My choice of "Value-Investing".

Value Investing is an investment principle of "buying a stock with a price lower than its value". This is a conservative and secure investment strategy, and have been proven to be one of the highest-return strategy in long-run. (The followers of Benjamin Graham are able to achieve an average CAGR of 20% or higher.)

Graham's way of applying "Value-investing" principle is quite easy to follow. We just have to buy a company with a price below its net asset value. Applying the margin of safety concept, Graham prefer in buying a stock where its share price is lower than two-third (67%) of its net working capital. (In Graham's definition, net working capital = current asset - total liabilities.) And Graham encourage a widely diversified portfolio, in order to minimize the risk.

Later, affected by Philip Fisher's investment philosophy, Warren Buffett improved the "value-investing" strategy, by using a different technique in stock valuation. In stead of valuing a stock by its book asset value, Buffett calculate the "intrinsic value" of a stock, taking its earning power, brand-name, etc. into account. That's why Buffett always buy some companies which has very little assets but a strong earning power. Different from Graham, Buffett's portfolio is quite concentrated, normally less than 20 stocks. When Buffett found a good company, he can throw 20% of his money into it. (one of his record is investing about 40% of his funds into American Express.) He have a very good understanding on the companies he bought, thus the risk is minimized although the portfolio is not diversified.

Buffett said, "you need only a little margin of safety if you understand the business very well; but a high margin of safety is needed when you have limited knowledge about the business you bought." and he said, "I prefer to buy a wonderful company with a fair price, than a fair company with a wonderful price."

I prefer to learn the Buffett's way. But this require us to do a lots of study and research about the business of a company. I found that this is not an easy job. (You have seen the mistake I've made in selecting AirAsia). But I can learn a lots of knowledge during my research.

Sometimes, especially when I found that I've made a serious mistake, I wondered if I can understand a business as good as Buffett. Few months ago, I thought that I understand a company quite well; months later, I found that I was wrong either in the accounting calculation or about the industry's future prospect. When I was busy, I wondered is it a better choice if I start with Graham's way, which is much easier and lower risk, yet can generate a comparable return as Buffett's. I just need to do some financial calculating... not much research have to be done on the business nature of the companies. (while it is easy, it's very boring...)

The problem is, Graham's approach needs a fully diversified portfolio. Currently, my investment fund is only RM 25K. If I invest RM1000 into each stock, I can have 25 companies in my portfolio. But, from next year (2008) onwards, the minimum brokerage fee of buying/selling a stock (on-line) could be increased to RM28 (still a proposal now, waiting for approval from the authorities). If it becomes true, then the money I invested into each stock should be at least RM5000, just to limit my trading cost within 1%. Thus, I can only "diversified" my RM 25K into five stocks....

So... seems that I don't have a choice...

Titan's prospect for 2008~2010.

In this article, I'll list down the reasons why I think that Titan's prospect in the next two years is quite positive.

Base on the nature of its business, Titan's profit growth can only come from two ways. First, the increase of production capacity. Second, a higher polymer-naphtha spread.

About the capacity.
last year, Titan's newly acquired subsidiary -- PT Titan, only produced about 100 KT of polymer during the whole year, while its capacity is 450 KTA. This year (2007), the production of this subsidiary is expected to be around 200KT, still below 50% of its whole capacity. I believe that, under the management of Titan, this subsidiary will able to utilise 100% of its capacity by the end of 2009. This represent a 20% increase in total production of Titan Group from today.

In December 2007, Titan will start two new plants - a propylene plant (115KTA) and a butadiene plant (100 KTA). The product from the butadiene plant will be directly sold to customers. The propylene produced by the new 115KTA plant will most probably being used as raw material to Titan's PP plant. So, I'm expecting Titan to take some "debottlenecking" process to increase its PP plant capacity by another 100KTA, maybe within two years.

As a conclusion, I think Titan Group's production output will increase by about 40% by the end of 2009.

About the Polymer-naphtha spread
The spread is affected by the supply-and-demand condition of polymer. As we have seen, the polymer-naphtha spread showed a gentle uptrend in the past few years. This show that the growth of demand for plastics is slightly faster than the growth of supply.

Seeing that global economy will continue growing for the next few years (leading by the strongth growth in China), the growth of demand for plastics is there. In fact, a lots of petochemical companies now are having their expansion plan, and new production plants is being constructed in a lots of country/area, just to grab this growing market of polymers.

However, according to the information available now, most of these new production plants are still in the early stage of construction. They are scheduled to start production only around 2010~2011. In this two years (before all these companies complete their expansion plan), Titan has a chance to enjoy a higher polymer-naphtha-spread, due to the strong demand growth and the slow growth of supply.

My Mistake - the "Defered Tax" in AirAsia's profit

In AirAsia's financial statement, There's a very important item, named "deferred tax". I didn't have any idea about what is it and what it means. (because I was a science-stream student, and never learn about accounting in school). I thought that it's some kind of complex taxing calculation, and I'd just ignored it in my previous analysis of AirAsia.

But, later I found that this "deferred tax" play an important role in AirAsia's financial statement. It made up about 20% of AirAsia's equity, and more than 40% of AirAsia's PAT! So, I think it's a MUST to understand what is it, and where it comes from.

