Friday, June 25, 2010

REITs vs Properties

For REIT investors, coming weeks are going to exciting with two largest REIT to date to be listed, Sunway REIT (July 8th) and the hot and juicy CapitaMalls Malaysia Trust (July 16th). I am still reading Sunway REIT prospectus - partly because somehow it got removed from Bursa website. Anyhow I only manage to download the first 80 pages but I guess it should be informative enough. Or if some of you have, would you mind to send it to me?

I am not really interested in REIT what more an IPO of REIT previously because I thought most of them aren't really great properties. They are good but aren't great. Sometimes I can't help but feel that REITs are the dump site for bad properties for developers. But of course not all of them does that. With the listing of Sunway REIT and CapitaMalls Malaysia Trust, finally we have something exciting in our REIT market. I won't go to much into details into both of these REITs. Sunway REIT star property is of course its Sunway Pyramid Shopping Mall while CapitaMalls Malaysia Trust's is non other than "Kam Ho" @ "Golden River", Sungai Wang Plaza which is located in the Golden Triangle itself. Probably we could see less people complaining about the traffic or problem finding parking space for these 2 malls. I really like shopping malls because I think these are the more "stable" investment. Offices come second. I keep my finger cross to wait for MidValley Megamall and KLCC to be listed.

So, what is REIT?
As far as I know, REIT is almost like a trust fund but instead of owning equities, bonds and other unit trusts, it owns only properties. But unlike property developers or investors who normally buy and sell properties for capital gain, REIT properties are those which meant for rental income. Of course the fund could still sell the properties like what Starhill REIT does, but primarily it is meant for rental income. So REIT is an income fund.

REITs vs Direct Properties Investment
If one were to rent out a property take a shop lot for example, he/she would have to buy the entire lot in order to rent it out for rental income. So the person will have to either has lots of cash, lots of friends to share or borrow money from bank to finance such investment. But for REIT, you won't have to do that because in a way you could own that small pieces of the lot which is readily shared by at least 500 other investors.

According to ECM Libra research dated 21st June 2010 (so pretty recent), the average existing M-REITs yield is about 8.7%  meaning if you buy each and every REITs with the same number of units, you'll get 8.7% dividend in return. So let's do some comparison. If you purchase a RM300k condo units by cash, likely you'll able to rent it out for about RM1100 per month (Penang market) so roughly you'll get about RM13200 annually which will give you about 4.4% yield excluding tax. This would make REIT a more attractive investment because if the yield is 8.7% this would mean you'll get RM26700 annually if you invested RM300K. That is twice as much as you get from your condo. Plus instead of owning a unit of some condo in Relau, Penang  you'll be getting a piece of Sungai Wang, Gurney Plaza and The Mines.

Okay some say, yea I can get loan from bank and all I need is to pay 10%-20% down payment and I'll get better deal. - Or is it? Don't forget you have installment to pay. Let's say the same condo and you pay 10% as down payment. To keep things simple we assume BLR rate of 6.05% from Hong Leong (don't worry about the variable rate because it actually comes back to the same thing. Banks are not stupid) and assume your loan repayment period is 30 years. Your estimated monthly loan installment would be about RM1600. That's negative cash flow of RM500 per month. If you pay 20%, you'll a negative cash flow of RM300 per month. If you invest RM30K in REIT, you'll get RM217.50 monthly but of course you could only cash the money quarterly or twice per year through dividend. One might argue, you'll able to raise your rental. But so as REIT. One might also argue if you'll able to get the rental income nett after you settle your loan. To keep things simple, assume reinvest your your dividend into your REIT annually and I bring down the yield say about 6% average over the next 30 years. Initially with RM30K you get RM2670 per year. If you compound 6% annually to the next 30 years, you'll probably get about RM14k annually in dividend which is about RM1200 in rental monthly. Alright that number may not be huge 30 years later due to inflation but hey, think about this, your REIT manager owns that piece of properties as well. Don't you think he might not want his income to be eroded by inflation? Don't you think he wants to beat the inflation? Also, that 6% is calculated by assuming your REIT's properties value and market value stayed the same over the next 30 years which logically not possible. Also, that is calculated by compounding it annually. For some REIT, you are getting your dividend every quarter or twice per year, so it actually compounds quarterly or half-yearly. And, you are not tied to any debt. You buy with what you have.

For REIT, you might also get capital gain just like the actual property itself. So you get capital gain plus income. Plus, there is NO CAPITAL GAIN TAX when you sell your REIT. Okay, REIT is listed on the stock market, so it is "efficient" - or is it? Yea, it does fluctuates a lot if you were to compare it to property price. It is listed in the market so it is easier for investors to put in their money and out, definitely they'll be element of emotions there. Probably I can say REIT prices are more emotional than the actual property ones. But historically it is really not that "efficient" if you compare it to business equities. Speaking about that, investor could own a piece of property easily through REIT because all you need to do to purchase is like buying a stock through your broker. Forget about the lawyer fees, S&P...etc. There are all taken care of. All you need to do is to research the REIT and its manager just like stock investment. Also, instead of managing the property yourself, you could have a manager who owns a portion of that property to manage it for you. This manager is likely to be the previous owner of that entire property, so you could have some historical performance check.

