Interesting arguments for and against using margin financing on a business with history of volatile earnings, high gearing and risky business model.

I understand that Eversendai has secured 2 units of lift boats – Aryan & Arjun, from Vahana Holdings worth USD180 million in 2014.

The 1st liftboat initially scheduled for delivery in the third quarter of 2017 has been delayed to 1st quarter of 2018 as certification and commissioning of the lift boat is more stringent than expected.

Vahana Holdings has obtained conditional financing for the 1st lift boat but there is a risk of impairment in FY19 should Vahana fail to secure a charter within 12 months of the boat being ready for delivery as banks will only release payments to Eversendai once a charter contract is secured.

The delivery of the 2nd lift boat which is about half way to completion, scheduled to deliver by 1st half of 2018 but delayed to a later date.

There is a potential of Vahana failing to secure financing for the 2nd lift boat and raising the risk of impairments for Eversendai.

It is not only Eversendai performance that count, the risk include client performance in securing business and financial close.

What is your risk reward expectation?

The weakening of the ringgit has improved exports and outlook, BN new ruling mandates at least 75% of all export proceeds to convert to ringgit instead of keeping USD either onshore or offshore for payment of imported goods, equipment and repay foreign currency loans. These drive demand for ringgit is driving its appreciation against the USD.

It has reduced 70% of the offshore trading of the USD-Ringgit forex market and ensure orderly trading of USD-Ringgit in domestic market.

Steady recovery of crude oil price also improved Govt. fiscal deficit position. A stable China with steady economy also facilitate foreign fund inflow into Malaysia through its OBOR initiative.

With strengthening of ringgit in sight, exporters will naturally sell forward their future USD earnings and these actions also drive demand for ringgit.

Ringgit strength may reverse if;
1> Export growth taper off, watch out for trade surplus figure.
2>The timing of US Fed interest rate hike and tightening of its balance sheet, and
3> Large redemption of MGS between now and next year.

Another potential problem is the lack of investment by Vietnam into Coal Mines.

Vietnam is going ahead with plans to build a new coal-fired power plant despite experts’ warnings over the nation’s coal depletion and the dangers of depending on imported fuel.

Energy analyst Dr Nguyen Tien Chinh has advised that Vietnam is taking a risk in setting up new thermal power plants without clear sources of coal supply, news outlet Vietnam.net reports.

The nation’s domestic coal production has been falling below government targets, and the government announced that it would consider adjusting its plan for coal imports to begin earlier and import more. Vietnam Energy Association chair Tran Viet Ngai said at the time that the nation would likely begin importing coal in early 2015, two years ahead of schedule.

"It's not easy for Vietnam to increase its coal output now, given that production cost is higher while there hasn't been sufficient investment in the coal mining sector," Ngai said in an interview with the Wall Street Journal. "We now have to dig deeper to get coal and importing is inevitable."

Vietnam face the same problem as India, coal production falling behind and imported coal too costly. Another issue is the investment in the power distribution network may affect the off-take of electricity. Mudajaya 26% interest Power plant in India is facing delayed and cost overrun. Risk of construction progress & cost escalation is one part, interest & currency risks, and finally risk of capacity off-take.

AmCham is an independent association of companies with the objective of promoting trade and investment between Vietnam and the U.S. With two chapters, one in Ho Chi Minh City and one in Hanoi, our membership of 700 companies and 1,500 representatives is unified by a commitment to promote trade and investment between Vietnam and the United States.

http://www.amchamvietnam.com/2017-update-on-foreign-mega-investment-projects-in-vietnam/

Items 10, 13, 17 & 21 are related to Thermal Power Plants in Vietnam.

(Jaks is the most expensive among the pack for in term of capacity, risk of delay and cost escalation from the initial announced investment are common). Good Luck to business sense.

10) $2.26 billion Jaks Hai Duong thermal power plant

The 25-year BOT 2×600 MW project by Malaysian company Jaks Resources Bhd. was licensed in 2011. Preliminary construction work on the project has already started, with the land clearance and boundary walls completed.

In July 2015, Jaks Resources Bhd. inked agreements with China Power Engineering Consulting Group Co., Ltd. to jointly develop the plant through a 50:50 joint venture.

The project’s construction was kicked off in March 27, 2016. Since then, there was no progress. By the end of 2016, the Hai Duong People’s Committee was trying to find ways to urge the developer to continue with the project but there is no new development as of now.


13) $2.018 billion Vinh Tan 1 Thermal Power Plant in Binh Thuan

Licensed in 2013, the BOT plant is an investment of a consortium of two Chinese companies and Vietnam National Coal-Mineral Industries Holding Corporation Ltd. (Vinacomin). The plant is part of Vinh Tan Thermal Power Complex, which consists of four projects with a total capacity of 5,600 MW. This is the country’s largest coal-fired thermal power plant.

