Tafi sold.

For the second time, Tafi was sold from my value-stocks portfolio. The first time I sold Tafi was during Nov-2008, then I bought it back in early December.

Here's the summary for these investments in Tafi.

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1st investment。

• bought 3000 units at 39 sen in Mar-2008.
• received dividend of 1.5 sen per share (less tax 26%).
• sold all at 43 sen in Nov-2008.

Total return is 10.5% for a period of nearly 9 months. Annualized return rate is about 14% p.a.

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2nd investment.

• bought 3000 units at 32 sen in Dec-2009.
• received dividend of 0.75 sen per share (less tax 25%).
• sold all at 40 sen in Oct-2009.

Total return is 23.5% for a period of 10 months. Annualized return rate is about 28% p.a.

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Conclusion.

Taking the average of these two investments, the return rate I get from Tafi had just achieved the minimum requirement of my value-stocks portfolio, i.e. 20% p.a.

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Choo Bee Metal Industries Bhd.

This is the new member in my value-stock portfolio

I bought Choobee at price of RM1.53 per share, which is equal to 68% of its net-working-capital (according to its Jun-2009 reports).

Other criteria of ChooBee:

• Low debt position. (according to its Jun-09 report, debt-equity ratio only 10%+)
• Continuous dividend payment for more than 10 years. (though net DY only around 3%）
• Low PE ratio (about 5.5 based on three years average EPS).

The negative part is, its has a high inventories and receivables level.

However, after comparing its figure in the past ten years, a found that Choobee's inventories and receivables are maintained at a stable level as compared to its revenue. And the figures from others steel companies also show that high inventories level is quite common in this industry.

Thus I think it's quite safe to invest in ChooBee.

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UMS sold.

UMS was sold from my value-stock-portfolio yesterday.

Actually, the current share price of UMS is still below its net-working-capital per share. The reasons of selling include:

• I bought Triumpl into this portfolio few weeks ago. Since these two companies are in similar business and both of them have very high inventories level, I think it's better for me to hold just one of them.
• The return on UMS already exceed my target return rate.
• I had found some other (more attractive) companies for investment.

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The following is a short summary for my investment in UMS.

• bought 1500 unit at 70sen in Sep-2008.
• received dividend 6 sen per share (less 25% tax) during holding period.
• sold at RM1.14 per share in Oct-2009.

Total return is 65% in 13 months. The annualized figure is about 59% p.a.

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Reasons buying Hartalega

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Glove companies had always been one of my favorite choice on KLSE stocks.

Last year, I sold my holding on Supermx because I need some cash to build my "value-stock" portfolio. About two months ago, I decided to invest again into glove company. And this time I choose Hartalega.

The reasons:

• Good profit margin (around 15% ~ 20%), much higher than Topglove/Supermx/Kossan.
• Impressive ROE ( > 30%).
• Asset-equity-ratio only 1.5, leverage ratio even lower than Topglov.
• High growth rate.

Hartalega is still expanding fast while others glove-manufacturers are facing slow-down in growth. According to its report, the production capacity of Harta would be doubled in 2009, and increase for another 50% in 2010. This growth rate is similar to that of Topglove ten years ago.

And the most attractive point of Hartalega is its expansion into nitrile-glove business. Currently, the sales of nitrile-glove accounted for 80% of Harta's revenue. We known that the profit margin of nitrile-glove is much better than latex-glove. And the nitrile-glove market also had a higher growth potential in future.

(That's why Kimberley-Clark had decided to exit latex-glove business, and focus on nitrile-glove production since 2006.)

Hence, I believe that the high margin, high ROE and high growth rate of Hartalega are sustainable. According to its expansion plan, Hartalega may become the world's largest nitrile-glove manufacturer in the next few years.

My average entry price is around RM4.70 per share. Currently, Harta is the single stock that has the highest weight in my portfolio. I'm going hold it for at least 5 years.

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Triumphal Associates Bhd

This week, Triumpl had become a member of my value-stock portfolio.

According to its latest quarterly reports, Triumpl's net-working-capital per share is about RM1.50. I bought it at 75 sen per share, a 50% discount from its net-working-capital.