After some readings and studies, I've get some idea about this "deferred tax". I understand that, due to the International Accounting Standard, this "deferred tax" is allowed to be recorded in an income statement. But I really doubt that this is a proper practice in reflecting the financial performance of a company.

The "deferred tax" item in AirAsia, for example, represent the tax credit given to the company. Though this tax credit is incurred during current year due to the company's CAPEX, it can only be realised/utilised in the future, i.e. when AirAsia is asked to pay a tax in the future, it can utilise the the tax credit, and save a lots of cash from the taxes it should pay.

My conclusion is, a "deferred tax" recorded in the income statement of a particular year actually bring no cash-flow into the company during that year. That's not an earning (at least in my opinion), just a future savings of tax. Showing the "deferred tax" in the income statement means recording a tomorrow cash-flow in today's statement. It's some kind of accounting technique to "polish" the financial performance of a company".

So, I've to do a new valuation on AirAsia. According to it's Q4-FY2007 statement, its EPS is about 21 sen, quite a good income. But if we exclude the deferred tax item from its income statement, its EPS is only 12 sen. If we exclude also the special item ("other operational income"), AirAsia's EPS for FY-2007 will become 8 sen only. This will give a PER value of about 25, quite a high number for a conservative investor like me. So, the share price of RM1.90 now is not as attractive as what i thought before.

However, the latest financial report shows that AirAsia still pose a very good prospect in the coming years. It's quite likely to have a 50% growth in PAT this year. So now... I'll hold its stock and continue to monitor its performance. If its EPS for FY-2008 (excluding deferred tax) can grow to a value not less than 15 sen, I'll consider to keep accumulating AirAsia's stock.

comments on the Sep-2007 financial reports

AirAsia
According to the current share price, my investment in AirAsia is now accountable for about 20% of my investment-portfolio. It's Q1-2008 earning per share is improved significantly as compared to Q1-2007. Besides its strong growth, I'm not planning to increase my stake in AirAsia. It's because recently I realised that I'd made a big mistake in the valuation of AirAsia's financial performance. I'll record this mistake in a new post, soon.

TITAN
Earning for the quarter is 4.7 sen per share, almost same as the previous quarter. The result for the next quarter could be lower, due to the high soaring oil price. However, the rising polymer's price is going to catch up with the oil price soon. And I think the naphtha-polymer spread will be improved in next year.

Supermax
The merging between Supermax and Seal Polymer was completed in September. But the contribution of revenue and profit from Spolymer is not fully reflected in this quarter's report. Balance sheet has a small improvent due to the merger. There's an accounting problem occured in APLI, but this shouldn't have a big impact on Supermx.

AKN
Earning per share for the quarter is about 2.7 sen. The company has already back into a profitable stage, as expected. Disposal of DDD business in HK has been completed and cash of about RM70 million will be generated from the process. About RM45 million proceed from the disposal has been utilised to settle the company's debt. The winding down of the entire DDD division is still in the process.

Does Titan's profit depends on oil price?

Some analysts worried about the profitability of Titan due to the rising oil price. On the other hand, the Titan's management always claimed that the company's profit doesn't affected by oil price, but the supply-demand condition of plastics which will determine the polymer-naphtha margin (the price spread between its product and feedstock).

To check whether the management's statement is true, I've done some research on the historical naphtha price, polymer price, and crude oil price. The following chart show the relationship between polyethylene-naphtha margin and oil price from Jan-2004 to Nov-2007:

source: http://www.plastemart.com/

* The prices shown above are international prices in our region. The exact prices of Titan's may not be the same as the above, but shouldn't be much different (within 5%).

From the graph, we can see that the oil price has been rising from about USD$30 to about USD$90 per barrel during this period. Naphtha price moved exactly in the same trend. Polyethylene's price also changed in similar way, but sometimes experienced a time-lag of 1~3 months. When this happened, the PE-naphtha spread will temporarily move in the opposite direction to the oil price, then will back to the normal level when the PE price catch-up with naphtha.

(Example: during Sep~Nov-2006, the oil price dropped from $80 to $60, the PE-naphtha margin temporarily up from $650 to $850 per tonnes. During Jan~May-2007, the PE-naphtha spread drop from $800 to $600 while the oil price rise from $65 to $85.)

As a whole, although there's some short-term volatility, the average PE-naphtha spread remain quite stable during 2004 to 2007, while the oil price has risen for almost 200%. In fact, it showed a slightly upwards trend during this period.

So, it's quite clear that the profitability of Titan doesn't affected by the rising oil price. Instead, Titan's profit is highly depend on the Polymer-naphtha margin, which in-turn depend on the demand-supply condition of plastic market. Seeing that the world's polymer capacity is growing with a slower rate than the demand for plastics, the outlook for polymer-naphtha margin will be quite positive in the near future.

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[updated 29/10/2008]: Those who interested to view the more updated version of the polymer-naphtha-spread chart , please visit here. In the document, I had also included a worksheet showing the correlation between oil price and Titan's quaterly report. I'll update the document from time to time.

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Reasons investing in Titan

I start accumulating the share of Titan Chemical since early 2007. The average cost per share is about RM1.60. In this article, I will list down the reasons I decided to invest in this company.

