CFTrader

For a person to invest in iCap is a fool.
You are paying TTB to hold cash.

I don't mind you pay me Rm 1m to hold on Rm 100m cash.

2016-09-23 12:44

chankp7010

For KC Chong, your article is indeed very insightful, detailed in analysis and very thorough in your research. Thank you very much for your hard work helping us to understand better on fundamental investment. Your report is simple yet understandable from a layman point of view. I like it very much. Please continue to write more on other counters, such as Tienwah, APM,Mitrajaya etc.

2016-09-23 13:43

yktay1

TTB is the best most famous and accurate investment manager in Malaysia. He has made 0 wrong calls over the past 2 years.


Cos he made 0 investments

2016-09-23 16:18

casperl

means TTB is identical sleeping investing manager over 2 years? human being may be lost their direction due to indecisive?

2016-09-23 16:26

paperplane2016

Totally agree, ppl buy ICAP is stupid, clueless and ignorance!

2016-09-23 18:33

speakup

TTB must RESIGN!

2016-09-23 18:50

Ntpboon

感谢分享。
“一山还有一山高”
“不識廬山真面目 ， 只緣身在此山中。”
KC Blog中自有“黃金屋”！

2016-09-23 20:48

kcchongnz

Posted by fayewong88 > Sep 23, 2016 08:14 PM | Report Abuse
kc are you promoting tguan now after kesm? is there no bias as a shareholder? i personally think both stocks are not good to buy now. time to take profit? yes!


Please read the two articles on KESM and Thong Guan a few times and see which is the statement below is correct.

1) That I asked others to buy them

2) That I advise those who have the shares to take a look at my analysis and see if they make sense and then decide if they want to sell

Have I actually tried to promote any share in i3? Which one and why you say so?

2016-09-23 23:15

paperplane2016

Chong NZ, mai gehgeh. U tell ppl tp, tht s a buy call Liao. Ppl will be guided by tht. The intention is lure ppl no?

2016-09-23 23:18

phg1

thong guan 4 . If target 2.5, it means sell?
Not a buy call!

2016-09-23 23:46

kcchongnz

Posted by paperplane2016 > Sep 23, 2016 11:18 PM | Report Abuse

Chong NZ, mai gehgeh. U tell ppl tp, tht s a buy call Liao. Ppl will be guided by tht. The intention is lure ppl no?


lure ppl? Yeah kah? Why do I have to do that? To sell to you?

Where did I mention about apa itu "target price"?

2016-09-23 23:46

deepestvalue

Interesting refresher...

However, why did you use the ROC to derive expected growth in revenues, when it should be on the firms operating income - even if the yield the same numbers in your simplified example, they are conceptually different

2016-09-23 23:46

kcchongnz

Posted by deepestvalue > Sep 23, 2016 11:46 PM | Report Abuse
Interesting refresher...
However, why did you use the ROC to derive expected growth in revenues, when it should be on the firms operating income - even if the yield the same numbers in your simplified example, they are conceptually different

"why did you use the ROC to derive expected growth in revenues"?

That is the assumption of structural growth, not growth from more borrowing or issue more shares, a common valuation technique by the professional.

"when it should be on the firms operating income"?

I am doing the DCFA from the firm level and then deduce that for the common shareholders.

"even if the yield the same numbers in your simplified example"

You can do it from the equity shareholder level too, also okay. I have no issue about that.

"they are conceptually different"

Why is that so? It is just that one start from the firm level and the other the common shareholders level. They are of the same concept; DCFA, aren't they?

2016-09-24 00:00

urfather

I think the wide difference in opinion on the valuation, i.e. valuation that is ranging from icap’s RM2.50 to current market price of RM4.26, lies in the different perception of the rate of return that icap wants vs what the market wants. While RM2.50 to RM4.26 is a rather substantial gap, I think it sort of makes sense as well given that TGUAN’s history of low adjusted operating margins ranging between 3% and 10% and averaging at about 6% (based on my own calculations and 15 years of past financial records).

Long-term historic earnings have really been fluctuating quite substantially and I think to a certain extent this can still continue to be a useful guide given that TGUAN’s operating business didn’t change much. If history is of any guidance, I would suppose it would be that history had shown that it is very difficult to sustain net margins even at moderate levels, even though the sales were able to grow quite substantially. Its focus on selling products that are of higher margin is basically a response to its deteriorating fundamentals and perhaps a timely one.

