader here, I am honest and speak the true thing.
We sold with the intention to buy back, it is my strategy.
Thank you.
Hmm, Mr. Koon did not sell at 4.48....Did he sell at 4.47,4.46,4,45 etc etc?? Did he sell any VS after his first post of VS on 22 Feb 2015??
2015-06-01 08:32
Koon Koon posted his first article of VS on 22 Feb. On 23 Feb (Mon), VS opened at RM4.14, Day's high was RM4.20, Day's low was RM4.14 n it closed at RM4.18.
2015-06-01 08:40
In today world, good is not good, bad is not bad.
Eg 1.uncle Koon help ppl w scholarship and not many who do that but you call pp conman
eg 2 1mdb daylight rob, but he bugis so it is ok
Eg3 dap penang manage to reduce debt, and increase foreign investment at same time absorb GST, but the no good because he chinese
Eg4. Zakat help malay and in malaysia only but other donation help all. Example tzuChi help until Nepal, India, Indonesia etc. This one show who walk talk n who talk talk
Got somemore but you think lor.
2015-06-01 08:50
When Koon Koon helps the poor I wanna kiss him, when Koon Koon conned people to buy when he is selling I wanna screw him...I think we should differentiate right and wrong....Do you mean by donating to the poor alone can indemnify him from all his wrongdoings?
2015-06-01 08:54
So for those who received BRIM1,2,3 etc should thank Ajib forever and forget whatever wrongdoings he made?? Forgive n forget??
2015-06-01 08:55
Murali, if you dislike what Mr.Koon and OTB said then just don't read and follow. Despite VS being heavily recommended, i did not buy any cause i have my own selection criteria too.Having said that, you must have followed and burned....The quote of stock market "buy at your own risk", did you not remembered?
2015-06-01 09:46
Once Old man finish unload 70%, can prepare to drop just like Mudajaya and Jayatiasa. Good Luck.
2015-06-01 09:59
Johnnys, U got burnt after following his earlier calls ah? Or you missed VS? Dont be sour grape....
2015-06-01 10:08
Murali, you are a crusader or what. If we invest without proper research and get burnt in the process, who is to blame but ourselves. If we are so naive as to follow recommendations blindly, we pay the price for our immaturity and greed. We get recommendations from every Tom, Dick and Harry all the time. If you personally feel that there are flaws in them, we would be beholden to you, to warn forummers here there and then, rather than make derogatory comments after the fact. Please don't take the easy route.
2015-06-01 12:29
There would be new project For vs and new model launched for keurig for next 3 to 6 month, if u think current price is overrated,i wont blame u, bcos when the price shoot up again, i will tell u what is mean by hater gonna hate, loser gonna lose and winner gonna win..... how far vs can go???let see
Last thing, invest is about prediction of future, don't talk shit about past history la please...
2015-06-01 13:28
This is not a fair statement.
Posted by bracoli > May 31, 2015 06:26 PM | Report Abuse
Wahhhh die... All kena con by otb and koon... Kikiki
As far as the share price of V.S is concerned. It has been doing well, very well indeed.
Note my article is for sharing if V.S is such a great company, from its past performance. Like its future share price, I have no idea if the company will be doing well in the future either. I am no good in predicting the future, especially the kind of business V.S is in. I would say it is highly uncertain. Granted, some people may be better to "predict" the future better, or can see the future better. Not me.
My evaluation of Globtronics is about its business. I see its business model and performance is much better than that of V.S. I don't just simply say, but provide you with analysis. You may not agree, that is fine with me. I talk nothing about price.
The above is just the first level of thinking. You need a second level thinking; i.e. is the price right?
Investment is not only about buying good companies, buy buying them at the right price. The price you pay determines your return.
2015-06-01 14:11
Posted by vsstaff > Jun 1, 2015 01:28 PM | Report Abuse
There would be new project For vs and new model launched for keurig for next 3 to 6 month, if u think current price is overrated,i wont blame u, bcos when the price shoot up again, i will tell u what is mean by hater gonna hate, loser gonna lose and winner gonna win..... how far vs can go???let see
Last thing, invest is about prediction of future, don't talk shit about past history la please...
Young man, cool down. If I were you, I would thank the one who tell you a story different from what you have heard before, instead of saying this.
"don't talk shit about past history la please... "
You get a balance view and then you evaluate, research about the view and make a more unbiased judgement, all by yourself.
Overconfidence is a very dangerous cognitive bias in investing. Unlike doing work which we should be confident of ourselves. Overconfidence in investing kills a lot of speculators and investors alike.
"There would be new project For vs and new model launched for keurig for next 3 to 6 month"
Just what project is it? What will it bring to V.S?
I did read something about it in a very popular and credible value investing website called "gurufucus" on a recent related article. i would suggest you look at it in details, seek advice if you can't comprehend. Think about it why such a spurt in sales in V.S the first quarter 2015, and think about why the high receivables.
But of course i don't know about the share price performance of V.S in the near future. It could go to RM7, RM10, RM20. I am not that surprised too. I just don't know.
Please note I hate nobody, andI ain't loser too.
2015-06-01 14:29
murali, refer to LiiHen A report, KYY latest baby. I think KYY already starting unload old Baby.
2015-06-01 15:37
"We are not alone."
