My Portfolio at the end of 2010.

Activities during this year:

• Stocks sold: Titan, MAS-Pa.
• Stocks bought: Notion, TSH, XDL, Kossan, Rex, IQgroup, UMSNGB.
• Money added: RM 6,000 in July, and RM 3,000 in Oct.

The buys and sells are mainly a result of a trimming process of my portfolio during the middle of this year. Kossan was bought when a new RM3000 fund was injected in October. Rex, IQgroup and UMSNGB are bought based on net-working-capital approach.

For the year 2010, my portfolio's average return rate is about 34% p.a., quite satisfied for me as it's much better than KLCI's performance.

Increase holdings in glove sector -- buying Kossan.

Recently, share prices of glove-companies had experienced some great fall.

I had decided to take the opportunity, and already bought in 1000 unit of Kossan on Friday.

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Why choose Kossan instead of Harta?

Diversification.

Hartalega is still my favorite glove-stock now. However, it had already made up 25% of my total portfolio value. Further increase in the weight will make me feel uncomfortable. Thus, I decided to buy in other glove-maker, in order to have some diversification.

Now that Harta and Kossan together form about 30% of my portfolio value. This already near my upper-limit. I will stop buying any glove-company in future, until their weight in my portfolio drop into a more comfortable level, e.g. 20~25%.

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Why choose Kossan instead of Topglov or Supermax？

I'm in opinion that all these three companies are great for investment. In fact, I often recommend people buying (diversify) into all these 3 companies.

There are two reason why I choose Kossan among the top-three's.

First and the main reason, I'm more favor into nitrile glove makers (that's why I invested in Hartalega). Among these 3 companies, Kossan has highest exposure into the nitrile glove market -- 40% of its revenue are from nitrile-glove. And I believe that the ratio will increase further in the coming years.

2nd reason, Kossan has a lowest PE among three companies. Now, the prospect of these companies are all great. However, people may loose interest on them if their growing pace slow down in the future. And this may lead to a lower appraisal of their values and share prices. For me, Kossan's lower PE means a higher safety-margin.

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UMS-Neiken Group Bhd.

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The new member of my value-stocks-portfolio. Bought at 25 sen per share, a discount of almost 40% from its net-working-capital (based on Jun-2010 report).

Listed on KLSE since 2006, UMS-Neiken is principally involve in the manufacturing of electrical wiring accessories.

a quick glance:

• PE ratio ~ 8. (calculated from three years average earnings).
• net dividend yield ~ 4%. (three years average).
• Cash per share ~ 9 sen. (at Jun-2010)
• Debt/Equity ~ 10%. (at Jun-2010)

Revenue fell significantly in 2009. However, EPS and dividend were relatively stable compared to 2008.

Its inventories, receivable, and borrowings show a slight increase recently.

The trading volume of its shares is quite low.

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Xidelang Holdings Limited

In early July, this company came into my sight when I was browsing through the postings in Investalks Forum.

Once I saw it, my eyes just can't move away from its unbelievable low price -- a PE as low as 2!

After several days of study and collecting information, I found that its financial situation and growth potential is great. Then, I decided to buy it at 36.5sen.

Here's some attractive numbers of XDL:

• ROE ~ 40%。
• Debt/Equity = 0.24.
• During years 2006 ~ 2009: Revenue CAGR = 59%, profit CAGR = 79%.

The numbers are great, yet it was trading at a price of PE=2, sounds not logical...

I had gone through its IPO prospectus, annual reports, also browse through some blogs and forums, and search for any information available on the internet. Finally came to my own conclusion about its extremely low price -- these newly listed China company just can't get confidence from the public! No matter how good is the data, people just don't believe in it. Manny worrying that it's another conman company.

I don't have a strong confidence in XDL either. But my thought was simple -- Since I didn't see any suspicious point in the data, I choose to believe it. But, isn't it too risky? ... Yes, it's risky -- if you put 50% of your fund in it. For me, I just invested RM5k+ , i.e. just about 10% of my entire portfolio value. I feel quite comfortable with this.

I think I will hold on to this stock for several years, as long as its fundamental remain strong.