I don’t have any predictions for TGUAN’s future, but my question is, technical expertise and possible future innovations aside, how long can their so-called premium products sustain overall margins amidst the obvious competition that it is already facing? I don’t know the answer to this question, but at current market price of RM4.26, I would think that the long-term investor would probably be facing moderate investment returns from TGUAN in the next 10 to 20 years. Bear in mind that I’m NOT referring to stock market returns, and I’m fully aware that earnings for the next 2 to 3 years might paint an entirely different picture of the future.

My point is that to pay at current price, we are expecting TGUAN to grow earnings at a decent pace over the next 5 years, and sustain whatever the future earnings level might be. So I actually don’t see there being a margin of safety incorporated in this price. So I actually don’t agree with the comment on 19% margin of safety. I can’t really point out the exact reason, but somehow I see this as a rather perverse way of explaining the concept of margin of safety.

I have read icap’s newsletters before and so far I have not seen the word target price. I don’t really read every single article or every single word, but as far as I know, icap has never given a target price or even mention that term. Kindly point out if I happen to be wrong about this. Still, from what I would understand, at least from my own point of view, is that RM2.50 is the price in which icap is willing to pay because this is the price that will yield at least a decent return over the long-term – hence the advise to BUY BELOW RM2.50 FOR THE LONGER-TERM. I don’t see any hint of a prediction that the price WILL go below RM2.50. From what I interpret is that if price doesn’t come down anywhere close to RM2.50, walk away and look for something else that will yield better long-term returns. I would also admit that if I know nothing and bought TGUAN and I see this advise, I would probably not know whether to sell or continue holding. My opinion is that the market is valuing TGUAN at close to perfection.

However, if you were to look at this from another perspective, if someone actually bought TGUAN at RM2.50 and below, and assuming that current market price is considered fair, and given that there is a change going on for the business, whether sustainable or not, there is a CLEARLY ESTABLISHED MARGIN OF SAFETY going on here.

Also bear in mind that icap has a section called the Ratings Table, which keeps track of all the companies that they had featured in their newsletter for subscribers to keep track of. Icap changed its advice from buy below RM1.70 to current advice on 08/04/2016. With the market price shooting to above RM4.00 pretty much means that the advice no longer matters for those who are seeing this advice NOW, which ultimately means that this advice is for the benefit of anyone who had bought TGUAN prior to the revision of the buying price. You will also need to take note that the current advice in the Rating Table also has a HOLD, which means that icap is NOT TELLING ANYONE SELL. At least not yet I guess. So the title of this article, “Thong Guan target price RM2.50. Sell?” becomes entirely irrelevant.

2016-09-24 14:04

urfather

I’m saying I THINK I UNDERSTAND where they are coming from. I’m not saying this to be true for icap, since I’m not TTB. For me, I don’t do DCF, and I don’t calculate WACC. I don’t do financial modelling. Neither do I come up with a target price and see if the future market price will hit my “target”, which I think is rather foolish. In fact business valuation is ALWAYS expressed as a range, so there really is no point in establishing a target. Instead, it really is more helpful to focus more on understanding exactly what the company is really trying to do and then assess the management based on what is understood about the business and the environment it is operating in to-date. Subsequently, the maximum price that should be paid would need to be established so that at least over the long-term, the investment return can still be reasonable.

2016-09-24 14:05

joekit

I guess it's too late for iCap to buy tguan at rm2.50. He should buy now since still got 19% margin of safety or else when price move to rm5.00 above, iCap will miss out again! Maybe Ttb is trying to make others sell by devaluing tguan so that he can buy cheaper!

2016-09-24 16:14

urfather

haha..joekit, i think even if icap plans to buy tguan, with the 300mil cash it holds currently and assuming 10% is allocated for tguan, icap will have to buy super slowly. If not it might run the risk of pushing up the price given the current volume of shares traded.

2016-09-24 18:13

Icon8888

I don't think Kc promoting lah. He found this case interesting so he wrote about it loh

2016-09-24 18:19

kcchongnz

“I don’t really read every single article or every single word, but as far as I know, icap has never given a target price or even mention that term. Kindly point out if I happen to be wrong about this.”

Regarding your statement above, you are right. But is there any difference from my statement below which is in the article itself?

“Again, the report did not recommend you to sell at the price but merely recommend a “Buy” at RM2.50 for the long term. Hence there was nothing wrong with icap’s suggestion, to buy at RM2.50.”

“From what I interpret is that if price doesn’t come down anywhere close to RM2.50, walk away and look for something else that will yield better long-term returns.”
“For me, I don’t do DCF, and I don’t calculate WACC. I don’t do financial modelling. Neither do I come up with a target price and see if the future market price will hit my “target”, which I think is rather foolish.”

