SERIOUS Investing

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2022-08-21T14:53:00.002+01:00

Why I bought Kossan

2021-05-03T02:58:00.003+01:00

If we noticed the market nowadays, it has been much more on sentiments rather than being rational. There's a lot more trading activities today where even the large funds are taking part. The emergence of retail players a.k.a. the "Robin Hood"s investors is allowing much more purchases based on sentiments. There are possibly tonnes of Telegram and Youtube groups advising people where and how to invest. When I switched on youtube channels on investments, even Gurmit Singh (Phua Chu Kang) in partnership with a young investor advisor is involved.

With this I would deem that there's opportunities to search for value. The rubber gloves companies do not need any more introduction as there are just too much "noise" out there. On my part I see that although vaccine is on the way and few countries (Israel, UK, maybe US) have shown good progress from the vaccination program, I believe it will take years before COVID will be fully addressed. In the past I was just too optimistic. Even as at now, many countries are seeing fresh highs as people get more agitated due to the length of the pandemic and they just take less precautions.

Even most economies could not bear the brunt of inactivities and they just have to open up. One do not need to look far but at Malaysia. Many governments are taking the stand that they just need to allow economies to work for its money (with conditions).

The first round of MCO, there was money being ditched out to people (Makcik Kiah), Second round there were more funds but lesser amount. Moratorium for loans were introduced and practiced during the first six months. Those have stopped. Now, it is much more targeted assistance and even then they are in small bits and pieces.

I believe those similar situations are being practiced in many other countries which are developing when the virus is still rampant. In India, I was expecting the collapse of the health situation many month ago but it seems that they were contained - possibly because of people were willing to adhere to SOPs - and human beings especially from the democratic block were only willing to adhere to so as much. Now we see the brunt of what COVID can do to a country like India (with 1.3 billion people), poor developing country and with lack of basic discipline.

Hence, COVID is here to stay for a while even with vaccines.

For gloves, there is no doubt there will be more companies starting to produce more. But the demand will still be outstripping supply until to a point when COVID is addressed. Even then, let's think through - with a pandemic this scale, many countries would be looking at relooking at their capacity to address the next pandemic. I do not think gloves will be much oversupplied for a while because of this.

I know that certain countries would be looking at gloves self-sufficiencies at some of point of time but there are just few countries which are manufacturing scale developed - which is why Malaysia is one of the beneficiaries from the gloves manufacturing capabilities.

Due to the above, I have hence bought Kossan (2200 units) for the Felice's Fund.

From 2 months ago until now, I have also sold some 3A and redeemed TA due to its delisting.

As for the latest fund position, it is as below.

Purchased Top Glove

2021-02-25T15:34:00.004+00:00

While in the past, I was critical but unsure of the company, this time around I think it is grossly oversold. The company had not paid much dividend as yet and has been repurchasing a substantial amount of its stocks over the pandemic period. The company remains to be the largest gloves manufacturer and is probably the company that benefitted the most in terms of revenue and profits due to the pandemic.

This is probably due to the aggressive nature of the management where they had increased capacities through organic and acquisition growth. The super abnormal profits have given opportunities I believe for many of the gloves manufacturers to improve on their efficiencies in the long run as they took this period to push more automation as well as improve on the living conditions of their workers especially the foreign workers.

I think given that Top Glove is trading at RM43billion valuation, it could be cheap. Post pandemic which for many countries could be seen by end of this year or mid of next year, we will potentially see restocking as these countries do not want to be shocked again by another similar situation. I think these gloves companies despite the coming on stream of other new entrants as well as much increased capacities of the existing company (including China and Thailand) may still see the plants running at full capacities.

I have hence bought 1500 units of Top Glove at RM5.19.

Bought Three-A Resources, Sold Freight and latest

2021-02-18T15:49:00.002+00:00

I have decided to make some changes on my holdings by first selling all 17,500 units of Freight Management which happens to be a very well managed company. Even then, I felt that the recent rise of logistic companies provided a good enough price for me to sell.

From that sale, I decided to buy 10,000 units of Three-A resources (3A - 0012) as I felt that it has not been much followed by many investors. Typically like the business as it is trading at below 13x PE. So who says that we cannot find value during the time when some sector's valuation have gone very high - technology sector mostly.

I think it is attractive given the sustainability of its business - i.e. caramel food applications.

At the same time, I have converted all the 136,000 units of WCEHB-PA into WCEHB.

Below is the latest holding.

Two factors which could push DNEX higher

2021-02-16T07:46:00.001+00:00

Well, tis the season for speculation. I do not really advise on speculation.

However, when I read some of the exercise regarding DNEX, there are some obvious reasons which somehow things may happen given the volatility.

Purchase price and manner the payment is made to the 60% of owners of Ping Petroleum. DNEX is buying Ping and one portion is paid by cash, another via shares.

The payment in shares as above is based on the share price 5-day VWAP of DNEX shares 2 business days before completion date. The exercise is yet to be completed, and the higher the share price, the lower the payment of shares is to be made to the sellers. In fact, if it exceeds certain share price, DNEX need not pay in RPS. Seems like at the moment given the share price, it need not issue RPS to the sellers.

Reason no 2.

DNEX still needs cash although they have raised some substantial private placement funds (don't know to who) at very cheap price of 30 sen and below.

DNEX WD's exercise price is at 50 sen and for warrant holders to exercise, it needs to be substantially above 50 sen. I would not exercise if the price is trading at 52 sen, if you know what I mean. Why take the risk.

BTW, the maturity date for the DNEX WD is 30 Jul 2021. Few months to go.

Well, I still use the word "could" as anything can happen. Shares can crash. DNEX may find other ways to raise more cash. Ping Petroleum's exercise may not go through. Silterra's deal may not happen. For example.

Whatever it is DNEX wins

2021-02-09T01:35:00.009+00:00

I woke up this morning listening to the news that the world is in short supply of chips as there are just not enough supply to meet demand. At the same time, the largest chip maker, TSMC has cornered 70% of the MCU market - not by design but due to their technological dominance where the rest of the competitors could not catch up - except for probably Samsung.

We have heard of there could be a delay in shipments of motor vehicles as when cars are fitted with more semiconductors when the demand has way outstripped supplies. Anyway, as in my previous article, I was critical of Malaysian companies like DNEX and Green Packet given the leading position to purchase the only fab owned by Malaysia - Silterra. They do not have the capabilities of running a fab.

I also woke up in a headline that says, Silterra is sold to DNEX - retaining the ownership in Malaysians hand. Well, it is a pride thing. In that deal, DNEX and CGP of Beijing on a 60%:40% basis has bid for Silterra which is now owned by Khazanah.

DNEX does not know how to run Silterra, but the management of Silterra knows how to run the old 130nm fab as they have been doing it for years. Now China is really in need of chips and fabs especially given the Trade War situation as it is on the rush for owning and acquiring technologies such as a fab technology.

It is old but still needed especially that China will just take anything as long as it is still running and producing well. It may well be investing into a more current process technology and I believe given the technology maturity, the Silterra's team will know how to run it and make it working.

In the long run, on paper it is still owned by Malaysian company and it is just like the Proton Geely relationship where we for patriotism sake, we have 60% of ownership without ability to control the demand and supply while the other will control in terms of management and technology. Perhaps in this way, the Chinese would prefer the arrangement as they have a strong say.

Anyway, it is positive for DNEX - don't look at the financial fundamentals as DNEX will not have the capability to buy Ping Petroleum, invest in Silterra, expand it further as I believe behind the scene there were already planning, I believe. Otherwise Khazanah would not have sold it and let the fab grappling with liquidity issues. It would have been a political suicide.

What nonsense is happening around Silterra?

2021-02-05T02:38:00.003+00:00

We know that Silterra is a problem child for Khazanah and ultimately our country. It has been bleeding money since inception probably around 2000. Although the idea came noble, the execution was not. It probably has lost us money to the tune of more than RM10 billion (I do not think anyone keep track as it is already a sunk costs). While on the financial side it was never a win, on the technology acquisition side it did some justifications. Malaysia now has some knowledge of how to handle a foundry albeit a very old one. We also have now people working in several foreign owned foundries most of them in Kulim and Penang.