While Vinh Tan 1, 3, and 4 remain under construction, Vinh Tan thermal plant 2 has started operation in January 2014.

The operation of the plant sparked strong opposition from residents in the surrounding area on account of potential pollution hazards. Due to strong coastal winds, Vinh Tan Thermal Plant 2 is obscured by fumes and dust, despite efforts to regularly irrigate the area, as required by local authorities.
In April last year, thousands of people blockaded National Highway No. 1A, stopping traffic for hours to complain about coal dust and cinder from the power complex, especially the newly built Vinh Tan No 2.

The Binh Thuan People’s Committee urged the power complex management board to stop all executive work when wind speed reaches above level 8 (88 km per hour).
At the end of 2016, Binh Thuan authorities stopped Vinh Tan 1 from pouring 1.5 million cubic metres of waste into the sea. As of January 2017, people living nearby still complained about the coal dust and cinder from the plant whenever wind blows heavily.

http://www.sourcewatch.org/index.php/Vinh_Tan_power_station

17) $2.018 billion Duyen Hai 2 thermal power plant in Tra Vinh

Licensed in 2015 by Malaysian Janakuasa (Malaysia), the Duyen Hai 2 thermal power project is going to be built in a BOT format.

The project has two turbines with a total capacity of 1,200 MW. Construction is going to start in the second quarter of 2016.

The plant, which is expected to go on stream before 2020, will be one of the four thermal power plants in Duyen Hai Power Centre. The remaining plants, representing a $6 billion investment by Electricity of Vietnam Group (EVN), are Duyen Hai 1, Duyen Hai 3, and Duyen Hai 3 extension.

Once completed, the power centre will contribute to the national power grid an additional capacity of 30 billion kWh annually.

On August 3, 2016, the Malaysian investor broke ground for this project.

21) $2 billion Nghi Son 2 Thermal Power project in Thanh Hoa

Nghi Son 2 was the first international tender for a large-scale coal-fired power plant in Vietnam. The project is going to be carried out under the build-operate-transfer (BOT) format. The $2-billion plant will be located in the province’s Nghi Son Economic Zone. It will have a capacity of 1,200 MW, produced by two 600 MW units.

In November 2016, the consortium of Japanese company Marubeni Corporation and Korea Electric Power Corporation (Kepco) signed with the Ministry of Industry and Trade the investment agreement for the project.

As of the end of 2016, the consortium was awaiting the investment certificate and was arranging the finances for the project. Though the ground-breaking ceremony was held in September 2015, the project has yet to secure a range of agreements to complete the BOT contract package.

http://www.sourcewatch.org/index.php/Cong_Thanh_power_station

Sunway is a credible developer and very transparent. Sunreit management has been able to continuously enhance its properties and create value.

Another factor is the USD/RM exchange rate, US dollar has strengthen for a quite a while. Since US Fed is adopting a less aggressive rate hike, US dollar has weaken. The strength of RM against USD will also play a part in deciding MGS 10-yr yield. A lot of moving parts to look out.

The most important factor is whether Sunreit management can continue to deliver earning growth and higher DPU payout.

Sunreit has on one hand has converted 94% of its borrowings into fixed rate. Hence, any increased in interest rate will have little impact on Sunreit finance costs.

Investors will compared the Sunreit's yield with that of MGS 10-yrs yield around 4.1%. Since MGS rating is much better, investors will expect a yield spread of 2%. A hike in interest rate will exert pressure on MGS 10-yr yield.

For Sunreit to maintain its current price, its strategy to improve its earning in future must be realizable to improve its DPU payout in order to maintain that yield spread of 2%.

Hence, end of the day, it is your view on whether Sunreit management has been in the past able to deliver its promises and continue to do so in future.

The taxable portion of 1.67 sen/unit, the tax rate is 10%. Hence the net of tax will be 1.503 sen/unit (1.67 x 90%). If you add this net of tax portion to the tax exempted portion of 0.61 sen/unit. The total Dividend you received per unit will be 2.113 sen/unit.

Hence, if you have 1,000 units of Sunreit, you should get RM 21.13 dividend payment RM(2.113 x 1000)/100.

Refer to Sunreit AR 2016 Part 1 Page 58 under message from CEO, the capital management section stated clearly that the average cost of debt is 3.93% and the ratio of fixed rate borrowings have increased from 88% in FY2015 to 94% in FY 2016. Hence, any hike in interest rate by Bank Negara will have little impact on Sunreit finance cost. Anyway the debts to total assets of Sunreit is around 33%, a comfortable position from the 50% limit set.

The key is whether the planned strategy in FY 2017 (page 59) will further enhance the earning and DPU going forward. It needs to maintain a yield spread of 2% over the 10-year MGS which is currently around 4% else any hike in interest rate by US Fed will exert pressure 10-yr MGS yield and indirectly affect its share price.

