There was a 40% run-up in share price in Nov last year after the government announced new measures to curb illicit tobacco. Some people were so carried away as to predict RM20 before the end of 2020.

I wasn’t very popular then when I commented on Dec 5 that “a share price recovery is only sustainable if EPS keeps on increasing in the coming quarters”. The closing price at that time was RM13.38. BAT briefly touched RM15.32 on Dec 7 before retreating back to RM13 level. As a result, the excitement in the forum died out and everyone quietly waited for another 2 months.

2020Q4 results show the decline has been reversed. But is it sustainable?

On QoQ basis,
Revenue at RM660m (RM628m in Q3) increased 5%
Gross margin at 26.5% (25.4% in Q3) up by about 1%
Operating margin 15.8% (14.0% in Q3) up by about 2 %
Profit before tax at RM104m (RM84m in Q3) increased 25%

Margin improvement has allayed concern about margin compression due to emphasis on low margin VFM products. The combined increase in revenue and better margin leads to 14% increase in net profit QoQ.

Despite the good results, BAT still has a long road ahead if we study the past 17 quarters of EPS as shown below.

12/31/2020 25.5
9/30/2020 22.3
6/30/2020 19.1
3/31/2020 17.8
12/31/2019 34.2
9/30/2019 29.1
6/30/2019 26.7
3/31/2019 31.0
12/31/2018 40.8
9/30/2018 51.1
6/30/2018 38.6
3/31/2018 33.7
12/31/2017 28.4
9/30/2017 51.0
6/30/2017 51.6
3/31/2017 41.6
12/31/2016 101.3

Recall in 2018 share price increased from RM23 to RM38. The share price increase in 2018 was backed up by three consecutive quarterly EPS increase from 28.4 cent to 51.1 cent before EPS faltered again. To go above RM20, RM30 or higher, BAT needs to deliver consecutive quarters of EPS leaps. Today result is not convincing enough.

The pledge for tougher enforcement has already been factored into the current share price. But also check out Note B7 which says “The tobacco black market continued to record a high illegal cigarette incidence at 64%”. Apparently, actions are still lacking.

As for investors attracted by the apparently high dividend yield of 9%, please watch out this is based on historical dividends only. Can the dividends sustain?

Refer BAT cash flow statement. For 2020 net cash flow from operation is RM196m, but the total dividend paid is RM254m. The dividend paid by BAT has been partly supported by borrowing. Borrowing has increased from RM421m in end 2019 to RM510m in end 2020. Without better results in coming quarters, dividends will be trimmed.

Another quarter of steady performance. The results can be found here
https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3127859

EPS grows on both QoQ and YoY basis:
QoQ = 9.72/9.27 – 1 = 5%
YoY = 9.72/8.88 – 1 = 9%

Profitability has also returned to pre pandemic level. Quarterly ROE for quarter ended
20201231 is 9.72/205 = 4.7%
20200930 is 9.27/201 = 4.6%
20200630 is 6.50/192 = 3.4%
20200331 is 8.08/192 = 4.2%
20191231 is 8.88/192 = 4.6%

The better profit is partly contributed by lower interest costs. Note 20 explains that “The weighted average interest rate of the Group borrowing categories as at 31 December 2020 ranges from 3.0% to 5.8% (31.12.2019: 4.7% to 5.8%) per annum.”

It is also helped by the fact that allowances for impairment loss remain muted.

Financing and loan receivables have increased, but only very slightly from RM1.68 billion a year ago to RM1.70 billion now. This shows management prudence but may also imply a slower pace of profit growth in the future.

Hi Ben. I’ve searched for Intco company announcement in English on Shenzhen Stock Exchange website, but there are only restricted to a few items with brief descriptions (select ChiNext, stock code 300677)
http://www.szse.cn/English/disclosures/announcements/index.html

Detailed announcement to the stock exchange is still in Chinese:
http://www.szse.cn/disclosure/listed/notice/

In the Chinese development model, the local government governments offer both implicit and explicit subsidies to manufacturers. Local governments provide cheap/ free land, industry park, infrastructure, tax incentives, cheap credits (though state-controlled banks). Since the opening up by Deng, local governments all over China have been fighting over each other to attract investment. GDP growth is a key KPI for local officials’ promotion so they have their self-interests at stake. I won’t comment on whether it’s fair or unfair. After all many American states also fight over each other to attract investments. But for China this has been a very successful development formula.

That explains why all the capacity announcements I shared earlier contain legal agreements between Intco and respective local governments. For example, in the agreement with Jiangxi 彭泽县 county, the government is responsible to deliver 800 acres of land acording to Intco’s specification. The land is priced at only CNY40,000 (RM25,000) per acre. In comparison, last year Hartalega paid RM 263 million for 38 hectares of land at Sepang, or RM2.77 million per acre. So Intco get its land at less than 1% of Harta’s cost!

http://www.szse.cn/disclosure/listed/bulletinDetail/index.html?05bdcdcb-ca2c-4db4-9e07-741fded2df81

More to that is the county government is also responsible for the electricity, water, wastewater, gas, telecommunication and other infrastructure; and provide a series of incentives. Of course, in return Intco is obliged to start production within 15 months, and to achieve annual export sales exceeding CNY3 billion in 5-year time, among other conditions.

Like you, I also suspect these multiple new capacity announcements are rushed out partly with its Hong Kong Stock Exchange listing in mind. Timing is most important. Currently, glove companies have a good story to tell -- raging pandemic; uncertainty in vaccine rollout; demand outstrip supply; secular growth …

If ASP weakens before Intco can list, it will raise a lot less money, thereby constraining its expansion. However, if it's lucky and ASP remains very strong, Intco can easily tap into an abundant amount of hot money. Just for comparison, Kuaishou Technology, the HKEX hot IPO this week attracted CNY1.3 trillion capital and 1,200X oversubscription.

But the ironic thing is, if the history of other Chinese companies is of any guide, an Intco that is flush with new money will soon go on a spending spree. It will build so many new capacities until the market is saturated and enters another round of shakeout.

To add to my previous comment, this is how I see the combination of fundamental + valuation quadrants in investing.

1) Good fundamentals + cheap valuation --> Price will catch up in next few quarters, at most the next 2-3 years. Very comfortable to hold.

2) Good fundamentals + expensive valuation --> Near term upside is limited. May have a hold a lot longer. Risk of disposing at a loss when occasional sell down happens

3) Poor fundamentals + cheap valuation --> Potentially a value trap. Pray for the price to recover fast before company fundamental deteriorates further

4) Poor fundamentals + expensive valuation --> Like buying lottery. Don’t bet your house.

No doubt some market players are not bound by the above rules. Insiders and quant funds are among the exception. But how many retail investors have their advantages (not to mention insider dealing is illegal)?

Hi calvin69. Yes, as mentioned in my comment, each company may have a small non-glove business but the effect is insignificant.

In the Intco case, besides gloves, it also produces wheelchairs, hot/ cold packs among other things. However, as of Jun 2020 gloves (classified under PPE category) already contributes more than 96% revenue and even higher profit contribution. Therefore, if other products are excluded, the operating margin from gloves alone should be even higher, albeit slightly.
http://stockpage.10jqka.com.cn/300677/operate/#analysis

Hi Marketsifu. I salute your risk appetite and perhaps skills. But for most people, I included, won’t have a strong enough heart to trade penny stocks, let alone PN17.

Short term trading is a zero sum game. In fact less than zero sum because Bursa and brokerages take a cut. While I agree that some may have insider info or the ability to read charts, I certainly don’t have the skills to win over other people’s money.

That’s why I always invest for the long term the philosophy is about sharing the fruits of growth. To be successful, company fundamentals and valuation (though PE is not a good indicator here) are equally important. Both Top Gloves and Hartalega have excellent fundamentals and superior management.

My back and forth discussion with Ben concerns only valuation, or more specifically how the future ASP trend will determine future profits (or cash flows discounted to today values), and therefore whether the stock is under/overvalued at the current price.

Ben, thanks again for your view.

China glove makers may not be at a disadvantage as commonly assumed. On the contrary, the financial statements of Intco show its cost structure is as good, if not better than leading Malaysian producers.