Other supporting points for buying Triumpl:

• nearly zero debt position.
• uninterrupted dividend payment for more than 10 years. (though the yield was quite low)
• low PE ratio. (about 5, three years average)
• cash per share about 34 sen. (about 45% of my buy price is for the cash)

The company's balance sheet condition is very similar to that of UMS Holdings Bhd (another company in my value-stocks portfolio). Triumpl also had very high inventories and receivables as compared to its profit. However, the level of these items are quite stable throughout the years.

Why ASW, ASB, ... can have superior return over private mutual funds?

A lots of people just can't stop questioning the sustainability of the "superior return?" of PNB funds.

When people ask me this question, I really don't know how to answer it. They start a question from a wrong point -- It's like asking why a man can always walk faster than a car.

How can you call that 7~8% p.a. of those PNB's fixed-priced funds a superior return?

Come on.... those funds (ASB, ASW, ASM, ASD) are invested mostly in equities, not bonds. Go ahead and compare their performance with some equity-based mutual funds out there.

(PNB's set the KLIBOR as the benchmarks for these fund, it doesn't mean that their performance should be compared to those money-market funds or bond funds.The benchmark itself is not a correct indicator to gauge the fund's performance. )

Know what I'm thinking?

These fixed-priced-funds of PNB have lower annual-management-fees and trustee fees compared to those private equity funds. So, their long-term average return (after cost) should be a bit higher than those private funds out there, provided that PNB's fund managers post at least an average investment skills. But, guest what, historical data shows that these PNB funds' performance are actually below average!

Thanks to our BN government, it had successfully made the people sooooooo hate about him, that they will always critic on whatever he did without any further judgement.

People look at our EPF, which is mostly invested in government securities and bonds (equity accounted for < 30% of EPF investments), they critic that the 5% dividends are too low and ask for a higher return. Now we have funds that are mostly invested in equity, and people start questioning the sustainability of its unbelievable high 7% return....

Hey, what do you expect?.... A fund that mostly invested in government securities can generate 7%, and the equity-based funds generate only 5% return instead?

Malaysian... use your brain please! Do your homework and think independently, Don't just follow what other people's saying!

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How to estimate the NAV of ASW2020.

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Amanah Saham 1Malaysia, a new fixed-priced-fund by PNB was launched yesterday. And I found that a lots of people feel uncomfortable with the "fixed priced" policy.

"How can the redemption price be fixed at RM1 while the NAV is fluctuating?"

(Just wonder why nobody ask the same questions on EPF. They work the same way too. Each dollar you put into your EPF account, plus dividend each year, can be withdraw with no risk of loss. Isn't it true that the NAV of EPF funds also fluctuate with the market? )

Seems that people may feel better if they know the NAV of those fixed-price-fund. So, this article suggests a method for estimating those NAV.

Although the NAV is not disclosed in the fund's annual report, it can be estimated indirectly through the following steps:

1. First, you can find a list of its 20 largest holdings from the fund's annual reports, together with their weights in terms of % of Total NAV.
2. Then, look for the annual reports of those companies. You should be able to find out the number of the company's shares that are held by the ASN's fund.
3. Find out the share price of the stocks on the balance sheet date of the fund.
4. Multiply the term-2 and 3 above, you'll get the market value of the company's share held by the fund.
5. from the term-1 and 4 above, the NAV of the fund can be calculated.
6. divided the NAV by the unit in circulation, you get the NAV per unit.

That's it.

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For illustration, I had done some calculation on ASW2020.

Example 1:

1. According to ASW2020's 2008 annual reports, Maybank accounted for 7.77% of its total NAV on 31-Aug-2008. (financial year end).
2. From the annual reports of Maybank, we know that ASW2020 held 76.5 million shares of the company.
3. The share price of Maybank at 31-Aug-2008 was RM7.85.
4. Thus, the ASW's holding on Maybank worth RM600.5 million on that date.
5. So, the NAV of ASW = RM600.5 / 0.0777 = RM7.73 billion.
6. divided by the unit in circulation, 7.795 billion, we have the NAV per unit = RM0.99.