While we have thrown substantial sum of money, for a long period we have tried to keep the fab afloat running on positive EBITDA - more or less cashflow positive. But we know that running foundries on positive EBITDA is not the right measurement as foundries capital costs are high - latest technology can go up to $20 billion (a 5nm or 3nm fab). There is no point for us to catch up.

While it has been a sore thumb, today, foundries have become an important asset in return thanks to two things, firstly IoT, IR4.0 autonomous vehicle etc. - as some businesses are not chasing for Moore's Law where the theory is that semiconductor is reducing half in size every 18 months. So old fabs have value. Another thing is China. They are hungry (all the while) and especially today where US is blocking them off from foundry technologies. So an old fab in Silterra is becoming an asset back albeit lower value than the newer fabs.

However, what is there to do with DNEX and Green Packet? Those two companies do not know how to run a fab! They probably have not stepped into a fab before 5 years ago, until now. Why is there a need to sell to a Malaysian company. If one notice both deals are with a China partner. The Chinese would rather work with one which do not need to know how to run a fab - hence DNEX and Green Packet. It is a flipping exercise if I may call it.

We have people and companies in Malaysia which may be closer to knowing the intricacies of running a foundry - even that is tough. I can probably see that the deal would have Silterra providing support for China's demand for chips but why not sell direct? DNEX and those other Malaysian companies do not know much. One is in some software support and Oil and Gas - another gotten some China's AI technology and try to deploy them in Malaysia.

Get on with real stuff and be direct. We have made mistakes on this for 20 years and it still has not ended.

GameStop Top Glove Short Squeeze: Who is Right Who is Wrong

2021-01-31T06:12:00.001+00:00

By now almost every news either online, daily or weekly, they would have mentioned something about GameStop. Personally, I have never heard of this company before prior to this. The thing about this event is that it created a movement where seemingly for once the small guys have gotten ahead of so called the bad guys - which is the Wall Street guys.

If we look at the price chart below on GameStop - Never in my life I have seen stocks moving in this kind of trajectory over my 30 years of investing life. The thing about this story is that GameStop did not discover gold, oil or have gotten a cancer drug approved. It is a company actually suffering from the current behavioral challenges as gaming has now moved into online and homes from its traditional distribution channel.

The story about GameStop is pure adrenaline, power of social, smartness of some and ignorance of the new batch of retail investors combined. Adrenaline is because of the hate towards Wall Streets where the community had never liked Wall Streets and they wanted a way to get back. Obviously, it was further pushed by several social media evangelists. The funny thing is that people like Chamath Palihapitiya, Elon Musks themselves do not really belong to the Main Streets group but they did inspire these new investors to jump in. The new group who do not clearly understand the meaning of valuation and business and investments. They are just followers.

In Malaysia, a similar group albeit smaller is trying to create a similar movement through Reddit. They claimed that JP Morgan in the runup to short sell Top Glove starting on 2 Jan 21 had tried to downgrade the stocks valuing the company at a valuation of RM3.50 (at the time, Top Gloves were trading at around RM7.00) which was way lower than the price provided by other investment houses. On 2 Jan, when short selling were allowed (with much limited conditions), Top Glove's stock were sold down with the short selling playing a substantial part. The Reddit group under Bursabets initiated under a pseudo-name Revenant claimed that the company was wrongly targeted as it wanted to short the stock.

After that rally call, Top Glove's stock had a runup by as much as 13% the following day. Both Bursa Malaysia and SC had asked the investment community to be cautious of social media chatrooms not long after that.

Now my question about all these is, who are in the wrong due to all these?

In the GameStop's situation, some guys saw a huge weakness in the shorting of the stock. It was shorted by 140%, obviously way over-shorted (by this actions, we see that by allowing the stock to be shorted way more than the stocks available, it is already wrong) - and the group that rallied the retail investors knew that by getting the community to come together, it can cause the shorts to get into trouble. There is no fundamentals in getting the stock to $400 a stock, but so is the over-shorting of the stock to 140%.

In Top Glove's case, yes we know that JP Morgan is a licensed advisor. It is allowed to provide a call even though the advise can be totally ridiculous? Then are they allowed to short sell the stock even after making a controversial call? (We do not know for real whether JP Morgan did the short selling, but we know that several foreign funds did short sell Top Glove and JP could have acted on their behalf)

Bursa and SC will not apprehend JP Morgan for sure. Now my question is, can Bursa and SC get all these so called licensed advisors to be fair. Can they get these guys to not pick when to release their analysis i.e. releasing to their clients first then only to the public? Can they get the investment houses to not be making any trading on the stocks which they make a call? One must know, in the social media world, the calls by these licensed advisors can be even more assertive and viral.

Gloves makers: Dividends, buybacks and share dividends are the way to go

2021-01-08T03:24:00.002+00:00

When I wrote my earlier piece (around April to May 2020) on the gloves, I think few sees what's coming. It was huge profits and prices but not even today's gloves price. Even during the early days some of the founders of the gloves makers were taking profits by selling some shares. (I remember Hartalega's Kuan and Kossan's Lim were selling (see below) some shares, and I do not think it was to mislead the market. Why would they?) Some of them bought back the shares later on.

Today, and until today the prices of the gloves (not stocks but actual gloves) have gone through the roofs - up to 5x its previous prices. Whether these prices are here to stay, I think the big 4 gloves makers are not able to provide a definitive answer. What is more than certain is this. Top Gloves is probably expected to make Net Profits of around RM12 billion to RM13 billion for its FYE 31 Aug 2021. Remember it used to make around RM400 million to RM600 million during a normal year. That was close to 100x its market cap today. Again, to highlight no Malaysian company has enjoyed before such profits in a single year except for Petronas the parent company.

It is hard to predict whether how fast it will become normal again. What is known is this. Gloves used to be a 3D (dirty, dangerous and difficult) business where Malaysian workers would not want to be into. Some of the quarters as shown are outright not livable. Malaysia has been using foreigners for the business.

Today, because of the cashflows that they are generating the guys are doing it differently. They are investing huge amount on automation, improving living quarters etc. Those were not so possible in the past. Hence, these are the changes that we will see in the near future.

Despite having so much funds, it seems that the world because of the pandemic just do not produce enough gloves for consumption. For this period, it seems that it is hard to replicate the factories and move on to produce more just to meet demand. At the same time, the glove makers are generating so much cashflow - an amount they have not seen before.

Top Glove is expected to bring in net free cashflow of about RM10 billion in the next 12 months. These are funds they may not need in the near term. So what should they do about it. I know that people have been critical of them when in just a few days they have spend some RM220 million just to do buybacks.

I think given the funds that they have this is just what they should do. Glove makers do not need funds like the highway or O&G guys. All the gloves makers - large ones especially - should just do all the 3 - i.e. cash dividends, buybacks and share dividends or even cancelling out their shares.

They can be done variably. When they think the share price is cheap, do buybacks. When it is not so cheap, then as what Top Glove has announced, do a aggressive dividend disbursement. Imagine, if they make RM12 billion PAT, 70% is just RM8.4 billion. There is still so much funds as compared to the past for them to use it for operations.

I am not sure how long this kind of cashflow numbers will continue to be enjoyed but by doing the dividends and buybacks they are bringing the right value to its shareholders as well as cashflow into the system.

What to expect in terms of valuation for the gloves makers

2020-12-17T09:21:00.003+00:00

During this pandemic, the gloves makers have made so much cashflow that it has not seen such money in their business lives. As an example, Top Glove just made net cashflow of RM2.8 billion based on its latest quarter alone. As a comparison, a similar quarter ending 30 Nov 2019, it was generating negative free cashflows.

Based on their own projections, prices or Average Selling Price (ASP) for gloves are still on the uptrend so much so that it is estimated that it will not be impossible for Top Glove to make as much as RM15 billion a year, possibly much of them would be net cashflow. Other gloves makers especially the Big Four including Hartalega, Kossan and Supermax are also enjoying such numbers albeit smaller net cashflow as against Top Glove due to their lower capacities.

After the shocking COVID-19 event which basically caused havoc to the world for almost the entire 2020, it is very difficult to project what would entail for 2021. Will we be able to deem some time around 2021 to be post-pandemic era?

What we possibly foresee is that the number of COVID patients will not reduce in the next 3-4 months especially during the winter season. At the same time, many countries - Malaysia included will not be getting vaccine supplies until at least March 2021.