1. Simple (Single) Business

The main business of Titan Chemical is production of polyethylene (PE) and polypropylene (PP). These products are what we generally call 'plastics'. Basically, it takes the raw materials e.g. naphtha and natural gas, breaks them into small unit of monomer, then combine those monomer become polymer substance.

During its expansion, Titan Chemical always stick to its core business. Last year, Titan acquired an Indonesian company named PT. Petrokimia Nusantara Interindo, which is then renamed to PT. TITAN Petrokimia Nusantara. PT. Petrokimia was the largest PE producer in Indonesia.

2. Leader in polyolefins industry

When Titan start its operation around 1990, its was the pioneer in petrochemical industry of Malaysia. Then it became the largest polyolefins manufacturer in our country. In recent years, Titan has gain about 50% share of our domestic PE and PP market.

Its newly acquired subsidiary, PT TITAN now holds about 20% of the domestic PE market share in Indonesia. After the acquisition of this subsidiary in 2006, Titan has now become the largest polyolefins producer in South East Asia (in terms of production capacity). With its economical scale, Titan can keep a low cost without compromise to quality.

3. Good Management Team

The founder of Titan, Datuk T.T. Chao, a Taiwanese, is a pioneer in the global petrochemical industry. He has built several successful business across continents of Asia and America in his 50-years entrepreneur-life. Let's have a look at his 'resume':

• In the mid-1950s, Chao was a co-founder of Taiwan's first polyvinyl chloride (PVC) business.
• In 1960's, he established China General Plastics Group, which included a number of the premier publicly-held petrochemical and plastics manufacturers in Asia.
• in 1980's, he entered the North American petrochemical industry with the acquisition of a polyethylene plant in Sulphur, Louisiana, and the creation of Westlake Polymers Corporation. (now listed on New York Stock Exchange)
• in late 1980s, he founded the Titan Group in Malaysia by building the country's first and largest integrated petrochemical complex in the state of Johor.
• in 1990's, he founded a joint-venture company consisting of a PVC resin plant and downstream calendering plant near Suzhou - Suzhou Huasu Plastics CO., Ltd.(SHPC)

Due to his outstanding contributions to the petrochemical community, he received the Petrochemical Heritage Award from the Chemical Heritage Foundation in 2005.
(press released: http://www.chemheritage.org/press/pr2005/pr_05_jan_17.htm)

Today, Titan Group is led by Mr. James Y. Chao (son of TT Chao). He has more than 30 years experience in petrochemical industry, and has assisted Datuk TT Chao in the founding of Westlake Goup, Titan Group and SHPC. Besides acting as the executive chairman in Titan, he is also the chairman of Westlake Group and Suzhou Huasu Plastics Corp.

Titan's former managing director, Mr. Donald Marion Condon, was named the American Express-Business Times "Malaysia CEO of the year" in 2005. He's re-designated as a director of Titan last year. Titan's present MD (appointed last year), Mr. Thomas Patrick Grehl also has 25-years experience in chemicals industry.

4. Profitability & Growing Potential

Despite the escalating oil price since 2004, Titan's profit keep growing during the same period. The raw material of polyolefins (naphtha) is a refined product from crude oil. Thus, the price of naphtha normally moves in conjunction with crude oil's price. The selling price of polymers will normally following the same trend, but a few months lagged behind. Hence, though the profit margin may become lower when the oil price is in a uptrend, it will be improved later.

More than half of Titan's production is for exportation. Among its customers, China is the biggest market, accountable for about 20% of its revenue. This is big positive sign for me. Firstly, being the fastest growing economic entity in the world, the demand for plastics in China is increasing in a higher rate than other countries; and Titan already enter into this market. The more important point is, Titan's production cost is lower than the China's local manufacturers. Thus, its selling price is competitive while having a sustainable profitability.

(This sounds impossible, but it's true. Besides its economic scale, one reason that Titan has a lower cost is because it is a pioneer in this industry. Titan's start-up cost is much cheaper because its plants are constructed 20 years ago. The new competitors today facing a much higher construction cost due to the high steel price.)

Currently, Titan's has a butadiene extraction plant and a propylene plant under construction, and is going to be completed soon. These two new plants is scheduled to test-run in Dec-2007, and their capacity is able to raise Titan's revenue by about RM1 billion (20%) next year. On the other hand, Titan's business in Indonesia is improving. I believe that its subsidiary (PT Titan) is going to turnaround soon, and begin to make positive contribution to Titan. And, Indonesia's market will provide a great growing potential for Titan in long term.

So, although the oil price is likely to keep rising, I believe that Titan will keep making bigger profit with the continuous expansions, coupled with its great operation and procurement strategy.

---------------------------------

I think Titan is undervalued at a share price of RM1.60. I decided to buy its share at this price due to the following considerations:

• The price is lower than its net asset value. (RM1.90 per share)
• The P.E. is lower than 7.0, based on its earning per share FY-2006 of 24 sen. (excluding the profit in the acquisition of PT Petrokimia)
• Its profit after tax will grow with a rate of 10 ~ 20% p.a. in the next few years, if the crude oil price is stabilized. (the grow rate will be higher if the oil price fall).

when the oil price fall back to a normal level, Titan's profit and its share price will rise dramatically . (I don't know when it will happen, but i really don't think the high oil price is sustainable). My own estimation, my investment in this counter will be three to five years.