Is it the best time to buy REIT now?
If you ask me, price-wise I would say yes, why not. But for me, I would still want to look at some other factors which is why I still haven't make any decision on any of them. For some reason which I yet to find out, M-REITs are selling below their book value. Meaning there is someone willing to sell his house which is worth RM300K for maybe about RM240K. So the price is good. 

Personally if you ask me to pick between REIT and the actual property, I would choose REIT unless you like to own the whole piece. That's me.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at 

Monday, June 21, 2010

My Strategy: Fool's Four Investing Guidelines

After watching Li Lu's talk on Value Investing for 1hr and 45mins (thanks to Bullbear Stock Investing Notes for great sharing), I think I'll probably call myself a hybrid investor. Okay, I created that term, basically I am a value + growth investor. Probably more on that some day, but today I want to share my investing guidelines that I always use when selecting or for most of the time rejecting stocks.

The Warren Buffett Way by Robert Hagstrom is the first investment book that I read and I am still following the 4 guidelines written in the book until today. From time to time, I've try to improve my skills but fundamentally I'll still stick to the 4 tenets mentioned.  Well, like what Li Lu said, thank god that I am still innocent when I first read the book. Here are the brief look on how I look at the 4 guidelines.

Business Tenets
This is normally what I first look at. Unlike Buffett, I don't start from the A and to the Z, but I rather select them randomly. The idea could come from research houses (although I normally don't read those from research houses' reports but I just see what they have), radios, online newspapers, of course blogs basically any where. In fact, I got one of the stocks in the great list after I overheard it over the radio. lucky? What do I do when something caught my eye? The first question is of course what business does it do? Is the business simple and understandable although I would rather call this predictable? And does the business has a great long-term prospect?

"I want to be in a business so good that even a dummy can make money" Buffett.

This is the quote that's always play in my mind when selecting a business because one day, a dummy will run your business. Think Genting offence Mr.Lim. Knowing what the business does is important because it puts me in the right mindset of a industry and it gets me a list of a business competitors. And if I were to know that I'll be making money for sure, the business will have to be predictable, simple and easy to understand. And to know if the business is able to last for the next 20 years  or so, it must have a long-term prospect not a business that is "hot" for the moment.

Financial Tenets
Financial tenets is the complement of business tenets. This is where people know if that a business is really making money. Revenue and gross margin of a business tells a lot of story about a business. This is where I could find if the business have a good sales and competitive advantage. If a business have a wide (around 15% or more depending on its industry) and consistent gross margin, chances are it has a strong competitive advantage or no significant competitors yet. If it is improving, chances are it might have just fought off its competitors, restructuring, or gaining on its competitors and of course vice versa. There is one thing that you should take note, if you see revenue improves and gross margins reduced, it is likely that it has reduced its products or services price to boost revenue and likely to have lose its competitiveness. However that is not always true, but of  course a more thorough investigation is needed when you spot something abnormal.

And of course, there are others like the balance sheets, debt/equity ratios, liquidity ratios, amount of fixed assets, capex and others ratios. For me, I'm pretty sensitive with a corporate debt level and I do not agree with Mary Buffett where she says not having debt at all is the best. Sometimes, it serves the shareholders better when a company is taking debt so finance part of its business expansion or investment. Think about this, a business knows demand will rise for its products by 10% per year but it is now running a full capacity, it needs to expand. But building a new plant needs RM15mil and its current cash level is only RM10mil. So it is RM5mil short. The management know the business is able to generate free cash flow of RM5million per year. The decision is either borrow that RM5mil or wait for another year. If the interest rate is about 5% or so, it'll be better that the management borrow the money from bank. And sometimes, to be there to pick up the demand first is important to a business competitiveness. You wouldn't want your competitors to benefit from that. So debt is not always bad. You just have to make sure that it doesn't stretch its balance sheet too widely that it'll have trouble servicing the debts.

Did I say improving my skill from time to time? Yes. I did not pay too much attention to receivables before the LCL Corp case. In fact, before this LCL Corp is already in my shortlist and I am just looking at the management and its competitive strength overlooking its financial shortcomings. So this is a lesson for me.  Receivables in fact does tell a lot about a company and how it does its business. One can in fact close a pretty big deal by just offering longer credit repayment period.

The important thing when analyzing the financial statements is curiosity like what Li Lu said. A good analyst must be curious. Why is this and why is that? It'll be good for the analyst if he is able to explain those numbers presented in the statements.

