Posted by sense maker > 2014-03-12 01:07 | Report Abuse

Nice write-up.

A few points to note:
1) Warrants will never be converted till maturity date in 2020 unless they are traded at discount at any point during its tenure, which is highly unlikely. On maturity date, conversion of the warrant will take place only if the mother share is traded above RM1, the exercise price.
2) Subsidiary accounts are consolidated, not equity-accounted for by the parent company.

If the momentum of Hevea continues and proves sustainable, I will consider buying some.

Posted by kcchongnz > 2014-03-12 04:43 | Report Abuse

A good analysis of the furniture companies, well done. A few points here for discussion:

1. Latitude income and cash flow statement is for two quarters Vs full year for others. This is not a comparison of equal period.

2. Equity accounting?
The financial statements do not seem to show that LIGL or other subsidiaries are equity accounted except for associate companies. Why do you think so? Can company deviate from the accounting rules to use equity accounting for subsidiaries?

3. “The ability of Hevea to control the cost of its raw materials helped to justify the much higher Earning Capacity (Net Profit over Market Capitalization) of an impressive 19.3%, trumping its nearest peer Liihen’s 16.3%.”
Net profit/Market cap of Hevea is high is because of the relatively high leverage used. Do not forget that high leverage can cut the other way very badly in time of economic distress. Hevea faced it in the US sublime housing crisis.

4. Discount to market price
Could you elaborate the “discount” as shown in the table? What is the basis of valuation?

5. As the warrant is in-the-money now with the underlying share and warrant price at 1.29 and 70 sen respectively and a conversion price of 1.00, it is highly likely that they will be converted before expiry, although nobody is going to convert the warrant any time soon with a premium of 32% and 6 more years to expiry. However the probability of dilution of earnings is high and real has to be accounted for. One way to do it is to use the option pricing to value the warrant and deduct this value from the common shareholders.

For me the best thing about Hevea is its abundant cash flow and free cash flow which the management has been using it wisely to pare down debts. If this continues in the next few years, Hevea will be less risky with less debts and money available for distribution and other investments.

Posted by danchong > 2014-03-12 07:33 | Report Abuse

Agree. Hevea can be a rocket. Buying is a matter of timing.

"For me the best thing about Hevea is its abundant cash flow and free cash flow which the management has been using it wisely to pare down debts. If this continues in the next few years, Hevea will be less risky with less debts and money available for distribution and other investments."

kcchong put it wonderfully well!!!

Posted by houseofordos > 2014-03-12 08:03 | Report Abuse

Nice write up... With HEVEA's debts reducing, its EV/EBIT is also becoming cheaper at 6.3 based FY2013 earnings. As earnings are mainly contributed by RTA section right now, I am excited on the potential of the particle board section which is growing very fast as debt gets pared down (This section is contributing lower now due to the USD denominated loan impact). Looking at the EBIT, it has more than doubled compared to 2012. I have retaken position in HEVEA.

KC,
4. Discount to market price
Could you elaborate the “discount” as shown in the table? What is the basis of valuation?
Market price Discount to NTA

Posted by Tey Tian Foo > 2014-03-12 10:45 | Report Abuse

Hevea have proven experience in handling 2008 crisis. That is a plus plus point especially with "bumpy world economy" ahead.

Posted by Ooi Teik Bee > 2014-03-12 10:59 |

Post removed.Why?

Posted by sense maker > 2014-03-12 14:48 | Report Abuse

Hevea mother share is a better bet than its warrant as the latter has low gearing.

Posted by Ooi Teik Bee > 2014-03-12 14:53 | Report Abuse

Hevea-WB is a better pick according to my research. Technical chart of Hevea-WB is also better than mother share. Hence I recommend to buy Hevea-WB to take advantage of lower price and high gearing.
Thank you.

Posted by soojinhou > 2014-03-12 17:11 | Report Abuse

Thanks. I learned a thing or two from your write up. For example, I didn't know old rubber trees are difficult to source. But of course, my comparison was with plywood industry where the raw materials are definitely more difficult to source.

Posted by brendonyeap > 2014-03-12 18:58 | Report Abuse

mr OTB, since the market had proven you wrong on Hevea vs Poh Huat, so do u recommend me to accumulate more of Poh Huat or Hevea now? or Hevea WB instead?

Posted by sense maker > 2014-03-12 21:18 | Report Abuse

Gearing of Hevea-WB is 1.87, low. Premium 31.6%, moderate given its long tenor till 2020. This warrant is not cheap to me although I did not go to calculate the mother share's volatility and the theoretical price of the warrant.

Posted by Ooi Teik Bee > 2014-03-12 22:09 |

Post removed.Why?

Posted by sense maker > 2014-03-12 22:16 | Report Abuse

1.28>1.00: the market price of mother> exercise price. That means the warrant is in the money, not out of money.