AKN - My short-term investment.

I start accumulating AKN's share since March-2007. Now it is accountable for about 23% of my portfolio's value. My average buying price is RM0.51.

I noticed this company in early 2006. At that time, its share price is about 40 sen, very low compared to its historical prices in years 2002 ~ 2004 (around RM5) . The share price was so low because it's been suffering loss for two consecutive years. And the share price was lower than half of its net asset value.

So, I keep an eye on it. After one year studying and monitoring it, I decided to buy its share and keep it for about one or two year. (that's considered a short-term investment for me).

Here's my observations on AKN before coming into the buying decision:

AKN was a good company, manage to generate a stable income in many years during the past. Its share price fell deeply in 2005 due to the huge loss it suffered in that year. (about 80 sen per share). This loss was mainly aroused from two factors:

1. There's a fire incident on Jun-2005, destroying one of its operation premises located at Penang. This had cause damages to the machinery and ceased the factory from operation. Thus, the company had to out-source its operations to external parties, to meet the custormers' delivery orders. This has cause a big lost to the company due to the high cost of out-sourcing. As a result from this, the factory's operation had been temporarily stopped since 2006. also, The company had to compensate the factory's staff and workers who had loss their job.
2. The design, development & distribution division (DDD division) of the company, which is based in China, was suffering loss due to the tough competition from China's local companies.

The loss from the fire incident is big. But this is obviously an one-time-event, and shouldn't have any continuous impact in future. On the other hand, the loss suffered from the DDD division, though is much smaller, is likely to be a sustainable one. So, we had to see how AKN's management deal with this.

AKN's management had taken some steps to rationalise its operation since 2004. Among those rationalisation processes, I think the following two steps are the most important:

1. Winding-down the lost-making DDD division. The company's management had decided to dispose the subsidiaries under this division, and exit entirely from the related semiconductor chip & software business.
2. Acquisition of a new subsidiary, named Paramount Discovery Sdn Bhd - a company that provide polymer coating solutions for the production of powder-free gloves.

Firstly, to discontinue the operations of DDD division is a wise decision. This will free the company from the continuing loss of the subsidiaries under this division, and at the same time the cash generated from the disposition can help the company to reduce its dept. (hence, reduce financing expenses of the company)

Then, the acquisition of Paramount Discovery Sdn Bhd make the company venture into the strong-growing latex glove industry. Unlike the semiconductor sector, (in which most other subsidiaries of AKN are involved), latex-glove industry is almost unaffected by economical cycle. Paramount Discovery will generate a stable growing income for the company in the future years.

After the rationalisation, the company has turn-around successfully in the FY-2007 (ended March). That's the time I start buying AKN's share.

Here's some figures that make me feel safe to buy AKN's share at about 50 sen:

• the buying price is only half of its net asset per share (about 90 sen).
• Its loss-making division is to be disposed soon. The earning from Paramount alone, when reflected on its income statement, will be about 10 sen per share. Together with the earnings from other subsidiaries, AKN's P.E. ratio will be less than 5.
• After the rationalization plan, AKN's main business concentration is now switch from semi-conductor industry to glove industry. (The Paramount's earning now accountable for the highest portion of AKN's income.) Latex-glove industry is a sector that I'm quite familiar with, as compared to the semiconductor business. And, I'm very optimistic about the future growth of latex-glove industry in Malaysia.

So, I'm confident that AKN's performance for the FY-2008 will show a strong improvement from the previous year. (earning per share will be around 12 ~ 15 sen, I think). By then, its share price may rise to about RM1.50. I'll cash out my profit at that time, and put my money back into some long-term-investment counter.

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[updated 10/7/2008] : I had sold all my AKN in July-2008. For the reason of selling it, please read my post "selling stock".

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Public Mutual join the China's "bubble party"

Finally, Public Mutual's "China Fund" was officially launched yesterday. Look at its advertisement: "Take advantage of China's growing economy" with new PB China Pacific Equity Fund.

I don't know which unit trust company start this, recently we always heard about this kind of "Big China Fund" launching in our country. Maybe the funds performed very well due to the current China's maket condition, the unit trust companies manage to attract a huge number of customers/investors. If Public Mutual do nothing, it may loss its attractiveness to the customers, and may loss its market share to the competitive companies. So... though a huge bubble is forming in China's stock market... "under the pressure of public's demand", Public Mutual launched this China fund finally.

I have a friend who had recently become a Public Mutual's representative, he was trying his best to persuade his clients into buying this newly-launced fund. (does he get more commission from selling this fund than selling others? I don't know). If you ask his oppinion about the bubble forming in China's stock market, you'll probably hear this: "don't worry... the market is not likely to collapse before the Olympics". Maybe this is just a persuading tecnique taught by his manager/supervisor, but it seems that he himself believe in this, because he will tell you that he himself already invest in this fund too. And, you know, a lots of people believe in this phrase. (Please don't tell me the fund managers of Public Mutual also believe in this bull-shit thing.)

