Posted by observatory > 2023-01-18 14:24 | Report Abuse

In light of Hong Leong Industries's ambition to expand its cemaric manufacturing capacity, I checked out a few global leading companies.

Apparently Mohawk Industries is the world largest flooring company. 2022 revenue was about USD12 billion (about 1/3 contributed by global ceramic segment). Past 5 year operating margin and ROE are about 10% and 11% respectively.

In our region Thailand SCG Ceramics is number 3 in the world. Past 5 year operating margin and ROE are about 5% and 4% respectively.

From the casual check, ceramic tile business does not seem to be overly exciting. My guess is it also ties to global housing producion. Next few years will not be an exciting period, to say the leasat, given housing market has cooled in many countries due to higher interest rate.

Yes I believe Spain manufacturers will suffer from higher energy price. However for time being European gas price has returned to pre-war level. Of course higher energy prices may return later this year. But European energy crunch may sort itself out by the time HLI completes its manufacturing expansion.

Perhaps a more important consideration is the coming EU's carbon border adjustment mechanism. A high tech low energy consumption plant may offer advanatges against older plants by competitors.

But overall I'm not terribly excited by ceramic tile business as compared to the already proven motorcycle business. It's better for the management to return the RM400m cash to shareholders if it cannot achieve a double digit return.

Posted by Sardin > 2023-01-20 13:08 | Report Abuse

What I hope the most is payout the 400 mil to us. If they do not want to pay out, then better invest in something with 10% IRR or higher. The worst is to keep the 400 mil until our last day.

Posted by Sardin > 2023-01-20 13:11 | Report Abuse

After Ukraine - Russia war, a lot of tiles may be needed for rebuilding the country.

Posted by lionel messi > 2023-01-27 11:58 | Report Abuse

Plenty of cheap tickets these few days. Fantastic opportunity to buy into a quality company cheap cheap.

Posted by Sardin > 2023-01-28 21:57 | Report Abuse

This counter needs a lots of patience. Put only a little bit of chips on this counter so that you don't run out of patience.

Posted by stockraider > 2023-01-29 11:26 | Report Abuse

Yamaha bikes selling very well mah!

Should do well loh!

Posted by lionel messi > 2023-01-30 11:54 | Report Abuse

So cheap. Fantastic.

Posted by Sardin > 2023-01-30 15:23 | Report Abuse

I think lots of shareholders are afraid of the investment in Guocera expansion. The plan is still a proposal that has not yet been decided, as far as I know. I somehow have the feeling that this plan will not be materialised in the end and annual dividend payout will increase to 65-70 sen per year. If the expansion is cancelled, if I were Tan Sri Quek, I might consider to sell Guocera away, and the proceed and the accumulated cash pile will be distributed out, at least partially, to a healthy level.

Posted by lionel messi > 2023-01-30 15:55 | Report Abuse

Agree Sardin. But fear is an opportunity to buy into a good company at cheap prices. Personally, I am indifferent to the Guocera expansion. Am sure they have done all the maths. Just their in house usage of tiles by Guoco is already sufficient. no need to sell to third parties.

Posted by Sardin > 2023-01-30 16:59 | Report Abuse

I once thought that release of this news could stir up fear in some investors and that will create a buy opportunity. Looks like that now.

Posted by Sardin > 2023-01-30 17:12 | Report Abuse

But I think this dip of confidence will not last long due to what is going to happen:
1. Announcement of excellent Q2 result by end of Feb (I predict Q2 EPS to be around 25 sen)
2. Those scared investors will realise that the cash to invest in Guocera is only about a quarter of the total cash accumulated.
3. Higher final dividend to be announced in May
4. Once the new plant is completed and operate by end of 2024, EPS will increase. And when EPS increases, dividend payout is likely to increase to keep the same payout ratio. The effect of higher EPS and dividend that occur at the same time is likely to make a double strike on the share price where market will re-rate this stock at higher PE.
So any investor who want to invest in this counter should wait for the above four events to complete, and decide later whether it is worthy to hold on to the share after the predicted rise in mid or late 2025.

Posted by Fabien _the efficient capital allocator > 2023-01-30 17:48 | Report Abuse

Added more today. cheers!

