Wednesday, August 24, 2011

Is Apple Going to Shoot At Their Own Foot?

I know this is just a rumour but if it is real, Apple could be doing a Tommy Hilfiger on themselves. I am not going to argue about iOS vs Androids. iPhone is cool in some way. But I think a lot of its "coolessness" are down to its "premiumness" looking at the countries it is popular at. No it is not the apps....

Yes, making a cheaper phone will boost sales but might hurts its "coolessness" and it might lost some of its fanboys and girls....a lot of them. Well, I could be wrong.

By the way, I don't own an iPhone.

Saturday, August 13, 2011

Market Has Only Three Directtions.....

I'm gonna start off by talking c*ck. Stock market can only go 3 directions: upward, downward and sideways. I once told a person, if the stock market goes sideways over the next 10 years, I'll gonna be rich. And if it goes downward, I'll be even richer....very rich  (up to a certain point la). What if it goes upward, wealth will definitely grow but I'll have some headache and probably have to work a little harder. Yes, regardless of stock market directions, I'll be in winning position (with an IF of course). Too good to be true?

Just like a value investor would tell you, the lesser the risk, the more he made, a bear or a sideways market isn't that bad after all. In fact, it is a pleasant situation to be in. No, I am not short selling. I am just investing from a business point. "Investing is most profitable if it is most businesslike" Benjamin Graham. What did I buy when I purchase a stock? Not a paper, but a small piece of a business....a very tiny piece. Refer to my previous post What Happen When You Purchase A Stock?

So it doesn't matter where the stock market goes, as long as the business you purchase is good, you'll do fine ...are doing fine. So it becomes even better if the market tanks when the intrinsic value of your business is growing. And where does the intrinsic value comes from? From the business. It has nothing to with the market  (up to a certain point, because prolong bear market might impact confidence). In bear or sideways market, you can buy more of a value, bigger piece of a business at a lower or constant price. Aren't that good? If you read Buffett's Letters to Shareholders, you'll the pleasant situation he was in before 1982. Look at the graph below.

Graphs above show DJIA was almost flat but US economy grew till 1982. Wow! Too bad, this kind of situation is unlikely to occur in modern days as information is widely available now. But that's what probably got him rich. 

The conclusion is, if you invest in a business, what matters is the business not the stock price. The stock price only concerns you when you intend to buy or sell. Market value drops, yes....intrinsic isn't. And you are still earning because your business is earning. If earning continues to grow like above, your intrinsic value grow. If you own a bakery store which is doing well, are you gonna be concern with daily and minutes price quote from potential buyer? No.

Okay, some might say. It is nice if you are on cash when it crash. Well, if you invest from base on value, you are unlikely to find good or even reasonable deal in a bull market. And you'll be automatically hoarding cash because you just cant find a good investment. Some might even give you opportunity to sell. And that is what I meant by headache. And when opportunity like last week arrives, you'll know you have plenty in your war chest.   

Wednesday, July 27, 2011

Gold Rush

I bet some of you or even some of your friends might brag on their smart move for gold purchases.
And I also bet those of you who are still holding stocks for the past few months would have been thinking..."What am I thinking?" Or you might feel a little nervous at the development in the US and Eurozone. 2008 all over again? (Anyway, it wasn't that bad isn't it if it happens?)

1960s Mini Cooper S

Lets look at the chart below, Gold Prices ve KLCI (sorry, I don't have index chart for both....anyway..was I interested...)

Both charts show the prices or index for the past 1 year. As you can see, gold prices has risen from...what about $38.5/kg to ..$51.5/kg. That's a CAGR of  33.7%!. Sweeet. KLCI? 1350 to 1560 and that is 15.5%....not so good...but not bad still. So yes, if you bought gold then, you have all the right to brag...good decision. If you walk around on the street, and someone talks to you about gold and the reasons why you should buy them, they won't go far away from these:
  • It has only one direction in the long term - UP
  • Hedge against inflation
  • A safe deposit
Lets look at it one by one. First, prices appreciate in the long term. Yes. 20 years price data below shows that it DID indeed happen. So yes, they are right. But 10 years is also long term right...2001, not so at all. 

Second, hedge against inflation. Lets put it about $12/kg in 1991to $51.5/kg in 2011. That gives you CAGR of about 7.9%. A pretty good if you trust government data and yea...your wealth are protected if you spending increases by that amount annually. So it is quite true then. Safe deposit, yea....if you trust your bank.

So did I bought any, YES of course, for my girlfriend as a gift...a jewellery in fact. Good investment? Hell yeah, if she is happy it is definitely good then. (although I prefer platinum or silver...looks a bit nicer)

So did I actually bought one for investment. NO. There are few reasons for that. I don't know how to value a gold. It isn't something that generates income in my pocket nor it is for itself. Okay, the market did the price. So how did the gold appreciates? Supply and demand. If demand more than supply, it appreciates and vice versa. So we know the total supply of gold in this world is finite, unlike petrol/oil where supply depreciates in a very long term. So the only way for it to appreciate is when the demand increases.

Question is where does that demand come from? Gold in fact doesn't have much economic value. Yes, it is the best conductor of electricity and heat. It is so good that it is not suitable for electricity transmission because it is too difficult to control. Heat, yes. If your car radiator is made of gold (McLaren F1 is gold plated) or your CPU heatsink is made of gold, it'll be quite cool. But aren't there a much cheaper and better solution. Yes, did I mention about price. It is too expensive to be economical enough for industrial use and considering we have much better solution why gold then. Compare to copper for example, it is cheaper and more economical for electrical transmission. Aluminium properties are good for cars. Titanium is light and strong enough for aircraft. Yes they are all same commodities but they have economics value.