With its great brand-name and strong sales-agent network, I believe that the size of this PB China Equity Fund can easily grow to RM 1 Billion. The biggest unit trust company in our country now is grabbing millions of ringgit from the public, and send the moneys into the China's stock market. (According to the fund's rules, when the huge money reaches, the fund managers can't keep them as cash. They must invest a certain minimum portion of the money into China's stock market, no matter how bad is the outlook for the market.)

If we assume that the same things are happening in other countries, then there will be trillions of money keep flowing into the China's stock market.

This is what I imagine:

"demand from public"

V

unit trust companies lauch "China funds"

V

huge money reach fund-managers

V

they had to invest into China's market

V

China's market is boosted into record high

V

"China funds" shows great performance

V

more funds launched, more money had to be invested into China

V

China market go even higher

.

.

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so, this can explain why the bubble of China's market can keep growing, and growing, and growing.... It's not impossible for the Shanghai's index to touch 10,000 point by next year. Under the aids of information technology in this globalisation era, one of the biggest bubble in the history is forming. It's already out of control.

(Believe it or not, no government can control the market, include the powerful communist government of China.)

Warren Buffett already sold most of his stake in PetroChina. I'll keep my self away from China's market. If anybody want to join this bublle party.... good luck, and take care.

Rising latex price & the glove-manufacturers

In this post, we'll see how the rising latex price affect the profitability of the latex-glove companies. (Latex is the raw material for glove-manufacturing, accountable for about half of the operational costs)

Here's the historical price movement of bulk latex:

source: Malaysian Rubber Board, http://www2.lgm.gov.my/Mre/YearlyAvg.aspx

[updated 30-10-2008: pls click here for the updated-verion of the chart.]

From the chart, we can see the recent price of latex is about 150% higher than that in 2001 & 2002. This definitely will rise the operational cost of latex-glove companies. But will it have a significant impact on their profitability?

The following graph shows the EBITDA margins and PAT (profit after tax) margins for the three largest glove-companies in Malaysia:

While the latex price rise significantly from 2002 to 2006, the profit margin of these glove-manufacturers just show a small decline in the same period. This small decline in profit margins could be cause by other factors, e.g. rising financial cost for expansion of production lines.

So, I think we can say the rising price of latex has a minimal impact on the profitabilily of latex glove companies. They are always able to pass on the rising cost to their customers.

Again, I feel that Supermax is the best choice (for investment) among this 3 companies . From the charts, we can see that Supermax's EBITDA margin in 2006 is about 1% higher than that in 2002, while Topglove's EBITDA margin shows a decline of about 2%. This shows that Supermax's management is better in maintaining the company's profitability.

On Time Performance of AirAsia & other airlines.

one reason I think AirAsia will continue to growth is its great on-time performance. An airlines that has a consistent punctuality will win the customers' respect and build up its name, thus gain a bigger market share in long run.

In this article, I just want to show: how good actually is the the on-time performance of AirAsia?

Here's the figures I get from AirAsia's website:
* a flight is considered on-time if it departs no later than 15 minutes from the schedule time.

From the chart, its two months (Aug & Sep) average performance is about 88%, Three months average (Jul~Sep) is about 85%.

We have to make a comparison to show how good is this figures. First, Lets compare the on-time performance of Jetstar Airways. (data from jetstar's website: http://www.jetstar.com/).

We can see that the on-time performance of AirAsia is as good as Jetstar's. And, Jetstar is the winner of the Best Low-cost Airlines (worldwide) in Skytrax's World Airline Awards 2007. I think this shows that AirAsia's performance is among the best in the world. (of cource, in this comparison, we assume that the figures announced on both airlines' website are true and reliable.)

Then, how about the comparisons with others airlines?

After some searching through the internets, I found that most Airlines do not publish their on-time performance on their web-site. However, we can get some statistics from http://www.flightstats.com/. Although the figures at this website only reflect the 20 most active routes for each airlines, it shouldn't be much different from the actual values.

Here's the figures I get from the website for some of the best airlines worldwide:
(statistic period: 15-Aug 2007 ~ 15-Oct 2007)

Low Cost Carriers:

Air Berlin	80%
easyJet	80%
Jetblue Airways	76%
Jetstar Airways	81%
Southwest Airlines	83%
Tiger Airways	85%

Full Service Carriers:

Singapore Airlines	84%
Thai Airways	79%
Cathay Pacific Airways	75%
Qatar Airways	73%
Qantas Airways	73%
Malaysia Airlines	76%

(It is quite a strange phenomenon that the LCCs perform better than those full service carrier. I guess maybe it's easier to be on-time for short-range flights. )

Unfortunately, the statistics about AirAsia at http://www.flightstats.com/ is incomplete, because it contains only figures for routes to Macau (which is about 65% on-time). This figures of single destination may be very different from the overall performance of AirAsia. For other routes which they don't have any data, they just quote 0% on-time-performance and 100% flight-cancellation. This does not reflect the real situation.

So, we can't double check the reliability of the on-time performance figures announced at AirAsia's website. However, according to my own experience (I've flown with AirAsia twice in September, and each flight I took depart on-time) and some of my friends' recently, I personally believe that error on the announced figures should be within 5%. So, lets assume that the real figure is 5% lower than the officially announced, the two-month-average performance of AirAsia (Aug & Sep-2007) still stand above80% (88% - 5% = 83%).