Several developed countries which have the potential to control the vaccine supplies through their manufacturing and production base will potentially be able to get half of its vaccine supplies by mid 2021. The report for vaccine seems promising but how will it affect the gloves makers come 2022. It is very much an unknown.

From reports, it is provided that the stocks for gloves for many is less that a few weeks. I would think that due to the demand is surpassing the supply by a tremendous amount at the moment, some countries may not have ample supply of gloves. Companies especially the large gloves makers have been able to sell some of their produce at spot prices - which at the moment is through the roofs. I would think it would be richer countries and those that needed the supply of gloves the most urgent would have to resort to spot purchases.

For the gloves makers on the other hand, the ones that are able to sell at spot prices would be the ones that do not have their supply committed to a particular buyer. That is why we see the first few months some of the players are not enjoying as high a profit as we see now. Potentially we have yet to see the best quarters yet among the gloves makers as reporting is about few months late from the actual transaction occurred.

How do we then evaluate the valuations of the gloves makers then? Many reports that I read take average of 5 years projections and compare them to past valuations. As an example, they would take the average of net profits for 2020/2021 until 2024/2025 and compare to the previous valuations that are usually given to gloves makers. As an example, if the glove sector is provided with 25x PE on average, they would take the projection numbers for the next 5 years and multiply by the past PEs.

I think this is not the correct method. Why? This is because the numbers for gloves makers now would be very different from the past 5 years. FY2021 and FY2022 numbers alone for Top Glove would be more than what they would have made in the past in aggregate. The correct method is to try to project the future cashflow albeit it being very difficult to project. Try doing it over the next 40 years.

While demand will far outstrip supply, there will be a period in the next few years where that supply numbers will be in parity to the demand. Perhaps by then the total production of gloves would have doubled the current supply todate. Still it is worth a try to project. Well, I did that.

Based on that method, I think Kossan and Top Glove are the most attractive priced and they may still be at the notch of being undervalued. Why? Kossan at RM5 (or RM12 billion) is the cheapest in comparison to its potential profits. Top Glove on the other hand because of its sheer capacity, it will benefit from being able to sell the most at spot pricing and it will enjoy the most due to its excess capacity as compared to the rest.

Hartalega, while it is the most efficient glove maker all the while, because of this pandemic, its advantage is diluted. At valuation of (RM12.40 or RM42.43 billion at the moment, I think it is the least attractive.

Supermax is the hard one as it is selling using the Original Brand Model where during times like this, it will enjoy the most margins. It is however hard to predict for how long it will enjoy those better margins and that also depends on the demand in the future. If we notice, it was the one which was least profitable in the past.

On the other hand, I agree for the gloves companies to do share repurchases (despite apprehensions from some press) as besides paying dividends what would these companies do with the huge excess cashflows. By repurchasing its own shares, it would be able to at least reduce the volatilities as everyone is trying to project the valuations of the stocks and I believe the onus is onto the management to know what is best. Also, I do not think they do it to support their own share prices as they have so much money this year for them not to support their own wealth.

Of course we should not print more money!

2020-11-19T10:08:00.003+00:00

When one youth leader who happens to be a Deputy Minister suggested that Malaysia should get Bank Negara Malaysia to print more money or in another sense, "helicopter money" it felt like, how come nobody thought of this. His proposal was, to get the BNM to create more money, provide them to the affected through perhaps subscription of debt issued by government. Here we go again, how come nobody thought of by drinking 'warm water" it should have killed the corona virus?

How come nobody in this world can "think outside the box" and solve these twin problems. COVID-19 and the economic disaster that comes with it. To be fair, there are countries that basically print more money, but they are not physical cash. Those countries the most famous or notorious among them - United States when its Federal Reserve literally increased its balance sheet size by a multiple of 2 from $4 trillion to $8 trillion in a matter of weeks sometime in March. The Fed then subscribed to debt issued the US government which were then be handed out to the groups in need. On top of that, there were a contentious debate where at one point of time the Fed were even considering purchasing debts issued by companies.

Why US can do things that we cannot do? At the time, when the Fed chairman came up with the bold move, it was rather scary but that action seemed to work. Well, during then. Firstly, US will get away with these action because the greenback is largely the reserve currency for the world. Because many countries, Malaysia included are holding US dollars as part of its reserves, we cannot afford for the currency to depreciate - in the short run, especially when the world are grappling with COVID together. There is basically nowhere to run as all countries is facing a similar issue.

For many, whom would have seen how the Fed had reacted, many alternative assets were deemed to be safe haven - there we see people rushing for gold, bitcoins, shares especially the less affected ones - as many do not trust US dollars anymore. But at least that is the US currency. We just cannot let it fall.

What about RM?

Well, we are not those currencies such as USD, Euros, Swiss Francs, Japanese Yen. As someone pointed out, Malaysia is more susceptible to follow the Zimbabwe's route if we do the same. Someone who follows bitcoin will understand the brilliance of the creator - where he or she understands that anything that is created with a finite number will be of value as long as it becomes a currency where people would want to hold. My belief is how many digital currencies can people create. That is infinite. Hence, we do not know human being's limitation to create. While Bitcoin can have a finite number, digital currencies itself is not. The debate is still on.

If Malaysia prints more money, we will be a small developing country which many around the world would not put the trust on. We are possibly doomed economically. Inflation would be uncontrollable, and Ringgit would be worthless.

What should we do then?

At this time, there is no choice but to increase the supply of money and hoping that its velocity of spending improves as many are just unable to spend, given the fear and lockdown included. We have seen the success of loan moratorium. During then, we still were able to see people are looking for ways to spend more as they suddenly have extra cash. While some would argue that one should not pamper those who are less affected with more short term cash and only concentrates on those that are affected, I do not agree. Provide loan moratorium to all except for those whom request for exemption. Do it the other way round! Rather than just give to the ones that need it. Extraordinary times call for extraordinary measure. For a while, take away the thought that people can misuse the leeway of extra cash as we need all the cash rotations that we need.

We need the ones that have jobs to support the ones that have not. That is not done by increasing taxes but get the people to spend more. Extend loans by another year. After all, the year 2020 felt like it is almost a non-existence in terms of growth.

Increase working age by at least another year i.e. from 60 to 61. Better still 62. We should get people to feel that they can have the opportunity to work longer to save the lost year(s). The feeling itself for many helps. Whether people really work until 62 is another matter. At least they have that assurance.

For those measures to work, I believe the banks would be able to absorb, after all I think during this times, new loans issued should be slower as banks would be more careful. It will not be a lost to the banks. For the hire purchase losses, maybe we should change the rules as the 6 months free interest should have stopped and the banks have already absorbed the losses.

With us getting the ones that still are capable to help the ones that have lost their jobs through consuming, I think that will help to create more jobs unintentionally. (Maybe intentionally)

There are however those that are affected even without these consumption fueling measures. Those are the airline workers, school bus drivers, school canteen operators. I am sure, the government should have enough information to know who are affected. During these times, we should not be lazy to go down to the details of those that are affected. Money should not be given free to all, but the affected many. The EPF's decision to allow drawdown for those affected is the right one, but with more of the budget that are given to those affected, I think the EPF's drawdown will be less needed as these should be deemed as long term savings.

Another thing that we should do is to convert the credit card interests into at least 36 months fixed loan with much lower interests - not more than 6%. These are times where banks should not take advantage but to extend their loan loss provisions. Put a cutoff period and limit. Limit that to 2 credit cards per individual or by amount. I would think the banks today have no problem with deposits, just that it will have higher loans provisions in the future. Still it should be able to withstand.

Like many have said, these are extraordinary times. We cannot just do the same old, but definitely not helicopter money!

Why the Ecoworld-UEM deal is a better deal for UEM than Ecoworld

2020-10-06T08:02:00.004+01:00

We have been hearing that Ecoworld is looking for financial support through some of the blogs and comments that came from political parties. It has been deemed as a rescue on Ecoworld as the company has a substantial debt that it is looking to pare down. For a while, as Ecoworld has been building its base, it has leveraged, and now it seems this has taken its toll on the company during the worst of times to leverage.