1960s Mini Cooper S

So gold....they have nothing much but only good for jewellery or for palaces or cars for some madmen from the Middle East (or our politicians). Then by simple logic, gold prices should increase in tandem with the world populations (after factoring birth and death) because that is how its demand increases (sound familiar to property investors?..i'll talk about that some day). And that if, or it should be, people demand for gold. There is how I see the fundamental of gold. Other than is speculative.

There is another way still. Hoarding. But like what Charlie Munger said "You are an a**hole if you did that".

1960s Mini Cooper S, a classic, a must try.

Thursday, July 21, 2011

Can You Invest in Stock with RM1000?

Yes, of course. You can even invest with RM300 (that if could find one) if you want to just that the cost of investment will way higher.

I have friends who use to ask me that question. "I have RM1000, can I invest in the stock market with that amount?". Yes, you can though RM3000 at least will give you the lowest cost. So should you wait till you have RM3000 before you invest? Not really.

Consider this. An X investment bank charges the minimum RM12 or 0.5% transaction fees per trade whichever higher. I'll exclude stamp duty and all that for simplification purpose. Then consider these 3 scenarios:

Invest with RM300
Minimum: RM12
0.5% of RM300 = RM1.50
So you transaction fee will be RM12 since it is higher.
Cost of investment = RM12/RM300 x 100% = 4%!

Invest with RM1000
Minimum: RM12
0.5% of RM1000 = RM5
So you transaction fee will be RM12 still.
Cost of investment = RM12/RM1000 x 100% =  1.2%

Invest with RM3000
Minimum: RM12
0.5% of RM3000 = RM15
So your transaction fee will be RM15 since it is higher.
Cost of investment = RM15/RM3000 x 100% = 0.5%

So now you can see clearly that investing with RM3000 gives you better cost saving. Now here is a little thing that you need to learn about investing: opportunity cost

Say you found (ICAP) is a good investment and you want to invest in it. I'll pick ICAP since it is easier to explain. If you do a little research on ICAP, you'll know that this is a closed-end fund. Which means there are 2 parts in its price.

First is the NAV which is tells you the mark to market asset value of the fund. put it simple, say it has RM100mil worth of stocks and RM100mil worth of cash, its NAV will worth RM200mil. divided by the number of units/shares issued say 100mil shares, it's NAV price would be RM2. Got it?

Then it also has the other part which is the market price. This market price is not always related to its NAV. It can be more (premium) or it can be less (discount). It is about how the general market feels ICAP is worth just like the stock market price. Supply and Demand ma. And this is the price which is shown on your trading platform when you key in ICAP or the current price demand from the market. So this is the price you would pay if you were to purchase it.

Now based on July 17th price, ICAP NAV is now RM2.79. It's market price is RM2.19. That would mean it is now selling at a discount to NAV which also mean you can purchase RM2.79 worth of stocks and cash for RM2.19. That is a 21.5% discount to NAV!

Say you were to wait till you have RM1000 before you invest, your opportunity cost for omission would be 21.5% - 1.2% = 20.3%!!!
That is Hell A Lot! Giving up 20.3% just to save 0.7% doesn't make any sense if you find ICAP a good investment. Plus if you know how ICAP invest, you would know that they won't hold onto a stock if they feel there is little upside on it versus the downside. So there is potentially bigger losses. Sorry to say this, isn't this what we call penny wise pound foolish?

The same goes to stock. If you find a good stock that is selling cheaply compare to its valuation, do the math above to see if it is worth saving that small transaction cost.

Sunday, July 17, 2011

Your First Investment in Stock

I have friends who ask me, how do I learn how to invest in stock market. For a start, I don't have a financial degree nor it is my profession. Well....maybe part time yea, since I am an investor now. In a way (no disrespect to business school), I think its is good because I happen to know that thing that were taught there weren't exactly helpful if not harmful - think Wall Street and Efficient Market Theory. Of course there are better school as well. Just that I would most likely fall into one of those teachings.

How I get started is a long story but I do have economics background picked up when I was younger. My knowledge in stock investment is through reading, reading and reading....and reading. It can be books, blogs, forums, financial sites or anything. Books of course have been the most helpful. I think for starters, the first and most important investment to make in stock is the investment in yourself. 

So here, I have three books which you can pick to invest in yourself and they are for value investing. Why value investing? To make it short, you'll be investing in the business and its fundamentals not the price - which makes more sense. These are the quickest way that I could think of.

The Warren Buffett Way - Robert Hagstrom
I always recommend this as the first book for everyone who just started. In fact this is the book that I read when I have no idea at all what is a stock market! So it is a book The book have a short history of you know who, how he got started to become who he is today. It provides the overall strategy for investing base on the 4 tenets:

  • Business tenets - Business economics of a business: the competitive advantage or moats
  • Management tenets - Which tells the honesty of the management and whether a management decision makes sense
  • Financial tenets - This tells the financial of a company. Is the balance sheet strong? Are they making profits?
  • Valuation tenets - How much would you pay for the business. The also also provides a sample of a Discounted Cash Flow Valuation. But I would recommend DCF table in wikipedia as it is more simplified and clearer. One note though, you might end up with over valuation if you follow his style, there is another book on valuation I'll show later.
It also mention about the concept of margin of safety which is an important tool that you would need.

The Five Rules for Successful Stock Investing - Pat Dorsey
This is a all in one book. It covers the first 3 tenets above in better details and only cost you about RM56 if you were to purchase it in Malaysia. This book discusses the economic moats for every sector or industry there is in the business world. You'll be able to identify great, good and ugly businesses after reading this. Although I would recommend The Little Book that Builds Wealth by similar author for moats, this book itself is good enough if you are a little bit tight on budget. 