Posted by Sardin > 2023-02-09 01:36 | Report Abuse

Hi Lionel Messi, how much net profit you think Guocera contributed to FY2022?

Posted by lionel messi > 2023-02-09 09:39 | Report Abuse

I have no idea Sardin. Am very new to the counter. Like it because of its motorbike business. Just hope Guocera will benefit a bit from the reconstruction in Turkey and Ukraine.

Posted by Sardin > 2023-02-09 09:49 | Report Abuse

Turkey and Ukraine a bit far. Ransport fee will be very expensive for heavy goods like tiles. Don't think it is competitive to export to these destinations unless customers are willing to pay for it but people in these regions are not rich.

Posted by lionel messi > 2023-02-09 09:58 | Report Abuse

Btw, how big is Guocera's business and market share? Are their prospects any good? Have nil idea abt tile business. Thanks Sardin.

Posted by Sardin > 2023-02-09 17:17 | Report Abuse

Guocera market share could be the top in Malaysia. But I'm not sure about its profitability.

Posted by Sardin > 2023-02-09 22:01 | Report Abuse

It was the top but not sure if it remains the top

Posted by Sardin > 2023-02-09 22:44 | Report Abuse

Hi Lionel Messi, according to my own calculation, it is possible that the amount of tile that Guoco consume might be able to take up all the supply from Guocera at the present stage but not sure after expanding to 3x of current capacity. However, the present tile business might be operating at tight margin. However, starts from FY2023 this will greatly improve and further improve in FY2024 due to a specific reason. No matter how, motorcycle business will remain the major contributor to the revenue and profit.

Posted by Sardin > 2023-02-09 22:56 | Report Abuse

The tile business is so intense that manufacturers are cutting each other's throat

Posted by lionel messi > 2023-02-10 08:45 | Report Abuse

Thanks Sardin. In a competitive business, the taikor with the deepest pocket will survive. Others will either fold or be acquired cheap cheap. Am sure Quek knows what he is doing. Cheers.

Posted by Sardin > 2023-02-10 16:23 | Report Abuse

What I'm afraid is he's not facing a local taikors now, but the one from China, big one.

Posted by stockraider > 2023-02-11 09:46 | Report Abuse

Yamaha is the top mkt cycle in msia mah!

HLI is the sole distributor loh!

Posted by Sardin > 2023-02-11 10:05 | Report Abuse

Hi Stockraider, we were talking about tile business

Posted by stockraider > 2023-02-11 10:20 | Report Abuse

I know, but 90% of HLI profits come from motorcycles mah!

Posted by lionel messi > 2023-02-13 08:02 | Report Abuse

No worries Sardin. Ang Mohs don't want to buy many things from China. They boycott, tariff and sanction them. Malaysia can benefit. Wonderful.

Posted by Sardin > 2023-02-15 18:59 | Report Abuse

This is my opinion on the new porcelain tile plant:
If the plan to invest 400 mil for a new porcelain plant can be executed with IRR of 4.55%, annual EPS might be increased by 4.45 sen. This investment may cost net cash per share to shrink by RM 1.27 per share to become around RM 3 per share. This is a better option to invest the cash when compare to money market fund that generates return at only around 1.05%.

Posted by Sardin > 2023-02-15 19:12 | Report Abuse

Earthquake in Turkey, I think has destroyed far more houses than that destroyed in Russia-Ukraine war. And there will still be a series of earthquakes at the same region in following years according to geologist. Rebuild of the area will need a lot of tiles. This may create a spillover effect to the Asia Pacific market.

Posted by Sardin > 2023-02-15 19:17 | Report Abuse

Another thing worth noting is that, tremendous reduction in sea freight compares to the past, is a very encouraging factor for exporting heavy goods like tiles. The big fat profit margin of the supply chain value just appear like that without needing to do anything.

Posted by observatory > 2023-02-15 19:31 | Report Abuse

Shareholders may tolerate the management holding idle cash in search of a strategic acquisition/ investment. Failing to find such target, the management is expected to return the cash to shareholders either via special dividends or share buyback.

If the management squanders its cash on projects with just 4% to 5% return, while the cost of equity may be about 10%, the management is effectively destroying shareholder value.

If the management could waste RM400m now, it could waste even more cash in the future. Instituitional investors will vote with their feet given the management's lack of discipline and poor capital allocation skill. I'm afriad that share price will take a big hit.