A simple way to compare is to look at the operating margin. The operating margin incorporates the factors you’ve cited where Chinese players are assumed to be at a disadvantage. The costs of labor, fuel, transportation, raw material and capital depreciation are already captured in the operating cost. Product quality and distribution network is reflected in the revenue. Poor (good) quality fetches lower (higher) price; hence lower (higher) revenue.

To make the comparison apple to apple (as much as I can), I use the quarterly data from Yahoo Finance website which imposes the same treatment/ definition (this means results differ a bit from company announcements, but not much). Note also each company may have a small non-glove business but the effect is insignificant. While different glove types are sold, a higher operating margin still reflects higher overall product profitability.

I compared Intco against Top Glove and Hartalega (figures in millions of MYR or CNY)

(A) For quarter ending Mar-2020 (Feb-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco 773 148 19%
Top Glove 1,230 149 12%
Hartalega 778 138 18%

(B) For quarter ending Jun-2020 (or May-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco 3,676 2,156 59%
Top Glove 1,688 430 26%
Hartalega 920 275 30%

(C) For quarter ending Sep-2020 (or Aug-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco 4,495 3,087 69%
Top Glove 3,110 1,431 46%
Hartalega 1,346 685 51%

(D) For quarter ending Dec-2020 (or Nov-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco <results not released yet>
Top Glove 4,759 3,096 65%
Hartalega 2,130 1,347 63%

Source:
https://finance.yahoo.com/quote/300677.SZ/financials?p=300677.SZ
https://finance.yahoo.com/quote/7113.KL/financials?p=7113.KL
https://finance.yahoo.com/quote/5168.KL/financials?p=5168.KL

Note that even by adding another 5% to 10% for Top Glove given its quarterly results lags by one month, Intco's operating margin still outperforms both Top Gloves and Harta. It is this high profitability and superior cost structure that can propel its aggressive capacity expansion.

While it’s possible that Intco’s over 200 billion capacity will only come online much later, the Chinese media expects it to be available by 2023.
https://finance.sina.com.cn/stock/s/2020-12-03/doc-iiznezxs4929762.shtml

My own view is the capacity plan of both Malaysian and Chinese players alike will keep changing. The ASP outlook will determine how much and how fast. If high ASP can be sustained for another 2-3 years, I don’t see what could hold back Intco and in fact other players back from pushing even more capacity as fast as possible to share in the bonanza while it lasts. Ironically this aggressive pursuit of high profit will also plant the seed of price destruction in the future.

Hence my view that Malaysian players should take control and expand aggressively now, even at the expense of sacrificing ASP and margin, so that they don’t lose market domination in the longer term.

Hi Ben, thanks again for your input. I’ve checked again. Apparently, I’ve double-counted some announcements which have in fact superseded earlier announcement with increased capacity. Over the last 12 months, Intco announcements actually focus on these 6 counties:

5-Feb-21 46 billion medical gloves 彭泽县 Anhui
30-Dec-20 13 billion PVC medical 夏邑县 Henan
1-Dec-20 3 billion nitrile medical, 50 billion PVC medical 青州市 Shandong
1-Dec-20 5 billion TPE and 5 billion CPE 沂源县 Shandong
3-Sep-20 40 billion medical 临湘市 Hunan
13-Mar-20 27 billion medical 彭泽县 Jiangxi

The total announced capacity in the 12 month period is therefore 189 billion. Adding its existing capacity of 36 billion, and the 9 billion Vietnam capacity plan announced in 2019, the total is 234 billion. A smaller number, but still very crazy.

The constraint of tools and equipment should be temporary. These things can be produced in non-dedicated facilities that are general purpose, so production ramp-up is easier. Many Chinese vendors also supply latex dipping machines.

I agree there is a real shortage of NBR or Nitrile Butadiene Rubber. As NBR is produced in dedicated petrochemical plants, it will take a while for new capacity to come online. For example, currently LG Chemical has 170,000 ton capacity. Its Ningbo plant in China will add another 100,000 tons in early 2021. But its recently announced cooperation with Petronas Chemical to add another 200,000 ton at Pengerang will only come online in 2023. Market leader Kumho Petrochemical too is adding capacity but also in stages. Nonetheless, if Chinese glove makers were to gain a foothold in the nitrile glove market, more NBR plants might be set up in China. Afterall China already has a thriving petrochemical industry and the necessary infrastructure and technical talents to support new NBR plants.

This is where I believe the glove ASP trend in the next few years will decide whether Chinese producers could steal market share from Malaysians. I agree with you that Malaysian glove makers are lower cost producers. During pre-Covid time, when Malaysian producers have to survive at a net margin of less than 10%, the less efficient Chinese producers will have no chance to get the necessary funding to expand and achieve the scale required to before they can drive down unit production cost.

However, it’s this abnormal time of high ASP that has open up a once in a lifetime opportunity for the Chinese to steal a march on Malaysian. The high ASP is like a rising tide that lifts all boats. As long as ASP does not come crashing down in the next 2-3 years, inefficient players can still make money and survive. This allows Chinese producers like Intco to exploit the rosy ASP picture to aggressively raise funds to expand capacity. Once the Chinese have sufficient scale, the local glove supply chain will naturally emerge there, driving down their cost further and forming a virtuous cycle (for them).

Of course, such reckless expansion could greatly harm glove pricing and is detrimental to all players, the Chinese included. But that’s how the Chinese did it in the past with quite a number of industries, with solar PV being a good example.

That is why I believe it might be in the long term interest of Malaysian glove producers to forgo share buyback and special dividend. Malaysian producers should instead plough back most of their profit to expand capacity even more aggressively and intimidate their Chinese rivals.

This is also the reason that OPEC prefers a stable but not very high oil price. OPEC would forgo short term profit rather than giving their (currently) higher cost competitors (US shale producers) to grow. Malaysian producers could learn from the OPEC lesson -- adopt a long view and flood the market with supplies instead of leaving the initiative to the Chinese!

Hi Ben. Thanks again for your excellent effort in compiling the relevant info. It’s not a surprise that the US government, regardless of under Trump or Biden, wants to recreate the strategic industries and supply chains at home. This was the reason why the Trump administration pushed TSMC to set up wafer fab in the US.

I continue to pay attention to the global supply situation. This is the annual capacity I’ve compiled earlier for the, may be previously, top 5.

Company (billion) 2020 2021 2022 CAGR (from 2020-22)
Top Glove 90 108 129 20%
Hartalega 41 44 49 9%
Kossan 32 36 43 16%
Supermax 26 36 48 36%
Sri Trang 33 38 49 22%
Total 222 262 318 20%

The expansion rate of 20% per annum is reasonable in my view. However, as discussed last week, I’m most concerned about the aggressive expansion by Intco Medical creating a global supply glut and depress ASP.

Since we last discussed Intco, the company has made yet another announcement yesterday of another 46 billion capacity for medical gloves.

https://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?stockid=300677&id=6894219

Based on my records, Intco has announced close to 284 billion new capacity in the last 12 months. If it could materialize in the next few years, the newly added capacity will be almost 30% large than the top 5 producers in 2020.

5 Feb 2021 46 billion medical gloves, Anhui province
30 Dec 2020 13 billion PVC medical, Henan province
30 Dec 2020 13 billion PVC medical, Henan province
1 Dec 2020 3 billion nitrile medical and 50 billion PVC medical, Shandong
1 Dec 2020 5 billion TPE and 5 billion CPE, Shandong
1 Dec 2020 50 billion nitriles and PVC for medical, Shandong
3 Sep 2020 40 billion medical, Hunan
24 Aug 2020 16 billion medical, Hunan
3 Jun 2020 16 billion medical, Anhui
13 Mar 2020 27 billion medical, Jiangxi

(extracted from company announcements in the link below)
https://vip.stock.finance.sina.com.cn/corp/go.php/vCB_AllBulletin/stockid/300677.phtml

I will closely monitor Intco's progress, especially its recent IPO submission in Hong Kong which, if successful, could give it more ammunition to fund its crazy expansion.

Hi Ben, thanks for your reply. Yes, I too enjoy our discussion which stimulates thoughts and further inquiries. As an investor, I always believe in the importance of adequately covering multiple points of view so that I won’t be caught by surprises later.

