Quarterly update for PCHEM, YINSON, QL, TOPGLOVE & STNE Feb 2019

This will be a simple quarterly report that I will be putting up for my family and friends. So I will have killed 2 birds with one stone, a simple letter to let everyone know what I am doing with our investments (using my alias as (S=QR) Philip), as well as sharing an investment journey that fellow retirees and new investors can learn from and understand without paying training fees and subscription payments. Admission is free.

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My investment strategy is simple, and yet difficult.

I am to invest in a concentrated manner, holding a small number of stocks that I can monitor and understand clearly its long term prospects.

I buy stocks based not on the stock price, but on the viability of its business in growing and keeping its competitive advantage over a period of 5 years or more. In short, a wonderful, growing business. Hopefully, as I am still an amateur with only 20 years of investing experience, I hope to buy them at a fair price, failing which I hope to buy them cheaper than what my 10 year projections of the business will be. I will be wrong on many occasions.

I try to avoid buying penny stocks, startups, turnaround stocks, asset plays, politically connected stocks, and investment banker/shark promoted stocks. I will be wrong many times, but more because of not acting on those opportunities, and not because of making bad investments(hopefully). My investment strategy involves reading annual reports, market journals, news reports, press releases on many many stocks in the bursa market, with the mental model that all businesses in malaysia will be related in someway to each other (from developer to banker to contractor to business owner to workers to government bodies to import to export and so on). Out of these many businesses, using that framework of relatedness, I monitor a group of stocks which has shown a background of achievement, competence and business growth in a number of years. These form my circle of competence, which I follow closely.

When I spot a viable long term growth trigger for the business, and the share price is not too onerous, I buy the stock with as much financial might as I am able to muster.  I try to ride the stock like a bat out of hell, reinvesting all dividends and quarterly capital as I can reliably muster. At each quarterly report juncture, I read the quarterly report (usually starting from the back where all the juicy details are), and see if the stock has performed along my expected projections. If it has, and the investing public has not yet caught on, I buy more.

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The results of my personal legacy investments are as follows:

My personal investments:

Shares owned                             Company                                 Cost*                                   Market value

    2,000,500                          QL Resources Berhad                RM1,265,892                         RM13,783,445

    2,013,800                          Topglove Corp Berhad                RM1,340,796                         RM9,263,480

    615,400                             Yinson Holdings Berhad             RM789,900                            RM2,769,300

* Cost includes all margin loan costs, interest payments, dividend reinvestments, monthly salary contributions, commissions from amway, year end bonuses, performance bonus, palm oil plantation returns, money drop from the sky, picked from rubbish bins, selling 4D private bookie activities(to company and subcontractor workers only - divested ) begging, mugging, borrowing, inheritence and so forth.

QL Resouces Berhad has been a gem of an investment for me. Last year there was earnings increase to RM206 million ringgit. out of which there was a dividend of 73 million given out. My share of that last year was 4.5 cent (around 80K). I have since built up to a larger position, reinvesting the returns and buying more stock, which my latest investment was 6.25@50K shares done in Dec of 2018. I believed that the entire bursa market was oversold, and it proved to be a good deal. Moving forward, I expect even more good things from QL management. We have hit the 1 billion quarterly revenue mark (or almost there give or take a few million), and a guaranteed huge growth driver in family mart which kicked off in 2016 and is now at 89 stores with a target for 200 upcoming. I expect many japanese familymart combi stores in Sabah and Sarawak soon, serving a healthy and tastier option to generic fast food options that you can get from 7-11 and mynews. Try the tomyam oden. Its good. Its QL.

In terms of growth, in 2009 quarter when I first invested in QL, we did 320 million in revenue, with 19.8 million in net profits. the book value was around 400 million. Today in 2019, the revenue is now 3 times more at 978 million,  with a net profit of 75 million, and a book value of 1.9 billion. Did I mention this is PER QUARTER?

The future of QL is as clear as its business units.  The food industry is a very huge market, and very treacherous to those who doesnt understand that only scale will survive. Different from many opinions, it is very very hard to get into this market and not make a loss.

The big companies that succeed are usually very highly intergrated, with vertical integration covering:

1) feedstocks production, manufacturing and trading(stocking and purchasing),

2) growing livestock, catching wild, processing, packing and freezing.

