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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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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Comment about Mar-2008 quarterly reports

AIRASIA

The result is better than I expected. Its operation in Indonesia and Thailand is improving despite the escalating oil prices. The environment for airline industry has become more and more challenging in this year. The record-high oil price and tough competitions in the industry will kick out some of the players, and those who survive——and I think AirAsia is surely one of the them——will benefit from it.

As I said, I will gradually increase my investment in AirAsia (up to the limit of 25% of my portfolio’s value). Currently, the only thing that worried me is the continuous drop of AirAsia’s load factor, which is about 68% in this quarter. However, I’m in confidence that it would be improved in next year, as a result from the ASEAN's sky liberation.

AKN

It surprised me with a proposal to sell off the businesses in Paramount Discovery. Its acquisition of Paramount Discovery about two years ago is one of the main reasons I invested in AKN. However, the proposed selling price of RM126.9 million is about four times higher than the acquisition price about two years ago. This means AKN will have a gain of about RM100 million in this transaction, which is equal to earning per share of about 80 sen.

This will help AKN to reduce its debts, cut the financial cost (hence improve its profitability), and achieve a healthier balance sheet. I hope these will boost AKN share price to a high level after the transaction is done, because I’m considering to withdraw my investment from AKN then.

RUBHD

The revenue and profit remain stable, as expected. Its reaction to WSIA remains uncertain. The scheduled tariff hike in Jan-2009——which is expected to boost its profit next year by at least 30%——remains the key reason for me to hold RUBHD.

But then a shockin news was announced last week, that Ranhill Berhad made a take-over offer on RUBHD. The offer price is only RM3.50 per share, which is 20% below its NTA. I really hope that this privatisation will fail, because RUBHD definitely worth much more than RM3.50!

SUPERMX

Revenue and profit is growing as expected. But the profit margin is decreasing, which is a warning signal to me. Although I feel that its current share price is very cheap as compared to its value, I'll rather stop accumulating Supermx. This is simply because the value of Supermx already made up a high percentage in my portfolio (about 25%). Currently, I need some diversification in order to reduce the risk of making mistake.

TITAN

As expected, Titan remain profitability despite the high oil price, and the polymer-naphtha spread is quite stable. I’m very happy to see the start-up of the butadiene plant and propylene plant has been carried out smoothly. Also encouraging is the increasing output from the Indonesia’s plant. The next step of Titan is the debottlenecking process of its polypropylene plant, which is expected to boost its Polypropylene capacity for another 100 KTA, by the end of this year.

"Value-Stocks" Portfolio - TAFI & ADVPKG

Advpkg had declared a tax-exempt dividend of 4.5 sen per share. This means I’m enjoying a net dividend yield of about 8% this year, which is higher than I expected. Maybe due to this higher dividend, its share price has been advance for more than 20% from my buy-price. However, I’m in the opinion that its current share price of about 70 sen is still under-valued.

Despite the declining revenue and profit,TAFI's share price remain quite stable.

My New Portfolio – with the Graham’s Value-approach.

As I mentioned few months ago, I’m planning to swift my stock-selecting method to Graham’s way. Thanks to Hong Leong Broking which maintains its minimum brokerage fee at RM12, allowing me to buy stock at smaller lots, with low transaction fee. Last month, I’ve opened a trading account with HLeBroking, and I’ve started this portfolio in the early of March.

The purpose that I set up this portfolio is to carry out an “experiment”, to test whether I could generate a good return with this approach. In his 48-years of investment life, Walter Schloss has showed that Graham’s method can give an compound return rate of 20%p.a., almost as same as Buffett’s record.

In this separated portfolio, I will select a number of undervalued stocks, simply based on their assets. I’m not going to study deeply into their business model, nor am I going to make a detail analysis about their future prospect. I’ll just concentrate on figures, not people. Everything is based on the historical data, not future forecast. More attention will be paid on analyzing their assets instead of earnings.

Before I started this portfolio, I had listed down some rules for the screening purpose:

First, I’m not going to invest into a property or plantation company. This is simply because I don’t have confidence in estimating the value of land-properties. However, I’ll still invest in such a company if it consists of high-liquidity-assets, and its share price below the value of these assets.

All the companies selected into this portfolio must have a price lower than its net-working-capital. Here, I’m using Graham’s definition, where “net-working-capital” equals to current assets minus total liabilities. As we know, Graham suggested to buy into stocks which is priced below two third of its net-working-capital, leaving a 33% safety margin. However, I think this rule is too strict, where I hardly find a counter on KLSE that comply with it. So, I use a lower standard-- price below net-working-capital as my first screening filter.

Since my requirement on net-working-capital is less than what Graham suggested, I have to set a few more screening criteria to lower my risk of investment. Some of them are:

• no debt (or very little debt).
• the PE ratio must be lower than 10.
• has a consistent record of dividend payment.
• not suffering loss during the past few years.
• the current price level should be at least 25% lower than its peak in the last 24 months.

I hope that I could find at least 10 counters from KLSE which can meet all the above stated criteria. I'll invest about RM1,000 in each of them, to form a diversified portfolio of value-stocks. Of course, I understand that ten counters is not actually diversified enough, but currently I only have about RM10 thousand budget for this.

Due to the low invest amount in each counter, the transaction fee (in and out) will be a bit higher, about 2% ~ 3% of invested amount. But if this portfolio can generate an average return of 20% p.a., I don’t think that transaction fee is a big matter.