Management Tenets
I would say, this is the hardest of all 4 but it is not impossible. To know if the management is honest or trust-able does not necessarily requires you to have a lunch with them. You can have those informations from their friends, relatives or even employees. Okay, that is tough as well, but the employees one aren't tough. What I normally do is to check the boards see if I knew or heard of any of them somewhere. If no, just Google them. All I need is one because I believe a good man would not do business together with a bad man. Well, that's me.

The other thing is to see if the management makes rational decision. One way is to look at their management history from financial ratios such as the ROE, a dollar for a dollar analysis and their dividend policy. ROE can tell us how well is the management doing with our money, equities. But, we still need to be careful on this because a company can have a huge ROE by just leveraging on its debt. When the management decided to retain company's earnings, we better make sure they make good use of it. If they use it to reinvest in the company, we have to make sure it bears fruits else they might as well just return it to the shareholders as dividend. A classic example of a corporate who keeps most if not all the earnings but do almost nothing if not not making bad investment with it is Genting Malaysia.

Value Tenets
If a company pass all the 3 tenets above, the final question is, how much would I pay for this company? This is where the valuation comes. It is the trickiest part, because this is where we try to predict the future outlook of a business and this is where most of the people usually gets it wrong. To be honest, I don't have a best guideline for you on this but it is important to have a margin of safety.

I use to use P/E ratio for valuation but I now prefer the discounted cash flow (DCF) valuation because I felt that this is a more business-like valuation. In short, DCF valuation is to calculate future cash that is to be added into your equity base through free cash flow. So, you are kinda like calculating the future book value but you discount it backwards to the current value. But I do use P/E ratio as a guide sometimes as if I see P/E like 50 or 70, that is definitely too expensive.

Since DCF valuation tries to predict overall the future look of a business, trying to get as right as possible is important which makes understanding the economics of the business vital. However, this is no exact science. Therefore, having a margin of safety is important.

So that's it. A brief explanation of the guidelines I use before making an investment decision. You'll notice that, following this guidelines will make you reject most stocks. That should make sense because if most of the stocks listed in KLCI are quality investments, most of use would have made hell lots of money.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at 

Sunday, June 13, 2010

The Good: Latexx Partners Bhd

If you have been following the Malaysian stock market a few months back - or as far as a year back, you would have notice that the rubber gloves companies stock prices and a condom maker (somehow) had gone through some phenomenal surges. It was a little too hot for me that time, so I give it a go and look for some other kind stocks. Recently the heat has subsided and I take a look at some of them.

Latexx Partners Bhd, is among those fast growing companies. Capitalized at RM724mil, its wasn't the biggest rubber gloves company in Malaysia behind the likes of Top Glove (RM3.85bil) and Kossan (RM1.18bil). It was founded by the Low brothers where Low Bok Tek (Robotech), the richest man in Taiping. If you doesn't know who he is, he is one the man who owns Konsortium express bus services  and several other private limited companies. Latexx Partners is currently on an aggressive expansion plan at the back of expected rising rubber gloves demand. Currently it is producing 6 billions of gloves annually where all its manufacturing facilities is located in Kamunting.

Latexx Partners is the OEM manufacturers of rubber gloves to many MNCs worldwide - sort of like Foxconn. Probably because of its focus on higher-end premium segment I would say its product range is narrow compared to its competitors such as Top Gloves where it only produces 3 different types of gloves; powdered latex examination gloves, powder-free latex examination gloves and powder-free nitrile examination gloves. As far as I know there are basically no difference in usage for both powdered and powder-free gloves. Just individual preferences as some are more comfortable with powdered ones while some felt irritated by that. Nitrile ones are made of synthetic rubber. Basically for those who are allergies to natural rubber's proteins.

In 2009, its powder-free latex gloves makes the highest revenue contribute of 56%, while powdered-latex gloves and nitrile gloves contribute 24% and 20% respectively. Latexx has a wide customer base over 300 clientèle in 80 different countries worldwide. 50% of its customers base are from the US followed by Asia Pacific (23%) and Europe (11%).

Historical Performance
Latexx Partners ride over the years has not been smooth and it only looks better in recent years from rising rubber gloves demands. After making losses for six consecutive years (1999-2004), its earnings returns to black in 2005. Its gross margin in 2003 and 2004 looks quite frightening. It looks as if the company has just started and its revenues and gross profits are not enough to cover staff and other expenses. I yet to have information on this but it does look competitions have squeeze its margin quite badly. Low Bok Tek actually left the company as MD in 2001 but return as a CEO in 2004. I'm not sure how true is this, but according to my source, his returns turns the company's fortunes and its does look that way. He manages to reduces losses in 2004 and the company starts making profits in 2005. Gross margins improved to about 14% and a dip in 2007 is probably due to rising commodities prices. The highly improved margin in 2009 is nothing to shout about really because rubber prices is at the lowest around that period.

Revenue Table

Operating Profits Table

Rubber Prices Chart

The management cost control did show some good sign as they actually reduced their administrative expenses which I think cutting numbers of employees by almost half in 2007 as the raw materials prices rose.