Just an update on Intco Medical glove production capacity. Recall earlier it’s unclear whether Intco has indeed expanded its capacity by 89.5% from 19 billion in 2019 to 36 billion in 2020. Today I’ve found the company confirmation made by the company Board Secretary or 董秘 in the social media (Note: this is also a unique Chinese feature where the Board Secretary usually functions as Investor Relations. And they interact with investors on social media)

On 14 Jan 2021 the Board Secretary replied to an investor query that by the end of 2020, the company capacity has reached 36 billion pieces, consisting of 24 billion PVC gloves and 12 billion nitrile gloves.

Source:
https://finance.sina.cn/other/relnews/dongmiqa_list.d.html?market=sz&code=300677#/home/sz300677

I've also noted on Jan 27 the Board Secretary has made another reply confirming a certain new production line being operational, adding 4.5 billion pieces of nitrile glove capacity. However, it's unclear whether the 4.5 billion is part of or on top of the 36 billion capacity.

There is an article by 21st Century Business Herald (which is like The Edge of China) reporting on the company situation.

https://m.21jingji.com/article/20210127/ac32eb5d27b1fa81537426232d9a8331.html

The article reports on Intco’s ambition to overtake Malaysian glove makers, especially in the nitrile segment. The journalist has counted the company announcements of an additional 172 billion piece capacity from Mar to Dec last year, which are mostly for medical use. It also says that Chinese analyst has estimated the capacity to reach 74.4 billion by end of 2021, and 110.4 billion by end of 2022. By then Intco could become the world's largest nitrile glove producer.

You might be right that Intco stock price might be elevated. As mentioned in the report, there is currently an intense debate on whether its aggressive capacity expansion will result in a global supply glut.

I’m not sure whether Intco could realize its ambition. But I’m pretty sure its stock price will be on a roller coaster ride from this point onwards.

By the way, Reuters also shows that the forward PE of Top Gloves is at 5.3 times versus Hartalega at 16.8 times.
https://www.reuters.com/companies/TPGC.KL
https://www.reuters.com/companies/HTHB.KL

In short, the valuation ranking is in fact Hartalega (16.8X) > Intco Medical (13.9X) > Bluesail Medical (7.8X) > Top Gloves (5.3X).

Malaysia glove companies can be dearer and cheaper than their Chinese peers at the same time. So probably the question isn’t about why Malaysian glove makers have lower valuation than Chinese. Rather the question may be why among Malaysian glove makers, Top Glove has a much lower valuation than Hartalega!

With due respect, I disagree with some of the comments here.

The question is how could a Chinese glove company enjoy a seemingly much higher valuation than the Malaysian big four, which together control 60% or more of the world market.

First, one needs to understand the peculiar nature of the mainland China stock market. Not only that a comparable company in mainland China may enjoy a higher valuation than its foreign peers, but even the share of the same mainland company could trade at a significant premium inside mainland China compared to say in Hong Kong.

Click on the link below you will find the full list of more than 100 Chinese companies that have a dual listing in the mainland (A share) and Hong Kong (H share). Every single one of these mainland company A share is sold at a premium to its H share which carries the same right and entitlement. In other words, its H share is sold at a discount outside of the mainland.

The discount could be as high as 70 to 80 percent. In other words, the mainland A share for the same company could be 3 times dearer than its Hong Kong H share! And many of them are large-cap stocks. The list includes the top insurance company China Life (62% discount), SMIC the chip maker targeted by US sanction (58% discount), and oil & gas behemoth PetroChina (51% discount).

http://www.aastocks.com/en/stocks/market/ah.aspx?sort=5&order=1&am...=3

Therefore any idea of exploiting the valuation difference by selling Intco Medical and buying Malaysian glove stocks will never fly, at least before those 100+ Chinese companies can close their own valuation gap which has persisted for years!

The next reason might be specific to Intco Medical itself. The company enjoys higher valuation partly to do the current market perception of its tremendous growth prospect. As reported in the links I share earlier, Intco has a capacity expansion plan of over 300 billion pieces. Chinese analysts claim that it could capture 30% world market 2-3 years from now. Rightly or wrongly, its higher valuation reflects the market expectation.

This can also be seen from the valuation disparity between Intco Medical versus the other Chinese glove maker Bluesail Medical. Both actually have comparable capacity right now. However, while the more aggressive Intco is sold at 13.9 times forward PE, the relatively conservative Bluesail is only sold at 7.8 times forward PE (refer data by Reuters in links below).

https://www.reuters.com/companies/300677.SZ
https://www.reuters.com/companies/002382.SZ

Therefore, even within China, comparable glove companies have different valuations. So this is not simply a matter of China has a higher (or Malaysia has a lower) valuation.

The stock market is forward-looking. The valuation reflects the market belief in future earnings growth prospects. As Intco is pursuing a very aggressive capacity expansion plan, right now the market grants a higher valuation. Of course, if it fails to achieve the growth assumed, its valuation will crash in the future.

Hi Ben, you’re welcome. It’s also my interest to understand the foreign situation.

I did some search. Another brokerage report also mentions the capacity of 36 billion by end of 2020. But the keyword here is “expect”. So I suppose the company has not made any official announcement yet.
我们预计2020年底公司总产能已达到360亿只（PVC手套产能240亿只，丁腈手套产能120亿只）

Source: https://xueqiu.com/S/SZ300677/169849357

I found another article that provides more details on the capacity expansion plan. The earlier expansion plan at Anhui and Jiangxi provinces targets 49+40+27 = 116 billion pieces capacity. It recently announced further capacity at Shandong totals 50+3+50+50 = 153 billion pieces.
Source: https://www.sohu.com/a/446766060_120047081

I’ve cross-checked some of the recent official announcements by Intco Medical. The numbers match (you may google translate for details):
http://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/CNSESZ_STOCK/2020/2020-12/2020-12-01/6756908.PDF
http://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/CNSESZ_STOCK/2020/2020-12/2020-12-01/6756907.PDF

Of course, there is still the question of whether the company could successfully execute such an aggressive expansion plan in the next few years. Are these just empty talks not unlike some Malaysian “vaccine players”?

Nonetheless, this company did have a track record of growing its capacity. It grew from 7-8 billion pieces in 2017 to a few times more by 2020. Funding should not be an issue as favored Chinese exporters typically enjoy cheap or even free land and easy access to credit by local governments. This company also plans for HK listing.

I would keep an eye on the Chinese players. There have been many examples of how their aggressive expansion spoilt the market, for example in steel and solar panels.

The other Chinese players beside Intco Medical are Bluesail Medical (蓝帆医疗), Hongray (石家庄鸿锐), Zhonghong Medical (中红医疗).

Ben，
The latest production capacity of Intco Medical mentioned by super_newbie is mentioned in a Chinese brokerage report. Capacity increased 89.5% annually from 19 billion in 2019 to 36 billion in 2020.
"同时2020 年公司产能大幅提升，从2019 年底190 亿只增加到2020 年底360 亿只，同比增速89.5%"

The Chinese analyst is equally bullish about future demand.

Interestingly, the Chinese analyst also expects Intco Medical to rapidly expand capacity and capture 30% world market share in 2-3 years.
"..未来2-3 年公司产能持续快速扩张，保守预计占到全球30%市场份额。"

Source:
https://xueqiu.com/S/SZ300677/169960193

Hi Ben. Thanks for your very informative reply.

Yes, I got your point. The data you’ve outlined would have provided a lot more insight. However, it might be difficult for outsiders to get such info as it’s probably commercially sensitive.

I believe JPM and you are looking into two different aspects. JPM uses the ballpark 4.7% deposit to projected FY21 revenue as their supporting evidence that the 2 year or longer order backlog does not lock in future revenue. The backlog is a good news, but not a guarantee for future (say FY22, FY23) high revenue. On that point, I tend to agree with them.

However, you’ve provided a very good input which I have never considered. If RM880 million in contract liabilities with ~600 day order backlog indeed represents the peak deposit, the excess amount of contract liabilities can be mostly attributed to spot orders. As we know spot orders enjoy much higher ASP, the excess contract liabilities amount may serve as another leading indicator to ASP trend, while ASP itself is the key determinant of margin and profit.

This will be an important metric to watch in the next quarterly results!

Ben,
Towards the end of your analysis, you brought up the issue of the percentage of deposit paid. I’ve read The Edge report. Let me first quote the relevant section of the report here:

***quote***
Investors argue that the revenue growth is secured as most glove producers claim to have two or more years of order backlog, but JP Morgan begs to differ.