The Board has a fiduciary duty to all shareholders to scrutinize the project. It needs to reassure shareholders that for any viable project, their targeted return is double digit, and nothing less!

Posted by Sardin > 2023-02-16 09:23 | Report Abuse

Could it be a news purposely done to encourage investors to sell? So far it is just a plan, could be called off anytime soon right? Based on technical chart, this had triggered fear and the price once dip to nearly 8.70 at large volume but very soon got a strong rebounced, is this a war between the uninformed and informed? Look at the price movement and volume, I suspect someone is trying to control the price slightly below 9 by buying more but selling less but intense at the closing time. The purpose of doing this I guess is to collect the shares at below 9.

Posted by observatory > 2023-02-16 14:00 | Report Abuse

There is no way to know the motive behind recent price movement for sure. However, we can still make some logical deductions.

As early as 4 Oct, the company has already made public in its annual report that “Looking forward, GHSB is exploring the establishment of a new plant with fully automated technology that requires minimal manpower and low energy consumption to expand its porcelain product range to grow its revenue and profit base.”

Note the recent share price weakness (frankly it is just a drop of mere few percents) happened in late Jan, a full three months after the original announcement. Given the time gap, it’s not likely that insiders manipulate the news for short term trading profit.

Besides, Tan Sri Quek’s brother is the board chairman and his daughter is a board member. The Quek’s family controls 76% of the shares, or over RM2.2 billion in market cap. Their family are multi-billionaires. It doesn’t make sense for them to risk reputation and criminal risks to support publication of false news.

Besides, the “large” trading volume you mentioned totaled about a million shares only. It looks large because this is an illiquid counter. With a share price difference of just 30 sen, any would be manipulator would earn not more than 300k! I bet the Queks would not want to associate themselves with any such small-time operator. Not to mention it would be easier to manipulate a penny stock than this illiquid counter.

One more point. The way I read it is this is quite likely a done deal. During the AGM on 2 Nov, the Board shared that “a) The new plant will be built at the available land area of the existing plant located at Kluang, Johor. b) The total investment cost estimated to be around RM400 million. c) The new plant targeted to be completed by end of 2024.”

Note the choice of word “will”.

In my view, a more likely explanation is this. Looking at the shareholder list, there are a few institutional funds where each hold 1 to 3 million shares. May be at the start of 2023, as fund managers reviewed their portfolio, one or two of them decided to trim because the relative risk reward was no longer appealing. Shareholders who thought otherwise bought the shares they dumped. Hence the price support.

Posted by observatory > 2023-02-16 14:02 | Report Abuse

Honestly, I have a dim view on the way that Board/ management handles shareholders’ communication.

RM400 million cash isn’t a small sum. It’s worth two and a half years of dividends, or almost double of FY22 net profit. However, the management only mentioned the plan in one passing sentence in the Annual Report. There was zero mention of the investment cost.

If no one had asked during the subsequent AGM, we minority shareholders would not have known that the company plans to sink in RM400 million on a currently struggling business!

The Board/ management should recognize that the Quek family isn’t the sole owner. For the sake of better corporate governance, how difficult is it to disclose more timely info to minority shareholders?

Will the management dedicate at least one paragraph on this investment in the upcoming quarterly report? Please share your investment rationale in greater details with your other shareholders too! Tell them why this is the right strategic investment that will create long term shareholders’ value.

Would this be too much to ask for?

Posted by lionel messi > 2023-02-16 16:14 | Report Abuse

Well articulated Observatory and Sardin. My simpleton theory is that the upcoming quarterly results may not be up to expectation resulting in insiders selling ahead and hence depressing price.

Posted by Sardin > 2023-02-16 19:37 | Report Abuse

On 30th Jan I predicted Q2 EPS 25 sen, now the actual result revealed is 23.38 sen. Should be quite close right? :)

Posted by lionel messi > 2023-02-17 08:14 | Report Abuse

Your the man Sardin. Obviously it's a miss by your estimation buy is it really so? Not too bad right?

Posted by stockraider > 2023-02-17 08:36 | Report Abuse

Put it this way loh!
Instead of putting their cash in bank deposits earning 3%pa.....it is better for them to invest in the project loh!

The ROI of this project is 10% mah!