On the balance sheet, Latexx does not particularly looks that healthy. Its liquidity over the past 5 years have been below the ratio of 1 except for 2007. Putting a "super stress test" will see the ratio deteriorate even worse to the range of 0.00 to 0.34. Ever since Low Bok Tek reign as CEO, Latexx has seem to improve its balance sheet but it does look a little uncomfortable.

Company Liquidity

For a manufacturing based company, inventories turnover is important. Latexx has been doing well in this area where it able to sells its inventories in about slightly over 2 months. Receivables turnover wise is also pretty good where it able to collect its receivables in about 2 months as well assuming all sales are done in credit terms.

Inventories Turnover

Receivable Turnover

Did I say aggressive expansion plan? On the back of overwhelming rubber gloves demand the group has been expanding their production capacities progressively by adding 26 new production lines from 2007 to 2009. This would explain the sudden jump in revenue in 2008 and 2009. They did not stop there as in 2010, the group spend another RM70mil to build another plant adjacent to the current one which expect to produce another 3 billions pieces of gloves. It is expected to be completed by 2011 which will gives its total gloves production to 9 billions per annum. Current plants are already running at full capacity.

Well we know Latexx does not much cash with them and with such expansion plan, we'll expect its borrowings to increase - and indeed it has. But the increased in capacity has also increase its ability to generate more cash flows. From the looks of it, it does not seem to have too much problem covering the debts which might probably justify Latexx ambitious effort to build another RM70mil plant.

Finance Cost Coverage

Corporate Development and Prospect
Latexx Partners growth will largely depends on two factors. Rising global rubber gloves demand and its high prospect JV with Budev. Recent global epidemic diseases has increase the awareness in many healthcare sectors of higher hygiene standards and practices. I don't have a crystal ball to say when the next global epidemic is going to hit but virus is highly mutate-able in nature and is doesn't look like its going to stop. Although, I am a little skeptical of rubber gloves demand driven by this. Another reason of rising demand will be the increasing healthcare expenditure in many developing countries driven also by aging population. This reason looks more solid to me. There is also an increasing trend of outsourcing to manufacturers which enable MNCs to focus more on their core business, brand building and market development. Question is, is that incredible demand a real one? I think it is, its short inventory turnover and production running at full capacity even after aggressive expansion shows sign of a real increase in demand.

On the corporate side, there are couple of plant expansion plan in place over the next 5 years. Plant 7 is expected to complete by 2013 (productions capacity to increase to 12 billions) while Plant 8 is expected to complete by 2015 which will increase its total productions to 15 billions pairs of gloves annually. All of them are based in Kamunting, cheaper land and avoiding the fight for natural gas power supply.

90% of the current products are supplied to medical sectors and the group planning to venture into food industry by launching a 3.0g nitrile gloves (lower end gloves) which are cheaper than natural rubber gloves. They also plan to launch a 3.5g nitrile gloves that give greater value to medical sectors need.

The biggest growth prospect of all for me will be the JV with Budev through a JV vehicle named Total Glove Company Sdn Bhd. Its patented method MPXX technology in natural rubber gloves examination and surgical gloves is a major breakthrough in its current industry. To explain MPXX technology in short, it is a unique cleaning method that could clean up all allergenic proteins that have been clinically proven to be the cause of latex allergy. This would change the entire face of current industry. But having say so, it will still takes time to win customer trust to this technology probably few years before we can see its shine. Budev explained that they pick Latexx over the likes of Top Glove due to its good name in the market as well as extensive MNCs customer base in which I think they could leverage on the MNCs brand name to help this new technology to penetrate the market. This kind of glove is aim at premium market and is expected to provide higher margin.

My View and Valuation
For me, the solid foundation of Latexx Partners growth is going to be the short-to-medium term rise in rubber gloves demand. The quick full capacity utilization does suggest a shortage of supplies. To value a company like Latexx will be quite difficult as there are too many uncertainties. Well, like Tan Teng Boo said, every company has its price, I'll try to give my best valuation I could for it. Given the good track record of Low Bok Tek management team, I'll make a guesstimate that the demand will meet its expansion plan.

Cost of revenue: I expect the cost of revenue ratio to go back to 86% as the raw material prices recover.
SGA expenses ratio: Management has shown good cost control, expected it to stay at the average of 9%.
Depretiation should rise to RM15mil in 2011 onwards, and RM20mil in 2013 onwards and RM25mil 2015 onwards.
Operations Capex is expected to increase by RM5mil after every expansion just like depretiation and Strategic Capex is expected to be RM70mil.
On the revenue front, revenue growth will be based on this production capacity projections as shown below with about 10% discount and expected to hit full capacity by 2016.

Projected Production Capacity

Since there is a high level of uncertainties in this projections, I'll take a 13%-14% discount as I group it in a group of high risk high return investment. This will give a safe purchase price of RM3.60-RM4.05.