I have no issue about your statement above too, absolutely none.

“However, if you were to look at this from another perspective, if someone actually bought TGUAN at RM2.50 and below, and assuming that current market price is considered fair, and given that there is a change going on for the business, whether sustainable or not, there is a CLEARLY ESTABLISHED MARGIN OF SAFETY going on here.”

Your statement above, however, seems to contradict your statement below, isn’t it?

“but somehow I see this as a rather perverse way of explaining the concept of margin of safety.”

“Subsequently, the maximum price that should be paid would need to be established so that at least over the long-term, the investment return can still be reasonable.”

So how do you establish your “maximum price”? Please share. After all, this article was written for sharing purpose.

In the report from icap, the writer was also curious how the RM2.50 came about, I mean there should be a way to establish that figure, shouldn't it?

2016-09-24 21:39

mrkeong

KC Chong, do u mind to revisit Insas again? Is it still worth to hold it after ur buy call years back.

2016-09-24 22:27

kcchongnz

Posted by mrkeong > Sep 24, 2016 10:27 PM | Report Abuse
KC Chong, do u mind to revisit Insas again? Is it still worth to hold it after ur buy call years back.

Mr Keong, no, I don't mind "sharing" with you what I think about Insas, but I don't think i ever made any "buy call" for Insas, or any other shares.

Please read my sharing as appended below, which i think it still stands; that Insas is way undervalued looking at its assets. But if Insas's value never unlock, please don't blame me as I have no control of it.



Insas and Graham net net

In 1932 at the bottom of the Great Crash, Ben Graham wrote an article on Forbes about the cheapness of the market and how companies are being quoted in the market for much less than their liquidating value, as if they were all destined to be doomed. He called these types of stocks, "net nets", companies that sell for less than its net current asset value, or net net working capital. Graham used the following formula to compute the liquidation value of a company.

Net Net Working Capital = Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities

It's the lowest form of valuation you could possibly do because it ignores everything about the business and just focuses on tangible assets. The formula states that;
• cash and short term investments are worth 100% of its value
• accounts receivables should be taken at 75% of its stated value because some might not be collectible
• take 50% off inventories, due to discounting if close outs occur

Insas’s latest balance sheet as at 30 June 2013 was used to compute the net tangible asset and Graham net net values. Besides cash, the net net values of quoted and unquoted investments owned are also taken as 100% of the book value. Note that tax assets, property, plant and equipment, Goodwill and “other assets” are taken as worth nothing.

The appended table shows that the Graham net-net value of Insas is RM1.23. This is more than twice its closing price of 64 sen on 30 October 2013.

Besides Insas has been profit averaging 6 sen per share for the last 10 years. It has on average positive free cash flow and a healthy balance sheet.

Why is Insas trading at such a big discount to its Graham net net value? I guess is investors have not much trust in the management in maximizing minority shareholder value. No dividends have been declared until recently, although it has been buying back its shares. So with the beginning of this more tangible dividend distribution, will Insas be re-rated in accordance with its value?

Insas Graham net net
Cash and equivalent 532,894 100% 532894
Investments 120,290 100% 120290
Investment properties 151,432 100% 151432
Associate companies 90,145.63 100% 90146
Receivables 345,289 75% 258967
Inventories 15,830.73 50% 7915
PPE 59,765 30% 17929
Other assets 43,503 0% 0
Total assets 1,359,150 xxxx 1179574
Total liabilities -325,949 100% -325949
Net assets 1,033,201 xxxx 853,625

No. of shares 693,334 xxxx 693,334
NAB 1.49 xxxx 1.23

2016-09-24 22:40

urfather

Hi KC. Point taken from your response. Perhaps I was a bit too hasty when I clicked on the comment button, without being clear about my stance or maybe even the tone of my comment. So I would like to apologise beforehand if I happened to be quite aggressive.

I’m neither a huge fan nor an equally huge critic of ttb, but I believe that anything written about anyone needs to be equally fair and, if I may use ttb’s favourite word, be objective. I’m not suggesting that you weren’t being objective, I’m actually referring to other people who do not seem to understand that icap’s ratings are NOT TARGET PRICES. So I merely tried to point this out so that anyone else who reads my comment will hopefully read it again. I’m pretty sure this is some tough luck on my part.