Example 2:

1. According to ASW2020's annual reports, Tenaga accounted for 6.60% of its total NAV at 31-Aug-2008.
2. From the annual reports of Tenaga, we know that ASW2020 held 66.5 million shares of the company.
3. The share price of Tenaga at 31-Aug-2008 was RM7.90.
4. Thus, ASW's holding on Tenaga worth RM526 million on that date.
5. So, the NAV of ASW = RM526 / 0.066 = RM7.97 billion.
6. divided by the unit in circulation, 7.795 billion, we have the NAV per unit = RM1.02.

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There are always some errors in the calculations. Some possible causes are:

• The financial year end of ASW and the holdings company are different. Thus number of share held by ASW reported in the companies's annual report may be different from the figures in ASW's report.
• The market values in ASW's report may be recorded using average price of the last few trading-days of its financial year end, instead of the closing price on 31-Aug. (need clarificaton here...)

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Tomei Consolidated Bhd

I had been sending order to buy Tomei during the past few weeks. Finally, my transaction was done at 45 sen per share few days ago. So, here come the new member of my value stock portfolio.

According to its Mar-2009 report, Tomei's net working capital per share is about 77 sen. This means that my buy price is at a discount of about 40% from its net working capital.

Others supporting criteria for this investment:

• low PE ratio. (< 5, three years average)
• high dividend. (net DY about 7%, three years average)

One thing had to take note here, is that the current asset of Tomei is mostly made up of inventories. Though I'm not worried about this, some people may think that the value of its inventories is subject to impairment(loss) if their recoverable value fall, which is quite possible in the current (weak) economic condition.

Another thing about Tomei is that its debt ratio is a bit high as compared to my others value stocks. However, this new member of my value-stocks portfolio had a much better liquidity than those earlier picks, i.e. advpkg, sjc, yahorng, ...

Stocks sold from my "value portfolio"

In the pass few weeks, three stocks from my "value-stock-portfolio" had been sold. This article is a short review about these investments:

1. Advpkg

Bought 2000 unit at 55 sen on Mar-08, received dividend of 4.5 sen per share (tax-exempt) while holding, and sold them at 72 sen on May-09. The total return is about 35% for a holding period of about 14 months.

2. Lysaght

I bought 1200 unit at 85 sen in Sep-2008, sold 100 unit in Dec-08 at RM1. Then I received a dividend of 5 sen per share (tax-exempt). Sold the remaining holdings at 99 sen in May-09. Total return is about 17% in 8-months.

3. SJC

Bought 2000 unit at 53 sen in Sep-2008, never receive dividend, and sold them all at 72 sen in Jun-09. Total return is about 32% for a holding period of 9-months.

Reasons of selling:

The first reasons is their low liquidity (very low trading volume). Now, the market price of many others stock are cheap enough to meet my selecting criteria of "value-stocks", yet their trading volume provide better liquidity. So, I sold these 3 stocks in the hope that I can replace them with some higher liquidity value-stocks.

The second reason is the returns of these 3 stocks had met my minimum requirement (>20%, annualized). However, their fundamental still very good. So, if I can't find other value-stocks worth for investment, I may buy these stocks back later, provided that their price had fall back to a cheap level.

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AirAsia 2008 - Operational Cashflow still Strong.

Due to its weak performance in 2008, the shareholders of AirAsia had been worried about its gearing and coverage ratios.

This article is just a simple analysis on AirAsia's 2008 cashflow, which is an important measure of the company's ability in servicing its debts.

According to its audited account, AirAsia's cashflow from operation in 2008 is negative RM 416 million. This number, however, is what we get after charging the unwinding loss on derivatives. Seeing that the huge cash outflow of this unwinding process is not neccesarily to be recurring, we should exclude them from our analysis so that we can get a more accurate picture on AirAsia's real performance.

How much cash had AirAsia actually paid in the unwinding transactions? According to its report, the total unwinding loss incurred is RM 1.1 billion. The loss is allocated and borne by three entities of AirAsia:

• AirAsia Malaysia: RM 679 milion
• Thai AirAsia: RM 222 million
• Indonesia AirAsia: RM 207 million.

Among these losses, only the RM 679 million is reflected in AirAsia's income statement. I believe, however, that the cash outflow of RM 1.1 bllion is all paid from within AirAsia. This is because the two oversea entities have no enough cash to settle those transations -- their operation are still in loss position, and their equities are negative. And from the statements of AirAsia, we can see that more than RM 500 million of cash was injected into these entities by AirAsia in 2008.