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x x x

The following spreadsheet shows some data that I sort out from XDL's IPO prospectus and annual report.

(NOTE: Currently there are 3 subsidiaries under XDL. They were separated entities before the listing. Its IPO prospectus only provides separated balance sheets data for these three entities. The consolidated data below is from my own calculation -- I sum up their numbers, then eliminate the related-parties & inter-companies' borrowings/receivables. There will be some errors in the calculation, which is unavoidable, due to the limited information disclosed.)

I had put the data on Google-Docs (click here to see the complete spreadsheet) for easier sharing. I will continuously updating the data in the future.

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TSH Resources BHD - strong growth ahead.

(I bought 3000 units of TSH at RM1.80, in early July.)

There are three business segment in TSH -- palm oil, cocoa, and wood products. While the palm-oil segment are growing exponentially, the other two segments were facing difficulties in recent years.

In 2009, palm-oil business had contributed about 80% of TSH's revenue, and 100% of its profit. Hence, we can say that the future of TSH is relying on palm-oil. So, I simply ignore the wood & cocoa segments, concentrate my analysis on its palm-oil business alone.

Let's take a look at the historical figures of THS' palm-oil segment: (RM million)

	Revenue	Profit
2001	83.0	14.5
2002	143.8	19.6
2003	233.5	35.8
2004	272.7	41.9
2005	318.0	35.7
2006	358.3	48.9
2007	575.7	85.3
2008	814.5	88.5
2009	784.2	118.6

During these years, the palm-oil business was growing at a CAGR of 30%.

In recent years, TSH had been aggressively purchasing plantation-land in Indonesia. Today, its accumulated land-bank area already closed to 100k hectares. Among these, only 25k ha had been planted with oil-palm trees. And in these 25k ha planted area, 13k ha are newly planted trees, age only 1~3 years old (i.e. non-matured). The remaining 12k ha trees are in prime matured stages, age 4~20 years.

Hence, we can predict that the oil-palm production of TSH is going to doubled within 3 years, which translated into a CAGR of > 25%.

Then, according to its management, current TSH's expansion plan is to plant up to 5000 ha of new estate per annum. If this target is achieved, then the matured-estates of TSH will be growing at 20% p.a. pace for another 3 years.

Seeing the huge land bank behind it, I believe that TSH will keep its double-digit-growth for many years, deep into the future.

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Reasons buying Notion.

This is a company that I had been observing since 2007, when it's still listed on MASDAQ. I bought 2000 units of it last month, at RM2.97, just before it plunge to the current level.

Main reason of buying is the high growing potential, supported by its great financial performance.

A review of historical data: (RM million)

balance sheet ratios and cashflow:

In short summary:

• Good profit margin (maintaining above 20%)
• Great ROE (above 20%)
• High growth rate (25% CAGR for year 2004~2009)
• Healthy balance sheet and cashflow.

I think that Notion is able to maintain this performance in the next five years.

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One more thing that I love Notion very much is the ability to diversified its product base. Below shows the product mix of Notion in recent years.

The balancing between SLR cameras and HDD sectors reduce Notion's dependency on a specific customer, hence lower its business risk.

This year 2010, the newly emerge customers, Samsung & Alphana, will bring Notion into the 2.5" HDD sector (producing baseplate and spindler motor hubs), hence further broadening its product base and customer base.

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Recent development.

Soon after I bought Notion, its share price dip 40%.

Following the release of its latest quarterly report, we had learned that Notion is currently facing technical challenges, causing a high rejection-rate from its new customer, Samsung. The higher operating cost leads to a very poor profit margin.

In my opinion, the high-rejection-rates problem is just a temporarily issue. I have my confidence in Notion's management, and believe that the company will manage to get through this. (Though it may take months to fix the problem).

So, its current share price actually looks very attractive to me, and I'm currently considering to increase my stake in Notion.

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Shares bought in July.

Last month, soon after selling MAS-PA and Titan, I added RM6000 of new capital into my portfolio. Then bought in 3 companies that I believe to have great potential to growth in the next 5 years:

• Notion, bought 2000 unit at RM2.97.
• XDL, bought 15000 unit at RM0.365.
• TSH, bought 3000 unit at RM1.80.