It was quite frustrating that it was not explicitly pointed out in this article because there really is a huge difference between a buying price and the conventional target price. Allocating less than 5% of the content to talk about “taking a closer look icap’s report”, in my opinion doesn’t cut it as being fair, because the majority of the content was spent on justifying your valuation for TGUAN and wondering why icap gave such a low buying price, without attempting to at least try to understand and tackle the “why” aspect. This article has sparked more unnecessary criticism on icap’s approach and this was the source of my frustration, and I would like to apologise again if I happen to be aggressive with my wordings.

With regard to the part on margin of safety, I might be having a different view about this concept. I can’t tell if it really is different because this is kind of my first time discussing my understanding of this subject with anyone. Anyway, valuation consists of two parts, i.e. speculative and investment value. Speculative value refers to expectations of the future and can be somewhat of an unknown because it probably has never happened before. On the other hand, investment value refers to what has already been accomplished, provided it is sustainable. As the saying goes, “a bird in hand is worth two in the bush”. The bird already in hand is the investment value, whereas the two birds in the bush represent the speculative counterpart.

When investing in a company, future growth is relatively uncertain because of the general long-term business cycle. It can probably be considered more uncertain especially if it is expected to reach a certain size or performance it has never achieved before. So such a growth admittedly involves a certain speculative element.

Let us assume that I somehow am able to justify that TGUAN is actually worth RM7.00 on a discounted basis based on its potential future growth. I might say that current price is 40% undervalued, which is huge. Unfortunately, such a quantitative undervaluation does not equate to margin of safety because RM7.00 takes into account the speculative amount. You might argue that margin of safety is already incorporated in the discount rate. My counter-argument is that with a slightly higher discount rate, whatever the amount may be, is likely to have cancelled off the speculative element, if not part of it, leaving behind the investment valuation.

2016-09-25 01:57

urfather

There is only the presence of margin of safety if the market price is actually below that of the investment value. So anything above is considered speculative, whereas anything below is considered safe. We can always pay at a premium above investment value and is still below the derived DCF valuation, but there is no margin of safety. The concept of investment value vs speculative value came from Security Analysis 6th edition (NOT 5TH EDITION – many people might say that they have read Security Analysis, which is most likely referring to the 5th edition, which I would say is not the “correct” version, so to speak). So my view is not original and this sort of shaped my understanding of margin of safety.

In the context of the article, I am assuming that market price of RM4.26 is the fair value. My version of a fair value is actually the investment value. This means that at the derived valuation of RM5.25, we are actually looking at a speculative element of about RM1.00.

Now this is where I’m coming from. It was mentioned that there is a 19% discount to the derived DCF valuation, and I disagreed because the so called undervaluation is actually referring to the speculative value. Similarly, establishing a buying price of RM3.39 equates to a 20% margin of safety, assuming RM4.26 really is an investment value, instead of 35%.

As I had mentioned as well, valuation is always expressed in a range between two reasonably pessimistic and optimistic scenarios. In my opinion, it is not a matter of being able to identify the weighted probabilities and settle upon a target price, because the value of a business actually encompasses the whole range. But we as human beings would feel somewhat safer if we are able to settle upon something concrete, even if it may not be entirely true. It is just like trying to establish whether someone is considered as selfish or generous. The truth is that everyone is both. It is the conditions that set the mood and sort of determines when is the “right time” to be overly selfish or partly-selfish, all the way to being partly-generous or overly generous.

I’m unable to definitively answer your question on the “how” part of establishing a maximum price paid, because this relates to my above explanation of why coming up with a target price is misleading. What I can say is that I always use the quoted prices as a guide to a company’s intrinsic value and compare with what a company is currently earning. Although I don’t do any forecasting, I do try to see how much the business could potentially earn assuming it is able to fully sweat its resources that are currently on hand. I also don’t establish any trigger price in the event of a substantial drop in prices because everything depends on the opportunities that is being identified in the market. So the valuation of the business is always relative to its next best alternative.

2016-09-25 01:57

kcchongnz

Hi urfather,

Good construction comments are hard to come by in i3investor. Thanks for your valuable comments.

If you read my article again, it is about updating my participants on my stock pick on Thong Guan, which I believe, many of them have bought it. A number of them are also subscribers of icap Newsletter and hence some of them sought my opinion. I am duty bound to provide them with my opinion.

I emphasized to them, the RM2.50 was a price icap advised his readers to buy TGuan at that price, and it was not a target price. Hopefully they don’t get unduly worried as TGuan share price at RM4.24, like Humpty Dumpty, may subject to a great fall. That is where my duty ends. I am not obliged to defend at length what icap has written about in its newsletter.