Property market has been bad for a while since probably 2015 when Bank Negara reduced the allowance for retail debt making the property market went spiralling down. While it has taken its toll, Ecoworld with its very confident management continued to grow, partially from its own money with debt together.

I for one have been impressed with the way the group has been building its brand. Today, it is probably one of the better brand in Malaysia. Of course, with the depreciation of oil price in 2016 and Covid in 2020, these events have been problematic for Ecoworld. MCO itself has caused the company to not be able to build its properties for almost 3 months. People will be careful in buying properties given the situation moreover. Additionally, it will have more challenges selling its properties to overseas client.

Ecoworld's latest balance sheet position

As seen from diagram above, Ecoworld's balance sheet is not in good position. However, to get out of it should not be through merger as I would deem it as a rescue on UEM rather than Ecoworld.

I still think Ecoworld can get out of the debt trap as long as it continues to deliver on its projects and through making a decent amount of new sales albeit lower as compared to previously. It claimed that it has RM3.36 billion of unbilled sales. Given that situation, I still think it is a situation which it is able to solve. If it is able to deliver on its projects, I believe the new injection of funds will materialise. It needs some time to show the results.

Let's visit the situation that UEM Sunrise is in. For a while, UEM has not had a strong management as well as performance. It is much more dependent on Johor than Klang Valley. Its gearing position is not much better off than Ecoworld although its liquidity position is better with RM1.35 billion cash. Because of UEM is a much older company with past records from the old Renong days, its book value is probably understated. That are the two advantage given that Ecoworld is doing an exercise with UEM Sunrise.

However, as we know during times like this liquidity is important but in the longer term it is the deliveries of sales, projects, better pricing etc.

What Khazanah is taking advantage of is the predicament that Ecoworld is facing and it is taking action. By proposing a merger, it is taking advantage of its long term problem by doing a merger which should not be deemed as a rescue.

For Ecoworld to take up this deal, it is probably facing more challenges in the future as while Khazanah has been in the past taken its hands off from the management, it does not mean it will not meddle especially on matters such as land issues and development.

Hence, I think while it is for the short term resolve of its issues for Ecoworld, I do not think it is a good deal for Ecoworld in the long run. For UEM, it is quite the opposite.

Good twist of questioning by Noelle Lim on BFM on Sasbadi CEO

2020-10-06T01:41:00.003+01:00

I liked the way Noelle changed her question when she interviewed the CEO of Sasbadi. I am sure that the CEO was not going to be frank when he was interviewed especially with questions on the competitiveness of our students especially on PISA test. He was questioned as well on teaching English in Maths and Science and it was clear that the CEO was not going to be frank preferring to protect his business rather than being forefront on it.

On the prospect of Sasbadi, to be frank given the experience that I have gone through in teaching my children during the MCO, I do not see a positive light of school text books. In fact, during the short period as mentioned by the CEO, the business is affected due to their inability to push their books through the schools. This means whenever a parent like me go to a bookstore, we have much more options. In fact the options is even more prevalent when I go online.

Quite a number of the old traditional business channels and methods will be affected especially now the choices have opened up.

Highway trust is probably the way to go

2020-08-30T05:16:00.000+01:00

One of the failings of the previous PH government was that it went full length for its fulfillment of the manifestos without thinking of its consequences. One of it was the abolishment of tolled highways which obviously is not possible. During the 22 months in power, there were 2 main proposals - lengthen the terms of PLUS highway while reducing and maintaining the rates and buying over the Gamuda owned highways. The first they managed to complete while the second I think it would not happen given the situation today.

The plans I would say were not thought of holistically. We now hear that the government is proposing to put together a trust and plans to put in total up to 35 highways into the trust. If I am not wrong, this would make more sense if the government is trying to reduce toll rates for the highways.

Although the plans are still vague, in my opinion the following would be part of the plan.

The Malaysian highways as I have mentioned many times are complex asset and shareholdings situations. The major shareholders of the highways are consisting of important players such as Khazanah, EPF, PNB, Gamuda, IJM and many bond holders. One must know the holders of highways actually are people's funds to an extent that Gamuda and IJM are held largely by Malaysian funds. We cannot terminate the contract as it would have impacted all of the above - government and people ownership related - not to say the sovereign trust of a country. How do we address the situation without impacting the players actively. A trust fund!

How should the trust fund work then? It is important to note that I am only 1 single individual whereas the government has many corporate thinkers and planners looking at it. Lets say from the 35 tolled highways, the total capital value is RM100 billion. To make the trust workable, Malaysian government would create a something like RM25 to RM30 billion highway trust funds - bond and equity (mainly government) combined. These money would only do 2 things - invest into existing and future highways, and pay dividends to bondholders and shareholders. The shareholders would be Malaysian government largely.

Additionally, the trust fund should not be profit oriented and it should also not be operator of highways. Its role is to purchase off about 20% to 30% of all highways from the current highway operators at the current market rate (with small discounts). The current highway operators shall be allowed to maintain the highways themselves while also be holding a significant controlling stake. This means that the highway trust through the government is a participant of the business but they are not involved in the daily decision making.

How does it help to reduce the toll rates then - where it can help the rakyat?

As most highways are usually profitable and cashflow accretive, they will pay good dividends to the shareholders. The trust fund being a shareholder will be receiving those dividends. The money received can be reinvested into the highways or it can be used to fund the subsidy on the price increase of the toll roads. As we know, many of the tolled highways are already being subsidised. In the past, it came from the government coffers directly i.e. from the yearly budget. Through the trust fund, it can still be directly from the coffers (i.e. partially from the dividends received) or through the extra unutilised funds from the highway trust fund.

Another additional structure which the government can do is to create a REIT like trusts for the highway owners. Through this the already completed highways (mainly) can get this highway REITS listed, where the government highway trust can invest into. This will enhance the capital as well as the bond market as now those are lacking.

Highways are allowed to still compete but at least they compete in the areas of service rather than price. Future and maybe even current technologies such as e-payment system will enable this concept to work better. I do not think in future highways tolling will be fully eliminated but perhaps some small fees will be charged (much like parking charges by municipals) to upkeep the roads. These revenue can be forwarded to the highway trust fund.

Through this method I think the concept of managing and keeping the tolled highways manageable for both users and subsidy providers (government) can be better afforded.

Why is the stock market doing fairly well, while we expect economy to go into recession

2020-06-08T03:37:00.001+01:00

There is no doubt the economy globally is getting into a recession. Technically, recession is when an economy faces a decline in two consecutive quarters. Most economies are facing lockdowns situation between the end of first quarter and second quarter of 2020. That by itself would have caused a technical recession for the 2 quarters. For some economies that are dependent on foreign purchases of our services, goods (such as Malaysia, Singapore, Thailand), even if we do well for our local economy, lower demand from overseas would cause a recession nevertheless. What is in most economists and government would be not to allow prolonged recession which is what we termed as depression. In short today, the argument is to whether we are moving into a depression or not and how to prevent it.

This time around people have been shocked by the so-called disconnect between the general economy (which we called Main Street) and stock market. In US, while technical unemployment is registering close to 20%, its Wall Street (stock market) is actually registering record numbers (Nasday which is mainly for technology stocks). Many stock markets although have not been registering as good numbers as Wall Streets, it nevertheless has rebounded and seemed to be doing well. KLCI which is the main blue chips stocks in Malaysia, is not at 1,556 points after touching a low of 1,219 on 19 March 2020, days after the Movement Control was announced. Our peak was about 1,878 points, the period when oil price was still registering above USD100. Hence, I would call it that the market is now at midpoint. However, the economy is seemingly going to suffer beyond the mid-point level for the stock market as we suffered a what I would call a double whammy - COVID-19 pandemic and low oil price (our economy is dependent to a large extent on oil).

Now the question is why is the stock market holding up? Here are a few explanations.

Emergence of retail investors

I have been investing in the market for a while. The last time I have seen the huge participation from retail was 1997 - prior to the last major Asian financial crisis. During then, we were trading at what we called T+7, which was we only pay 7 days after we made our trade. Today it is T+2. Hence, during then a lot of people were playing contra - where we do not have to pay for the trade until many days later. Hence, during the trade, if the stock rises, we do not need to pay any money for the purchase. Since the crisis, with EPF (a very large fund) started to come into the stock market, retail players started to dwindle. The market has been largely determined by how EPF and several smaller others wanted the market to be (together with smallish foreign institutional funds).