"It is crucial to understand order backlog and secured revenue. Orders are merely an agreement to buy a certain volume with prices determined or undecided. Buyers can walk away from it,” it wrote, noting that secured revenue is when customers have paid fully or partially for future delivery.

"As shown in Top Glove's quarterly results, we have indeed seen a sharp spike in deposits collected, from RM60 million a year ago to the latest quarter’s RM1 billion.

"However, the deposit paid is merely 4.7% of projected revenue for the financial year ending Aug 31, 2021 (FY21). It is not even equal to a month’s worth of glove sales," said JP Morgan.
***unquote***
Source: https://www.theedgemarkets.com/article/glove-bear-jp-morgan-tells-clients-gloves-aint-needed-during-vaccinations

Rightly or wrongly, JPM has suggested that the order backlog does not translate into secured revenue since the order price is not finalized. In other words, they have suggested that while the volume is secured, the price (and therefore revenue) is still undetermined. Future revenue will drop if ASP reverts downward. The supporting evidence put forward by JPM is the relatively low amount of deposit paid by customers (RM1 billion as of last quarter or 4.7%) versus their projected revenue for FY21.

Both of us have actually discussed this point earlier. You’ve highlighted the balance sheet item “contract liabilities” of RM 1,089.404 million the Top Glove’s latest quarterly report ending 30-Nov 2020. I believe “the latest quarter’s RM1 billion” referred to by JPM points to the same number.

Given that the last quarter revenue was already RM4,759 million, and the FY21 whole year revenue may be around or exceed RM20 billion, the RM 1,089.404 million contract liabilities are indeed just about 5% of the annual projected revenue. If the deposit is spread over a period of 2 years of order backlog, the deposit percentage is even lower.

This in fact is my concern too.

It’s good to read that Top Glove has provided you with the info on the percentage deposit collected from orders. Hopefully you can get the green light from Top Glove to share the info and thereby addressing this doubt. Or better still, I think Top Glove should release a statement providing the same info to all investors based on Q&A they have with individual investors.

@kywoo, @x3mg33,

By past practice, I doubt Allianz will announce a special dividend separately just a few weeks later.

Previously the company actually announced the interim and special dividend together in a single announcement on 31 Dec 2019.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3013154

RCE Capital share price was range-bound between RM1.5 to RM1.7 for most of 2017 to 2019. This translated into a Price to Book ratio of 0.9X to 1.2X for an ROE of about 17% to 18%. I felt it was undervalued then.

Lately, the share price has gained a lot, especially after its FY21Q2 result announcement in Nov where the company has recorded YoY growth in EPS and dividend despite a difficult time.

On a trailing twelve-month basis, the ROE has trended slightly downward to 16%, as higher net profit in the numerator has been weighed down by an even higher shareholder fund of RM2.01 per share. At a closing price of RM2.75 on Dec 31, the Price to Book ratio has crept up to about 1.4X.

In my view the current price is fair, but it is no longer undervalued.

First, profit growth has slowed. The EPS growth in the past few years has correlated with the growth of its net loan book
FY Diluted EPS (sen) Net Loan Book (RM'b)
2015 9 sen RM1.07b
2016 12 sen RM1.26b
2017 24 sen RM1.41b
2018 26 sen RM1.53b
2019 28 sen RM1.60b
2020 32 sen RM1.69b

However, management has turned cautious a few quarters ago (although being conservative is good in my view), resulting in a slight decline in its net loan book to RM1.67b in FY21Q2. Profit cannot keep increasing when the size of the business stops expanding, at least for the time being.

The second reason is the profit growth in the past few quarters have also been supported by a decline in funding cost as interest rate has trended lower. But this is a one-time boost that has come to an end and cannot be repeated.

Why can’t the stock be traded at a higher valuation? A relatively small market cap (about RM 1b now) is one reason as large institutional funds cannot easily buy a sizeable holding without driving up the price (probably this is going on right now).

The other reason is despite the salary reduction scheme, RCE personal loan business is inherently risky relative to say mortgages or hire purchase loans. Looking back into history, the company once got into serious trouble in 2013-14.

I think the share price has gone up very fast lately not due to any change in fundamentals. Instead, it is due to the general market sentiment where investors/ speculators are chasing yields. RCE Capital starts to attract attention as not many companies could register increasing profit under the current economic situation. When analysts start to adjust TPs upward and some investment “gurus” urging followers to buy, its share price has been chased up.

Personally, I’ve stopped topping the share. But it’s probably too early to sell. So I’m just holding on, contented with collecting dividends at a present yield of above 4%.

TG is a Mercedes. The challenge is to determine whether it's currently sold at the price of a Kancil, a Mercedes or a Ferrari.

A common valuation mistake I read here is to assume the TG's record quarterly profit of RM2.4 billion, which is a spectacular 20-time YoY increase, would automatically translate into a higher share price.

Record profit or not, we first need to work out how much TG is worth.

Most will probably agree that TG will make higher and higher profits in the coming few quarters. The controversy over workers’ treatment will probably have only a minimal impact on the short-term profit outlook.

TG management has also guided that ASP for 2QFY21 will be 30% higher than 1Q. So despite the lower shipment due to factory closure, it’s still reasonable to assume 2Q EPS to be 20% higher QoQ.

I would even assume that EPS can increase 20% QoQ for the remaining 3 quarters of FY21, which means coming quarters EPS would be 36, 43 and 51 cents. But note my assumption is more bullish as it means FY21 full-year net profit is at RM12.9 billion. This is way higher than the analyst consensus at RM8.6 billion.

The intrinsic value of TG share is made up of future cashflows. It is RM0.36/1.02 + RM0.43/1.04 + RM0.51/1.06 + future cashflows, or RM1.25 + cashflows from FY22 and beyond (assume 8% discount rate).

TG closing price today is RM6.30. In other words, only RM1.25 or about 20% of today's share price is contributed by remaining FY21 profits. The remaining 80% has to come from future years.

The key is for how long can TG book record profit before it starts to decline. The law of economics dictates that ever-increasing profit is impossible. We also should not forget that only a year ago TG quarterly profit is in the range of 2, 3 or 4 cents.

If high profit can sustain for several more years before a gradual decline, then at RM6.30 today the share is indeed a bargain. Believers should be happy instead of cursing others for selling low. You should be happy as this is your opportunity to collect more and patiently wait for a few more years to harvest the investment. Why curse? Unless you have no confidence in the company too, and your intention is to pass the share on at a higher price? Profit for you but loss for the next person?!

However, if you think the high profit cannot sustain beyond the near term, instead of cursing you should plan for exit soon.

Either way, keep your cool. Being emotional is bad for the wallet.

Good to hear that the Sinopharm vaccine is effective. So are the good news flowing from other vaccines, Chinese or not.

This is one more step towards recovery. IOIPG can look forward to increased footfalls in its malls and recovery of its hotel occupancy next year. So are Aeon and various other retail and hospitality REITs.

But IOIPG as a direct vaccine play?

Even if the rumor turns out to be true, please consider these before jumping into the so-called vaccine trade:

(1)
Khairy said the government deals directly with Pfizer and COVAX, “without the use of any middleman or third party”

https://www.theedgemarkets.com/article/khairy-govts-covid19-vaccine-deal-only-pfizer-and-covax-others-are-private-arrangements

(2)
Granted Khairy doesn’t rule out the private deals, provided they can get Malaysian regulators’ approvals.

A few Chinese firms are at the advanced stage, including the much-cited Sinopharm, which is an established pharmaceutical company in China.

The only problem is rumor mill has linked Sinopharm to multiple Malaysian companies, where IOIPG is just one of them.

Yes, property firm IOIPG with an RM2 billion revenue seems to be a more reliable vaccine partner than say Kanger International that sells bamboo products (2019 revenue RM65 million).

But what can IOIPG bring to the table as a vaccine partner?

Pharmaceutical bottling expertise? That’s the domain of Duopharma and Pharmaniaga.
https://www.bernama.com/en/general/news_covid-19.php?id=1860534

Cold chain logistics? That’s the domain of Tasco, Tiong Nam, and perhaps Apex Health.
https://www.theedgemarkets.com/article/tasco-stock-rides-covid19-vaccine-wave

Frontline expertise to provide vaccine services? But IOIPG does not own hospitals and nurses as IHH and KPJ do.