Conclusion: AirAsia on-time performance ranks among the best worldwide. Its performance is much better than those full service carrier like MAS, giving it an opportunity to grab a bigger market share in the future. I belive LCC model will continue to shake the aviation industry, and AirAsia will continue to grow and become the leading LCC in the reagion.

Supermax and other Latex Glove Companies.

the global demand on latex gloves has been growing exponentially in recent years. Since this growing trend of glove market is not likely to stop for the coming years (though it may slow down gradually) , the latex glove manufacturers will benefit a lots from it.

Malaysia's companies are the largest suppliers of latex gloves in the world. There are several latex glove companies listed on Bursa Malaysia. Here's a simple comparison based on their annual report FY2006:

Obviously, the three largest companies are:

1. Topglove
2. Kossan
3. Supermax

The huge production capacity of these companies ensure that they can produce gloves with lower cost than their competitors. Hence they can maintain their profit margin while keep the selling price competitive. When I decided to buy a glove company, I only considered this three biggest companies. After doing some study, I've chosen to invest in Supermax.

The first reason is Supermax has a better earning power. I've create a table to make a comparison between 3 companies:

(I don't have the EBITDA data of Kossan, but the comparisons of EBITDA should be similar to PBT and PAT)

Clearly, Supermax has a highest profit margin among them. This is a result from the continuous effort of its managment in controlling the cost. The 2% difference in profit margin can make a very big difference, especially when the market become gradually saturated and tough competitions occur. So, I think Supermax will become the last winner, though its growth rate in recent years is a little slower than Topglov and Kossan.

At the end of Sep-2007, when the privatisation of Seal Polymer is completed, Supermax is going to beat Kossan and become the 2nd largest glove company. If Supermax privatise APLI in the future, it will become almost same size as Topglove.

Another reason I choose Supermax, is because the price of Topglove and Kossan are already too high. Look at some figures relating the share prices of these companies:

		Topglov	Supermax	Kossan
	PAT '2006 (RM million)	78.4	39.7	39.5
	No. of share (million)	300	227	160
	Earning per share (sen)	26.2	17.5	24.7
	Share price (RM)	6.2	2.4	4.5
	Equity per share(RM)	2.0	1.2	1.3
	Price/Earning ratio	24	14	18
	Price/Equity ratio	3.1	2.0	3.4

* the no. of share & equity per share are based on the latest quarterly report.

Due to my investment prinples, I'll never buy a company that has a PE higher than 15, no matter how good is the company. So, I'll never consider to buy Topglove though it's the biggest latex glove company, unless its share price fall below RM4.50. Besides, Supermax's Price/Earning ratio and Price/Equity ratio is significantly lower than the other two, This make Supermax a better choice for a secure investment.

Reasons of buying Supermax

Let's have a quick look on Supermax. With its current share price of about RM2.40,

• the P.E. ratio based on the profit for FY-2006 is about 13.
• the net asset per share is about RM1.20, about half of its share price.
• the liability to equity ratio is about 1.0

As we can see, the figures are not very attractive. Its share price is not at a bargain level, nor is it very expensive. I may consider its current price is quite 'fair' due to its latest financial condition. I invested in Supermax not because of its cheap price. I invest in it because it is a continuous growing company with a bright future.

As Warren Buffette said, "it's much better to own a wonderful company with a fair price, than buying a fair company with wonderful price".

This is what i feel when I invested in companies like AirAsia and Supermax.

Supermax has some criteria that make it a wonderful company that worth to buy:

1. Simple business model - manufacturing of rubber gloves
2. Growing market for its products
3. Good management
4. Profitability - Consistent profit margin

Let's go through these one by one:

1. Simple Business Model Supermax has only one core business – Manufacturing and selling rubber gloves. It has a wide range of rubber gloves, made of natural latex or synthetic rubber. Its products are mainly for dental and medical use. Most of the products are exported, mainly to U.S. and Europe.

The merge between Supermax and Seal Polymer is going to be completed by the end of Sep-2007. Seal Polymer is involved in the similar business as Supermax. I like a company that grow while concentrate on its core business.

2. growing industry. The demand of rubber gloves has been growing in recent years, due to the growing health conscious and hygiene awareness, especially in the advanced countries like U.S. and Europe's. And the most important point is, the demand on medical gloves will only keep growing, independent of economical cycle. Hence, Supermax has a consistent growing market. From 2002 until now, Supermax’s revenue and profit had recorded an average growing rate of about 40% per year. I’m confident that its growth rate will be maintained above 20% per annum for few more years.

After merging with Seal Polymer, Supermax now has become one of the biggest manufacturers of rubber gloves in the world.

3. Management Team Tthe financial condition of Supermax is better than other glove companies in Malaysia, due to the continuing effort of its management, under the leadership of its CEO, Mr Thai Kim Sim.