Posted by Ooi Teik Bee > 2014-03-12 22:21 | Report Abuse

Conversion price = 1.00
Warrant price = 0.685
Mother share price = 1.28

Conversion price + warrant price < Mother share price = In the money
Presently, it is out of money.
Thank you.

Posted by brendonyeap > 2014-03-12 22:25 | Report Abuse

mr OTB, if u wana say this, then most of the warrants prices at the Bursa are out of money ie the warrants price + conversion price >> mother price.
But why arent the warrants price moving? can explain?

Posted by Ooi Teik Bee > 2014-03-12 22:32 | Report Abuse

Dear brendonyeap,
I told you many ... many times, please attend my training course. You will be a better trader.

Hevea-WB is moving ahead of mother share price, hence it is trading at 31.6% premium. If WB is not moving ahead of mother share, the price should be <= 0.28. Presently, it is trading at 0.685.
Cannot understand, please attend my training course.
Thank you.

Posted by sense maker > 2014-03-12 22:32 | Report Abuse

OTB's formula is premium calculation, and it cannot be equated with being in or out of money. This is a basic formula.

Hevea needs 2 more years to pay off its debt, now at RM84m. The best time to buy Hevea is 1 year from now, I estimate.

Posted by brendonyeap > 2014-03-12 22:46 | Report Abuse

I think i had explained to u over the telephone 2 weeks ago about my situation? I wanted to attend yr course, its just that my responsibility and help needs me always to be around in Kota Baru during that duration.

Posted by davors > 2014-03-12 22:53 | Report Abuse

there are many stock in-the-money maaaaa like freight, seg, hapseng, inari, ijmplnt, gdex, kpj, masteel, etc...
what OTB said in "12/03/2014 22:09" is very logical and reasonable for warrant traders...

anyway better don't trade if you don't even know to calculate it...

Posted by okdoke > 2014-03-13 09:34 | Report Abuse

jhoLow, thanks for the info. I am unable to decide to buy hevea since you have not publish 6 series. May I have the privilege to have all series email to me roslan602@yahoo.com thanks in advance

Posted by Money156 > 2014-03-13 10:10 | Report Abuse

If Hevea so good, why nobody buying?

Posted by Ooi Teik Bee > 2014-03-13 23:57 | Report Abuse

Posted by brendonyeap > Mar 12, 2014 10:46 PM | Report Abuse

I think i had explained to u over the telephone 2 weeks ago about my situation? I wanted to attend yr course, its just that my responsibility and help needs me always to be around in Kota Baru during that duration.

Ans : FYI, this class is full house. Very good response from I3 members. Thank you for your support.

Posted by tsuern > 2014-03-19 23:51 | Report Abuse

In or out of the money measures the difference btwn the mother price and warrant exercise price. Premium or discount measures the difference btwn mother price and (warrant price + warrant exercise price).

Once the mother price exceeds the warrant exercise price, the warrant is in the money, but it can be at discount or premium depending on its warrant price.

Eg, inari-W is in the money but at a discount, hevea-W is in the money but at a premium.

Posted by tsuern > 2014-03-20 00:00 | Report Abuse

Somehow the cos in the furniture sector are accorded a low PE. Wonder it is because the stiff competition in the industry. But the players showed good profit last year. Thks Jho Low for the well written article on Hevea as I have been wondering why the market is not giving the co due recognition. What Hevea need is coverage by Research Houses to do a nice report and high TP. Their Investor Relation need to work on this....

Posted by tsuern > 2014-03-20 00:09 | Report Abuse

As for the idea to push for early conversion of Warrant to repay debt mentioned by Jho, since this is a long-life warrant expiring 2020, warrant holder are unlikely to convert early. If mother rise, warrant will also rise (at a bigger percentage) so no need to convert. That's the beauty of derivative. Of course, the major shareholder (if he is also warrant holder) can take the lead, but will he take his own money to repay co debt? He will be better off making from the increase in price of warrant. Anyway the Q4 result (cashflow statement) showed that the co can repay 20 over million debt every quarter so the co shd be debt free by end of 2014 - if sales go smoothly

Posted by brendonyeap > 2014-03-20 07:33 | Report Abuse

TQ Tsuern for ur lengthy explanation. Yeah i think Hevea is in a good position now for progress , its just a matter of time for it to grow. We shall wait for the next quarterly report in May 2014.

Posted by talkking > 2014-03-20 22:37 | Report Abuse

identity theft lah..the real jho no need beg promote the stock...just buy buy buy like najib son and sell later..so senang kena tipu by a name

Posted by Tey Tian Foo > 2014-03-21 11:40 | Report Abuse

The market's confident with Furniture sector have not fully recovered yet. If the furniture sector continue the very good performance, should be able to justify higher PE soon. Nevertheless, most of the shares have run up quite substantially compare to 6 months ago. Hevea, PoHuat, Latitud etc have run up by almost 100% in six months time which is very good.