Sustainable growth rate (SGR) = ROE x (1 – dividend payout ratio)

It is a measurement of how much a company can grow using internal generated funds. That’s why positive free cash flow (FCF) concept is vital, the ideal case is when FCF (operating cash flow minus capex) is sufficient to pay dividend. Else it needs to monetize asset, secure more commercial borrowing or raise fund through right issue to facilitate growth. Net profit must be based on core business earning less one-off and unrealised fair value gain or loss.

In order to improve ROE, business needs at least one of the followings:
ROE = Net profit/Revenue x Revenue/Total Assets x Total Assets/Equity
1. Increase assets turnover ratio by generating more revenue with optimum assets employed. In other words, managing of working capital such as inventory, receivables and payables to lower the cash conversion cycle. Ensure optimum utilisation of PPE capacity.

2. Source for cheaper leverage and match loan tenure with investment gestation period. If possible, loan drawdown according to requirement.

3. Lower income taxes by reducing lumpy non-deductible expenses, take advantage of tax incentives etc.

4. Improve operating margin through tighter cost control.

5. Sustainable free cash flow to support dividend payment.

Trend analyses of the above factors are important to understand what make the business tick.

Price to book ratio is also vital to gauge whether the business is over or under value.

Assuming a stock with a book value of RM 1 per share and its share price is also RM 1 (Price to book value = 1.0). A 12% ROE will produce 12 cents per share return for the investor (P/E of 8.3). If the payout ratio is 50%, investor will get 6 cents/share as dividend and the remaining 6 cents will increase the book value of the business and should reflect in the market value of the business (technically speaking if the business can continuously achieve 12% SGR). In order words, the total shareholder return (TSR) will be 12% (6% dividend yield + 6% capital gain).

Alternatively, if the stock price is RM 1.50 per share (P/E of 12.5), the investor will still receive 6 cents per share as dividend. But in this case, the yield is only 4%. The book value of the business will similarly increase by 6 cents to RM 1.06 but the market value will increase by 6% to RM 1.59. TSR in this case will be 10%.

The situation will be reversed if the investor bought at a price below book value – said at RM 0.80 per share. The dividend yield will be 7.5%, plus a 6% in capital gain, the TSR is 13.5%.

Debt to equity ratio (=<50%) should read in conjunction with interest coverage ratio (>=2) and net debt position (ideally net cash).

If the business can consistently deliver superior ROE and support a decent dividend payout ratio, the factor that determines the future TSR is PBV or P/E ratio.

It is all boiled down to risk-return relationship on the business model you are investing on. Generally, the higher the return, the higher the risk. There is no guarantee that you will get higher return by taking more risks.

FA on a trial and tested business with potential of earning growth with positive EVA, positive FCF and acceptable gearing level will improve your chances of achieving the expected TSR.

Don't forget to check on the grey area from reliable third party report such as rating agency etc.

Unfortunately common sense will only prevail if you do your homework.

That's right Icon, understanding of the business model is very important. What are the factors that affect the revenues and costs. Market segments by product mix and by geographical locations.

High or low capex to drive growth, Nature of its bank borrowings, foreign or local, fixed or floating.

Positive free Cash flow in the long run to sustain dividend policy and earning growth. What is the underlying catalyst for next phase of growth; cost optimization, venture into new market or new product.

Cultivate the discipline in applying the value investing approach. A mindset shift to focus on "Return on invested capital - ROIC", EVA, Free cash flow, net debt to equity, EV/EBITDA and dividend yield.

Risk comes from not knowing what you're doing, it is better to pay a fair price for a well run company - a business that can prosper in good and bad time.

The message from this article is to learn how to optimize return from your investments (defensive or growth) with minimum risks especially when you have retired.

If you can consistently get above general inflation return, then you can stretch your retirement funds. The ideal situation is to accumulate enough retirement nest egg to generate passive income to replace 80% of your active income as nobody know when is our last day.

When we retired and aged, medical expenses is a major issue depending your health condition. You need to be adequately insured especially on critically illness when you are young or prepared to set aside a tidy sum as emergency funds.

The calculation of the monthly saving of RM 700 is a simplified version by assuming the 4% return is eaten up by the 4% inflation rate.

The correct way of calculating the annual withdrawal with an initial sum of RM 167,000 for a period of 15 years with an annual return of 4% should be:

(A + P/r)*(1+r)^n – P/r = 0

A= RM 167,000
R = 4%
n =15
P = annual withdrawal.

(167,000 + P/0.04)*(1+0.04)^15 – P/0.04 = 0
(167,000 + P/0.04)*1.8=P/0.04
300,600 = P/0.04 – 1.8P/0.04
P*(25-45) = 300,600
P = 300,600/-20
P = - 15,030 (which work out to be around RM 1,252.5 per month)

Value investing is not as sexy as some other style s of investing such as momentum trading. Value investor profits are made by investing in quality businesses, not by trading.