The emergence of the retail investors seemingly is appearing from the lockdowns. I have started to hear doctors, lawyers, young professionals, executives started exploring the market. I call this healthy as it is obviously a financial lesson for many of them whether they made money or not. (I am not worried of rich doctors losing money in the market and started learning about fundamentals - they can learn fast)

One of the stockbroking license holder which focuses on retail (Rakuten) for the first time experience profits. Now, whether post COVID-19 these retail investors remain. I hope so, as the market is starved of new groups of investors. Imagine, how eager for us to hope for this group while these new investors whom have been looking at other asset classes such as bitcoins, forex are now putting some attentions on stocks. The focus now is for them to make money over the long term rather than losing and leave.

Stocks as alternatives for other investment assets

As mentioned above, while the younger generations have gone into other kinds of investments, this time around those alternatives are not doing well. Those includes commodities mainly and to a smaller extent bonds.

It helps when in US, the largest of the stocks such as Amazon, Microsoft, Netflix are expected to report record numbers. In Malaysia, those are the rubber gloves companies. It does help to spur the stock market economy as there are no substitutes for investing into rubber gloves companies if not investing into the stock market. Similarly, there is no other way to invest into Amazon.

Flush with liquidities

The Federal Reserve of US is throwing $4 trillion or more into the economy. We are far, but we will get some as well. In Malaysia, we are getting hundreds of billions of stimulus cash or other forms. Imagine if the banks tell us we do not have to pay our loans for 6 months, we suddenly have extra cash. That is probably where money will flow into the stock market. At the same time, when we cannot spend outside of our homes, we may buy some goods online, the remaining some would probably go into the stock market. Profits feed more liquidity into the market and this time around the liquidity is into the hands of the small guys rather than the institutionals - which is good.

In addition, when the system is flush with liquidity with the Feds printing money, it also means the cash we hold has come down in value. This encourages even with the complex investment thoughts not to hold cash in the long term as the money they hold would lose value.

I have been chasing where the money has flowed to - however I have missed out that it actually moved from the banks (system) to the hands of the consumers but some of it ended up in the market. I have originally thought that the institutional guys (such as funds) would be keeping funds to pick up the debt instruments. It has yet to really happen.

Market valuation is a not a fix situation

One of the reason I have never put a price onto a stock - although I generally think what a price would be for me to be interested. When interest rates go to zero in US and in Malaysia, dropped by more than 1%, that investments or savings would tend to move somewhere else. The opportunity investments from bonds or fixed deposits would be other asset classes. In finance, we call this risk free rates. So now risk free rates has dropped, so when we do a discounted cashflows, the other alternative asset would increase in price. Example for this, risk free rate drop to 2% - generally this means I am willing to take risk of a straight line PE (better still DY) of 50x (not encouraging the thinking that a 50x PE is a fair value but just as example). In the past, when risk free rate was 4%, that PE I was willing to tolerate was 25x. That is a 1 single X factor increase.

Will this trend last?

I hope it does last long enough. Nothing beats the need to rekindle or beefing up the Main Streets. However, the market itself can play a role as happy investors will translate into happy consumers. This is the way generally the poorer income group (here we call them B40) can get helped besides giving cash alone.

The financial economy (includes capital markets) is also a part of the economy, and we need to get this to be more active.

Why some highways are less profitable

2020-06-06T07:09:00.001+01:00

I do not quite agree when we put it that it is very difficult to project the cashflow projections of highways. Unless we are talking of flying cars and changing habits over transportation over the next 30 - 40 years, this business will be more consistent than many businesses. Yes, we do not know what the future entails but so are many other businesses. As long as cars, trucks and buses are not replaced roads will still be used.

I have been asked on why then some of the highways are not profitable or rather seemed to be not or less profitable. Take a read over this news - PLUS Expressway's profits for FY2016 was RM288 million i.e. not great for a company this size.

For FY2010, let me show what the number was. FY2010, it was already doing RM1.3 billion PAT. What happened then?

Did the traffic dropped. It obviously did not drop. By 2019, PLUS was already doing RM4 billion revenue. Let's look at this news. Post delisting, PLUS raised a RM30 billion debt. Much of the money went back to the short term funds raised and for repaying to EPF.

I provide a simple P&L calculation as below. Let's assume a project in middle of its concession and the P&L is as provided below. If the cashflow is consistent, I do not need to do much, many Investment Bankers will be approaching the company.

With good ratings, the funding rate would allow the owner of the business to take money upfront and use the funds to venture into other projects. So, when people like Warren Buffett says he has $130 billion cash, it does not mean he has no debt, he has carved out his good assets such as the utilities and made available funds for his other acquisitions. So is YTL.

Let's say the highway has 20+ years to run (and revenue is growing), when approached, the company would raise a RM20 billion debt at probably 5% and the P&L would look like below.

Now, immediately the profits is now 0. Of course, overtime the profitability would increase as it is needed to pay principal for the debt instrument but we usual investors are probably being misrepresented if we do not know the actual exercised behind it. Usually, this kind of projects may be candidates for delisting and then relisting.

The similar situation was probably seen for MTD Capital (which went delisting as well in 2011), the owner for East Coast and KL-Karak Highway.

Today, as provided to me, ECE and KL-Karak Highway together are not making much profits which is not true in actual cashflow per se.

This the reason why I mentioned of cashflow rather than profits for concessions such as highways.

Challenging the Gloves valuation - Top Glove as example

2020-06-04T16:39:00.000+01:00

This article is going to be hugely unpopular. But let me put it, I am a supporter of Malaysian gloves business, you can do a search on my write-ups. The recent events on increasing valuation for gloves not just by retail investors but analysts' recommendations really surprised me. Let me take the largest of the gloves maker - Top Glove which is the largest maker by far. I have no doubt that the demand-supply had gone out of whack. However, how is it that the valuation can be this high.

Two analysts put it at around RM20, another put it at RM23. Today, Top Glove's price is around RM15.60. That translates to RM52.6 billion, RM60.5 billion and RM41 billion valuation respectively. Numbers are just numbers. I am taking those numbers and try to present where it is based on that valuation and what are the risks by picking those prices, especially at RM23 and RM20.

Below are the most aggressive numbers based on a RM23 valuation. The analyst presented the numbers for the subsequent 3 years between 2020 to 2023 and went silent on numbers further down the road. It is obvious the next 2 years will be period where numbers are going to be very high - I do not dispute. I am thinking even at 2022/23 (PAT RM836.6 million), if the profits is going to double the numbers for the normal period of 2019/20 - that is a stretch.

However, let us just say I am going to be hugely bullish i.e. after the period 2022/23, it will still grow at 10% per year for the next 6 years. Based on the above situation, I have put up 3 situations i.e. at what average PE would the company be given their price of RM23, RM20 and RM15.60. The average PEs for 10 years would be very high indeed - 64x (at RM23), 55.5x (RM20) and 43.3x (RM15.60)

To go for a more humble situation, I would not challenge the numbers for the next 3 years but let us put the 2023/24 PAT at a more realistic number. Post 2023, the PAT will drop by 20% - even then its number would be 84% higher from its normal year i.e. 2019/20. Subsequently, the profit numbers would grow 5%. That translates to 80.51x PE for price of RM23, 70x PE (RM20) and even a very high 54.61x PE for its current price of RM15.60.

Even, at a price of RM10 (which is not something we can expect given it is now RM15.60, the average PE would have been 35x, given the scenario above. See below's table. That is still high.

Now, let's look at the economics of rubber gloves.

Remember, rubber gloves while at today's situation it is difficult to create enough supply to meet demand, however are we saying that the demand-supply will still be abnormal after COVID-19. In fact, with the creation of extra capacity at large quantities, it is possible that there could be oversupply situation by then i.e. 3 years after this pandemic started in Jan 20.

Rubber gloves business is not a monopolistic business, although there are situations where certain companies such as Top Glove, Kossan and Hartalega are the larger of the manufacturers. Are we saying that with COVID-19 assuming to be still around after this 2 years, there will not be ramp up of supplies by these guys who would act as check and balance of each other in terms of competition? What about the other players?

How long does it take to create new factories and new lines? More than a year?

