@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?

I also benefit greatly from reading some of the valuable comments posted earlier. I agree the valuation is attractive.

Can anyone comment on Hong Leong Industries (HLI) future source of growth?

I've skimmed through the annual reports. So first let me recall what I've learned. Please correct if I'm wrong.

HLI business has 2 segments:
1. Consumer - motorcycles, marine, ceramic tiles
2. Industry - fiber cement board, concrete roofing tiles

The building material business has been struggling for years due to price competition from China; slowdown in domestic housing and infrastructure business; rising energy cost in earlier years; inventory problem due to the proliferation of SKUs. I suppose this business will not recover anytime soon.

The marine business is relatively new. No figure has been provided. Anyway, my impression is this is not a big and fast-growing market.

HLI cash generation power comes from its Yahama motorcycle franchise in Malaysia, and the 24% stake in its Vietnam associate.

<Malaysia>
In my view, the motorcycle revenue growth in Malaysia can be broken down into three components: total industry sales volume (TIV); average selling price (ASP); and grabbing market share from competitors.

a) TIV
It peaked at 592k in FY2013, then declined yearly to a low of 430k in FY2016, and after that recovered to 573k in FY2019. Volume grew strongly at 16% in FY2019 due to tax holidays.

Since TIV is now near the historic peak, I guess future growth will slow down. Let's say it reverts to 3%, which is the CAGR of the past 15 years (366k in FY2004, 573k in FY2019)

b) ASP
Due to the affordability issue, the increase in future ASP is constrained by the average income growth. Let's say 2%, which is my guess for the long term inflation rate.

c) grabbing market share
HLI market share has been stagnant. According to its earlier annual reports, its share was 33% to 36% between FY2007 and FY2012; and above 30% in FY2013-14. After that, HLI stopped reporting its share. From another source, I learned that in 1H2019 it has 36% share.

Assuming its market share stays constant, longer term motorcycle revenue growth rate will be about 3% + 2% + 0% = 5%.

<Vietnam associate>
The TIV in Vietnam has grown from around 2 million a decade ago to 3.29 million in FY2019. It contracted 0.3% in 2019.

Yamaha has around a quarter of market shares in the decade of the 2000's. It has 27% and 23% share in FY2017 and FY2018. It reported sales reduction in FY2019 but did not reveal the number.

The impression given is Vietnam business has also slowed.

Given both Malaysia revenue and Vietnam contribution are likely to slow down, the recent phenomenal growth in EPS (14% CAGR in the past 5 years) and FCF (27%) probably cannot sustain. This is because bottom-line improvement through cost-cutting and efficiency measures are not long term sustainable.

Does anyone agree or have a different idea? The other questions I have are

1. What are the competitive advantages of Hong Leong Yamaha Malaysia over Honda and other local companies such that it can maintain its market leader position? How might it gain/lose market share in the future?

2. If Hong Leong is truly good in this business, why can't it convince Yamaha to let it co-invest in franchises in other ASEAN countries beyond Vietnam?

Lastly, I repeat that the valuation seems attractive to me too. I just try to understand the growth aspect.

@kywoo,

Thank you for your explanation. It makes sense now.

I checked the latest annual report. In the 2019 AR, page 98, Note 14 shows that most of the cash and cash equivalents are "deposit with licensed banks". I suppose this deposit refers to the money market fund that you've mentioned.

Yes, I agree it is a bad policy to keep so much cash.

If the company continues to grow its FCF as in the past few years this happy problem will become even more severe unless the management declares special dividends or engage in acquisition.

Or maybe the management believes its FCF growth will not be sustainable? The dividend contribution from its Vietnam associates, which used to be in excess of RM100 million per annum, is rapidly declining.

Motorcycle sales in Malaysia are also approaching the historic peak so future growth is likely to slow?

What's the expected impact of the new minimum wage at RM1,200 per month starting 1 Jan 2020?

The minimum wage is set to increase year after year given the pledge of RM1,500 target set by the current government. Any idea how much automation is possible for furniture makers?

Can anyone explain this?

Refer FY2020 Q1 quarterly report.

1) The company cash pile generates very low interest return

Beginning cash and cash equivalents = RM1,039,941k
Ending cash and cash equivalents = RM1,190,067k
Average cash and cash equivalents = (1,039,941k + 1,190,067k)/2 = RM1,115,004k
Interest income for Q1 = RM940k
Annualized interest rate = (940k/1,115,004k) * 4 * 100% = 0.34%

The company has been accumulating cash for the past several years.

Given the management isn't in a hurry to distribute or deploy the cash, any idea why the management does not park the cash in higher-yielding FD?


2) High borrowing cost

Beginning borrowings = RM38,730k
Ending borrowings = RM38,110k
Average borrowings = (38,730k + 38,110k)/2 = RM38,420k
Finance cost for Q1 = RM1,142k
Annualized borrowing rate = (1,142k/38,420k) * 4 * 100% = 11.9%

The borrowing rate seems too high.


Even though the company has a cash balance of over 1 billion and borrowing of just RM38 million, the company incurs more financing costs (over 1 million in Q1) than in interest received (less than 1 million).

Do I miss something? Any idea?