Thus, instead of RM 679 milion, the total amount of RM 1.1 billion should be used for our adjustment on AirAsia's cashflow. After the first adjustment, the operational cashflow of AirAsia had become a positive RM 691 million.

Then, due to the reason discussed in my previous post (regarding the recurring nature of the fuel-hedging transactions), I'll charge back a cash outflow of RM136 million (equal to 20% of RM679 million) into AirAsia's cashflow account. After this second adjustment, AirAsia's operational cashflow of 2008 would be a positive RM 555 million.

* This figure is from the perspective of AirAsia company only. Because I can't get the information on the cashflows of TAA and IAA, analysis from the level of whole AirAsia Group can't be done.

Compared to the company's cash outflow on interest (RM 240 milion) and repayment of borrowing (RM 301 million), the operational cashflow can be considered as strong, and its cashflow ratios is within my comfort zone.

However, this cashflow performance is still below my initial expection. In 2009, I hope that AirAsia can make a huge improvement, generating an operational cashflow of no less than RM 1 billion.

Dissecting AirAsia's Earning 2008 (Part2)

Here, we examine AirAsia's financial performance, taking into account the profit/loss from Thailand AirAsia (TAA) and Indonesia AirAsia (IAA).

Revenues of the jointly-control-entity & associates in 2008:

• TAA: RM 889 million
• IAA: RM 482 million*

And their results are:

• TAA: RM -118 million
• IAA: RM -83 million*

* Besides IAA, AirAsia has a number of other associates. In the sense that their contribution should be quite small, I assumed that the figures of revenue/loss from associates as reported in AirAsia's statment are all derived from IAA.

The net losses stated above are after the adjustment discussed in part-1, i.e. I took out the whole unwinding loss on derivatives (RM 222 million for TAA, RM 207 million for IAA), and then charge back 20% of its amount .

The above losses are not reflected in AirAsia's reported income statement, because the associate's results are consolidated into AirAsia's statement using equity method, and their equity had become zero since few years ago. However, to gauge the economic performance of AirAsia as a grouop, these unregconized losses should be taken into account.

Consolidating the share of loss (48.9%) from these associates, AirAsia's results in 2008 will turn negative -- a net loss of RM 38 million. It should be pointed out that the shared profit/loss from the long-haul AirAsia X had not been included here. However, its contribution in 2008 should be quite small and hence negligible.

Next, we examine AirAsia's performance from the perspective of whole AirAsia Group. Here, we consolidate 100% of TAA & IAA's revenue and results with AirAsia Malaysia. In my opinion, this is the most appropriate measure of AirAsia Group's performance. (see the reasons here.)

The figures after consolidation are:

• Revenue: RM 4.00 billion
• Profit/loss: RM -141 million
• Profit margin: -3.5%

From the Group's perspective, AirAsia was suffering a loss in 2008. I'm a bit disappointed with this performance. However, the prospect of AirAsia in 2009 is very optimistic.

Dissecting AirAsia's Earnings 2008 (Part 1)

As pointed out in my older posts, AirAsia's reported earnings need some adjustment before the numbers can be used to gauge its performance.

To dissect AirAsia's 2008 earnings, let's begin with the reported numbers in its Income Statement:

• Profit before tax (PBT) : RM -869 million
• Profit after tax( PAT) : RM -497 million
• Earning per share: -21.1 sen

We start our analysis using PBT to eliminate the effect of deferred tax. First adjustment we had to do is taking out the non-operating gain/loss from the reported income. They are:

• unwinding derivatives (interest-rate swaps): RM -152 million
• unwinding derivatives (fuel hedging contract): RM -678 million
• foreign exchange movement on borrowings: RM -235 miilion

After our first adjustment, the profit of AirAsia in 2008 is RM196 million, which is equivalent to 8.2 sen per share. Not bad so far...

But I would like to discuss further about the validity of the adjustments done. Those 3 items are excluded because they are thought to be non-recurring in nature. But are they really so?