3) efficient logistics and delivery team to send and market the processed food to the masses.

Those that dont understand this part well and execute poorly on all fronts are doomed to languish in averageland. Companies like layhong, CCK, etc that only do one part well, they will not earn a meaningful growing profit. They will forever languish in penny stocks range because the volume will get bigger and bigger as the population increases, but the big companies will force the profit margins lower and lower, killing the small players and forcing consolidation. Business vertical efficiency tends to do that. No one ever asks KFC or Nandos if their chicken is antibiotic free or they only want to eat layhong chicken. Price per kg comes first.

There is only a handful of companies in Malaysia that does all 3 things well in this huge market pie. QL is excellent at the first 2 parts, and with their addition of family mart, I am even more confident that they have grasped the difficulty of item 3, and have decided to learn from the best, japan's 2nd largest combi family mart. The lessons that they will learn on how to handle marketing and delivery to the end user will definitely serve them well as they replicate their business regionally.

I look forward to the day 10 years from now when 1 quarter of QL will be 2 billion in revenue, and a net profit of 150 million per quarter. It has performed so far along the lines of my growth triggers, and unless they invent star trek food 3D process, I expect business to be resilient to interruption. I expect the next growth triggers to be from local regions like indonesia, vietnam, phillipines etc where over time efficient integrated business will rule over ineficient ones. QL has yet to have a negative quarter, and excellent diversification and expansion track record historically. This quarter is their all time record of quarter revenue and quarterly profits. I am satisfied to sit and wait and hold. I am expecting them to jump from 206 million net profit last year to 240 million net profit this year end.

Topglove Corp Berhad is a one of a kind business in Malaysia. It produces something simple, a plastic glove with such efficiency and volume that they control a big share of the world market (25%). They export to all 4 corners of the world (195 countries), and the advantage of having a vertically integrated business coupled with being on the equator ( where rubber trees are best grown) allows them to supply, market and sell with fantastic volume and size. They are the lowest cost producer of the world gloves market, they have size, and most of all they have reputation and quality. In a market like medical gloves and condoms, reputation can make or break you. Toglove has ample, and is cheap to boot.

Now in analyzing growth of topglove, we need to understand the market size. Mature markets like Japan, West Europe and USA are mature markets, with high sales and usage of nitrile and latex gloves.  There is another part of the with a huge growth (35% growth YoY) which is ... the rest of the world. People are starting to see the value in using gloves for medical operations, factory operations, hygiene,healthcare and industrial applications. The growth of the world glove market is expected to grow by 10% yearly, and the 177 million capex investment (150 new lines, 18 billion new glove capacity per year) shows Topglove conviction in meeting that need.

Someone once asked me why I did not invest in Hartalega back then when compared to Topglove. It was having fantastic margins, gives out big dividends every quarter, and is valued more than topglove. For me, I always believe that dividends should only be given out to shareholders if the management can no longer find an efficient use for it. If they give out dividends simply because shareholders asked for it, the taxation, double handling and stamping etc serves as an inneficient way for the company to make use of retained earnings. I believe the management of Topglove may have been a bit slow on the uptake and made a mistake with Aspion purchase (which we paid for), but I believe they have the right mindset and approach. In essence, harta lega would find it hard to assault the topglove fortress, but topglove is the barbarian at the gates of nitrile products. Time will tell what happens.

In any case, I still see a good growth trigger for Topglove. Hartalega is not challenging topglove latex glove dominance anytime soon, but Topglove purchase of Aspion for 1.37 billion for its nitrile glove market shows that it is willing to challenge that portion of the business with Harta. With a target to of 148 new lines with 14.8 billion new gloves (by 2020) specifically targeted at nitrile gloves market. with a current 60 billion gloves a year capacity,  a 24% increase in capacity ensures that it continues to fight harta for market share growth long term, while hartalega continues to  reward its short term shareholders at the cost of future market share. Aspion is a regrettable waste of my shareholding money, but the 200M usd bond raised to pay of its debts at 2% and 5% share dilution(if taken at 6.204 per share) is still acceptable. The savings of RM16 million per year over 5 years (i suspect less) is a sign of good governance. I await my 17 cents dividend with baited breath. I expect topglove to grow in tandem with the world market (10% a year increase), increase its market share and expand into different markets (nitrile gloves, condoms) efficiently. It will be busy for many years yet. Did I mention that this quarter they hit an all time revenue in a quarter? The growth story is not done yet.

