kcchongnz blog

Sendai and The Golden Rule of Investing, some important lessons kcchongnz

kcchongnz
Publish date: Tue, 01 Oct 2019, 05:36 PM
This a kcchongnz blog

James is a 40-year old hard-working software engineer working for a multi-national company. He spends most of his time working and when not at work, he tries to spend as much time as possible with his family, a wife and two kids age 10 and 12. He earns a decent salary. However, having read a number of books in personal finance written by Yap Meng Hui, Carol Yip and a few other authors, and finance bloggers like KC Lau, Suraya, CF Liew, and a few others on personal finance, he realizes that in order to have financial freedom and leads a better life in retirement, he needs to save a substantial amount of money at retirement. In order to fulfill his dream, he needs to earn some good return from his savings. He thought the only way to do it is to invest in the stock market.

James has been dabbling in the stock market for more than 10 years, with the hope of making some quick money. However, as he is a busy professional, he has not much time to seriously learn about investing, except occasionally reading some periodicals such as the Edge Malaysia, Focus Malaysia, and some finance and investment blogs, one of them is the popular i3investor. The outcomes of his stock investing have been dismal.

It was from this i3investor that somewhere in mid-2017 that he read about and was extremely fascinated by an unconventional investing strategy, the “Golden Rule of investing”. That was the talk of the town (i3investor). There were also numerous seminars held over in Kuala Lumpur, Petaling Jaya, Ipoh, and Johore Bahru, all propagating this revolutionary Golden Rule Investing Strategy (GRIS). The GRIS appeared to have become the Holy Grail of investing then.

The GRIS is in fact a simple, easy to understand and to use investing strategy. All an investor needs to do is to watch out for the quarterly results of a company. If the company makes an increase quarterly earnings compared to the preceding quarter for two consecutive quarters, and the price-to-earnings ratio of the stock is less than 10, it is a “must buy”, a recommendation much higher than the “strong buy” normally used by investment bankers, as the share price of the stock would rise, and continues to rise, without the slightest doubt.

Two stocks listed in Bursa were used to illustrate the GRIS; Jaks Resources, and Eversendai; both are from the Construction sector. Numerous articles were written about them and published in i3investor and adopted in many financial and investment blogs. As the GRIS was supposed to be a “sure win” investment strategy, leverage or margin finance was encouraged in order to make more money.

Eureka! That was what James has been searching for in the last ten years in order to change his faith in stock investing. James was particularly attracted to the stock, Eversendai.

James did a little research on this company and found that it is an impressive local company with high specialization in steel structure construction with its footprint all over the world, especially in the Middle East, in the oil rich States in the Gulf. Its principal activity is the provision technical services, such as Structural design, detailing works, Unfolding drawings and Value engineering services. The Company has completed over 100 projects, including projects in 10 countries, such as Malaysia, Thailand, Philippines, Indonesia, Hong Kong, Oman, Saudi Arabia, Bahrain, Qatar and UAE.

At the end of May 2017, he read about the 1st quarter financial result of Sendai ended 31st march 2017, he found the company made a turnaround from a huge loss from the preceding quarter to a net profit of RM15.3m, and that the company had secured numerous projects amount to close to RM2 billion worth. He thought he had found something interesting. When he further read the numerous articles and comments written in i3investor promoting the stock, he could not resist any more and started spending a few tens of thousands Ringgit to buy some stocks of Sendai at about RM1.30. The stock was in a strong uptrend then, with its share price rising from about 70 sen 6 months ago, and from 40 sen a year ago, something fitting in what he knows about technical analysis, that he must buy stocks in uptrend in order to make money.

Figure 1: Share price movement of Sendai

The share price of Sendai did go about RM1.40 as there were a lot of noises of “margin” and “sailing” on the stock in i3investor. However, don’t know why, the share price began to drop after that to about RM1.00 in mid-August 2017, and James became a little jittery, more so when he read some articles written by one KC Chong on Sendai describing the risks investing in it and his discouragement about using margin finance investing in it. However, shortly after that, Sendai reported its second quarter result for 2017 ending 30th June 2017. The company made RM20.8m net profit, an increase of 35%. Ini kali lah (This must be the time), James shouted, as the company has made increasing profit for two quarters, the answering of the GRIS! What KC Chong was talking about were a bunch of bullshit, he said. He used half of his saving, RM100k, buying a hundred thousand shares more of Sendai at about RM1.00.