The only connection I have in mind is for IOIPG to convert some empty lots in its mall into vaccination centers!

(3)
Besides, is the vaccine business profitable?

I suspect it’s going to be a “national service” in China. Look at Sinopharm share price. YTD it has dropped 33% from $28.40 to $19.40

https://finance.yahoo.com/quote/1099.HK?p=1099.HK&.tsrc=fin-srch

But could Malaysia be different? Well, even those supposed Malaysian beneficiaries I mentioned above have cautioned that the financial benefit is limited

(4)
What if IOIPG is so clever that it finds a way to makes lots of money from the speculated vaccine deal?

So clever that it can justify the share price hike from RM0.85 a month ago to the recent high of RM1.75?

Multiply by its share base of 5,506 million, this is a sum of 5,506m x (RM1.75 – RM0.85) = RM,4,955 million.

Let's do the maths. By now the Malaysian government has secured supplies to cover at least 30% population. We can expect government procurement to expand further. That leaves the speculated private vaccine with a much smaller pool of takers who is willing to fork out their own money for vaccination.

Say it is 10% of the Malaysian population, i.e. the half of the T20 population that does not immediately qualify for government vaccine. 10% population is about 3.3 million.

Now, to justify IOIPG's share price appreciation of almost RM5 billion, it needs to make at least the following profit per person = RM4,955 million/ 3.3 million population = about RM1,500 per person!

Is this possible?

May be. But I can also hear politicians clamoring for actions against the profiteer, whose boss happens to be the husband of a DAP ex-minister!

(5)
Well, you may still argue it doesn’t matter even if this is just a rumor, even a very poor rumor, as long as you can sell your share at a higher price to the next greater fool.

Then good luck to you.

Remember the syndicate would like more of you to think in this way.

Are there any material developments that justify the current price at RM1.7?

If you have an interest in the stock, it is better for you to read the Board's reply yourself. Decide for yourself rather than relying on other's interpretation.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3111913

Different readers may interpret it differently. However, I will just read the reply at its face value. I'm particularly drawn to this sentence in Point 2:

"IOIPG has not to its knowledge embarked upon any corporate development which we can say with reasonable conviction may account for the trading activity under reference."

I just disposed off all shares. I accumulated this year because I thought the company is undervalued. I plan to hold for several years until the property market recovers. The recent good quarterly result was a nice surprise. But I never thought the price of such a multi-billion cap stock could double in just a few weeks.

Good luck to anyone who continues to hold on. Will revisit this company in the future when valuation is more appealing.

Let's recap BAT results in the past 16 quarters:

Quarter EPS DPS
9/30/2020 22.3 21
6/30/2020 19.1 18
3/31/2020 17.8 17
12/31/2019 34.2 33
9/30/2019 29.1 29
6/30/2019 26.7 26
3/31/2019 31.0 30
12/31/2018 40.8 47
9/30/2018 51.1 40
6/30/2018 38.6 35
3/31/2018 33.7 33
12/31/2017 28.4 43
9/30/2017 51.0 43
6/30/2017 51.6 43
3/31/2017 41.6 40
12/31/2016 101.3 77

Trailing 12-month EPS declined 62% from 245.5 sen to 93.4 sen. DPS declined 56% from 203 sen to 89 sen.

The share price declined 65% from RM37.86 three years ago (4 Dec 2017) to RM13.38 today.

BAT has been trading at a low price earlier for a very good reason.

Now the market sentiment has reversed after the government has vowed to raise revenue by cracking down on illicit cigarettes.

However, a share price recovery is only sustainable if EPS keeps on increasing in the coming quarters. It happened in 2018 when the share price rose 65% from RM23 to RM38, backed up by 3 consecutive quarters of EPS increase. But when EPS growth faltered after 2018, the share price collapsed again.

Whoever believes that BAT share price could grow back to RM30+ (last reached in 2018), let alone the all-time high of RM70+ (reached in 2014), needs to have a plausible story on how BAT EPS could keep on growing quarter after quarter.

Why illicit tobacco market share could be successfully rolled back this time whereas the effort failed in 2018?

Why is this time different?

Insider info may or may not be true.

Even if the info is true, the timing could be wrong. Good news may coincide with a market crash.

Even if both info and timing are right, it could still be difficult to judge how much of the good news has already been priced in. We often see a good quarterly result being followed by sell down.

Only after reading fairplay's comment that I realize that Board Chairman Datuk Ng Peng Hay has resigned. Datuk Ng's resignation was announced on Nov 24, merely 4 days before the coming AGM. No reason was cited.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3107685

To recap, this is the third board member resignations this year. The first was announced on Feb 24 this year by Madam Leong So Seh, citing personal and health issues. In fact, Mdm Leong was only re-elected just 5 months earlier in Sep 2019.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3026283

The second resignation was by Datin Siah Li Mei on Aug 3 this year, citing health issue. Datin Siah only joined the board in July 2019.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3074128

Could it be a coincidence? I note the dual listing project expenses of RM6.68 million first came to light in the quarterly report of Feb 29, 2020, in a one-line mention on page 14.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3057502

@cnman53, from the self-interest of board and management perspective, I see no reason for iCap to seek media publicity unless they want to raise new capital (won't fly), or defend against another attempt by CoL to unseat the board.

Otherwise, the less publicity the better. Lack of outsiders' interest will not affect the management fee or board remuneration.

How about writing an email to the Minority Shareholders Watch Group (MSWG), highlighting questionable practices, back up with evidences?

Now we know why the CCM share price has moved up from RM1.23 in Oct2 to RM2.79 today. It was just announced that Batu Kawan would buy PNB's 56% stake of CCM at RM3.10. This would trigger a mandatory general offer.

https://www.thestar.com.my/business/business-news/2020/11/17/batu-kawa...

What is interesting is that the CEO of CCM, Encik Mukri bin Harun, who used to own zero shares in his company, announced the intention to deal in CCM shares on 3 Nov.

https://www.bursamalaysia.com/market_information/announcements/company...

The CEO then bought 120,00 shares on Nov 9 and 10 at an average price of RM2.28. What a coincidence!

https://www.bursamalaysia.com/market_information/announcements/company...

Is the CEO going to cash out at RM3.10, which would have netted him a 36% profit or close to RM100k?

Perhaps Encik Mukri bin Harun has merely expressed his strong confidence in the company's future under his stewardship? In that case, he should forgo the MGO. He should hold his shares for the long term, casting a vote of confidence in his own leadership!

You can find info on unsold inventory in the Annual Report. It's reported in the note for Inventories, being part of the "completed development properties"

PE is not 4.61 times as shown. You need to apply diluted EPS by assuming all ICPS are converted to ordinary shares. The trailing-twelve-month PE is about 9 times.

@dumbMoney,
I agree with you that ICAP return should be based on market price. My analysis above is in fact based on the ICAP market price which was extracted from the Trading View website.

It is misleading for the TTB to promote measuring ICAP performance based on NAV rather than market price return. As you have put it well, when an investor, due to his own financial circumstances or other reasons needs to sell ICAP, he can only sell at market price and not NAV!

ICAP's latest published NAV is RM2.83 per share. But the closing price is only RM1.91. The market places a whopping 33% discount on ICAP NAV!

Potential investors who have studied ICAP long history of underperformance knows the risk of buying into ICAP today. Despite its apparent deep discount, new investors are likely to get trapped with the same if not growing discount in the future years. Therefore almost no one, not even the ICAP fund manager himself, wants to buy ICAP! The only established buyer is the City of London who buys in the hope to force through changes to unlock ICAP value, which is resisted by the board and TTB.

ICAP remains a value trap until the Board of Directors steps up to demand better performance from TTB (unlikely), or until the board is voted out (difficult since a segment of long-term shareholders has been instilled with fundamentally wrong concepts that are actually detrimental to their own interest!)

There is another way to look at this fallacy. TTB believes his fund is undervalued because he urges investors to measure the fund by NAV and not by the market price. But if ICAP is indeed under-valued, why TTB who holds more than 60% fund asset in cash has never bought back ICAP shares? Why not exploit this market “mispricing” at his own fund as any true value investor would have done?

If TTB is a value investor, he needs to act like what he claims to be. Unless, of course, ICAP fully deserves its deep NAV discount, which means TTB is wrong for claiming ICAP is under-valued.