June 1, 2015 by Vishal Khandelwal
This interview was part of the May 2015 issue of my premium newsletter on value investing, behavioural finance, and business analysis – Value Investing Almanack (VIA).
http://klse.i3investor.com/blogs/kianweiaritcles/77803.jsp
SN: What are some of the characteristics you look for in a high-quality business?
JJ: Moat is very high on the list but the thing is that most companies don’t have one. So it’s important to check that the numbers from the financial statements confirm that a moat exists. Some rules of thumb for a high quality business are – return on invested capital above 15%, free cash flow growth with a low level of capex needed, and a consistent or improving cash conversion cycle.
2015-06-01 15:38
KC, very interesting that most people only want to read stuff to affirm their opinions, they simply cannot accept opposing opinions, no matter how good are the underlying reasons. Well, I think we both welcome opposing views, because groupthink is very dangerous in investment. Young man if you don't know what it is you should look it up because it almost triggered a nuclear holocaust in the Bay of Pigs incident. Always seek opposing views, you may have overlooked something and it may save you from very grave mistakes.
2015-06-01 19:39
Interview with Jae Jun continues:
http://klse.i3investor.com/blogs/kianweiaritcles/77803.jsp
SN: What’s your two-minute advice to new investors or students interested in a career in investing?
JJ: Become an expert in accounting. The language of business and investing is accounting. But don’t just end there. Learn to understand, speak and interpret the language instead of just knowing the alphabets.
Masuk kandang kambing mengembek, masuk kandang kerbau menguak.
2015-06-01 20:03
Posted by soojinhou > Jun 1, 2015 07:39 PM | Report Abuse
KC, very interesting that most people only want to read stuff to affirm their opinions, they simply cannot accept opposing opinions, no matter how good are the underlying reasons. Well, I think we both welcome opposing views, because groupthink is very dangerous in investment. Young man if you don't know what it is you should look it up because it almost triggered a nuclear holocaust in the Bay of Pigs incident. Always seek opposing views, you may have overlooked something and it may save you from very grave mistakes.
"groupthink is very dangerous in investment"
This is very very true. I once was invited to be a contributor of a private website three years ago. The participants there are very united. They give full "support" to shares promoting in the forum, practically hugging each other, cheering together for the share price to go up. They behave like a cult. Two shares which were promoted heavily were Asia Media and Smartag. There were a number of analysts promoting them too then. When I told them different stories after looking at their business, I was sort of like an enemy.
The adjusted price of Amedia was 11.5 sen, and Smartag about 23 sen then. Today they closed at 5 sen and 15.5 sen respectively.
2015-06-01 20:58
Most peoples will agree that the value of a company is equal to the present value of its distributable cash flows. Yet most peoples could not readily see that growth in earning could reduce value instead of increase value of a company.
I think this could largely due to peoples just simply equate earning as distributable cashflows as if all earning can be distributed out.
The fact is that almost all growth required additional capital, that is in the general case distributable cash flow is less than earning infact it equal earning -additional capital required for growth. To be able to explain this better let me use the following symbols, let;
V=present value, E=earning, aC=additional capital needed for growth,ROE=return on equity,r=cost of capital, g=growth rate
Then the present value formula is simply:
V=(E-aC)/(r-g), I think most peoples may simply omit subtracting aC(additional capital required for growth) from E, in which case present value is wrongly stated as V=E/(r-g) which give rise to the wrong conclusion that any g will inflate V as it reduces the denominator of the V equation.
Realising the correct equation is V=(E-aC)/(r-g) we can proceed to see why or how g can actually reduces V. To do that let us simplify and assume that a proportional increased of capital employed is required to fund growth e.g. a 10% growth required a 10% additional capital employed, then
V=(E-aC)/(r-g)=(E-g X C)/(r-g)=((ROE X C)-(g X C))/(r-g)=C x(ROE-g)/(r-g), where C= Equity employed
Restating again V= C X (ROE-g)/(r-g) less us discuss some of the different scenarios
1) if g=o, i.e. if there is no growth then V=C X ROE/r =E/r, this is the equation that most peoples are familiar. It is insightful to note that if ROE is equal to r i.e. if return of equity is equal to cost of capital then value is simply equal to the equity or capital put up by the shareholders, no more and no less. One can only expect to have a higher V if the return is higher than its cost, if ROE is less than r it can actually reduces the value of the equity committed in the first place i.e. value destruction. This equation reinforces why ROE is critical!
2)If ROE=r, V=C irrespective of any g, simply put no amount of growth will add value if ROE is just equal to r.
3) if ROE < r then higher g actually make V smaller, that is higher growth is worse if return on equity is less than cost of capital or as Kc puts it it destroyed value faster!
It is interesting to ponder what should be the appropriate scenario for VS valuation and that of Globetronic.
2015-06-02 17:22
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Posted by YiStock > May 31, 2015 06:40 PM | Report Abuse
Hi mr kcchong, how adviseble if can we safely ignore PE or give higher tolerance when a good company like gtronic constantly gives high ROIC?
PE ratio valuation is just a relative valuation. It is good to give a quick and dirty ballpark number though.
A way to do see what price is good to buy is to make use of a discount cash flow analysis by incorporating the expected growth rate into it to find the intrinsic value due to the firm, and then the equity shareholders, and only buy when there is a reasonable margin of safety.
All other valuation methods are distant substitute. Seth Klarman.
2015-05-31 19:03