Market factors that drive volatility assigns an incorrect price to a stock with strong fundamental in term of earnings, dividends, book value and cash flow. By applying a proven screening process for value stocks, a value investor will buy into a sound business at bargain price due to market inefficiencies.

It is undeniably true that whatever method you applied, investment decision required judgement based on past performances and underlying future growth drivers. Businesses with strong fundamental will give value investor a conviction to buy and hold to enjoy both the consistent dividend payout and capital gain from sustainable earning growth. Margin of safety by its name is an extra measure to mitigate the unknown risks.

The elasticity of demand of goods or services is only one side of the story. How productive, innovative, cost effective and ability to manage its cash, borrowings and tax play a part in achieving a competitive edge and sustainable growth. The corporate culture the management trying to promote also play an important role.

It is vital to differentiate a value company and a company that simply has a declining price. If Co. X has been trading at RM 2 per share but suddenly drops to RM 0.80 per share, it does not automatically signal that Co. X is selling at a bargain. All we know is that Co. X is less expensive. The drop in price could be due to market respond to a fundamental problem. We need to compare current share price to intrinsic value and not to historical share prices. The fundamental question we need to address is whether Co. X actually worth more than RM 0.80 per share.

One interesting article by Andrew Sheng on how do we get out of the debt trap.

Prof Goodhart of LSE has carefully analysed the three options for deleveraging or getting out of the debt trap.

1.The first is to deleverage by swapping debt for equity, being tried by China.
This is feasible when the country is a net lender and both borrowers and lenders
are state-owned entities.

2.The second option is to use inflation to reduce the real value of debt. As the
recent experience showed, getting inflation even up to target was tough to
achieve.

3.The third option is to address collateral by inducing lenders and borrowers to
renegotiate their debt or make the debt permanent. This is both painful and
difficult and is unlikely to be adopted unless other options are tried.

http://www.thestar.com.my/business/business-news/2016/05/28/how-do-we-get-out-of-the-debt-trap/

The B/S strength has indeed improved substantially and should be in a position to pay better dividend in future. The management intention to spend RM20 mil capex to upgrade to increase automation and reduce labour costs is aright step to improve the quality of its products to retain and attract premium customers.

My only concern is 90% of its revenue is denominated in USD but its input costs are mostly denominated in Ringgit. You can see in its annual report that most of its receivables and payables were denominated in USD and Ringgit respectively.

At current ROE of around 20%, if the dividend payout increase to 30% of EPS. Its sustainable growth rate at 14% is very good. Hence, at RM 1.18, achieving a TSR of 10% should be sustainable.

Sorry, the EV/Ha are denominated in Thousand not mil.

I would use these parameters to benchmark valuation of pure upstream players:
a> Enterprise Value per hectare,
b> FFB yeild per hectare - Plantation operation,
c> CPO oil extration rate - % per mt of FFB on milling operation,

If we benchmark MHC (FY12/14) performance with Genting Pltn (FY12/14), IJM Pltn (FY 03/15), TH Pltn(FY12/14) and Kretam (FY12/14)

Figures are calculated based on Plantation operation data published in MHC co. Website. MHC's EV/Ha(Planted area) is not cheap compared to other upstream players.


MHC RM 83.6 mil/Ha, 20.50 mt/Ha, 20.28%/mt of FFB
Genting RM 60.9 mil/Ha, 20.10 mt/Ha, 22.10%/mt of FFB
IJM RM 55.8 mil/Ha, 25.60 mt/Ha, 20.90%/mt of FFB
TH RM 43.7 mil/Ha, 20.52 mt/Ha, 20.19%/mt of FFB
Kretam RM 46.9 mil/Ha, 22.46 mt/Ha, 21.23%/mt of FFB

In the original calculation of the power plant investment, the original capex was RM 5 bil. If based on the debt/equity of 70:30, the equity investment will be RM 1.5bil.

Mudajaya 26% interest in the power plant will come to RM 390 mil. If you look at the FY 2012 annual report, Mudajaya has only India Pwergen as its only investment in associate, the total cost of investment shown was RM 862 mil. In other word the total additional capex incurred was RM (862 - 390) + (862 -390)*74/26 = 472 + 1343 = RM 1.815 bil. This is rough 36.3% more than the original estimate of RM 5 bil.

The total capex of RM 6.815 bil will be amortized over remaining concession period after the commissioning of the plant. I doubt the revenue from power supply after commission will be sufficient to cover the plant recurring operating cost, interest charges (can increase on reset upon commision) and repayment of the RM 3.5 bil loan. Especially there is a delay and shorter period to sell. There are also risks of sufficient coal supply for optimal power generation and also power off-take from the state.

Not to mentioned its share of losses of RM 225 mil as at FY 12. I doubt there will be any share of profit after commissioning of the plant (just based on the figure in the annual report) unless the operating margin is strong. Mudajaya will be lucky to fully recover its investment cost at the end of the concession period.

I merely make this deduction based on my understanding and the figures presented in the annual report.