Yinson is a wonderful company that I started investing heavily in 2013. It has a unique story, as a turnaround company that sold all of its trucking and logistics assets (a horrible business with no moat) and ventured into the FPSO market in the right way, by purchasing Fred. Olson, a norwegian company. Instead of competing in local malaysia market (which was full of race based controls), they decided to take on the international market instead. They currently have 5 FPSO's, huge vessels which do processing and production of hydrocarbons directly in the sea, instead of building unwieldy platforms to dig up oil. It is the most efficient (capital commitment and time wise) method of doing offshore oil extraction, and I see a future where oil reserves will be getting less and less and harder to get to. The floating production, storage and offloading will have a big future in moving from site to site quickly, deliver and relocate to a new site.

Oil price 20USD a barrel Yinson makes money, oil price 80USD a barrel Yinson makes money. What do I mean by this remark? Yinson makes a very predictable earnings case because its contract is a fixed charter basis, with a fixed early termination penalty (the cost of FPSO conversion) built into the contracts, Yinson does not lose money on oil price difference, only on their ability to convert and deploy the converted ships to their chartered location on time and on schedule. I can tell you a thing or two about Mr Lim on schedule and ability, from the old days. He is one of the few owners who can fix his own 10 ton lorry, repair axles, change a blown lorry tire and get things going on time. He prides himself on being efficient and hands on. I can see the same managerial talent in his son.

Why is Yinson different from Sapura and Bumi Armada? A few major reasons. Firstly, the contracts they sign are very different. Sapura and bumi signed contracts where the payments are a JV share and based on the prevailing price of oil per barrel. That is a stupid way of signing a contract, and hinged on hoping the oil price will always stay up. Therefore in good times you roll, and in bad times you fold. Not only that, a lot of the contracts are based on infrastructure first, get the jobs in later. Therefore a gross underutilization of assets occur, and a lot of labour, machinery and vessels are put aside, waiting for the next contract. However, the debt and the management inefficiency (although in all honesty, driving a sportscar is far easier than maneuvering a 30 ton crane lorry) leads to higher tender prices and less ability to compete with little small norwegian company yinson. I put that in the "too hard" pile (as shown by the armada kraken fiasco). Yinson on the other hand, structures their contracts so that they build only when they win a charter contract. Add that to their skill in hiring Chinese companies to do their conversion (ahead of time and cheaper than their expectation), and you have a recipe for success.

What to expect from Yinson in the future? Predicting Yinson is very straightforward. Contracts are fixed, with 8-10 years contract length and extendable period.They can do bareboat charter (ship only), or full O&M management.  It is the cheapest FPSO charter by far, and building a huge goodwill from efficient on time deployment. It has recently sign a JV with sumitomo (Yinson technical works, sumitomo financing). It will send its maiden FPSO project into Malaysian waters (first local malaysian project by a malaysian internation company, funny.) ahead of schedule and cheaper conversion cost than expected (which THHE couldn't even do despite winning contract for years), building a big name locally should it be successful. On the international front, Yinson is so famous now to the point that FEP will bankroll Yinson a deposit fee, paying it an upfront cost of USD110 million to finance their conversion. Funnier still, this new FPSO Anyala will be converted from its Gabon based FPSO Allan, which was contract was canceled (and penalties written off down to 70 million usd). Yes, FEP will be giving free money to Yinson to convert a ship already converted FPSO Allan (which CNR gave an early termination notice on the 9th year of a 10 year contract, with an early termination fee penalty), which is pretty much amazing for a niche FPSO market with more tender bids in the last year than the last 3 years combined. I am continually amazed at these turn of events. If you were to look the dictionary for the phrase "money drop from sky", I am sure you will find the bald head of Mr Lim smiling ear to ear at you on the page description. I expect a few more contract wins these next few years, as the Yinson supercar is driving circles around the likes of Sapura and bumi Armada and others. I have a feeling my 10 cents per share dividend is going to increase sometime soon. Possibly even as early as this year. I am content to build my position.