Posted by observatory > 18 hours ago | Report Abuse

Honestly, I have a dim view on the way that Board/ management handles shareholders’ communication.

RM400 million cash isn’t a small sum. It’s worth two and a half years of dividends, or almost double of FY22 net profit. However, the management only mentioned the plan in one passing sentence in the Annual Report. There was zero mention of the investment cost.

If no one had asked during the subsequent AGM, we minority shareholders would not have known that the company plans to sink in RM400 million on a currently struggling business!

The Board/ management should recognize that the Quek family isn’t the sole owner. For the sake of better corporate governance, how difficult is it to disclose more timely info to minority shareholders?

Will the management dedicate at least one paragraph on this investment in the upcoming quarterly report? Please share your investment rationale in greater details with your other shareholders too! Tell them why this is the right strategic investment that will create long term shareholders’ value.

Would this be too much to ask for?

Posted by Sardin > 2023-02-17 10:08 | Report Abuse

Hi Lionel Messi, I estimated the Q2 EPS by using my own model and assumptions. With that level of estimated / true EPS, I think it is good to hold and perhaps slightly increase the stakeholding when the price dip to 8.70. This is because:
i) the dividend is in the up trend
ii) earning has basically recover post-Covid 19
iii) the PE is still cheap probably because of investor's memory about the big impact during MCO but MCO has came to past and this one-off incident/effect is gone and investor's confidence will recover after another 1 or 2 quarter showing steady / solid revenue and earnings. When this happen, PE and share price will improve to above PE 10
iv) I'll further improve my model of performance estimation based on latest quarter report and I feel that there might be positive factors towards next quarter earning in the brew.

Posted by Sardin > 2023-02-17 10:14 | Report Abuse

The shallow dip of price despite moderately high volume shows that there are solid support to the price and that support is not likely from unimformed shareholders because this is not a hot stock. In other words, I suspect that the support come from "smart money".

Posted by lionel messi > 2023-02-17 14:47 | Report Abuse

Thanks Sardin. Very insightful as always. I suspect the impending targeted fuel subsidy can be a major catalyst for HLI as more people switch to motorbikes. My simpleton hypothesis as always haha.

Posted by Sardin > 2023-02-22 10:25 | Report Abuse

Target price RM 16.50 in next 3 years.

Posted by stockraider > 2023-02-22 11:38 | Report Abuse

Go for it mah!
Veli bullish loh!

Posted by lionel messi > 2023-02-22 14:18 | Report Abuse

OMG Sardin, RM16.50? That's wonderful. Well, you're the expert in HLI. Hope you will be right again.

Posted by lionel messi > 2023-02-22 16:19 | Report Abuse

Meantime, I have the easy task. Just buy amap.....as much as possible. Cheers :)

Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2023-03-30 16:37 | Report Abuse

Security LastPr PE DY% Divcts ROE ttm-marg
HLIND (Automotive) 8.96 10.06 5.8 52 14.02 9.3

Posted by Sardin > 2023-04-11 11:47 | Report Abuse

The project for the new RM 400 mil porcelain plant is real. Many old factory buildings have been demolished. I visited the site. I don't think there is a turning back for this plan. A bit disappointed because this is not the best dream I had with the company's cash.

Posted by Sardin > 2023-04-11 11:52 | Report Abuse

If anyone is interested can just drive your car to Guocera factory in Kluang. It can be observed from the road side. You can see piles and piles of rubbles at the construction site. I think it has started to burn money while the new factory takes time to build.

Posted by lionel messi > 2023-04-12 16:53 | Report Abuse

Have some confidence bro. Am sure they know what they are doing. This is not a con man, scammer company like many on Bursa.

Posted by Sardin > 2023-04-13 19:28 | Report Abuse

Hi Lionel Messi, I agree that is not a con man. The biggest problem is I feel he is stingy lah. Already so much cash why not increase the payout ratio to 90%-100% woh. Everybody is getting old liao. Already hold more than 5 years lo. This durian tree only give me banana every year.

Posted by stockraider > 2023-04-15 13:10 | Report Abuse

On the positive side.........HLI put the money to work........instead of passively leaving it idle in fixed deposits loh!

Long term will be beneficial mah!

Also hli dividend yield now, already quite good mah!