My View: I don't think there is any product distinction between Latexx Partners and other manufacturers. For me, Latexx Partners is just taking a pieces of the pie off other big names. There are chances that Latexx could struggle once the rubber gloves supplies meets the demand. To invest in Latexx Partners is to invest in a company with large Capex laid ahead which will eat shareholders value although it'll eventually have the ability to generate estimated free cash flow of about RM160mil annually. However, there is a bright side in Latexx with their partnership with Budev where they jointly own the MPXX patent. This really could be the NEXT BIG THING. There is a trend of increasing nitrile latex gloves demand and it could be a good sign for MPXX tech type of gloves. It has yet to hit the market, we'll just have to wait and see.

Talking about Latexx Partners is almost like having Steve Jobs managing GM with a new breakthrough vehicle. The management under Low Bok Tek has definitely turned Latexx Partners fortune around. This is a proven management team but this is also a business in a very competitive environment. I can't help but feel that Latexx is riding on the shortage of rubber gloves supplies so no heavy competition just yet. But once the supplies meet the global demand, I am afraid it's going to be quite ugly. That's is why MPXX technology is so vital to Latexx Partners as they can leverage on both rising demand and this technology to dominate the market.

It is difficult to decide where to categorize Latexx Partners. They are promising for short-to-medium term investment but could be tough in the longer term. So I will have it in The Good list as for now and probably describe it as an invest-able company but with high-risk. Will I invest in Latexx Partners? If I invest in Latexx Partners, I'll be betting on MPXX to succeed and it is a good bet. Well, maybe a little. This is a GAMBLE.

(Special thanks to a source for providing some those information)

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at

Thursday, June 10, 2010

My Way: Ways Not To Lose Money in Investment

Perhaps it should be called ways to achieve Rule No.1. World Cup is just 2 days 0 hour and 58 minutes away as I wrote this...I can see the clock counting down on my screen. Okay, it is just around the corner, so for those who seriously do not want to lose any money, stay away from betting in the World Cup (oops, I have nothing against you, Vincent) because whoever lose, the bookies win. There is a reason why it is called a gaming industry. Gaming = entertainment. You have to pay for entertainment, watch movie also have to pay ma.

To avoid losing money;

  • Studies, studies, studies....
Whether it is the stock market, mutual funds, equities, insurances or any investment products, a deep understanding of an investment is important. What, when, who, why and how; all these have to be answered. I always make sure in whatever I invested in, it must be within my circle of competence. Sounds familiar huh, yes I learn this from Buffett. I believe he is right because the more variables that is left unknown, the more it'll sound like.......gambling. I guess, we are well aware what the odd is. I would rather miss the boat than get myself drowned in a sinking boat. 

Sun Tzu said "He whom has done his calculation in his temple, stands a better chance of winning the battle"

Buffett "Investment must be rational - if you don't understand, don't do it"

  • Buy only when it is cheap
It is harder to do this for mutual funds because it is harder to evaluate its intrinsic value given the fact that it invested in multiple places of investment. Perhaps the easier to purchase is when we hit a bear market for equities themed funds. Maybe you can advise me. For equities, it is straight forward. Buy when it is below its intrinsic value. 

  • Margin of error
Investment is no rocket science. There is no way that the calculation of intrinsic value be 100% accurate not even 99%. So the best way to do this is to have a margin of error.  The margin depends on individual on the amount of risk one wants to take. "I rather be approximately right and precisely wrong" Buffett.

  • Beware of the demon called, Greed
Do not jump into a stock just because it is "hot". Because it really burns. "Hot" stocks normally have an unpredictable business nature. This is a good thing for speculators because prices tend to fluctuate violently. And they love this because it gives them the opportunity to buy low and sell high --- or does it? Not everyday's Sunday. 

  • Turn off the stock market
Why? Human are emotional. We are happy when we see green and sad when we see red. So why bother making ourselves sad when we are not selling after all. For me, the more I look at it, the more I'll get driven by the nuisances of the market so I better not see. That doesn't mean I buy and leave them there. I still monitor them, but not the prices but their business operations. It won't take too much of my time, few minutes everyday, few hours every quarter and few days every year.

  • Diversify but not too diversify
I always hear the anti buy and hold investors say "We are different, we are not Buffett". Well, as a long-term value investor myself, I have to agree with them on this --- partly. It is true for as a retail investor myself, there are things that Buffett does that I can't. It'll be hard to imagine that I can call up a CEO of a corporation and ask him/her for a lunch or coffee break. I can only know that much that I can't afford to have a focused portfolio like he does. So, I try to diversify a little but not too much or too deliberate as I am still a believer of focus investing.  I have to admit that my current portfolio aren't too diversified either, currently managing 4 equities and a fund. What Buffett said makes sense "I can't make hundreds good decisions all every time". But like I say, I no Buffett, I'll diversify a bit if I felt a little uncomfortable with the amount of holdings in a particular stocks.