Where to deploy capital for this quarter? After looking at the multiple opportunities and the opportunity costs entailed, I still find myself going back to these 3 companies. It is within my circle of competence, and I feel comfortable in investing in it for the long term. Noting that part of topglove bond deal is to allow 2% of the major shareholders to allow their shares to be put on loan (short sales) has brought the price down to a very comfortable level. I am comfortable in putting double down on topglove and yinson, putting in an extra 20,000 shares in topglove at 4.68, and 20,000 shares in Yinson at 4.25. The big bet should come next quarter, when the dividends come rolling in. On QL, sadly the investing public has caught on, realizing the strength of its business. I had previously bought 50,000 shares in QL on 6.25 december, and hopefully more people will bash the stock and bring the price down, so I can collect more.

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As for my investment with my wife and respected father in law, the rules of engagement are very different. The goal is to choose a far more low risk and safe investment, and to select the stock with the greatest possibility of growth and minimum risk. The stock must have a worthy dividend policy, and there must not be any margin or any outside form of capital deployed. Only dividends may be reinvested. The split will be a 30/30/40% of shareholdings, with me holding the biggest shareholding (as it should, we sink or swim together, any risk I take must be bigger than others).

The investment chosen is as follows:

Shares owned                             Company                                            Cost*                                   Market value

    1,495,200                        Petronas Chemicals Berhad                 RM12,264,640                         RM13,905,630

*reivested full earnings from PBB divestment (from 2012 to 2019 January) minus some angpau money, a nice dinner, and some renovation at the old house.

It is not easy investing your family future. More so if the investment belongs to your wife and father in law. If one day you should find yourself in a position to be trusted, be fearful, be wary, and be careful. If you get a second chance after failing the first time, be even more wary. With such a  mindset, if you believe that you can only invest on 20 stocks in your entire life, you will choose with utmost care. After much deliberation (and much holding onto public bank stock since 2012), the family has agreed and we have reinvested our capital gains (thank god malaysia still does not have stock sales tax) from PBB and moved it into PCHEM. And not a moment too soon.

PCHEM has enjoyed a record quarter. All time high in revenue this quarter (5 billion ) and an all time high dividend (18 cents) Very much deservedly so. Petronas chemicals has all the trappings of a wonderful moat company. A huge yearly revenue of almost 19.5 billion, and incredible earnings of 25% net profit, or 5 billion after tax. Amazingly, even after giving out 50% of its earnings as dividends, it still has the ability to grow at an incredible clip. Even if it had no amazing growth triggers, just the synergy and vertical integration alone would be worth the investment.

The key to the entire puzzle that solves my investment into PCHEM is of course, the final testing and commissioning phase of PIC, the petronas integrated complex. This single complex alone would boost production from 10.7 MTPA to 13.8 MTPA, basically increasing total production of PCHEM by 30%. But the story is not so simple. It also has multiple new petrochemical processes that currently cannot be found locally (like isononanol processing), which will spur growth in the next generation of local industries and businesses in Malaysia (especially johor), and present a huge leg up into the future. And did I mention that feedstocks will be coming in from the same building next door, with crude oil refining supplied by Petronas AND Saudi Aramco, ensuring consistent, efficiently costed feedstock sources for decades to come. 

I expect about 269K in dividends ( another record high, but less after fractional taxes and expenses), which will be fully reinvested into PCHEM as soon as possible. Hopefully the price will stay low enough, while I continue to collect as much as possible, reinvesting return every 6 months. I still dont have a clue what the terminal value (the age when revenues and earnings start to stagnate) for a business like PCHEM, but if you asked me? at 25% net profits, by the time PCHEM hits Dowdupont growth level and hits its terminal growth rate of  5% net profits, it would be doing 50 billion USD in revenue and 2.5 billion USD in net earnings. I remain cautiously optimistic (especially since the major population growth in the future will be in south east asia, china and india, while USA will be a slowing market) which is annual report lingo for \(^__^)\  /(^__^)/

buy more when dividend income comes in.

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And now for the coup de grace.