Read this and you will know why?

https://www.crisil.com/Ratings/Brochureware/News/CRISIL-Ratings_PR_Power-Sector_28Jul2015.pdf

http://www.crisil.com/pdf/ratings/crisil-insight-power-sector-compendium.pdf

For your info TeckChuan, i am also looking at Coastal closely. I have make one round in early 2014. It rolling 4Q FCF has turn negative in 09/14. With the sale of one of its JUG, its should be in a better position to weather the O&G storm. Its current price looks quite attractive.

It has sold one of its Jack Up rig and waiting for delivery for the 2nd one in 4Q.

http://www.thestar.com.my/business/business-news/2015/04/22/coastal-contracts-clinches-rm807mil-rig-sale/

http://www.offshoreenergytoday.com/coastal-contracts-sells-jack-up-rig-to-avoid-market-downturn/

Due to the late delivery of the 1st Rig by the builder, Coastal file a notice of arbitration in Singapore seeking damages.

http://www.rigzone.com/news/oil_gas/a/141037/Coastal_Contracts_Unit_TML_Seeks_565M_in_Damages_from_2_Rig_Builders

http://www.bursamalaysia.com/market/listed-companies/company-announcements/4890525

Good medicine taste bitter. Once you know it works, your endless appetite to learn more to search for the source of lasting wealth is unimaginable.

Your writings and advices are invaluable to those who wish to create wealth by investing in businesses that can produce sustainable earning growth, positive free cash flow and EVA. Keep up the good work.

Wishing you and your family a happy and prosperous Chinese New Year!!! 恭喜發財...

Europe, Japan and many other governments pursued currency depreciation policies that boosted growth through beggar-thy-neighbour export measures instead of promoting fiscal policies to stimulate domestic demand such as higher spending on productive infrastructure, lift labour income and consumption.

The sum of all trade balances in the world is equal to zero, this implied that not all countries can be net exporters, currency wars end up being zero-sum games.

US policymakers definitely are concerned on dollar strength and its impact on net exports, inflation and growth. It is a matter of time America will enter into the fray. Once the US corporate earnings weaken and macro economic numbers spiral down. Funds will naturally move to Europe, Japan, China and other markets with weaker currency and undervalue equities.

We should not confuse pleasure with happiness. If our consciousness trapped within the ego, the “Me”, then in no way will be able to know genuine happiness.

Happiness has a quality that neither the “Me” or the ego has ever known. “You can be happy … or you can be right.”

Ask yourself next time whether you are to sacrifice your own personal happiness just so that you can make your ego happy by being right?

Mr. Koon realizes how lucky he is to have what he has, he tries to help and reduce the social and economic gaps in the society. Charitable work not only makes a social change but is also a mental growth among people and lead to the road of improvement.

I would like to tell the Starfish Story by Loren Eiseley, one day a man was walking along the beach when he noticed a boy picking something up and gently throwing it into the ocean.

Approaching the boy, he asked, “What are you doing?”

The youth replied, “Throwing starfish back into the ocean. The sun is up and the tide is going out. If I don’t throw them back, they’ll die.”

“Son”, the man said, “don’t you realize there are miles and miles of beach and hundreds of starfish? You can’t possibly make a difference!”

The boy bent down, picked up another starfish, and tossed it back into the surf. Then, smiling at the man, he said, “I made a difference for that one.”

Mr. Koon chooses to throw his stars wisely and well, hopefully more will be blessed.

Stock selection is an art and it’s very personal. The same methodology in the hand of different person will yield different results and it depends very much on your background knowledge & experience, perception of risk and expected return as well as the company past and future performances within the industry where the business operates.

Once you have a conviction to make a call based on whatever method you used, it is your own decision and cannot blame others who have offered their investment view points. It is our own greed and fear that drive us to make the wrong decision.
Mr. Koon’s advice to monitor business performance on a quarterly basis is a sound one. We should analyse using trailing twelve months (rolling four quarters) results to gauge the trend.

Look for wider operating margin on revenue. Return on cash holding not distributed should be optimized. Unrealized and one-off gain or losses should be treated separately (if you take this off from profit, you must deduct the same from reserve). Corporate effective tax rate must be well managed to stay within or below the statutory limit.

Besides noting the increase in revenue, we must also ensure the ratio between revenue and total assets employed in the business also improved.
Business that employed leverage must be sustainable with appropriate coverage.
Last but not least the business must be able to generate sustainable free cash flow to support dividend payment. Has the target company able to weather the economic down cycle in the past.

If possible, benchmark the target company performance with its nearest competitor allow more options.

Google for latest media announcement on business direction and how its future strategy will impact on profit, free cash flow and ability to pay dividend.
What is important is at the end of the day, you should be able to use the above criteria to screen through various options and make a net gain (capital gain + dividend yield) on your investment calls that will motivate you to learn and improve further in your future endeavour.

