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?

I’m an admirer of Warren Buffet too.

Like ICAP, Buffet’s Berkshire Hathaway can be also be thought of as a closed end fund, one with an insurance business bolted on. But the similarity ends there.

(1)
Warren Buffet draws an annual salary of US Dollar 100,000 per annum despite managing a half a trillion-dollar company. Buffet’s interest is aligned with Berkshire shareholders because almost all his net worth is tied up in Berkshire shares. Buffet becomes one of the richest men in the world because of outperformance in Berkshire shares. Not because of management fee.

https://www.investopedia.com/ask/answers/020915/what-warren-buffetts-annual-salary-berkshire-hathaway.asp

(2)
Berkshire Hathaway share price has traded at a premium of 20% or more to its book value.

https://ycharts.com/companies/BRK.A/price_to_book_value

(3)
Berkshire has a portfolio of superior companies. Those companies generate cash faster than Buffer can find suitable investment targets. What does Buffet do with Berkshire fast accumulating cash pile? He buys back Berkshire shares. Berkshire might have bought back more than $5 billion in recent weeks.

https://markets.businessinsider.com/news/stocks/warren-buffett-likely-spent-5-billion-on-berkshire-hathaway-buybacks-2020-7-1029387230#

By the way, I have not even mentioned that stock exchange filing shows ex-director Madam Leong So Seh, the member of Audit Committee and Chairperson of Nomination Committee, resigned on 24 Feb 2020 on ‘personal and health reason’.

The resignation came just 5 months after she was reelected on 21 Sep 2019.

Further to my comment above. Note when I started commenting on ICAP here, I've avoided questioning management investment strategy. I talk about its strategy now only in response to comments from others.

What prompted me to comment on ICAP in the first place is the RM6.68m dual-listing project expenses incurred in Q3 FY2020. No explanation was given regarding the project, which many have assumed to be dead long years ago. No written explanation can be found over these years on how the dual listing is supposed to work, and how it could close the discount gap.

In my view, the lack of disclosure and lack of transparency is more troubling than ICAP investment strategy.

But I don’t blame TTB and his Capital Dynamic for that. After all, TTB/ Capital Dynamic is just a fee collecting service provider to ICAP. What I question is how well the company directors have carried out their fiduciary duty and with shareholders’ interest in mind!

@ahteck85,
Many company AGMs are attended mostly by retirees anyway.

But I agree with your point. ICAP shareholders are mostly long-term followers of iCapital. Some have been subscribers to its newsletter before internet has even become available in Malaysia. Capital preservation ranks high for these retirees.

However, on the other hand, I would also argue that regular income distribution is equally important for retirees. That is why many retirees will hold portfolios of blue-chip dividend stocks on long term basis.

But I reckon not all retirees are comfortable with stock picking. They entrust ICAP, the only closed end fund in Bursa for their investment. Sadly, ICAP has never paid dividend since its inception in 2005, except once in 2013.

There is nothing wrong for companies that don’t pay dividend as long as the companies can invest their accumulated cash wisely in high return growth business, generating more cash in the future. The market rewards such companies by paying a premium for its share. Investors who need to raise cash can just sell a portion of their shareholding.

Sadly, ICAP is not one of these growth companies. ICAP management chooses to park its huge cash pile in banks for over a decade, now yielding annual return of 3% or even less.

In fact the 3% bank interest has to be net off against 0.75% + 0.75% = 1.5% management and advisory fee on the cash principal; and the bank interest itself incurs 24% Malaysia corporate tax. Shareholders’ return on the cash in bank is actually less than 1% annually!

Following this strategy, the shareholders have waited for 13 years for the great market crash as anticipated by the fund manager. Like a broken clock that forever points to 6 'o clock, the great crash will eventually come, if the dip in Mar 2020 did not count as one. Yes, when the great crash comes the fund manager could pick up cheap stocks. But what about the opportunity cost lost in the 13 years interval?

In fact, any retiree who is not comfortable with stock picking will be better served by keeping say half of their cash in FD (where interest is tax free), and invests the other half through open ended unit trusts on dollar cost averaging basis.