I cannot see the economics of it as this business is not in a situation where barriers of entry is very high. No player has huge advantage over the other except for some extra efficiencies and economies of scale. Given the huge margins today, many new companies will not even bother with scale. There could even be new entrants - have any of the analysts thought of this given it is so lucrative?

There are just too much unknowns and many of these are not put into considerations. For many businesses, by putting a overly high price, they run into risks of being shun when situation becomes normal. Typically for this business, it is about long term relationships. I understand that some of them had created a new idea by putting a percentage of their supplies on the spot market (meaning let it be done through bids). However, business like this is not done in such manner. It is not our typical commodities.

Why there're flaws in the most extensive written piece on WCE

2020-06-02T14:49:00.000+01:00

I must say I am impressed with a fellow blogger on the piece about WCE titled "Why Highways are gruesome industry - WCE Holdings Berhad". This article has been pointed to me, and I feel that since I have been a promoter of this asset and stock, I do have a duty to write and provide my opinion.

In his article, he pointed out that WCE is worth 25 sen which is around the pricing it is trading at currently.

Let me go point by point but I try to be brief:

- assumptions and cashflow projections - I would like to thank him for providing a brief on RAM's base numbers for the calculation of the highway's rating and cashflow. It is highlighted as below that the base case scenario for the cashflow provided by RAM is RM461 million on average for the first 5 years of its full operations. That I assume will be for year of 2022/2023 where this project has been delayed to. I have done my own cashflow (extensive) and it is very difficult to share it and I have to say that the numbers which I have is very close.

My basis for the first full year of operation is based on PLUS's numbers as well as the traffic that the west coast is able to generate by itself. Choivo puts it that the first full year of revenue will be RM200 million which I do not think is right. At the moment (prior to the 18% discount), PLUS is doing about RM4 billion a year. About 78% of that comes from North-South Expressway (NSE). Hence, on that basis, we can project some numbers for WCE. NSE has 772km whereas WCE has 233km (actual length is 316km as some portion are free). Lets assume that with the opening of WCE, it will take about 35% of the traffic from PLUS. The numbers will hence be something like this:

Total PLUS revenue x NSE portion x 35% x total WCE's length compared to PLUS x 233 (i.e. the tolled portion) / 316

= RM4,000 million x 78% x 35% x 316 / 772 x 233 / 316

= RM329 million a year

Besides that I am sure that WCE is generating its own traffic as the path that it passes through has its own base which is from Klang to Lumut and right up to Penang port. That to me should be around 20% of additional traffic. So let's say

RM329 million x extra 20% = RM394.8 million

The first few years, the growth should be high, hence let's put a 7% onto the growth of the revenue.
So we should be able to get numbers like RM395m, RM422m, RM452m, RM484m, RM517m. So let's say my calculation provides a revenue of RM454 million for the first 5 years on average. This is pretty close to the ones provided by RAM. RAM as in its usual practice will put a sensitised case where it provides RM275 million. That in our language is the worst case scenario. One must note that RAM looks at whether the bond is payable while I look at the investability of the project (which margins of safety) See below.

This beginning number is very important as it is a basis for subsequent years. In cashflow projections, only few things are important: inflow, growth, costs. Once we have the first full year inflow right, the next thing which is important is growth. Highways will have high growth in first few years and as we know for WCE, many developers are already preparing themselves for the completion of this highway as the project act as nucleus for growth from the west coast to southern Selangor. Remember Abdul Wahid (ex TM, Maybank CEO) was very keen for the growth of southern Selangor through Klang and Port Klang when he was the EPU Minister.

- The project is 50 + 10 years. The writer only uses 50 years for his cashflow projection. The PLUS10 is when WCE does not meet the minimum required IRR (which I assume is at around 9%). As we know, there is a huge difference between total 50 years vs if we are able to collect another 10 more years. Remember, the last 10 years are the best 10 years. Obviously, if WCE is able to achieve the minimum IRR, then the toll collection should end at year 50, then we should be not debate about how profitable the highway is.

- The writer mentioned highway is rarely profitable. It is not true, many highways in Malaysia are profitable. Some highly. He puts in the numbers for PLUS. That is not right and misleading. PLUS was built at a costs of RM5 billion. How did it have RM30 billion debt today. This is because the owners were taking money upfront and used the cashflow to sell debt. That I believe had been done various times. Basically, PLUS is about using the cashflow to increase the debt. When the debt is high, obviously the interests is proportionately high as well - hence the losses, which coincidentally reduces the tax rates. So, for the profitable highway guys, it is about increasing the debt with low interests and reducing the taxes. I believe the restructuring for KL-Karak and ECE are pretty much the same. Let me put it this way, why is it that even less than a year ago several parties were keen on PLUS and they were putting a price of up to RM39 billion on PLUS. One must know that some of the bidders have been advised by the same group of people whom are advising for the WCE project.

Although SPRINT is not profitable, this is because it is part of the continuous project from LDP. The strategy is SPRINT feeds the traffic to LDP, where the latter is the most profitable highway in Malaysia. Such is the cleverness of Gamuda. Yes!, The Storm water project is not supposed to make money as Gamuda-MMC already took the money from the difficult construction project. Although some highways are not profitable, they have been poorly studied and are usually built by PNB or some contractors whom did not do enough study. I do not want to name them.

- IJM's track record - The company is second to Gamuda at studying, building and managing highways through its subsidiary Road Builder. Such highways are NPE, Besraya and eventually LEKAS will be profitable as well. IJM will not want to depend on traffic consultant to provide the numbers or projection as their skin is in the game. Why would IJM be negotiating hard on the contract when it knows it would have been losing money on the project.

- WCE is not really northern region - in fact WCE is taking away the more profitable portion of PLUS's NSE - which is why it stops at Banting and Taiping.

- The meat is not for the highway owners but rather the contractors and maintenance companies, as mentioned. NOT TRUE. In the case of PLUS - yes. Why? PLUS is owned partially by us (through EPF) while UEM's subsidiary - Edgenta - maintains the highway. Let me put it this way, if I am owner and contractor, I have liberty of allocating the profits. In the case of WCE, IJM is not making much profits as it is putting attention at keeping the costs within the budget - as it has also been overrun. Talking about PLUS, if the maintenance is given to another company, and WCE is from within, how much savings would WCE be having?

In the case of WCE, the listed company will be the owner (80%) and maintenance company as well.

Generally my mistakes is by putting much early thoughts into a very long term project, as I put myself into a position where if provided an opportunity to buy a highway like this, at what price would I commit. That obviously is not in the mind of many investors as they would rather see the money now - hence the difference between greenfield and brownfield projects.

To me, it is not even meaningful to put WCE at a price of around RM700 million which is the value the market provides for it today. If it is a loss making highway, it would be zero value for the highway (without including the 40% property owned at Rimbayu). Anyway, the highway and property division is clearly demarcated and the liabilities are not intertwined. Why is RM700 million an unimaginable valuation then? There are mainly few probabilities -

1) what is the probability of the project not completed - well it is now about 70% completed.
2) what is the probability of it being loss making which makes the project not meaningful - think of the additional 10 years assuming it does not achieve the targeted IRR.
3) what is the delay on the portion which is free and build by the government

Hence, when looking at it, it is about the probabilities as RM700 million is about 2 of initial years of collection for a project which has 50 or more years to receive its cashflows. The latter years, what the inflow will be I do not even need to share as in highway, it is about continuous growth albeit at lower growth for latter years. Think through this carefully.

Where do we look for Malaysia in the new normal

2020-05-30T06:17:00.001+01:00

I started my career at almost the similar timeframe as September of 2019 in this crisis, but 22+ years past. During then, the market was really hot especially among the second boards (then there was a second board which later was merged into the Main Board). Back then, I was tasked to maintain a group of 40+ loan accounts and look for new ones. I remembered the 2 earlier business accounts that I met up with which was my first time to Batu Pahat and Muar, situated in southern Malaysia were furniture makers. Both of them were doing relatively well. One whose business was selling to the entire country with lorries delivering furniture comprising from simplest of low costs RM30 furniture to sofas. The other was doing purely exports, run by a Taiwanese family.