When I give an opinion, it is my nature to try to give some numbers too to justify what I say. For example, I provide some market valuations in terms of PE, P/B, P/CFFO, P/FCF, Ebit or Ebitda multiples etc. as shown in the article, rather than just plugging figures from the sky. Here, I talked about “the present”, which I think it is better than the way “past”. Those are may be what you termed as “Investment value” in your comments.

I also like to do DCFA to get a feel of the value, not target price, of a company so that I can compare to its price to decide if I want to invest or not, although not always all the time but in this case is essential because of the claims of the warrant and loan stock holders which have significant dilutive effect on the underlying share, in my opinion. Many super investors do not use DCFA, I know, but those I follow closely such as Seth Klarman, Mohnish Pabarai, Howard Marks, etc. do that judiciously. Again this is my personal choice.

To do DCFA, one looks at its present state of business, some numbers, and a peep of its future, make some assumptions of course, use some conservative assumptions if one is interested in the stock, get an intrinsic value (IV) of the stock (not target price), and hence a margin of safety (MOS). The concept of MOS is important to me as there is always a range of values for the IV of a stock, but to me, it at least give me a feel what this IV is. Those may be the “speculative value” you mentioned about. Investing is about the future and not the past, everything involves some speculative elements, doesn’t it? I do not see it as a “perverse” way to explain margin of safety as you emphasized. As I have said, I have no issues if you are not interested on DCFA as many good and successful investors aren’t too because of various issues of assumptions. I am sure your investing way have serve you well too, just like my way serves me well.

Thanks for your comments again.

2016-09-25 11:05

urfather

hahaha..okay. kc, if u don't mind, I would like to take back my usage of the word "perverse". It was the result of my brashness, especially when I purposely registered so that I could comment here. I've read enough comments in i3 to know that the majority of the responses are really irrational and shallow, other than being prone to incite anger. and I want no part of it. It would take a lot of discipline and self control in order not to fall into the trap of unnecessary arguments that go nowhere but cause heartburn (cuz there is no way anyone can "digest" them properly).

right after my first round of comment, I realised that my frustration wasn't supposed to be intended for u. just so u know, from the start, I don't hv any disagreement with ur methods or anyone else's for that matter, as long as the approach is sustainable, reliable and effective. no one will ever know whether all three are applicable without allowing time to run its course. Even if they do, the majority would hv forgotten about it and as a result will not truly learn anything from the experience. only those who observe the methods will only b able understand and take the most out of the learning process. so shallow minds who read anything without understanding (not just ur articles) will always just jump into conclusions and start talking trash because they can't wait until next month to revisit the problem, let alone next year or next three or five years.

I definitely don't hv the right to criticise just because my view and approach happened to be different. having said that, I was just merely explaining where I'm coming from, and in no way implying that mine is more superior or whatever, although my descriptive words may have been quite strong. As a matter of fact the approach that I'm using is basically to cover and minimise my own flaws. So it is one of the reasons why I take into heart the concept of margin of safety rather seriously, or probably too seriously..LOL

2016-09-25 12:54

ckkhen

I have never come across such MATURED and OBJECTIVE discussions re value investing in this forum by kcchong and urfather.

I have learnt so much from both gentlemen.

Thank you, urfather. Welcome aboard.

2016-09-26 09:20

lookingaround

Perhaps people often forget their investment horizon.

For FA based investments, the investment horizons are almost always 10 years or above, or probably forever.

The key decisions are always either:
1) to cash in at target price X to obtain profit Y during the investment horizon
2) to cash out at target price Z upon obtaining profit Y at much earlier stage during the invement horizon

Valuation methods are nothing more than to meet our personal expectation.

If you can buy something at your expected price after whatever valuation method, then buy it.

If you can sell something that you have bought earlier at your expected price after whatever valuation method, then should you SELL it for ANOTHER BETTER BUY?

The point is, what are the better buys you can get after selling the current holdings? Or have you had it enough?

2016-09-26 12:55

Artemis

Thank you for the good write-up KC. However, I have a few question in mind I would hope to be able to receive your clarification:

1) What is the basis for your assumption of 12% growth rate during the supernormal growth period?
2) How did you come up with 30% reinvestment rate during the supernormal growth period?
3) Is it prudent to assume the profit margin for year 6 (which is eventually used to derive the terminal value) is the same as the profit margin for the supernormal growth period? My concern lies primarily in the industry dynamics (i.e. competition, currency, cost escalation etc..)

2017-10-22 13:29