@vidusaka,
I lay down my reasons, backed up with facts extracted from ICAP filing with Bursa, on why the company disclosure is lacking.

Instead of challenging my with counter facts and reasons, you accused me of being paid by City of London (CoL) without evidence. You went on to accuse me of conning other investors!

I probably touched a raw never just because I questioned ICAP management practice!

For record, I have no relation with COL. I also know none of their management and none of their staffs.

I’m a believer in value investing. I dive deep into individual companies. You may check my profile and past comments. Although I don’t usually comment in this forum, you can still find dozens of my past comments discussing on other companies financials, strengths and weaknesses.

You, on the other hand, has posted your very first comment in this forum accusing me of being paid by CoL. That makes me wonder whose interest you’re trying to protect!

Curiously, a few other forum participants have also commented exclusively on ICAP but not other companies. But I give the benefit of doubt that their investment may be mostly or even wholly tied up with ICAP.

But your case is interesting.

Such observation has aroused my curiosity. Now I’m going to study more about ICAP past saga with CoL. I’ll be back with another writing.

@jeydan89,
You said ICAP is undervalued. Yes, it might be undervalued considering its NAV as of Jul 24, 2020 was RM2.88 per share, but it was traded at a closing price of RM2.00. A 30% discount to its NAV!

The trouble is ICAP has been traded at increasing discount since 2008. Based on the filing to Bursa, in the last week of 2008 it was traded at 10.9% discount. By 2013 the discount grew to 20%. By 2018 it was 23.3%. Now it is 30% discount.

ICAP is a classic example of value trap. That is why it attracted activist investors like City of London to accumulate in order to enter the board, hoping to unlock the value by forcing management to return excess cash to shareholders, which the management has resisted for years.

If you like these types of investment you may want to own Media Prima and Star Media. Their current share prices are substantially below their net cash position. By such yardstick, they are even more undervalued than ICAP!

@ahhuat56,
You said shareholders were the one asking TTB to do dual-listing. TTB merely executed their wish. So there is nothing for them to complain about paying the RM6.68m recorded in Q3 FY2020.

Sorry you got it the other way round. Refer New Straits Times article on Nov 7, 2012. It reported that

quote
Capital Dynamic Managing Director Tan Teng Boo said the fund will be listed in both Kuala Lumpur and another country … “As a fund owner, you will have double benefits of narrowing the discount of iCapital.biz share price as well as allowing shareholders to invest globally. However the fund, which has been our baby for the past three years, will not be launched if the three new directors (from City of London) are elected to the board,” Tan told reporters at its headquarters here yesterday.
unquote

Need I say more?

@ahhuat56,
An update about dual-listing project is not price sensitive. For example, if you go to Petronas Chemical IR websites, you can find presentation and webcast where management updates status of on-going RAPID project and their plan for plant shutdown in coming months. The key is disclosure. Companies with good corporate governance will make sure such important information is publicly available for all investors.

If quarterly update is too much of a hassle, companies can still update their shareholders in the Chairman’s statement and CEO’s/MD’s statement section of Annual Report. This is the norm for companies with good corporate governance.

@ahhuat56,
I’ve already searched through every annual report since 2010. Not a single word was mentioned about the dual listing project. No written explanation on how it worked. No progress update.

You mentioned you heard of it in the AGM. I don’t dispute that. I know shareholders asked about the project in AGMs. A NST article in 2012 also reported it. Another article in 2014 mentioned the project was still in “final stages”. But none of the articles could tell how dual listing was supposed to work.

Why the explnation was not provided in the annual reports, which is the most important document for management to communicate to shareholders annually?

Why such an important project had to exist in the memory of shareholders who happened to attend the AGM? And how much details had been revealed?

Can anyone give the definitive account of how dual listing is supposed to work and how will it benefit shareholders?

All my comments above may be irrelevant if the dual listing project was dead years ago with no consequence today.

But this is not the case.

In the latest reporting quarter ended on 29/02/2020, ICAP registered a loss after booking dual listing project expense of RM6.68m or close to 5 sen NAV per share.