Accounting is the language of business and investing. You won't be able to do this successfully if you don't understand the language. There are basically 3 financial statements: Income Statement, Balance Sheet and Cash Flow Statement. These are the 3 statements that you need to understand before you can start. And to be honest, I am sceptical if people are able to manage their own personal finance without understanding these 3 statements. This book could provide you enough knowledge that you need. It even discusses the debatable discount rate - if you know what I mean. I have to say I agree with him.

It also points you some red flags that you might want to take note on the management. It definitely doesn't cover all as there are infinite ways for financial shenanigans. But do not let this scares you away because I bet you know who to trust and who doesn't. Understanding the financial language and margin of safety will give you good enough protection already. 

Value Investing: from Graham to Buffett and Beyond - Bruce Greenwald
This is one of the best book on valuation so far. It defines the concept of value investing. It groups value investing into 3 types of valuations:

  • Assets Valuation - Which is on the balance sheet - aka the Cigar Butt style. It offers the least risk and of course huge returns. It is the safest bet of all. But, you have to be really good and extremely familiar with the business assets because there is where the value lies. I am afraid, this is better suited for full-time investor mainly for 2 reasons: It is very difficult to find such investment or assets that is selling below its hard value. And you need a team to identify its value quickly. Few of the best known investor in this style is Benjamin Graham and Seth Klarman.
  • Earnings Power Value - This is where we find the intrinsic value of a business. Buffett once said "...the value of a business is how much the business could generate over a period of time..". This has a little more risk. However it could be greatly minimized by picking businesses which wide moats.
  • Earnings Power + Growth Value - This is the riskiest of all. Although I have to admit that I use to this kind of valuation and in fact make great trades with this. But I guess I was a little lucky. I started in 2008, and it is difficult to get punished by such market condition. Never pay for growth unless you are very sure what it looks like.
So there you have it. These 3 books could give you enough arsenal to start in the stock market. Of course one might ask, these are Americans books which focus on US stocks. Okay, this is not a book on stock tips but rather educational. Except for taxes and laws, most of them are applicable to any businesses in the world. 

There are others books that you might be interested as well:
The Intelligent Investor - Ben Graham:  Dubbed as the bible of investing. It doesn't only cover stock but other investment types as well such as ETF and mutual funds. And the concept of margin of safety. A must read.
Common Stocks Uncommon Profits - Phil Fisher: Great book on management and "di-worsify". Also a must read.
Security Analysis: Ben Graham: If you are full-time or hardcore stock investor. This is a must read. In fact, any new employee in Uncle Tan's firm have to read this before they start anything. 

Of course, it would guarantee you success. Temperament is important as well but I don't have any remedy for that. That you would have to control it yourself. I'll leave you with this wise words from Sun Tzu "Know yourself and know the enemy, and you won't fear any battles"

Friday, July 8, 2011

Is Hai-O Shares Buy-Back Sensible?

This is probably one of the most exciting company on The List judging by the fact I wrote on it many times. But this is not a good thing because I would rather prefer it to be booooorrring - business wise. I wasn't the only one. This once darling of many analysts now find itself no worthy to look at. Although I must admit I did caught by the numbers as well but I'll talk about it in details later.

If you look at Bursa announcement, you would have notice they have been actively buying back shares all the way back in late March this year. There could be 2 reasons behind this. One the price are undervalued so it makes sense to purchase. The second one is that the management is trying to hold their share price from falling further (given that consensus analyst valuation is at about RM1.80 - RM2.00). It is for the first reason, then current shareholders should have no much complain. If it is the second....that depends on where you stand. If you talk about charity that'll be fine. Business-wise....huh? Isn't the cheaper the better? Why maintain the price?

So if the management think it is undervalued, is their purchase price sensible. Lets put business analysis aside as I intend to write a shorter one today...erm..night. If current earnings is sustainable, we are looking about RM29.9mil after-tax owners' earnings assuming capex is about RM3mil (which I think will grow higher since they are getting into manufacturing the heat thingy). The business has lost its moat in MLM division and other division probably never have one. So for my own valuation, I am looking at about RM1.30 to RM1.50 judging by the risk of having no moat thus higher discount. That is roughly my purchase price back 08 anyway but have sold them off lah....though abit late. The management meanwhile repurchase the shares at the range of RM2.15 to RM2.30 which roughly 8% discount rate. So it is not too insensible still just that I am abit "cheap".

Now my mistake. Previous MLM earnings are mainly contributed by the big ticket items which is the water-filters and lingeries. These earnings are not sustainable. How often do you buy new water filters or health lingerie? Of course those filters inside have to change every year and some 2 years. But that only cost around 10% each of the entire water filter's price. If say an average of 3 filters have to be changed annually, that'll be only 30%. That if all the consumers willing to change them. Coincidently, this year revenue also 30% of last year in MLM division. BUT that is really just coincident because average MLM turnover is about 90%. That also tell us that it is still growing in some way. But I was really caught by the big numbers it is generating. If it was like what the analysts say that it had hit the bottom, it means current earning is sustainable. For me, I don't know I'll just have to wait for the next AR.

I had to take my hat off to Uncle Tan (not the MD by the way) who sold off ICAP stakes in HAIO before April 2010. I don't think that is luck...perhaps a lil..that's investing right.

Anyway, I still think the management does the right thing over the entire period. Even before it slows down. They had actually introduce lower priced  products which could generate recurrent sales earlier. So they know it and are putting efforts to do more including some halal chinese herbs. On the new act, I do hear some CDMs (it is a top seller position for those who are not into MLM) had their membership terminated. This will definitely hurt on the short term but it good for the long term and the whole industry. As for the retailing division, I think they high level strategy is right by concentrating on more house-own brand as well as promoting it. Retail business naturally don't have moat. But with their own brand they might create a small one (if it is successful). Technology division....we'll just wait and see.