Two years ago, Supermax had acquired shares of Seal Polymer and APLI, and became largest shareholder of these companies. Mr Thai had then become new CEO of these companies. At that time, APLI was suffering loss; and Mr Thai had turn APLI into profitable in early 2007. This is an evidence showing his ability of managing a company, especially in reducing operational cost.

about two months ago, most glove manufacturers in Malaysia faced an allegation by Tillotson Corporation (a U.S. company), of patent infringement of nitrile gloves. Supermax then announced that they will pay the loyalty fee to Tillotson Corporation, for all its nitrile gloves selling in U.S. This immediate response shows that Supermax's management is paying respect to intellectual property of other party.

4. Consistent Profitability About 50% of its cost is the raw material – latex. In recent years, the price of bulk latex rose from RM2 per kg (year 2002) to about RM5 per kg now. But the EBITDA margin of Supermax is maintain at about 15%. So I never worried about the rising price of latex, because Supermax is always able to pass the rising cost onto its customers.

Besides its consistency, Supermax's profit margin is also better than average value of other glove companies. So, it will always be profitable while selling its product with a competitive price.

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[updated 10/10/2008]: I sold Supermx at the end of September-2008. Please read this post for the reason.

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comments on the Jun-2007 financial reports

some comments on my companies base on their quarterly reports JUN-2007.

AirAsia
Result quite satisfied. Earning (exclude non-operational item) for the FY2007 ended 30th June is about 16 sen per share, a strong growth compare with last year. A strong growth is expected for the two coming quarter. I’ll continue my plan to accumulate AirAsia’s stock. Hope that its price not going to hike too soon.

TITAN
Earning for the quarter is about 4 sen per share, a drop of about 50% from the previous quarter. Good news is, it declares an interim dividend of 3 sen, from their half-year earning of 12 sen per share. This shows that the management really applying their dividend policy (30% distribution of earning, announced earlier this year). As the oil price is coming to a record high, Titan’s profit margin may become even lower in the next quarter. I’m not worry about this, as I’m confident that the management is able to raise the selling prices of the product to keep the company to be profitable.

Supermax
Continue to show a strong growth in both revenue and profit. The merging between Supermax and Seal Polymer is going to be completed soon. The whole contribution of revenue and profit from Spolymer will be shown in the next quarter’s report. The merging shouldn’t have much impact on the earning per share of the company. Though the company is facing a little pressure from the rising price of latex, I'm quite confident that it will maintain its current profit margin, and keep the strong growing rate in both revenue and profit.

AKN – (my short-term investment)
Earning per share for the quarter is about 3 sen, a good improvement, as expected. The loss-making division has been sold, and the cash $$$ is to be receive in the coming quarter. Seeing that it already wind down the DDD division, and the cash generated may be used to settle some of its debt, the performance for the next quarter is likely to be much better. I’ll continue to hold this company until its price hit RM1.40

How big is the brand "AirAsia"?

Some people around me always travel in flight due to their job. Hence, I'd heard a lots from them about AirAsia and MAS. And from their mouth, I know the conditions of the services and performances of these airlines.

Here are my observations on the growth in AirAsia during these years:

One or two years ago, people still don’t like AirAsia. They choose AirAsia just because it is cheap. People has a lots of complains like:

Attitude of its staff were bad.

The food on flight is not good enough.

It doesn’t assign seat numbers for passengers.

Boarding onto AirAsia’s flight is a bit mess up, just like getting on a bus.

Delays and cancellations are common.

Some rumors said that AirAsia sometimes combined the passengers of two flights into one.

Actually, most of these negative impressions arise from people’s over-expectation on AirAsia to meet the same standard as other airlines, because most people that took AirAsia didn’t have any experience with other LCC. They can only compare AirAsia to their previous experience with normal airline, especially MAS. We all know that, MAS is famous (worldwide) for its good service and excellent attitude. (always, I heard that MAS flight attendances are all quite beautiful too). In fact, MAS wins the Skytrax's Best Cabin Staff Award for many years. So, the quality of AirAsia’s services is just too bad as compared to MAS.

while AirAsia is keep improving, people now gradually get used to AirAsia’s no-frill style – no ticket, no assigned seat, no free meal, etc.

An important improvement of AirAsia is the reduction of delayed flight. AirAsia’s on time performance for the past six months is about 85%. Some of my friends now prefer AirAsia than MAS, even when they are on an official trip (means they don’t have to pay for the air tickets, their employers will pay for them), simply because they are fed up with the (infamous) flight-delays of MAS.

Another reason they prefer AirAsia is that AirAsia makes their schedules more flexible, because it has a higher flight frequency than MAS. They have more choice for the departure time.

So now, the name “AirAsia” means a lots.

1. It means “cheap”. This is the most sucessful brand image for AirAsia. When I fly, I definitely choose AirAsia; because I know that with AirAsia I'm having the lowest fare.
2. It also means “less delay”, as compared to MAS.
3. It means “more choice” for departure time, due to its high flight frequency.

AirAsia today has gradually become an airline that people prefer to fly with, not only due to the economic consideration. That’s what we call “the power of brand”.