To find a stock that meets all the above criteria is not an easy job. Currently, I have only four candidates in my hand. I’d already invested into two of them, in the beginning of this March (I’ll discuss them in my next post). I'll continue the searching until I've found ten of them.

TaTa...

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Comment on Quarterly Reports 31-DEC-2007

AirAsia

Showing a good great result despite the high oil price, half-year profit shows an increase of more than 100%. There's a foreign exchange gain of RM 134 million included in the half-year PBT of RM 276 million. Excluding this item, the half-year PBT will be only RM 142 million (about 6.0 sen per share). AirAsia only hedge 30% of fuel for the period until Jun-2008, quite a worrying figure. However, the losses in IAA and TAA had been improved in the quarter. With the newly delivered Airbuses, I believe that they will become profitable soon. I've decided to hold the share of company, but not going to increase my investment unless the price fall below RM1.40.

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AKN

It suffered a loss of RM 2.3 million in the quarter. This is due to the provision for diminution in value of investment in Subordinated bond of RM2.425 million, and the loss on sale of marketable securities of RM4.58 million as a consequence from the winding down process of the DDD subsidiaries in HK and China. Excluding these special items, the group would have generated a PBT of RM 4.7 million (about 4 sen per share).

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RUBHD

Show an improved result as compared to last year. There’s still no announcement being made regarding the license migration under WSIA. Last week, the major shareholder RUBHD, Lambang Optima announced that it had just disposed almost all of its holding of RUBHD shares (about 7% of RUBHD total number of share). I still need more time to observe this company.

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SUPERMX

Continue to show growth in both revenue and profit. The 12-month figures show that its profit margin is almost remained as the previous (2006) level. However, the 4th quarter’s margin falls significantly to about 8.2% only. Recently the share price of Supermx has gone down sharply. I had increase my investment this company, because I'm in an opinion that its current price is very attractive ( PE < 8).

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TITAN

As expected, EPS for the quarter is only 3.6 sen. The whole year profit has decrease for 13% as compared to 2006. A tax-exempt dividend of 3.0 sen is proposed. Total dividend for the year is equal to 28% of net profit, a bit lower than its announced dividend policy (30% payout rate). Thought the feedstock price has rise to a record high, prospect for the company is still good, as the demand for polymers (especially PE) remain strong. I believe that the shrink in refinery margin is just temporarily. And the Indonesia plant’s production is only 169KT for the year 2007, still below 40% of its capacity. The new butadiene plant will start to generate profit for the company in Q1-2008.

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AirAsia: the McDonald’s in aviation industry?

Few days ago, I found that AirAsia’s business model is somewhat similar to McDonald’s -- It is going to generate a huge income from the leasing of aircrafts.

The story of my discovery started from last year, when I realised that I had made a serious mistake in analysing AirAsia -- I ignored the deferred tax item in its financial statement. Since then, I had gone through AirAsia’s financial report again, again, and again, just to make sure that there’s nothing else that I’ve missed.

Then, I discovered an interesting item in the reports —- the aircrafts.

First, let’s introduce two entities that's related to AirAsia -- Thai AirAsia (TAA) and Indonesia AirAsia (IAA). Some people may think that TAA and IAA are subsidiaries of AirAsia. But, in fact, they are not wholly owned by AirAsia. TAA is only a jointly controlled entity of AirAsia, and IAA is an associate company. Both of them started their operation in 2004, and AirAsia only owns 49% stake in each of them. AirAsia had paid USD 5.26 million (about RM 20 million) to get the 49% share of TAA, while IAA’s only cost AirAsia USD 2.00 (two dollars).

Since beginning of their operation, TAA and IAA never own an aircraft. All the aircrafts in operation are either owned by AirAsia, or leased by AirAsia from other parties. AirAsia then lease or sublease these aircrafts to TAA and IAA. They would then, of course, pay a rental fee to AirAsia.

The table below show how much money AirAsia had collected each year, from the leasing of Boeing aircrafts to TAA and IAA. I have included the PBT and Net Cash from Operation of AirAsia in this table, for comparison purpose.

As we can see, the income from leasing aircrafts is quite significant when compared to AirAsia’s PBT, or operational cash.

However, the actual earning from these leasing activities should be quite small, because most of these aircrafts are not owned by AirAsia. (The company only owns six Boeing aircrafts). AirAsia lease the Boeings from other party and sublease them to TAA or IAA. I don’t think AirAsia can make a good profit out of this.

But in the next few years, AirAsia’s fleet size will grow dramatically. Due to the latest information, it has 175 confirmed order of Airbus. According to the current planning of AirAsia's management, more that half of these aircrafts will be leased to TAA or IAA. Then, the rental income may have a great contribution to AirAisa's profit.

This is similar to what McDonald’s did about 50 years ago. In the early stage of its expansion, McDonald’s signed long-term lease-contracts with some property owners to rent their properties, and then subleased those properties to its franchisees. Later, while McDonald realized the great potential of rental income, it started to buy its own properties. Then, the rental income had gradually become the most important part of its profit.

So, while AirAsia's fleet size is expanding, will the rental income (of aircraft) gradually play an important role in AirAsia's profit?

Well, maybe it's too early to make a conclusion now. Let's wait and see......

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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...

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.

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"

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unit trust companies lauch "China funds"

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huge money reach fund-managers

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they had to invest into China's market

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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.

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