The absence of buyback over these years for a fund that is flush with cash speaks louder than words!

@ cnman53
If you still don’t like to use KLCI index as a comparison, my suggestion is to compare against “cost of equity”, as public listed companies are subjected to.

The idea is straight forward. Assume an investor has capital that can be invested over a period of 10 years.

The lowest risk investment will offer the lowest rate of return, called the “risk-free” rate. In the Malaysian context, the "risk-free" investment is the 10-year bond issued by the Malaysian government. It is “risk-free” because we assume that the Malaysian government won’t default.

Currently this risk-free rate is slightly under 3%. In the past 10 years, it averaged around 3% to 4%.

For any other 10 year investment that is riskier, the investor will rationally demand a higher return. For example, one may invest in freehold property in a prime location with the expectation that net rental yield + appreciation over 10 years is at least 6% to 8%.

For the KLCI stock market as a whole, I would demand a slightly higher return, say around 7% to 9%. This is the “cost of equity” for the stock market. Note my 7% to 9% target is slightly higher than the 6% to 7% that KLCI has delivered (after dividend reinvestment) between Mar 2009 to Mar 2020.

What is the right “cost of equity” for ICAP?

Given it is a captured closed-end fund, personally I see it as equally risky, if not riskier investment, than a diversified 30 component stock of KLCI 30. I would at least demand a return of 7% to 9% per annum, like what I demand from KLCI.

But ICAP only returned 3.6% over that period!

Given that, one may as well park the money in a Malaysian government bond, which is safer. If buying bonds is difficult, one may just place 12 months FD and roll the FD over every year for over a decade. The FD still matches ICAP return!

@ cnman53
I agree with dumbMoney. For Malaysian funds, open or closed-end, the best comparison is still the widely followed KLCI index after dividend reinvested.

I agree that benchmarking against the index over a short period of say 6 months, 1 year, or even 3 years could be misleading/ unfair to managers. Value fund managers usually underperform the benchmark when growth stocks are in favor and vice versa.

However, for a longer period of one cycle (defined as from one market top to the next top, or one bottom to the next bottom), all fund managers should be measured against the index. Even Warren Buffett’s Berkshire Hathaway is compared against S&P500. Berkshire lagged S&P500 in the late 90’s tech mania but more than made up after the bubble burst.

For Malaysia's case, one may define the cycle of bottom to bottom as Mar 2009 bottom (Global Financial Crisis) to Aug 2015 bottom (oil rout, 1MDB, Ringgit depreciation…). If you don't accept 2015 as a bottom (it was a bear market with more than 20% drop), surely Mar 2020 would have qualified as a bottom.

How did KLCI perform over this market cycle?

Mar 2009: 837
Aug 2015: 1,504 --- 80% growth (before dividend) since Mar 2009, or 9.6% CAGR
Mar 2020: 1,208 --- 44% growth (before dividend) since Mar 2009, or 3.4% CAGR
(Source: Trading View, Excel RRI formula)

How did ICAP perform during the same period?
Mar 2020: RM1.25
Aug 2015: RM2.10 --- 68% growth (before dividend) since Mar 2009, or 8.4% CAGR
Mar 2020: RM1.85 --- 48% growth (before dividend) since Mar 2009, or 3.6% CAGR

Comparing KLCI to ICAP:

ICAP clearly underperformed KLCI during the cycle of Mar 2009 to Aug 2015, even before dividend reinvestment of KLCI is considered.

During the longer cycle from Mar 2009 to Mar 2020, on appearance ICAP outperformed KLCI by a whisker. But that was before dividend reinvestment is considered.

ICAP only paid a miserable one-time dividend throughout its 15 years in existence. While I don’t have the full data, on average KLCI 30 component stocks (which consist of many high dividend yield banks) have about 3% dividend yield.

Therefore during the 11 years from Mar 2009 to Mar 2020, while ICP CAGR is 3.6%, the compound annual growth rate of KLCI is about 3.4% + 3%, i.e. in the range of 6% to 7% per annum.

If ICAP is an open-ended unit trust it would have been closed down long ago.

Late Tan Sri Lee Shin Cheng's son, Lee Yeow Seng, has moved from the position of CEO to Executive Vice Chairman. Dato' Voon Tin Yow from SP Setia/ Eco World has taken up the CEO position in Apr 2020. What is the implication of this reshuffling of position?

@cnman53,
The recognition of the RM6.68 million dual-listing expenses also happened at an interesting time.

The project was said to have been shelved some years back. But the expenses were only booked during the height of the pandemic. The expenses were recognized for the quarter ending 29 Feb 2020 and were published on Jun 10. There was only a one-sentence mention, buried under Note B1 of page 14 in the quarterly report. The Commentary by Fund Manager made no mention of this project and the reasons for its failure.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3057502

I’ve been waiting for a good explanation in the 2020 Annual Report but again none has been offered.

Why book the expenses at the height of the Covid-19 pandemic? Did the pandemic deal the final blow to the project? Or was it given that many listed companies also reported awful results during the same period, it was an opportunistic moment to quietly slip in the cost of a failed project long ago?

The board of directors owes shareholders an explanation.

Closed end fund is a good for the manager, but less so for the fundholders. The fact is well known in the US.

Way back in 1992, the legendary Fidelity Magellan Fund Manager Peter Lynch wrote in his book Beating The Street:

*quote*
From outside Fidelity, I’d gotten numerous offers to start a Lynch Fund, the closed-end variety listed on the New York Stock Exchange. The would-be promoters said they could sell billions of dollars’ worth of Lynch Fund shares on a quick “road show” to a few cities.

The attraction of a closed-end fund, from the manager’s point of view, is that the fund will never lose its customer base, no matter how badly the manager performs.

That’s because closed-end funds are traded on the stock exchanges, just like Merck or Polaroid or any other stock. For every seller of a closed-end fund there has to be a buyer, so the number of shares always stays the same.

This isn’t true of an open-ended fund such as Magellan. In an open-ended fund, when a shareholder wants to get out, the fund must pay that person the value of his or her shares in cash, and the size of the fund is reduced by that amount. An unpopular open-ended fund can shrink very fast as its customers flee to other competing funds or to the money markets. This is why the manager of an open ended fund doesn’t sleep as soundly as the manager of the closed-end kind.

A $2 billion Lynch Fund listed on the NYSE would have continued to be a $2 billion enterprise forever (unless I made a series of horrendous investment boo-boos and lost the money that way). I would have continued to receive the 75 basis points ($15 million) as my annual fee, year in and year out.

It was a tempting proposition, monetarily. I could have hired a bunch of assistants to pick stocks, reduced my office hours to a leisurely minimum, played golf, spent more time with my wife and my children plus gotten to see the Red Sox, the Celtics, and La Bohème. Whether I beat the market or lagged the market, I’d still have collected the same hefty paycheck.
*unquote*

The essence is in the last sentence. “I beat the market or lagged the market, I’d still have collected the same hefty paycheck”.

And Lynch spoke of only 75 basis points (0.75%) in annual fee.

@ahhuat56,
You said majority of Malaysian investors don’t know how to take advantage of closed-end funds.

Pardon my ignorance. I have no idea too on how to take advantage of this Malaysian closed-end fund that only paid out a token dividend in past 15 years; with poor stock picking records; and park most of its asset as bank FD’s for over a decade; and charges shareholders 1.5% annual fee for the huge pile of cash parked almost permanently in the banks; and watsing close to RM7 million of shareholders' fund on a dubious dual listing project which led to nowhere.

Instead of lamenting on the ignorance of Malaysian investors, shouldn’t the fund manager shoulder the responsibility for giving closed-end funds such a bad name in Malaysia, such that no more closed end funds have been set up since 2005 after the bad experience with ICAP?

@enigmatic,
The name “iCapital” means nothing given the fund has underperformed for years, during good time as well as bad. Yet the fund charges a 1.5% annual fee (not to mention other expenses), on not just invested shares but also the cash hoard which is worth more than 60% of fund assets. If changing the fund name is the price to pay for better performance and shareholder value, so be it.

You said TTB is synonymous with ICAP. That is precisely the problem! There is a cultivated impression of TTB being indispensable while Buffett and Munger have groomed capable successors who could take over any time.