I'll write down the reasons of buying them in the coming posts.

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here, just to record an interesting observation on their price-movements in the past few weeks:

• Notion's price had been falling for nearly 40%,
• XDL, on the other hand, up for nearly 40%,
• TSH, almost unchanged.

three extremely-different ways of price move happening at once, what a coincidence!

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Trimming my Portfolio and Strategy.

I had been holding quite a number of shares.

Some of them are traded based on a well-defined strategy, i.e. my "value stocks portfolio" was built according to Graham's "net-working-capital" approach (with a little modification).

Others are selected based on different style and prospect. AirAsia and Hartalega were bought due to their long-term growth potential. When I bought Titan in 2007, I was expected to ride on its 3 ~ 4 years growth (capacity) only, which was expected to end soon by 2011. For MAS-PA, it is a low-risk investment with attractive return rate, and holding-till-maturity was my initial thought.

However, I had decided recently to refine my investment style into a simple investment strategy. In the trimming process, I had decided to sell off Titan and MAS-PA, concentrating all my future effort on a single long-term-growth-stocks strategy.

Details of my "growth-stocks" strategy are:

• High growth: company's earning that are expected to achieve 20% CAGR or above in the coming 3~ 5 years.
• Growth sustainability: expected to maintan at least 10%p.a. growth-rate for another 5~10 years.
• When to buy: trailing PE at 10 or lower.
• When to sell: Long-term holding. Sell only when the fundamental of the company had changed, or it is found that a serious mistake had been made during analysis, or when there occur a more attractive investment opportunity.
• Diversification: 5 ~ 10 stocks.

According to these strategy, Hartalega and AirAsia will be kept in my portfolio because I think they fulfill the growth criteria. Titan and MAS-PA will be sold and switched to some others stocks that meet the requirement.

After this trimming process, my investment holdings will only consist of two simple portfolios:

• value-stocks.
• long-term growth stocks.

the value-stocks is an experimental portfolio set up to examine the net-working-capital approach. All my future savings will be invested into long-term growth stocks.

Hope that this trimming decision will make my investment life simple and easy in the future.

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IQ Group Holdings Bhd

This is the new company being bought into my value-stock portfolio today.

I bought it at 50sen, which is a discount of more than 40% from its net-working-capital per share (based on its Dec-2009 report).

Other good criteria of this company:

• Plenty of cash (about 35 sen per share).
• zero borrowings.

The stock is currently trading near its historical low price. The PE ratio is around 10, based on its three years average earning of FY2007~2009.

The company was listed on Bursa since 2005. Its profitability had been falling through these years, and suffered a small amount of lost in FY2009. It stopped paying dividend since 2008.

For the FY2010, a profit of 2.5 sen per share was recorded for the 9-month period ending Dec-2009. No dividend had been declared yet.

The investment decision today is kind of Walter Schloss' style. Walter likes to purchase companies when they were facing problem, i.e. when their profit and dividend fell, provided that the company had no debt. And he likes to bought companies at prices near their historical low.

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Great Investor -- Walter Schloss.

One of the greatest successor of Graham's value-investment philosophy.

It's because of him, that I had decided to start an experimental portfolio applying Graham's net-working-capital strategy. During his investment lifetime of nearly 50 years, Walter had achieved an incredible return rate of about 20% p.a..

Yet, a lots of people never heard about him.

So, this is a short introduction about Walter Schloss (more precisely, a short summary of what I've read about him on the internet).

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Walter never went to college. He was employed and worked in Graham's firm for nearly ten years. When Graham decided to retire and winding up his firm on 1955, he introduced Walter to some of his clients. And that's how Walter started his own career, with a "net-working-capital" fund.

Walter's investment style is very different from Warren Buffett's. While picking stocks, Walter focus only on tangible asset. He always had a well diversified portfolio, holding more than 100 stocks most of the time.