Besides my own observations, there are some supporting points that AirAsia is a great brand:

1. In the new released World Airline Awards® year 2007, AirAsia ranks no.1 in Asia region for the Best Low-cost Airline Award. (The Skytrax’s World Airline Awards® are recognized around the world, and renowned for being the only truly global, Independent passenger survey of airline standards.)
2. Recently, a new AirAsia Credit Card was launched. The issuer of this new AirAsia’s card is Citibank. As we know, Citibank is the top-brand in credit card service. Citibank is now partnered with AirAsia...... I think this means something.
3. Couple of weeks ago, the Virgin’s Group announced that it’ll take up 20% in FAX. There are total five airlines under Virgin Group, each of them carry the word "Virgin" in their name, e.g. Virgin Atlantic, Virgin America, etc. But this time, instead of using its “Virgin” brand, FAX is renamed to "AirAsia X" to start its long-haul LCC business. As Tony said, “AirAsia brand is very big, bigger than Virgin out here.”

Reasons of buying AirAsia

In value-investment, you must be able to list downs the attractive features of a company that you're investing in. If your text can't cover for (at least) half page of a paper, it's probably that you're not quite understand this company, and this investment can't be considered a secure one.

So, I decided to list down all the reasons for every company that I buy. I start with AirAsia, because this is my latest investment. I'm still quite excited that I found this company for investment.

I invest in AirAsia, because it's a great company, due to the following reasons:-

1. Simple business model that I can understand.
2. A growing company in a growing industry.
3. Great management – Tony Fernandes
4. High profitability – It has a high profit margin compared to the other LCCs.
5. Leader in the industry – Best Low-cost Airline Award (rank no.1 in Asia region), year 2007 .
6. Strong Brand Name - high value of intangible asset.

Above reasons show how good is the AirAsia. I'll elaborate these points one by one in the following comments.

But, no matter how good is a company, it's not a good investment if the price is high. I have to make sure that I'm not paying too much for it. Here's my own analysis based on its 3Q-2007 report:

• AirAsia's stock price is around RM1.80 today. 9-month profit for FYE2007 is about RM0.13 per share. this means its PER for 2007 is about 10 to 12.
• its 9-month revenue grow 53%, and the 9-month profit before tax grow 190% as compare to 2006.
• based on its growth in fleet size from 50 aircrafts (this year) to about 150 (year 2013), my estimation for its average growing rate in the next five years is about 25% per annum.
• The ratio of PE to its growth rate is less than 0.5, so the price may be considered cheap. (This is an analysis technic suggested by Peter Lynch).
• its net asset per share is just 64sen. This is less comfortable for a secure investment. But AirAsia has a great value of intangible asset - its brand name.

As a conclusion, I'll continue to accumulate AirAsia stock as long as its price is still below RM2.00.

And I hope that my holding period for this stock is...... forever.

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[updated 3/11/2008]: Months after holding AirAsia, I had found several accounting pitfalls in the statements of AirAsia. In short, AirAsia's performance is not as good as I thought before (i.e. when I wrote this post). For more details, pls refer to my other posts tagged "airasia".

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Discover the low-cost-carrier - AirAsia

The first time I heard about AirAsia, is from friends around me.

People start talking about AirAsia.
“AirAsia’s ticket is very cheap”,
“It’s a new airline, you can fly with only RM9.99”
“now flying to Penang is cheaper than driving”

wow, this company is really cool....
I love Airasia, because she makes “every one can fly”.
and She makes me able to fly.

Before the existence of AirAsia, I never fly. The air tickets are just too expensive. Being attracted by its “One Million Free Tickets” promotion and the low prices, I had been flying with AirAsia more than ten times during past twelve months. And because of AirAsia, I and my wife can have our honey-moon in Bali.

Thanks to AirAsia.

When flying with AirAsia, I found that it is almost full-loaded in every flight, especially during weekends. When the price is cheap, just about every one likes to take a flight.

So, some voices come into my mind,
“I like this company, she really makes every one fly”
“this company must be making plenty of $$$$$”
“Buy its share!”

A lots of people don’t believe in the business model of AirAsia.
“the air tickets are so…… cheap…..!!!!”
“how can it make profit out of that….???”
“the low price is just temporarily, it will raise the price later, or it may not survive”
“how long can it last before going to bankrupt?”

But for me, I believe in the magic of Wal-Mart:
The lower is your price, the more money you make.
And I really love the phrase sound: “the more you help people to save their money, the more $$$$ you get from them”

Wow, this is the greatest idea in the world. The feeling of “earning money while helping people to save money” is just like “getting rich while doing charity”. Sounds cool……

And, you know, AirAsia is doing the same thing as Wal-Mart. So, I decided study this company.

Start a blog of Investment

quite some time ago, i'm thinking to have my own blog about investment. and it remained as an idea in my brain for about a year. Today, 10-Aug-2007, I'm very happy, that i finally put it into action, and start this blog. why i want to start this blog:

• I'd like to have an investment diary, to record my ideas of investment and the reasons when I make a decission.
• I hope that this blog can serve as a track record for my investment activities, so that i can review my performance in the future, looking back on the right decissions i've done, and, more important, the mistakes that i've made.
• I hope that i can list down the principles of my investment strategy, and to share my thoughts to anybody that loves value-investing.
• most important reason: i hope this blog will record my succesful investment result, serving as evidence that value investment is one of the highest return investment strategy in long-run. It has been proved in US by Warren Buffet, and now, i want to proof that value-investment works best in Malaysia too. (in short, to 'show off' how best is my performance of investment, haha....)