Sunday, June 19, 2011

How To Bankrupt A Listed Company

I was talking to a...well I would say a manager of a listed company in Malaysia. We came across a topic on how Isome manufacturing firms in this country syphon money out from them. it isn't a definitive way but I would say one of the way. It is really some good insight, and I think I have to revisit some of the accounting in The List.

Suppose a manufacturing firm were to purchase a new machine or equipment worth RM10mil. And they choose to finance it from bank. Instead of borrowing RM10mil, they borrow RM25mil instead. That extra RM15mil, know where it goes. How did the bank able to loan out RM15mil extra? 2 possible reasons. One, would they possibly know how much that machine worth especially it is some "new" equipment. Plus the more they loan the more they earned. No big deal. Two, buyer, seller and loaner work out a "deal".

You would say this only involves some executives and directors who are suppose to look after shareholders' interest overlook such activity. I would say, it goes as high as there and even the owner (executive owner/founder). Owner? How would an owner does that to a company he owns? Well, what do you think happened during an IPO.

I remember I went to a seminar where the presenter mentioned Malaysia Semua Boleh. This is Bolehland anyway. I'll share out more if I have anything new especially on how shareholders got leaked.

Link to BolehLand

Monday, June 6, 2011

Similar But Not The Same

An anonymous reader suggested me to take a look at N2N Connect who are in a business just like Excel Force.  But first apologies when I say I couldn't find a similar business listed on Bursa and thank you to .... well ..."anonymous".

N2N Connect Bhd is the younger siblings of Excel Force. I shouldn't say siblings, they are both competitors to each other. And like Excel Force, they deliver online stock broking system, applies the same ASP model and some other mobile "value added" services to their customers which I think are redundant. Oh come one...instant messaging on GPRS? Their business economics moat is from the ASP model which I have explained in the previous post on  Excel Force. Product wise, I think N2N Connect has a small edge where it is able to provide GTD trades which some traders would love to have (not sure if it is from the broker or the system). But still I don't think that would give them competitive edge as most customers would like prefer cheaper brokerage rates and system stability than services like that.  Anyway, N2N only have worry about the latter half.

Despite similar business model and economic moat of the two, their finances are totally different. One, you see it raking up profits after profits, while the other have an erratic profits margin and at some occasion in the red. It could be one of the two reasons for this. One, is that somehow N2N Connect has a higher cost structure and inefficient. Two, they are on the Amazon-style "get big fast" strategy as striking deals with as many customers as possible is the key to growth. Whichever it is, it is hard to tell for me because its annual report provides too little information about it. (Time for shareholders to speak up!).

Speaking about efficiency, N2N Connect SGA expenses does raise a few question if you look at the table below. Part of the expansion? I don't know. It is hard to tell from the report. Another question is, both Excel Force and N2N Connect operates in the same region and countries (Malaysia, Singapore, Thailand and Vietnam) but they have more than twice the number of employees versus Excel Force (90 vs 39, courtesy of

However, N2N did explain in the AR that sudden drops in revenue in 2008 was due lesser trading activities and yea, volume does get thinner from Q4 2008 to probably 2H of 2009 which we saw further shrinkage in revenue. This large impact could suggest that revenue from ASP model dominates their income stream the most (possibly more than 75%) unlike Excel Force which is about two thirds. The details however, can't be found in the AR.

There is another evident that shows just how aggressive N2N expansion strategy is. Their receivables turnover are significantly higher as well.

It is hard to draw what their normal earnings are like as there aren't enough information disclosed in its AR. Whether it is due to competitive reasons or trying to hide something, I'll go with the safer bet on Excel Force. But if one were to find out that it is due to bad management or bad investment decision, it could be an exciting opportunity for some groups of value investors. The problem is, how could you derive value from it and how much does it worth?
Could Excel Force capitalize on this? Well, this is the kind of advantage of businesses with a wide moat. They'll just do fine even with bad management and could easily turn earnings around. Threat from Excel Force are minimal or non-existence, perhaps on securing new customers is where they really compete. Unless N2N really screw things up, it is unlikely that Excel Force will benefit from competitor's bad management decision. How this could turn out remains to be seen. I am happy enough to stay at the sideline on N2N Connect.

Saturday, May 14, 2011

The Good: Excel Force MSC Bhd

It has been some time since my last post. I have a friend to thank where he thought me how I could use some tools provided by my broker to filter stocks. Yea, it is kinda embarrassing since I have been using it for some years. Well, to my defence, I don't visit my stock broking site that often - I am a lousy customer remember?

Alright, Excel Force. As usual, some little background. Excel Force principally or I would mainly owned and operated by 2 Taiwanese, Jeff Wang and his spouse Sharon Sun. It began operations in 1994 before it is incorporated in 2002. So it is quite a young company I would say. They both founded Excel Force which are now in the stock information applications and services business. In short, if you happen to use AA Anthony, ECM Libra, HLeBroking,  Jupiter Securities and so on, you are using their software.

Business Economics, Management and Finances
Since these 3 factors are pretty much linked together, I think it'll be easier if I write them as a whole. Excel Force categorize their business into 3 divisions.

  • Application Solutions: This is where the RnD took place and revenue are generated from the sales of products as well as trainings.
  • Maintenance Services: Contractual maintenance services after products warranty expiry period
  • Application Service Provisions: Uses ASP model, that have fixed monthly charges for services and transaction charges
The third contribute the most to its profits over the past 3 years (60%-72%) and we can easily understand why. This is where customers pay for its services after purchasing its products and system which provide steady stream of income to the business. The use of ASP model is that the customer would outsource its entire IT department to Excel Force which provide access to its apps and services through this model. This would have save lots of fixed cost incurred by its customers. Excel Force then charges monthly fees for this services and charges variable fees for transactions, buying/selling of stocks for example. So the more trades are, the more it earns. hmmm.....