  •  Don't get marry because of money
Companies with questionable corporate governance should be avoided even if it is making hell lots of money. A bad person is a bad person. Your money will not be safe with this people. If I see something that I don't feel comfortable with, I'll either reduce my holdings or sell off everything.

These might not be all but that's all I have, I'll update this post from time to time as I learn. Maybe you have some that you might want to share. Hope to learn from you as well. Nevertheless, it is important to learn not to lose money before thinking how to make them.

History have proven that point:

Inter Milan (Champions League 2010) - I hate to see this as a Devils fan

"Investing is entertaining, if you're having fun, you are probably not making any money. Good investing is boring" Soros about rule No.2? Ermm....Ginkgo?

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at

Monday, June 7, 2010

The Good: Freight Management Holdings Bhd

Call it coincidence, the four companies that attracted me to do a research on them happen to be the small caps. I have to admit investing in a small cap does gives a considerable higher returns than "blue chips" but it also comes with higher risk - or does it? Do Sime Darby rings a bell?

Freight Management Holdings Bhd (FMHB), founded by couple of husband and wife, Mr Chew Chong Keat and his wife, Ms Gan Siew Yong in 1988, they have grown over the years and got themselves listed in the KLSE Second Board in 2005 and to the main board 2 years later in 2007. FMHB is an international freight forwarder which acts as an intermediate between importers/exporters and carriers. Its principal activities includes sea/rail/air frieght management services, tug and barge operations, warehouse and distribution, custom brokerage and project management....basically a one-stop logistic service provider.

Historically, seafreight has been the main contributor in the freight services segment followed by air and rail freight. The incorporation of FMHB subsidiary in Singapore which provides Tug and barge services in 2006 have contributed well into FMHB revenues coming in second overtaking air and rail freight revenue. Revenue from sea freight being the most efficient transportation cost and volume wise, has been growing steadily since 2002 with the growth of external trades. Despite being the only 3 rail freight provider between Malaysia and Thailand, this segment faces challenges as locomotive shortage problem has affected its business. To solve this problem, FMHB provides its own trucking services which is lessen delivery time but with a higher charge to its customer. Its air freight segments however focuses more on the lower segment has it faces competition from DHL in the higher segment.

FHMB involves in both Full Container Load (FCL) and Less-than a Container Load (LCL) in its sea and rail freight activities. Although FCL contirbutes higher revenue, LCL gives better margin (more than 20% higher) than FCL. Why is this so? They are able to have multiple charges based on individual consignment while paying the same rate per container.

Historical Business Performance
  • Overall revenue for FMHB has been growing steadily at the average rate of 12.5% where profits before tax is increasing at the average rate of 20.2% on the back of improving COGS margin (FY06-FY09).
  • From a source of mine, FMHB has been sending their sales force for extensive trainings which explain the increased of SGA expenses ratio.
  • Over the past 5 years, trades receivable is low (less than 3 months). The best part, it is decreasing!
  • Doing a super stress test liquidity test ([current assest-inventories-receivables]:current liabilities) on FHMB may not have done justice to them given the fact that their revenue are driven by a widely diversified sources. So to test the liquidity, I'll do it a bit different. this method is created by me, so no accuracy guarantee ya. We all know LCL comes from multiples sources and cost wise to the customer is significantly lower than LCL. So, I give a guess that receivables from LCL are more collectible. LCL contributes 40-45% of freight revenue over the past 5 years, so i make a guess that 40% of those receivables are collectible. This may not be super accurate but I think this gives a better picture.

  • FMHB has been paying dividend consistently and on FY09, a total dividend of 34sen were distributed after the adjustment of bonus shares issued. That is a dividend yield of 4.3% on the price of RM0.80.

What I like about FHMB is that it is a light asset player. Most capex has been spend for business expansion rather than cost capex. Is their growth sustainable? That we'll have to go back to how freight forwarders business works. Freight forwarders hanlde all the documents, requirements and legalities because sending package internationally requires all these which help to reduce burden of their client. Freight forwarders normally have established good relations and networks with other logistic companies. What would this translate to? A better rates for their client. When a freight forwarder receive a project, they'll post an advertisement for bidding and they'll pick a list of best options with all points considered to their client. Once their client pick the bidders, the rest are all left to the freight forwarders. A good freight forwarding service can save the client untold time and potential headaches while providing reliable transportation of products at competitive rates. Networks is the strong point of a freight forwarder. FMHB has a network of 107 agents in 127 countries worldwide. This kind of business is only well known to locally, and we could see, FHMB is acquiring JV with many local firms in different countries - a good sign of growth. (A special thanks to a close source for all the informations regarding logistic business)