In my opinion, the FX movement is quite volatile and the trend is difficult to predict, thus its short-term movement can be considered as non-recurring. But fuel-hedging is a different case. Every airlines in the world will more or less hedge their fuel consumption. AirAsia's current position without any hedge is just a short term bet on the movement of oil prices. Sooner or later, it will resume oil-hedging activities.

So, the unwinding decission taken by AirAsia last year, is like charging all the future loss into one year. This action will make its 2008 earning worse, at the same time inflate its future reported income (less loss from hedging).

I suggest that we charge a portion of the unwinding loss back into AirAsia's income.

According to its quarterly report (Sep-2008), the original intention of AirAsia when entering these contracts is to hedge its fuel cost in the remaining period of 2008 and year 2009. Lacking of any detail information, I think the unwinding loss of these contracts (RM 678million) should be spread evenly over the five quarters starting Q4-2008. As a result, a loss of RM136million (= 20% x RM678million) should be charged into each of these quarters to bring down the inflated earning.

As a result, AirAsia's adjusted earning in 2008 will become RM 60 million, or 2.5 sen per share.

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Recommend reading: Common Stock and Uncommon Profit

This is one of the best investment book in the world.

It can be found in most MPH bookstore in Malaysia. I bought it and finished reading it last year, and it change my investment thought and strategy.

The book is about how achieve great investment result by buying into some great companies' stocks and hold them for long period. A company that worth holding for long period must be one that will keep growing for decades. So, we can say that this book is about how to pick a "long-term growth stock".

In the books, Fisher list out some attributes that may concern an investor when he is trying search for a good company.

Fifteen points tolook for in a common stock

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting control?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-rage or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing to that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
14. Does the management talk freely to investors about it affairs when things are going well but “clam up” when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?

x x x

What so special about these points is, most of them are not directly reflected in the financial statements of a company.

Instead of judging a company from financial view, Fisher pay more attention on "human factors". In other words, the growth company that we should look for is the one with great management, great teams and great culture. These are the factors that makes the company's growth sustained years after years.

If you could identify some companies that meet most of these 15 points, and buy their stocks with sufficient low price, then you'll probably enjoy some great returns in the next twenty or thirty years, by doing almost nothing -- just holding them.

Daily KLCI is affected by US-market, So What?

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Most people in local market had heard a statement similar to this:

"The daily move of KL market is affected by US. If US market rise during the previous night then most probably KLCI will rise today."

People that believe in it may watch the US market throughout the night, and hope to get some idea to trade in the following day.

Well, if you'd ever tried to use the statement to form a day-trade strategy, you'll probably quite upset with it. While it seems to be correct from statistical view, you just can't make money from it.

Why?

Before we continue, let's look at some historical data. The following chart shows daily relationship between local market and US market. Each point indicate the change of KLCI on a certain day, and the change of S&P500 index the night before. (I only plot about 100 data in this chart, so that it won't be too populated.)

From the chart, we can see that there's a weak relationship between local & US market (correlation coeficient ~ 0.45). So, we can say that the above statement is correct -- if US market rise, our market most probably will follow too.

Then why we can't make a profit out of it?

We can see the reason if we divide the change of KLCI in each day into two components:

1. The difference between opening price and the previous close.
2. the following move in that day. (closing price - opening price)

The sum of these two components equals the daily change of KLCI as comparing to previous close. We examine them one by one. First, we check the the relationship of the first component (opening price - previous close) with US market:

As you see, there is a strong relationship between them. So, when US market rise in a particular night, our market most probably will "open high" in the next morning. If Us market drop, KLCI will "open low". Our market's opening price is strongly affected by US.

What happen after the market open?

Here come the second component. The following chart relate the moves of KLCI within a day to the S&P500 index change in previous night. It's very clear that after the market open, the following move within the day is totally unrelated to US market.

Conclusion:

When US market rise during the night, it will immediately reflect in our market with a higher opening price in the morning. After opening, the move of our market is totally independent. So, you can never make money by simply watching US market throughout the night unless you can trade KLCI at a favorable price before it open.

The statement quoted in the beginning of this article -- just like other statements made by most economist -- it is true, but useless !

New Year, New Blog.

In this new year, I have decided to start a new blog. It's talk about my investment thought, just like this one, but it's in chinese.

Anybody who can read chinese, your visits are welcomed: KLSE 投资札记.

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