The moat level for this division is pretty wide as customers are locked in to use their services due to high switching cost. However Excel Force could destroy it if something goes wrong with their server which jeopardize their relationship with customers as well as reputation. For the customers side, switching to other service just because it provides slightly cheaper services could be cumbersome, time costly and worst very costly (imagine poor service, brokers might lose their own customers). That's probably why you would see most of those customers they shown on their website have more than 15 years of relationship. Plus, I have no knowledge of any listed competitors to them and there is reason for that. Although this is a profitable business model (we'll get to that), the market aren't huge. There are only a handful of stock brokers and investment bankers available. Its ability to "lock in" works as a double edge sword as well. It means other are able to "lock in" their customers making Excel Force difficult to grow....unless their competitors are mediocre.

Its fundamental are pretty solid. Having no debts and profit margin of 36%-50%. Return on equity are high averages about 26%. If you look at the table below, you could see a decreasing ROE. Well, that is because cash earnings has been retained over the past few years and thus reducing the ROE. My guess, it was kept for expansion purposes as they were looking expand in SEA region.

Looking at the 2010 ROE, I bet it is time for the management to think about its retained cash position. (OK, to avoid confusion, ROE is to evaluate management and my standard is 15% and ROIC is on the profitability of the business). After several adjustment with the assumption that RM1mil is needed for operation, it has about RM22mil excess in cash. With that adjustment, we could see the ROIC of the business is 160% which is highly profitable

Oh yeah, this is nice. Their recent earnings drops (>40%) has cause their stock price to plunge to about RM0.30 - RM0.35. That gives the market valuation of about RM40million. Yes, this is a very small company and possibly the tiniest I have research on so far. Like I said before, the market aren't huge so that comes in little surprise. The book value is about RM0.26 per share so there is about 4 to 10 sen premium for the current price. But does it worth the premium?

That we'll have to look at the earnings power value (EPV). But first, what's its earning power? Lets look at the table below.

We could see that App Services has been the main profits generator over the past 5 years and we could also see that all 3 divisions profits margin have been squeezed in 2010. Although the management said it only happens to App Solutions division, but it seems to impact across all division. Well, that is all because of the high expenses needed for its overseas projects. That makes sense because if we were to look at the revenue table below, it actually increases. So I believe these are 1 time charges.

How sould we value this? Erm...I would split these into 2. First, I'll just take the more stable earning stream from App Services Division plus a slight adjustment to the other 2 division in 2010. That we'll have an estimated earnings of about RM4.5mil. That would give me a valuation of RM0.37 per share which about the market value. Then I'll use the normalized earnings power that I believe it should be which is about RM6mil and that would give me a price of about RM0.46 per share. That would give me about 19.5% margin of safety to the first. So with the current price, I would say, this is a Sweeeeeeeeet deal.  

Sunday, March 20, 2011

Moat on The List

Some of you might have heard this term before. Moat actually means competitive advantage in business term. Well at least that is what Buffett likes to call it, "economics moats". To illustrate this I'll pinjam from the man himself. If you have a childhood with Disney cartoons, you probably would have notice those medieval castle that was surrounded by water. Those are moats (although I use to think they are deco when i was young), a defensive frontline for the castle. So moats is what protects a castle from being attacked and the wider it is the better. And for investment, this castle is your business.

I picked up a book called The Little Book That Builds Wealth. Man I start to like these series. Unlike the previous one, this book is for those who wants a little more intensity in investment - picking your own stock. This book basically talks about 4 types of economic moats which are:

  1. Intangible Assets
  2. Switching Costs
  3. Network Effect
  4. Costs Advantages
I won't go into the details on them as the types of moats are specific to business model. Instead, I'll show you the list the businesses on The List have and I'll classify the level into Wide, Narrow and None. 

Just like what I have mentioned in the previous post, JobStreet has the Network Effect kind of moat. Its strength lies in its customers on both end. Both are making new competitors in this region difficult to find their footing. If it is so easy, would have eaten them long ago. But they are all not invincible like Coca-Cola. But even if competitors tried, there'll be a lot of blood shed and not economic wise to do so. Moat level: Wide

Freight Management
Just like JobStreet, they have Network Effect as well. Their long lists of customers make them able to negotiate lower price from vendors which in turn lowered their cost which can be passed to their customers. A win for both end. And also, their wide network vendors allows their customers to choose the best service and best price. Who would you rather pick? And not just that. Some research have shown customers would rather stick to the freight forwarder they use to work with. That is because of high switching cost. Imagine late delivery or worse...lost.
Moat level: Wide

My E.G.
They have Intangible Assets moat which is government contract. And government can only offer this much.  But there is one problem with this class of moat. Government can choose not to renew the existing contracts but as long as the contracts are still there, they are well protected. (On a side note, I kinda try their services few months back and also the peak hours for summons. And I can say it is buggy and sarks. Why sarks? IF your server can't handle the traffics, just say so. Don't lie and say it is under maintenance.).
Moat level: Narrow

Well, this is my old time favourite. Gosh I was lucky not to get punished by my mistake. Actually they do have Intangible Assets (brand) and a little Network Effect from their MLM business but they have blown it all up. Once Intangible Assets like brand name lost it, it'll almost never recover. On their core TCM business though, their niche is mid-market segment but still compete head to head against Eu Yan Sang. I know people would rather pay more for Eu Yan Sang products than theirs.
Moat level: None