How much would I pay for Freight Management?
  • Cost of revenue ratio is actually been decreasing over the past 5 years due to increasing higher contributions from higher margin services such as LCL. But I'll take the average of 79%
  • SGA expenses ratio grows at the average of 8.5% and I estimate it to grow over the next 5 years. But it is likely to stay stagnant somewhere in the period but I'll take the worst case.
  • Depreciation is averaged at about RM5.5million per year
  • Capex is estimated about RM8.5million per year on average as well.
  • Income Tax remains 25%
  • On the revenue front, FHMB revenues mainly derived from these four countries, Malaysia, Singapore, Australia and Indonesia. Average trades growth from Malaysia is about 12.9%, Singapore 11.3%, Australia 7.09% and Indonesia 14.2%. If the average stays for within the next 5 years, total trades growth from these countries is going to be about 15%. This is higher than FHMB average 4 years growth which is about 12.5%. To stay conservative, I pick the lower ones which is 12.5%.

This would make a below RM1.105 FHMB purchase price a low risk purchase. (Note: the lower the price you pay, the lower the risk)

To be honest, I really like FHMB to be in the Great List as it is one of the leading freight forwarder in this country and pretty well-known for its efficiency in this region. Its well-established networks over the years and its well-known name in its industry gives itself a high competitive barrier to its smaller competitors. The only reason why it is in the Good List is because of its low net operating profit margin below 10%. This is probably because of the nature of FHMB business as a middle person of transportation which makes it looks something like a retailer in consumer industry. But unlike retailers, FHMB able to pass any rise in cost to its customers and do not have inventories to worry about. But as you can see from the table below, it is improving and has all the potential to be in the Great List. If i were you, I would allocate a small portion for this company.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at

Just What Is Halal Money Anyway?

Football betting is now legalized in Malaysia or already is, but the question is, is this money halal?

First of all, I would like readers to know that I'm not Muslim and may not have the expertise to explain this (but I do know gambling is haram), but it always fascinate me, how do the tax revenue from gambling industry can be halal-dified? And how those chairmen and Muslims who have stakes in this companies make their earnings halal. I am not writing this to provoke anything (this is not a political blog), just that there are something that I don't quite understand.

Lets go for the obvious first, the Gentings. We all Genting Malaysia (GENM) does not only owns the hotels/resorts in Genting but it also owns the casinos. From the GENM annual reports you could see the names of Tun Mohd. Hanif bin Omar (TMHO) and General Tan Sri Mohd Zahidi bin Hj Zainuddin (TSMZ) own 5000 shares and 10000 shares respectively. Those got to be Muslim names right. TMHO also has 101000 shares in Genting Bhd who owns 48.64% of GENM. In recently opened Genting Singapore PLC, TSMZ has 446000 shares in it. And those have not include their stock options. Remember the last 2 post, if one owns shares in a company, means he owns part of the business.

Now lets go to tax revenue which have been making all the headlines recently, Berjaya of courese. I will not go too deep into football betting legalisation topic, but my focus is on the tax revenue from these sort of companies, Berjaya Corp (football betting through Ascot), Berjaya Sports Toto (lottery), the Gentings and of course the other two lottery companies. Tax revenue, if properly allocated is used for the development of the country, citizens welfare and etc. Maybe I'm wrong, but from what I see, government revenue from tax are mixed of those halal and those from gambling business which looks non-halal to me.

Chances are, these revenues could be used by the Muslims in this country. Is this considered halal? If it is, aren't they indirectly involve in gambling business and aren't the owners of the Gentings directly involved in them? I understand that even monies that circulates around the world are the mix of both. Maybe there is some way to "clean" or "halal-dified". I don't know but I hope Muslims readers could help to advise. Just wondering.......

This comment is based on my personal thoughts and opinions. It should not be considered as facts. Do share your own thoughts. You can always place your comments here and or email me privately

Saturday, June 5, 2010

Would You Be Better Off If You Ignore The Stock Market

The month of May had been a pretty depressing month for the stock market,of course that include the KLSE. Again, a depressed stock market is a good time for investors. Been through and couple of blogs, forums and friends and I see something that I don't quite understand as always. Basically I see two sets of people; one which is extremely glad that they have sold of their stocks earlier while the other are cursing their luck and selling off their stocks cutting losses. Stock market is indeed very emotional huh...

To explain this, I think it might be better if I tell a story.

(This story is actually taken from a friend of mine. It is a little elaborated but did not run far from the actual story itself)

The Story of Mr.E
Let's take one of the stocks from the Great List, Hai-O Ent (Okay okay, I only have two. It's not easy to find a good investment what more a great one). If Mr.E purchased this stock a year back he would have bought at around RM1.70 (adjusted price after stock split and bonus issue). Mr.E likes to monitor the stock price after he bought one. Say, if he kept it for 3 months, the price would have gone up to RM2.12, a cool 24.7% gain. Around Sept 28 to October 1st, Hai-O stock price rocketed from RM2.25 to RM2.64. Upon seeing this, Mr.E says Waoo!! huge gain and sold off his stocks at this point. But, Hai-O price continues to rise. Mr.E felt "Gosh I should never have sold it". He came back and purchase again at RM3.00.
Hai-O rally comes to a halt around mid Nov, stock price plummeted from the high of RM3.33 to RM2.56 within 2 weeks (a 23% lost). That got Mr.E panic and he sold off at about RM2.80. Hai-O stocks turns around after that and continue to rally to about RM4.00 at the end of Feb. This rally gives Mr.E confidence to purchase again at about RM3.50.