Don’t follow blindly but do your own homework to asses whether the entry price provides the comfort level to achieve the targeted return that you hope to achieve within your investment time horizon.

We should welcome all suggestions with an open mind and narrow them down to suite our selection criteria. Do not resort to personal attack that lead to unnecessary brinkmanship that do not benefit anyone. Focus on the subject matters that concerned us.

Remember Satyam scandal....

http://qz.com/379877/the-satyam-scandal-how-indias-biggest-corporate-fraud-unfolded/

I think is for certain, the management really lack of skill to manage its cash stockpile to optimize income. its past three years interest income is consistently at 0.35% of its two years average cash balances. Does this make sense?

Please read CRISIL latest rating report on India power sector.

https://www.crisil.com/Ratings/Brochureware/News/CRISIL-Ratings_PR_Power-Sector_28Jul2015.pdf

It is not all doom and gloom, think positive and do what is right for our beloved country Malaysia.

December 21st 2015, Wan Saiful Wan Jan - CEO of IDEAS, in an interview with the edge, propounded that we should stop being so dependent on politician from all parties. For decades, our society has been waiting for a saviour politician whom we think will change everything. It is as if when the “right” person takes over, then all our problems will be solved.

This is wrong and we must change this attitude. Instead we must realise that we as a society are the ones who hold true power and the politicians are nothing but people whose salaries we pay. We should demand that they behave like our workers and stop behaving like our masters.

For them to change, we must change the way we view them first.

Referred to the most famous speech given by President Abraham Lincoln – “Government of the people, by the people, for the people, shall not perish from the Earth.”

Here’s wishing you all good health, peace, love and prosperity throughout 2016.

Sustainable growth rate (SGR) = ROE x (1-Dividend Payout Ratio), businesses that can deliver consistent ROE over the years with positive free cash flow and dividend payout policy should be able to create wealth for the shareholders.

If you track the management ability to manage operation, induce demand for top line growth and cost control measures to improve margin. Its investment and divestment decisions and how it funds its capex and working capital for growth. In addition, how productive in term of assets management to optimize capacity utilization, debt to equity and interest coverage are keys to achieve sustainable growth rate.

If a business can deliver an ROE of 12%, assuming its market price is RM 1.00 and book value per share is also RM 1.00. Hence, its P/E ratio will be 8.3 (1/0.12) and P/BV will be 1. If its dividend payout ratio is 50% of EPS, the dividend yield will be 6%. If the retained earning of 6 cents is reinvested and the market price should increase to RM 1.06. In reality the market sentiment may give premium or discount.

Assuming is the market price is RM 1.50, the 6 cents dividend will give a yield of 4%, and a 6% growth rate should give a market price of RM 1.59. Hence the TSR is now 10% (6% capital gain + 4% dividend yield) instead of 12%.

Alternatively, if the market price is RM 0.80, now the dividend yield will be 7.5% and resulting a TSR of 13.5%.

If the business fundamentally can deliver a sustainable growth rate, negative market sentiment will give us an opportunity to enter at a bargain price.

Forex gain or loss has three parts, translation gain or loss in consolidating foreign subsidiary, valuation gain or loss due to foreign currency loan and transaction gain or loss. The first two are unrealized gain or loss unless there is a disposal or repayment of loan, whereas transaction gain or loss is realized gain or loss.

In the case of YTLREIT, in term of consolidating the Aussie and Japanese subsi, there is a translation gain but this go direct to reserve in Balance Sheet. Whereas the valuation loss of the AUD 262 million loan is charged as unrealized loss in P/L.

Overall the is a net gain and resulted an increase in Net Asset Value compared to last year audited account ended 30/6/15.

Take note that the management plan to raise RM 800 mil to repay debt has again not successful and application to Bursa on 20/11/15 to seek extension of time of six months from 30/12/15 to 29/6/16 to complete the placement to increase fund size still pending approval.

Before you invest in a business, you must know what are the key drivers affecting its top line growth and cash flow performances.

Banking industry is facing a tough time at the moment due to low loan growth, margin compression, rising non-performing loans and tighter banking regulations. Most of the banks with high cost to income ratio are trying hard to trim costs by consolidation its operation and offer VSS to improve bottom line.

With fewer IPOs and low corporate debt issuing exercises, the fees based income also shrinking.

That's why you see a lot of promotions by Kenanga, CIMB etc to encourage younger generation to trade. More trade, more volume and more business.

One year is too short a period for long term investment. If the business you are investing in cannot and has not demonstrate the resilient to withstand the test of time and become a PN17 victim on an economic down cycle, then your selection criteria were flaw in the first place.

In a down cycle with low sales and plunging price, rising NPL and interest rate are common. The moment it defaulted in repaying the principal and interest of secured loans for a period of six months, the secured creditors will take action to recover their debts once they sense the business is no longer viable. Usually this will happen to businesses that have high gearing level during growth phase and fail to manage their working capital and capex appropriately. In other word, it has over trade.