Mind you this is no false accusation. You can check out yourself in Note B1, page 14 of the quarterly report. There was just a one liner that ‘recognition of RM6.68 million of dual listing project expenses’.

Has the project been restarted recently? If the answer is yes, what form will it take? How much additional spending in future quarters is expected?

Could it be that the project expenses were capitalized years ago and this was a write-off (given time is bad why not get all the bad news out in one go)? The problem with this explanation is ICAP has zero non-current asset to write off other than investment holding.

But my point is why don’t the management be forthright about the spending and give at least a brief update on the project in the quarterly report? Having spent a sizeable amount of shareholders’ money recently, the project has more relevance to shareholders than repeating the wisdom of Benjamin Graham!

Isn't management transparency a quality treasured by value investors?

@Nepo,
It will be better for ICAP shareholders if the dual listing just dies a natural death.

I suspect TTB floated the idea of dual-listing in 2012 to fend off the attempt by City of London to control the board, which would have forced the company to return excess cash to shareholders. It was probably a not well thought through diversionary tactic by TTB at the time.

Asset management companies grow by expanding internationally. That was why Aberdeen Standard, Franklin Templeton, Nomura, Principal and the like expanded into Malaysia. The expansion benefited their company shareholders. However, their unit trust/ mutual fund investors did not benefit from the expansion. Their fund investors certainly did not pay for the expansion.

For ICAP case, due to the lack of transparency, I see only confusion and potential conflict of interest.

ICAP shareholders are fund investors. The company ICAP engages the service of a fund manager called Capital Dynamics Asset Management Sdn Bhd, where TTB is the founder and MD.

ICAP shareholders do not share the profit of Capital Dynamic, which is another private company and a separate entity. ICAP shareholders do not benefit from Capital Dynamics gaining more business overseas.

Without explaining how the whole scheme works, why should ICAP shareholders pay RM6.68m or close to 5 sen NAV for the dual listing project? Besides, the information is buried in one sentence in the Q3 report footnote! This is not good corporate governance.

ICAP board of directors, headed by Chairman Datuk Ng Peng Hay, have the fiduciary duty to protect shareholders’ interest and explain how the spending will benefit shareholders. They simply cannot outsource the job to TTB or Capital Dynamics Asset Management, which legally is just a fee collecting service provider to ICAP.

I look forward to a full disclosure in the next quarterly report, annual report and AGM.

I hope whoever working in ICAP who happens to read this message will convey back to ICAP management and its board.

@Nepo,
Instead of leaving it to trust, let's focus on the specific subject of dual listing. As value investors, let’s approach it dispassionately based on the facts we already know and debate over the merits.

To recap, the dual listing project incurred RM6.68m in the last reporting quarter. The expense was 1.6% of net asset value then, or close to 5 sen of NAV.

This was a sizeable sum for a small fund like ICAP. Given the importance, curiously, I could not find a single word mentioned about the project plan or progress in the annual reports of the past 5 years. After reading 5 annual reports I just gave up.

It is also amazing that no update was given in the latest quarterly report after 1.6% of net asset had been spent. Instead TTB chose to talk about Covid-19, Malaysia politics, Benjamin Graham and 1929 Great Depression in his long commentary.

I bet if Graham were alive today, he would not have approved such a lack of disclosure. What more this was from a self-styled bottom-up value investor who supposedly would demand the highest disclosure standard in his invested firms.

My second concern is about the merit of dual listing. After further digging, I found a 2012 NST article where TTB said dual listing would narrow the fund NAV discount. I note TTB only mentioned his idea before 2012 AGM in response to the threat of City of London gaining board seats.

But how would dual listing narrow the discount? TTB did not elaborate. Another sign of insufficient transparency.

But we can walk through his idea. Let’s assume ICAP has a second listing in Singapore. New shares are created in SGX. Will all the new shares be distributed to existing Malaysian shareholders, such that they can trade in both Bursa and SGX? But if trading in one bourse could not close the discount, how could dividing the trading volume in two bourses do the trick?