James continued to buy more and more of Sendai, only one stock, when the company made increasing profit again during the third and fourth quarter of year 2017 as he saw in Table 1 in the Appendix. During the fourth quarter, earnings per share (EPS) increased again to 3.84 sen. James annualize the fourth quarter earnings to 15.36 sen. He applied a P/E ratio of 10 to it, and concluded that Sendai should worth RM1.53, and he could buy loads of it at RM1.00, cheap, cheap, for a potential gain of 53%.

However, luck was not on James’ side. The share price of Sendai continued to drop to about 70 sen at the end of August when the company reported a reduced profit for its second quarter 2018 ending 30th June 2018. The judgment day came when Sendai reported another quarter of losses happened for the 3rd quarter result ending 30th September 2018, announced on 29th November 2018. There were two consecutive quarter of losses, and hence the GRIS was broken. It was a sell for Sendai, and James followed the GRIS religiously and sold all the stock at 50 sen. All in, James lost about 65% of its capital, or close to RM100k.

Luckily for James who cut loss after the GRIS was broken. The share price of Sendai continues to drop and closed at 39 sen on 30th September 2019.

James is still scratching his head; what had happened to this Holy Grail of Investing, GRIS? He asked. Eversendai has been making money for so many quarters, and even for the last four quarters, and it made about 10 sen. Using a PE ratio of 10, the other part of the GRIS, it should worth at least RM1.00, and it has an asset backing of RM1.14. It has close to 2 billion Ringgit worth of jobs on hand. How come it is trading at such a low price of 39 sen now?

James has been staring at the share price movement of Sendai in Figure 1 above and the quarterly reports of Sendai in Table 1 below, bewildered. He wants to seek some answers. Now, James remembered KC Chong and his teaching in i3investor. He found the email address of KC Chong below.

ckc13invest@gmail.com

James realized now that in investing, the most important thing is to avoid making big losses first by following stock tips and some simplistic rules. He promises himself to learn from KC how to avoid making huge losses and then hopefully, earn satisfactory return in the long-term following the right path of investing for a more predictable and better retirement.

Table 1: Quarterly Financial Performance of Sendai

Date

Financial

No.

Financial

Revenue

PBT (RM,000)

Net Profit

EPS (Cent)

Year

Quarter

(RM,000)

(RM,000)

28-Aug-19

31-Dec-19

2

30-Jun-19

379,885

11,106

8,369

1.07

29-May-19

31-Dec-19

1

31-Mar-19

399,629

10,802

11,141

1.43

28-Feb-19

31-Dec-18

4

31-Dec-18

492,496

23,855

19,586

2.51

29-Nov-18

31-Dec-18

3

30-Sep-18

432,206

16,371

13,136

1.68

28-Aug-18

31-Dec-18

2

30-Jun-18

389,772

8,847

10,753

1.38

31-May-18

31-Dec-18

1

31-Mar-18

391,276

28,004

26,614

3.41

27-Feb-18

31-Dec-17

4

31-Dec-17

519,224

31,706

29,812

3.84

27-Nov-17

31-Dec-17

3

30-Sep-17

449,321

19,706

20,826

2.69

28-Aug-17

31-Dec-17

2

30-Jun-17

465,870

25,747

20,609

2.66

25-May-17

31-Dec-17

1

31-Mar-17

395,968

18,713

15,264

1.97

28-Feb-17

31-Dec-16

4

31-Dec-16

340,973

-192,198

-193,075

-24.95

 

Related Stocks
Market Buzz
Discussions
Be the first to like this. Showing 1 of 1 comments

3iii

The GRIS mehod has proven to be grissly to its inventor!

Losing all his again and needing to sell long held assets to cover the losses.

In investing, focus first on not losing your capital.

Remember Buffett's rule no 1: do not lose your money (capital).

2019-10-02 08:36

Post a Comment