Of course, 6 months later the Asian financial crisis hit Malaysia. We knew about it but my lack of experience caused me to not know what to do and expect as it was my first real experience of what a crisis was. In a matter of hours Malaysian Ringgit was devalued by easily double digit percentage. The business community whom were caught did not know what to do. So was the entire nation. I can vouched however, there is a huge difference though during then compared to today. During then, the banks would have pulled back the banking lines that were unutilised as they feared of facing more exposures. (Today, quickly BNM imposed a 6 months moratorium on payment for the businesses - This would have given some breather although we have yet to see the impact after that 6 months)

Of course, when RM plunged - it was a tale of two stories for the furniture makers. The one that was selling within the country saw its sales plunged (and later went under receivership) while the one that was doing exports later on became very big and it subsequently got listed and has a huge operations in Vietnam today. We know the main reasons as sales was in USD through exports to US and Europe while the local one was holding a combined foreign and local costs while sales was a mere fraction of what it used to be when the crisis hit.

Today, that situation we faced 21 years ago has its similarities. BNM and the Finance Ministry this time would not have the challenge of defending the Ringgit but we have an economy that was almost on standstill for 2-1/2 months - especially on buying the non-essential items (furniture is one of them). We are going to face worse as time passed when people are now more careful on their spending. That spiralling effect of less-spending would cause local domestic economy to suffer. This time around though, the sales to US for some goods will not enjoy a similar profile as the US, UK, Japan, China's Main Streets are also suffering the same.

However, as one can vouched, this crisis (as people call it will turn to a new normal - and that new normal does not look good for Malaysia) is going to change the business landscape. What is the new normal then? It is going to be more of the digital normal - which means usage of services, purchases of goods are almost borderless. Today, I am sitting at home working using cloud services provided by Google and Amazon. My company is buying more servers with components and equipment made by Intel, AMD, Cisco just to address this period. There is this imagination that the new normal would also mean many globally would subscribe to services and products that are provided by just a handful - Amazon, Google, Microsoft, Facebook, Netflix, Alibaba, Tencent, ByteDance. Many people are buying goods direct from China through Lazada and Shopee - I am not sure our government realise this but the retail market share is more and more getting away from Malaysian companies.

Where do we go then? It is going to be late if we want to compete against the Amazon(s) and Alibaba(s). Rubber glove is a good situation for Malaysia but it is not the new normal. It is the current normal and it may go away. We as a country has to build and encourage up a group of businesses that will be trading globally. Rubber gloves gave us some business safety net. We have a country which geographically and infrastructure-ly built for international trade. The Trade War which is back after 3 months of hiatus - we Malaysia is going to take advantage of it. We are going to use Klang, Johor's ports as an advantage.

Already some of the businesses that are resilient - we can see is made out of this infra and positioning. Those names are Scientex, Dialog, Guan Chong (maybe even MSM) - mainly comprise of producers, traders and manufacturers of essential and daily used items. We have to get Malaysian companies to be strong with digital exposures.

What we have tried to do through our digital initiatives did not really bear much fruits. We were followers. If in US or China a digital business model is successful, we tried to copy them. This is not taking advantage of what we are strong in. Malaysia is a nation which is exposed to the world. US and China, when they built on an idea - they have a huge internal consumption to test on those ideas. We do not have that. I am sure when Spotify was created it was not meant for the Swedish market.

So where do we go in terms of the stock market? All things are not lost. We have enough of these companies and entrepreneurs. When I was exposed to the rubber gloves makers back in 2000, those companies were nowhere near what we imagine they are today. We can recreate many of these similar companies in many different industries. Scientex is one huge example. So was Press Metal. Back 18 years ago, I was not impress with the company - again I am mistaken.

I think this crisis, which is yet to show its true-devil self, would still present opportunities and the way to look for it is less of the inward looking ones but search for the ones that would go outward of this country.

The rise of the retail traders

2020-05-23T02:39:00.002+01:00

What the movement control has managed to give rise is the emergence of the retail traders in Malaysia a number which we have not seen in the past decade. This is a welcome situation on the perspective of balancing the trades as in the past Malaysia's trade have been dominated by the very large pension or savings funds in Malaysia. I have never liked the situation in Malaysia as we were overly heavy on EPF, KWAP, PNB where decisions were focused on a few individuals rather than the masses.

Despite the CMCO, we have seen the largest trade volume in Malaysia on 18 May 2020. Although the Trade value was not the highest, the volume were high. These are probably due to 2 factors, emergence of the new retailers and very active participation from the syndicates. We need both to achieve that.

As an example how much were retailers in the market, see the volume below:

Trade on 16 March 2020 (before MCO)

As below, we would see retail participation has increased almost 2x of previous. The institutionals whom would be taking advantage assuming they are better fund managers would also be participating. So, we actually see more liquidity in the market despite the downturn where people are losing their jobs.

Trade on 18 May 2020 (during CMCO)

The numbers on 16 March was already on the highside. On a normal day, prior to COVID-19, the trades were usually about in the realm of RM1 billion.

During MCO and CMCO, things that never happened, this time around is rather unusual. I hear over the radio, a doctor whom was staying at home during the MCO, who usually would not have the time to do trading, started his stock market activities during then. I have friends whom I was convincing them to invest - many of them successful business person asking for contacts to opening of trading account.

While these people are rich and pretty successful, they are usually small business owners or professionals, whom would not know much about stock market valuations but they are people whom are smart and understand what looks good and what is not. They have some good sense or risk management. They are not that much of gamblers.

Now in this MCO, they are emerging. Question is how long they will stay. At least for now, they have created an account and have their money in the trading account.

If the market really experience downturns, some of these people would leave while some might even stay for a long while. For a while, Bursa Malaysia has been experiencing many delisting exercises as small companies which are not much of an interest to the large funds such as EPF, have seen their share prices being low comparatively to the international markets. These are the ones which retail should have participated but they did not. It remains to be seen whether these retailers would remain.

I am for it. At the end of the day, although there is an opportunity for trades and speculation, I still think investing over a longer horizon prevails. When I mentioned longer term, it means over few years - not over few months like some older person is trying to promote.

Reach me through telegram - @intellecpoint

2020-05-17T01:55:00.000+01:00

I realise that for any speedy as well as more secure and not-flooded with unnecessary spams, you can now reach me at

https://t.me/intellecpoint

or

username : @intellecpoint

I have created a group called Intellectpoint
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Not surprising that Yee Lee is doing a quick takeover exercise

2020-05-13T03:21:00.002+01:00

Wilmar which part of its business is selling cooking oil in China, just announced a good result considering the huge impact from COVID-19 in China. This is what it reads for Wilmar which sells flour, cooking oil in China largely.

"Being a producer of essential products for both food and non-food categories, the Group’s operations were not significantly impacted by the various stages of lockdowns globally. Demand for the Group’s consumer products grew amidst the COVID-19 pandemic as household consumption increased due to the implementation of movement restriction measures globally. Sales volume for consumer products grew by 34.8% to 2.9 million MT in 1Q2020, mainly from increased demand for the Group’s consumer staples such as rice, flour and cooking oil."

Back here in Malaysia, Yee Lee which just announced a takeover offer after a failed in 2019, this time offering at a lower price of RM2.06.

One of Yee Lee's larger business is cooking oil under the brand "Helang". At the first time of offering, its offered price was deemed "not fair but reasonable" - which is common for Malaysian companies in Bursa nowadays.

We are just too optimistic

2020-05-06T05:32:00.000+01:00

For much of the COVID-19 period between February to now (May 4), we have been largely tracking the S&P500. This rebound is good for the market given the sharp drop that many stock markets have experienced especially in March 2020.

Comparison between S&P 500 and KLCI (3 months between 5 February to 4 May)

I however think, we are just too optimistic. US is pumping USD3 trillion into their economy with Federal Reserve acting as the biggest bailout machine. EU and Japan will take similar actions. However, here in South East Asia, we can't just print money like what they do. Anything that we need from in terms of booster in the economy is just like picking up the crumbs from whatever is left out from the economic stimulus that are provided by these superpowers. US will come out the fastest as they have the luxury of having its currency as the reserve currency, China will be the dark horse, while the developing economies will be left hungry.

If anything, post COVID-19, let's look at what we can buy from the stock market. Retail will be dominated by Lazada and Shopee, both China's supported companies. Food and goods delivery would be controlled by foreign companies as well. Anything digital would be largely controlled by foreign companies. What do we have? Perhaps we have a small little company that does e-government services aka MYEG in the digital space. That's all.