In fact, I cringe at the comparison of TTB to Buffett. Despite TTB’s frequent quoting of Warren Buffett, and have never shied away from being compared to the Oracle of Omaha, the two of them can never be more different. The difference goes beyond one being a true value investor who walks the talk, while the other a market timer who speaks the lingo of value investing.

1. Buffett’s Berkshire Hathaway grows 25,000 times from about USD20 million in 1965 to the current USD500 billion, representing a compound annual growth rate (CAGR) of 20% over 55 years. TTB’s ICAP started at about RM140 million in 2005 and has grown to just 270 million after 15 years in existence, representing a CAGR of 4.5%. ICAP underperforms KLCI after considering dividend reinvestment of KLCI.

2. Buffett's total compensation from Berkshire in 2019 was $374,773. Buffett has not set up a management company to charge a 1.5% annual fee for running Berkshire as TTB does to ICAP.

3. Buffett demonstrates humility and admits mistakes while TTB blames others. When challenged by CoL, TTB threw up the idea of dual listing to narrow the ICAP NAV discount. After billing ICAP shareholders for close to RM7 million this year for the failed dual-listing, TTB did not even explain, let alone apologize for wasting shareholders’ money.

I don’t mean for TTB to pay just a token dividend to placate shareholders. If the ICAP board genuinely wants to close the discount gap, the board should simply return ALL the cash to shareholders.

Failing that, TTB’s company should at least forgo the easy money which is the 1.5% annual fee imposed on ICAP cash holding that it has enjoyed over the years.

If TTB threatens to quit again, shareholders should just let him quit. The fund can then start afresh.

I would envision the following. The new board can select a replacement fund manager from a long list of capable fund houses in Malaysia – Eastspring, Kenanga, KAF, Affin Hwang, to name just a few. Anyone of them will be happy to manage at an annual fee of no higher than 1.5% currently paid to TTB’s company.

After that, the board should call an EGM. Shareholders will vote on two items. The first item is to approve the replacement fund manager. The second item is to decide whether ICAP should give back the cash hoarding to shareholders in the form of a special dividend.

Based on the latest quarterly report as of 31 Aug, the cash hoarding is 242.778 + 5.744 = RM248.522 million. Divided by 140 million shares in circulation, each share at today's closing price of RM1.93 is entitled RM1.78 of special dividend.

Ex-dividend, ICAP share will only consist of stock investment worth about RM1.05 per share (based on the latest published NAV at RM2.83 minus cash RM1.78 = RM1.05).

Ex-dividend, the share just needs to trade at a price higher than RM0.15 to outperform the sorry state today (special dividend RM1.78 + ex-dividend price RM0.15 = today closing price at RM1.93)

With a new manager, the share could easily trade anywhere from RM0.80 to RM1.00 per share. Adding back the RM1.78 special dividend received, at a stroke ICAP is worth RM2.58 to RM2.78 a share, i.e. a share price increase of about 40%.

Why go through the charade of dual-listing purportedly to narrow ICAP NAV discount, which generated nothing except burning a RM7 million hole in shareholders’ pocket?

As I’ve argued, just distribute the entire cash hoarding as special dividend will drastically narrow the discount. Of course, while shareholders may benefit, the fund manager will collect a lot less money after the cash hoard is returned to shareholders.

Ultimately my question to the board of directors, whose remuneration is paid by shareholders, is this, WHERE YOUR LOYALTY LIES?

I see a third problem developing now. ICAP has filed a judicial review against Securities Commission and CoL as it accuses CoL of breaching 20% shareholding limit. But who will pay for the legal fee if ICAP loses the legal challenge? At the courtesy of ICAP fundholders again ?!

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3092802

Is it a coincidence that director Siah Li Mei, who joined in July 2019, resigned on Aug 2020 on health reason?

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3074128

Is it also a coincidence that the other director Leong So Seh, the Chairperson of Nomination Committee, resigned on “personal and health issue” in Feb 2020 after just being reelected a few months earlier in Sep 2019?

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3026283

I anticipate a few bogus forum participants whose only track record in this forum was to defend TTB will accuse me for being paid by CoL. Let me say it again, I’m not. I have no relation with CoL. I just comment based on public information published by ICAP. Refute me with facts if you can. Otherwise don’t waste your time.

When releasing ICAP quarterly result in Jul 29, the fund manager commented in the report that “"As this year’s AGM approaches, shareowners should watch out for a new round of negative comments on your Fund in the social media. Please be aware of this and not to be misled. "Lies, damned lies, and statistics" is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak or false arguments."

Rather than succumbing to this under-siege mentality, it’s better for the fund manager to spend his time already paid for by fundholders to improve his stock-picking skill!

It’s also the time for those well-paid directors to wake up. Carry out your fiduciary duties for shareholders or make way for others!

ICAP’s under-performance over the years is one thing. A bigger problem is poor corporate governance.

As I’ve mentioned in my comments in July, and others have also pointed out, the fund manager holds more than 60% of assets under management in cash. Its cash position was even higher in earlier years.

ICAP shareholders get zero return for those cash position. Why? Even if ICAP gets a 2% FD rate, it has to pay a quarter or 0.5% as profit tax to the Malaysian government. The remaining 1.5% return goes to the fund manager. This leaves fundholders with nothing! The large cash position basically offers the fund manager a stable stream of fees!

The second problem is buried in the ICAP 2020 Annual Report. The fund wasted almost RM7 million of fundholder’s capital on the futile dual-listing project. But this is all the directors got to say “The results of the operations of your Fund during the financial year were not, in the opinion of the directors, substantially affected by any item, transaction or event of a material and unusual nature other than the dual-listing project expenses as disclosed in the statement of profit or loss and other comprehensive income.”

Hello! Can the directors at least give some indication of whether the Fund Manager, Capital Dynamics Asset Management Sdn Bhd (“CDAM”), shared some of the cost for promoting this failed idea when it was challenged by the City of London (CoL)? Or was it an impromptu diversion tactic then with the cost borne by ICAP shareholders?

@dangerzone, I also have the same question.

There are many listed companies around the world producing industrial hoses, sometimes as part of their wide range of product offerings.

I've listed a few below. However I'm not familiar with this industry. So I'm not sure whether they are direct competitors, or potential future competitors for the Trelleborg JV.

1) German listed Continental AG, which doesn't just produce tyres

https://www.continental.com/en/products-and-innovation/product-finder?...
https://finance.yahoo.com/quote/CON.DE?p=CON.DE&.tsrc=fin-srch

2) US listed Parker-Hannifin

https://finance.yahoo.com/quote/PH?p=PH&.tsrc=fin-srch
https://ph.parker.com/my/en/high-pressure-hose

They have an office at Shah Alam.

3) US listed Gates Industrial Corporation

https://finance.yahoo.com/quote/GTES?p=GTES&.tsrc=fin-srch

https://s22.q4cdn.com/277773419/files/doc_presentations/2020/GTES-Inve...
(Read slide 8 and 9. It claims to be one of few scaled players in a large, fragmented $29B addressable market)

It seems that Wellcall is just a small fish in the big ocean.

If anyone has info about industry please share.

@Felicity, @myinvesting,
Thanks for your input.

According to this article, the ICPS was created to repay a loan extended by Allianz SE for an acquistion.
https://www.theedgemarkets.com/article/allianz-proposes-rights-issue-icps

I agree the ICPS should be at a premium given dividend is 1.2X. However the low liqudity works against it, especially if there are more ICPS sellers than buyers, who are mostly long term investors.

May be that explains the continous conversion over the years. But the ocnversion pace has slowed since 2019.

@ kywoo, I read you comment on 23/03/2020. You mentioned "Thirdly, on conversion to ordinary shares you will get conversion rate of less than 1 to 1 basis."

I've tried to figure out the ICPS conversion ratio. The Annual Report of 2019 seems to imply conversion ratio is 1 to 1. It said "During the financial year, the Company increased its ordinary shares to 176,887,639 by the issuance of 199,200 ordinary shares pursuant to the conversion of 199,200 ICPS"

However, according to the circular below, Clause 4.10 (B) in page 9 states "that number of new AMB share(s) that holder of each ICPS is entitled to receive .... shall be multipled with the following formula:- revised number of AMB share/ original number of AMB share".

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=2950250

Do you refer to this formula? I have no idea what it is talking about. If you do can you explain? Is there any cost involved in conversion?