Walter describe himself as:

• doesn't like to lose money.
• doesn't understand business.
• not good in judging people.
• didn't visit the companies that he invest, or talk to the management.
• never predict the market, never bothered about economics.
• likes to invest in company that has very little or no debt.
• likes to see that a big portion of a company's stock owned by the management.
• likes to buy companies that are facing problem. (when their earnings and dividends drop)

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Anybody who likes to understand more about Walter, here's some good links：

• Story of Walter, on Forbes (Feb-2008)
• Video Interview of Walter Schloss (2008）
• Walter Schloss: 16 Golden Rules for Investing

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A new framework for my Value-stock-Portfolio.

[阅读中文版本]

I started this experimental portfolio since 2008 (see here). After two years of practicing, I had done some review and had decided to make some modification on the strategy framework.

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Entry strategy：

• buy at price lower than 70% of net-working-capital.

a single criterion for stock selection.

This is to make my strategy as simple as possible. In the past two years, I found that it's not hard to find a number of stocks that fulfill this criterion. However, those companies that are suffering lost, or having problem of management's integrity, are definitely out of the list.

Other figures e.g. PE, DY, cash per share, etc. will only be used as supplementary guidelines.

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Exit strategy：

• sell at price between 80% to 120% of net working capital.
• maximum holding period for each stock is 4 years.

Of course, the ideal exit-price should be above NWC, but I have less confident that every stock in the portfolio will rise above this level. Thus, I need some flexibility.

To determine the suitable selling price (within the 80~120% range), other factors are used as reference, e.g.:

• PE、DY、quality of assets, etc.
• target return rate.

I hope that this strategy can be made more simple in the future.

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Target return rate：

• for entire portfolio: 25% p.a.
• for each stock in the portfolio: at least 30% p.a.。

Two years ago, I set a 20% p.a. target for the portfolio. That was actually the results achieved by Walter Schloss (who keep practicing net-working-capital strategy) in his 50-year investment lifetime. But recently only I realized that the potential return for this strategy should be higher here, because we have no capital-gain-tax in Malaysia.

Since the portfolio is not always in 100% equity position, and some stock may fail to achieve the target, it's reasonable to have higher target on each single stock than the target of entire portfolio. For those stocks that have good quality, like high DY, low PE, healthy balance sheet, etc., I would aim for a higher target e.g. 60% p.a.

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Risk Management：

• Weight on each stock shall not exceed 15% of the portfolio value (at the time of purchase).
• Avoid investing in companies of same industry. If there's really a good opportunity, the weight on each industry should not exceed 20% of portfolio.

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x x x

From now on, all investment decision in my value-stock-portfolio will be made based on this new framework.

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Rex Industry Berhad

[阅读中文版本]

The new member of my value-stocks-portfolio.

I bought it at 65 sen per share, a 47% discount from its net-working-capital (according to its Sep-2009 report).

However, judging from any other view, Rex doesn't sound like a good investment choice:

• its PE ratio is high.
• bad dividend record （didn't pay dividend from year 2002 ~ 2006). DY of 2007 and 08 is quite low too.
• its profit margin showed a trend of descending during the past ten years. Though its revenue boosted up in recent years, PAT continued falling.
• high investories & receivable.
• trading volume of shares is very low.

In other words, the decision to invest in Rex is purely Graham's net-working-capital approach, without any other supporting point (e.g. low PE, high DY, high cash, low debt...).

Hence, this transaction is a meaningful case-study to test my net-working-capital strategy. If the return from this investment turns out to be good ( > 20% p.a.), it would be a strong support for me to continue practicing this strategy.

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My Portfolio at the end of 2009.

Here's the composition of my portfolio at 31-Dec-2009.

Activities during this year:

• Stocks sold: Advpkg, Lysaght, SJC, UMS, Tafi.
• Stocks bought: Hartalega, Tomei, Triumpl, Choobee.
• Money added: RM 9,100 in the middle of the year.

If being asked what I'd feel regret about my investment during this year, it would be my slow reaction in buying Hartalega. Its price was below RM3.50 when it first came into my sight, but I only took action when its price went above RM4.50 -- Lesson learned: take action immediately when you found a good company trading at an attactive price. This event also strengthened my believe in long-term buy-and-hold strategy.

For the year 2009, my portfolio's average return rate is about 41% p.a., a bit lower than KLCI's performance.

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