We of course have our export industries but they are not as competitive as Vietnam anymore and we are largely dependent on foreign companies whom may not be interested at Malaysia as much as before. We in fact should not be dependent on them as much as we are not able to compete in terms of price. We should not compete in this area. Technically, many of the countries are catching up.

Let's pull out the companies in Malaysia that we think can be one which we can be proud of regionally. Even at one point of time, the government probably felt that Axiata is best being managed by the regional Telenor (Digi).

If anything this COVID-19 will expose our weakness economically - although the Ministry of Health had done a wonderful job. The economic revival is left to a group of people whom had just been in office for 2 months. Do we expect miracle?

They will have the standard statement. Let's go digital - Industry 4.0, go for FDIs. The local retailers whom many of them have yet to reach maturity, would probably fall by the wayside. The poor support that is given to our industries comprising many of small and medium sized is bad so much so many would suffer and may not be around. Those spaces would be filled by the new entrants and in the name of FDIs, we would be happy to open up to these guys to take over the economic spaces.

We can call that free market competition at a time when many countries are looking inward - and globalization is dwindling.

Why is then our KLCI trending similarly to the US. One has to bear in mind, within S&P500, the top 5 companies (Apple, Amazon, Microsoft, Alphabet, Facebook), their future looks good given the current situation. They will be better off now and in the latter part when things are back to normal. We are not.

Sold almost all Airasia - Why

2020-05-05T05:57:00.000+01:00

I have sold almost all (16700 @ RM0.81) of Airasia par 200 units on 23 April 2020. Well, the rationale is almost similar to Warren Buffett's idea of selling all his holdings but it is different. Let me put the reasons.

For Berkshire Hathaway, he basically owned the Big 4 airlines - United, Delta, Southwest, American Airlines. When he bought the airlines I believe, it was due to the industry was facing reduced or managed competition, and the number of seats was much more controlled. One notice that Berkshire did not own a particular company but instead owned the Big 4. There was a reason to this, he did not want to make a picking on a company but rather made an industry call. COVID-19 pandemic however, changed that landscape much due to unforeseen oversupply even after the lockdown is over. The government of US was in fact putting $25 billion to support its airline industry during this trying times.

How the airline industry is going to change? The way people travel is going to be different and there are various thoughts - such as foregoing the middle seats for a single aisle, more sanitation and control etc. These are going to reduce the revenue for the airline companies but instead increased their costs. Nowhere in the world would be dissimilar when comes to this issue.

Malaysia or our region which includes China and India's situation is somewhat different although there are much similarities. These airlines be it Singapore Airlines, Thai Airways, MAS, Airasia, Lion Air - they are operating off different bases and registered as airlines businesses operating off a specific country. We know that Singapore government gave a rescue package of around $13 billion to SIA. Emirates and Qatar Airways which are representing much richer countries would have done the same - if not already done. We hear of Australia - at the moment - would allow Richard Branson's Virgin Australia to go under although airline industry plays a pivotal role in providing strength for the business and tourism industry - which is unforeseen in my opinion. I think China, would the same in rescuing its airlines as they are pretty much state-owned anyway.

What about Airasia? Well, the only thing we have heard is that the government may consider the amalgamation of Airasia-MAS and maybe including the much affected AAX. I however think that it is going to be very hard - depending on how hard Airasia or MAS are being hit. MAS would have been hit harder as it was not in any situation to survive, unless Khazanah continues to pump in cash. One must notice that at this moment, Khazanah would also be needed to perform its call of duty to support government's financial need.

Airasia was being lucky that it sold more than 110 planes over the last 2 years. It was holding cash as it managed to secure more than RM11 billion of sale. We also have gotten some of the cash in the form of dividends (about RM1.35 per share) from that results, and I have heard of analysts mentioning that the cash situation would have been better if it was not distributed. Well, let's put it that some of the cash may have remained in the hands of the largest shareholders and when in need, there would possibly be a cash call exercise. So I think, Airasia would be saved despite it being a private company.

Why would I then sell Airasia? First of all, it is probably the hardest hit industry and no one can predict the outcome. No matter how our modelling is done, it is hard to predict. Let's say the worst case scenario - what if no vaccine is found even after 2 years? People may not be able to fly inter-country for months or quarters. I still think at this moment the fittest will survive and given the balance sheet of Airasia, it is the fitter one. HOWEVER, where Airasia is operating from i.e. Malaysia, Thailand, Philippines, Indonesia - these countries are not the fit ones.

These countries would have enough trouble supporting their economies whatever the outcome may be from COVID-19 and they would not have the financial power to support their airlines. Malaysia is hit by the virus, political uncertainties, oil. Thailand is hit as well and it is probably thrashed by the automotive industry situation.

Post COVID-19, the ones with the balance sheet will survive and prosper. The same is onto a particular company - and the similar situation would be for countries.

What I am afraid is - the SIAs, Scoot, Qatar, Emirates would be outrunning the air space. There would be oversupply of seats for a while. The situation is people would be still hungry to travel but not for the shorter term. I know I have heard of behavior will change but I think certain behavior like wanting to travel will stay, but the bigger thing I fear is that the poorer countries may not be able to support their own industries and airline industry needs support no matter what the outcome would be in future.

The Malaysian stock market does not look bright

2020-04-26T04:52:00.002+01:00

COVID-19 really takes many by surprise. It is very different from other economic downturn. This downturn is global and it impacts basically every major country especially the very large developed countries. No country it seems would be spared and the largest of economy currently are busy fighting the virus. When this fight is partially or fully over, only then the economic activities would be fully restored. The problem with this time is, we do not know when. It is feared that by the time we reopen our economic activities fully, many companies would not have the ability to survive.

Although this crisis feels like it had happened over a long period, in actual fact the real effect has only been felt for less than 3 months - since February when it really started in China. In most economies and stock markets especially the recent ones, there were most often hope and people traditionally had thought that it would have recovered. This crisis will recover but it may take a long time for that to reach its full economic activities let alone growth. The fact of the matter is that this is just the beginning of a long war.

To compare, one should not compare 2021 or 2020 against its immediate previous year. It should not be year on year although it is good to get an indication of growth. The base year for any of this should be 2019.

For 2020, it is a given that the world is to face a recession, and we may even get to a depression if the crisis persist for a longer period. For economy to return, many countries are using debt. Companies that are hugely affected will need rescue and government will use the debt that they issue to fund those rescue - if it is of any major assistance. The ability for any government to issue debt would depend on each country's capacity.

US government is talking of up to $4 trillion in terms of additional budget. For Japan, it is in excess of $1 trillion. Malaysia? we do not have much fiscal ability. By my count, after the several stimulus that have been announced, Malaysian government is possibly raising additional RM35 billion at the moment. I believe that amount will touch RM50 billion, but we do not have much tools to raise further funds through debt.

Why?

The world's government are now raising debts. Basically every country. To pick up those, they need someone to buy. In US, they would have it easier to do that as US Dollar is the world's currency. Many countries, business companies would want to hold Dollar as a reserve. To do that, they are going to pick up the government bonds. Europe's EU will have some ability of the same. So is Japan. What about Malaysia? We will have challenges to raise bonds unless we offer attractive terms. What are those terms - good rates but would anyone be buying our bonds if the rates are attractive but the currencies may deteriorate?

So what does our government do? We grapple for our own funds to pick up those - organizations such as EPF, KWAP, Petronas, PNB. Many of these GLCs and statutory bodies would be needed to pick up a substantial portion of the country's bond issuance. However...

Once they pick up these instruments, they would forgo the other - which would be - they would be selling stocks and other assets. (Stocks is the most liquid though) In the case of EPF, it may look at selling its overseas stocks and patch them back into our MGS. They will be needed to defend our market as well.

Now do we know why despite the challenges faced by companies, EPF does not move an inch (except for the 7% contribution option given to employees) on requiring employers to reduce their contribution. This is because that net inflow of around RM3 billion a month into EPF is a necessary instrument to defend the country's trouble.

What should investors in Malaysia do then. Given the uncertain and tight monetary situation, one should wait. For the first time, one should hold safe assets - it may not be cash but some defensive companies or assets - really defensive ones.