In this whole process Mr.E makes a gain of RM1.24 per share or 73%. If he ignores the market and held on till the end of Feb, he would have make RM2.30 per share or 135%. Now you see the difference. One might have argue, if he bought and sold at the lowest and highest point, he would have made more. BUT, the question is, when will it be the lowest and when will it be the highest? What if you sell at this moment and a minute after it hits the highest point? The fact is no one could convincingly predict the stock price even a second later.

The stock market is very emotional and the prices are emotionally fluctuating for most of the time. If one monitor the stock price constantly, chances are, he is pretty likely to be driven by the emotions of the stock market into making irrational decision.

Don't get me wrong, buy and hold doesn't mean buy and sleep. It is commonly misunderstood among the two. It doesn't mean that you can buy and ignore your stock altogether. What it mean is that one should ignore the stock price but monitor the businesses, management and fundamentals itself. For me, I normally check the announcement from the KLSE website on my holdings after 8pm (that's when they got everything updated) almost everyday. My portfolio is rather focus, so I don't have much to read, once a week is sufficient. Other than that, it is from the Btimes, TheEdge and BizStar. And most importantly, I rarely check the stock price and I guess that's what makes me sleep well.

To answer the question, I would say yes, you would have been better of if you ignore the stock market.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at

Thursday, June 3, 2010

What Happen When You Purchase A Stock?

Imagine this, one day you wake up in the morning and feel like buying a stock. Take IOI Corp. for example. So you went on and call your broker or used an online trading tool provided by most brokers today to check the market value of IOI Corp. And you are given a quote that it is selling at RM4.91 per share (take today's closing price for example). After doing all your analysis, you felt that RM4.91 is a fair asking price to pay and you went on purchase say 1000 units of shares.

Okay, what you just did, is not just purchased 1000 units of stocks with a symbol named IOICORP or stock code of 1961 like what most people would have thought. What you just did is, you just bought as small piece of a business engaged in cultivation of oil palm and processing of oil palm registered under a name called IOI Corporation Bhd. Yes, you are part of thousands others who own this corporation with 1000 shares or 0.00000016% of the business.

What happen next? You have a CEO managing your business for you, who also happens to be your group director and owns 42% of your company. Not only that, you also have COO, CFO along with others, factories, refineries, that 0.00000016% piece of land and etc: a working established business. Cool huh.....

When you see earnings per share in IOI Corp annual report Income Statement due next quarter, that is YOUR EARNINGS times the 1000 units that you own. It is YOUR MONEY. Alright, when you own a business, rationally you want your business to keep operating if it is generating earnings right? So, you need to pay your employees, buy a new machine, or even change a new light bulb in the office. You might even think of expanding your business say buying a new land in Indonesia for example. That is why some of your earnings have to be retained for these purposes. Hey, that is your money, who makes the call to keep them?

Your CEO does and sadly, your 0.00000016% of voice wouldn't have help much if you ever decided to keep all your earnings into your pocket. Yes, you are just a minority shareholder. BUT, you should have consider all these factors before you purchase the shares. Come on, be rational. As a business owner, you'll definitely want your business to continue to generate income or grow your wealth for you. Without retaining some of these earnings, there is no way your business is able to sustain either of those.

What you need to make sure is that your CEO and your group of executives are trustable - making right decision. You can check by looking at their past records of management decision making such as the ROE, shares repurchases, special dividends, earnings growth and etc. Whenever management decided to retain your earnings, you better make damn sure that they are making good use of the money. Else, they might as well return those earnings to you so that you can invest elsewhere. (More about how a corporate could grows shareholders wealth someday). Of course, there is no perfect method to ensure that the management won't abuse their power. I'm not naive enough to say that by looking at their historical decisions I could guarantee they'll continue doing that. We'll never know. Investing aren't risk free. You can only minimize it. That's part of the risk I'm taking - and I hope my instinct is right.

What I want to tell today is that, when you purchase a stock, you are not merely buying a stock, you are buying a small piece of a business. The stock market, the brokers and that online tools are just there to facilitate this process. It is the process of buying a share of a public listed company made simple and easy. Probably because of this and its easily accessible market quotation, people tend to treat it and trade it as a stock with a label and a code. They call it "play stock". Don't be surprise if you see most of them have no idea what they are playing with. Yes, you can play, but I hope you know what you are playing.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at