In a volatile market, it is not advisable to throw everything you have on one particular stock. It is prudent to set a limit for a single stock and enter in tranches. Average down should the price move against you.

I think it all boil down to whether you are looking for exciting ride on a roller coaster based on momentum trading or you prefer being constantly rewarded with steady stream of dividend payments and sustainable capital growth over longer term based on sound business fundamental.

Don't forget you can reinvest those steady stream of dividends for more income if you don't need it support your lifestyle.

I agreed with bsngpg, it is very tough to get quick lunch on every trade. Momentum trading is like gambling, depending on the skill of the player and required frequently on-line monitoring in case Mr. Market mood turned against you.

I have a friend with good family background and career liked to bet in index future, he is also a property flipper earning good return during good time. Now he has lost his job for embezzlement and being sued for bankruptcy.

The good thing of Uchitec management is it worked hand in glove with clients on R&D effort. So far,it has managed to come up with new product lines that qualified for pioneer status. Its earning is exempted from tax.

As for Sunreit, the promoter is a reputable developer with the ability to inject quality assets into the REIT. Beside the diverse portfolio of 12 properties; 4 in retails, 3 in offices, 4 in hotels and one hospital. 60% of the REIT's net income contributed by Sunway Pyramid. Sunway Putra Mall which recently reopened after an asset enhancement exercise will contribute positively in future. Other than regularly enhancing its assets value, the management also actively managed its debts portfolio, 60% of its debts is on fixed rate and the rest on floating rate. Should the interest rate rises in future, the risk of hike in interest expense is mitigated. Sunreit capitalization rate is around 10.3% for FYE 06/15, its a ratio of net investment income (net rental income+Depn+fair value gain/loss+other income) over book value of investment properties. One of the highest among the REITs.

Take Uchitec and Sunreit as example, i have quite a substantial investment in these two counters.

I bought Uchitec in Dec 2012 at an average cost (including transaction costs) of RM 1.1644, holding period till 24/10/15 is 2.89 years. At current price of RM1.59, the unrealized (CAGR) compounding annual growth rate is about 18%, Uchitec paid dividend twice a year, amounting to 11 cents per annum, this give a yield (over acq. cost) of around 9.5% (its dividend yield at current price is 6.9%). The total return per annum is 27.5%.

The company is debt free with strong positive free cash free. Its capex investments in FY11,12,13 and 14 amounting to RM 66 million are all funded with internal generated funds.

I have bought SUNREIT in July 2010 at an average cost of RM 0.8966, holding period till date is 5.26 years. At current price of RM 1.53, the unrealized CAGR is 13.4%.
Sunreit paid dividend four times a year which gave a net yield of 8.4% at acq. cost. The total annual return is around 21.8%.

I will continue to hold them unless there is a sudden surge in price or their business models have changed that affect their ability to paid a decent dividend.

Dear xuewen, you are right. Lets' make it simple. In business or investing, the key word here is don't "Over-trade". Especially when you need to leverage beyond the comfort zone by building up capacity, inventories and receivables.

I dislike businesses that used financial engineering tactics to mislead investors that do not add value to shareholders.

Analysis of business involved profit & loss performance, balance sheet strength and cash flow arising from operation, investment and financing decision.

When you mixed fundamental analysis with trading mentality, sometime you may get blinded with one aspect of the business performance and overlook the weaknesses building up in other areas that may endanger its viability should the environment it operated in turn sour. Especially when valuation get too lofty.

I would prefer to invest in a well run business with sustainable profit growth, right mix of debt equity structure and positive free cash flow. Especially on businesses which delivered consistent dividend payout.

I respect KC fundamental analysis skill and propounding the right mindset for long term investment.

Those who are new to equity investment, learn to identify businesses that can deliver sustainable profit growth, generate positive free cash flow consistently and with strong balance to survive the volatile economic environment.

Total shareholder return (TSR) = Capital gain + dividend yield. Only businesses that have strong characteristics of the above can deliver the expected return in the long term.

I would recommend you to read kcchongnz blog to learn the art of fundamental analysis.

In simple language, VS cannot continue to opt for cash calls or loans to bankroll its revenue and profit growth trajectory in the long run.

"Profit is not earned till it is collected", especially so in current volatile economic environment. The huge divergence between its profit and free cash flow in the past does not provide the comfort to buy it at current valuation.

This is a fruitless exercise like injecting morphine into spine to relieve pain temporary. If you are not prepare to perform major surgery to cure the source of the problem, the end result is inevitable.

Central Banks have artificially suppressed interest rates to the extent of stealing savers’ money. It is supposed to fund business activities and assets to generate future growth but it went to fund consumptions, housing, stocks buybacks and financial speculation.

The total public and private debts globally is estimated to be around USD 200 trillion and another USD 600 trillion of derivative contracts waiting to explode anytime. United States alone had a total national debts of USD 18 trillion and needs to pay USD 260 billion interest annually.