OK, may be new shares will be sold to new Singaporean investors through an IPO. But how could ICAP justify raising fresh money from new investors when it has not made use of its existing cash pile that has been sitting in the bank for over a decade? And I also don’t see how having another set of shareholders could narrow the discount.

If TTB acts in the best interest of ICAP shareholders, he owes them a detailed explanation before spending their money on the project!

He should also tell shareholders how much more he needs to spend after the RM6.68m expenses.

Can anyone explain the background of the dual listing project?

According to Q3 financial results (quarter ending Feb 29, 2020), ICAP registered a loss after taxation of RM6.3m, or a loss of 4.52 sen per share.

The main reason was found in note B1 (page 14). Expenses of RM6.68m were recognized for the dual listing project. However no explanation or progress update were given by the Fund Manager.

The Fund Manager was more keen to remind "market-timing investors" about Covid-19, most serious global economic contraction since 2019, and Malaysia political turmoil (refer Note B3, page 15-16).

But applyng my own value investing approach to ICAP, I'm more interested to read ICAP plan on the dual listing. I want to know the progress and how it might be affected by current situation.

Can anyone explain this dual listing stuff?

How can dual listing possibly turn around ICAP fortune given until the last reporting quarter ICAP still had 60% of asset tied up in cash?

Being cynical, I do notice cash also pays towards the management and advisory fee of 1.5% per annum.

I have a question.

Refer 2019 annual report (page 38). Interest and dividend income were RM9.8m and RM4.9m respectively. After deducting RM8.7m expenses (including RM7.2m to fund manager), profit before tax was RM6.1m. Income tax was RM2.1m. Effective tax rate was 34%. This was higher than the 24% statutory tax rate.

More details were provided in Note 12 (page 45). It showed the dividend income RM4.9m was tax exempted. But there was no exemption for the RM9.8m of interest income.

The bulk of ICAP taxation was contributed by the non-deductable expenses of RM1.8m. Any idea what it is?

Quarterly dividend is reduced from 3.5 cent to 2.5 cent, reversing the previous trend of increasing dividend. Quarterly paytout ratio is reduced to 23%. But I think it's fair that the management wants to be conservative around this time.

After adjusting for gain/ loss of forex, derivative and PPE disposal, profit before tax for 2020Q1 is about the same as 2019Q1. However I agree it's a commendable result.

Dividend is cut from 35sen to 25sen to "preserve" cash!

@Gemstar, thanks for your sharing.
I also use discounted cash flow model for the purpose of double checking. I’ll vary the assumed initial FCF, growth rate, perpetual growth, discount rate to get an idea of different fair values under different assumptions. I also reverse calculate from the current price to understand what are the assumptions implied in the current share price.

After doing one company, the exercise can be extended to other companies (although very time consuming). While I don’t believe in a precise fair value (that doesn’t exist), I think such exercise helps to understand relative attractiveness across different companies.

But back to your valuation, I have a few questions/ comments:

1. Your stage 1 is based on 10-year period, not 5 years as mentioned

2. Your discount rate of 9.8% seems fair. I’m wary of using beta to calculate discount rate, as beta changes over time when share price swings. But I think a 10% discount for a conservative company with a huge net cash position is fair.

3. I’m skeptical about the year 2020 FCF projected by the analyst you mentioned (BTW which analyst?). I guess the projection RM515.72 million is related to the trailing 12 months FCF which is RM512 million. But during the MCO of at least 8 weeks, sales & factory operation across all businesses will be severely impacted. There is also potentially weak demand post-MCO. Vietnam associate may face similar challenges. The company may bounce back in 2021, but I think 2020 will see a much lower FCF than the past 12 months.

4. Your FCF growth rate assumption starts at 2.93% in the first year, and it grows faster and faster until 3.4%, and the perpetual growth rate is the highest at 3.42%. Such an assumption is unusual because all businesses face increasing competition over time. A prudent approach might be to start with a higher growth rate, but settle with a lower perpetual growth rate at the terminal stage.

Try varying those assumptions and the fair value can differ substantially.