They are in a highly competitive business although they do have costs advantages over smaller competitors due to their economic of scale. But their main rival is Kimberly-Clark. One good measure of competitive advantage is are they able to pass higher inflation cost to customers easily. The answer seems no. Prices of their tissues are close to those Kimberly-Clark and customers don't have brand preference for facial tissue except for those higher-end tissue which are really used to wipe face. But they are always Kimberly-Clark around. And the same goes to ladies sanitary-pad either. One thing good is that, they only have one real competitors and for the fact that they operate at probably higher margin than their smaller competitors, higher cost could be a blessing in disguise.
Moat level: None

Kawan Food
First of all, kudos to Kawan Food for their effort to automate their productions. This is one of the few manufacturing firm that sees the problem ahead others. Moat has little to do with management so I'll put that aside. I only half agree with the writer when he says restaurant or those in food business don't have moat. I think they do have a little. Maybe he is from western country but we Malaysian do pick our food. Taste is important than hygiene...yes..oh come on. But taste is very subjective but once you are to get the taste right and promo it well, that's it. Just look at the hawker stalls in Penang. BUT, this are never a large scale business. They can only be that big and that's it. How about Kawan Food then? Nope, they don't have that. Those hawkers are special case, just the way Malaysian behave. But for Kawan, if someone able to copy their recipe... you know. They don't have and unlikely to create the kind of brand attachment like See's. 
Moat level: None

Teo Guan Lee
Someone ask me why me I recommend some unknown and potentially risky business. No doubt, retail business are tough and for TGL it is extremely volatile. They have to operate at losses for certain quarters. But that could be a blessing in disguise for them. Tough business can automatically help you to wipe competitors off IF you could survive it. TGL moat lies in their Intangible Assets where they sign exclusive right to make clothes on some well branded cartoon characters. But it is not something that could last forever as popularity for cartoon changes although the likes of Tweety Bird could stay for decades. But they'll lose it once it ends. Second volatility actually helps their pricing power because they could raise it without people noticing it - for most at least. Yes just like See's. Their only threat are those pasar malam products. But, you only buy once per year, wanna buy so cheap punya shirt meh.
Moat level: Narrow

Latexx Partners
Hmm...there is a high probability the deal will go through. And end of story. I'll talk further if it falls.
Moat Level: None

Genting Malaysia
Well, this is interesting. They have Intangible Assets moat and I would have to say the late Uncle Lim sign a pretty good deal from the government. Looking at the Malaysia politics right now, it is very very unlikely that they'll grant another similar one. How about the mother Genting? Genting has the similar moat but narrower judging from their Singapore operations. But for Malaysian one, it is well wide. I only don't like the way they treat their shareholders. It could have been in the great. 
Moat level: Wide

Hup Seng
They are pretty much like Kawan. 
Moat level: None

I am not going to explain on The Ugly list because it is a bit late know as you can see I'm getting lazier. But I guess you would have know how to judge. 

Anyway, I think that is a good book to have on your book shelf and a must I guess. I have revisit the book several times during my analysis and I think will continue to do so.

Saturday, February 26, 2011

"Magic" Formula?

I just went to a investment seminar by iFast Capital this afternoon and was little disappointed to find out that there wasn't much information shared considering the fact that I went to a quite educative seminar by iCapital last August. Well it wasn't really that bad a seminar actually. What I think is it is targeted to those who like to know a little but wouldn't like the trouble to analyse a little deeper on the economy and investment - although I do felt the speakers put too much focus on their fund (I have a friend who told me that "that is what financial advisor is about"). But it is a good time for potential unit trust buyers to meet the fund manager because I think if you were to invest in equities fund, you have to meet the manager to make sure both yours and his/her goals are aligned.

Well there are few reasons why I don't like equities unit trust but I'm not going to discuss to much about it today. If that is the case, is there a way to get exposure to equities if one don't like the intensity to analyzing and picking individual stock? Yes of course, you can buy ETF where you'll be investing in a little bit of everything - that your wealth will grow along with the market at a pretty low cost. But what if you are someone in between and you want to beat the market?

If you are the kind who pick your own stocks, well turn away because I don't want to waste your time. But if you aren't read on.

I came across this book called The Little Book That Beats the Market while I was searching for The Little Book  of Economics. I am not here to promote the book nor review it, but there is an interesting formula mentioned by the book called the "magic formula". Yes, magic. And I'll show you part of it not all of it because I don't want to take away the credits from this book.

What this formula does is that it ranks the stocks which have the highest ROE and the lowest PE combined. And you'll buy the top few ... erm .. not few actually but some of the top in the rank (the magic number is in the book anyway).

Why high ROE? ROE is return on equity and generally the higher the ROE the more profitable the business is.  It basically means the earnings return a business gets on its capital or equity invested. I don't want to get into too detail in it but it is something like your interest rate the higher it is the more you get. And usually business with high ROE have a high growth potential because of the higher returns it could generate from its invested capital.

ROE = Total Earnings / Total Equities

I'll put 15% as the "magic" number of high ROE.

Why low PE? PE is price to earning ratio which mean the lower it is, the cheaper the stock is in valuation term. It also means you'll get more of a something from the price you pay for a stock. Some says, it is how valuable a stock is. The lower the PE is the less valuable the stock is. wait...wait...wait...How can something not valuable be a good investment. Well, this is why investors should love the stock market because there will be time where the market will see a profitable business as a junk. 

PE = Market Price / Earnings

I don't have a "magic" number for this but something below 10 should be considered cheap.

If you combined both of those criteria together, you'll get to buy a profitable company at a low price. Isn't that sounds like value investing? Yes, close.

So get a piece of paper or an Excel sheet, rank them and buy a few....erm...not few but some of the top in your list. Okay, why do I say some (actually not some also la, you'll probably need about 30 stocks). That is because you have to diversify if you were to use this strategy. Information on ROE and PE are readily available if you know where to find. If you look at the word "Earnings" that I highlighted just now, that number you get is actually accounting earnings. It may or may not represent the true economic of a business and normally it doesn't. In layman terms, it reported its earnings according to the accounting principle it adopted. Why do they report such a misleading number? One, that is the law lor...two, there is no perfect or even proper way to report an accounting figure. But as Buffett puts it, he and Charlie will be lost without those numbers. So normalization and adjustment have to be made on the reported earnings. 