Clause 4.10 (A) also mentions the tenure is perpetual. So I think you're right that there is no time limit for conversion (unless it's forced conversion during winding up/liquidation).

That brings me to another question. 23 millions ICPS have been converted since 2011. Why did ICPS holders want to convert to ordinary shares?

Did it have to do with price? I note in certain years ICPS price tended to transact at a discount but at other years at a premium.

Or ease of selling? But that only make sense for large quantity selling. For a small quanitty, selling the ICPS directly in the illiquid market may still be faster than waiting for conversion into ordinary shares.

Any thought on that?

Basic EPS is 94.82 sen (diluted EPS 48.45 sen) versus 66.57 sen (33.99 sen) a year ago. On appearance a 42% increase is an extraordinary result.

However, the consolidated P&L shows that there is a fair value gain of RM368 million (versus FV gain RM128 million a year ago). This is probably contributed by the fixed income investment due to lower interest rate.

Part B Note 1.3 also mentions higher PBT for the general insurance segment is mainly due to lower motor claims ratio during MCO period. This is likely to be a one-time effect too. Claim ratio in Q2 is 54.5% versus 61.1% a year ago.

But it is still good result. Gross earned premium at RM1,228 million is higher than a year ago, although slightly lower than RM1,306 million in Q1.

And my last comment -- on your statement that ICAP “1.5% fees is lower than open-ended fund's fees”

That is not true.

Since Lipper does not provide fee info, I looked up Malaysia equity funds listed in Fundsupermart. I checked out the top 5 funds with highest 10-year annualized return. I picked the best long-term return funds because they are in a better position to raise fee.

These is the data:
1. Eastspring Investments Small-Cap Fund: annual return 13.87%, annual mgmt fee 1.50%
2. Kenanga Growth Fund – annualized return 12.29%, fee 1.50%
3. KAF Vision Fund – annualized return 11.19%, fee 1.50%
4. Kenanga Growth Opportunities Fund – annualized return 10.87%, fee 1.55%
5. RHB Thematic Growth Fund – annualized return 9.88%, fee 1.50%

Conclusion: 4 out of 5 top equity funds charge a management fee of 1.50%, similar to ICAP 0.75% +0.75% = 1.50%.

Actually there is a little bit more than management fee. On average there is another ~15 basis points which make up the full expense ratio. But ICAP also incurs other expenses on top of its 1.5% fee.

The other expense of buying open-end unit trust is the one-time sales charges. Fundsupermart charges 0.75% to 1.75%, while banks charge about 3% after rebate. It's slightly more expensive than the two times stock brokerage fees of buying and selling ICAP, given online brokerage fee is about 0.1% to 0.42%. (However fundsupermart supports free switching)

But spreading over a holding period of 10 years or more, the cost incurred in owning open end unit trusts is comparable to owning ICAP.

On top of the better performance (albeit I picked only top funds) at 9.88% to 13.87% p.a., versus ICAP 1.4%, unit trust investors also get their full NAV when redeeming their funds. They don't suffer a 30% discount when they selling.

A clarification of my return calculation. What I’ve stated is the cash portion, which made up on average about 2/3 of NAV in the past several quarters.

For each RM100 of cash parked in bank, ICAP receives about RM3. Management & advisory fee for that RM100 cash principal is about RM1.50. The roughly RM3 annual interest received is taxed at 24% i.e. RM0.72. In other words, for the 2/3 of NAV parked in cash, each RM100 of cash returns only RM3 – RM1.5 – RM0.72 = RM0.78, or less than 1% of principal.

Thererfore the other 1/3 of the NAV tied up in equity investment has to work very hard to increase overall return. This explains the underperformance in the past decade.

Curious to find out the overall annualized return, I’ve extracted the following data:

Inception: Oct 2005: NAV RM1.00, Price RM 1.00
10 years ago: 22 Jul 2010: NAV RM2.25, Price RM1.83
Special dividend: Sep 2013: RM0.095
Latest weekly update 22 Jul 2020: NAV RM2.88, Price RM2.00

Applying Excel formula XIRR, this is the results:

Annualized NAV return since inception 7.8%, price return 5.3%
Past 10-year NAV return 2.9%, price return 1.4%

Money is not free. Any students of Discounted Cash Flow know equity capital has a cost, commonly defined as risk free rate + equity (share) market premium.

The risk free rate can be assumed as 10Y Malaysian government bond yield. It averaged about 4% in previous decade. Equity risk premium is typically 5% to 7%. Taken together, typical stock investment in Malaysia should have a hurdle rate of about 4% + 6% = 10% per annum.

ICAP return since inception or in past 10 years was clearly below hurdle rate.

Besides, price return rather than NAV return should be used as performance yardstick. This is because investors who need to raise cash now by selling in stock market can only sell at market price, not selling NAV.

(For the same reason Star Media investor can only sell at 35 sen today, not at the net cash of 50 to60 sen, or its net tangible asset at 109 sen).

ICAP (price) return at 5.3% (past 15 years) or 1.4% (past 10 years) are clearly not acceptable.

Has the board been sleeping?

I compare TTB to Buffett only because TTB likes to quote Buffett TTB likes to mention Buffett’s words to rationalize his position.

The ICAP annual report describes TTB as
“As a result of his fascination with investing, he has the unique ability of blending his investing skills with his business experiences. As Warren Buffett, the world renowned investor, said, “It’s been awfully good to have a foot in both camps.” “

With such overture, it's only fair to invite comparison.

I agree ICAP is not exactly the same as Berkshire, even though both are traded in stock market and both are in the business of investing money (with Berkshire having an extra insurance business)

Yes, ICAP is much smaller than Bershire. But the small size should have worked towards ICAP’s advantage.

ICAP could invest in companies without immediately revealing its position as long as its stake is below 5%. ICAP can also invest or dispose a small stake in small companies without moving the market price against it. Not for Berkshire. Any small bet for Bershire moves the market.

Rightfully, skilled fund managers who manage small funds should be able to outperform. Usually they only become mediocre when their fund sizes grow too large.

But we don't see that in ICAP.

Second, I agree technically it’s the fund manager’s prerogative to keep most of ICAP asset in cash, even for over a decade. Technically the fund prospectus does not forbid TTB from holding as much cash as he wants, and as long as he feels necessary.

Having said that, holding a large cash position is a market timing behavior. Holding large cash poisition for years is a long term market timing behevior in anticipation of stock market crash.

Market timing is common among macro, top-down money managers. But large cash position for over a decade is at odd with bottom-up, value-oriented managers. TTB’s past commentaries give the impression that he is in the latter camp. But his action shows he is the former.

It should be the board of directors’ duty to review and question this contradiction. But I doubt they do.

I also don’t agree with your analogy comparing ICAP investment strategy with an individual with 10 million dollars. Yes, an individual should diversify and should have an asset allocation plan. But an equity fund should not (note we’re not talking about a balanced fund here, which has a pre-defined bond to equity ratio). An equity fund like ICAP should not put another layer of undefined asset allocation on top of individual investors' personal allocation.

For example, ICAP average cash holding is about 2/3 for the past few quarters. An individual may have an allocation plan of 50% cash and 50% equity. If he invests all his equity with ICAP, ICAP has effectively altered his allocation to less than 20% equity and more than 80% cash.

@iPilot50,
I appreciate your view. Although I may not agree with your conclusion, at least we seem to be able to engage in a civil conversation, a discussion based on facts and reasons.

Pardon me because I’m going to write a page full arguing against your position. But nothing personal. This is my approach. I welcome opposite and contrarian views that prove me wrong and point out my blind spot.

First, I agree that the fund long term return is more important than dual listing project expenses. If last quarter RM6.68m was a one-off expense (the quarterly report didn’t spell out), the expense represented ‘merely’ 1.6% of net asset, or about 1 year in fee.

The reason I raised the dual listing expenses was about transparency rather than the spending. But my criticism is reserved for the board of directors rather than fund management. It should be company directors’ duty to demand and ensure a high standard of disclosure.

@vidusaka,
Another baseless accusation?

I readily admit that I’ve made a mistake in my spelling. Sadly, I see some people are still in denial mode despite years of contrary evidence.

This is your second comment ever in this forum. Both are attempts to deflect legitimate criticism against ICAP.

“Paid by posts or by words?” This question probably suits you.

Apart from spelling, any other factual mistakes that you have found in my posts?