With Interest rates at negative or zero territory and balance sheets inundated with debts, central banks will have little space to manoeuvre in their monetary policy. End of the day, alleviating debt trap with more debt is a strategy doomed to failure.

The current equity markets overvaluation is a by-product of this debt mania.

Corporate management concentrate on stock buybacks with borrow money to improve EPS and push up stock prices instead of investing in R&D, new factories and equipment to create jobs. Such financial engineering will eventually come to an end and it is a matter of time the equity bubble will burst.

Investors are likely to face a much tougher road in the years ahead. Take care….

This is a fruitless exercise like injecting morphine into spine to relieve pain temporary. If you are not prepare to perform major surgery to cure the source of the problem, the end result is inevitable.

Central Banks have artificially suppressed interest rates to the extent of stealing savers’ money. It is supposed to fund business activities and assets to generate future growth but it went to fund consumption, housing, stocks buybacks and financial speculation.

The total public and private debts globally is estimated to be around USD 200 trillion and another USD 600 trillion of derivative contracts waiting to explode anytime. United States alone had a total national debts of USD 18 trillion and needs to pay USD 260 billion interest annually.

With Interest rates at negative or zero territory and balance sheets inundated with debts, central banks will have little space to manoeuvre in their monetary policy. End of the day, alleviating debt trap with more debt is a strategy doomed to failure.

The current equity markets overvaluation is a by-product of this debt mania.

Corporate management concentrate on stock buybacks with borrow money to improve EPS and push up stock prices instead of investing in R&D, new factories and equipment to create jobs. Such financial engineering will eventually come to an end and it is a matter of time the equity bubble will come crashing down.

Investors are likely to face a much tougher road in the years ahead. Take care….

Smart investors will pay attention to the general health of the market and keep their losses small. The money you make in a stock isn’t based on how many shares you own it’s based on the amount of money invested.

You should be on your guard when investing in thematic stock with rich valuation whereby sustainability of its performance depends on the continuity of the theme itself.

Cut your losses in any stock at 10% below your purchase price is your insurance policy. A small loss can be overcome but a big one will damage your portfolio. Take a 50% loss on a stock will need it to rise 100% to break even.

On the contrary, if you cut losses at 10%, a single 25% rise can recover two 10% losses. If the stock price falls on expanded volume, sell first and ask questions later. Capital preservation allows you to re-enter the market later especially if you have limited capital or worse still if you are on margin financing.

In a volatile market, unless you are dealing with defensive businesses that generate consistent earning and cash flow that paid decent dividend (5%-8% of purchase price excluding one-off special dividend), the strategy is to board a ship that can sail through the current economic storm.

Oil price movement is affected supply and demand and some speculative elements. If China GDP growth cannot sustain at 7%, the demand for commodities including oil will weaken and couple with impending supply from Iran early next year. The possibility of oil price moving up in the near term looks dim.

In addition, China ability to switch from export led GDP growth to domestic consumption is hampered by the recent meltdown in the stock market. China has to do more monetary easing and increase infrastructure spending.

European countries growth are hamstring by austerity drive and their debt to GDP are growing over the years since 2008. It is not a good sign.

In addition, US GDP growth sustainability is still a question mark. Japan may also heading for more problems.

If the prices of commodities such as oil continue falling, countries that loaded with US denominated debts and face with trade and fiscal deficits will definitely heading for sovereign debt defaults. That will create a domino effect on the banking industry world wide, more so in the developed countries where exposure to riskier products are more prominent.

If you wish to bottom fish fundamentally sound companies at bargain price, better wait till the first sign when banks reported stable quarterly earning.

Example :
Inventory Outstanding = (Average Inventories)/(COS/no of days)
For QE 4/15, Inventory Outstanding = [(256+270)/2]/(1,215/273)
= 263/4.45 = 59 days outstanding

If you benchmark VS's CCC with those like Uchitec etc.. you will know what i means.

QE 4/15 FY14 FY13 FY12 FY11
VS RM'mil RM'mil RM'mil RM'mil RM'mil
Revenue 1,430 1,715 1,164 1,202 1,027
COS 1,215 1,517 1,058 1,055 879
GP 215 198 106 147 148
GP margin 15.0% 11.5% 9.1% 12.2% 14.4%
Y-O-Y Growth Rate
Revenue 47.3% -3.2% 17.0%
COS 43.4% 0.3% 20.0%

Inventories 256 270 178 105 87
Trade & Other Receivables 437 448 411 318 203
Trade & Other Payables 371 437 375 273 182

Days 273 365 365 366

Inventory Outstanding 59 54 49 33 DIO
Sales Outstanding 84 91 114 79 DSO
Payable Outstanding 91 98 112 79 DPO
Days Days Days Days
CCC = DIO+DSO-DPO 52 47 51 33