Not just that, high ROE doesn't always mean high profitability or growth because a business can take debt to lower denominator and if the business returns all its earnings as dividend it may not grow as fast. But both action can result a high ROE. Same goes to PE, lower doesn't always mean cheaper. It can be really a junk because both ROE and PE is actually old figures and the reason it becomes low is because its future economics no longer favors them. Think newspaper.

But if you were to use this formula you definitely wouldn't want to do all that time consuming effort. In this case, you'll definitely have to diversify to spread the risk across. In that many stocks you'll probably get a few losers but the winners are not just able to offset the losers but will give you a decent return. That's what the book claims and I think it does make sense that's why I share this.

If you need prove you'll have to read the book. It shows its track record on US stocks and most of the time it beats the market. How bout Malaysian stocks? I don't have the figure to show because that is not how I invest. I am merely sharing how it can be done in an easier way. Oh come on, you have to do some homework right. 

Will it work on Malaysian stock then? I think it does make sense and it might work. Hey, I started value investing thinking it might work.

Disclaimer: This is not my idea and I don't want to take credit for this. I am merely sharing and commenting on it.

Tuesday, January 25, 2011

Well, Lets Get Back to the Basic

An idea told by Benjamin Graham, glorified by Warren Buffett.

I found this article at Do take a read if you were to understand what happens when you purchase a stock. Isn't that what investing is all about?

Back to the Basic: What is a Stock?

Saturday, January 22, 2011

The Good: Teo Guan Lee Corp

Nope, this is not a poultry industry business although company with this kind of name tend to be involved in poultry business. Rather they are in primarily apparels industry and a little property investment (less than 2% of revenue). There isn't much to talk about the company's history. It started in 1934 as a small enterprise dealing in general merchandise. Now it has 2 offices; 1 in Prai and another in KL, 9 boutiques and 400 consignment outlets. (Anyway i copy this from their website so you can just read from there)

Its apparels business includes manufacturing, marketing and distribution. Basically from front end manufacturing to sales. Well, apparels business is typically very competitive in Malaysia because somehow, we aren't that good at branding our goods which could have give this sort of business great economic advantage, pricing power, apart from the likes of Padini (locally) and Bonia (internationally). So, what do Teo Guan Lee (TGL) has? Well, the company name may not sound sexy but their brands do (not all entirely theirs). They have 2 house brands and 8 character licensing brands.

House Brands: KikiLala, Cuddles
License Brands: Sesame Street, Garfield, Power Puff Girls, Tom&Jerry, Popeye, Ultraman, Pixie&Dixie, Pronic

I think you would have able to guess TGL is in kid's apparels business. For their house brand, I believe KikiLala has a strong branding locally and would appeal to most parents. Trendier parents might prefer the likes of Guess Kids, Gap Kids or Baby Gap but that is entirely a different market. For the license brand, they are able to product products using the character brand mentioned and when you look at them, they are about fun and kids wanna have fun. So the bigger name might sound a little...boring I guess. But their advantage is not entirely protected for 2 reasons. First they don't have exclusive right to produce them. Second, is the threat from "pasar malam" products. Walk out to a pasar malam or any store, you'll definitely see one of those. So the only way to differentiate themselves is the quality and of course the appeal.

Being in a kids' apparels business is quite different from the adult one as business tend to be very cyclical as parents would tend to buy more new clothes for kids during festive season particularly during CNY as a set of new clothes is a must by Chinese tradition of course not forgetting Hari Raya as well. But, if they buy from TGL this year, you can be reassure they'll llikely to return the year after because kids tend to grow faster when they So there is some form of repeatability there but TGL may still need to cushion the low season. Probably would prefer CNY and Aifilfitri falls on a different quarter. TGL did okay last 4 quarters and manage to register profits although I think mainly cushioned by rental income from properties.

Financial Fundamental
When you look at fashion and apparels businesses, the No.1 thing that would worry is the inventory. And TGL did quite average in comparison to its peers although they are in a different business. Table below are measured in months. You can clearly see why Yen Global is struggling.

We have seen better brand products tend to command better margin. However for TGL, although they have good branding appeal with their license products, they still couldn't top it. Maybe parents are more sensible towards their kids and purchases are less impulsive.

But I would say, there could be a little untap pricing power potential for TGL although they could afford to have lower margin as they do not need to spend much on SGA expenses. They could just leverage on Cartoon Network. In 2010, TGL generates RM4 on every RM1 spend on SGA, Padini (RM2.87), Bonia (RM2.17), Hing Yiap (RM4) and Yen Global (RM1.80). 

From 2006-2010, liquidity for TGL is a bit of a worry as it has stay below 1. But it has steadily improved from 0.46 to 0.76. And from the latest quarterly report, it has now improved to 0.93. 

DE ratio has improved as well to about 33.3%. Receivables turnover rate is pretty average which is about less than 2.5months probably due to their heavy reliance on consignment outlets sales. It is pretty clear as Padini managed less than a month, Bonia and Hing Yiap less than 2 months while struggling Yen Global needs about 8 months!

So fundamentally they are OK and things seems to get better for TGL.

I never like businesses that diverse into property investment. It doesn't make too much sense to shareholders as well. And owning a property for rental income from Corporate is not a good idea due to double taxation (corp tax + witholding tax for dividend). BUT, TGL case is different in fact I am quite glad that the management did that as it provide some income and liquidity during the low season.