Having said that, I myself cannot avoid such psychology. What I do is to compile a total paper profit/ loss on each stock based on current price. Looking at number, I will know average down does not reduce any paper loss.

Average down is a risky psychology. Better to treat each new buy and sell decisions on individual basis. Forget about past sunk cost.

BAuto doesn't delay its financial results announcement. Its quarter ends on Jan31. That's why it releases in March instead of Feb. Anyway the result is weak, and this is the quarter after its pricing issue has been resolved, but before being hit by Covid-19. Expect worse results in Jun.

Agree. For long term investment, the focus should be on the fundamentals; that the company's long term prospect remains healthy and is not affected by current events.

Speculators probably won't buy this stock on margin given its share price is slow-moving? May be fund managers need to dump the stock to meet redemption demand or raising cash to buy more attractive bargains?

Today the closing price is RM6.78. I wonder what kind of scenario it has priced in. Factory and dealer shops' closure due to Covid-19 outbreak? Deep recession?

It's impossible to predict the bottom. But given HLIND's strong balance sheet, it should survive even a deep recession.

As of the lastest quarter, net cash is RM1,254m - RM32m = RM1,223m, or RM3.9 per share. FCF is RM1.6 per share. Even if it just breaks even this year, but recovers next year, I believe there is still a good margin of safety.

For long term investors, the dilemma may be prices for other stocks have also fallen a lot. It's hard to judge the relative attractiveness among them. But HLIND at current price seems quite attractive.

The share price of HLIND has been solid until today. While the market panic, HLIND stock price remained firm. But today it dropped 15%. In contrast Oriental dropped about 3%.

It's unclear what might be the firm specific reason contributing to the sharp fall other than general market panic and pessimism over the economy.

What's the possibility that both active & passive fund managers who tracked the MSCI index did not fully dispose their holdings when HLIND was excluded from the index a few months ago, and are forced to dump now?

@enigmatic ¯\_(ツ)_/¯, you might be right. Grabfood and the likes must have contributed to some of the volume. But I'm not sure by how much. Wonder if there is any industry data that we can refer?

Yes, deflation is not only bad but much worse than inflation in my view. While inflation might be bad for consumers, businesses can usually pass on the rising cost to customers. With deflation the economy might just get sucked into a downward spiral, where consumers don't spend --> business contracts --> workers retrenched --> consumers have no income to spend ...

But I don't think deflation is a worry for Malaysia. Although the official inflation rate has been low for several quarters, I don't think it will turn into deflation. Afterall we keep hearing people complaining about the rising cost of living.

If the oil price stays low, it will function a one-off tax cut for importing countries. It shall benefit oil importers like India. India Reserve Bank can cut rates with less worry about inflation.

But low oil price is a double-edged sword for Malaysia. Although the government saves from reduced petrol subsidy, its oil revenue from tax and Petronas dividend declines faster. Lower USD revenue from oil export will weaken MYR. The weak MYR, if persistent, can cause higher inflation due to rising import costs. It also constraints BNM's ability to cut OPR further to stimulate the local economy.

The more expensive Yen is not good for BAuto. However given the stock price has dropped so much, may be the worst-case have already been priced in? The historical dividend yield is 14%. Even if the dividend is cut by half in the coming 12 months, forward DY is still 7%. Can we assume that as long as the economy doesn't get into a recession, BAuto will be able to stay profitable and continue distributing dividends?

The Malaysia motorcycle data revealed in Annual Reports are Malaysia industry sales volume:

Fin Year Volume Growth
FY2019 573,000 16.0%
FY2018 493,966 4.4%
FY2017 473,000 10.0%
FY2016 430,000 -10.4%
FY2015 480,000 -13.8%
FY2014 556,680 -6.0%
FY2013 592,126

Apparently Malaysia volume last peaked in FY2013. Then it contracted for the next 3 years before growing again in the recent 3 years. So HLIND impressive sales in the last few years are helped by overall industry growth.

However, what I don't know is what has driven the national growth in the past 3 years, and what has contributed to its decline in years before. Note the swing in motorcycle sales is larger than vehicle sales.