The last investment is for the sandakan smallholders and plantation farmers group, which I have been a part of and been friends with for the last 30 years. As they have been asking me for stock advice for many years (I had the same investment advice for the last 9 years. Buy QL.) some have taken my advice, others have not. But all have realized that the most consistent way of making money long term is by holding tight to your investment for a long period. Upon further discussion among friends, it was proposed that I should managed the funds that were put away in money markets in singapore. I said yes, with the condition that I will put up 50% of the close end fund, the holding period would be 10 years (no cancellations, hard to atm when your money is put in Singapore), and I would be allowed to use margin if needed, and hold cash if I deem fit. The "close ended fund" was oversubsribed, and I ended up with a 40/60 split (60 belonging to the retirees and other old dirty men who made money during palm oil spike and had nothing to buy with it in Sabah (trust me, the shopping malls in kunak and lahad datu are far from ideal) 

Shares owned                             Company                       Cost*                                   Market value

   200,000                                  Stoneco Ltd                 USD3.800,000                        USD6,400.000

*includes all margin, interests and fractional costs

For those who wondering, how did we own 200,000 shares when our total investment was supposed to be USD2,888,888 as previously agreed? Yes, I had decided to act on my capability as fund manager and invested extra on margin for stoneco. hubris and confidence combined. 

STNE is and remains our fastest growing stock (so far) in the shortest time yet. The IPO was in end of 2018. It started at 24, went up to 32, then dropped down to 19. At 19 I believed it was a no brainer for such an amazing business, and so I pulled the trigger. the share price has now gone back to its original high water mark of 32. From here on out the growth will depend on the business performance, profit earning and growth prospects.

And what a performance it had. 

STNE is now the 4th largest payments acquirer in Brazil. Their IPO recently has been backed by alibaba and Berkshire Hathway. I must admit I am going out of my circle of competence, so a helping hand by the financial arm of alibaba and BRK I decided to check out Stoneco. What I found astounded me.

In a business where the big banks are too rigid and slow to move and are very happy and satisfied with their current arrangement with VISA, AMEX and MASTERCARD, Stoneco has realized that the future of payments comes in many forms, digital, credit card ,  points, gift cards, cryptocurrency and many others. The company that is able to integrate everything together into one single device that can process legacy card systems, as well as link to your smartphone cloud account to digitize payments online will do very well in the future. The company that goes a step further, uses easily available smartphone apps and integrates in data 4.0 to allow you to do ALL the processes ( credit card payment gateway + POS point of sale system + Invoicing and accounting system) in one simple platform device targeted speciffically at the SMALL BUSINESS like hairdressers, one man contractors, fruit sellers at the market, the one man programmer and designer to allow them to be an efficient business (for only RM150 a month all included) is going to be a rockstar.

Stoneco has grown from 126 million in revenue  in 2016 (33 million loss), 240 million revenue in 2017 (33 million loss) to the sept quarter of 2018 where it had a revenue of 104.8 million (in one quarter) and a net profit of 22 million. Its concept of skipping the big ugly bank building and instead using its MLM style "angels" system to go to ground and help business owners directly is a revolutionary move (for banking industry) Using their operational metrics (how they measure their growth), in 2017 they had 131 thousand clients. This year they had 268 thousand clients. As their charges are based on a monthly fee and a fractional cost of each transaction, they also use TPV (total payment volume) as a metric for how well their business is doing.

They did  RS15.3 billion in 4Q 2017 and RS26.6 billion in 4Q 2018, for a growth of 73.8%.

This growth is simply amazing. Imagine an ecosystem where you make a small fee of every banking transaction, a few cents, invisible if you stand alone. But mind boggling in its profitability when you start to have 1 million companies using it and doing daily transactions every day. In their IPO prospectus, Stoneco aims to target the 8.8 million SME's, one man operators etc in signing them up to use their services. If everyone starts using their payment system in Brazil, and it is replicated regionally, well... did I just describe another VISA in the making for you? In either case, Stoneco has raised a warchest of USD1.5 billion from its IPO, and is an immediately profitable company that has gained a suitable scale (big enough to be efficient, small enough that the investing price is still low)

I wait with baited breath on what it will do in the future. Based on its upcoming results come March 18, more equity may be deployed.

Learn something new everyday,

Philip