I do like Teo Guan Lee business model actually as the don't have to worry too much on the marketing side. This gives them the advantage to keep the cost down although they would to pay for licensing fees. But this do make their work whole lot easier. If you can't beat 'em, buy 'em. Trend? What trend? The management has also keep looking for new licensing opportunity over years and in 2009 they have secure "Transformer" license just when the movie was a hit.

So the golden question is, how much would you pay? 

Revenue growth wise, TGL isn't really exciting. Although revenue CAGR for past 5 years is about 8.4%, I am looking at about 3%. Parents seems to have control their spending on kids during bad times. But TGL does have enough pricing power to pull when needed after looking at their 2007 result (manage 14.4% growth in sales when gross margin improves by 1045 basis point). 2007 is when commodities prices are on the rise.

With cost of revenue at about 63.1% of revenue, SGA expenses at 25.9% and Capex average out to RM1.4mil, the adjusted fair price to pay for TGL would be RM1.85.  

Tuesday, January 11, 2011

You Do It Best, When Do Nothing At All

Recent rally has excited many and have definite caught the interest of retail investors who have stayed sideline for the last couple years. I found an interesting article from Smart Money. It is not easy to find a contrarian investor during such bull market.

Make More Money by Not Trading at All

Read more: Make More Money by Not Trading at All -

Tuesday, January 4, 2011

The Good: My E.G. Services Bhd

This is a relative young company whois in an almost monopoly position in its ..well..own industry. Founded in 2000 its got itself listed in 2005. There aren't too much romance to talk about the history of this company so I'll skip that.

My E.G., i think it probably stands for Malaysia E-Government services provider. Its business model is divided into 2 division: Government to Citizen (G2C) and Government/Enterprise Solution (GES). I think most of us are familiar with G2C especially during this "summons promotions" period. Anyway besides summons, they also provide services like driving theory test bookings, issuance and renewal of licences, electronic bill payment and payment ("EBPP") as well as online information services on electronic bankruptcy or liquidation status searches (E-Insolvency). All these can be done through the internet or its kiosk in the less developed area.

GES is not an internet based service but a software or system development as well as maintenance service provider to government and enterprises. Target market are the driving, insurance and financial institutions and others la.

Historically, G2C is the bigger contributor in revenue than GES. But sadly, individual contribution from them has not been disclosed ever since 2008.

Apart from the MD,  the rest of the directors are what you need to be in a government business if you know what I mean. There is not much mentioned about the rest of the co-founder but I guess he does have a decent team with him - technically.

Service and product quality
I have only use this a couple of times. Services is okay (just click and pay, not much to comment about) but I've never tried their CS before to be honest. But everything can be done in decent internet speed apart from the "normal hours" when traffics are expected to be high till March. Product quality, yes there is, still a little annoying where i have to log in like a thousand times to pay for tickets. But overall better than most government sites.

Okay, that's about its business in 15 minutes - a pretty simple business.

Financial History
Well, if you look at the past 5 years, its revenue and operating income growth has been staggering at 34% and  50.3% respectively largely due to its acquisition of its competitor mySpeed Sdn Bhd. Since then sales growth has been quite impressive registering 19.8% in 2009 and 18.3% in 2010. Well, My E.G business model is pretty resilient during tough times so are we probably seeing revenue growth slows down? Erm..growth wise maybe but I do believe public awareness of My E.G. services is still pretty low. To be honest, their ads are really confusing and message delivery is mediocre at best.

Being in an e-commerce business, My E.G. gross margin is high in comparison to most industry, and it has improved steadily since 2005 from 31.6% to 59.8%. And they did use this margin to their advantage by increasing their A&P activities. I think this is a good strategic move but seriously the quality needs to be improved. This is probably the reason why sales efficiency has drop over the last 5 years from RM10.88 generated of every RM1 spend on SGA to RM5.93 in 2010.

My E.G has been conservative on its leverages on debt, keeping the D/E ratio below 1 although debt level has  increased to RM5mil in 2008, they are still in a very healthy position for the fact that they still have RM11mil in cash.

Receivables turnover rate is about 3.5 months in FY2010 which is likely to be contributed from GES division as G2C divisions transactions is either by cash (FPX) or credit cards. They should have no problem collecting these from the banks.

Overall, the financial condition of My E.G. is pretty strong and are more than capable to generate more than RM7.5 million of cash in the next few years. And they have a pretty decent ROE at 18% on average.

Well, this is the tricky part. This is a young company with a huge prospect for growth and they have plan to continue to expand their services by commercializing various government services over the next 5 years. Well this expansion plan wouldn't take huge amount of capex, but their expansion on e-Services center and kiosk will. Problem is, it is unknown how much capex are they going to incur in the future and how much has the expansion from center and kiosk has contributed to its growth. So I'm taking a 3 stages guesstimate normalized  growth of 8.7% over the next 5 years before it declines steadily to terminal growth of 3%. (How I come out with 8.7%, well that's a secret). Capex should near its depreciation level at about RM6mil. That would give me a safe purchase price at about RM0.37. (NOTE: There are huge chances that I might have undervalue this company but it is better safe than sorry). So unless I get this sweeeeet deal, I would rather wait till it becomes more predictable. Sadly, somehow rather that name below has double the shares price.

But My E.G has great growth potential and 15 years contract with government has given it a monopoly position. Will it face contract termination of any sorts if there is a change in government? Nope, I don't think so as it does not make business sense to any government to do that. My E.G. business model benefits both sides as it does not only generates revenue to the company but its solution would have tackle much government administrative mess and inefficiency at the lower level. And the current higher SGA expenses is unlikely to remain at this level on the long run once its has own the public mind. My E.G. does sound like a great business to invest in, but we have seen how often mismanagement occur when a corporate is given a monopoly position in this country. Anyway things look find as for now. But I'll keep this very close under my radar.