Without understanding the past contributing factors, it's difficult to project whether the tailwind enjoys by the company in recent years will continue.

@antoniomc27
The share of profit in associate companies during the past 12 quarters are as follow (in thousands RM, starting from latest quarter):
21,957
6,512
9,894
23,133
33,061
24,783
24,383
26,005
38,430
32,825
25,020
40,604

On YoY basis, the contribution declined by 21,957/33,061 -1 = -34%. But if compared to the previous quarter, it seems to have turned the corner, although I have no idea whether this is just an aberration or a new trend. I'm also unclear whether the impact of the current epidemic on the Vietnam market.

I hope to hear from the rest who has followed this company for a long time.

Any idea whether the Coronavirus outbreak poses supply chain disruption risk? Do parts supplied from Japan rely on China suppliers?

Yes. Demography affects the demand. However demography changes slowly as birth and death rates don't vary much from year to year.

There must be other reasons as demography alone cannot explains the large swing in motorcycle demands

Yes. As Silverhawk has pointed out, the record-high profit in recent years coincided with enlarged TIV in the Malaysia motorcycle market.

As reported in HLIND annual reports, the TIV in recent years are
FY2016 0.430 million
FY2017 0.473 million (+10% YoY)
FY2018 0.494 million (+4% YoY)
FY2019 0.573 million (+16% YoY)

During the same period, the automotive market is flat:
CY 2016 0.580 million
CY 2017 0.577 million (-0.5% YoY)
CY 2018 0.599 million (+3.8% YoY))
CY 2019 0.600 million forecasted (+0.2% YoY)

While cars are big-ticket items, it still puzzles me why the motorcycle market can grow so fast/ is more volatile.

Did buyers forego cars for cheaper motorcycles when the economy was bad? It doesn't seem so as before 2016 motorcycle sales were in double-digit decline for a few years.

The large cash pile at Hong Leong Industries makes little sense as historically the business doesn't need too much Capex after MPI was split... unless the management has some acquisition targets, or waiting for a time to fund the cash need for its controlling shareholder.

I wonder what are the chances of turning around its non-motorcycle business, or rearranging HLIND business portfolio like what it did a few years ago involving Hume Industries.

@Silverhawk, thanks for sharing the insight into competition between Honda and Yamaha.

I googled and found Honda is indeed the undisputable world leader. It 2019 the top 3 spots by revenue and units sold are:
1. Honda (US$18.59b, 19.554m units),
2. Yamaha (US$9.732b, 5.39m units)
3. Hero Moto (US$4.964b, 7.857m units)

(from https://www.mbaskool.com/fun-corner/top-brand-lists/17638-top-10-bike-companies-in-world.html)

Given Honda is a few times bigger, and maybe the ability to leverage on its car manufacturing, I wonder why it has not used its economy of scale to stay further ahead (or perhaps it's doing that now?)

One example is the rivalry between Intel and AMD. The much smaller AMD continues to stay in the game but has a difficult time catching up its larger rival who can outspend it in R&D.

According to the website motorcyclesdata, Malaysia sales volume in 1H2019 was 257,480 units.

Yamaha sold 92,693 units (36% market share). Honda sold 79,800 units (31% share).

https://motorcyclesdata.com/2019/08/21/malaysia-motorcycles/

Qualitatively, from a consumer standpoint, what drives people to buy a Yamaha bike versus other brands? I've tried to ask people around me but don't seem to get a good answer.

Unfortunately I can't attend the AGM. Appreciate if anyone who can attend can share what they've learned in the meeting.

The motorcycle sales volume data can be found in the Management Discussion and Analysis section of the Annual Reports. In some years overall market volume and market share were provided. In some other years own sales volume were revealed. There was no consistency. I compiled them year by year.

2018 Annual Report shows that Group MD Huang Sha only controls 3.4% of the shares. Another director Tan Kang Seng has the largest block but only at 11.37%. Any foreseeable issues with the lack of substantial shareholding?

Although Huang Sha is paid several million in fee, remuneration and bonus, surely the incentive of larger stockholding can help?